W HOLDING CO INC - FORM 10-K - October 28, 2009

Attached files

file	filename
EX-32.2 - EX-32.2 - W HOLDING CO INC	g20836exv32w2.htm
EX-32.1 - EX-32.1 - W HOLDING CO INC	g20836exv32w1.htm
EX-31.2 - EX-31.2 - W HOLDING CO INC	g20836exv31w2.htm
EX-31.1 - EX-31.1 - W HOLDING CO INC	g20836exv31w1.htm
EX-23.2 - EX-23.2 - W HOLDING CO INC	g20836exv23w2.htm
EX-21.1 - EX-21.1 - W HOLDING CO INC	g20836exv21w1.htm
EX-10.12 - EX-10.12 - W HOLDING CO INC	g20836exv10w12.htm
EX-23.1 - EX-23.1 - W HOLDING CO INC	g20836exv23w1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2008


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

For the transition period from to

Commission File No. 001-16799

W HOLDING COMPANY, INC.

(Exact name of registrant as specified in its charter)


Commonwealth of Puerto Rico		66-0573197
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)


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

Registrant’s telephone number, including area code: (787) 834-8000

Securities registered pursuant to Section 12 (b) of the Act:


Common Stock ($1.00 par value per share)		New York Stock Exchange
(Title of Each Class)		(Name of Each Exchange on Which Registered)

Securities registered pursuant to Section 12 (g) of the Act:


Preferred Stock ($1.00 par value per share)*		The NASDAQ Stock Market LLC
(Title of Each Class)		(Name of Each Exchange on Which Registered)

(Title of Each Class)
7.125% Noncumulative, Convertible Monthly Income Preferred Stock, 1998 Series A ($1.00 Par Value per Share)
7.250% Noncumulative, Non-Convertible Monthly Income Preferred Stock, 1999 Series B ($1.00 Par Value per Share)
7.600% Noncumulative, Non-Convertible Monthly Income Preferred Stock, 2001 Series C ($1.00 Par Value per Share)
7.400% Noncumulative, Non-Convertible Monthly Income Preferred Stock, 2001 Series D ($1.00 Par Value per Share)
6.875% Noncumulative, Non-Convertible Monthly Income Preferred Stock, 2002 Series E ($1.00 Par Value per Share)
6.700% Noncumulative, Non-Convertible Monthly Income Preferred Stock, 2003 Series F ($1.00 Par Value per Share)
6.900% Noncumulative, Non-Convertible Monthly Income Preferred Stock, 2003 Series G ($1.00 Par Value per Share)
6.700% Noncumulative, Non-Convertible Monthly Income Preferred Stock, 2004 Series H ($1.00 Par Value per Share)


*		A Form 25 delisting the above-listed series of preferred stock was filed on May 12, 2008.

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer o	Accelerated Filer þ	Non-Accelerated Filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2008 (the last business day of the registrant’s fiscal 2008 second quarter), was $102,213,355 based upon the reported closing price of $42.50 per share (as adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008) on the New York Stock Exchange as of June 30, 2008. The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2009 (the last business day of the registrant’s most recently completed second fiscal quarter), was $34,137,260 based upon the reported closing price of $14.20 per share on the New York Stock Exchange as of June 30, 2009. The registrant had no non-voting common equity outstanding as of June 30, 2008 or June 30, 2009. For the purposes of the foregoing calculation only, registrant has treated as common stock held by affiliates only common stock of the registrant held by its directors and executive officers and voting stock held by the registrant’s employee benefit plans. The registrant’s response to this item is not intended to be an admission that any person is an affiliate of the registrant for any purposes other than this response.

Number of shares of common stock outstanding as of September 30, 2009: 3,297,815

DOCUMENTS INCORPORATED BY REFERENCE

None

TABLE OF CONTENTS


PART I
ITEM 1. BUSINESS			2
ITEM 1A. RISK FACTORS			28
ITEM 1B. UNRESOLVED STAFF COMMENTS			38
ITEM 2. PROPERTIES			38
ITEM 3. LEGAL PROCEEDINGS			39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			41

PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			42
ITEM 6. SELECTED FINANCIAL DATA			47
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			126
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			126
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES			201
ITEM 9A. CONTROLS AND PROCEDURES			201
ITEM 9B. OTHER INFORMATION			204

PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			205
ITEM 11. EXECUTIVE COMPENSATION			214
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			230
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			232
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES			233

PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES			236

SIGNATURES			239
EX-10.12
EX-21.1
EX-23.1
EX-23.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I


ITEM 1.		BUSINESS

EXPLANATORY NOTE

This Annual Report on Form 10-K is the first periodic report since W Holding Company, Inc. (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2007. This report contains the Company’s consolidated financial statements and related notes for the year ended December 31, 2008. The delay was due to the need for additional time to complete the Company’s audit of its financial statements for the fiscal year ended December 31, 2008. As previously reported on the Company’s Current Report on Form 8-K filed on January 30, 2009, the Company determined not to reappoint Deloitte & Touche LLP as the Company’s independent registered public accounting firm and instead, as of January 28, 2009, the Company engaged BDO Seidman, LLP (“BDO Seidman”) as its independent registered public accounting firm. The Company has not filed its Quarterly Reports on Form 10-Q for quarters ended March 31, June 30 or September 30, 2008 (the “Quarterly Reports”). In lieu of filing these Quarterly Reports, the Company has included in this report substantially all of the information required to be included in such Quarterly Reports.

FORWARD-LOOKING STATEMENTS

Certain statements in this filing and future filings by the Company, especially within Management’s Discussion and Analysis of Financial Condition and Results of Operations, include forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In general, the word or phrases “may”, “should”, “will”, “expect”, “anticipate”, “estimate”, “project”, “intend”, “continue”, “believe” or similar expressions are intended to identify forward-looking statements. In addition, certain disclosures and information customarily provided by financial institutions, such as analysis of the adequacy of the allowance for loan losses or an analysis of the interest rate sensitivity of the Company’s assets and liabilities, are inherently based upon predictions of future events and circumstances. Although the Company makes such statements based on assumptions which it believes to be reasonable, there can be no assurance that actual results will not differ materially from the Company’s expectations. Important factors which could cause its results to differ from any results which might be projected, forecasted or estimated, based on such forward-looking statements include, but are not limited to: (i) general economic and competitive conditions in the markets in which the Company operates, and the risks inherent in its operations; (ii) the Company’s ability to manage its credit risk and control its operating expenses, increase interest-earning assets and non-interest income, and maintain its net interest margin; (iii) fluctuations in interest rate and inflation; and (iv) the level of demand for new and existing products. A discussion of factors that could cause actual conditions, events or results to differ materially from those expressed in any forward-looking statements appears in Item 1A, “Risk Factors”. Should one or more of these risks or uncertainties materialize, other risks or uncertainties arise, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements. Except as required by applicable law, the Company does not intend, and specifically disclaims any obligation, to update forward-looking statements.

GENERAL

The Company is a bank holding company offering a full range of financial services. The business of the Company is conducted through its wholly-owned commercial bank subsidiary, Westernbank Puerto Rico (“Westernbank” or the “Bank”). 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.

In July 2000, the Company became a financial holding company under the Bank Holding Company Act (“BHC Act”). As a financial holding company, the Company was permitted to engage in financial related activities, including insurance and securities activities, provided that the Company and its banking subsidiary met certain regulatory standards. On May 20, 2008, the Company withdrew its financial holding company status under the BHC Act. As a result, effective on such date the Company’s activities are limited to those deemed closely related to banking by the Board of Governors of the Federal Reserve System (“FRB”). The change did not have impact in the Company’s operations and business practices.

Westernbank operates through a network of 48 bank branches (including 11 Expresso of Westernbank branches) located throughout Puerto Rico, including 25 in the Western and Southwestern regions, 14 in the San Juan metropolitan area, 7 in the Northeastern region, and 2 in the Eastern region, and a website on the Internet. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted into law, pursuant to which, among other things, the amount of deposit insurance provided by the Federal Deposit Insurance Corporation (the “FDIC”) was temporarily increased from $100,000 to $250,000 per depositor until December 31, 2009. On May 20, 2009, President Barack Obama signed legislation that extended this temporary increase to $250,000 per depositor through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories, except IRAs and other certain retirement accounts, which will remain at $250,000 per depositor. Westernbank’s deposits, including Individual Retirement Accounts (“IRAs”), are insured by the Deposit Insurance Fund (“DIF”), which is administered by the FDIC, up to $250,000 per depositor. In addition, on November 21, 2008, the FDIC issued a final rule regarding the Temporary Liquidity Guarantee Program (“TLGP”). Under the TLGP, the FDIC provides full insurance coverage of non-interest bearing deposit transaction accounts of participating institutions until June 30, 2010 and guaranties of qualifying senior unsecured debt. Westernbank has chosen to participate in the insurance coverage of non-interest bearing deposit transaction accounts.

Westernbank’s traditional banking operations include retail operations, such as its branches, including the branches of the Expresso division, together with consumer loans, mortgage loans, commercial loans, investments (treasury) and deposit products. Besides the traditional banking operations, at December 31, 2008 Westernbank operated four other 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 Center Regulatory Act, which offers commercial banking and related services, and treasury and investment activities outside of Puerto Rico;

	•		Westernbank Trust Division, which offers a full array of trust services;

	•		Expresso of Westernbank, a division which specializes in small, unsecured consumer loans up to $15,000 and real estate collateralized consumer loans up to $150,000; and

	•		Westernbank International Trade Services, established during the first quarter of 2006, a division which specializes in international trade products and services.

In the first quarter of 2008, Westernbank Business Credit Division, which specializes in commercial business loans secured principally by commercial real estate, accounts receivable, inventory and equipment, was integrated into the operations of the commercial loans department of Westernbank under the name of Asset-Based Lending Unit.

Westernbank owns 100% of the voting shares of:

	•		Westernbank World Plaza, Inc. (“WWPI”), which owns and operates Westernbank World Plaza; a 23-story office building, including its related parking facility, located in Hato Rey, Puerto Rico, the main Puerto Rican business district.

	•		SRG Net, Inc., a Puerto Rico corporation that operates an electronic funds transfer network. The assets, liabilities, revenues and expenses of SRG Net, Inc. at December 31, 2008 and 2007, and for each of the three years in the period ended December 31, 2008, were not significant.

	•		Westernbank Financial Center Corp (“WFCC”), which was incorporated under the laws of the State of Florida to conduct commercial lending and other related activities in the United States of America. WFCC commenced operations in February 2007, was largely inactive, and was closed during the third quarter of 2008. WFCC’s main asset consisted of a commercial loan of $33.1 million at December 31, 2007. The assets, liabilities, revenues and expenses of WFCC as of and for the years ended December 31, 2008 and 2007, were not significant.

	•		Westernbank Insurance Corp. (“WIC”) a general insurance agent placing property, casualty, life and disability insurance, primarily to mortgage customers of the Company. Effective on May 19, 2008, Westernbank owns 100% of the voting shares of WIC. On May 19, 2008, the Company contributed 100% of its ownership in WIC to Westernbank. The assets, liabilities, revenues and expenses of WIC at December 31, 2008 and 2007, and for each of the three years in the period ended December 31, 2008, were not significant.

At December 31, 2008, the Company had total assets of $15.3 billion, a loan portfolio-net of $8.7 billion, an investment portfolio of $4.7 billion, excluding short-term money market instruments of $1.1 billion, deposits of $11.0 billion, borrowings of $3.3 billion and stockholders’ equity of $915.4 million.

Westernbank seeks to differentiate itself from other banks by focusing on customer relationships and personalized service, and offering customers direct access to senior management. As part of this strategy, Westernbank strives to make fast and effective decisions locally. Westernbank’s branches offer modern facilities with advanced technology and remain open to customers for longer hours compared to many other local banks, with a number of branches offering both Saturday and Sunday hours. In addition, Westernbank trains its employees to promote an effective and customer-focused sales culture.

The Company is focused on the expansion of Westernbank in the San Juan metropolitan area. The Company has opened 14 branches in the San Juan metropolitan area since 1998. In the first quarter of 2002, Westernbank acquired Westernbank World Plaza; 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, the Bank’s regional commercial lending office and the headquarters for the Expresso of Westernbank and Westernbank International Trade Services divisions. In addition, the Company continues to build upon its existing platform and further expand its fee-based businesses, including insurance brokerage, trust services and securities brokerage. In September 2006, March 2007 and May 2009, the Company opened its newest mega branches in the cities of Bayamón, Canóvanas and Ponce, respectively.

At December 31, 2008, the Company’s financial performance was reported in three reportable segments: (1) the traditional banking operations of Westernbank Puerto Rico, (2) the activities of the division known as Westernbank International, which includes the activities of WFCC (“Westernbank International”), and (3) the activities of the Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division, which specializes in asset-based commercial business lending. Other operations of the Company, not reportable in any segments, include: Westernbank Trust Division; Westernbank International Trade Services Division; SRG Net, Inc.; Westernbank Insurance Corp.; Westernbank World Plaza, Inc.; and the transactions of the parent company only, which mainly consist of other income related to the equity in the net income (loss) of its wholly-owned subsidiaries.

The traditional banking operations of Westernbank Puerto Rico include 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), investments (treasury) and deposit products. Consumer loans include loans such as personal, collateralized personal loans, credit cards, and small loans. Commercial products consist of commercial loans including commercial real estate, unsecured commercial and construction loans.

Westernbank International’s activities consist of commercial banking and related services, and treasury and investment activities outside of Puerto Rico. Up to the third quarter of 2008, WFCC carried out commercial lending and other related activities in the United States of America. WFCC commenced operations in February 2007, was largely inactive, and was closed during the third quarter of 2008. As of December 31, 2008, 2007, and 2006, and for the periods then ended, substantially all of Westernbank International’s business activities consisted of investments in securities of the U.S. Government or U.S. sponsored agencies, money market instruments with entities located in the United States, certain asset-based loans originated by the Asset-Based Lending Unit and a commercial loan originated by WFCC, to entities principally located in the United States of America.

At December 31, 2008, the business activities of the Asset-Based Lending Unit consisted of commercial business loans secured principally by commercial real estate, accounts receivable, inventory and equipment.

The Company and its wholly owned subsidiaries’ executive offices are located at 19 West McKinley Street, Mayagüez, Puerto Rico 00681, and the telephone number is (787) 834-8000. The Company’s Internet address is www.wholding.com.

FINANCIAL INFORMATION REGARDING SEGMENT REPORTING AND GEOGRAPHIC AREAS. Refer to BUSINESS SEGMENT REVIEW on Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 23 in the notes to the consolidated financial statements included in this Annual Report on Form 10-K under Part II, Item 8 for further financial information regarding segment reporting and geographic areas.

COMPETITION

The financial services and banking business are highly competitive, and the profitability of the Company will depend principally upon the Company’s ability to continue to compete in its market area, primarily in the Commonwealth of Puerto Rico (“Puerto Rico”), as well as to a significant extent upon general economic conditions in its market place. Substantially all of the Company’s business activities are with customers located in Puerto Rico. In attracting and retaining deposits and in its consumer and commercial lending activities, the Company encounters intense competition principally from credit unions, commercial and non-commercial banks and to a lesser extent to other financial institutions operating in Puerto Rico, such as insurance companies, brokerage firms (particularly for deposit products), and certain other non-financial institutions, including certain governmental organizations which may offer subsidized financing at lower rates than those offered by the Company. The Company has been able to compete effectively with other financial institutions by emphasizing technology and customer service, including local office decision-making on loans, establishing long-term customer relationships and building customer loyalty, and by providing products and services designed to address the specific needs of its customers. Significant deterioration in the local economy or external economic conditions, such as inflation, recession, unemployment, decrease in 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.

LENDING ACTIVITIES

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

It is Westernbank’s policy to originate 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 independent appraisers approved by the Board of Directors are required for mortgage and all real estate loans.

It is Westernbank’s policy to require Senior Lending Credit Committee (“SLCC”) approval for all loans in excess of $25.0 million, including the Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division. The SLCC also reviews and ratifies all loans from $2.5 million to $25.0 million approved by Westernbank’s regional credit committees. The SLCC is composed of a majority of the members of the Company’s Board of Directors and senior lending officers. All loans in excess of $25.0 million, including the Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division, approved by the SLCC are also reviewed and ratified by the Board of Directors of the Company. All loans in excess of $100.0 million require the approval of the Board of Directors of the Company.

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

Westernbank’s practice is that its production and origination of residential real estate loans are mostly conforming loans, eligible for sale in the secondary market. The loan-to-value ratio at the time of origination on residential mortgages is generally 75%, except that Westernbank may lend up to 90% of the lower of the purchase price or appraised value of residential properties if private mortgage insurance is obtained, except for certain qualified new development projects, by the borrower for amounts in excess of 80%.

Westernbank originates fixed and adjustable rate residential mortgage loans secured by a first mortgage on the borrower’s real property, payable in monthly installments for terms ranging from ten to forty-five years. Adjustable rates are indexed to specified prime or LIBOR rates. All conforming mortgage loans are originated with the intent to sell. Westernbank has also granted loans, mainly secured by first mortgages on one-to-four residential properties, to mortgage originators in Puerto Rico.

Westernbank originates primarily variable and adjustable rate commercial business and real estate loans. The Company’s commercial real estate loan portfolio is mostly comprised of loans to owner-occupied borrowers in which the real estate collateral is taken as a secondary source of repayment. Since the summer of 2007, in light of deteriorating economic conditions in Puerto Rico and as part of the Company’s strategy to strengthen regulatory capital ratios, the Company decided to curtail major commercial lending activities. For the year ended December 31, 2008, commercial real estate loans to owner-occupied borrowers amounted to 79% of total commercial real estate loans. These loans are sensitive to the economic condition and cash flow of the borrower’s business, but are less sensitive to market conditions, capitalization rates, vacancy rates, rental rates, and so on. Westernbank also makes real estate construction loans subject to firm permanent financing commitments. In general, commercial lending, including commercial real estate, asset-based, unsecured business and construction, are considered by management to be of greater risk of uncollectibility than consumer lending, including residential real estate, 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.

Westernbank offers different types of consumer loans in order to provide a full range of financial services to its customers. Within the different types of consumer loans offered by Westernbank, there are various types of secured and unsecured consumer loans with varying amortization schedules. In addition, Westernbank makes fixed-rate residential second mortgage consumer loans. In July 2002, Westernbank launched a new banking division focused on offering consumer loans that now has 10 full-service branches, called “Expresso of Westernbank”, denoting the branches’ emphasis on small, unsecured consumer loans up to $15,000 and collateralized consumer loans up to $150,000.

Westernbank offers the service of VISA TM and MasterCard TM credit cards. At December 31, 2008, there were approximately 20,544 outstanding accounts, with an aggregate outstanding balance of $49.3 million and unused credit card lines available of $68.3 million.

In connection with all consumer loans originated, Westernbank’s underwriting standards include a determination of the applicants’ payment history on other debts and an assessment of the ability to meet existing obligations and payments on the proposed loan.

For information regarding the Company’s Lending Activities and disclosures refer to Financial Condition — Loans, on Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K under Part II.

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

Loan origination and commitment fees vary with the volume and type of loans and commitments made and sold and with competitive conditions in the residential and commercial mortgage markets. Loan origination fees net of related direct loan origination costs are deferred and amortized over the life of the related loans as a yield adjustment using the interest method or a method which approximates the interest method. Commitment fees are also deferred and amortized over the life of the related loans as a yield adjustment. If the commitment expires unexercised, the fee is taken into income.

Westernbank recognizes as separate assets the rights to service mortgage loans for others, regardless of how those servicing rights are acquired and assesses the capitalized mortgage servicing rights for impairment based on the fair value of those rights. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using prices for similar assets with similar characteristics. Impairment is recognized through a valuation allowance for an individual servicing right, to the extent that fair value is less than the carrying amount for that right. The total cost of mortgage loans to be sold with servicing rights retained is allocated to the mortgage servicing rights and the loans (without the mortgage servicing rights), based on their relative fair values. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated servicing income. As of December 31, 2008, Westernbank had $3.3 million in mortgage servicing assets.

NON-PERFORMING LOANS, TROUBLED DEBT RESTRUCTURINGS AND FORECLOSED REAL ESTATE. The Company places a loan in non-performing status as soon as management has doubts as to the ultimate collectibility of principal or interest or when contractual payments of principal or interest are 90 days overdue. When a loan is designated as non-performing, interest accrual is suspended and a specific provision is established, if required. When a borrower fails to make a required payment on a loan, Westernbank attempts to cure the deficiency by contacting the borrower. If the delinquency exceeds 90 days and is not cured through

normal collection procedures, Westernbank will generally institute measures to remedy the default. If a foreclosure action is instituted and the loan is not cured, paid in full or refinanced, the property is sold at a judicial sale at which Westernbank may acquire the property. 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. Thereafter, if Westernbank acquires the property, such acquired property is appraised and included in the foreclosed real estate held for sale account at the fair value at the date of acquisition. This asset is then carried at the lower of fair value less estimated costs to sell or cost until the property is sold.

The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flows may not be sufficient to meet payments as they become due, but in no event is it recognized after a borrower is 90 days in arrears on payments of principal or interest. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is charged against income and interest is accounted for on the cash-basis method or for certain high loan-to-value credits on the cost-recovery method until qualifying for return to accrual status. Generally, a loan is returned to accrual status when all delinquent interest and principal payments become current in accordance with the terms of the loan agreement or when the loan is both well secured and in the process of collection and collectibility is no longer doubtful. Consumer loans that have principal and interest payments that have become past due one hundred and twenty days and credit cards and other consumer revolving lines of credit that have principal and interest payments that have become past due one hundred and eighty days are charged-off against the allowance for loan losses.

A troubled debt restructuring is a formal restructure of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued interest, and extension of the maturity date.

For further financial information regarding the Non-Performing Loans, Troubled Debt Restructurings and Foreclosed Real Estate refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K under Part II.

ALLOWANCE FOR LOAN LOSSES. The Company maintains an allowance to absorb probable loan losses inherent in the Company’s portfolio. The allowance is maintained at a level the Company considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectibility and historical loss experience of loans. Credit losses are charged and recoveries are credited to the allowance. Provisions for loan losses are based on the Company’s review of the historical credit loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses.

Estimates of losses inherent in the loan portfolio involve the exercise of judgment and the use of assumptions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control. Because of uncertainties inherent in the estimation process, management’s estimate of credit losses in the loan portfolio and the related allowance may change.

The allowance consists of two components: the specific allowance and the general allowance. The Company follows a systematic methodology in determining the appropriate level of these two allowance components.

Larger commercial and construction loans that exhibit probable or observed credit weaknesses are subject to individual review and thus subject to specific allowance allocations. 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, as well as evaluation of legal options available to the Company. The review of individual loans includes those loans that are impaired as provided in Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan, as amended. Any allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loans’ effective interest rate or the fair value of the underlying collateral. Appraisals are obtained from qualified appraisers and are reviewed by an independent appraisal review group to ensure independence and consistency in the valuation process. Appraisal values are updated on an as needed basis, in conformity with market conditions and regulatory requirements. The Company evaluates the collectibility of both principal and interest when assessing the need for loss accrual.

are necessary to reflect losses inherent in the portfolio. These qualitative factors include: the effect of the national and local economies; trends in loans growth; trends in the impaired and delinquent loans; risk management and loan administration; changes in concentration of loans to one obligor; changes in the internal lending policies and credit standards; and examination results from bank examiners and the Company’s internal credit examiners.

Homogeneous loans, such as consumer installments, residential mortgage loans, and credit cards are not individually risk graded. General allowances are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are generally based on the higher of current year or the average of the last two to three year historical net charge-offs by loan category, adjusted for significant qualitative factors that, in management’s judgment, are necessary to reflect losses inherent in the portfolio. These qualitative factors include: the effect of the national and local economies; trends in the delinquent loans; risk management practices; collection practices; and changes in the internal lending policies and credit standards.

In 2008, the Company has not substantively changed its overall approach in the determination of the allowance for loan losses. There have been no material changes in the criteria or estimation techniques as compared to prior periods that impacted the determination of the current period allowance for loan losses.

Impaired Loans

Loans are classified as impaired or not impaired in accordance with SFAS No. 114. A loan is impaired when, based on current information and events, it is probable that Westernbank will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the agreement.

Westernbank measures the impairment of a loan based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. Larger commercial and construction loans that exhibit probable or observed credit weaknesses 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.

INVESTMENT ACTIVITIES

The Company’s investments are managed by the Investment Department. Purchases and sales are required to be reported monthly to the Assets and Liabilities Committee (composed of the entire Board of Directors of the Company and various Senior Executive Officers of the Company and Westernbank).

The Investment Department is authorized to purchase and sell federal funds, interest bearing deposits in banks, banker’s acceptances of commercial banks insured by the FDIC, mortgage and asset-backed securities, Puerto Rico and U.S. Government and agencies obligations, municipal securities rated A or better by any of the nationally recognized rating agencies, commercial paper and corporate notes 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 repurchase agreements.

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

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

The Company’s investment portfolio as of December 31, 2008, consisted principally of U.S. Government and agencies obligations and mortgage-backed securities issued or guaranteed by FHLMC, FNMA or GNMA. There were no investment securities other than those referred to above in a significant unrealized loss position as of December 31, 2008. In addition, the Company does not have investments in residual tranches.

SOURCES OF FUNDS

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

In connection with its asset/liability management, the Company uses brokered deposits since these deposits provide the flexibility of selecting short, medium and long term maturities to better match the Company’s asset/liability management strategies. Typically, brokered deposits tend to be highly rate-sensitive deposits, and therefore, these are considered under many circumstances to be a less stable source of funding for an institution as compared to deposits generated primarily in a bank’s local markets. Brokered deposits come primarily from brokers that provide intermediary services for banks and investors, therefore providing banks, such as Westernbank, increased access to a broad range of potential depositors who have no relationship with Westernbank and who actively seek the highest returns offered within the financial industry. However, due to the competitive market for deposits in Puerto Rico, coupled with generally low interest rates in the United States, the rates paid by Westernbank on these deposits are often lower than those paid for local market area retail deposits. The Puerto Rico deposit market is more challenging than the deposit market on the U.S. mainland. Puerto Rico has a relatively stable population base, a number of very competitive local banks looking to expand, and a large proportion of citizens that do not have bank accounts. Also, the difference between the after-tax interest earned from bank deposits, compared to the after-tax returns from investments held in local mutual funds, preferred stock, local GNMAs and other municipal bonds makes those other investments more attractive than deposits to some investors. These dynamics present significant challenges for gathering and retaining local retail deposits. The result is a high cost local deposits market. The Company believes that the benefits of brokered deposits outweigh the risk of deposit instability. For further discussion, see “Supervision and Regulation - Brokered Deposits” below.

BORROWINGS

A summary of short-term borrowings, including federal funds purchased, repurchase agreements, advances from Federal Home Loan Bank and borrowings under lines of credit, and interest rates at and for the years ended December 31, 2008, 2007 and 2006 are set forth in Item 7 “Management Discussion and Analysis of Financial Condition and Results of Operations-Borrowings” section.

FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS. As part of the Company’s asset/liability management, the Company uses interest-rate contracts, which include interest-rate exchange agreements (swaps), and option agreements, to hedge various exposures or to modify interest rate characteristics of various items on its statements of financial condition.

The Company accounts for its derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This Statement requires recognition of all derivatives as either assets or liabilities in the statements of financial condition and requires measurement of those instruments at fair value through adjustments to either accumulated other comprehensive income (loss) or current earnings or both, as appropriate. On the date the Company enteres into a derivative contract, the Company designates derivative instruments as either a fair value hedge, cash flow hedge or as a derivative instrument not designated as a hedge. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment attributable to the hedged risk are recorded in current period net income (loss). For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in accumulated other comprehensive income (loss) and subsequently reclassified to net income in the same period(s) that the hedged transaction impacts net income. For all hedging relationships, derivative gains and losses that are not effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current period net income (loss). Similarly, the changes in fair value of derivative instruments that do not qualify for hedge accounting under SFAS No. 133 are also reported in current period net income, in noninterest income.

The net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. The net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income within net gain (loss) on derivative instruments.

Prior to entering into a hedge transaction, the Company formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the statement of financial condition or to specific firm commitments or forecasted transactions along with a formal assessment at both inception of the hedge and on an ongoing basis as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. The Company discontinues hedge accounting prospectively when it is determined that the derivative is or will no longer be effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires, is sold, or terminated, or management determines that designation of the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued, the future gains and losses arising from any change in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transaction is still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized or accreted into earnings over the same periods which the hedged transactions would have affected earnings.

Certain contracts contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated from the host contract and carried at fair value.

The fair value of the derivative instruments is based on an independent valuation model that uses primarily observable market parameters, such as yield curves, and takes into consideration the credit risk component, when appropriate. Although most of the derivative instruments are fully collateralized, a credit spread is considered for those that are not secured in full. The fair values produced by this proprietary valuation model are in part theoretical and therefore can vary between derivative dealers and are not necessarily reflective of the actual price at which the contract could be traded. Small changes in assumptions can result in significant changes in valuation. The risks inherent in the determination of the fair value of a derivative may result in income statement volatility.

One of the main risks facing the Company is interest rate risk, which includes the risk that changes in interest rates will result in changes in the value and in the cash flows of the Company’s assets and liabilities and the risk that net interest income will change in response to changes in interest rates. The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate

volatility. Additionally, the Company holds derivative instruments for the benefit of its commercial customers. The Company does not enter into derivative instruments for speculative purposes.

The Company’s interest rate risk management strategy may involve modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the Company’s net interest margin. Derivative instruments that the Company may use as part of its interest rate risk management strategy include interest rate swaps, indexed options and interest rate caps. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments and the value of the derivative 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 fair value of a derivative is based on the estimated amount the Company would receive or pay to terminate the derivative contract, taking into account the current interest rates and the creditworthiness of the counterparty. The fair value of the derivatives is reflected on the Company’s statements of financial condition as derivative assets and derivative liabilities.

Derivative instruments are generally negotiated over-the-counter (“OTC”) contracts. Negotiated OTC derivatives are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise price and maturity. OTC contract generally consist of swaps, caps and Standard and Poor’s 500 Composite Stock Index options.

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.

Indexed options are contracts that the Company enters into in order to receive the average appreciation of the month end value of the Standard & Poor’s 500 Composite Stock Index over a specified period in exchange for the payment of a premium when the contract is initiated. The credit risk inherent in the indexed options is the risk that the exchange party may default.

Interest rate caps represent a right to receive cash if a reference interest rate rises above a contractual strike rate; therefore, its value increases as the reference interest rates rise. Interest rate caps protect against rising interest rates. The credit risk inherent in the interest rate cap is the risk that the exchange party may default.

The Company utilizes interest rate swaps (“CD Swaps”) to convert a portion of its fixed-rate brokered certificates of deposit (“CDs”) or firm commitments to originate fixed-rate brokered CDs to a variable rate. The purpose of entering into these CD Swaps is to hedge the risk of changes in the fair value of certain brokered CDs or firm commitments to originate brokered CDs attributable to changes in the LIBOR rate (interest rate risk). The hedged brokered CDs are typically structured with terms of 3 to 20 years with a call option on the Company’s part, but no surrender option for the CD holder, other than for death or disability. The extended term of the brokered CDs minimizes liquidity risk while the option to call the CDs after the first year provides the Company with funding flexibility.

On January 3, 2006, the Company redesignated most of its CD Swaps relating to certain CDs utilizing the “long-haul” method of SFAS No. 133 and completed new contemporaneous hedging documentation. In cases in which the hedging relationship was effective, the changes in the fair value of both the hedged items (the CDs) and the interest rate swaps were recorded through earnings. At December 31, 2007, the notional amount of these CD Swaps and the principal balance of the hedged CDs amounted to $470.2 million. On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities- Including an Amendment of FASB Statement No. 115 and discontinued the use of fair value hedge accounting of SFAS No. 133 on these CD Swaps. This Statement allows entities to choose to measure certain financial assets and liabilities at fair value with any changes in fair value reflected in earnings. The Company elected to measure at fair value the brokered deposits being hedged with the CD Swaps. The fair value option may be applied on an instrument-by-instrument basis. One of the main considerations in the determination for the adoption SFAS No. 159 was to eliminate the operational procedures required by the long-haul method of accounting in terms of documentation, effectiveness assessment, and manual procedures followed by the Company to fulfill the requirements specified by SFAS No. 133. As part of the adoption of SFAS No. 159, on January 1, 2008, the Company recorded a cumulative effect adjustment of $5.3 million that was credited to retained earnings.

The Company offers its customers an equity-linked certificate of deposit that has a return linked to the performance of the Standard & Poor’s 500 Composite Stock Index. Under SFAS No. 133, a certificate of deposit that pays interest based on changes on an equity index is a hybrid instrument that requires separation into a host contract (the certificate of deposit) and an embedded derivative contract (written equity call option). 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 enters into an offsetting derivative contract (indexed option agreement that has a return linked to the performance of the Standard & Poor’s 500 Composite Stock Index) to economically hedge the exposure taken through the issuance of equity-linked certificates of deposit. Under the option agreements, the Company will receive the average increase in the month-end value of the index in exchange for the payment of a premium when the contract is initiated. Since the embedded derivative and the derivative contract entered into by the Company do not qualify for hedging accounting, these derivatives are recorded at fair value with offsetting gains and losses recognized within noninterest income in the consolidated statements of operations.

The Company also enters into derivative contracts (including interest rate swaps and interest rate caps) for the benefit of commercial customers. The Company may economically hedge significant exposures related to these derivatives by entering into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. The Company minimizes the credit risk through credit approvals, limits, counterparty collateral and monitoring procedures. Since these derivatives do not qualify for hedging accounting, they are recorded at fair value with offsetting gains and losses recognized within noninterest income in the consolidated statements of operations. During 2008, there were no credit downgrades to parties of derivative instruments. At December 31, 2008 and 2007, the notional amount of these interest rate swaps amounted to $343.9 million and $345.3 million, respectively, and the notional amount of these interest rate caps amounted to $86.5 million and $86.7 million, respectively.

Refer to Note 19 to the consolidated financial statements for a detail of derivative transactions, included herein in Part II, Item 8.

OFF-BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS. In the ordinary course of business, Westernbank enters into off-balance sheet credit related financial instruments consisting of commitments to extend credit, commitments under credit-card arrangements and standby and commercial letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. Westernbank periodically evaluates the credit risks inherent in these commitments, and standby and commercial letters of credit, and establishes loss allowances for such risks if and when these are deemed necessary. For the year ended December 31, 2008, there was no such allowance for losses on unfunded loan commitments as the exposure was not considered significant to the Company. At December 31, 2007, the Company had an allowance for losses on unfunded loan commitment totaling $1.1 million included in accrued expenses and other liabilities in the consolidated financial statements.

For the years ended December 31, 2008, 2007 and 2006, the Company did not record any loss allowances in connection with risks involved in off-balance sheet credit-related financial instruments, other than the $1.1 million allowance for losses on the unfunded loan commitments recorded in 2007. At December 31, 2008 and 2007, there were no additional off-balance sheet credit-related financial instruments other than those mentioned above.

Refer to Note 18 to the consolidated financial statements for a detail of off-balance sheet activities, included herein in Part II, Item 8.

FAIR VALUE MEASUREMENTS. The estimated fair value of financial instruments is subjective in nature and involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. In addition, the fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business.

Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which provides a framework for measuring fair value under accounting principles generally accepted in the United States of America. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement.

Effective January 1, 2008, the Company adopted SFAS No. 159, which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on an instrument-by-instrument basis (“fair value option”). Upon election of the fair value option in accordance with SFAS No. 159, subsequent changes in fair value are recorded as an adjustment to earnings. The adoption of SFAS No. 159 resulted on cumulative adjustments of: (1) $5.3 million increase to retained earnings; (2) $12.9 million decrease to deposits; (3) $4.2 million decrease to other assets; and (4) $3.4 million decrease to deferred income tax.

The Company elected on January 1, 2008 to measure at fair value certain long-term, callable brokered deposits (financial liabilities) that were hedged with interest rate swaps (“SFAS 159 Brokered CDs”) and were previously designated for fair value hedge accounting in accordance with SFAS No. 133. Electing the fair value option allows the Company to eliminate the burden of complying with the requirements for hedge accounting under SFAS No. 133 (e.g., documentation and effectiveness assessment) without introducing earnings volatility. Interest rate risk on the SFAS 159 Brokered CDs continues to be economically hedged with callable interest rate swaps with the same terms and conditions. The Company did not elect the fair value option for the vast majority of other brokered deposits because these are not hedged by derivatives.

The fair value of SFAS 159 Brokered CDs is obtained from non-binding third party pricing services. The third party pricing service provider determines the fair value of the brokered deposits through the use of discounted cash flow analyses over the full term of the CDs. The options component, the callable feature, is valued using a “Hull-White Interest Rate Tree” approach, an industry-standard approach for valuing instruments with interest rate call options. The model assumes that the embedded options are exercised economically. The fair value of the CDs is computed using the outstanding principal amount. The discount rates used are based on US dollar LIBOR and swap rates. The fair value does not incorporate a credit risk spread, since the callable brokered deposits are generally for amount less than the FDIC insurance.

Interest paid/accrued on SFAS 159 Brokered CDs is recorded as part of interest expense on deposits and the accrued interest and the fair value (excluding accrued interest) of the SFAS 159 Brokered CDs are reported within deposits in the consolidated statement of financial condition. Fair value changes are included in earnings within noninterest income in the consolidated statement of operations.

Refer to Note 20 to the consolidated financial statements for more information of financial instruments, included herein in Part II, Item 8.

YIELDS EARNED AND RATES PAID

The net income of the Company depends primarily upon the difference or spread between the interest income received on its interest-earning assets and the interest paid on its interest-bearing liabilities. See “Management Discussion and Analysis of Financial Condition and Results of Operations”, included herein in Part II, Item 7.

ECONOMIC CONDITIONS, MARKET AREA AND COMPETITION

Puerto Rico (also referred to as the “Island” or the “Commonwealth”), a Commonwealth of the United States of America, is the easternmost of the Greater Antilles and the fourth largest island of the Caribbean. The Island is located at the crossroads between North and South America, at just 3.5 hours airtime from New York and 60 minutes from Venezuela and has a population of approximately four million people. As in the rest of the United States, the Island has a local judicial system. The Island constitutes a district in the federal judiciary and has its own U.S. district court. Also, most of the U.S. federal agencies are represented on the Island. However, the Island has its own internal revenue system and is not subject to U.S. taxes. Spanish and English are the official languages of the Island.

The Island uses U.S. currency and forms part of the U.S. financial system. As a Commonwealth of the U.S., the Island falls within the U.S. for purposes of customs and migration, and therefore there is a full exchange of funds, people and goods between the Island and the U.S. Puerto Rico banks are subject to the same Federal laws, regulations and supervision as those of the financial institutions

operating in the rest of U.S. The FDIC insures the deposits of Puerto Rico chartered commercial banks, including Westernbank, the banking subsidiary of W Holding Company, Inc.

Factors affecting the U.S. economy usually have a significant impact on the performance of the Island economy. These include exports, direct investment, the amount of federal transfer payments, the level of interest rates, the level of oil prices, the rate of inflation, and tourist expenditures, among others. During the Commonwealth’s fiscal year ended June 30, 2008, approximately 75% of Puerto Rico’s exports went to the U.S, which was also the source of approximately 50% of Puerto Rico’s imports. In the past, the economy of the Island has generally followed economic trends in the overall U.S. economy. The U.S. economy, which was severely hit by the housing-market and credit crises, entered into a recession in late 2007.

The economy of the Island is mainly driven by the manufacturing and service sectors. The manufacturing sector has experienced positive and negative changes over the past years as a result of increased emphasis on higher wage, high technology industries such as pharmaceuticals, biotechnology, electronics, computers, microprocessors, professional and scientific instruments, and certain high technology machinery and equipment, in addition to the reduction of tax incentives. In recent years, the service sector also has played a major role in the economy, leading all sectors in providing employment.

During 2008, the Island continued to be in a prolonged economic slowdown, which has led to a recessionary cycle. The main drivers contributing to the recessionary cycle include budget shortfalls, economic weakness within the manufacturing and construction sectors, diminished consumer buying power driven by increases in utility costs, gasoline prices, highway toll charges, the implementation of sales taxes and periodic impasses between the Executive and the Legislative branches of the Island government. Historical declines have occurred in the local manufacturing sector. Three important indicators for the manufacturing sector (jobs, hours worked and payroll) pointed toward the continued weakening of local manufacturing activity. During 2008, the manufacturing sector lost approximately 7,700 jobs in comparison with figures reported in 2007, for a decrease of 7.20%, although many multinational corporations continue to have substantial operations in the Island. As in 2007, the construction sector, a historical backbone of the Island economy, continued to be relatively weak during 2008, as the combination of the current Commonwealth’s fiscal situation and a decrease in the public investment in construction projects has dramatically affected the sector. The value of construction permits during the year ended December 31, 2008 declined when compared to 2007, with most of the drop coming from the public sector. The multiplier effect of a decrease in capital investment has been already felt in other areas of the Island economy, with the banking sector one of the most affected.

The banking sector has been historically the financial support for all the industrial and commercial activity on the Island. At December 31, 2008, there were ten FDIC insured banks operating in Puerto Rico, with total assets, loans and leases-net and deposits of approximately $99.5 billion, $61.2 billion and $64.0 billion, respectively. U.S. banks, foreign banks and the major Puerto Rican banks all offer commercial banking services designed to support the emerging requirements of their local clients as well as of their international clients. Historically, the economic strength and liquidity of local financial institutions, considered the pillar of the Island’s economy, have allowed the Puerto Rico banking sector to extend credit, without which the Island’s economy could not be sustained. The growing combination of loans, deposits and assets historically has been the key to the economic progress for the past years.

Throughout 2007 and 2008, the banking sector has experienced a reduction in the credit quality of, and a worsening of trends affecting, its residential mortgage, commercial and construction loan portfolios, particularly new housing development projects which have been affected by the continuing deterioration of the economy, in addition to the oversupply of new homes at all levels. And while the Puerto Rico housing market has not seen the dramatic decline in housing prices that is generally affecting the U.S. mainland housing market, there is lower demand due to diminished consumer acquisition power and confidence, among other things. Since 2008 the Island government has taken actions and implemented tax incentives initiatives designed to boost the demand of the housing market. However, there can be no assurance that these actions will help to boost the Island housing market.

Other economic indicators for 2008 showed additional signs of weakness. With the exception of the total civilian population, all the indicators of job-market performance reflect a downturn. The total labor force, number of jobs, participation rate, and number and percentage of unemployed all continue to show signs of deterioration. The Island unemployment rate, which has been historically higher than the average U.S. unemployment rate, increased to 13.5% at December 31, 2008, the highest since 1999. According to the Puerto Rico Labor Department, a total of 1.2 million people were employed in Puerto Rico at December 31, 2008, which represents a decrease of approximately 24,000 jobs, or 2.0% when compared to December 31, 2007. The rate of participation in the labor force fell from 46.1% in 2007 to 45.0% in 2008.

Activity in the tourism sector has also shown signs of weakness, as hotel registrations, hotel occupancy rates and passengers movement each decreased when compared to 2007 as a result of the continuing deterioration of the U.S. and Island economy.

Future growth of the Island economy will depend on several factors including, the economic condition of both the Commonwealth and U.S, the level of interest rates and changes to existing incentive legislation, among others. At the end of fiscal year 2008, the Island remains in a recession. The recent crisis in the capital markets and consequent restrictions on credit could add to the uncertainty prevalent on the Island as a result of the prolonged stagnation of local economic activity, or impact the economy’s ability to grow, which would impose additional limitations on recovery in the foreseeable future.

Current Fiscal Situation

In January 2009, the newly elected Governor of the Commonwealth of Puerto Rico indicated that the Island is facing a $3.2 billion budget deficit and that it continues to increase. As a result, the Governor has declared the Island in a “State of Fiscal Emergency”. One of the first steps that he has taken in an effort to boost the Island’s economy is the creation of a fiscal plan which calls on all government agencies to slash operational costs by 10 percent in an attempt to control expenditures. Other steps aimed to restructure the Island Government’s existing debt and postpone the $300.0 million annual debt service were the refinancing of Government Obligation Bonds, the issuance of $4.0 billion in Puerto Rico Sales Tax Financing Corp. bonds and the sale of assets of the Puerto Rico Infrastructure Authority valued at approximately $1.75 billion. The Governor also, in combination with the Economic & Fiscal Reconstruction Committee, a committee composed of 14 prominent figures of the Island’s private sector and some with prior public sector experience, presented several other proposals to eliminate the Island government’s deficit within the next four years and stimulate the Island’s economy.

These proposals were submitted to the Puerto Rico Planning Board to conduct a large scale economic study on the different actions proposed and its economic impact on the Island. In addition, the final approval and implementation of the proposals require legislative approval and depend on better management by the Island Government and the receptivity of potential buyers and credit agencies.

At the current time, the Island government is proposing a series of bond issues to pay for current obligations, reduce the operational deficit, pay off part of the extra-constitutional debt and stimulate the Island economy. These resources, in conjunction with the almost $5 billion of the federal government’s economic stimulus plan, would exceed the total current budget for the Commonwealth General Fund. This injection of money into several sectors of the economy would be undertaken in an effort to stimulate the economy. However, there can be no assurance that the above actions will be approved and implemented or that such actions will ultimately help to boost the Island’s economy.

RECENT SIGNIFICANT EVENTS

Settlement with Tax Authorities

During the first quarter of 2008, Westernbank negotiated tax agreements with local and federal authorities that yielded a benefit of $33.3 million. For more information, refer to Note 11 to the consolidated financial statements, included in Part II, Item 8.

Consent Order with the FDIC and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) and Written Agreement with the Board of Governors of the Federal Reserve System and other notices from the FDIC

On November 24, 2008, Westernbank received notice from the FDIC. As a result of the notice and the Orders discussed below, Westernbank’s operations and activities are now subject to heightened regulatory oversight. For instance, pursuant to Section 914 of the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), Westernbank must notify the FDIC prior to certain management changes, and must obtain approval prior to the payment of certain severance payments. Further, Westernbank must obtain the non-objection of the FDIC before engaging in any transactions that would materially change the balance sheet composition of the bank, including growth in total assets of 5% or more or significant changes in funding sources, such as increasing brokered deposits or volatile funding. Additionally, prior written approval of the FDIC will be required in order for Westernbank to issue any debt guaranteed by the FDIC under the Temporary Liquidity Guarantee Program. No assurance can be given that further regulatory actions taken by the FDIC would not have a material adverse effect on Westernbank.

In May 2009, the Company and Westernbank entered into (i) a Consent Order (the “Consent Order”) with the FDIC and the OCIF and (ii) a Written Agreement with the Board of Governors of the Federal Reserve System (the “Written Agreement”, and, together with the Consent Order, the “Orders”). The Orders build on the informal agreement which Westernbank entered into with the FDIC in February of 2008.

The Orders do not impose penalties or fines on the Company or Westernbank, however, the Orders impose certain restrictions relating to dividends and credit extension. Additionally, the Orders require the Company and Westernbank to take various affirmative actions, including, but not limited to, strengthening the Bank’s and the Company’s Boards of Directors by increasing the number of independent directors; strengthening Westernbank’s management; submitting a capital, profit, budget and liquidity contingency plans; obtaining approvals prior to paying any dividends; submitting a written plan to reduce and monitor Westernbank’s problem and adversely classified loans; eliminating from Westernbank’s books, by collection or charge-offs, all items or portions of items classified “Loss” as a result of the FDIC’s 2008 examination; submitting loan policies and procedures for regulatory approval; restricting credit advances to adversely classified borrowers; establishing an adequate and effective appraisal compliance program; and maintaining an adequate allowance for loan losses.

In addition to the aforementioned actions, the Consent Order requires Westernbank to maintain a Tier 1 leverage ratio of not less than 5.5% as of the date of the Consent Order, 5.75% at September 30, 2009 and 6.0% at March 31, 2010. As of September 30, 2009, Westernbank expects to be above the applicable Tier 1 leverage ratio required by the Consent Order. Although Westernbank may comply with the quantitative definition of a well capitalized institution under applicable bank regulations, by virtue of having a capital directive within the Consent Order, Westernbank is deemed to be adequately capitalized as of the date of the Consent Order. Concurrent with the Orders, the FDIC granted Westernbank a renewable six-month waiver expiring November 30, 2009, for the issuance of brokered certificates of deposits. The waiver allows Westernbank to continue to issue brokered certificates of deposits. No assurance can be given that the Orders would not have a material adverse effect on the Company or Westernbank.

During 2008, the Company adopted the following strategies to provide additional sources of liquidity and to continue to comply with regulatory capital requirements:

	•		Reduced Westernbank’s risk-weighted assets by shifting the composition of its investment portfolio from called agency securities with a risk-weight of 20% to GNMA mortgage-backed securities and collateralized mortgage obligations with a risk-weight of 0%.

	•		Reduced by 74% the payment of cash dividends on common stock in 2008.


	•		Increased Westernbank’s borrowing capacity with the FHLB — At December 31, 2008, the Company’s available borrowing capacity with the FHLB increased to $467.6 million from $137.3 million at December 31, 2007.


	•		Sold unused real estate owned — During 2008, Westernbank sold certain land lots originally held for future branch development and recognized a gain on sale of $14.7 million.

	•		Negotiated tax settlements — During the first quarter of 2008, Westernbank negotiated tax agreements with local and federal authorities that yielded a benefit of $33.3 million.

	•		Transferred the Company’s insurance agency to Westernbank in 2008, resulting in a capital infusion to Westernbank of $2.9 million.

Dividends Suspension

On February 17, 2009, the Company announced that the Company’s Board of Directors voted to suspend regular monthly dividends on the Company’s common stock and all outstanding series of its preferred stock, effective with the payment to be made on March 16, 2009 and applicable to stockholders of record as of February 27, 2009, to strengthen and maintain the Company’s capital position.

Transactions with Affiliates of Lehman Brothers Inc.

Westernbank has counterparty exposure to affiliates of Lehman Brothers Holdings Inc. (“LBHI”), which filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 15, 2008 in connection with certain securities repurchase agreements and derivative transactions. Lehman Brothers Special Financing Inc. (“LBSF”) was the counterparty to the Company on certain interest rate swap and cap agreements guaranteed by LBHI. The filing of bankruptcy by LBHI was an event of default under the agreements. On September 19, 2008, the Company terminated all agreements with LBSF and replaced them with another counterparty under similar terms and conditions. In connection with such termination, the Company has an unsecured counterparty exposure with LBSF of approximately $484,600. This unsecured exposure was written-off during the third quarter of 2008.

In addition, Lehman Brothers Inc. (“LBI”) was the counterparty to the Company on certain sale of securities under agreements to repurchase. On September 19, 2008, LBI was placed in a Securities Investor Protection Act (“SIPA”) liquidation proceeding after the filing for bankruptcy of its parent LBHI. The filing of the SIPA liquidation proceeding was an event of default under the repurchase agreements resulting in their termination as of September 19, 2008. The termination of the agreements caused the Company to recognize the unrealized loss on the value of the securities subject to the agreements, resulting in a $3.3 million charge during the third quarter of 2008. Westernbank also has an aggregate exposure of $139.2 million representing the amount by which the value of Westernbank securities delivered to LBI exceeds the amount owed to LBI under repurchase agreements. On January 27, 2009, Westernbank filed customer claims with the trustee in LBI’s SIPA liquidation proceeding. On June 1, 2009, Westernbank filed amended customer claims with the trustee. Management evaluated this receivable in accordance with the guidance provided by SFAS No. 5, “Accounting for Contingencies”, and related pronouncements. In making this determination, management consulted with legal counsel and technical experts. As a result of its evaluation, the Company recognized a loss of $13.9 million against the $139.2 million owed by LBI as of December 31, 2008. Determining the loss amount required management to use considerable judgment and assumptions, and is based on the facts currently available. As additional information on the LBI’s SIPA liquidation proceeding becomes available, the Company may need to recognize additional losses. A material difference between the amount claimed and the amount ultimately recovered would have a material adverse effect on the Company’s and Westernbank’s financial condition and results of operations, and could cause the Company’s and Westernbank’s regulatory capital ratios to fall below the minimum to be categorized as well capitalized.

Deposit Insurance Risk-Based Assessments

The deposits of Westernbank are insured up to regulatory limits by the FDIC. The Federal Deposit Insurance Reform Act of 2005 gave the FDIC increased flexibility in assessing premiums on banks and savings associations, including Westernbank, to pay for deposit insurance and in managing its deposit insurance reserves. Due to the financial crises affecting the banking system and financial markets, in 2009 the FDIC increased regular rate assessments over the rates in effect during 2008 and imposed a special assessment of five basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009. This special assessment was collected on September 30, 2009, and resulted in an additional charge to Westernbank of $6.8 million.

As a result of the special assessments and the increase in the regular assessment rate, the Company expects an increase of approximately $35.7 million in its deposit insurance premium expense for 2009, as compared to 2008. As of December 31, 2008, the Deposit Insurance Fund reserve ratio reported by the FDIC was .40 percent. The FDIC is required by law to return the reserve ratio to 1.15 percent no later than the end of 2013. As a result, Westernbank expects to be subject to increased deposit insurance premium expenses in future periods. On September 30, 2009, the Board of Directors of the FDIC adopted a Notice of Proposed Rulemaking that would require insured institutions, such as Westernbank, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis points increase in assessment rates effective on January 1, 2011. For additional information regarding FDIC insurance coverage and deposit insurance premium assessment rates, refer to “—Supervision and Regulation—FDIC Deposit Insurance Coverage” and “—Supervision and Regulation—FDIC Deposit Insurance Premium Assessments” below.

Reverse Stock Split

On November 7, 2008, the stockholders of the Company approved an amendment to the Company’s Certificate of Incorporation to effect a reverse stock split at a specific ratio to be determined by the Board in its sole discretion within the range of one-for-ten to one-for-fifty, inclusive. On November 14, 2008, the Company announced that its Board of Directors had established a ratio of one share-for-every fifty shares of the outstanding common stock for the Company’s proposed reverse stock split of all outstanding shares of the Company’s common stock, to become effective December 1, 2008. All financial statement data and references to average number of shares outstanding, per share amounts, common shares issued and stock option information have been retrospectively adjusted to reflect the reverse stock split.

EMPLOYEES

At December 31, 2008, the Company had 1,445 full-time employees, including its executive officers. The Company considers its employee relations to be excellent.

AVAILABLE INFORMATION ON WEBSITE

We make available free of charge, through our investor relations section at our website, http://www.wholding.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Copies are also available, without charge, from W Holding Company, Inc, Corporate Communications and Investor Relations, 19 West McKinley Street, 3rd Floor, Mayagüez, PR 00680.

The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at its web site (http://www.sec.gov). In addition, our Internet website, in the Investor Relations Section, also includes our Code of Business Conduct and Ethics, our Code of Ethics for our Chief Executive Officer and Senior Financial Officers, the charters of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, and the Corporate Governance Guidelines of our Board of Directors. We also make available free of charge in print to any stockholder who requests them copies of our corporate governance principles, and the charters of each standing committee of our board of directors. Requests for copies of these documents should be directed to Mr. Juan C. Frontera, Secretary, W Holding Company, Inc., P.O. Box 1180, Mayagüez, Puerto Rico 00681. To the extent required by SEC rules, we intend to disclose any amendments to our code of conduct and ethics, and any waiver of a provision of the code with respect to the company’s directors, principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on our web site referred to above within five business days following any such amendment or waiver, or within any other period that may be required under SEC rules from time to time.

SUPERVISION AND REGULATION

The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As a bank holding company, the Company is subject to the regulation, supervision, and examination by the Federal Reserve Board (“FRB”). The Company is required to file periodic reports and other information with the FRB and the FRB may conduct examinations of the Company. Westernbank is subject to the regulation, supervision and examination of the FDIC and the Puerto Rico Commissioner of Financial Institutions (the “Puerto Rico Commissioner”) and, as to certain matters, the FRB. Westernbank Insurance Corp. is subject to the regulation, supervision, and examination of the Office of the Commissioner of Insurance of Puerto Rico.

Under the provisions of the Bank Holding Company Act, FRB approval is required if the Company seeks to acquire direct or indirect ownership or control of any voting shares of a bank or bank holding company if, after such acquisition, the Company would own or control directly or indirectly more than 5% of the voting stock of the bank or bank holding company. Prior approval of the FRB is also required before the Company may engage in or acquire more than 5% of the voting stock of companies engaged in certain permissible non-banking activities. In acting on such requests for prior approval, the FRB considers certain competitive, management, financial and other factors specified in the BHC Act. The FRB also has authority under certain circumstances to issue cease and desist orders and other enforcement actions against bank holding companies and their non-bank subsidiaries.

Under the Bank Holding Company Act, a bank holding company is prohibited with limited exceptions, from engaging, directly or indirectly, in any activities that are not closely related to the businesses of banking or managing or controlling banks.

Under FRB policy, a bank holding company such as the Company is expected to act as a source of financial strength to its banking subsidiaries and to commit support to them. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks must be subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. As of December 31, 2008, Westernbank was the only depository institution subsidiary of the Company.

The Company is subject to capital adequacy guidelines of the FRB. The guidelines apply on a consolidated basis and generally require bank holding companies to maintain a ratio of Tier 1 capital to total average assets of at least 4.0%. There is a minimum ratio of 3.0% established for the most highly rated bank holding companies. The FRB’s capital adequacy guidelines also require bank holding companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0% and a minimum ratio of qualifying

total capital to risk-weighted assets of 8.0%. 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 FRB’s guidelines. In addition, any bank holding company whose capital falls below levels specified in the guidelines can be required to implement a plan to increase capital. As of December 31, 2008, the Company is in compliance with the FRB’s capital adequacy guidelines with a ratio of Tier 1 capital to average assets of 5.26%, a ratio of Tier 1 capital to risk-weighted assets of 8.96%, and a ratio of total capital to risk-weighted assets of 10.24%.

Under the guidelines for qualifying total capital, at least half of the total capital is to be comprised of Tier 1 Capital. Tier 1 capital generally consists of common stock, retained earnings, noncumulative perpetual preferred stock, qualifying trust preferred securities and minority interests in certain subsidiaries, less any amounts of goodwill, other intangible assets, interest-only strips receivables, deferred tax asset, nonfinancial equity investments, and other items that are required to be deducted under FRB guidelines. The remainder may consist of supplementary capital elements, including subordinated debt, other preferred stock and loan and lease loss reserves, all subject to various qualifications and limitations (“Tier 2 Capital”). With respect to risk-based and leverage capital ratios, most intangibles, including core deposit intangibles, are deducted from Tier 1 Capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to originated and purchased mortgage servicing rights and purchased credit card relationships and include a “grandfathered” provision permitting inclusion of certain existing intangibles.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal banking regulators must take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Prompt corrective action provisions are not applicable to bank holding companies. The FDICIA and the regulations issued thereunder established five capital tiers: (i) “well capitalized”, if a depository institution has a total risk-based capital ratio of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more, and is not subject to any written capital order or directive; (ii) “adequately capitalized”, if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized”, (iii) “undercapitalized”, if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) “significantly undercapitalized”, if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%, and (v) “critically undercapitalized”, if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Generally, a depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it received a less than satisfactory examination rating at its most recent examination and did not subsequently address the examiner’s concerns or if its primary federal regulator determines, after notice and the opportunity for a hearing, that the depository institution’s condition is unsafe or unsound or is subject to any written agreement order, capital directive or prompt corrective action to meet and maintain a specific level for any capital measure. Although Westernbank complies with the quantitative definition of a well capitalized institution, by virtue of having a capital directive within the Consent Order, Westernbank is deemed to be adequately capitalized as of the date of the Consent Order. As of December 31, 2008, Westernbank capital ratios were:

Tier 1 capital to average assets — 5.19%
Tier 1 capital to risk-weighted assets — 8.81%
Total capital to risk-weighted assets — 10.09%

Refer to “Regulatory Capital Ratios” section included herein in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

As noted above, in May 2009, Westernbank entered into a Consent Order with the FDIC and the OCIF. The Consent Order requires Westernbank to maintain a Tier 1 leverage ratio of not less than 5.5% as of the date of the Consent Order, 5.75% at September 30, 2009 and 6.0% at March 31, 2010. As of September 30, 2009, Westernbank expects to be above the Tier 1 leverage ratios required by the Consent Order. No assurance can be given that the Consent Order will not have a material adverse effect on the Company or Westernbank.

During the third quarter of 2009 to strengthen Westernbank’s regulatory capital ratios, the Company transferred to the Bank from its investment portfolio certain securities that yielded a capital infusion of $13.5 million to Westernbank.

FDICIA generally prohibits a depository institution from making any capital distribution (including the payment of a dividend) or paying any management fees to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowings from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the

amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to the appointment of a receiver or conservator.

Failure to meet the capital guidelines could subject an institution to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business. At December 31, 2008, the Company and Westernbank were in compliance with all capital requirements. For more information, refer to Note 15 to the consolidated financial statements, included herein in Part II, Item 8.

DIVIDEND RESTRICTIONS. The principal source of funds of the Company is dividends from Westernbank. The ability of Westernbank to pay dividends on its common stock is restricted by the Puerto Rico Banking Act, the Federal Deposit Insurance Act (“FDIA”) and FDIC regulations. In general terms, the Puerto Rico Banking Act provides that when the expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be charged against the undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If there is no sufficient reserve fund to cover such balance in whole or in part, the outstanding amount shall be charged against the bank’s capital account. The Puerto Rico Banking Act provides that until said capital has been restored to its original amount and the reserve fund restored to 20% of the original capital, the bank may not declare any dividends. In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a bank.

The payment of dividends by Westernbank may also be affected by other regulatory requirements and policies, such as maintenance of adequate capital. If, in the opinion of the regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice, which depending on the financial condition of the depository institution, could include the payment of dividends, such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. The FRB has issued a policy statement that provides that bank holding companies should generally pay dividends only out of operating earnings for the current and preceding two years. In addition, all insured depository institutions are subject to the capital-based limitations required by FDICIA.

The Company is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, will be equal to 10% or more of the Company’s consolidated net worth. The FRB may disapprove any purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, order or directive of the FRB, or any condition imposed by, or written agreement with, the FRB. Such notice and approval is not required for a bank holding company that would be, both before and after the purchase or redemption, considered “well capitalized” under applicable regulations of the FRB, that received a rating of “1” or “2” overall and for management at its most recent examination, and that is not the subject of any unresolved supervisory issues. Notwithstanding the foregoing, any redemption of the Company’s preferred stock will require the prior approval of the FRB. In addition to these general requirements, the Written Agreement prohibits the Company from purchasing or redeeming any shares of its stock without the prior written approval of the Reserve Bank.

On February 17, 2009, the Company announced that the Company’s Board of Directors voted to suspend regular monthly dividends on the Company’s common stock and all outstanding series of its preferred stock, effective with the payment to be made on March 16, 2009 and applicable to stockholders of record as of February 27, 2009, so as to maintain the Company’s capital position.

In addition, as explained above, in May 2009, the Company and Westernbank entered into (i) the Consent Order with the FDIC and the OCIF and (ii) the Written Agreement with the Board of Governors of the Federal Reserve System. Pursuant to the Orders, the Bank may not declare or pay any dividends without the prior written approval of the Regional Director of the FDIC’s New York Regional Office. Requests for approval are required to be received at least 30 days prior to the proposed date for the declaration of dividends and are required to contain, but not be limited to, information on consolidated earnings for the most recent annual period and the last quarter and the Company shall not declare or pay any dividends or receive any dividends from Westernbank without the prior written approval of the Federal Reserve Bank of New York and the Director of the Division of Bank Supervision and Regulation of the FRB.

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

Westernbank derives its lending, investment and other powers primarily from the applicable provisions of the Puerto Rico Banking Law and the regulations adopted thereunder. That law governs the responsibilities of directors, officers and stockholders, and the corporate powers, savings, lending, capital and investment requirements and other activities of Westernbank. The Puerto Rico Commissioner has extensive rulemaking power and administrative discretion under the Puerto Rico Banking Law, and generally examines Westernbank on an annual basis.

The Puerto Rico Banking Act requires that at least 10% of the yearly net income of Westernbank be credited annually to a reserve fund. This must be done every year until the reserve fund is equal to the total paid-in capital for common stock and preferred stock or 10% of total deposits. At December 31, 2008, Westernbank had a reserve fund established in accordance with the requirements of the Puerto Rico Banking Act. The Puerto Rico Banking Law also provides that when the expenditures of a bank are greater than the receipts, the excess is charged against the undistributed profits of the bank, and the balance, if any, is charged against and reduces the reserve fund. If there is no reserve fund sufficient to cover the entire amount, the excess amount is charged against the capital account and no dividend can be declared until the capital has been restored to its original amount and the reserve fund to 20% of the original capital.

Under the Puerto Rico Banking Act, Westernbank must maintain a legal reserve in an amount equal to at least 20% of Westernbank’s demand liabilities, except certain government deposits (federal, state and municipal), that are secured by actual collateral. The reserve is required to be composed of any of the following securities or combination thereof: (1) legal tender of the United States; (2) checks on banks or trust companies located in any part of Puerto Rico that are to be presented for collection during the day following the day on which they are received, (3) money deposited in other banks provided said deposits are authorized by the Commissioner, subject to immediate collection; (4) federal funds sold to any Federal Reserve Bank and securities purchased under agreements to resell executed by the bank with such funds that are subject to be repaid to the bank on or before the close of the next business day; and (5) any other asset that the Commissioner identifies from time to time. At December 31, 2008, Westernbank had a legal reserve of 454.81%.

Section 17 of the Puerto Rico Banking Law permits Puerto Rico commercial banks to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of fifteen percent (15%) of the sum of: (i) the bank’s paid-in capital; (ii) the bank’s reserve fund; (iii) 50% of the bank’s retained earnings; subject to certain limitations, and (iv) any other components that the Commissioner may determine from time to time. If such loans are secured by collateral worth at least twenty five percent (25%) more than the amount of the loan, the aggregate maximum amount may reach one third (33.33%) of the sum of the bank’s paid-in capital, reserve fund, 50% of retained earnings and such other components that the Commissioner may determine from time to time. There are no restrictions under the Banking Law on the amount of loans that are wholly secured by bonds, securities and other evidence of indebtedness of the Government of the United States, or of the Commonwealth of Puerto Rico, or by bonds, not in default, of municipalities or instrumentalities of the Commonwealth of Puerto Rico.

Westernbank has a significant lending concentration with an aggregate unpaid principal balance of $405.3 million at December 31, 2008 to a commercial group in Puerto Rico, which exceeds the loan-to-one borrower limitation thus constituting a violation of the provisions of Section 17 of the Puerto Rico Banking Law. On May 20, 2008, the Puerto Rico Commissioner imposed a $50,000 penalty and ordered the Board of Directors of Westernbank to take immediate appropriate actions to resolve the issue. Westernbank has explored various alternatives to decrease its exposure to this borrower to comply with the loan-to-one borrower limitation. However, due to the credit tightening propelled by the current economic environment, such efforts have not materialized. Westernbank continues to pursue other actions in order to reduce such excess. There can be no assurance that the Commissioner will not take further actions on this issue. As of December 31, 2008, this loan relationship was not impaired. For more information, refer to Note 4 to the consolidated financial statements, included in Part II, Item 8.

The Banking Law prohibits Puerto Rico commercial banks from making loans secured by their own stock, and from purchasing their own stock, unless such purchase is made pursuant to a stock repurchase program approved by the Commissioner or is necessary to prevent losses because of a debt previously contracted in good faith. The stock purchased by the Puerto Rico commercial bank must be sold by the bank in a public or private sale within one year from the date of purchase.

The Puerto Rico Finance Board (the “Finance Board”), which includes as its members the Puerto Rico Commissioner, the Secretary of the Treasury, the Secretary of Commerce, the Secretary of Consumer Affairs, the President of the Economic Development Bank, the President of the Government Development Bank and the President of the Planning Board, has the authority to regulate maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in Puerto Rico. The current regulations of the Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses, including real estate loans, is to be determined by free competition. In addition, the current regulations of the Finance Board do not set a maximum interest rate for retail sales installment contracts, for credit card purchases and for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances, and insurance premiums.

Under Puerto Rico law, no person or company may acquire direct or indirect control of a bank or a bank holding company without first obtaining the prior approval of the Puerto Rico Commissioner. Control is defined to mean the power, directly or indirectly, to direct or decisively influence the management or the operations of the bank or the bank holding company. Control is presumed to exist if a person or entity, or group acting in concert, would become the owner, directly or indirectly, of more than 5% of the voting stock of the bank or the bank holding company as a result of the transfer of voting stock, and such person, entity or group did not own more than 5% of the voting stock prior to the transfer.

FDIC DEPOSIT INSURANCE COVERAGE. The deposits of Westernbank are insured up to the applicable limits established by law. The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), which merged the Bank Insurance Fund and the Savings Association Fund into a single fund, the Deposit Insurance Fund (“DIF”), increased the maximum amount of the insurance coverage for certain retirement accounts and provided for “inflation adjustments” in the maximum amount of coverage available with respect to other insured accounts. The Emergency Economic Stabilization Act of 2008, among other things, temporarily increased the amount of deposit insurance from $100,000 to $250,000 per depositor until December 31, 2009. On May 20, 2009, President Barack Obama signed legislation that extended this temporary increase to $250,000 per depositor through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and other certain retirement accounts, which will remain at $250,000 per depositor. In addition, on November 21, 2008, the FDIC issued a final rule regarding the TLGP which, among other actions, provides full insurance coverage of non-interest bearing deposit transaction accounts of participating institutions until June 30, 2010. Westernbank has chosen to participate in this program.

FDIC insurance on deposits may be terminated by the FDIC, after notice and hearing, upon a finding by the FDIC that the insured bank has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition to continue operations as an insured bank, or has violated any applicable law, regulation, rule or order of or condition imposed by or written agreement entered into with the FDIC.

FDIC DEPOSIT INSURANCE PREMIUM ASSESSMENTS. Westernbank is subject to the deposit insurance premium assessments of the DIF. The FDIC uses a risk-based premium assessment system. The Reform Act gave the FDIC more discretion to price deposit insurance according to risk for all insured institutions regardless of the level of the DIF reserve ratio. The Reform Act also provided a credit to all insured depository institutions, based on the amount of their insured deposits at year-end 1996, and is applied automatically to reduce the institution’s quarterly premium assessment to the maximum extent allowed, until the credit is exhausted. Westernbank fully utilized its credit in 2007.

Effective January 1, 2007, the FDIC implemented a revised risk-based assessment system (“FDIC Assessment Rule”) providing for assessment rates that vary based on the level of risk posed by the institution to the DIF. Under the FDIC Assessment Rule, all insured depository institutions are placed into one of four risk categories. An institution’s risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured institution also is assigned to one of three supervisory subgroups. Subgroup “A” institutions are financially sound institutions with only a few minor weaknesses; subgroup “B” institutions are institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration; and subgroup “C” institutions are institutions with respect to which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless corrective action is taken to correct the areas of weakness. Well capitalized and well managed banks are generally assigned to risk category I, while undercapitalized banks in supervisory subgroup “C” are generally assigned to

risk category IV. Within risk category I, the FDIC Assessment Rule combines supervisory ratings with other measures, such as measuring certain financial ratios or looking to long-term debt issuer ratings, to further differentiate risk and the pricing of deposit insurance coverage.

Under the FDIC Assessment Rule, premiums are assessed quarterly. As of January 1, 2009, all insured institutions were required to pay a base rate assessment of 12 to 50 basis points of their deposits for the first quarter of 2009, and 7 to 77.5 basis points after April 1, 2009, based on the risk of loss the particular institution poses to the DIF. This is an increase from the rate assessment that was in effect during 2008. The increase in the base rate assessment from 2008 to 2009 is due to the financial crises affecting the banking system and financial markets. In addition, on February 27, 2009, the FDIC issued an interim rule that would charge banks an emergency special assessment of 20 basis points of insured deposits. On May 22, 2009, the FDIC amended the interim rule and imposed a final special assessment of five basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009. This special assessment was collected on September 30, 2009, and resulted in an additional charge to Westernbank of $6.8 million.

As a result of the special assessments and the increase in the regular assessment rate, the Company expects an increase of approximately $39.2 million in its deposit insurance premium expense for 2009, as compared to 2008. As of December 31, 2008, the DIF reserve ratio reported by the FDIC was 40 basis points. The FDIC is required by law to return the reserve ratio to 1.15 percent no later than the end of 2013. As a result, Westernbank expects to be subject to increased deposit insurance premium expenses in future periods.

On September 30, 2009, the Board of Directors of the FDIC adopted a Notice of Proposed Rulemaking that would require insured institutions, such as Westernbank, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis points increase in assessment rates effective on January 1, 2011.

In addition to deposit insurance premiums, all FDIC-insured institutions are required to pay a pro rata portion of the interest due on bonds issued by the Financing Corporation (“FICO”) in the late 1980’s to recapitalize the former Federal Savings and Loan Insurance Corporation. FICO assessments are set quarterly based on insured deposits, and in 2008 ranged from 1.14 basis points in the first quarter to 1.10 basis points in the fourth quarter. These assessments will continue until the FICO bonds mature in 2017 through 2019.

CROSS-GUARANTEES. Under the FDIA, a depository institution (which term includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined generally as the appointment of a conservator or a receiver and “in danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions liable to the FDIC, and any obligations of that bank to its parent corporation are subordinated to the subsidiary bank’s cross-guarantee liability with respect to commonly controlled insured depository institutions. Westernbank is currently the only FDIC-insured depository institution controlled by the Company and therefore not subject to this guaranty provision.

BROKERED DEPOSITS. FDIC regulations govern the receipt of brokered deposits. Under these regulations, a bank cannot accept, rollover or renew brokered deposits (which term is defined also to include any deposit with an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. However, a bank that is adequately capitalized may not pay an interest rate more than 75 basis points over prevailing rates under any circumstances. Concurrent with the previously mentioned Consent Order, the FDIC granted Westernbank a renewable six-month waiver for the issuance of brokered deposits. As part of its strategy, the Bank is committing to continue diversifying its funding sources. Westernbank has been able to obtain sufficient brokered certificates of deposits to fund its operation without limitation from the current regulations. However, no assurance can be given that the current condition will be maintained during future periods.

SAFETY AND SOUNDNESS STANDARDS. Section 39 of the FDIA requires each federal banking agency to prescribe for all insured depository institutions that it regulates standards relating to internal control, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. In addition, each federal banking agency is required to adopt standards that specify (i) a maximum ratio of classified assets to capital, (ii) minimum earnings sufficient to absorb losses without impairing capital, (iii) to the extent feasible, a minimum ratio of market value to book value for publicly-traded shares of the institution or holding company, and (iv) such other standards relating to asset quality, earnings and valuation as the agency deems appropriate. Finally, each federal banking agency is required to prescribe standards for the employment contracts and other compensation arrangements of executive officers, employees, directors and principal stockholders of insured depository institutions that would prohibit compensation, benefits and other arrangements that are excessive or that could lead to a material financial loss for the institution. If an insured depository institution or its holding company fails to meet any of

the standards described above, it may be required to submit to the appropriate federal banking agency a plan specifying the steps that will be taken to cure the deficiency. If an institution or holding company fails to submit an acceptable plan or fails to implement the plan, the appropriate federal banking agency will require the institution or holding company to correct the deficiency and, until it is corrected, may impose other restrictions on the institution or holding company, including any of the restrictions applicable under the prompt corrective action provisions of FDICIA.

ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. State banks and their subsidiaries are limited in their investments and activities engaged in as principal to those permissible under applicable state law and that are permissible for national banks and their subsidiaries, unless such investments and activities are specifically permitted by the FDIA or the FDIC determines that such activity or investment would pose no significant risk to the DIF and the banks are, and continue to be, in compliance with applicable capital standards. The FDIC has by regulation determined that certain real estate investment activities do not present a significant risk to the DIF, provided they are conducted in accordance with the regulations. Provisions of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”), permit national banks to establish financial subsidiaries that may engage in the activities permissible for financial holding companies, other than insurance underwriting and merchant banking. In order to exercise this authority, a bank and its depository institution affiliates must be well-capitalized, well-managed and have CRA ratings of at least “satisfactory”. For a state bank, such activities also must be permissible under relevant state law.

ACTIVITIES AND INVESTMENTS. The activities as “principal” and equity investments of FDIC-insured, state-chartered banks such as Westernbank are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state-chartered bank generally may not directly or indirectly acquire or retain any equity investments of a type, or in an amount, that is not permissible for a national bank.

TRANSACTIONS WITH AFFILIATES AND INSIDERS OF WESTERNBANK. Transactions between Westernbank and any of its affiliates, including the Company, are governed by sections 23A and 23B of the Federal Reserve Act, as implemented by the FRB’s Regulation W. An affiliate of a bank is generally considered to be a company or entity that controls, is controlled by or is under common control with the bank. Generally, sections 23A and 23B (1) limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the bank’s capital stock and surplus, and limit such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (2) require that all such transactions be on terms that are consistent with safe and sound banking practices. The term “covered transactions” includes the making of loans, purchase of or investment in securities issued by the affiliate, purchase of assets, issuance of guarantees and other similar types of transactions. Most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amount, depending on the nature of the collateral. In addition, any covered transaction by a bank with an affiliate and any sale of assets or provision of services to an affiliate must be on terms that are substantially the same, or at least as favorable, to the bank as those prevailing at the time for comparable transactions with nonaffiliated companies.

Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans by a bank to executive officers, directors, and principal stockholders. Under section 22(h), loans to a director, an executive officer and to a stockholder controlling greater than 10% of a bank and certain of their related interests (“insiders”) and insiders of affiliates, may not exceed, together with all other outstanding loans to such person and related interests, the bank’s loans-to-one-borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus for unsecured loans and an additional 10% of the institution’s unimpaired capital and surplus for loans fully secured by readily marketable securities). Section 22(h) also requires that loans to insiders and to insiders of affiliates be made on terms substantially the same as offered in comparable transactions to other persons, unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the bank and (ii) does not give preference to insiders over other employees of the bank. Section 22(h) also requires prior board of director’s approval for certain loans, and the aggregate amount of extensions of credit by a bank to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.

COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act (“CRA”), as implemented by federal regulations, a financial institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires federal examiners, in connection with the examination of a financial institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Company

has a Compliance and Risk Management Committee, which oversees the planning of products, and services offered to the community, especially those aimed to serve low and moderate income communities. Westernbank, at its most recent evaluation of performance under the CRA, was rated satisfactory by FDIC examiners.

CUSTOMER INFORMATION SECURITY. The FRB, the FDIC and other bank regulatory agencies have adopted final guidelines (the “Guidelines”) for safeguarding confidential, personal customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The FRB, FDIC and the other banking regulatory agencies later supplemented the Guidelines to include a requirement that the security programs of financial institutions include the development and implementation of a risk-based response program to address incidents of unauthorized access to customer information in customer information systems. The Company has adopted a customer information security program that has been approved by the Company’s board of directors.

FEDERAL HOME LOAN BANK SYSTEM. Westernbank is a member of the Federal Home Loan Bank System. The System consists of 12 regional Federal Home Loan Banks, with each subject to supervision and regulation by the Federal Housing Finance Board. Each Federal Home Loan Bank provides a central credit facility primarily for member institutions. Westernbank, as a member of the FHLB of New York, is required to acquire and hold shares of capital stock in that FHLB in an amount equal to the greater of: 1.0% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year; 5% of its FHLB advances outstanding; or 0.3% of its total assets. At December 31, 2008, Westernbank held $64.2 million in capital stock of the FHLB of New York.

Advances from a FHLB are secured by a member’s shares of stock in the institution, certain types of mortgages and other assets, including investment securities. Interest rates charged for advances vary depending upon maturity and the cost of funds to the FHLB. As of December 31, 2008, Westernbank had $42.0 million in outstanding advances and $1.07 billion in repurchase agreements from the FHLB of New York, and has available $467.6 million under a line of credit facility with the FHLB.

INTERNATIONAL BANKING CENTER REGULATORY ACT. The business and operations of Westernbank International Banking Entity are subject to supervision and regulation by the Puerto Rico Commissioner. Under the International Banking Center Regulatory Act, which provides for the creation of international banking entities (“IBEs”) (“IBE Act”), no sale, encumbrance, assignment, merger, exchange or transfer of shares, interest or participation in the capital of an IBE may be initiated without the prior approval of the Puerto Rico Commissioner, if by such transaction a person would acquire, directly or indirectly, control of 10% or more of any class of stock, interest or participation in the capital of the IBE. The IBE Act and the regulations issued thereunder by the Puerto Rico Commissioner (the “IBE Regulations”) limit the business activities that may be carried out by an IBE. Such activities are limited in part to those involving persons and assets located outside of Puerto Rico. The IBE Act provides further that every IBE must have not less than $300,000 of unencumbered assets or acceptable financial securities.

Pursuant to the IBE Act and the IBE Regulations, the Westernbank IBE must maintain segregated books and records of all its transactions in the ordinary course of business. The Westernbank IBE also is required thereunder to submit to the Puerto Rico Commissioner quarterly and annual reports of its financial condition and results of operations.

The IBE Act empowers the Puerto Rico Commissioner to revoke or suspend, after notice and hearing, a license issued thereunder if, among other things, the IBE fails to comply with the IBE Act, the IBE Regulations or the terms of its license, or if the Puerto Rico Commissioner finds that the business or affairs of the IBE are conducted in a manner that is not consistent with the public interest.

For information regarding recent legislative actions affecting the income taxation of IBEs, refer to “Commonwealth Taxation — Income Taxes” below.

PRIVACY. Under the GLB Act, all financial institutions, including the Company, Westernbank and Westernbank Insurance Corp., are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties pursuant to their privacy policies or at the customer’s request, and establish procedures and practices to protect customer data from unauthorized access. The Company and its subsidiaries have developed such policies and procedures, and the Company believes these policies and procedures are in compliance with all privacy provisions of the GLB Act.

ANTI-MONEY LAUNDERING. On October 26, 2001, the President signed into law comprehensive anti-terrorism legislation known as the USA PATRIOT Act of 2001 (the “USA Patriot Act”). Title III of the USA Patriot Act substantially broadened the scope of the U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States of America. The U.S. Treasury Department and federal banking agencies have issued a number of regulations and other guidance implementing the USA Patriot Act requirements that apply to financial institutions. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of customers. The effectiveness of a financial institution in establishing such policies, procedures and controls to combat money laundering activities is a factor to be considered in any application submitted by a financial institution under the Bank Merger Act, which applies to Westernbank, or any expansionary banking proposal under the BHC Act, which applies to the Company.

REGULATORY ENFORCEMENT AUTHORITY. The enforcement powers available to federal banking regulators include, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, to require written agreements and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Federal law requires, except under certain circumstances, public disclosure of final enforcement actions by the federal banking agencies. In addition, the FRB and FDIC may take various other informal actions. Refer to “Recent Significant Events” above for a detailed description of certain regulatory agreements entered into with the FDIC, the OCIF and the FRB.

THE SARBANES-OXLEY ACT. The Sarbanes-Oxley Act of 2002, (“Sarbanes-Oxley”) implemented a broad range of corporate governance and accounting measures for public companies (including publicly-held bank holding companies such as the Company) designed to promote honesty and transparency in corporate America. Sarbanes-Oxley’s principal provisions, many of which have been interpreted through SEC regulations, provide for and include, among other things: (i) the creation of an independent accounting oversight board; (ii) auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients; (iii) additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer of a public company certify financial statements; (iv) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; (v) an increase in the oversight of, and enhancement of certain requirements relating to, audit committees of public companies and how they interact with the Company’s independent auditors; (vi) requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer; (vii) requirements that companies disclose whether at least one member of the audit committee is a ‘financial expert’ (as such term is defined by the SEC) and if not discussed, why the audit committee does not have a financial expert; (viii) expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; (ix) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions on nonpreferential terms and in compliance with other bank regulatory requirements; (x) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; and (xi) a range of enhanced penalties for fraud and other violations.

FUTURE LEGISLATION. Changes to federal and local laws and regulations (including changes in interpretation or enforcement) can affect the operating environment of the Company and its subsidiaries in substantial and unpredictable ways. From time to time, various legislative and regulatory proposals are introduced. These proposals, if codified, may change banking statutes and regulations and the Company’s operating environment and can have retroactive effect. If codified, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Company cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon our financial condition or results of operations. It is

likely, however, that the current high level of enforcement and compliance-related activities of federal and local authorities will continue and potentially increase.

COMMONWEALTH TAXATION

GENERAL. Under the Puerto Rico Internal Revenue Code (the “PR-IRC”), all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Company, Westernbank, WIC and SRG Net, Inc. (the “Companies”) report their income and expenses based on the accrual basis of accounting and file their Puerto Rico tax returns on a calendar year basis.

INCOME TAXES. The Companies are subject to Puerto Rico regular income tax on income earned from all sources up to a maximum rate of 39%, except for years 2005 and 2006, in which a transitory additional surtax of 2.5% over net taxable income was imposed by the Governor of Puerto Rico under Law No. 41, signed on August 1, 2005. This transitory additional tax was in effect for taxable years 2005 and 2006. This transitory additional income tax of 2.5% was initially recorded in the third quarter of 2005, and amounted to $3.8 million for the year ended December 31, 2006. On May 13, 2006, with an effective date of January 1, 2006, the Government of Puerto Rico approved Law No. 89 which imposed an additional 2.0% income tax on all companies covered by the Puerto Rico Banking Act, as amended, such as Westernbank. This transitory income tax of 2% amounted to $3.0 million for the year ended December 31, 2006. These transitory income taxes ended on December 31, 2006. On March 9, 2009, the Governor of Puerto Rico signed into law Act No. 7 (“Act No. 7”), also known as Special Act Declaring a Fiscal Emergency Status to Save the Credit of Puerto Rico, which amended several sections of the PR-IRC, including sections related to income, property, excise and sales and use tax provision. Act No. 7 imposes a series of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax determined, which is applicable to companies whose combined income exceeds $100,000, effectively increasing the maximum statutory rate from 39% to 40.95%. This temporary measure is effective for tax years that commenced after December 31, 2008 and before January 1, 2012.

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

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

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

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

Westernbank World Plaza, Inc., a wholly owned subsidiary of Westernbank, elected to be treated as a special partnership under the PR-IRC; accordingly, its taxable income is taxed at Westernbank.

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 Center 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 under certain circumstances. Pursuant to the provisions of Act No. 13 of January 8, 2004, for taxable years commencing after June 30, 2003, the net income earned by an IBE that operates as a unit of a bank under the Puerto Rico Banking Law, will be considered taxable and subject to income taxes at the current tax rates in the amount by which the IBE taxable income exceeds 40% in the first applicable taxable year (2004), 30% in the second year (2005) and 20% thereafter, of the taxable income of Westernbank, including its IBE taxable income. Westernbank’s IBE carries on its books a significant

amount of securities which are, irrespective of the IBE status, tax exempt by law. Moreover, the Act provides that IBE’s operating as subsidiaries will continue to be exempt from the payment of income taxes. For the years ended December 31, 2008 and 2006, the provisions of the Act did not have any effect on the Company’s financial position or results of operations. For the year ended December 31, 2007, the provisions of the Act resulted in an additional income tax provision of $3.8 million.

Under Act No. 7, all IBEs are subject to a special 5% tax on their net income not otherwise subject to tax under the PR-IRC. This special assessment is effective for tax years that commenced after December 31, 2008 and before January 1, 2012.

The Company evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. These changes, when they occur, can affect the income tax accruals as well as the current period’s income tax expense and can be significant to the operating results of the Company. The Company’s consolidated statements of financial condition include an accrual of $2.0 million and $44.0 million at December 31, 2008 and 2007, respectively, for the exposures resulting from tax positions identified by the Company in connection with this evaluation.

WFCC is a U.S. entity and accordingly is subject to income tax under the U.S. Internal Revenue Code. WFCC commenced operations in February 2007, was largely inactive, and was closed during the third quarter of 2008. In addition, Westernbank is subject to special flat income tax rates on gross income received from certain loans and investments as required by the U.S. Internal Revenue Code. These flat income tax rates range from 10% to 30%.

Any change in these tax laws or other regulations, whether by applicable regulators or as a result of legislation subsequently enacted by the Congress of the United States or the applicable local legislatures, may have an impact on the Company’s effective tax rate.


ITEM 1A.		RISK FACTORS

The material risks and uncertainties that management believes affect the Company are described below. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of, or that it currently deems immaterial, may also impair business operations.

If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly.

A continuation of recent turmoil in the financial markets, particularly if economic conditions worsen more than expected, could have an adverse effect on our financial position or results of operations.

In recent periods, United States and global markets have been very volatile, and general economic conditions appear to be deteriorating. This situation is continuing and, since the beginning of the third quarter of 2008, has worsened significantly. The impact of this situation, together with concerns regarding the financial strength of financial institutions, has led to distress in credit markets and issues relating to liquidity among financial institutions. Some financial institutions around the world have failed; others have been forced to seek acquisition partners. The United States and other governments have taken unprecedented steps to try to stabilize their respective financial systems, including investing in financial institutions. Our business and our financial condition and results of operations could be adversely affected by (1) continued or accelerated disruption and volatility in financial markets, (2) continued capital and liquidity concerns regarding financial institutions generally and our counterparties specifically, (3) limitations resulting from further governmental action in an effort to stabilize or provide additional regulation of the financial system, or (4) recessionary conditions that are deeper or last longer than currently anticipated.

We rely heavily on brokered deposits to meet our liquidity needs.

At December 31, 2008, we had $8.6 billion in brokered deposits, or 78% of our total deposits. We rely, in large part, on brokered deposits as a source of liquidity. We need liquidity to, among other things, pay operating expenses, maintain our lending activities and replace certain maturing liabilities. Without sufficient liquidity, we may be forced to curtail our operations. Brokered deposits represent a less stable source of funding than do local retail deposits. The availability of additional brokered deposits depends on a variety of factors including market conditions, regulatory matters and the Company’s and Westernbank’s overall financial condition.

In May 2009, the Company and Westernbank entered into (i) the Consent Order with the FDIC and the OCIF and (ii) the Written Agreement with the Board of Governors of the Federal Reserve System (which are referred to as the “Orders”). The Orders build on the informal agreement which Westernbank entered into with the FDIC in February of 2008. Concurrent with the Orders, the FDIC granted Westernbank a six-month waiver expiring on November 30, 2009, for the issuance of brokered certificates of deposits. The waiver allows Westernbank to continue to issue brokered certificates of deposits.

If the Company is not able to renew or roll over our existing brokered deposits on terms satisfactory to us or at all, our liquidity will be adversely impacted.

Our allowance for loan losses may not be adequate to cover actual loan losses determined in the future, which may require us to take a charge to our earnings and adversely impact our financial condition and results of operations.

We maintain an allowance for loan losses that we believe is adequate for absorbing any probable losses inherent in our loan portfolio. Management determines the provision for loan losses based upon an analysis of general market conditions, credit quality of our loan portfolio, and performance of our customers relative to their financial obligations with us. Estimates of losses inherent in the loan portfolio involve the exercise of judgment and the use of assumptions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The ultimate amount of incurred losses is susceptible to changes in economic, operating, and other conditions, including changes in interest rates that may be beyond our control and such actual losses may exceed the allowance for estimated loan losses. Although management believes that the allowance for loan losses is adequate to absorb any probable losses on existing loans that may become uncollectible, there can be no assurance that the allowance will prove sufficient to cover actual loan losses in the future. Significant increases to the provisions for loan losses may be necessary if material adverse changes in general economic conditions occur or the performance of our loan portfolio deteriorates. Additionally, banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses. If these regulatory agencies require us to increase the allowance for loan losses, it could have a negative effect on our results of operations and financial condition.

Our use of appraisals in deciding the amount of specific allowance assess against an impaired relationship may cause a material adverse effect on our business, financial condition and results of operations.

In determining the amount of allowance to be assessed against an impaired relationship, we generally require an appraisal of the collaterals securing the relationship. However, the appraisal is only an estimate of the value of the collateral at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the subject collateral, thus, increasing the possibility of loss if a borrower defaults. Such events could have a material adverse impact in our results of operations, financial condition and capital position.

We may be required to increase our valuation allowance for our real estate held for sale, which could have a material adverse effect on our financial condition, results of operations and capital position.

As of December 31, 2008, we had approximately $104.8 million of net real estate held for sale (with an associated $3.1 million valuation allowance). In determining the amount of allowance to be assessed against our inventory of real estate properties held for sale, we generally require an appraisal of such properties. However, the appraisal is only an estimate of the value of the property at the time the appraisal is made. Among other things, our estimate of value makes assumptions regarding the highest and best use of the property, considering the use of the property that is physically possible, legally permissible, and financially feasible as of the measurement date. Specifically, our assessment of value takes into consideration the future use of such properties, including changes in zoning to facilitate future development. Changes in legislation and zoning laws may impact our assessment of the highest and best use of our properties, which could affect the amount that may be obtained upon the sale of our real estate held for sale. If such events occur, our valuation allowance may need to be increased which could have a material adverse impact on our results of operations, financial condition and capital position.

The fair value of the real estate properties we hold for sale may be adversely affected by continued deterioration in the housing and general economic conditions in Puerto Rico. Continued weakness of economic conditions in Puerto Rico may require us to increase our valuation allowance related to real estate held for sale properties which could have a material adverse effect on our results of operations, financial condition and capital position.

We may face adverse consequences if Westernbank is not categorized as a “well-capitalized” institution.

Westernbank was considered well-capitalized under the FDIC’s Capital Adequacy Guidelines as of December 31, 2008. To be categorized as well capitalized, an institution must meet or exceed minimum total risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage ratios as set forth in the table above. See Note 15 to the consolidated financial statements, included in Part II, Item 8. However, although Westernbank’s capital ratios exceed the levels called for to be categorized as well capitalized, due to the capital directive in the Consent Order, Westernbank is currently deemed to be adequately capitalized. If Westernbank is unable to regain “well-capitalized” status in the future, it could jeopardize our ability to obtain additional funding and increase our liquidity costs. Specifically, as a result of being classified as “adequately capitalized”: (i) the Bank is not able to renew or accept brokered deposits without prior regulatory approval; and (ii) the Bank pays higher insurance premiums to the FDIC, which collectively reduce our earnings and could have an adverse effect on our business, financial condition and results of operations. Please see the risk factor “We rely heavily on brokered deposits to meet our liquidity needs.” above.

Regulators could take additional adverse actions against the Company or Westernbank as a result of the Consent Orders.

In May 2009, the Company and Westernbank entered into entered (i) the Consent Order with the FDIC and the OCIF and (ii) the Written Agreement with the Board of Governors of the Federal Reserve System (which are referred to as the “Orders”). The Orders build on the informal agreement which Westernbank entered into with the FDIC in February of 2008.

In addition to the aforementioned actions, the Consent Order requires Westernbank to maintain a Tier 1 leverage ratio of not less than 5.5% as of the date of the Consent Order, 5.75% at September 30, 2009 and 6.0% at March 31, 2010. As of September 30, 2009, Westernbank expects to be above the applicable Tier 1 leverage ratio required by the Consent Order. By virtue of having a capital directive, Westernbank is deemed to be “adequately capitalized” for purpose of prompt corrective action provision of Section 38 of FDIA. If Westernbank is unable to regain its “well-capitalized” status in the future, it could jeopardize its ability to obtain additional funding and increase the Company’s liquidity costs. Specifically, as a result of being classified as “adequately capitalized”: (i) the Bank is not able to renew or accept brokered deposits without prior regulatory approval; and (ii) the Bank pays higher insurance

premiums to the FDIC, which collectively reduce our earnings and could have an adverse effect on our business, financial condition and results of operations. Concurrent with the Orders, the FDIC granted Westernbank a six-month waiver expiring November 30, 2009, for the issuance of brokered certificates of deposits. The waiver allows Westernbank to continue to issue brokered certificates of deposits. Failure of the Company or Westernbank to remain in compliance with the terms of the Consent Orders could result in the imposition of additional regulatory actions and/or in monetary penalties.

The soundness of other financial services institutions may adversely affect our credit risk.

We rely on other financial services institutions through trading, clearing, counterparty, and other relationships. We maintain limits and monitor concentration levels of our counterparties as specified in our internal policies. Our reliance on other financial services institutions exposes us to credit risk in the event of default by these institutions or counterparties. These losses could adversely affect our results of operations and financial condition.

Difficult market conditions have adversely affected our industry.

Dramatic declines in the housing market over the past years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concerns about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business, financial condition and results of operations. We do not expect that the difficult conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:

	•		We expect to face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

	•		Market developments may affect customer confidence levels and may cause increases in delinquencies and default rates, which we expect could impact our charge-offs and provision for loan losses.

	•		Our ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.

	•		Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions.

There can be no assurance that recently enacted legislation will stabilize the U.S. financial system.

Since October 2008, a host of legislation has been enacted in response to the financial crises affecting the banking system and financial markets and threats to investment banks and other financial institutions.

	•		On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”) pursuant to which the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

	•		On October 14, 2008, the U.S. Treasury announced the Capital Purchase Program under the EESA pursuant to which it would purchase senior preferred stock and warrants to purchase common stock from participating financial institutions.

	•		On November 21, 2008, the FDIC adopted a Final Rule with respect to its Temporary Liquidity Guarantee Program pursuant to which the FDIC will guarantee certain “newly-issued unsecured debt” of banks and certain holding companies and also guarantee, on an unlimited basis, non-interest bearing bank transaction accounts.

	•		On February 10, 1009, the U.S. Treasury announced the Financial Stability Plan under the EESA, which is intended to further stabilize financial institutions and stimulate lending across a broad range of economic sectors.

	•		On February 18, 2009, President Obama signed the America Recovery and Reinvestment Act (“ARRA”), a broad economic stimulus package that included additional restrictions on, and potential additional regulation of, financial institutions.

Each of these programs was implemented to help stabilize and provide liquidity to the financial system. There can be no assurance, however, as to the actual impact that the EESA and its implementing regulations, the Capital Purchase Program, the Financial Stability Plan, the ARRA, the FDIC programs, or any other governmental program will have on the financial markets. The failure of the EESA, the FDIC, or the U.S. government to stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

We may not be able to raise additional capital necessary to fund our growth and remain adequately-capitalized.

Our ability to raise additional capital to support our growth and meet minimum regulatory capital requirements at the holding company and at Westernbank is dependent on us being able to efficiently and cost-effectively access the capital markets. Accordingly, we must continue to be able to issue additional equity securities, trust preferred securities and/or debt when and in the amounts we deem necessary, and there must be ready purchasers of our securities willing to invest in us. However, events or circumstances in the capital markets generally that are beyond our control may adversely affect our capital costs and our ability to raise capital at any given time. For instance, the capital and credit markets continue to experience high levels of volatility and disruption. In certain cases, especially in the case of stocks of financial institutions, the markets have produced significant downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength or condition. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, including on our ability to access capital. Our inability to raise additional capital on terms satisfactory to us or at all may affect our ability to grow and would adversely affect our financial condition and results of operations.

The increase in the FDIC deposit insurance premiums is expected to cause a significant increase in our non-interest expense.

The FDIC may continue to adopt actual rates that are higher without further notice-and-comment rulemaking, subject to certain limitations. If the FDIC determines that assessment rates should be increased, institutions in all risk categories could be affected. The FDIC has exercised this authority several times in the past and could continue to raise insurance assessment rates in the future. The increased deposit insurance premiums proposed by the FDIC are expected to result in a significant increase in our non-interest expense.

Our operations and activities are now subject to heightened regulatory oversight and the Bank is subject to certain terms and conditions under regulatory agreements between the Bank’s Board of Directors, the FDIC and the OCIF.

On February 27, 2008, the Board of Directors of Westernbank, the OCIF and the FDIC reached an agreement (the “Informal Agreement”) which establishes timeframes for the completion of corrective and remedial measures which have been previously identified and are in process of completion. The Informal Agreement provides that the Board of Directors of Westernbank will, among other things, conduct management and loan reviews; review and make any necessary revisions to Westernbank’s asset/liability and investment policies; ensure the Westernbank’s compliance with the Bank Secrecy Act (“BSA”) and Westernbank’s BSA Compliance Program; correct all apparent violations of laws and regulations; formulate a plan to improve asset quality; submit and implement a profit and budget plan; develop and submit a capital plan to remain well-capitalized; and establish a compliance committee to monitor and coordinate compliance with the agreement. As described in Note 4 to the consolidated financial statements included herein Part II, Item 8, Westernbank has a significant lending concentration with an aggregate unpaid principal balance of $405.3 million at December 31, 2008 to a commercial group in Puerto Rico, which exceeds the statutory limit for loans to individual borrowers and continues to be a violation of the agreement. On May 20, 2008, a penalty of $50,000 was imposed by the OCIF. As of December 31, 2008, this loan relationship was not impaired. There can be no assurance that the OCIF and the FDIC will not take further action on this issue.

On November 24, 2008, Westernbank received notice from the FDIC. As a result of that notice and the Informal Agreement described above, Westernbank’s operations and activities are now subject to heightened regulatory oversight. For instance, pursuant to Section 914 of the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), Westernbank must notify the FDIC prior to certain management changes, and must obtain approval prior to the payment of certain severance payments. Further, Westernbank must obtain the non-objection of the FDIC before engaging in any transactions that would materially change the balance sheet composition of the Bank, including growth in total assets of 5% or more or significant changes in funding sources, such as increasing brokered deposits or volatile funding. Additionally, prior written approval of the FDIC will be required in order for Westernbank to issue any debt guaranteed by the FDIC under the Temporary Liquidity Guarantee Program. No assurance can be given that further regulatory actions taken by the FDIC would not have a material adverse effect on Westernbank.

We are subject to pending litigation that, if decided against us, could require us to pay substantial judgments, settlements or other penalties.

Currently, we are a party to several litigation matters, including a shareholder securities class action and a shareholder derivative action, as well as litigation relating to the Inyx loan. We are unable at this time to estimate our potential liability in these matters. We expect all of these lawsuits to be time-consuming, and they may divert management’s attention and resources from our ordinary business operations. More information regarding these lawsuits is included in “Item 3—Legal Proceedings” and “Notes to Consolidated Financial Statements—Note 13, Commitments and Contingencies” included herein in Part II, Item 8.

Commercial and Construction Lending Risk

Our construction loans are based upon estimates of costs and value associated with the completed project. These construction estimates could be inaccurate, which could affect our ability to fully collect on such loans.

We have historically originated construction loans for income producing properties and residential projects. At December 31, 2008 construction loans totaled $1.4 billion, or 16% of total loans. Construction lending involves risks associated with the timely completion of the construction activities for their allotted costs and the time needed to stabilize income producing properties, sell residential tract developments or refinance the indebtedness. The risks inherent in construction lending may adversely affect our net income. Such risks include, among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the relevant properties; substantial cost overruns in excess of original estimates and financing; market deterioration during construction; and lack of permanent take-out financing. Loans secured by such properties also involve additional risk because such properties have no operating history. In these loans, loan funds are advanced upon the security of the project under construction, which is of uncertain value prior to completion of construction. There can be no assurance that such properties will be sold or leased so as to generate the cash flow anticipated by the borrower. Such consideration can affect the borrowers’ ability to repay their obligations to us and the value of our security interest in collateral.

Westernbank is exposed to commercial lending credit risk.

In recent years, Westernbank has emphasized commercial and consumer lending activities. Commercial lending, including commercial real estate, asset-based, unsecured business and construction, is generally recognized as involving greater credit risk than consumer lending, including residential real estate, because the individual commercial loans are typically larger in size than consumer loans 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. The properties or assets securing these loans may also be harder to dispose of in foreclosure.

Concentration exposure to a number of material borrowers may cause a material adverse effect on our business, financial condition and results of operations.

Section 17 of the Puerto Rico Banking Law permits Puerto Rico commercial banks to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of fifteen percent (15%) of the sum of: (i) the bank’s paid in capital; (ii) the bank’s reserve fund; (iii) 50% of the bank’s retained earnings, subject to certain limitations; and (iv) any other components that the Commissioner may determine from time to time. If such loans are secured by collateral worth at least twenty five percent (25%) more than the amount of the loan, the aggregate maximum amount may reach one third (33.33%) of the sum of the bank’s paid-in capital, reserve fund, 50% of retained earnings and such other components that the Commissioner may determine from time to time. There are no restrictions under the Banking Law on the amount of loans that are wholly secured by bonds, securities and other evidence of indebtedness of the Government of the United States, or the Commonwealth of Puerto Rico, or by bonds, not in default, of municipalities or instrumentalities of the Commonwealth of Puerto Rico.

We have been adversely impacted by deteriorating credit quality in our loan portfolio, and a substantial portion of the portfolio currently consists of non-performing loans or is otherwise adversely classified. No assurance can be given that the portfolio will not experience further weakness or loss.

As a result of significant deterioration in economic conditions in our market area, our loan portfolio suffered substantial deterioration during 2007, and we expect the performance of our loan portfolio to continue to deteriorate in the near future. At December 31, 2008, total classified assets, which comprise all impaired loans classified as substandard — impaired, doubtful or loss, and foreclosed real estate held for sale, and non-performing loans totaled $1.6 billion and $1.8 billion, respectively. Additional increases in the allowance for loan losses may be necessary in the future. No assurance can be given that additional loans will not be added to “classified” status or that existing classified loans will not migrate into lower classifications, which would result in additional provisions for loan losses. Further deterioration in the quality of our credit portfolio could have a material adverse effect on our earnings, results of operations and capital requirements.

Our business is concentrated in Puerto Rico and continued weakness of the Puerto Rico economy may continue to adversely affect our financial performance.

Substantially all of the properties and other collateral securing our real estate, commercial and consumer loans are located in Puerto Rico. Consequently, our financial condition and results of operations are highly dependent on economic conditions in Puerto Rico. The Puerto Rico economy has been in the midst of a prolonged economic recession since the second quarter of 2006. The ongoing economic environment and uncertainties in Puerto Rico may continue to have an adverse effect on the quality of our loan portfolios and may result in a rise in delinquency rates and charge offs. These concerns may also impact growth in interest and non interest income. Although management utilizes its best judgment in providing for loan losses, there can be no assurance that management has accurately estimated the level of probable loan losses or that we will not have to increase our provisions for loan losses in the future as a result of future increases in non-performing loans or for other reasons beyond our control. Any such increases in our provision for loan losses could have a material adverse impact on our future financial condition and results of operations. Also, a potential reduction in consumer spending may impact growth in other interest and non-interest revenue sources.

In addition, weakness in other financial institutions in Puerto Rico may result in regulatory actions against such institutions. Such regulatory actions, among other things, could result in sales of assets that could further negatively impact the real estate market in Puerto Rico generally, as well as the quality of our loan portfolios, and could require increases to our provisions for loan losses.

Our disclosure controls and procedures and internal control over financial reporting were determined not to be effective as of December 31, 2008, as evidenced by material weaknesses that existed in our internal controls. Our disclosure controls and procedures and internal control over financial reporting may not be effective in future periods, as a result of existing or newly identified material weaknesses in internal controls.

Effective internal control over financial reporting is necessary for compliance with the Sarbanes-Oxley Act of 2002 and appropriate financial reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of

our financial statements for external reporting purposes in accordance with GAAP. As disclosed in this Annual Report on Form 10-K, management’s assessment of our internal control over financial reporting identified a number of material weaknesses in various areas as discussed in Item 9A. Controls and Procedures. A material weakness is a deficiency in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. See Item 9A. Controls and Procedures of this Form 10-K for remediation status of material weakenessess identified. However, there can be no assurance that additional material weaknesses will not be identified in the future. We are committed to continuing to improve our internal control processes and we will continue to diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and improve our internal control over financial reporting, we may determine to take additional measures to address internal control deficiencies or determine to modify certain of the remediation measures described herein. We will continue to be at an increased risk that our financial statements could contain errors that will be undetected, and we will continue to incur significant expense and management burdens associated with the additional procedures required to prepare our consolidated financial statements.

We are late in our filings with the SEC, and, as a result, we will be limited in our ability to register our securities for offer and sale until we are deemed a current filer with the SEC.

Until current periodic reports and financial statements are filed, we are limited from registering our securities with the SEC for offer and sale. This may preclude us from raising debt or equity financing in the public markets and will limit our ability to use stock options and other equity-based awards to attract, retain and provide incentives to our employees.

There is a lack of public disclosure concerning the Company.

The Company has not yet filed with the SEC its quarterly reports on Form 10-Q for the fiscal quarters ended March 31, June 30 and September 30, 2009. The Company expects to file these reports or the financial information required by these reports as soon as practicable after the filing of this Form 10-K. Until the Company files this financial information, there will be limited public information available concerning the Company’s most recent interim results of operations. See further discussion in “Item 3-Legal Proceedings” of this Form 10-K.

Our delay in filing all required financial statements may adversely affect our ability to attract customers, investors and employees.

Our ability to attract customers and investors may be adversely affected by the delay in filing all the required financial statements and the risks and uncertainties that delay may suggest. This delay may also have an adverse effect on our ability to attract and retain key employees and management personnel.

The SEC has requested information and documentation relating to our loans to Inyx, Inc. The SEC Staff may disagree with the manner in which we have accounted for and reported the financial impact of the adjustments to previously filed financial statements.

The SEC has requested information and documentation relating to our loans to Inyx, Inc. (“Inyx”) and we have provided information and documents to the SEC Staff on a voluntary basis. Because the Company is unable to predict the outcome of this inquiry, the SEC Staff may disagree with the manner in which the Company has accounted for and reported the financial impact of the adjustments to previously filed financial statements and there may be a risk that the inquiry by the SEC could lead to circumstances in which the Company may have to further restate previously filed financial statements, amend prior filings or take other actions not currently contemplated.

We have counterparty exposure to Lehman Brothers Inc. in connection with certain securities repurchase agreements.

Our performance is subject to interest rate risk.

Our results of operations depend to a large extent on the success of Westernbank. Among the risks related to Westernbank are those related to interest rate fluctuations, lending operations and our ability to manage growth. Interest-rate fluctuations could adversely affect net interest income if our cost of funds increases faster than our yield on interest-earning assets. Increases in interest rates also increase the costs of loans to businesses and consumers and may reduce demand for such loans, which could negatively affect the ability of the Company to increase its loan portfolio. Increases in interest rates may reduce the value of the Company and Westernbank’s fixed-rate financial assets and may have an adverse impact on its earnings and financial condition. The Company and Westernbank own a substantial portfolio of real estate loans, mortgage-backed securities and other debt securities with fixed interest rates. The market value of an obligation with a fixed interest rate generally decreases when prevailing interest rates rise.

Future operating losses may require us to adjust the valuation allowance against our deferred tax assets.

We evaluate our deferred tax assets in accordance with SFAS No. 109, “Accounting for Income Taxes”, which states that deferred tax assets should be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. This process involves significant judgment by us, including but not limited to future operational results, future levels of interest rates, and future credit losses. The determination of a valuation allowance on deferred tax assets ultimately depends on the realization of sufficient taxable income within the allowable carryforward and carryback periods under the PR-IRC. Due to significant estimates used in establishing the valuation allowance and the potential for actual results to differ from taxable income projections, it is possible that we will be required to adjust the valuation allowance in future reporting periods. Such changes could adversely affect our results of operations, financial condition and capital position.

Changes to business strategy to diversify our revenue and liquidity sources may not be successful.

Since our 2006 and 2005 financial statements restatement announcement and as a result of the restatement process, the loan internal review process and deteriorating macroeconomic conditions in Puerto Rico, among other factors, we have faced a number of financial, operational and legal difficulties that have had a material adverse effect on our business, financial condition and results of operations, including the following:

	•		Reduced net interest income as a result of the decrease in short-term rates and the decrease in spread between prime rates and LIBOR; specifically, our loan portfolio is mostly tied to prime rates while our funding is tied to LIBOR, thus, a reduction in the spread has an adverse effect on our results of operations;

	•		the continued downturn in the economy of Puerto Rico;

	•		increase in the level of non-performing loans; and

	•		increase in general and administrative costs as a result of the restatement process.

As a result, we have decided to make certain changes to our business strategy to diversify our revenue and liquidity sources. The changes in our strategy are principally designed to produce earnings streams that are more stable, transparent and easier to protect from interest rate risk and credit cycle and to provide for an easier diversification of our liquidity sources. Specifically, we intend to:

	•		Continue with the expansion into the San Juan Metropolitan Area

	•		Diversify our loan portfolio

	•		Diversify our liquidity sources

	•		Diversify our business mix by improving services and product offerings to the affluent professional, consumer, and corporate segment

There can be no assurance that the change in business strategy will have the intended result of diversifying our revenue and liquidity sources.

Competition with other financial institutions could adversely affect our profitability.

Westernbank faces substantial competition in originating loans and in attracting deposits. The competition in originating loans comes principally from other U.S., Puerto Rico and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other institutional lenders and purchasers of loans. A number of institutions with which Westernbank competes may have significantly greater assets, capital and other resources. In addition, certain of Westernbank’s competitors are not subject to the same extensive federal regulation that governs Westernbank’s business. As a result, certain of Westernbank’s competitors may have advantages in conducting certain businesses and providing certain services. Additionally, much of our growth has focused on the San Juan metropolitan area, which is a competitive market where a number of established financial institutions already exist. Increased competition could require Westernbank to increase its rates offered on deposits or lower the rates charged on loans, which could adversely affect our profitability.

Changes in statutes and regulations, including tax laws and rules, could adversely affect us.

We, as a Puerto Rico-chartered bank holding company, and our subsidiaries, are each subject to extensive federal and local governmental supervision and regulation relating to our banking and insurance businesses. In addition, there are laws and other regulations that restrict transactions between us and our subsidiaries. Any change in such laws or regulations, whether by applicable regulators or as a result of legislation subsequently enacted by the Congress of the United States or the local legislature, could adversely affect our profits and financial condition.

The imposition of additional property tax payments in Puerto Rico may further deteriorate our commercial, consumer and mortgage loan portfolios.

On March 9, 2009 the Governor of Puerto Rico signed into law the Special Act Declaring a State of Fiscal Emergency and Establishing an Integral Plan of Fiscal Stabilization to Save Puerto Rico’s Credit, Act No. 7 (the “Act No. 7”). Act No. 7, as amended, imposes a series of temporary and permanent measures, including the imposition of a 0.591% special tax applicable to properties used for residential (excluding those exempt as detailed in the Act No. 7) and commercial purposes, and payable to the Puerto Rico Treasury Department. The 0.591% special tax will be computed based on the taxable value of such properties for purposes of the “Centro de Recaudación de Ingresos Municipales.” This temporary measure will be effective for tax years that commenced after June 30, 2009 and before July 1, 2012. The imposition of this special property tax could adversely affect the disposable income of borrowers from the commercial, consumer and mortgage loan portfolios and may cause an increase in our delinquency and foreclosures rates.

Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements.

Our financial statements are subject to the application of Generally Accepted Accounting Principles in the United States (“GAAP”), which is periodically revised and/or expanded. Accordingly, from time to time the Company is required to adopt new or revised accounting standards issued by the FASB. Market conditions have prompted accounting standard setters to promulgate new guidance which further interprets or seeks to revise accounting pronouncements related to financial instruments, structures or transactions as well as to issue new standards expanding disclosures. The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our annual and quarterly reports on Form 10-K and Form 10-Q. An assessment of proposed standards is not provided as such proposals are subject to change

through the exposure process and, therefore, the effects on our financial statements cannot be meaningfully assessed. It is possible that future accounting standards that the Company is required to adopt could change the current accounting treatment that the Company applies to its consolidated financial statements and that such changes could have a material adverse effect on the Company’s financial condition and results of operations.

Natural disasters and geopolitical events beyond our control could adversely affect us.

Natural disasters such as earthquakes, wildfires, extreme weather conditions, hurricanes, floods, and other acts of nature and geopolitical events involving terrorism or military conflict could adversely affect our business operations and those of our customers and cause substantial damage and loss to real and personal property. These natural disasters and geopolitical events could impair our borrowers’ ability to service their loans, decrease the level and duration of deposits by customers, erode the value of loan collateral, and result in an increase in the amount of our non-performing loans and a higher level of non-performing assets (including real estate owned), net charge-offs, and provision for loan losses, which could adversely affect our earnings.

Applicable laws restrict our ability to pay dividends.

Our main sources of liquidity are dividends from Westernbank, interest and dividends on portfolio securities we own and net proceeds from capital borrowings and offerings of our capital stock. Westernbank may not pay dividends if upon payment it would become undercapitalized under the regulations enforced by the FDIC. Westernbank also could be subject to these dividend restrictions if the FDIC determines that it is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. We are also subject to restrictions on dividends generally imposed on Puerto Rico corporations and may be restricted in our ability to pay dividends by minimum capital requirements imposed by the Federal Reserve Board. The Federal Reserve Board issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. In addition, pursuant to the Consent Order and the Written Agreement discussed above in Part I, “Business—Recent Significant Events,” Westernbank and the Company may not pay dividends without the prior written approval of the appropriate regulator.

Provisions of our charter and applicable law may prevent a change of control.

Provisions of our certificate of incorporation, as well as United States federal banking law, could make it more difficult for a third party to acquire us even if doing so would provide our stockholders with a “premium” to prevailing market prices or otherwise be beneficial to our stockholders. These provisions in our charter documents include a staggered board of directors; a provision that prohibits stockholders from calling special meetings of stockholders; and advance notice procedures for nomination of directors and for stockholder proposals.

The loss of a key employee may adversely affect our prospects.

We believe that our management team is one of our most valuable assets and has a very high level of experience, depth and expertise. They are largely responsible for our growth and development to date. The loss of the services of any member of our management team could adversely affect our business prospects. Most of our executive officers do not have an employment agreement with us.


ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.


ITEM 2.		PROPERTIES

The Company owns the premises housing its main offices at 19 West McKinley Street, Mayagüez, Puerto Rico. Also, as of December 31, 2008, Westernbank owned approximately 10 branch premises and other facilities, one lot for future development, and one office building, all of them located in Puerto Rico. In addition, as of such date, Westernbank leased properties, mainly for branch operations, in approximately 37 locations in Puerto Rico.

At December 31, 2008, the Company’s future rental commitments under non-cancelable operating leases aggregated $12.5 million, not considering renewal options.

The principal property owned by Westernbank World Plaza, Inc., a wholly owned subsidiary of Westernbank, for banking operations and other services is described below:

•

Westernbank World Plaza — a 23-story office building located at Puerto Rico’s main business district and which serves as Westernbank San Juan metropolitan area headquarters, our regional commercial lending office and the headquarters for the Westernbank Business Credit and Expresso of Westernbank divisions. The book value of this property at December 31, 2008, was $59.8 million. This property was encumbered by a mortgage note which was paid in full and canceled on July 13, 2009. Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Borrowings”.

The Company’s investment in premises and equipment, exclusive of leasehold improvements, at December 31, 2008, was $101.5 million. The combined net book value of the Company’s main offices as of December 31, 2008 was $1.7 million.

ITEM 3. LEGAL PROCEEDINGS

This item describes the material legal proceedings that: (1) were pending as of December 31, 2008; (2) were terminated during the period from January 1, 2008 through the filing of this report; or (3) are pending as of the filing of this report. Thus, the description of a matter may include developments that occurred since December 31, 2008, as well as those that occurred during 2008.

Shareholder Securities Class Action. In September and October 2007, three separate complaints, entitled Hildenbrand v. W Holding Company, Inc., et al., C.A.No. 07-1886 FAB (D.P.R.), Webb v. W Holding Company, Inc., et al., C.A.No. 07-1915 FAB (D.P.R.), and Saavedra v. W Holding Company, Inc., et al., C.A.No. 07-1931 FAB (D.P.R), were filed in the United States District Court for the District of Puerto Rico as putative class actions against the Company, Westernbank and certain of their current or former officers and directors. Thereafter, all three cases were consolidated into the Hildenbrand action.

Following the filing of motions mandated by statute, the Court appointed Felix Rivera, Jose A. Nicolao, Fundacion Rios Pasarell, Inc. and Efren E. Moreno as lead plaintiffs in Hildenbrand. Pursuant to an agreed scheduling order, the lead plaintiffs’ Consolidated Amended Complaint was filed April 28, 2008. The complaint names as defendants the Company and Westernbank, as well as current and former officers of the Company and Westernbank. The complaint alleges that the individual defendants engaged the Company and Westernbank in a fraudulent lending scheme and issued misleading information to the market, principally in connection with the timing and reporting of impairments to loans to Inyx that are described below. Plaintiffs allege that these actions artificially inflated the trading prices of the Company’s securities. The plaintiffs brought the action on behalf of all those who purchased the Company’s securities during the period between April 24, 2006 and June 26, 2007, claiming violation of Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder) by the Company, Westernbank and the individual defendants, as well as violation of Section 20(a) of the Exchange Act by the individual defendants. Plaintiffs are seeking unspecified damages for the class arising from alleged economic losses from investing in the Company’s securities.

The Company and individual defendants filed motions to dismiss, arguing that the Consolidated Amended Complaint lacks particularized factual allegations required to state claims for securities fraud under Sections 10(b) and 20(a). Briefing on the motions was completed on September 10, 2008. On March 24, 2009, the Court denied the defendants’ motions to dismiss. On April 7, 2009, the Company and the individual defendants (except for a former officer of the Company and Westernbank) filed a motion for reconsideration or, in the alternative, for certification of an interlocutory appeal, and the former officer of the Company and Westernbank joined in that motion on April 15, 2009. Discovery was stayed while the defendants’ motion was pending. After briefing by the parties, the defendants’ motion for reconsideration and the request for certification of an interlocutory appeal were denied by the Court on July 28, 2009.

On August 11, 2009, the Company and Westernbank filed their answer to the Consolidated Amended Complaint, denying liability and raising numerous affirmative defenses to the claims asserted against them. On August 25, 2009, all individual defendants, except for a former officer of the Company and Westernbank, filed their answers to the Consolidated Amended Complaint, also denying liability and raising numerous affirmative defenses to the claims asserted against them.

On October 13, 2009, a former officer of the Company and Westernbank filed his answer to the Consolidated Amended Complaint, denying liability and raising numerous affirmative defenses, and also asserting cross-claims against the other defendants, including the Company and Westernbank, and third-party claims against numerous other current or former officers, directors, or shareholders. In his cross-claims, the former officer of the Company and Westernbank claims a right to indemnification for any judgment entered against him and a right to join the class as a purchaser of Company stock during the alleged class period. According to the Court’s scheduling order, issued on October 16, 2009, the defendants have until October 28, 2009 to respond to the cross-claims asserted by former officer of the Company and Westernbank. The Company and Westernbank plan to file a response by that date.

Under the Court’s scheduling order, the initial pre-trial conference is set for the week of December 16, 2009, discovery is set to end on May 10, 2010, and trial is set to begin on August 2, 2010. As in any case, this schedule is subject to further modification if the Court later deems it appropriate.

At this time, discovery has not yet commenced. The Company intends to vigorously defend this action.

Shareholder Derivative Action. On January 11, 2008, Hunter Wylie, who claims to be a Company shareholder, filed a shareholder derivative complaint (the “Complaint”), entitled Wylie v. Stipes, et al., and W Holding Company, Inc., C.A.No. 08-1036 GAG (D.P.R.), in the United States District Court for the District of Puerto Rico, purportedly on behalf of the Company against certain of the Company’s current and former officers and directors, and named the Company as a nominal defendant. Plaintiff contends that since April 2006 the individual named defendants caused the Company to overstate the value of its loan portfolio, principally in connection with the timing and reporting of impairments to loans to Inyx that are described below, and thereby allegedly caused monetary and reputational losses to the Company. After the Company and individual defendants moved to dismiss on April 7, 2008, the plaintiff filed an Amended Complaint on June 9, 2008, alleging breach of fiduciary duty, waste of corporate assets, unjust enrichment, violation of the Title 14, Section 2727 of the laws of Puerto Rico, and a claim for reimbursement under Section 304 of the U.S. Sarbanes-Oxley Act. The Amended Complaint seeks unspecified monetary damages for the Company’s benefit from the individual defendants and a court order directing the Company to alter its governance policies. The Company and the individual defendants moved to dismiss the Amended Complaint, arguing principally that plaintiff failed to make a pre-suit demand on the Company’s Board of Directors, and thus lacks standing to proceed with this derivative action, that plaintiff otherwise failed to allege facts sufficient to state claims for relief, and that there is no private right of action under Section 304 of the Sarbanes-Oxley Act. Briefing on the motions to dismiss was completed on December 16, 2008. On February 2, 2009, the Court entered an Opinion and Order granting the motions to dismiss in part and denying them in part. The Court dismissed Count I of the Amended Complaint (claiming reimbursement under Section 304 of the Sarbanes-Oxley Act) in its entirety, dismissed Count IV (alleging unjust enrichment) as to certain defendants, and denied the motions to dismiss as to the other counts challenged therein.

Following the Court’s February 2, 2009 Order on the motion to dismiss, the Company’s board of directors formed a Special Litigation Committee (the “SLC”) and charged it with full and exclusive authority to investigate, review and analyze the facts and circumstances that are the subject of the Wylie lawsuit and to determine what action should be taken on behalf of the Company with respect to plaintiff’s claims. The SLC has engaged the law firm of Conception, Sexton & Martinez of Coral Gables, Florida to assist in carrying out its charge. On April 22, 2009, the SLC moved the Court to stay the case to permit the SLC time to conduct its investigation and, if necessary, take action on the Company’s behalf. On June 5, 2009, the Court granted the SLC’s motion, staying the case until August 24, 2009.

Subsequent to August 24, 2009, the Company filed an answer to the Amended Complaint as nominal defendant, and the remaining defendants (except for a former officer of the Company and Westernbank) filed answers to the Amended Complaint, denying liability and raising numerous affirmative defenses to the claims asserted against them, but no other litigation activities, including discovery, have commenced.

We expect the SLC to file a report with the Court regarding the results of its investigation and what actions, if any, it is or will be taking on behalf of the Company. The Company intends to vigorously defend this action.

SEC Informal Inquiry. The SEC has requested information and documentation relating to Westernbank’s loans to Inyx. The Company has provided that information and the documents to the SEC Staff on a voluntary basis.

Litigation Relating to the Inyx Loan:

Westernbank Puerto Rico v. Kachkar, et al., 07-civ.-1606 (ADC-BJM) (D.P.R.) and member cases Inyx, Inc., et al. v. W Holding Company, Inc., et al, Civil No. 08-2428 (ADC-BJM) and Kachkar, et al. v. Westernbank Puerto Rico, Civil No. 08-2427 (ADC-BJM): Westernbank filed an initial complaint against Inyx, Inc., Jack Kachkar, Inyx’s Chief Executive Officer, and certain other officers in the United States District Court for the District of Puerto Rico on July 5, 2007, and amended the complaint on August 23, 2007. In its amended filing, Westernbank alleges violations of the U.S. Racketeer Influenced and Corrupt Organizations Act (“RICO”) and other fraud-based claims, as well as claims related to alleged breaches of certain loan agreements and guarantees. Westernbank, among other things: (a) seeks damages of over $142 million against the defendants under, among other causes of action, RICO; (b) requests payment of over $142 million from the defendants on amounts due and payable under certain loan agreements; and (c) requests that the Court order foreclosure on Westernbank’s collateral. On September 20, 2007, Westernbank moved to freeze certain of defendants’ assets. On July 23, 2008, a Report and Recommendation was issued by the Magistrate Judge recommending that Westernbank’s motion to freeze assets be granted (the “Asset Freeze Report and Recommendation”).

All defendants moved to dismiss and certain defendants moved alternatively to stay or transfer the case to the United States District Court for the Southern District of Florida in which they had, at that time, two other cases pending. The two cases were: (1) Kachkar, et al v. Westernbank Puerto Rico (Florida Circuit Court Case No. 07-22573-CA-40) and (2) Inyx v. Westernbank, et al. (Florida Circuit Court 07-26412-CA-30). The first of these cases was filed on July 23, 2007, when Jack Kachkar and Viktoria Benkovitch filed a complaint against Westernbank in the Circuit Court for the 11^th Circuit of Miami-Dade County, Florida. The complaint alleges that Kachkar and Benkovitch should not have to perform their obligations under the guarantees, security agreements, and asset pledges they provided to Westernbank, and asserts causes of action for: (1) fraudulent inducement and damages; (2) rescission of instruments based on fraudulent conduct and/or lack of consideration; (3) slander of title and damages; and (4) violation of Florida’s Deceptive and Unfair Trade Practices Act. This action was subsequently removed to the U.S. District Court for the Southern District of Florida under the caption Kachkar and Benkovitch v. Westernbank Puerto Rico, Civil No. 07-22140-Cooke (the “Kachkar Case”). The second case was filed on August 17, 2007, when Inyx filed a complaint against Westernbank, the Company and certain current and former officers of the Company and Westernbank in the Circuit Court for the 11^th Circuit of Miami-Dade County, Florida. Inyx alleged that a promissory note and mortgage that Inyx provided to Westernbank during the course of the business relationship between the parties should be rescinded, and that Inyx should be awarded damages because Westernbank allegedly breached an oral forbearance agreement to refrain from collecting on loans it had made to Inyx and its subsidiaries, and because Westernbank failed to provide additional financing to these companies. This action was subsequently removed to the U.S. District Court for the Southern District of Florida under the caption Inyx, Inc. v. Westernbank Puerto Rico, et. al., Civil No. 07-22409-Cooke (the “Inyx Case”). On September 25, 2008, the Kachkar Case was consolidated into the Inyx Case in the United States District Court for the Southern District of Florida (the “Florida Consolidated Cases”).

On April 17, 2008, all the transfer motions were denied. On September 5, 2008, the Magistrate Judge issued another Report and Recommendation by which he recommended that all of the defendants’ motions to dismiss be denied. On September 22, 2008, the defendants, except for Inyx, filed their respective objections to the Magistrate Judge’s Report and Recommendation concerning the motions to dismiss. On October 9, 2008, Westernbank filed its response to the defendants’ objections to this Report and Recommendation.

On September 8, 2008, Westernbank filed a Motion for Partial Summary Judgment on the breach of contract claims. On March 3, 2009, the Magistrate Judge issued a third Report and Recommendation, this time recommending that Westernbank’s Motion for Partial Summary Judgment on the breach of contract claims be granted (the “Summary Judgment Report and Recommendation”). Among other things, the Magistrate Judge recommended that defendants Kachkar and Benkovitch be personally liable under certain personal guarantees for $100.1 million.

On October 3, 2008, all of the defendants filed their respective answers to Westernbank’s Amended Complaint. Some of the defendants (Kachkar, Benkovitch, Inyx, Inc., and Green) also filed counterclaims. On December 2, 2008, Westernbank filed a motion to dismiss the original counterclaims filed by the defendants Kachkar, Benkovitch, Green and Inyx pursuant to Fed.R.Civ.P. 12(b)(6). On January 14, 2009, defendants Kachkar, Benkovitch, Inyx and Green filed amended answers to Westernbank’s First Amended Complaint and Kachkar, Benkovitch and Inyx filed amended counterclaims. Defendant Green withdrew his counterclaim against Westernbank for alleged defamation. The Amended Counterclaims can be categorized into five distinct groups. The primary set of counterclaims, raised by Inyx, Kachkar, and Benkovitch, seeks enforcement of an alleged “oral forbearance and workout agreement” between Westernbank, Inyx, Kachkar, and Benkovitch related to approximately $142 million in loans that Westernbank had made to Inyx and its subsidiaries under various written loan agreements. The second subject of the counterclaims is the claim brought by Inyx alleging that Westernbank breached the agreements and otherwise breached an implied covenant of good faith and fair dealing by not giving Inyx ten days to pay the amounts then outstanding (close to $140 million), and by abruptly placing Inyx into administration in the United Kingdom. The third set of counterclaims involves allegations that Westernbank either breached a confidentiality agreement relating to Kachkar’s supposed business relationship with Mr. Saadi Gadhafi, or tortiously interfered with that relationship. A fourth set of counterclaims revolves around the allegation that Westernbank breached an unwritten escrow agreement allegedly entered into on or about the 20^th of June, 2007. The fifth and final set of counterclaims is composed of Kachkar’s and Benkovitch’s claims relating to their real estate in Florida, with respect to which they raise claims of conversion, rescission of instruments, slander of title, and violations of Florida’s Deceptive and Unfair Trade Practices Act.

On December 23, 2008, the Florida Consolidated Cases were transferred to the District of Puerto Rico. Subsequently, on June 23, 2009, the Court granted Westernbank’s motion to consolidate Civil Case No. 07-1606 (ADC/BJM) (“Lead Case”) with the two transferred Florida cases under the following captions in the District of Puerto Rico, Civil Case Nos. 08-2427 (JAF) and 08-2428 (ADC/BJM) (“Consolidated Cases”).

On February 18, 2009, Westernbank filed another motion to dismiss the amended counterclaims pursuant to Fed.R.Civ.P. 12(b)(6). At the request of the Court, and notwithstanding that a motion to dismiss was filed, on June 22, 2009, Westernbank filed its answers to the defendants’ Amended Counterclaims in Civil Case No. 07-1606 (ADC/BJM).

On June 25, 2009, Westernbank filed an emergency motion to stay discovery in the pending Consolidated Cases before the Court until a ruling on the three Reports and Recommendations and motions to dismiss that were pending consideration in the Lead and Consolidated Cases. Pursuant to an Order dated July 7, 2009, the Court granted Westernbank’s request.

On July 24, 2009, the Court ordered the Inyx Parties to re-file their objections to the Summary Judgment Report & Recommendation within the applicable 25-page limit. Also on July 24, 2009, the Court granted Westernbank five (5) working days from the filing of the Inyx Parties’ revised objections to the Summary Judgment Report and Recommendation to file its corresponding response to the same. The Inyx Parties filed their Amended Objections on July 29, 2009, to which Westernbank responded on August 5, 2009.

On August 20, 2009, the Court issued the first opinion and order adopting in full the Report & Recommendation issued by the Magistrate Judge on September 5, 2008, thus denying the Motions to Dismiss filed by the Inyx Parties in Civil Case No. 07-1606. Also on August 20, 2009, the Court ordered the Inyx Parties to file, within 5 days of the issuance of the order, a motion setting forth the amount of the bond, if any, that should be imposed upon Westernbank in the event the Court adopted the Asset Freeze Report and Recommendation (the “August 20^th Order”).

On August 31, 2009, the Inyx Parties filed a “Motion to Set Bond of $150 Million” (“Motion to Set Bond”). On September 1, 2009, Westernbank moved to strike the Motion to Set Bond based on the Inyx Parties’ failure to comply with the time period established by the Court in its August 20^th Order. Pursuant to an order issued on that same date, the Inyx Parties’ Motion to Set Bond was stricken from the record (the “Order Striking the Bond Motion”).

Also on September 1, 2009, the Court issued its second opinion and order, this time adopting in full the Asset Freeze Report and Recommendation and, consequently, granting Westernbank’s Motion to Freeze Assets (the “Asset Freeze Opinion and Order”).

On September 9, 2009, the Inyx Parties filed a Motion for Reconsideration whereby they request the Court to reconsider its Asset Freeze Opinion and Order (the “First Motion for Reconsideration”). On September 10, 2009, the Inyx Parties filed a motion to stay the Asset Freeze Opinion and Order pending the disposition of the First Motion for Reconsideration. On September 11, 2009, the Inyx Parties filed a motion requesting the Court to reconsider its September 1^st Order Striking the Bond Motion (the “Second Motion for Reconsideration”). On September 15, 2009, the Inyx Parties’ filed a motion to stay the Asset Freeze Order pending the disposition of the Second Motion for Reconsideration.

On September 22, 2009, the Court issued a third opinion and order, this time adopting in full the Summary Judgment Report and Recommendation, thus granting Westernbank’s breach of contract claims.

On September 23, 2009, Westernbank filed a motion for voluntary dismissal without prejudice against co-defendants Colin Hunter and Steven Handley, as a result of a confidential settlement agreement reached with them. On September 28, 2009, the Court granted this motion and entered Partial Judgment dismissing Westernbank’s claims against co-defendants Colin Hunter and Steven Handley, without prejudice, pursuant to the terms and conditions of the confidential settlement agreement.

On September 28, 2009, Westernbank also filed its oppositions to the defendants’ First and Second Motions for Reconsideration and the motion to stay the Asset Freeze Opinion and Order.

On October 1, 2009, defendants Inyx, Inc., Kachkar, Benkovitch and Rima Goldschmidt filed a motion requesting, among other things, that the Court produce to them the confidential settlement agreement entered into by Westernbank and co-defendants Hunter and Handley, which Westernbank had submitted under seal to the Court on September 23, 2009, as part of the filings related to the voluntary dismissal without prejudice of the claims against said co-defendants. On October 2, 2009, Westernbank filed its response to the arguments raised in the motion requesting disclosure of the settlement agreement, and produced said agreement to Inyx, Inc., Kachkar, Benkovitch and Goldschmidt. Thus, on October 14, 2009, the Court issued an order finding as moot the motion for disclosure of the settlement agreement.

On October 5, 2009, defendants filed a motion to strike from the record Westernbank’s oppositions to the First and Second Motions for Reconsideration, and Westernbank opposed on October 19, 2009. The motion to strike the First and Second Motions for Reconsideration is still pending before the Court’s consideration.

Finally, on October 12, 2009, Westernbank filed a Motion for Partial Summary Judgment on the Fraud Guarantees executed by defendants. Defendants have until October 29, 2009, to file their response in opposition to this motion for summary judgment.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

A special meeting of stockholders of the Company was held at the J. William Fulbright Center at Hogan & Hartson LLP, 555 Thirteenth Street, NW, Washington, D.C. 20004 at 8:00 a.m. local time on November 7, 2008, pursuant to due notice, for the following purpose:

•

to vote on a proposal to adopt an amendment to our Certificate of Incorporation to effect a reverse stock split of the Company’s common stock, at any time prior to December 31, 2008, at a specific ratio to be determined by the Board of Directors in its sole discretion within the range of one-for-10 to one-for-50, inclusive.

The total number of votes eligible to be cast as of the record date of the meeting (September 19, 2008) was 164,906,923 eligible votes. A quorum was obtained with 146,161,188 shares represented in person or by proxy, which represented approximately 89% of all votes eligible to be cast at the meeting. Broker non-votes are not counted as a vote cast or entitled to vote on any matter presented at the annual meeting.

The results of the election, as certified by representatives of the BNY Mellon, duly appointed inspectors of election for the special meeting, were as follows:


For			128,140,337
Against			17,830,730
Abstain			190,121

Total Shares			146,161,188

No other matters were discussed at the special meeting.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “WHI”.

The following table sets forth the range of high and low sales prices of the Company’s common stock, as quoted in the NYSE system, at the end of the first three quarters of year 2009 and of each quarter for 2008 and 2007. The prices reflect inter-dealer quotations, without retail mark-up, mark-down or commissions and do not necessarily represent actual transactions:


Quarter ended	High⁽¹⁾		Low⁽¹⁾
September 2009	$	14.74	$	9.12
June 2009		27.61		8.56
March 2009		16.97		6.24

December 2008	$	32.50	$	7.29
September 2008 ⁽²⁾		49.00		23.00
June 2008 ⁽²⁾		61.00		42.50
March 2008 ⁽²⁾		79.50		50.50

December 2007⁽²⁾	$	118.50	$	37.50
September 2007 ⁽²⁾		149.00		91.50
June 2007 ⁽²⁾		282.50		125.00
March 2007 ⁽²⁾		311.00		233.00


(1)		Prices in table are rounded.

(2)		As adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

As of September 30, 2009, the Company had 696 stockholders of record of its common stock, not including beneficial owners whose shares are held in record names of brokers or other nominees. The last sales price for the Company’s common stock on such date, as quoted on NYSE was $13.40 per share.

The Company has issued the following non-cumulative, monthly income preferred stock:


						Issuance
						Price and
						Liquidation				Proceeds From
Issuance			Dividend			Preference		Shares		Issuance, Net of		Issuance
Year		Type of Preferred Stock	Rate			Per Share		Issued		Issuance Costs		Costs

	1998	Convertible, 1998 Series A		7.125	%	$	25		1,219,000	$	29,143,000	$	1,332,000
	1999	Non-convertible, 1999 Series B		7.250			25		2,001,000		48,273,000		1,752,000
	2001	Non-convertible, 2001 Series C		7.600			25		2,208,000		53,103,000		2,097,000
	2001	Non-convertible, 2001 Series D		7.400			25		1,791,999		43,238,000		1,562,000
	2002	Non-convertible, 2002 Series E		6.875			25		1,725,000		41,463,000		1,662,000
	2003	Non-convertible, 2003 Series F		6.700			25		4,232,000		102,192,000		3,608,000
	2003	Non-convertible, 2003 Series G		6.900			25		2,640,000		63,671,000		2,329,000
	2004	Non-convertible, 2004 Series H		6.700			50		2,675,500		129,311,000		4,464,000
	2005	Non-convertible, 2004 Series H		6.700			50		401,300		19,450,000		615,000


		Total							18,893,799	$	529,844,000	$	19,421,000

The preferred stock ranks senior to the Company’s common stock as to dividends and liquidation rights. Each share of the 1998 Series A preferred stock is convertible, at the holder’s option, at any time on or after the 90th day following the issue date, into .995 shares of the Company’s common stock, subject to adjustment upon certain events. The per share conversion ratio equates to a price of $355.98 (as adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008, stock splits and stock dividends declared) per share of common stock.

DIVIDENDS

The Company’s cash dividends corresponding to 2008 and 2007 were as follows:


Record date	Payable date	Amount per share^{(1) (2)}
Year 2008

January 31, 2008	February 15, 2008	$	0.2083
February 28, 2008	March 15, 2008		0.2083
March 30, 2008	April 17, 2008		0.2083
April 30, 2008	May 15, 2008		0.2083
May 31, 2008	June 15, 2008		0.2083
June 29, 2008	July 17, 2008		0.2083
July 31, 2008	August 15, 2008		0.2083
August 31, 2008	September 17, 2008		0.2083
September 28, 2008	October 15, 2008		0.2083
October 31, 2008	November 15, 2008		0.2083
November 30, 2008	December 17, 2008		0.2083
December 31, 2008	January 15, 2008		0.2083

Total			$2.5000


Year 2007

January 31, 2007	February 15, 2007	$	0.7915
February 28, 2007	March 15, 2007		0.7915
March 30, 2007	April 17, 2007		0.7915
April 30, 2007	May 15, 2007		0.7915
May 31, 2007	June 15, 2007		0.7915
June 29, 2007	July 17, 2007		0.7915
July 31, 2007	August 15, 2007		0.7915
August 31, 2007	September 17, 2007		0.7915
September 28, 2007	October 15, 2007		0.7915
October 31, 2007	November 15, 2007		0.7915
November 30, 2007	December 17, 2007		0.7915
December 31, 2007	January 15, 2008		0.7915

Total			$9.5000


(1)		Dividends amounts in the table are rounded.

(2)		As adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

On February 17, 2009, the Company’s Board of Directors announced that the Board voted to suspend regular monthly dividends on the Company’s common stock and all outstanding series of its preferred stock, effective with the payment to be made on March 16, 2009 and applicable to stockholders of record as of February 27, 2009, so as to maintain the Company’s capital position.

In addition, pursuant to the Consent Order entered into in May, 2009, the Bank may not declare or pay any dividends without the prior written approval of the Regional Director of the FDIC’s New York Regional Office. Requests for approval are required to be received at least 30 days prior to the proposed date for the declaration of dividends and are required to contain, but not be limited to, information on consolidated earnings for the most recent annual period and the last quarter.

Additional information concerning legal or regulatory restrictions on the payment of dividends by the Company and Westernbank is contained under Item 1, “Business — Supervision and Regulation - Dividend Restrictions” and Notes 15 and 16 to the Consolidated Financial Statements included herein in Part II, Item 8.

The Puerto Rico Internal Revenue Code of 1994, as amended, generally imposes a withholding tax on the amount of any dividends paid by Puerto Rico corporations to individuals, whether residents of Puerto Rico or not, trusts, estates, and special partnerships at a special 10% withholding tax rate. Dividends distributed by Puerto Rico corporations to foreign corporations or partnerships not engaged in trade or business in Puerto Rico are also generally subject to withholding tax at a 10% rate. Prior to the first dividend distribution for the taxable year, such shareholders may elect to be taxed on the dividends at the regular rates, in which case the special 10% tax will not be withheld from such year’s distributions.

United States citizens who are non-residents of Puerto Rico will not be subject to Puerto Rico tax on dividends if said individual’s gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married, and form AS 2732 of the Puerto Rico Treasury Department “Withholding Tax Exemption Certificate for the Purpose of Section 1147” is filed with the withholding agent. U.S. income tax law permits a credit against the U.S. income tax liability, subject to certain limitations, for certain foreign income taxes paid or deemed paid with respect to such dividends.

Holders of the Company’s common stock are urged to consult with their own tax advisors as to the tax consequences of dividend payments made by the Company.

PERFORMANCE OF W HOLDING COMPANY, INC. COMMON STOCK

The following graph compares the cumulative 5-year total return to shareholders on W Holding Company, Inc.’s common stock relative to the cumulative total returns of the Dow Jones US index and the Dow Jones US Banks index. The graph assumes that the value of the investment in our common stock and in each of the indexes (including reinvestment of dividends) was $100 on 12/31/2003 and tracks it through 12/31/2008.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among W Holding Company, Inc., The Dow Jones US Index
And The Dow Jones US Banks Index

12/03

12/04

12/05

12/06

12/07

12/08

W Holding Company, Inc.

100.00

175.95

223.85

122.85

91.57

19.99

Dow Jones US index

100.00

130.75

146.45

155.72

179.96

190.77

Dow Jones US Banks index

100.00

132.94

152.03

155.32

182.84

136.79


(A)		The lines represent monthly index levels derived from compounded daily returns that include all dividends.

(B)		The indexes are reweighted daily, using the market capitalization on the previous trading day.

(C)		If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.

(D)		The index level for all series was set to $100.00 on December 31, 2003.

This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

The stock price information shown on the graph is not necessarily indicative of future price performance.

RECENT SALES OF UNREGISTERED SECURITIES

No sales of unregistered securities were made by the Company in 2008.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES

No purchases of the Company’s common stock were made by or on behalf of the Company in 2008.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto, appearing elsewhere in this Form 10-K, and the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected historical consolidated financial data as of the end of and for each of the five years in the period ended December 31, 2008, are derived from the Company’s Consolidated Financial Statements.


	Year ended December 31,
	2008			2007			2006			2005			2004
	(Amounts in thousands, except per share data)
Income Statement Data:

Interest income	$	806,293		$	1,070,189		$	989,790		$	793,205		$	591,376
Interest expense		663,369			785,126			681,419			483,747			314,219

Net interest income		142,924			285,063			308,371			309,458			277,157
Provision for loan losses		(67,506	)		(277,562	)		(90,880	)		(80,006	)		(36,691	)

Net interest income after provision for loan losses		75,418			7,501			217,491			229,452			240,466
Noninterest income		60,655			47,798			37,098			35,820			53,628
Noninterest expenses		(195,809	)		(163,409	)		(124,518	)		(108,230	)		(100,125	)

Income (loss) before income taxes		(59,736	)		(108,110	)		130,071			157,042			193,969
Income taxes		54,286			39,772			(70,492	)		(33,547	)		(22,093	)

Net income (loss)		(5,450	)		(68,338	)		59,579			123,495			171,876
Preferred stock dividends		36,910			36,910			36,911			36,985			27,158

Income (loss) attributable to common stockholders	$	(42,360	)	$	(105,248	)	$	22,668		$	86,510		$	144,718


Share Data:
Basic earnings (loss) per common share (1)	$	(12.84	)	$	(31.92	)	$	6.89		$	26.37		$	44.30
Diluted earnings (loss) per common share (1)	$	(12.84	)	$	(31.92	)	$	6.74		$	25.61		$	42.80
Cash dividends declared per common share (1)(2)	$	2.50		$	9.50		$	9.50		$	9.30		$	7.19
Cash dividends declared on common shares	$	8,245		$	31,327		$	31,236		$	30,575		$	23,502
Period end number of common shares outstanding (1)		3,298			3,298			3,290			3,282			3,278
Weighted average number of common shares outstanding (1)		3,298			3,297			3,288			3,280			3,267
Weighted average number of common shares outstanding on a fully diluted basis (1)		3,298			3,297			3,361			3,412			3,409
Dividend payout ratio (3)		(19.46	)%		(29.76	)%		137.80	%		35.34	%		16.24	%
Book value per share data (1)	$	116.59		$	141.12		$	187.40		$	189.81		$	172.59


	Year ended December 31,
	2008			2007			2006			2005			2004
	(Amounts in thousands, except per share data)
Performance ratios:
Return on assets (4)		(0.03	)%		(0.39	)%		0.36	%		0.81	%		1.33	%
Return on common stockholders’ equity (4)		(9.97	)		(19.46	)		3.66			14.55			28.79
Operating expenses to total end-of-period assets		1.28			0.91			0.73			0.67			0.70
Net yield on interest-earning assets		0.88			1.63			1.88			2.08			2.22

Balance Sheet Data:
Total assets	$	15,282,897		$	17,926,711		$	17,074,144		$	16,112,273		$	14,321,620
Money market instruments		1,096,465			942,987			971,633			803,655			1,066,779
Investments securities held to maturity, securities available for sale and trading securities		4,708,211			7,077,198			7,028,120			7,079,191			6,929,260
Loans-net		8,667,717			9,209,911			8,554,177			7,765,191			5,917,352
Total liabilities		14,367,530			16,930,475			15,926,801			14,958,386			13,244,061
Total deposits		11,002,173			10,496,501			9,337,063			8,375,609			6,244,170
Borrowings		3,281,074			6,284,158			6,483,449			6,468,461			6,931,385
Total preferred equity		530,838			530,838			530,838			530,926			511,744
Total common equity		361,067			360,745			359,289			357,454			356,462
Stockholders’ equity		915,367			996,236			1,147,343			1,153,887			1,077,559

Capital Ratios:
Total capital to risk-weighted assets		10.24	%		9.06	%		11.92	%		12.75	%		14.90	%
Tier I capital to risk-weighted assets		8.96			7.79			10.66			11.95			14.01
Tier I capital to average assets		5.26			4.90			6.76			7.26			7.69
Equity-to-asset ratio (4)		5.76			6.12			6.93			7.33			7.36

Asset Quality Ratios:
Total non-performing loans and foreclosed real estate held for sale as a percentage of total assets at end of period		10.85	%		9.97	%		1.68	%		0.94	%		0.27	%
Total non-performing loans as a percentage of loans at end of period		17.43			18.60			3.21			1.87			0.58
Net loans charged-off to average total loans (5)		1.34			1.54			0.74			0.27			0.34
Allowance for loan losses to total loans at end of period		3.15			3.55			2.31			1.79			1.34
Allowance for loan losses to non-performing loans		18.08			19.07			71.87			95.55			233.64
Allowance for loan losses to non-performing loans, excluding loans collateralized by real estate		183.85			121.52			131.08			164.69			3,182.27

Other Information:
Common Stock Price: End of Period (1)	$	10.30		$	60.50		$	298.00		$	411.50		$	764.67


(1)		Adjusted to reflect all Company stock splits and stock dividends, including, most recently, the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

(2)		Cash dividends amounts are rounded.

(3)		Common stockholders’ dividend declared divided by income (loss) attributable to common stockholders.

(4)		The return on assets is computed by dividing net income by average total assets for the period. The return on common stockholders’ equity is computed by dividing net income less preferred stock dividends by average common stockholders’ equity for the period. The equity-to-asset ratio is computed by dividing average equity by average total assets. Average balances have been computed using beginning and period-end balances.

(5)		Average balances were computed using beginning and period-end balances.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section analyzes the major elements of the Company’s consolidated financial statements and should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto and other detailed information appearing elsewhere in this Annual Report on Form 10-K. Readers should also review carefully Item 1, “Business—Forward-Looking Statements” and Item 1A, “Risk Factors” for a description of the forward-looking statements in this report and a discussion of the factors that might cause our actual results to differ, perhaps materially, from those forward-looking statements.

The MD&A includes the following sections:

	•		DEFINITIONS: Provides a brief definition of key terms used through the MD&A.

	•		OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: Provides a brief summary of the most significant events and drivers affecting the Company’s financial condition and results of operations.

	•		CRITICAL ACCOUNTING POLICIES: Provides a discussion of the Company’s accounting policies that require critical judgment, assumptions and estimates.

	•		RESULTS OF OPERATIONS: Provides an analysis of the consolidated results of operations for 2008 compared to 2007, and 2007 compared to 2006.

	•		FINANCIAL CONDITION: Provides an analysis of the most significant balance sheet items that impact the Company’s financial statements and business.

	•		BUSINESS SEGMENTS REVIEW: Provides a description of the Company’s operating business segments and an analysis of the results of operations for each segment.

	•		QUARTERLY FINANCIAL INFORMATION: Provides an analysis of the consolidated results of operations and financial conditions for each of the quarters in 2008 compared to 2007, and 2007 compared to 2006.

	•		RISK MANAGEMENT: Provides disclosure and analysis about the Company’s main risks, specifically credit risk, market risk and interest rate risk, liquidity risk, operation risk, legal risk, reputational risk, and concentration risk. This section also includes a discussion of the Company’s off-balance sheet activities and contractual obligations.

	•		OFF-BALANCE SHEET ARRANGEMENTS — Provides disclosure of off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the registrant’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

	•		MANAGEMENT CERTIFICATIONS — Provides disclosure of certifications provided by management during the most recent fiscal year.

DEFINITIONS

	•		Loans receivable — net — represents extensions of credit (commercial or personal) resulting from direct negotiations between Westernbank and a borrower, and which management has the intent and ability to hold for the foreseeable future or until maturity or pay-off, net of any deferred fees or costs the allowance for loan losses.

	•		Commercial real estate loans — extensions of credit secured by commercial real estate properties (excludes construction loans).

	•		Residential real estate loans — extensions of credit secured by 1 to 4 family residential properties.

	•		Construction loans — extensions of credit secured by real estate made to finance (a) land development (i.e., the process of improving land) preparatory to erecting new structures or (b) the on-site construction of industrial, commercial, residential, or farm buildings.

	•		Total commercial real estate loans — includes commercial real estate and construction loans.

	•		Commercial, industrial & agricultural (“C&I”) — extensions of credit to sole proprietorships, partnerships, corporations, and other business enterprises, whether secured (other than those that meet the definition of a “loan secured by real estate”) or unsecured, single-payment or installment.

	•		Total commercial loans — includes commercial real estate, construction and C&I loans.

	•		Consumer loans secured by real estate — extensions of credit secured by commercial real estate properties or residential real estate properties.

	•		Consumer other — unsecured extensions of credit, includes installment loans, lines of credit, overdraft, and credit cards.

	•		Total consumer loans — includes consumer loans secured by real estate and consumer other.

	•		Retail deposits — includes non-interest bearing accounts, passbook accounts, NOW accounts, money market accounts and individual certificate of deposits.

	•		Brokered Deposits — represents funds which Westernbank obtains, directly or indirectly, by or through any deposit broker for deposit into one or more deposit accounts.

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Total assets at December 31, 2008, 2007 and 2006 were $15.3 billion, $17.9 billion, and $17.1 billion, respectively. The decrease in total assets was mainly driven by decreases in the Company’s investment portfolio, excluding short-term money market instruments, and in the Company’s loans portfolio. The investment portfolio, excluding short-term money market instruments, decreased $2.4 billion, from $7.1 billion at December 31, 2007, to $4.7 billion at December 31, 2008, due to the Company’s decision to deleverage its balance sheet to strengthen the Company’s regulatory capital ratios. During 2008, the Company changed and repositioned its balance sheet by shifting the composition of its investment portfolio from callable agency securities with a risk-weight of 20% to GNMA mortgage-backed securities and collateralized mortgage obligations with a risk-weight of 0% and deleveraging the Company’s balance sheet. In particular, the Company made used of short-term money market instruments and proceeds from called investment securities to pay down repurchase agreements as they matured. The investment portfolio, excluding short-term money market instruments, was $7.0 billion at December 31, 2006. Loans receivable-net decreased by $542.2 million, from $9.2 billion at December 31, 2007 to $8.7 billion at December 31, 2008, due primarily to the Company’ decision to curtail major commercial lending since the summer of 2007 in light of worsening economic conditions in Puerto Rico and the application of stricter underwriting guidelines. Loans receivable — net was $8.6 billion at December 31, 2006. As part of the Company’s strategy to strengthen its capital ratios, during 2008 the Company emphasized its loan production toward the small business and residential mortgage loan sectors while deemphasizing the large corporate and construction loan portfolios.

Total deposits reached $11.0 billion at December 31, 2008, from $10.5 billion at December 31, 2007, and $9.3 billion at December 31, 2006. The increase is mainly attributable to increases in brokered deposits. Brokered deposits at December 31, 2008, 2007 and 2006 were $8.6 billion (78% of total deposits), $7.9 billion (75% of total deposits), and $6.8 billion (73% of total deposits), respectively. Retail deposits at December 31, 2008, 2007 and 2006 were $2.4 billion, $2.6 billion, and $2.5 billion, respectively.

Net loss for the year ended December 31, 2008 was $5.5 million, compared to a net loss of $68.3 million and a net income of $59.6 million for the years ended December 31, 2007 and 2006, respectively. Basic and diluted earnings (loss) per common share for the year ended December 31, 2008 amounted to $(12.84), compared to basic and diluted earnings (loss) per common share of $(31.92) and to basic and diluted earnings (loss) per common share of $6.89 ($6.74 on a diluted basis), adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008, for the comparable periods in 2007 and 2006, respectively. As more fully discussed in this Item 7, the Company’s financial performance for 2008, as compared to 2007, was principally impacted by the following:

	•		A decrease of $210.1 million in the provision for loan losses, as a result of steps taken by the Company since the middle of 2007 to mitigate the credit risk underlying its total commercial loan portfolios under the current economic environment, which included segregating origination, underwriting and credit administration functions, setting portfolio limits and applying stricter underwriting guidelines, among others. In addition, in connection with the 2007 and 2008 consolidated financial statements, the Company’s internal loan review department examined the entire construction and asset-based loan portfolios, and commercial loan relationships in excess of $3.0 million using current appraisals, the majority of which were done in 2007 or more recently, for substantially all of the underlying collateral. The Company’s determination of valuation allowances was mainly based on a collateral dependent analysis, which reflects the value of the property in its present condition after appropriate deductions for selling costs. The loan loss provision for 2007 included the incorporation of such appraisals in the calculation of the specific allowances.

	•		A decrease of $142.1 million in net interest income, mainly due to a decrease in net yield on interest-earning assets coupled with a decrease in the Company’s average earning assets.

	•		An increase of $32.4 million in noninterest expenses, for the most part due to increases in deposit insurance premiums and supervisory examination, salaries and employees’ benefits, municipal tax expenses and in the provision for claim receivable.

	•		An increase in the income tax benefit of $14.5 million mainly due to a positive variance in the current provision for income taxes, offset in part by a significant decrease in deferred tax benefits. For 2008, the Company’s current provision for income taxes amounted to a benefit of $31.9 million, compared to an expense of $33.8 million in 2007. The positive variance in 2008, when compared to 2007, was mainly attributed to agreements reached with local and federal authorities that yielded a benefit of $33.3 million for 2008, coupled with a negative variance in taxable income.

	•		An increase of $12.9 million in noninterest income, principally as a result of an increase of $12.5 million in net gain (loss) on sales of loans, securities and other assets coupled with an increase of $1.5 million in other fees and commissions, offset in part by decreases in service and other charges on loans. During 2008, the Company sold certain land lots originally held for future branch development and recognized a gain on sale of $14.7 million. The increase in other fees and commissions was mainly driven by higher credit card fees as a result of higher merchant fees due to an increase in assessment rates and higher automatic teller machine fees as a result of the imposition of a usage fee to non-bank customers. The decrease in service and other charges on loans was mainly due to lower volume of business in commercial loans due to the Company’s decision to curtail major commercial lending in light of worsening economic conditions in Puerto Rico.

Net loss for the year ended December 31, 2007, when compared to a net income in 2006, was mainly attributed to an increase of $186.7 million in the provision for loan losses (principally attributed to increased provisions in the Company’s total commercial loan portfolios), an increase of $38.9 million in noninterest expenses (mainly attributed to additional professional fees, salaries and employees’ benefits, deposit insurance premium and other expenses incurred during 2007) and a decrease of $23.3 million in net interest income (mainly as a result of the effects of the flattening of the yield curve), partially offset by an increase of $10.7 million in noninterest income and a decrease of $110.3 million in the provision for income taxes.

The Company’s returns on average assets for the years ended December 31, 2008, 2007, and 2006 were (0.03)%, (0.39)% and 0.36%, respectively, while the Company’s returns on average common stockholders’ equity for the years ended December 31, 2008, 2007, and 2006 were (9.97)%, (19.46)%, and 3.66%, respectively.

CRITICAL ACCOUNTING POLICIES

The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company’s financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity:

•

Allowance for loan losses — The allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.

The Company maintains an allowance to absorb probable loan losses inherent in the portfolio. The allowance is maintained at a level the Company considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectibility and historical loss experience of loans. Credit losses are charged and recoveries are credited to the allowance. Provisions for loan losses are based on the Company’s review of the historical credit loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses.

		Estimates of losses inherent in the loan portfolio involve the exercise of judgment and the use of assumptions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control. Because of uncertainties inherent in the estimation process, management’s estimate of credit losses in the loan portfolio and the related allowance may change.

		The allowance consists of two components: the specific allowance and the general allowance. The Company follows a systematic methodology in determining the appropriate level of these two allowance components.

		Larger commercial and construction loans that exhibit probable or observed credit weaknesses are subject to individual review and thus subject to specific allowance allocations. 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, as well as evaluation of legal options available to the Company. The review of individual loans includes those loans that are impaired as provided in Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan, as amended. Any allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loans’ effective interest rate or the fair value of the underlying collateral. The Company evaluates the collectibility of both principal and interest when assessing the need for loss accrual.


		General allowances based on loss rates are applied to commercial and construction loans which are not impaired and thus not subject to specific allowance allocations. The loss rates are generally derived from two or three year historical net charge-offs by loan category adjusted for significant qualitative factors that, in management’s judgment, are necessary to reflect losses inherent in the portfolio. These qualitative factors include: the effect of the national and local economies; trends in loans growth; trends in the impaired and delinquent loans; risk management and loan administration; changes in concentration of loans to one obligor; changes in the internal lending policies and credit standards; and examination results from bank examiners and the Company’s internal credit examiners. During 2007, the Company segregated the commercial and construction loan portfolios for purposes of determining loss rates into additional loan categories based on collateral type.


		Homogeneous loans, such as consumer installments, residential mortgage loans, and credit cards are not individually risk graded. General allowances are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are generally based on the higher of current year or the average of the last two to three year historical net charge-offs by loan category, adjusted for significant qualitative factors that, in management’s judgment, are necessary to reflect losses inherent in the portfolio. These qualitative factors include: the effect of the national and local economies; trends in the delinquent loans; risk management; collection practices; and changes in the internal lending policies and credit standards.

•		Other-than-temporary impairments — The Company reviews its investment securities for impairment on a quarterly basis or earlier if other factors indicative of potential impairment exist. An impairment charge in the consolidated statements of income is recognized when the decline in the fair value of the securities below their cost basis is judged to be other-than-temporary.

		Available-for-sale and held-to-maturity securities are reviewed at least quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the length of time and the extent to which the fair

value has been below cost, the expectation for that security’s performance, the credit worthiness of the issuer and the Company’s intent and ability to hold the security to allow for any anticipated recovery in fair value if classified as available for sale, or to maturity. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the consolidated statements of operations.

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

•		Securities classification and related values — Securities are classified as held-to-maturity, available-for-sale or trading on the date of purchase. Only those securities classified as held-to-maturity, and which management has the intent and ability to hold to maturity, are reported at amortized cost. Available-for-sale and trading securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in accumulated other comprehensive income (loss) and noninterest income, respectively. The fair value of a security is determined based on quotations received from pricing service firms and/or securities dealers. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Realized securities gains or losses are reported within noninterest income in the consolidated statements of operations. The cost of securities sold is based on the specific identification method. The assessment of fair value applies to certain of the Corporation’s assets and liabilities, including the investment portfolio. Fair values are volatile and are affected by factors such as market interest rates, prepayment speeds and discount rates.

•		Valuation of financial instruments — The measurement of fair value is fundamental to the Company’s presentation of financial condition and results of operations. The Company holds derivatives, investments and other financial instruments at fair value. The Company holds its investments and liabilities on the statement of financial condition mainly to manage liquidity needs and interest rate risks. A substantial part of these assets and liabilities is reflected at fair value on the Company’s financial statement of condition.

Effective January 1, 2008, the Company adopted SFAS No. 157, which provides a framework for measuring fair value under accounting principles generally accepted in the United States of America. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 1 assets and liabilities include equity securities that are traded in an active exchange market, as well as certain U.S. Treasury and other U.S. government and agency securities and corporate debt securities that are traded by dealers or brokers in active markets.

include (i) mortgage-backed securities for which the fair value is estimated based on the value of identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities (e.g., brokered deposits elected for fair value option under SFAS 159) whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3 — Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Company’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Company’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

For a detail of fair value of financial instruments please refer to Note 20 in the notes to the consolidated financial statements included in this Annual Report on Form 10-K under Part II, Item 8.

•

Certain liabilities and contingencies — In the ordinary course of business, the Company’s management is required to make certain estimates and assumptions that affect the reported amounts of liabilities and disclosures of contingent liabilities at the date of the consolidated financial statements and therefore the reported amounts of revenues and expenses during the reporting period. Such estimates are subjective in nature and involve uncertainties and matters of significant judgment regarding past and expected gains or losses, current economic conditions, and risk characteristics, among other factors. The following is a description of the most significant methods and assumptions used by the Company in estimating the amounts reported in connection with certain liabilities and contingencies as disclosed in the financial statements:

	•		Income taxes — The Company is required to compute income taxes in connection with its preparation of the consolidated financial statements. This computation involves estimates and assumptions made by the Company’s management based on its interpretation of current and enacted tax laws and regulations that affect the reported amounts of current and deferred income tax provisions. The carrying value of the Company’s net deferred tax asset assumes that the Company will be able to generate sufficient taxable income in the future to realize most of the tax benefit. If expectations about future taxable income are not materialized, the Company may be required to record a valuation allowance to reduce the recorded amount of its deferred tax asset resulting in an increase of income tax expense in the consolidated statements of operations.

			The Company evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. These changes, when they occur, can affect the income tax accruals as well as the current period’s income tax expense and can be significant to the operating results of the Company.

	•		Other Contingencies — The Company is a defendant in legal actions arising in the normal course of business. Evaluation of these contingencies requires management of the Company, after consultation with its legal counsel, to assume certain positions based on its interpretation of current laws and regulations. Such interpretations are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, actual results could differ from management position and estimates.

RESULTS OF OPERATIONS

NET INTEREST INCOME

The Company’s principal source of earnings is its net interest income, which is the difference between interest income on loans and invested assets (“interest-earning assets”) and interest expense on deposits and borrowings, including federal funds purchased and repurchase agreements and advances from the FHLB (“interest-bearing liabilities”). Loan origination and commitments fees, net of related costs, are deferred and amortized over the life of the related loans as a yield adjustment. Gains or losses on the sale of loans and investments, service charges, fees and other income, also affect income. In addition, the Company’s net income is affected by the level of its non-interest expenses, such as the provision for loan losses, compensation, employees’ benefits, occupancy costs, other operating expenses and income taxes.

The Company’s net interest income is subject to interest rate risk due to the re-pricing and maturity mismatch of the Company’s assets and liabilities. The Company manages its exposure to interest rate risk through the Company’s Assets and Liabilities Management Committee (“ALCO”). The main objective of the Company’s Assets and Liabilities Management program is to invest funds judiciously and reduce interest rate risks while optimizing net income and maintaining adequate liquidity levels. As further discussed under the header “- Market Risk and Interest Rate 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 inclined towards the preservation of capital with adequate returns. The ALCO, which includes the entire Board of Directors and senior management, is responsible for the asset-liability management oversight. The Investment Department is responsible for implementing the policies established by the ALCO.

2008 VERSUS 2007. Net interest income for the year ended December 31, 2008 was $142.9 million, a decrease of $142.1 million or 50%, from $285.1 million for the prior year. The decrease in net interest income was mainly due to a decrease in net yield on interest-earning assets coupled with a decrease in the Company’s average earning assets. For 2008, the net yield on interest-earning assets decreased by 75 basis points, from 1.63% in 2007 to 0.88% in 2008. The decrease in net yield on interest-earning assets during 2008 was driven by the following factors: a higher volume in non-performing loans, primarily due to the slowdown in the Puerto Rico economy; lower loan yields resulting from the repricing of variable-rate construction and commercial loans tied to short-term indexes; and lower yields in the overall investment portfolio, primarily due to lower reinvestment rates on investment securities redeemed through prepayments or maturities during 2008. The Company’s repricing mismatch of its assets and liabilities also contributed to the decrease in net interest income. For further details on the Company’s interest rate risk profile, refer to “Risk Management — Market Risk & Interest Rate Risk” section of this discussion. For 2008, when compared to 2007, the overall cost of funds decreased by 53 basis points, from 4.80% for year 2007, to 4.27% for year 2008, principally due to lower short term rates in 2008. The average interest rates paid on total deposits decreased 38 basis points, from 4.66% in 2007, to 4.28% for 2008. The decrease was mainly driven by lower interest rates on brokered deposits, the Company’s primary source of funding. Average interest rates paid on retail deposits decreased by 49 basis points, from 3.16% in 2007 to 2.67% in 2008. Average interest rates paid on brokerage deposits decreased from 5.18% in 2007 to 4.78% in 2008. The average interest rates paid on federal funds purchased and repurchase agreements decreased 78 basis points, from 5.01% in 2007, to 4.23% in 2008. The average interest rate paid on advances from the Federal Home Loan Bank also decreased by 16 basis points, from 5.54% in 2007, to 5.38% in 2008.

Average interest-earning assets for the year ended December 31, 2008 decreased by $1.3 billion, or 7%, compared to the year ended December 31, 2007, driven by an overall decrease in the average investment securities portfolio of $1.3 billion, or 15%, particularly due to investments securities called during the first half of 2008. Average investments securities and average money market instruments decreased by $2.9 billion, or 46% and $146.5 million, or 17%, respectively, in 2008, when compared to 2007. Average mortgage backed securities increased by $1.8 billion, to $2.8 billion in 2008 from $935.3 million in 2008. During the first half of 2008, approximately $5.5 billion of callable agency securities were early redeemed through call exercises due to the drop in rate in the long end of the yield curve. As a result, the Company repositioned its investment portfolio by reinvesting the proceeds on mortgage-backed securities at lower rates.

2007 VERSUS 2006. Net interest income for the year ended December 31, 2007 was $285.1 million, a decrease of $23.3 million, or 8%, from $308.4 million for the prior year. The decrease in net interest income was mainly due to a reduction in the net yield earned on the net interest-earning assets, offset in part by an increase in average balance on interest-earning assets. For the year ended December 31, 2007, the net yield on interest-earning assets decreased by 26 basis points when compared to the same period in 2006. The decrease in net yield on interest-earning assets during 2007 was mainly driven by the effects of the flattening of the yield curve experienced during most of 2007, coupled with the mismatch between the re-pricing profile of the Company’s assets and liabilities. At December 31, 2006 and for most of 2007, the Company was liability sensitive since the Company’s liabilities re-price earlier than its assets. As a consequence, in periods of rising short-term rates or flattening of the yield curve, the Company’s average rate paid on its interest-bearing liabilities increases in higher proportion than the increase in the average yield earned on its interest-earning assets. For further details on the Company’s interest rate risk profile, refer to “Risk Management — Market Risk & Interest Rate Risk” section of this discussion. For the year 2007, when compared to 2006, the overall cost of funds increased by 32 basis points, from 4.48% for year 2006, to 4.80% for year 2007. The average interest rate paid on deposits increased 49 basis points, from 4.17% in 2006, to 4.66% for 2007 and the average interest rates paid on federal funds purchased and repurchase agreements increased 12 basis points, from 4.89% in 2006, to 5.01% in 2007. The average interest rate paid on advances from the Federal Home Loan Bank also increased by 20 basis points, from 5.34% in 2006, to 5.54% in 2007. The average yield earned on interest-earning assets increased 10 basis points from 6.14% to 6.24%, for the year ended December 31, 2007, when compared to year 2006. The increase in the average yield for the year ended December 31, 2007, was mainly due to higher average yields earned in almost all the categories of interest-earning assets, and most significant in the Company’s mortgage backed securities portfolio.

Average interest-earning assets for the year ended December 31, 2007 increased by $1.2 billion, or 7%, compared to year 2006, primarily driven by an increase in the average loan portfolio of $904.5 million, or 11%, particularly in the total commercial real estate loan portfolios coupled with an increase in the Company’s mortgage-backed securities portfolio. The average investment portfolio, excluding mortgage-backed securities and money market instruments, decreased by $60.4 million, and the average mortgage-backed securities increased by $302.5 million, or 48%. The decrease in the average investment portfolio, excluding mortgage-backed securities and money market instruments, was primarily in short-term tax exempt securities, such as U.S. Government Agencies discount notes, while the increase on the average mortgage-backed securities was specifically due to CMO’s issued or guaranteed by FNMA and FHLMC available for sale bought during the quarter ended June 30, 2007. The average money market instruments increased by $14.7 million. The impact of the growth in average interest-earning assets was offset by an increase in the average interest-bearing liabilities of $1.1 billion, or 7% for the year 2007, principally by brokered deposits, when compared to year 2006.

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. Average balances are daily monthly average balances. The yield on the securities portfolio is based on average amortized cost balances and does not give effect to changes in fair value that are reflected as a component of consolidated stockholders’ equity for investment securities available for sale.


	Year ended December 31,
	2008								2007								2006
			Average			Average					Average			Average					Average			Average
	Interest		balance (1)			yield / rate			Interest		balance (1)			yield / rate			Interest		balance (1)			yield / rate
	(Dollars in thousands)
Interest-earning assets:
Loans, including loan fees (2)	$	569,533	$	9,265,967			6.15	%	$	723,765	$	9,266,562			7.81	%	$	661,095	$	8,362,032			7.91	%
Investment securities (3)		102,017		3,514,058			2.90			260,300		6,458,955			4.03			261,971		6,519,398			4.02
Mortgage-backed securities (4)		115,420		2,766,619			4.17			45,291		935,269			4.84			28,489		632,792			4.50
Money market instruments		19,323		713,585			2.71			40,833		860,093			4.75			38,235		845,375			4.52

Total		806,293		16,260,229			4.96			1,070,189		17,520,879			6.11			989,790		16,359,597			6.05


Interest-bearing liabilities:
Deposits:
Retail		66,770		2,503,541			2.67			80,225		2,540,079			3.16			65,500		2,390,868			2.74
Brokered		388,543		8,132,803			4.78			383,073		7,398,889			5.18			300,563		6,380,663			4.71

Total Deposits		455,313		10,636,344			4.28			463,298		9,938,968			4.66			366,063		8,771,531			4.17

Federal funds purchased and repurchase agreements		205,076		4,851,329			4.23			315,030		6,289,605			5.01			307,463		6,290,818			4.89
Advances from FHLB		2,980		55,409			5.38			5,691		102,684			5.54			7,893		147,780			5.34
Borrowings under line of credit		—		—			—			1,107		18,220			6.08			—		—			—

Total		663,369		15,543,082			4.27			785,126		16,349,477			4.80			681,419		15,210,129			4.48


Net interest income	$	142,924							$	285,063							$	308,371

Interest rate spread							0.69	%							1.31	%							1.57	%

Net interest-earning assets			$	717,147							$	1,171,402							$	1,149,468

Net yield on interest-earning assets (5)							0.88	%							1.63	%							1.88	%

Ratio of interest-earning assets to interest-bearing liabilities				104.61	%							107.16	%							107.56	%


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

(2)		Loans fees, net amounted to $8.5 million, $17.1 million and $15.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.

(3)		Includes available for sale securities.

(4)		Includes trading and available for sale securities.

(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 changes in outstanding balances and the changes in interest rates. The changes are segregated for each major category of interest-earning asset and interest-bearing liability into amounts attributable to (a) changes in volume (change in volume times old rate), (b) changes in rates (change in rate times old volume), and (c) changes in rate/volume (change in rate times the change in volume). The rate/volume variances are allocated to changes in volume and changes in rate on a proportional basis.


	Year ended December 31,
	2008 vs. 2007									2007 vs. 2006
	Volume			Rate			Total			Volume			Rate			Total
	(In thousands)
Interest income:
Loans	$	(46	)	$	(154,186	)	$	(154,232	)	$	70,540		$	(7,870	)	$	62,670
Investment securities (1)		(98,110	)		(60,173	)		(158,283	)		(2,439	)		768			(1,671	)
Mortgage-backed securities (2)		75,467			(5,338	)		70,129			14,507			2,295			16,802
Money market instruments		(6,107	)		(15,403	)		(21,510	)		648			1,950			2,598

Total increase (decrease) in interest income		(28,796	)		(235,100	)		(263,896	)		83,256			(2,857	)		80,399

Interest expense:
Deposits:
Retail		(1,139	)		(12,316	)		(13,455	)		4,269			10,456			14,725
Brokered		24,728			(19,258	)		5,470			50,896			31,614			82,510

Total		23,589			(31,574	)		(7,985	)		55,165			42,070			97,235
Federal funds purchased and repurchase agreements		(65,322	)		(44,632	)		(109,954	)		(59	)		7,626			7,567
Advances from FHLB		(2,549	)		(162	)		(2,711	)		(2,512	)		310			(2,202	)
Borrowings under line of credit		(1,107	)		—			(1,107	)		1,107			—			1,107

Total increase (decrease) in interest expense		(45,389	)		(76,368	)		(121,757	)		53,701			50,006			103,707

Increase (decrease) in net interest income	$	16,593		$	(158,732	)	$	(142,139	)	$	29,555		$	(52,863	)	$	(23,308	)


(1)		Includes available for sale securities.

(2)		Includes trading and available for sale securities.

PROVISION FOR LOAN LOSSES

The provision for loan losses is charged to earnings to maintain the allowance for loan losses at a level that the Company considers adequate to absorb probable losses inherent in the loan portfolio. The adequacy of the allowance for loan losses is based on ongoing, quarterly assessments and evaluations of the collectibility and historical loss experience of loans. The Company follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses. Although the Company believes that the allowance for loan losses is adequate, factors beyond the Company’s control, including factors affecting the Puerto Rico economy may contribute to delinquencies and defaults, thus necessitating additional reserves.

During 2008, the Company provided $67.5 million for loan losses, as compared to $277.6 million in 2007 and $90.9 million in 2006.

2008 VERSUS 2007. The Company’s provision for loan losses decreased by $210.1 million or 76% during 2008, when compared to 2007.

The decrease in the provision for loan losses is the result of certain factors, including, steps taken by the Company since the middle of 2007 to mitigate the overall credit risks underlying the Company’s total commercial loan portfolio and the effects of the continuing downturn in the economy of Puerto Rico, which has been in recession since 2006. These steps included segregating origination, underwriting and credit administration functions, setting portfolio limits and applying stricter underwriting guidelines, among others. In addition, in connection with the 2007 consolidated financial statements, the Company reviewed and obtained recent appraisals for substantially all properties underlying construction and asset-based lending loans and other impaired commercial loans. The loan loss

provision for 2007 included the incorporation of such appraisals in the calculation of the specific allowances. Additional reasons for the decrease in the provision for loan losses in 2008 included the following: a reduction of the outstanding principal balance of the Company’s loan portfolio by $598.8 million, from $9.5 billion at December 31, 2007, to $8.9 billion at December 31, 2008; a reduction of $216.0 million or 12% in non-performing and impaired loans, mainly due to the Company’s decision to curtail major commercial lending since the summer of 2007; and pay downs received on loans accounted for under the cost-recovery method.

The provision for loan losses for commercial real estate loans, excluding construction and asset-based loan portfolios, amounted to $23.5 million for the year ended December 31, 2008, a decrease of $88.0 million when compared to 2007. The decrease in the provision for loan losses for these commercial real estate loans, excluding construction and asset-based loans portfolios, was mainly attributable to a slight decrease of $10.4 million in non-performing loans from $717.7 million at December 31, 2007, to $707.3 million at December 31, 2008.

The provision for loan losses for the Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division, loan portfolio amounted to $27.9 million for the year ended December 31, 2008, an increase of $2.0 million, when compared to 2007. The increase was mainly due to slight increases in the specific allowance of certain loans classified as impaired during 2007. The loan portfolio of the Asset-Based Lending Unit decreased from $998.0 million at December 31, 2007 to $782.6 million at December 31, 2008, a decrease of $215.4 million or 22%. Non-performing loans of the Asset-Based Lending Unit also decreased from $606.5 million at December 31, 2007 to $259.4 million at December 31, 2008, a decrease of $347.1 million or 57%.

The provision for commercial, industrial and agricultural loans resulted in a credit to the provision of $3.0 million for the year ended December 31, 2008, compared to a provision of $11.3 million in 2007. The decrease is mainly attributable to a decrease in the outstanding principal balance of the loan portfolio mainly due to the Company’s decision to curtail major commercial lending, and a decrease in non-performing loans of the loan portfolio, mainly as a result of the foreclosure of a troubled relationship coupled with pay downs received on loans accounted for under the cost-recovery method. The outstanding principal balance of the commercial, industrial and agricultural loan portfolio decreased from $851.4 million at December 31, 2007 to $716.5 million at December 31, 2008. Non-performing commercial, industrial and agricultural loans decreased from $274.8 million at December 31, 2007 to $148.4 million at December 31, 2008.

The provision for loan losses for construction loans for the year 2008 amounted to $6.2 million compared to a provision for loan losses of $113.7 million for the year ended December 31, 2007. After steps taken during 2008 (as explained below), the Company determined that a lower provision for loan losses for the Company’s construction loan portfolio was needed to maintain the allowance for loan losses at a level that the Company considers adequate to absorb probable losses inherent in the construction loan portfolio. The following factors contributed to the aforementioned decrease: since the summer of 2007, the Company decided to stop new construction lending activity in light of worsening economic conditions in Puerto Rico; as part of the preparation of the Company’s 2007 and 2008 consolidated financial statements, during the second half of 2008 and continuing in 2009, the Company’s internal loan review department examined the entire construction loan portfolio using appraisals, the majority of which were done in 2007 or more recently, for each impaired loan, and incorporated such appraisals in the loan loss provision for 2007; as a result of the loan review conducted during the fourth quarter of 2008, the Company decided to account for most of its impaired construction portfolio under the cost-recovery method, resulting in the application of $30.7 million in payment received directly against principal; and a reduction in non-performing loans, partly as a result of the aforementioned payments for loans under cost-recovery accounting.

The provision for loan losses for the total consumer loan portfolio amounted to $12.9 million of the total provision for loan losses for the year ended December 31, 2008, while for 2007, it accounted for $16.8 million of the total provision for loan losses. The decrease is mainly attributable to the overall decrease of $35.1 million in the consumer — other loan portfolio and a higher volume of consumer loans secured by real estate. Consumer loans collateralized by real estate amounted to $494.6 million at December 31, 2008.

For discussion regarding Loans Charged-Off, Non-Performing and Impaired Loans, Allowance for Loan Losses, and related ratios refer to “Non-performing loans, Troubled Debt Restructurings and Foreclosed Real Estate Held For Sale” under “Financial Condition.”

2007 VERSUS 2006. The Company’s provision for loan losses increased by $186.7 million or 205% during 2007, compared to 2006. Net charge-offs during 2007 amounted to $141.0 million, which when subtracted from the provision for loan losses of $277.6 million resulted in a net increase in the allowance for loan losses of $136.5 million or 68%.

The increase in the provision for loan losses for 2007 is mainly attributable to higher non-performing and impaired loans and higher net loans charged-off and specific reserves during the period in the Company’s commercial, construction and asset-based lending loan portfolios coupled with the growth of the Company’s loan portfolios. The increase is principally due to the effects of the continuing downturn in the economy of Puerto Rico, which has been in recession since 2006. The slowdown in activity is the result of, among other things, higher utilities prices, higher taxes, government budgetary imbalances, the upward trend in short-term interest rates, and higher levels of oil prices. The slowdown in activity has impacted the commercial real estate mortgage loan portfolio, including the construction loan portfolio, of the Company. Westernbank has historically provided land acquisition, development, and construction financing to developers for residential housing projects. In connection with the preparation of the 2007 consolidated financial statements, the Company reviewed and obtained recent appraisals for substantially all properties underlying construction and asset-based lending loans and other impaired commercial loans. The loan loss provision for 2007 includes the incorporation of such appraisals in the calculation of the specific allowances. Since the middle of 2007, the Company has taken several steps to mitigate the credit risk underlying its commercial, construction and asset-based loan portfolios, including segregating origination, underwriting and credit administration functions, setting portfolio limits and applying stricter underwriting guidelines.

The provision for loan losses for Commercial and C&I loans, excluding construction and asset-based loan portfolios, accounted for $122.9 million or 44% of the total provision for loan losses for the year ended December 31, 2007. The increase in the provision for loan losses when compared to 2006 is mainly attributable to higher non-performing and impaired loans in the Company’s total commercial loan portfolio due to worsening economic conditions in Puerto Rico. Total non-performing and impaired loans in this portfolio amounted to $726.5 million at December 31, 2007. As of December 31, 2007, the Company classified as non-performing and impaired loans twelve loan relationships with outstanding principal balances of $104.2 million, $88.1 million, $64.2 million, $47.0 million, $44.2 million, $38.7 million, $35.8 million, $34.0 million, $28.9 million, $25.7 million, $24.2 million and $21.7 million at December 31, 2007. These loans relationships required valuation allowances of $6.0 million for the $104.2 million loan, $7.7 million for the $64.2 million loan, $9.8 million for the $47.0 million loan, $19.1 million for the $44.2 million loan, $18.0 million for the $35.8 million loan and $2.9 million for the $28.9 million loan. Loan relationships with outstanding principal balances of $88.1 million, $38.7 million, $34.0 million, $25.7 million, $24.2 million and $21.7 million did not require valuation allowances as of December 31, 2007.

The provision for loan losses for construction loans accounted for $113.7 million or 41% of the total provision for loan losses for the year ended December 31, 2007. The increase in the provision for loan losses for construction loans, when compared to 2006, is mainly attributable to a significant increase in impaired construction loans principally due to the effects of the continuing downturn in the economy of Puerto Rico, which has been in recession since 2006. The slowdown in activity has impacted the commercial real estate loan portfolio, including the construction loan portfolio, of the Company. Total non-performing and impaired loans in the construction portfolio were $429.4 million at December 31, 2007. There were no such loans at December 31, 2006. The increase in total non-performing loans is a direct result of the aforementioned economic slowdown in Puerto Rico, as demand for new housing has decreased due to affordability concerns. Total non-performing and impaired loans in the construction — mortgage loan portfolio was principally attributed to four loan relationships with outstanding principal balances of $73.6 million, $70.3 million, $48.6 million and $30.4 million, and five other construction-mortgage loans with outstanding principal balances of $38.5 million, $36.6 million, $34.4 million, $26.0 million and $22.7 million at December 31, 2007. The following loans or loan relationships required valuation allowances at December 31, 2007: $6.3 million for the $73.6 million loan relationship, $14.2 million for the $70.3 million loan relationship, $9.6 million for the $48.6 million loan relationship, $5.8 million for the $36.6 million loan, $13.5 million for the $34.4 million loan, $4.4 million for $30.4 million loan and $6.0 for the $22.7 million loan. The $38.5 million loan and the $26.0 million loan did not require valuation allowances.

The provision for loan losses for Westernbank Business Credit division and those asset-based loans held by Westernbank International division (the “Divisions”), accounted for $25.8 million or 9% of the total provision for loan losses for the year ended December 31, 2007, while for 2006, it accounted for $86.1 million or 95% of the total provision for loan losses. The decrease of $60.3 million in the provision for loan losses for the Divisions for 2007 is mainly the result of significant specific allowances taken on non-performing and impaired loan relationships during 2006. During the year ended December 31, 2006, the Company established valuation allowances for four classified asset-based loan relationships held by the Divisions with aggregate outstanding principal balances of $108.7 million, $44.9 million, $40.5 million, and $7.3 million at December 31, 2006. These loans required valuation allowances at December 31, 2006 as follows: $59.4 million for the $108.7 million loan, $11.4 million for the $44.9 million loan (after partial charge-off of $7.5 million), $15.2 million for the $40.5 million loan, and $2.5 million for the $7.3 million loan (after a partial charge-off of $3.0 million). These loans are inadequately protected by the current net worth and paying capacity of the borrower and have collateral shortfalls. The average yield of Westernbank Business Credit Division’s loan portfolio at December 31, 2007, was 8.39%.

As part of the preparation of the 2007 consolidated financial statements, the Company’s internal loan review department examined the entire construction and the asset-based loan portfolios using appraisals, the majority of which were done in 2007 or more recently, for substantially all of the underlying collateral. In addition, the Company’s internal loan review function examined each commercial and C&I loan relationship over $3.0 million using appraisals, the majority of which were done in 2007 or more recently, for each impaired loan. The Company’s determination of valuation allowances was mainly based on a collateral dependant analysis, which reflects the value of the property in its present condition after appropriate deductions for selling costs. The loan loss provision for 2007 includes the incorporation of such appraisals in the calculation of the specific allowances. Although management believes that the current allowance for the commercial and C&I loan portfolios is sufficient, future additions to the allowance may be necessary if economic conditions deteriorate. Since 2007, the Company has taken several steps to mitigate the credit risk underlying its commercial and C&I loan portfolios, including setting portfolio limits and applying stricter underwriting guidelines.

The provision for loan losses for the consumer loan portfolio, including the Expresso of Westernbank loan portfolio, which is the principal component of the consumer loan provision, increased by $8.9 million, from $7.9 million for the year 2006 to $16.8 million for the year 2007 or 6.05% of the total provision for loan losses for the year ended December 31, 2007. The increase was primarily due to an increase in the delinquency levels of the consumer loan portfolio at December 31, 2007. The delinquency ratio on the consumer loan portfolio, including the Expresso of Westernbank loan portfolio, for the categories of 60 days and over increased by 49 basis points, to 2.01% at December 31, 2007, when compared to 1.52% for the comparable period last year. The increase in the delinquency ratio of the consumer loans portfolio is mainly attributable to the economic downturn which affected regular consumer loans past due over 60 days which are collateralized by real estate properties.

At December 31, 2007, the allowance for loan losses was $338.7 million or 3.55% of total loans, and 19% of total non-performing loans (“reserve coverage”), compared to an allowance for loan losses at December 31, 2006, of $202.2 million or 2.31% of total loans, and 72% of total non-performing loans. The decrease in the reserve coverage was mainly due to the fact that the increase in non-performing loans was in portfolios for which the Company has experienced low rate of losses, mainly commercial real estate loans. A significant portion of the non-performing loans did not require a specific allowance given the adequacy of collateral coverage. As a consequence, the allowance for loan losses did not increase proportionately with the increase in non-performing loans and the ratio of allowance for possible loan losses to total non-performing loans decreased over time.

For the year ended December 31, 2007, net loan charge-offs amounted to $141.0 million or 1.54% to average total loans, an increase of $110.9 million, when compared to $30.1 million or 0.36% to average total loans in 2006. The increase in loans charged-off for the year ended December 31, 2007, when compared to the same period in 2006, is mainly attributed to an increase of $104.0 million in commercial and C&I loans charged-off. Such increase in the commercial and C&I loans charged-off resulted principally from loans charged-off on the Company’s asset based lending division. During 2007, the Company charged-off $120.7 million of certain asset based lending division non-performing and impaired loans with outstanding principal balances of $102.7 million after charge-offs. Specifically, during 2007, the Company charged-off $92.4 million related to the Inyx loan relationship.

Consumer loan charge-offs for the year ended December 31, 2007, were $16.1 million, an increase of $3.5 million or 28.06%, when compared to $12.6 million for the same period in 2006. Such increase is principally attributed to loans charged-offs by the Expresso of Westernbank division, the principal component of the consumer loan charge-offs. Loans charged-off by the Expresso of Westernbank division increased from $8.9 million for the year ended December 31, 2006, to $11.0 million for the same period in 2007, an increase of $2.1 million. The average yield of the Expresso of Westernbank loan portfolio was 22.45% at December 31, 2007. Also, the portion of the loan portfolio of Expresso of Westernbank collateralized by real estate at December 31, 2007, already accounts for 24% of the outstanding balance.

The Expresso loan portfolio includes small, unsecured consumer loans up to $15,000 and real estate collateralized consumer loans up to $150,000. These loans generally have a higher credit risk when compared to the rest of Westernbank’s consumer loan portfolio, since the Expresso Division principally targets the typical small consumer loan customers who are usually low income earners. Therefore, the Expresso of Westernbank division loan portfolio carries a higher risk of default when compared to the total consumer loans portfolio in general.

The accounts written-off are submitted to the Collections Department recovery unit for continued collection efforts. Recoveries made from accounts previously written-off amounted to $3.2 million in 2007 and $5.2 million in 2006, a decrease of $2.0 million or 39%.

NONINTEREST INCOME

Total noninterest income amounted to $60.7 million for 2008, as compared to $47.8 million for 2007 and $37.1 million for 2006.

The following table presents the components of total noninterest income:


	Year ended December 31,
	2008		2007		2006
	(Dollars in thousands)
Service and other charges on loans	$	10,364	$	12,687	$	12,527
Service charges on deposit accounts		11,712		12,397		9,976
Other fees and commissions		21,858		20,313		15,104
Net gain on derivative instruments and deposits measured at fair value		3,125		1,308		632
Gain on trading account securities		—		92		164
Net gain (loss) on sales of loans, securities and others assets		13,596		1,001		(1,305	)


Total noninterest income	$	60,655	$	47,798	$	37,098

2008 VERSUS 2007. For the year ended December 31, 2008, noninterest income increased $12.9 million or 27%, when compared to year 2007. This increase was mainly the result of an increase of $12.6 million in net gain (loss) on sales of loans, securities and other assets coupled with an increase of $1.5 million in other fees and commissions, offset in part by decreases in service and other charges on loans. During 2008, the Company sold certain land lots originally held for future branch development and recognized a gain on sale of $14.7 million. The increase in other fees and commissions was mainly driven by higher credit card fees as a result of higher merchant fees due to an increase in assessment rates and higher automatic teller machine fees as a result of the imposition of a usage fee to non-bank customers. The decrease in service and other charges on loans was mainly due to lower volume of business in commercial loans due to the Company’s decision to curtail major commercial lending in light of worsening economic conditions in Puerto Rico.

2007 VERSUS 2006. For the year ended December 31, 2007, noninterest income increased $10.7 million or 29%, when compared to year 2006. This increase was mainly the result of an increase of $7.8 million or 21% in service fees and other fees and commissions due to higher activity resulting from the Company’s overall growing volume of business, and an increase of $2.2 million on net gain on sales and valuation of loans, securities, and other assets.

NONINTEREST EXPENSES

Total noninterest expenses amounted to $195.8 million for 2008, as compared to $163.4 million for 2007 and $124.5 million for 2006. The following table presents the components of total noninterest expenses:


	Year ended December 31,
	2008		2007		2006
	(Dollars in thousands)
Salaries and employees’ benefits	$	65,191	$	60,436	$	54,378
Equipment expenses		13,868		13,244		11,610
Deposits insurance premium and supervisory examination		16,384		10,398		3,770
Occupancy		10,586		9,383		8,482
Advertising		7,095		8,641		9,140
Printing, postage, stationery and supplies		4,289		3,860		3,654
Telephone		2,632		2,068		2,275
Net loss (gain) from operations of foreclosed real estate held for sale		2,233		182		(270	)
Municipal taxes		10,585		8,775		6,218
Professional fees		19,845		17,884		3,819
Provision for claim receivable		14,406		—		—
Other		28,695		28,538		21,442


Total noninterest expenses	$	195,809	$	163,409	$	124,518

2008 VERSUS 2007. Total noninterest expenses for 2008 increased by $32.4 million or 20% compared to 2007. The increase in total noninterest expenses for 2008 was mainly due to increases in deposit insurance premiums and supervisory examination, salaries and employees’ benefits, municipal tax expenses and the provision for claim receivable.

Deposit insurance premiums and supervisory examination expenses increased $6.0 million or 58% in 2008 compared to 2007. The increase was mainly due to the increase in premiums assessed by the FDIC as a result of the final FDIC assessment regulations adopted on November 2, 2006, parts of which became effective in 2007, coupled with an increase in Westernbank’s deposit base, mainly brokered deposits. In addition, as discussed above, as a result of the special assessments and the increase in the regular assessment rate imposed by the FDIC in 2009, the Company expects an increase of approximately $39.2 million in its deposit insurance premium expense for 2009, as compared to 2008. For additional information regarding FDIC insurance coverage and deposit insurance premium assessment rates, refer to Part I, Item 1, “Business—Supervision and Regulation—FDIC Deposit Insurance Coverage” and “—Supervision and Regulation—FDIC Deposit Insurance Premium Assessments”.

Salaries and employees’ benefits, the largest component of total noninterest expenses, increased $4.8 million or 8% in 2008 compared to 2007. The increase for 2008 is principally attributed to the recruiting of new executive officers by the Company and the Bank during the latter part of 2007 and during 2008.

Occupancy expense increased by $1.2 million in 2008 compared to 2007. This is the result of the continued growth of the Company’s branch network.

Municipal tax expenses (a tax based on gross revenues, as defined) increased by $1.8 million or 21% in 2008 compared to 2007. The increase in municipal tax expenses was due to higher gross revenues earned, which is based on the prior year volume of business.

Professional fees expenses increased by $2.0 million in 2008, when compared to 2007. The high volume of professional fees expenses was primarily due to legal, accounting and consulting fees associated with the internal review conducted by the Company’s Audit Committee as a result of the Company’s restatement process.

Provision for claim receivable amounted to $14.4 million, due to the effect of losses recognized during the third and fourth quarters of 2008, on transactions with affiliates of Lehman Brothers Inc.

Noninterest expenses, as a group, excluding salaries and employees’ benefits, deposit insurance premiums and supervisory examination expenses, occupancy expenses, municipal taxes, professional expenses and the provision for claim receivable, increased by $2.3 million during the year ended December 31, 2008, from $56.5 million in 2007, to $58.8 million in 2008. This is the result of continued strict cost control measures implemented by the Company, maintaining operating expenses at adequate levels.

2007 VERSUS 2006. Total noninterest expenses for 2007 increased by $38.9 million or 31% compared to 2006. The increase in total noninterest expenses for 2007 was mainly due to increases in professional fees, salaries and employees’ benefits, deposit insurance premiums and supervisory examination, equipment and municipal tax expenses.

Professional fees expenses increased by $14.1 million in 2007 compared to 2006. The increase for 2007 was primarily due to legal, accounting and consulting fees associated with the internal review conducted by the Company’s Audit Committee as a result of the restatement announcement and other related legal and regulatory proceedings.

Deposit insurance premiums and supervisory examination expenses increased $6.6 million or 176% in 2007 compared to 2006. The increase was mainly due to the increase in premiums assessed by the FDIC as a result of the final FDIC assessment regulations adopted on November 2, 2006. The final regulations implemented certain changes to FDIC assessments, which became effective in 2007.

Salaries and employees’ benefits, the largest component of total noninterest expenses, increased $6.1 million or 11% in 2007 compared to 2006. The increase for 2007 is primarily attributed to the increases in personnel, normal salary increases and related employees’ benefits, principally related to the Company’s continued expansion in all of its business areas, mainly in the San Juan Metropolitan area. During 2006 and 2007, the Company continued its expansion into the San Juan Metropolitan area by opening two branches in Bayamón and Canóvanas. Also, during the first quarter of year 2006, the Company established Westernbank International Trade Services (“WITS”), a division of Westernbank Puerto Rico that provides international trade products and services to customers. At December 31, 2007, the Company had 1,536 full-time employees, including its executive officers, an increase of 173 employees or 13% since December 31, 2006.

Municipal tax expenses (a tax based on gross revenues, as defined) increased by $2.6 million or 41% in 2007 compared to 2006. The increase in municipal tax expenses was due to higher gross revenues earned in 2007.

Depreciation, maintenance and related equipment expenses increased by $1.6 million or 14% in 2007 compared to 2006. This is the result of the continued growth of the Company’s branch network.

Noninterest expenses, as a group, excluding professional fees, salaries and employees’ benefits, deposit insurance premiums and supervisory examination expenses, municipal taxes and equipment expenses, increased $7.9 million or 18%, during the year ended December 31, 2007, from $44.7 million in 2006, to $52.7 million in 2007. These increases resulted primarily from the additional investment in technology and general infrastructure to sustain and coordinate the Company’s growth and expansion in all of its business areas, mainly in the San Juan Metropolitan area.

PROVISION (CREDIT) FOR INCOME TAXES

The Company’s primary tax jurisdiction is Puerto Rico. Under Puerto Rico income tax laws, the Company is required to pay the higher of an alternative minimum tax of 22% or regular statutory rates ranging from 20% to 39%, except for year 2006, in which a transitory additional income tax of 2.5% over net taxable income was imposed by the Governor of Puerto Rico under Law No. 41, signed on August 1, 2005, effectively increasing the maximum statutory regular tax rate to 41.5% in 2006. The transitory income tax of 2.5% ended on December 31, 2006. Under the Puerto Rico Internal Revenue Code (“PR-IRC”), all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns. On May 13, 2006, with an effective date of January 1, 2006, the Governor of Puerto Rico approved an additional one-year transitory tax rate of 2.0% applicable only to companies covered by the Puerto Rico Banking Act, as amended, such as Westernbank, which raised the maximum statutory tax rate to 43.5% for the 2006 taxable year. The Company, Westernbank, Westernbank Insurance Corp. and SRG Net, Inc. are subject to Puerto Rico regular income tax or alternative minimum tax on income earned from all sources. Westernbank

World Plaza, Inc., a wholly owned subsidiary of Westernbank, elected to be treated as a special partnership under the PR-IRC; accordingly, its taxable income or deductible loss is included in the taxable income of Westernbank. On March 9, 2009, the Governor of Puerto Rico signed into law Act No. 7 (“Act No. 7”), also known as Special Act Declaring a Fiscal Emergency Status to Save the Credit of Puerto Rico, which amended several sections of the PR-IRC, including sections related to income, property, excise and sales and use tax provision. Act No. 7 imposes a series of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax determined, which is applicable to companies whose combined income exceeds $100,000, effectively increasing the maximum statutory rate from 39% to 40.95%. This temporary measure is effective for tax years that commenced after December 31, 2008 and before January 1, 2012.

The PR-IRC provides a dividend received deduction of 100%, on dividends received from wholly owned subsidiaries subject to income taxation in Puerto Rico. The income on certain investments is exempt for income tax purposes. Also, Westernbank International division operates as an International Banking Entity (“IBE”) under the International Banking Center 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 under certain circumstances. As a result, the Company’s effective tax rate is generally below the statutory rate.

Pursuant to the provisions of Act No. 13 of January 8, 2004 (the “IBE Act”), for taxable years commencing after June 30, 2003, the net income earned by an IBE that operates as a unit of a bank under the Puerto Rico Banking Law, will be considered taxable and subject to income taxes at the current tax rates in the amount by which the IBE taxable income exceeds 40% in the first applicable taxable year (2004), 30% in the second year (2005) and 20% thereafter, of the taxable income of Westernbank, including its IBE taxable income. Westernbank’s IBE carries on its books a significant amount of securities which are, irrespective of the IBE status, tax exempt by law. Moreover, the Act provides that IBE’s operating as subsidiaries will continue to be exempt from the payment of income taxes. For the year ended December 31, 2008 and 2006, the provisions of the IBE Act did not have any effect on the Company’s financial position or results of operations. For the year ended December 31, 2007, the provisions of the IBE Act resulted in an additional income tax provision of $3.8 million. Under Act No. 7, all IBEs are subject to a special 5% tax on their net income not otherwise subject to tax under the PR-IRC. This special assessment is effective for tax years that commenced after December 31, 2008 and before January 1, 2012.

Westernbank Financial Center Corp. (“WFCC”) is a U.S. entity and accordingly is subject to income tax under the U.S. Internal Revenue Code. WFCC commenced operations in February 2007, was largely inactive, and was closed during the third quarter of 2008. In addition, Westernbank is subject to special flat income tax rates on gross income received from certain loans and investments as required by the U.S. Internal Revenue Code. These flat income tax rates range from 10% to 30%.

Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109. FIN No. 48 also prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with FIN No. 48 is a two-step process. The first step is a recognition process to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to be recognized in the financial statements. The cumulative effect adjustment of $10,585,000 was charged to retained earnings to increase the accrued liability for uncertain income tax positions and the deferred income tax asset by $12,445,000 and $1,860,000, respectively. Unrecognized tax benefits mainly relate to income which could be subject to special flat income tax rates in U.S. and certain expense deductions taken in income tax returns. Unrecognized tax benefits, including accrued interest and penalties, amounted to $2.0 million and $44.0 million, respectively. During the first quarter of 2008, the Company settled with tax authorities most of its uncertain income tax positions for $8.9 million. The resulting income tax benefit of $33.3 million was recognized as a reduction to the income tax

provision in the first quarter of 2008. The provision for income taxes related to unrecognized tax benefits for the year ended December 31, 2008, amounted to a benefit of $33.2 million, compared to an expense of $30.6 million in 2007.

The Company’s provision for income taxes for the year ended December 31, 2008, amounted to a benefit of $54.3 million, compared to a benefit of $39.8 million in 2007 and an expense of $70.5 million in 2006.

2008 VERSUS 2007. The increase in income tax benefit for 2008 compared to 2007 was mainly due to a positive variance in the current provision for income taxes, offset in part by a significant decrease in deferred tax benefits. For 2008, the Company’s provision for current income taxes amounted to a benefit of $31.9 million, compared to an expense of $33.8 million in 2007. The positive variance in 2008, when compared to 2007, was mainly attributed to agreements reached with local and federal tax authorities related to unrecognized tax benefits that yielded a benefit of $33.3 million for 2008, coupled with lower taxable income.

Deferred income taxes reflect the impact of credit, operating and capital losses carryforwards, and temporary differences between amounts of assets and liabilities for financial reporting purposes and their respective tax bases. The income tax provision includes total deferred income tax benefits of $22.4 million and $73.6 million for 2008 and 2007, respectively. The decrease in deferred tax benefit in 2008 is mainly attributable to temporary differences related to the changes in the allowance for loan losses (See Note 11 — “Income Taxes” — to the consolidated financial statements).

The portion of the provision for income taxes related to unrecognized tax benefits resulted in a benefit of $33.2 million and an expense of $30.6 million for the years ended December 31, 2008 and 2007, respectively. Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes”. The cumulative effect adjustment of $10.6 million was charged to retained earnings to increase the accrued liability for uncertain income tax positions and the deferred income tax asset by $12.5 million and $1.9 million, respectively. Unrecognized tax benefits mainly relate to income which could be subject to special flat income tax rates in a tax jurisdiction in U.S., and certain expense deductions taken in income tax returns.

The Company evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due, among other, to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. These changes, when they occur, can affect the income tax accruals as well as the current period’s income tax expense and can be significant to the operating results of the Company. The Company’s consolidated statements of financial condition include liabilities of $2.0 million and $44.0 million at December 31, 2008 and 2007, respectively, for the exposures resulting from income taxes related to unrecognized tax benefits identified by the Company in connection with this evaluation.

The Company classifies interest and penalties related to uncertain income tax benefits as a component of its income tax provision. The accrual for uncertain income tax positions includes an accrual for interest and penalties of $475,000 and $5.5 million at December 31, 2008 and 2007, respectively. During the year ended December 31, 2008, the Company decreased the accrual for interest and penalties for uncertain income tax positions by $4.1 million, mainly as a result of the settlement of certain income tax positions with tax authorities, as explained above. Interest paid on such settlement amounted to $985,000. During the year ended December 31, 2007, the Company recognized approximately $2.3 million in interest and penalties.

2007 VERSUS 2006. The variance in the provision for income taxes for 2007 compared to 2006 was mainly due to a decrease in the current provision for income taxes coupled with an increase in deferred tax benefits. The current provision for income taxes for the year ended December 31, 2007, amounted to $33.8 million, compared to $76.6 million in 2006. The decrease in the current provision for income taxes for the year ended December 31, 2007, when compared to 2006, is attributed to lower taxable income coupled with the expiration of transitory income taxes enacted by the Government of Puerto Rico that ended on December 31, 2006, which were partially offset by the increase in the income tax contingency provision.

attributable to temporary differences related to the increases in the allowance for loan losses (Refer to Note 11 — Income Taxes — to the consolidated financial statements included herein in Part II, Item 8).

The portion of the provision for income taxes related to unrecognized tax benefits (2007) or income tax contingencies (2006) amounted to $30.0 million and $10.2 million for the years ended December 31, 2007 and 2006, respectively. Uncertain income tax positions mainly relate to income which could be subject to special flat income tax rates in a tax jurisdiction outside of Puerto Rico, and certain expense deductions taken in income tax returns. The Company’s consolidated statements of financial condition include liabilities of $44.0 million and $10.9 million at December 31, 2007 and 2006, respectively, for the exposures resulting from income taxes related to unrecognized tax benefits (2007) or income tax contingencies (2006) identified by the Company.

The Company classifies interest and penalties related to uncertain income tax positions as a component of its income tax provision. During the year ended December 31, 2007, the Company recognized approximately $1.0 million in interest and penalties.

NET INCOME (LOSS)

The Company’s net income (loss) for the years ended December 31, 2008, 2007, and 2006 amounted to $(5.5) million, $(68.3) million, and $59.6 million, respectively. The variance in net income (loss) for the year ended December 31, 2008, when compared to year 2007, was mainly attributable to: a decrease in the provision for loan losses of $210.1 million, mainly due to strict measures adopted by the Company since the middle of 2007 to mitigate the overall credit risks underlying the Company’s loan portfolio and the tax agreements negotiated by Westernbank with local and federal authorities that yielded a benefit of $33.3 million for 2008, partially offset by a decrease in the net interest income of $142.1 million and an increase in noninterest expenses of $32.4 million. The variance in net income (loss) for the year ended December 31, 2007, when compared to year 2006, was attributable to an increase in the provision for loan losses of $186.7 million, mainly caused by the Company’s Commercial and C&I loan portfolios. In addition, the net loss resulted from an increase of $38.9 million in noninterest expenses and a decrease of $23.3 million in net interest income, partially offset by a decrease of $110.3 million in the provision for income taxes and an increase of $10.7 million in noninterest income.

FINANCIAL CONDITION

LOANS

Loans receivable-net were $8.7 billion or 57% of total assets at December 31, 2008, a decrease of $558.6 million or 6%, from December 31, 2007. Loans receivable-net were $9.2 billion or 51% of total assets at December 31, 2007, an increase of $655.7 million or 8%, from December 31, 2006.

The following table presents the composition of the loan portfolio as of year-end for each of the last five years.


	At December 31,
	2008						2007						2006						2005						2004
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial real estate loans (1)	$	5,100,483			58.8	%	$	5,556,789			60.4	%	$	4,963,117			58.0	%	$	4,268,251			55.0	%	$	3,154,679			53.3	%
Residential real estate loans		965,171			11.2			970,419			10.5			1,014,957			11.9			1,298,535			16.7			879,056			14.9
Construction loans		1,439,224			16.6			1,429,125			15.5			722,789			8.4			505,760			6.5			328,145			5.5
Commercial, industrial and agricultural (1)		716,514			8.3			851,423			9.3			1,245,541			14.6			1,003,673			12.9			768,604			13.0
Consumer — secured by real estate		494,556			5.7			482,961			5.1			447,593			5.3			542,769			7.0			542,080			9.2
Consumer — other		233,858			2.7			257,914			2.9			362,360			4.2			287,615			3.7			324,854			5.4

Total loans		8,949,806			103.3			9,548,631			103.7			8,756,357			102.4			7,906,603			101.8			5,997,418			101.3

Allowance for loan losses		(282,089	)		(3.3	)		(338,720	)		(3.7	)		(202,180	)		(2.4	)		(141,412	)		(1.8	)		(80,066	)		(1.3	)

Loans — net	$	8,667,717			100.0	%	$	9,209,911			100.0	%	$	8,554,177			100.0	%	$	7,765,191			100.0	%	$	5,917,352			100.0	%


(1)		Includes $782.6 million, $998.0 million, $1.43 billion, $1.25 billion and $831.1 million of the outstanding loans of the Asset-Based Lending Unit, formerly known as as Westernbank Business Credit Division, at December 31, 2008, 2007, 2006, 2005 and 2004, respectively.

Westernbank’s commercial real estate, construction, and commercial, industrial, and agricultural loans are primarily variable and adjustable rate products. Total 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 MasterCard (™) accounts to its customers.

Total Commercial Loans

As of December 31, 2008, commercial real estate and construction loans were $6.5 billion or 75% and C&I loans were $716.5 million or 8% of the $8.7 billion loan portfolio-net, compared to commercial real estate and construction loans of $7.0 billion or 76% and C&I loans of $851.4 million or 9% of the $9.2 billion loan portfolio-net as of December 31, 2007. Over the last few years, the Company has emphasized the commercial loan segment in Puerto Rico. This has enabled Westernbank to shift its asset composition to assets with shorter maturities and greater repricing flexibility. The strategy has also enabled Westernbank to diversify its revenue sources, while maintaining its status as a secured lender, with approximately 89% of its loans collateralized by real estate as of December 31, 2008. As of December 31, 2008, the loan portfolios of the Asset Based Lending Unit, formerly known as Westernbank Business Credit Division, amounted to $782.6 million compared to $998.0 million as of December 31, 2007. For the years ended December 31, 2008 and 2007, the average yield of Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division, was 7.46% and 8.39%, respectively.

At December 31, 2008, Westernbank has a significant lending concentration with an aggregate unpaid principal balance of $405.3 million to a commercial group in Puerto Rico. As of December 31, 2008, this loan relationship was not impaired.

At December 31, 2008, commercial real estate loans totaled $5.1 billion. In general, commercial lending, including commercial real estate, asset-based, unsecured business and construction, are considered by management to be of greater risk of uncollectibility than consumer lending, including residential real estate, 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 has historically provided land acquisition, development, and construction financing to developers for residential housing projects. Construction loans extended to developers are typically adjustable rate loans, indexed to the prime interest rate with terms ranging generally from 12 to 48 months.

The Company’s commercial real estate loan portfolio is mostly comprised of loans to owner-occupied borrowers in which the real estate collateral is taken as a secondary source of repayment. For the year ended December 31, 2008, commercial real estate loans to owner-occupied borrowers amounted to 79% of total commercial real estate loans. These loans are sensitive to the economic condition and cash flow of the borrower’s business, but are less sensitive to market conditions, capitalization rates, vacancy rates, rental rates, and so on.

The composition of the Company’s construction loan portfolio as of December 31, 2008 by category follows:


	(In thousands)
Loans for residential housing projects:
High-rise (1)	$	163,473
Mid-rise (2)		208,792
Single-family detach		288,434
Mix		153,534


Total for residential housing projects		814,233

Construction loans to individuals secured by residential properties		7,266
Land loans		315,286
Loans for commercial projects:
Hospitals and other healthcare services		109,138
Shopping malls		51,929
Manufacturing		27,303
Hotels		35,666
Piers		27,372
Others		54,784

Total before net deferred fees and allowance for loan losses		1,442,977
Net deferred fees		(3,753	)

Total construction loan portfolio, gross		1,439,224
Allowance for loan losses		(110,777	)

Total construction loan portfolio, net	$	1,328,447


(1)		For purposes of the above table, high-rise portfolio is composed of buildings with more than 7 stories.

(2)		Mid-rise relates to buildings up to 7 stories.


	(Dollars in
	thousands)
Total undisbursed funds under existing commitments	$	298,691

Construction loans in non-accrual status	$	523,093

Net charge-offs — Construction loans	$	12,721

Allowance for loan losses — Construction loans	$	110,777

Non-performing construction loans to total construction loans		36.35	%

Allowance for loan losses — construction loans to total construction loans		7.70	%

Net charge-offs to total average construction loans		0.89	%

The following summarizes the construction loans for residential housing projects in Puerto Rico segregated by the estimated selling price of the units:


	(In thousands)
Under $300,000	$	263,702
$300,000 - $600,000		249,001
Over $600,000		301,530


Total	$	814,233

Residential Real Estate Loans

Residential real estate loans are mainly comprised of loans secured by first mortgages on one-to-four family residential properties. At December 31, 2008, the Company’s residential real estate loan portfolio amounted to $965.2 million, a decrease of $5.2 million, when compared to balances as of December 31, 2007. The reduction is mainly the result of prepayments received from a portfolio purchased from a mortgage originator group in Puerto Rico, net of new originations. The Company’s strategic intent is to emphasize residential real estate lending to diversify the Company’s revenue source and to increase liquidity.

During 2008, Westernbank securitized $4.2 million of residential mortgage loans into Government National Mortgage Association (“Ginnie Mae”). Westernbank continues to service certain outstanding loans that have been securitized and sold to Fannie Mae and Ginnie Mae.

Consumer Loans

The Company’s consumer loan category is comprised of consumer loans secured by real estate and other loans. The Company originates consumer loans secured by real estate in amounts up to 75% of the appraised value of the property, including the amount of any existing prior liens. Such loans generally have an interest rate that is variable based on market conditions. The loans are secured with a first or second mortgage on the property, including loans where another institution holds the first mortgage. The Company’s consumer other loan category consists principally of unsecured consumer and credit card loans. At December 31, 2008, the Company’s total consumer loan portfolio totaled $728.4 million (of which $494.6 million were secured by real estate) compared to $740.9 million (of which $483.0 million were secured by real estate) at December 31, 2007. Consumer loans generally have shorter terms and higher interest rates than commercial and mortgage loans but generally involve more credit risk because of the type and nature of the collateral and, in certain cases, the absence of collateral. In addition, consumer lending collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness and personal bankruptcy. The Company’s policy is to charge-off any unsecured consumer loan delinquent over 120 days.

The following table summarizes the contractual maturities of Westernbank’s total loans for the periods indicated at December 31, 2008. Contractual maturities do not necessarily reflect the expected term of a loan, including prepayments.


			Maturities
					After one year to five years				After five years
	Balance		One year or		Fixed		Variable		Fixed		Variable
	outstanding		less		interest		interest		interest		interest
	(In thousands)
Commercial real estate loans	$	5,100,483	$	1,977,611	$	218,752	$	373,489	$	106,924	$	2,423,707
Residential real estate loans		965,171		10,482		80,553		27,045		846,977		114
Construction loans		1,439,224		983,847		8,124		367,086		7,168		72,999
Commercial, industrial and agricultural		716,514		477,667		36,767		149,264		1,542		51,274
Consumer — secured by real estate		494,556		10,289		35,454		10,765		66,968		371,080
Consumer — other		233,858		110,905		98,190		9		23,692		1,062

Total	$	8,949,806	$	3,570,801	$	477,840	$	927,658	$	1,053,271	$	2,920,236

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

Westernbank’s practice is that its limited production and origination of residential real estate loans are mostly conforming loans, eligible for sale in the secondary market. The loan-to-value ratio at the time of origination on residential mortgages is generally 75%, except that Westernbank may lend up to 97% of the lower of the purchase price or appraised value of residential properties if private mortgage insurance is obtained, except for certain qualified new development projects, by the borrower for amounts in excess of 80%.

Westernbank originates fixed and adjustable rate residential mortgage loans secured by a first mortgage on the borrower’s real property, payable in monthly installments for terms ranging from ten to forty years. Adjustable rates are indexed to specified prime or LIBOR rate. All 30-year conforming mortgage loans are originated with the intent to sell. Westernbank has also granted loans, mainly secured by first mortgages on one-to-four residential properties, to mortgage originators in Puerto Rico.

Westernbank originates primarily variable and adjustable rate commercial business and real estate loans. Westernbank also makes real estate construction loans subject to firm permanent financing commitments.

NON-PERFORMING LOANS, TROUBLED DEBT RESTRUCTURINGS AND FORECLOSED REAL ESTATE HELD FOR SALE

The Company places a loan in non-performing status as soon as management has doubts as to the ultimate collectibility of principal or interest or when contractual payments of principal or interest are 90 days overdue. When a loan is designated as non-performing, interest accrual is suspended and a specific provision is established, if required. When a borrower fails to make a required payment on a loan, Westernbank attempts to cure the deficiency by contacting the borrower. If the delinquency exceeds 90 days and is not cured through normal collection procedures, Westernbank will generally institute measures to remedy the default. For collateral dependant loans, if a foreclosure action is instituted and the loan is not cured, paid in full or refinanced, the property is sold at a judicial sale at which Westernbank may acquire the property. 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. Thereafter, if Westernbank acquires the property, such acquired property is appraised and included in the foreclosed real estate held for sale account at the fair value less costs to sell 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.

Westernbank engages in the restructuring of the debt of borrowers who are delinquent due to economic or legal reasons, if the Company determines that it is in the best interest for both the Company and the borrower to do so. In some cases, due to the nature of the borrower’s financial condition, the restructure or loan modification fits the definition of Troubled Debt Restructuring (“TDR”) as defined by the SFAS No. 15, Accounting by Debtors and Creditors of Troubled Debt Restructurings. Such restructurings are identified as TDRs and accounted for based on the provisions SFAS No. 114, Accounting by Creditors for Impairment of a Loan.

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


	December 31,
	2008			2007			2006			2005			2004
	(Dollars in thousands)
Commercial real estate loans (1)	$	825,504		$	1,058,189		$	120,527		$	55,807		$	24,988
Residential real estate loans		43,106			3,071			1,641			2,125			1,730
Construction loans		523,093			429,387			—			—			—
Commercial, industrial and agricultural loans (2)		148,446			274,753			149,831			83,781			429
Consumer — secured by real estate		14,890			6,670			4,904			4,204			5,035
Consumer — other		4,992			3,983			4,405			2,084			2,087

Total non-performing loans		1,560,031			1,776,053			281,308			148,001			34,269
Foreclosed real estate held for sale		98,570			10,971			5,917			4,137			3,811

Total non-performing loans and foreclosed real estate held for sale	$	1,658,601		$	1,787,024		$	287,225		$	152,138		$	38,080

Interest that would have been recorded if the loans had not been classified as non-performing	$	90,704		$	48,974		$	20,009		$	5,525		$	3,557

Interest recorded on non-performing loans	$	25,874		$	17,068		$	5,046		$	743		$	243

Total non-performing loans as a percentage of total loans at end of period		17.43	%		18.60	%		3.21	%		1.87	%		0.58	%

Total non-performing loans and foreclosed real estate held for sale as a percentage of total assets at end of period		10.85	%		9.97	%		1.68	%		0.94	%		0.27	%


(1)		Includes $118.2 million, $340.3 million, $77.6 million and $14.4 million of loans of the Asset-Based Lending Division, formerly known as Westernbank Business Credit Division, at December 31, 2008, 2007, 2006 and 2005, respectively.

(2)		Includes $141.2 million, $266.2 million, $147.8 million and $79.8 million of loans of the Asset-Based Lending Division, formerly known as Westernbank Business Credit Division, at December 31, 2008, 2007, 2006 and 2005, respectively.

Total non-performing loans at December 31, 2008 amounted to $1.6 billion compared to $1.8 billion at December 31, 2007, a decrease of $216.0 million or 12%. The decrease in non-performing loans, when compared to 2007, is mainly attributable to the Company's decision to curtail major commercial lending, including construction lending, during the summer of 2007 and the application of stricter underwriting guidelines coupled with the acquisition of real estate properties in lieu of payment and/or the collection of six troubled relationships in the Company’s Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division, with an aggregate principal balance of $164.1 million. During the summer of 2007, as a result of the slowdown in the economy of Puerto Rico and after determining that one of the Bank’s largest asset-based lending relationships was impaired and that there was a significant collateral deficiency, the Company decided to curtail major commercial lending and to make adjustments to Company's underwriting standards designed to strengthen the credit quality of its loan portfolio.

Non-performing loans in the commercial real estate mortgage portfolio at December 31, 2008 decreased by $232.7 million, when compared to balances as of December 31, 2007. The decrease is mainly attributed to the aforementioned foreclosure of a troubled relationship, improved financial conditions of certain impaired relationships, and payoffs and pay downs received from impaired relationships, offset in part by an increase in impaired relationships due to the effects of the continuing downturn in the economy of Puerto Rico.

Non-performing loans in the asset-based lending unit at December 31, 2008 decreased by $347.0 million, when compared to 2007. The decrease is mainly attributed to three loans with outstanding principal balances of $163.5 million, $24.1 million, and $9.9 million that the Company determined to return to accrual status based on payment performance, improving financial condition, and adequacy of collateral values, coupled with payoffs and pay downs received from impaired relationships and foreclosure of one relationship.

Total non-performing loans in the construction loan portfolio were $523.1 million at December 31, 2008, compared to $429.4 million at December 31, 2007. The increase is mainly attributed to three loans with outstanding principal balances of $39.5 million, $27.8 million and $8.4 million at December 31, 2008. These loans required valuation allowances of $2.8 million for the $39.5 million loan and $3.4 million for the $27.8 million loan. The loan with an outstanding principal balance of $8.4 million did not require a valuation allowance as of December 31, 2008.

Non-performing loans in the total consumer loans portfolio increased by $9.2 million or 87% at December 31, 2008, when compared to balances at December 31, 2007. Such increase was mainly due to non-performing loans in the regular consumer loans portfolio which are collateralized by real estate due to effects of the aforementioned slowdown in the economy of Puerto Rico.

The increase in non-performing loans in 2007 as compared to 2006 is mainly due to increases in non-performing loans of the Company’s commercial real estate mortgage loan portfolio as well as in the construction loan portfolio. The increase is principally due to the effects of the continuing downturn in the economy of Puerto Rico, which has been in recession since 2006. The slowdown in activity is the result of, among other things, higher utilities prices, higher taxes, government budgetary imbalances, the upward trend in short-term interest rates, and higher levels of oil prices. The slowdown in activity has impacted the commercial real estate mortgage loan portfolio, including the construction loan portfolio, of the Company.

Non-performing loans in the commercial real estate mortgage portfolio, excluding loans of the asset-based lending unit, formerly known as Westernbank Business Credit Division, in 2007 increased by $675.0 million, when compared to 2006. The increase is mainly attributed to twelve loan relationships with outstanding principal balances of $104.2 million, $88.1 million, $64.2 million, $47.0 million, $44.2 million, $38.7 million, $35.8 million, $34.0 million, $28.9 million, $25.7 million, $24.2 million and $21.7 million at December 31, 2007. These loans relationships required valuation allowances of $6.0 million for the $104.2 million loan, $7.7 million for the $64.2 million loan, $9.8 million for the $47.0 million loan, $19.1 million for the $44.2 million loan, $18.0 million for the $35.8 million loan and $2.9 million for the $28.9 million loan. The loan relationships with outstanding principal balances of $88.1 million, $38.7 million, $34.0 million, $25.7 million, $24.2 million and $21.7 million did not require valuation allowances as of December 31, 2007.

Non-performing loans in the asset-based lending unit, formerly known as Westernbank Business Credit Division, in 2007 increased by $381.0 million, when compared to 2006. The increase is mainly attributed to five loans with outstanding principal balances of $163.5 million, $63.4 million, $48.7 million, $24.1 million and $22.8 million. At December 31, 2007, none of these loans required valuation allowances. These loans are inadequately protected by the current net worth and paying capacity of the borrower.

Total non-performing loans in the construction loan portfolio were $429.4 million at December 31, 2007. There were no such loans in prior years. The increase in total non-performing loans is a direct result of the aforementioned economic slowdown in Puerto Rico, as demand for new housing has decreased due to affordability concerns. The increase in total non-performing loans in the construction loan portfolio was principally attributed to four loan relationships with outstanding principal balances of $73.6 million, $70.3 million, $48.6 million and $30.4 million, and five other construction-mortgage loans with outstanding principal balances of $38.5 million, $36.6 million, $34.4 million, $26.0 million and $22.7 million at December 31, 2007. The following loans or loan relationships required valuation allowances at December 31, 2007: $6.3 million for the $73.6 million loan relationship, $14.2 million for the $70.3 million loan relationship, $9.6 million for the $48.6 million loan relationship, $5.8 million for the $36.6 million loan, $13.5 million for the $34.4 million loan, $4.4 million for $30.4 million loan and $6.0 for the $22.7 million loan. The $38.5 million loan and the $26.0 million loan did not require valuation allowances.

As part of the preparation of the 2007 and 2008 consolidated financial statements, during the second half of 2008 and continuing in 2009, the Company’s internal loan review department examined the entire construction and the asset-based loan portfolio using appraisals, the majority of which were done in 2007 or more recently, for substantially all of the underlying collateral. In addition, the Company’s internal loan review function examined each commercial and C&I loan relationship over $3.0 million using appraisals, the majority of which were done in 2007 or more recently, for each impaired loan. The Company’s determination of valuation allowances was mainly based on a collateral dependant analysis, which reflects the value of the property in its present condition after appropriate deductions for selling costs. The loan loss provision for 2007 includes the incorporation of such appraisals in the calculation of the specific allowances. Although management believes that the current allowance for the commercial and C&I loan portfolios is adequate, future additions to the allowance may be necessary if economic conditions deteriorate. Since 2007, the Company has taken several steps to mitigate the credit risk underlying its commercial and C&I loan portfolios, including setting portfolio limits and applying stricter underwriting guidelines. The Company’s Internal Loan Review Department (“ILRD”) has also continued to actively participate in the loan classification and determination of loss reserves. In addition, the Bank’s credit monitoring functions, which cover all lending functions, are now required to obtain updated appraisal reports for all adversely classified loans in excess of $1,000,000 and continue to be involved in the credit review analysis process with enhanced communication to both, Management and the Bank’s ILRD.

During the third quarter of 2008, the Company established procedures through the Company’s Department of the Chief Credit Risk Officer (“CCRO”) to ensure that appraisal reports are reviewed by a qualified officer independent of the credit function. In addition, during 2009 the Company strengthened its appraiser review function by creating an Appraisal Review Division. This is an independent unit reporting to the Company’s CCRO, staffed with experienced personnel. The Appraisal Review Department responsibilities, among others, include: (1) preparation of engagement and order appraisals; (2) revision of appraisals to ensure that appraised values submitted are properly supported, reasonable, and in compliance with all federal and state regulations, as well as the Company’s policies and procedures; (3) preparation of written review reports; (4) coordination with appraisers for any necessary corrections on appraisals prepared for the Company; and (5) providing advice and assistance to loan officers in the implementation of the Company’s appraisal policy.

Non-performing loans in the consumer loans portfolio increased by $1.3 million or 14.44% at December 31, 2007, when compared to December 31, 2006. Such increase was mainly due to non-performing loans in the regular consumer loans portfolio which are collateralized by real estate.

ALLOWANCE FOR LOAN LOSSES

The Company maintains an allowance to absorb probable loan losses inherent in the loan portfolio. The allowance is maintained at a level the Company considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectibility and historical loss experience of loans. Credit losses are charged and recoveries are credited to the allowance. Provisions for loan losses are based on the Company’s review of the historical credit loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses.

Larger commercial and construction loans that exhibit probable or observed credit weaknesses are subject to individual review and thus subject to specific allowance allocations. 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, as well as evaluation of legal options available to the Company. The review of individual loans includes those loans that are impaired as provided in Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan, as amended. Any allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loans’ effective interest rate or the fair value of the underlying collateral, if the loan is collateral dependent. For collateral dependent loans, the fair value of the collateral is generally obtained from appraisals. Appraisals are obtained from qualified appraisers and are reviewed by an independent appraisal review group to ensure independence and consistency in the valuation process. Appraisal values are updated on an as needed basis, in conformity with market conditions and regulatory requirements. Should the appraisal show a deficiency, the Company records a specific reserve for the underlying loan. This deficiency is categorized as a nonrecurring fair value adjustment. The Company classifies loans receivable subject to nonrecurring fair value adjustments as Level 3 under SFAS No. 157. Refer to Note 20 to the consolidated financial statements, included herein in Part II, Item 8, for further details on the Company’s fair value designations under SFAS No. 157.

General allowances based on loss rates are applied to commercial and construction loans which are not impaired and thus not subject to specific allowance allocations. The loss rates are generally derived from two or three year historical net charge-offs by loan category adjusted for significant qualitative factors that, in management’s judgment, are necessary to reflect losses inherent in the portfolio. These qualitative factors include: the effect of the national and local economies; trends in loans growth; trends in the impaired and delinquent loans; risk management and loan administration; changes in concentration of loans to one obligor; changes in the internal lending policies and credit standards; and examination results from bank examiners and the Company’s internal credit examiners.

Homogeneous loans, such as consumer installments, residential mortgage loans, and credit cards are not individually risk graded. General allowances are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are generally based on the higher of current year or the average of the last two to three year historical net charge-offs by loan category, adjusted for significant qualitative factors that, in management’s judgment, are necessary to reflect losses inherent in the portfolio. These qualitative factors include: the effect of the national and local economies; trends in the delinquent loans; risk management; collection practices; and changes in the internal lending policies and credit standards.

At December 31, 2008, the allowance for loan losses was $282.1 million, consisting of $129.1 million specific allowance and $153.0 million of general allowance. As of December 31, 2008, the allowance for loan losses equals 3.15% of total loans, compared with an allowance for loan losses at December 31, 2007, of $338.7 million, or 3.55% of total loans.

In the current year, the Company has not substantively changed in any material respect of its overall approach in the determination of the allowance for loan losses. There have been no material changes in criteria or estimation techniques as compared to prior periods that impacted the determination of the current period allowance for loan losses.

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


	Year ended December 31,
	2008			2007			2006			2005			2004
				(Dollars in thousands)
Balance, beginning of year	$	338,720		$	202,180		$	141,412		$	80,066		$	61,608

Loans charged-off:
Commercial real estate loans (1)		(61,915	)		(14,736	)		(11,549	)		(1,835	)		(3,958	)
Residential real estate loans		(822	)		(1,421	)		(94	)		(121	)		(297	)
Construction loans		(12,757	)		—			—			—			—
Commercial, industrial and agricultural loans (2)		(37,049	)		(111,922	)		(11,057	)		(6,398	)		(1,475	)
Consumer — other		(15,299	)		(16,105	)		(12,576	)		(13,809	)		(16,473	)

Total loans charged-off		(127,842	)		(144,184	)		(35,276	)		(22,163	)		(22,203	)

Recoveries of loans previously charged-off:
Commercial real estate loans		500			590			2,685			756			746
Residential real estate-mortgage loans		147			87			66			212			206
Construction loans		36			—			—			—			—
Commercial, industrial and agricultural loans		1,082			721			161			252			1,098
Consumer — other		1,940			1,764			2,252			2,283			1,920

Total recoveries of loans previously charged-off		3,705			3,162			5,164			3,503			3,970

Net loans charged-off		(124,137	)		(141,022	)		(30,112	)		(18,660	)		(18,233	)
Provision for loan losses		67,506			277,562			90,880			80,006			36,691

Balance, end of year	$	282,089		$	338,720		$	202,180		$	141,412		$	80,066

Ratios:
Allowance for loan losses to total loans at end of period		3.15	%		3.55	%		2.31	%		1.79	%		1.34	%
Provision for loan losses to net loans charged-off		54.38	%		196.82	%		301.81	%		428.76	%		201.23	%
Recoveries of loans to loans charged-off in previous period		2.57	%		8.96	%		23.30	%		15.78	%		26.71	%
Net loans charged-off to average total loans (3)		1.34	%		1.54	%		0.74	%		0.27	%		0.34	%
Allowance for loans losses to non-performing loans		18.08	%		19.07	%		71.87	%		95.55	%		233.64	%


(1)		Includes $10.9 million, $10.2 million and $7.5 million of the Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division, loan charge-offs, for the years ended December 31, 2008, 2007 and 2006, respectively.

(2)		Includes $33.4 million, $110.5 million, $8.3 million and $5.3 million of the Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division, loan charge-offs, for the years ended December 31, 2008, 2007, 2006 and 2005, respectively.

(3)		Average loans were computed using beginning and period-end balances.

The 2008 provision for loan losses was $67.5 million, a decrease of $210.1 million or 76% when compared to 2007. The decrease in the provision for loan losses is mainly attributable to strategies put in place by the Company since the summer of 2007. Refer to the discussion on the “Provision for Loan Losses” above for further details on the specific items affecting the provision for loan losses in 2008, 2007 and 2006.

For the year ended December 31, 2008, net loan charge-offs amounted to $124.1 million, or 1.34% of average loans, a decrease of $16.9 million, when compared to $141.0 million, or 1.54% of average loans in 2007. The decrease in net loans charged-off for the year ended December 31, 2008, when compared to the same period in 2007, is mainly attributed to a decrease of $74.9 million in C&I loans charged-off, offset in part by increases in loan charge-offs in commercial real estate and construction of loans of $47.2 million and $12.8 million, respectively.

The following table presents the Company’s historical loss rate by loan category as of the end of each of the year presented:


	At December 31,
	2008			2007			2006			2005			2004

Net charge-off to average loan:
Commercial real estate loans		1.15	%		0.27	%		0.39	%		0.03	%		0.12	%
Residential real estate loans		0.07	%		0.13	%		0.00	%		-0.01	%		0.01	%
Construction loans		0.89	%		0.00	%		0.00	%		0.00	%		0.00	%
Commercial, industrial and agricultural loans		4.59	%		10.61	%		0.97	%		0.69	%		0.06	%
Consumer — other		5.38	%		4.88	%		3.40	%		3.97	%		4.60	%

Total net charge-offs to average loan		1.34	%		1.54	%		0.74	%		0.27	%		0.34	%

Total consumer loan charge-offs for the year ended December 31, 2008, were $15.3 million, a decrease of $806,000 or 5%, when compared to $16.1 million for the same period in 2007. Such decrease is principally attributed to loans charge-offs by the Expresso of Westernbank division, the principal component of the consumer loan charge-offs. Loans charged-off by the Expresso of Westernbank division decreased from $11.0 million for the year ended December 31, 2007, to $9.4 million for the same period in 2008, a decrease of $1.6 million. The decrease in loan charge-offs is due to a decrease in the outstanding balance of the portfolio due to the Company’s decision to curtail growth in this consumer segment in light economic conditions in Puerto Rico.

The Expresso loan portfolio includes small, unsecured consumer loans up to $15,000 and real estate collateralized consumer loans up to $150,000. These loans generally have a higher credit risk when compared to the rest of Westernbank’s consumer loan portfolio, since the Expresso Division principally targets small consumer loan customers, who are usually of higher risk. Therefore, the Expresso of Westernbank division loan portfolio carries a higher risk of default when compared to the total consumer loans portfolio in general.

The Expresso of Westernbank division has established policies, procedures and controls to assess, monitor and adequately manage the specific credit risk posed by this loan portfolio under the FDIC guidelines for sub-prime lending programs, even though this program does not exceed the 25% of capital applicable for such guidelines. The division’s loan analyses and applications are processed in the system software that has embedded controls to help enforce the lending policies and limits as approved by the division’s senior management. Lending parameters and authority levels are programmed in a loan process application, restricting individuals to their level of authority. Also, the system uses tools to assist the loan officer in identifying critical information in the customer’s credit report based on a credit scoring process. The system returns a suggested decision and loan amount, based on the customer’s net disposable income, FICO Score, and credit profile tests. In addition to this package, the division branches obtain a credit report from a second credit bureau to ensure that the lending officer possesses all information needed to make an informed decision and to reduce the division’s credit risk exposure. Overall credit scores for the portfolio are analyzed periodically.

The accounts written-off are submitted to the Collections Department recovery unit for continued collection efforts. Recoveries made from accounts previously written-off amounted to $3.7 million in 2008 and $3.2 million in 2007, an increase of $543,000 million or 17%.

For the year ended December 31, 2007, net loan charge-offs amounted to $141.0 million or 1.54% of average loans, an increase of $110.9 million, when compared to $30.1 million or 0.74% of average loans in 2006. The increase in loans charged-off for the year ended December 31, 2007, when compared to the same period in 2006, is mainly attributed to an increase of $104.9 million in loans charged-off by the Company’s asset-based lending unit, formerly known as Westernbank Business Credit Division. Specifically, during 2007, the Company charged off $92.4 million related to the Inyx loan relationship.

Total consumer loan charge-offs for the year ended December 31, 2007, were $16.1 million, an increase of $3.5 million or 28%, when compared to $12.6 million for the same period in 2006. Such increase is principally attributed to loans charged-off by the Expresso of Westernbank division, the principal component of the consumer loan charge-offs. Loans charged-off by the Expresso of Westernbank division increased from $8.9 million for the year ended December 31, 2006, to $11.0 million for the same period in

2007, an increase of $2.1 million. The average yield of the Expresso of Westernbank loan portfolio was 22.45% at December 31, 2007. Also, the portion of the loan portfolio of Expresso of Westernbank collateralized by real estate at December 31, 2007, already accounts for 24% of the outstanding balance.

Recoveries made from accounts previously written-off amounted to $3.2 million in 2007 and $5.2 million in 2006, a decrease of $2.0 million or 39%.

The following table presents the allocation of the allowance for loan losses, the loan portfolio composition percentage and the allowance to total loans ratio in each loan category, as set forth in the “Loans” table above at the end of each year.


	At December 31,
	2008			2007			2006			2005			2004
				(Dollars in thousands)
Allowance for loan losses:

Commercial real estate loans (1)	$	115,108		$	151,403		$	46,998		$	44,382		$	36,306
Residential real estate loans		3,948			4,532			4,654			3,275			407
Construction loans		110,777			117,281			3,616			4,059			3,715
Commercial, industrial and agricultural loans (2)		38,273			51,028			132,144			73,288			18,187
Consumer — secured by real estate		2,787			2,963			2,262			1,276			2,156
Consumer — other		11,196			11,513			9,767			13,154			17,269
Unallocated		—			—			2,739			1,978			2,026

Total allowance for loan losses	$	282,089		$	338,720		$	202,180		$	141,412		$	80,066


Loan portfolio composition percentages:
Commercial real estate loans		56.99	%		58.19	%		56.68	%		53.98	%		52.60	%
Residential real estate loans		10.78	%		10.16	%		11.59	%		16.42	%		14.66	%
Construction loans		16.08	%		14.97	%		8.26	%		6.40	%		5.47	%
Commercial, industrial and agricultural loans		8.01	%		8.92	%		14.22	%		12.69	%		12.82	%
Consumer — secured by real estate		5.53	%		5.06	%		5.11	%		6.87	%		9.04	%
Consumer — other and others		2.61	%		2.70	%		4.14	%		3.64	%		5.41	%

Total loans		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%


Allowance to total loans ratio at end of year applicable to:
Commercial real estate loans		2.26	%		2.72	%		0.95	%		1.04	%		1.15	%
Residential real estate loans		0.41	%		0.47	%		0.46	%		0.25	%		0.05	%
Construction loans		7.70	%		8.21	%		0.50	%		0.80	%		1.13	%
Commercial, industrial and agricultural loans		5.34	%		5.99	%		10.61	%		7.30	%		2.37	%
Consumer — secured by real estate		0.56	%		0.61	%		0.51	%		0.24	%		0.40	%
Consumer — other and others		4.79	%		4.46	%		2.70	%		4.57	%		5.32	%
Unallocated (as a percentage of total loans)		0.00	%		0.00	%		0.03	%		0.03	%		0.03	%

Total loans		3.15	%		3.55	%		2.31	%		1.79	%		1.34	%


(1)		Includes an allowance of $8.2 million, $17.5 million, $20.7 million, $13.5 million and $3.3 million for the asset based lending division loan portfolio at December 31, 2008, 2007, 2006, 2005 and 2004, respectively.

(2)		Includes an allowance of $30.3 million, $37.4 million, $129.1 million, $65.9 million and $9.6 million for the asset based lending division loan portfolio at December 31, 2008, 2007, 2006, 2005 and 2004, respectively.

At December 31, 2008, the allowance for possible loan losses was 18.08% of total non-performing loans (“reserve coverage”) compared to 19.07% and 71.87% at December 31, 2007 and 2006, respectively. The decrease since 2006 in the reserve coverage ratio was mainly due to the fact that the increase in non-performing and impaired loans was in portfolios for which the Company’s loan-to-value position was sufficient to cover potential collateral deficiencies. A significant portion of the non-performing loans did not require a specific allowance given the adequacy of collateral coverage. As a consequence, the allowance for loan losses did not increase proportionately with the increase in non-performing loans and the ratio of allowance for possible loan losses to total non-performing loans decreased.

The allowance for loan losses at December 31, 2008 amounted to $282.1 million, compared to $338.7 million and $202.2 million at December 31, 2007 and 2006, respectively. As a percentage of total loans, the allowance for loan losses amounted to 3.15%, 3.55%, and 2.31% at December 31, 2008, 2007 and 2006, respectively. The Company maintains an allowance for loan losses to absorb probable credit-related losses inherit in its loans receivable portfolio. The allowance for loan losses is affected by net charge-offs, loan portfolio balance, and the provision for loan losses for each period. For the year ended December 31, 2008, when compared to the year ended December 31, 2007, the allowance for loan losses was primarily impacted by $124.1 million of net-charge offs taken during the period, offset in part by a provision for loan losses of $67.5 million taken during the period. The increase in the allowance for credit losses for the year 2007 as compared to 2006 is attributable to the following factors: higher non-performing and impaired loans, higher net loans charged-off and specific reserves during the period, principally in commercial lending loan portfolios, including construction-mortgage, which increased the loan loss factor of this portfolio and its corresponding general allowance; and the overall growth in the Company’s loan portfolio, mainly those of its commercial real estate mortgage and construction mortgage loans portfolio.

Troubled Debt Restructurings

A troubled debt restructuring is a formal restructure of a loan where the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued interest, and deferral of cash payments. Note, however, that a debt restructuring is not necessarily a troubled debt restructuring even if the debtor is experiencing some financial difficulties.

As of December 31, 2008 and 2007, Westernbank had commercial loans totaling $122.9 million and $88.1 million, respectively, that met the definition of TDR’s, and therefore have been accounted for as TDR’s. At December 31, 2008, commercial loans accounted for as TDR’s and amounting to $4.8 million were in accrual status, while the remaining $118.1 million were in non-performing status. At December 31, 2007, the $88.1 million commercial TDR loans were in non-performing status.

Impaired Loans

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


	December 31,
	2008			2007			2006			2005			2004
	(Dollars in thousands)
Investment in impaired loans:

Covered by a valuation allowance:
Commercial real estate loans (1)	$	389,550		$	129,159		$	215,035		$	107,406		$	23,908
Construction loans		440,847			396,960			—			—			—
Commercial, industrial and agricultural loans (2)		70,749			395,882			22,267			7,913			6,067

Sub-total		901,146			922,001			237,302			115,319			29,975

Do not require a valuation allowance:
Commercial real estate loans (3)		413,061			469,339			9,912			10,887			—
Construction loans		83,389			83,209			—			—			—
Commercial, industrial and agricultural loans (4)		73,580			313,997			21,513			38,552			24,200

Sub-total		570,030			866,545			31,425			49,439			24,200


Total	$	1,471,176		$	1,788,546		$	268,727		$	164,758		$	54,175

Valuation allowance for impaired loans:
Commercial real estate loans (5)	$	49,121		$	31,766		$	93,144		$	42,350		$	6,846
Construction loans		64,903			66,988			—			—			—
Commercial, industrial and agricultural loans (6)		16,994			76,292			5,360			2,187			1,566

	$	131,018		$	175,046		$	98,504		$	44,537		$	8,412


Percentage of valuation allowance to impaired loans		8.91	%		9.79	%		36.66	%		27.03	%		15.53	%


	Year ended December 31,
	2008		2007		2006		2005		2004
			(Dollars in thousands)
Average investment in impaired loans:
Commercial real estate loans	$	890,113	$	431,485	$	171,449	$	45,265	$	19,111
Construction loans		494,082		132,683		—		—		—
Commercial, industrial and agricultural loans		213,978		221,932		39,836		32,665		27,398

	$	1,598,173	$	786,100	$	211,285	$	77,930	$	46,509

Interest collected and recognized as income
on non-performing and impaired loans:
Commercial real estate loans	$	12,212	$	14,335	$	2,920	$	—	$	—
Construction loans		6,534		—		—		—		—
Commercial, industrial and agricultural loans		4,993		1,705		2,124		743		243

	$	23,739	$	16,040	$	5,044	$	743	$	243


(1)		Includes $6.5 million, $36.9 million, $42.4 million and $24.8 of loans of the Asset-Based Lending Unit at December 31, 2008, 2007, 2006 and 2005, respectively.

(2)		Includes $111.1 million, $297.8 million, $140.0 million, $80.5 million and $18.5 million of loans of the Asset-Based Lending Unit at December 31, 2008, 2007, 2006, 2005 and 2004, respectively.

(3)		Includes $38.5 million, $66.8 million, $35.3 million and $14.0 million of loans of the Asset-Based Lending Unit at December 31, 2008, 2007, 2006, and 2005, respectively.

(4)		Includes $101.9 million, $197.0 million, $7.8 million, $91,000 and $87,000 of loans of the Asset-Based Lending Unit at December 31, 2008, 2007, 2006, 2005 and 2004, respectively.

(5)		Includes $473,000, $6.8 million, $10.3 million and $6.3 million of loans of the Asset-Based Lending Unit at December 31, 2008, 2007, 2006 and 2005, respectively.

(6)		Includes $12.5 million, $24.9 million, $82.8 million, $36.0 million and $6.8 million of loans of the Asset-Based Lending Unit at December 31, 2008, 2007, 2006, 2005 and 2004, respectively.

The decrease in the investment in impaired loans is the result of the following factors: first, steps taken by the Company since the middle of 2007 to mitigate the overall credit risk underlying the Company loan portfolio, principally the commercial loan portfolio (including construction and asset-based loans), and the effects of the continuing downturn in the economy of Puerto Rico, which has been in recession since 2006. This included setting portfolio limits and applying stricter underwriting guidelines, among others. Second, as part of the preparation of the 2007 and 2008 consolidated financial statements, during the second half of 2008 and continuing in 2009, the Company’s internal loan review department examined the entire construction and the asset-based loan portfolios using appraisals, the majority of which were done in 2007 or more recently, for substantially all of the underlying collateral. In addition, the Company’s internal loan review function examined each commercial and C&I loan relationship over $3.0 million using appraisals, the majority of which were done in 2007 or more recently, for each impaired loan. The Company’s determination of valuation allowances was mainly based on a collateral dependant analysis, which reflects the value of the property in its present condition after appropriate deductions for selling costs. The loan loss provision for 2007 includes the incorporation of such appraisals in the calculation of the specific allowances. Although management believes that the current allowance for the commercial and C&I loan portfolios is sufficient, future additions to the allowance may be necessary if economic conditions deteriorate. Since 2007, the Company has taken several steps to mitigate the credit risk underlying its commercial and C&I loan portfolios, including setting portfolio limits and applying stricter underwriting guidelines. The Company’s Internal Loan Review Department (“ILRD”) has also continued to actively participate in the loan classification and determination of loss reserves. In addition, the Bank’s credit monitoring functions, which cover all lending functions, are now required to obtain updated appraisal reports for all adversely classified loans in excess of $1,000,000 and continue to be involved in the credit review analysis process with enhanced communication to both, Management and the Bank’s ILRD.

During the third quarter of 2008, the Company established procedures through the Company’s Department of the Chief Credit Risk Officer to ensure that appraisal reports are reviewed by a qualified officer independent of the credit function. In addition, during 2009 the Company strengthened its appraiser review function by creating an Appraisal Review Division. This is an independent unit reporting to the Company’s CCRO, staffed with experienced personnel. The Appraisal Review Department responsibilities, among others, include: (1) preparation of engagement and order appraisals; (2) revision of appraisals to ensure that appraised values submitted are properly supported, reasonable, and in compliance with all federal and state regulations, as well as the Company’s policies and procedures; (3) preparation of written review reports; (4) coordination with appraisers for any necessary corrections on appraisals prepared for the Company; and (5) providing advice and assistance to loan officers in the implementation of the Company’s appraisal policy.

INVESTMENTS

The Company’s investments are managed by the Investment Department. Purchases and sales are required to be reported monthly to the Assets and Liabilities Committee (composed of the entire Board of Directors of the Company, the Chief Financial Officer, the Chief Operating Officer, the Treasurer and Chief Investment Officer of Westernbank, and the Chief Accounting Officer).

At the date of purchase, the Company classifies 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 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 income 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. Available-for-sale and held-to-maturity securities are reviewed at least quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the length of time and the extent to which the fair value has been below cost, the expectation for that security’s performance, the credit worthiness of the issuer and the Company’s intent and ability to hold the security to allow for any anticipated recovery in fair value if classified as available for sale, or to maturity. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the consolidated statements of operations.

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

Federal funds sold and resell agreements amounted to $336.7 million and $550.0 million, respectively, at December 31, 2007. Federal funds sold mature within five business days, while resell agreements mature as follows: $200.0 million in 2009; and $350.0 million in 2010. At December 31, 2008, there were no federal funds sold or resell agreements outstanding. The Company monitors the fair value of the underlying securities as compared to the related receivable balances of the resell agreement, including accrued interest, and requests additional collateral when the fair value of the underlying collateral falls below the collateral requirement. At December 31, 2007, the fair value of the underlying collateral for resell agreements amounted to $586.6 million.

The Company’s investment portfolio as of December 31, 2008 amounted to $4.7 billion, a decrease of $2.4 billion and $2.3 billion when compared with the investment portfolio of $7.1 billion and $7.0 billion as of December 31, 2007 and 2006, respectively. The decrease in the Company’s investment portfolio is mainly the result of the Company’s strategy to deleverage its balance sheet in order to strengthen regulatory capital ratios. As part of the Company’s strategy to strengthen regulatory capital ratios, the Company also shifted the composition of its investment portfolio from callable agency securities with a risk-weight of 20% to GNMA mortgage-backed securities and collateralized mortgage obligations with a risk-weight of 0% during 2008.

The following table presents the carrying value of investments at December 31, 2008, 2007 and 2006:


	2008		2007		2006
	(In thousands)
Held to maturity :
US Government and agencies obligations (USGO’s)	$	372,311	$	5,927,530	$	6,314,091
Puerto Rico Government and agencies obligations (PRGO’s)		13,312		10,207		11,663
Corporate notes		21,436		21,436		21,433
Mortgage-backed securities		630,911		639,024		660,392

Total		1,037,970		6,598,197		7,007,579

Available for sale:
USGO’s		307,880		—		—
PRGO’s		11,456		15,305		18,050
Mortgage-backed securities		3,347,993		461,790		—
Equity securities — common stock		2,912		1,906		2,491

Total		3,670,241		479,001		20,541

Total investments	$	4,708,211	$	7,077,198	$	7,028,120

Mortgage-backed securities at December 31, 2008, 2007 and 2006, consist of:


	2008		2007		2006
	(In thousands)
Available for sale:
Collateralized mortgage obligations (CMO’s) issued or guaranteed by the Government National Mortgage Association (GNMA)	$	2,953,904	$	—	$	—
CMO’s issued or guaranteed by the Federal National Mortgage Association (FNMA)		380,439		445,478		—
CMO’s issued or guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC)		13,650		16,312		—

Total available for sale		3,347,993		461,790		—


Held to maturity:
GNMA certificates		5,574		6,254		7,140
FHLMC certificates		1,942		2,444		3,055
FNMA certificates		2,691		3,014		3,358
CMO’s certificates issued or guaranteed by FHLMC		551,802		556,547		573,735
CMO’s certificates issued or guaranteed by FNMA		68,902		70,765		73,104

Total held to maturity		630,911		639,024		660,392

Total mortgage-backed securities	$	3,978,904	$	1,100,814	$	660,392

The following table states the name of issuers, and the aggregate amortized cost and fair value of the securities of such issuers (includes available for sale and held to maturity securities), when the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity at December 31, 2008 and 2007. This information excludes securities of the U.S. and P.R. Government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies that are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer and include debt and mortgage-backed securities.


	2008				2007
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
			(In thousands)
GNMA	$	2,990,112	$	2,959,670	$	6,254	$	6,417
FHLMC		568,072		551,284		775,469		721,484
FNMA		467,085		452,057		524,515		516,091
FHLB		677,470		679,883		5,625,984		5,617,919

The carrying amount of investment securities at December 31, 2008, by contractual maturity (excluding mortgage-backed securities), are shown below:


	Carrying		Weighted
	amount		average yield
	(Dollars in thousands)
US Government and agencies obligations:
Due within one year	$	465,140		2.75	%
Due after one year through five years		215,051		4.14

		680,191		3.19


Puerto Rico Government and agencies obligations:
Due within one year		470		3.80
Due after one year through five years		23,803		4.10
Due after five years through ten years		495		4.86

		24,768		4.11


Other:
Due after ten years		21,436		8.33


Total		726,395		3.37

Mortgage-backed securities		3,978,904		3.88
Equity securities		2,912		1.67

Total	$	4,708,211		3.80	%

The Company’s investment portfolio at December 31, 2008, had an average contractual maturity of 25 months, when compared to an average maturity of 21 months at December 31, 2007. The Company’s interest rate risk model takes into consideration the callable feature of certain investment securities. Assuming that all call features are exercised, the Company’s investment portfolio as of December 31, 2008, had a remaining average maturity of seven months. During the first half of 2008, approximately $5.5 billion of U.S. Government agency notes with an average yield of 3.97% were called. The Company reinvested part of the proceeds in U.S. Government agency notes, mortgage-backed securities, and collateralized mortgage obligations amounting to approximately $3.30 billion at an average yield of 4.12% during the first half of 2008.

During the quarter ended June 30, 2006, management concluded that certain held to maturity investments in Puerto Rico Government Obligations (“PRGO’s”), with an amortized cost of $21.6 million were other-than-temporarily impaired and recorded an impairment loss of $1.1 million. These securities were downgraded by one notch below investment grade in May 2006. As a result of the downgrade below investment grade of these PRGO’s, they were transferred to the available for sale category at their fair value of $20.6 million. In addition, during the quarters ended December 31, 2007 and 2006, the Company recorded an other than temporary impairment loss of $585,000 and $750,000, respectively, on its equity securities available for sale.

The Company’s investment portfolio as of December 31, 2008, consisted principally of U.S. Government and agencies obligations, Puerto Rico Government and agencies obligations, and mortgage-backed securities issued or guaranteed by FHLMC, FNMA or GNMA. There were no investment securities other than those referred to above in a significant unrealized loss position as of December 31, 2008. In addition, the Company does not have investments in residual tranches.

At December 31, 2008 and 2007, the significant unrealized loss position relates to interest rate changes and not to credit deterioration of any of the securities issuers. The Company assessed the ratings of the different agencies for the mortgage-backed securities, noting that at December 31, 2008 and 2007, all of them have maintained the highest rating by all the rating agencies and reflect a stable outlook. In addition, the held to maturity PRGO’s continue to be rated as investment grade as of December 31, 2008. Investment securities with prepayment provisions did not have significant unamortized premiums at December 31, 2008 and 2007. The aggregate unrealized gross losses of the investment securities available for sale and held to maturity amounted to $69.5 million and $72.6 million at December 31, 2008 and 2007, respectively, a decrease of $3.0 million. As management has the ability and intent to hold debt securities until maturity, or for the foreseeable future, if classified as available for sale, no declines are deemed to be other-than-temporary at December 31, 2008 and 2007.

DEPOSITS

Westernbank offers a diversified choice of deposit accounts. At December 31, 2008, total deposits, including brokered deposits, amounted to $11.0 billion, an increase of $505.7 million or 5% compared to a balance of $10.5 billion at December 31, 2007. The increase is mainly attributed to an increase in brokered deposits, offset in part to decreases in retail deposits. The Company’s brokered deposits at December 31, 2008 amounted to $8.6 billion, an increase of $696.0 million or 9% as compared to balances of $7.9 billion at December 31, 2007. The increase was a result of the Company’s strategy to increase its liquidity position in light of financial market conditions. In connection with its asset/liability management, the Company uses brokered deposits since these deposits provide the flexibility of selecting short, medium and long term maturities to better match the Company’s asset/liability management strategies. Typically, brokered deposits tend to be highly rate-sensitive deposits, and therefore, these are considered under many circumstances to be a less stable source of funding for an institution as compared to deposits generated primarily in a bank’s local markets. Brokered deposits come primarily from brokers that provide intermediary services for banks and investors, therefore providing banks, such as Westernbank, increased access to a broad range of potential depositors who have no relationship with Westernbank and who actively seek the highest returns offered within the financial industry. However, due to the competitive market for deposits in Puerto Rico, coupled with generally low interest rates in the United States, the rates paid by Westernbank on these deposits are often lower than those paid for local market area retail deposits. The Puerto Rico deposit market is more challenging than the deposit market on the U.S. mainland. Puerto Rico has a relatively stable population base, a number of very competitive local banks looking to expand, and a large proportion of citizens that do not have bank accounts. Also, the difference between the tax rate on interest earned from bank deposits, versus the much lower tax rate on returns from investments held in local mutual funds, preferred stock and local GNMAs makes those other investments more attractive than deposits to some investors. These dynamics present significant challenges for gathering and retaining local retail deposits. The result is a high cost local deposits market. The Company believes that the benefits of brokered deposits outweigh the risk of deposit instability given that these accounts have historically been a stable source of funds.

The Company offers deposits accounts through its retail branch network. Retail deposits are principally attracted from retail and commercial customers in Puerto Rico, the Company’s primary market area, through the offering of a broad selection of deposit instruments, including passbook, negotiable order of withdrawal, or NOW, and Super NOW, checking and commercial checking accounts and time deposits. Savings deposits decreased from $711.0 million as of December 31, 2007, to $670.2 million as of December 31, 2008, a decrease of $40.8 million or 6%. Other deposits, including related accrued interest, decreased from $2.0 billion as of December 31, 2007, to $1.7 billion as of December 31, 2008, a decrease of $296.6 million or 15%.

At December 31, 2008, the scheduled maturities of time deposits in amounts of $100,000 or more are as follows:


	(In thousands)
3 months or less	$	136,476
over 3 months through 6 months		73,269
over 6 months through 12 months		119,943
over 12 months		119,433

Total	$	449,121

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


	2008					2007					2006
	Average		Average			Average		Average			Average		Average
	amount		rate			amount		rate			amount		rate
						(Dollars in thousands)
Time deposits	$	9,193,418		4.74	%	$	8,543,989		5.17	%	$	7,305,932		4.72	%
Savings deposits		702,807		1.75	%		706,989		2.11	%		755,800		2.06	%
Interest bearing demand deposits		340,708		1.99	%		279,992		2.46	%		279,886		2.08	%
Noninterest bearing demand deposits		399,411		—			407,998		—			429,913		—

	$	10,636,344		4.28	%	$	9,938,968		4.66	%	$	8,771,531		4.17	%

BORROWINGS

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


	December 31,
	2008		2007		2006
	(In thousands)
Federal funds purchased and repurchase agreements (1)	$	3,204,142	$	6,146,693	$	6,320,481
Advances from Federal Home Loan Bank (FHLB)		42,000		102,000		127,000
Mortgage note payable		34,932		35,465		35,968

	$	3,281,074	$	6,284,158	$	6,483,449


(1)		Federal funds purchased amounted to $100.0 million at December 31, 2007, at a weighted average interest rate of 4.44%, and mature the next business day. No such borrowings were outstanding at December 31, 2008 and 2006.

Westernbank has made use of institutional federal funds purchased and repurchase agreements in order to obtain funding, primarily through investment banks and brokerage firms. Repurchase agreements are collateralized with investment securities while federal funds purchased do not require collateral. Westernbank had $3.2 billion in repurchase agreements outstanding at December 31, 2008, at a weighted average interest rate of 3.77%. Repurchase agreements outstanding as of December 31, 2008, mature as follows: $779.1 million within 30 days; $603.5 million within 31 days to one year; $1.6 billion in 2010; and $224.5 million in 2012.

Westernbank also obtains advances from FHLB of New York. As of December 31, 2008, Westernbank had $42.0 million in outstanding FHLB advances at a weighted average interest rate of 5.87%. Advances from FHLB mature in 2010.

At December 31, 2008, the Company had outstanding $2.4 billion in repurchase agreements for which the counterparties have the option to terminate the agreements at the first anniversary date and at each interest payment date thereafter. Also, with respect to repurchase agreements and advances from FHLB amounting to $380.0 million at December 31, 2008, at the first anniversary date and each quarter thereafter, the FHLB has the option to convert them into replacement funding for the same or a lesser principal amount based on any funding then offered by FHLB at the then current market rates, unless the interest rate has been predetermined between FHLB and the Company. If the Company chooses not to replace the FHLB’s funding, it will repay the convertible advances and repurchase agreements, including any accrued interest, on such optional conversion date.

In addition, Lehman Brothers Inc. (“LBI”) was the counterparty to the Company on certain sale of securities under agreements to repurchase. On September 19, 2008, LBI was placed in a Securities Investor Protection Act (“SIPA”) liquidation proceeding after the filing for bankruptcy of its parent LBHI. The filing of the SIPA liquidation proceeding was an event of default under the repurchase agreements resulting in their termination as of September 19, 2008. The termination of the agreements caused the Company to recognize the unrealized loss on the value of the securities subject to the agreements, resulting in a $3.3 million charge during the third quarter of 2008. Westernbank also has an aggregate exposure of $139.2 million representing the amount by which the value of Westernbank securities delivered to LBI exceeds the amount owed to LBI under repurchase agreements. On January 27, 2009, Westernbank filed customer claims with the trustee in LBI’s SIPA liquidation proceeding. On June 1, 2009, Westernbank filed amended customer claims with the trustee. Management evaluated this receivable in accordance with the guidance provided by SFAS No. 5, “Accounting for Contingencies”, and related pronouncements. In making this determination, management consulted with legal counsel and technical experts. As a result of its evaluation, the Company recognized a loss of $13.9 million against the $139.2 million owed by LBI as of December 31, 2008. Determining the loss amount required management to use considerable judgment and assumptions, and is based on the facts currently available. As additional information on the LBI’s SIPA liquidation proceeding becomes available, the Company may need to recognize additional losses. A material difference between the amount claimed and the amount ultimately recovered would have a material adverse effect on the Company’s and Westernbank’s financial condition and results of operations, and could cause Westernbank’s regulatory capital ratios to fall below the minimum to be categorized as well capitalized.

At December 31, 2008, Westernbank World Plaza, Inc., a wholly-owned subsidiary of Westernbank Puerto Rico, had outstanding a $34.9 million mortgage note, at an interest rate of 8.05% per year up to September 11, 2009. Subsequent to September 11, 2009, the mortgage note would have borne interest on the then outstanding principal balance at a rate per year equal to the greater of 13.05% or the Treasury Rate plus five percentage points; or 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. On July 12, 2009, Westernbank World Plaza, Inc. exercised the prepayment option and paid off the mortgage in full, thereby cancelling the mortgage note.

A summary of short-term borrowings, including federal funds purchased, repurchase agreements and advances from Federal Home Loan Bank, and interest rates at and for the years ended December 31, are indicated below:


	2008			2007			2006
				(Dollars in thousands)
Federal funds purchased:
Balance at end of year	$	—		$	100,000		$	—
Weighted-average interest rate at year end		—	%		4.44	%		—	%
Monthly average outstanding balance	$	7,692		$	24,308		$	3,077
Weighted-average interest rate for the year		4.44	%		5.17	%		4.69	%
Maximum month-end balance	$	—		$	100,000		$	40,000

Repurchase agreements:
Balance at end of year	$	779,142		$	1,364,075		$	1,070,582
Weighted-average interest rate at year end		1.20	%		4.85	%		5.33	%
Monthly average outstanding balance	$	1,001,358		$	1,497,932		$	1,731,600
Weighted-average interest rate for the year		2.64	%		5.19	%		4.97	%
Maximum month-end balance	$	1,559,157		$	2,771,592		$	2,282,650

Advances from FHLB:
Balance at end of year	$	—		$	60,000		$	25,000
Weighted-average interest rate at year end		—	%		4.52	%		5.43	%
Monthly average outstanding balance	$	14,923		$	29,615		$	33,462
Weighted-average interest rate for the year		3.65	%		4.99	%		5.01	%
Maximum month-end balance	$	58,000		$	60,000		$	50,000

Borrowings under line of credit:
Balance at end of year	$	—		$	—		$	—
Weighted-average interest rate at year end		—	%		—	%		—	%
Monthly average outstanding balance	$	—		$	15,158		$	—
Weighted-average interest rate for the year		—	%		6.00	%		—	%
Maximum month-end balance	$	—		$	34,030		$	—

Total short-term borrowings:
Balance at end of year	$	779,142		$	1,524,075		$	1,095,582
Weighted-average interest rate at year end		1.20	%		4.81	%		5.33	%
Monthly average outstanding balance	$	1,023,973		$	1,567,013		$	1,768,139
Weighted-average interest rate for the year		2.67	%		5.19	%		4.97	%
Maximum month-end balance	$	1,617,157		$	2,865,622		$	2,322,650

STOCKHOLDERS’ EQUITY

Stockholders’ equity decreased to $915.4 million as of December 31, 2008, compared to $996.2 million in 2007 and $1.1 billion in 2006. The 2008 decrease resulted principally from the combination of the Company’s net loss of $5.5 million for year 2008, dividends declared of $8.2 million and $36.9 million on the Company’s common and preferred shares, respectively, and a $35.9 million other comprehensive loss, net of tax on available for sale securities recognized during the year as a result of increases in interest rates during 2008 and the cumulative effect of the adoption of SFAS No. 159 on January 1, 2008, which resulted in a credit to retained earnings of $5.3 million. The 2007 decrease, as compared to 2006, resulted principally from the combination of the net loss of $68.3 million generated during the year ended December 31, 2007, dividends declared during the year 2007 of $31.3 million and $36.9 million on the Company’s common and preferred shares, respectively, and the cumulative effect of the adoption of FIN No. 48 on January 1, 2007 which resulted in a charge to retained earnings of $10.6 million.

During 2007 and 2006, the Company issued 8,404 and 7,521 shares of common stock, respectively, upon the exercise of stock options by several of the Company’s executive officers. Proceeds from the exercise of stock options during the years ended December 31, 2007 and 2006 amounted to $1.2 million and $1.1 million, respectively. No stock options were exercised during 2008.

The number of common shares outstanding (as adjusted) increased from 3,289,734 at December 31, 2006, to 3,298,138 at December 31, 2007, as a result of the issuance of 8,404 common shares (as adjusted) from the exercise of stock options.

On November 7, 2008, the stockholders of the Company approved an amendment to the Company’s Certificate of Incorporation to effect a reverse stock split at a specific ratio to be determined by the Board of Directors in its sole discretion within the range of one-for-ten to one-for-fifty, inclusive. On November 14, 2008, the Company announced that its Board of Directors has established a ratio of one share-for-every fifty shares of the outstanding common stock for the Company’s proposed reverse stock split of all outstanding shares of the Company’s common stock to become effective December 1, 2008. All financial statement data and references to average number of shares outstanding, per share amounts, common shares issued and stock option information have been retrospectively adjusted to reflect the reverse stock split.

REGULATORY CAPITAL RATIOS

The Company (on a consolidated basis) and Westernbank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Westernbank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Westernbank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

At December 31, 2008, the Company and Westernbank were in compliance with all the regulatory capital requirements that were applicable to them as a financial holding company and state non-member bank, respectively, (i.e., total capital and Tier 1 capital to risk-weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to average assets of at least 4%) to be considered a well capitalized institution.

As of December 31, 2008, Westernbank was considered well-capitalized for purposes of the prompt corrective action regulations adopted by the FDIC pursuant to the FDICIA. To be considered a well-capitalized institution under the FDIC’s regulations, an institution must maintain a Leverage Ratio of at least 5%, a Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10%, and not be subject to any written agreement or directive to meet a specific capital ratio. At December 31, 2008, Westernbank’s Leverage Ratio, Tier 1 Capital Ratio and Total Capital Ratio were 5.19%, 8.81%, and 10.09%, respectively.

In May 2009, Westernbank entered into (i) a Consent Order (the “Consent Order”) with the FDIC and the OCIF and the Company entered into (ii) a Written Agreement with the Board of Governors of the Federal Reserve System (the “Written Agreement”, and, together with the Consent Order, the “Orders”). The Orders build on the informal agreement which Westernbank entered into with the FDIC in February of 2008. By virtue of having a capital directive within the Consent Orders, Westernbank is deemed adequately capitalized as of the date of the Consent Order. For a detailed description of these orders, please refer to Part I, Item 1, “Business-Recent Significant Events”, in this Annual Report on Form 10-K.

On February 17, 2009, the Company’s Board of Directors voted to suspend regular monthly dividends on the Company’s common stock and all outstanding series of its preferred stock, effective with the payment to be made on March 16, 2009 and applicable to stockholders of record as of February 27, 2009, so as to maintain the Company’s capital position.

The Company’s and Westernbank’s actual capital amounts and ratios as of December 31, 2008 and 2007, are also presented in the table below:


							Minimum To Be
			Minimum				Well Capitalized Under
			Capital				Prompt Corrective
	Actual		Requirement				Action Provisions
	Amount	Ratio	Amount	Ratio			Amount	Ratio
	(Dollars in thousands)
As of December 31, 2008:

Total Capital to Risk Weighted Assets:
Consolidated	$948,259	10.24%	$741,081		8	%	N/A	N/A
Westernbank	933,042	10.09	740,110		8		$925,137	10%

Tier I Capital to Risk Weighted Assets:
Consolidated	$830,412	8.96%	$370,541		4	%	N/A	N/A
Westernbank	815,344	8.81	370,055		4		$555,082	6%

Tier I Capital to Average Assets:
Consolidated	$830,412	5.26%	$631,134		4	%	N/A	N/A
Westernbank	815,344	5.19	628,808		4		$786,010	5%

As of December 31, 2007:

Total Capital to Risk Weighted Assets:
Consolidated	$1,028,775	9.06%	$908,293		8	%	N/A	N/A
Westernbank	1,008,782	8.89	907,287		8		$1,134,109	10%

Tier I Capital to Risk Weighted Assets:
Consolidated	$884,424	7.79%	$454,146		4	%	N/A	N/A
Westernbank	864,605	7.62	453,585		4		$680,377	6%

Tier I Capital to Average Assets:
Consolidated	$884,424	4.90%	$721,576		4	%	N/A	N/A
Westernbank	864,605	4.82	718,115		4		$897,644	5%

The increase in regulatory capital ratios in 2008 is mainly attributed to the Company’s decision to deleverage its balance sheet and the Company’s decision to shift the composition of its investment portfolio from investments carrying 20% risk-weight, mainly agency securities, to investments carrying 0% risk-weight, mainly GNMA mortgage-backed securities and collateralized mortgage obligations.

In December 2007, the Company made a $60.0 million capital infusion to Westernbank.

The Company’s ability to pay dividends to its stockholders and other activities can be restricted if its capital falls below levels established by the Federal Reserve guidelines. In addition, any bank holding company whose capital falls below levels specified in the guidelines can be required to implement a plan to increase capital. Furthermore, the Company’s ability to pay dividend is restricted by the Orders entered into the Board of Governors of the Federal Reserve System, the FDIC and the OCIF.

The principal source of income and funds for the Company are dividends from its subsidiaries. Federal and Puerto Rico banking regulations place certain restrictions on dividends paid and loans or advances made by Westernbank to the Company. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of Westernbank, and loans or advances are limited to 10 percent of Westernbank’s capital stock and surplus on a secured basis. On February 17, 2009, the Company and Westernbank’s Boards of Directors adopted a resolution to suspend the payment of dividends on Westernbank’s common stock and on the Company’s common shares and all of the outstanding series of its preferred shares, effective with the payment to be made on March 16, 2009 and applicable to stockholders of record as of February 27, 2009, as a measured to strengthen the Company and Westernbank’s capital positions.

For further discussion, refer to “Part I, Item 1, Business — Supervision and Regulation — Dividend Restrictions” in this Annual Report on Form 10-K.

BUSINESS SEGMENT REVIEW

The Company’s management monitors and manages the financial performance of three reportable business segments, the traditional banking operations of Westernbank, the activities of the division known as Westernbank International, which includes the activities of Westernbank Financial Center Corp. (“Westernbank International”) and the activities of the Asset-Based Lending Unit, formerly known as Westernbank Business Credit, which specializes in asset-based commercial business lending. Other operations of the Company not reportable in those segments include: Westernbank Trust Division, which offers trust services; Westernbank International Trade Services Division, which specializes in international trade products and 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 (loss) of its two wholly-owned subsidiaries.

Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Company’s organizational structure by divisions, nature of the products, distribution channels, and the economic characteristics of the products were also considered in the determination of the reportable segments. The Company evaluates performance based on net interest income and other income. Operating expenses and the provision for income taxes are analyzed on a combined basis. The accounting policies of the segments are the same as those described in Note 1 “Organization and Summary of Accounting Policies” and Note 23 “Segment Information” of the consolidated financial statements, included herein in Part II, Item 8.

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.

Westernbank Puerto Rico

Westernbank Puerto Rico’s traditional banking operations consist of Westernbank’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), investments (treasury) 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.

The highlights of the Westernbank Puerto Rico segment’s financial results for the years ended December 31, 2008, 2007, and 2006 include the following:


	•		Total net interest income and noninterest income for the year ended December 31, 2008 was $123.2 million compared to $20.7 million and $262.6 million for the years ended December 31, 2007 and 2006, respectively. Variances were mainly due to the provision for loan losses for years 2008 and 2007, as discussed below.

	•		Net interest income for the year ended December 31, 2008 was $107.3 million compared to $233.3 million and $237.8 million for the years ended December 31, 2007 and 2006, respectively. The decrease in net interest income for the year 2008 as compared to 2007 was mainly due to lower net-yield earned on interest-earning assets, mainly due to the repricing of commercial loans in a lower rate environment, higher average non-performing loans, and lower yields on the investment portfolio, including average mortgage-backed securities and average money market instruments, coupled with a decrease of interest-earning assets due to the Company’s decision to deleverage its balance sheet to strengthen regulatory capital ratios. The decrease in net interest income for the year 2007 as compared to 2006 was primarily attributable to a reduction in the net yield earned on interest-earning assets, offset in part by an increase in the average balance on interest-earning assets.

	•		The provision for loan losses for the year ended December 31, 2008 was $40.3 million compared to $251.5 million and $4.8 million for the years ended December 31, 2007 and 2006, respectively. The decrease in the provision for loan losses for 2008 is the result of the following factors: steps taken by the Westernbank since the middle of 2007 to mitigate the overall credit risks underlying its commercial loan portfolio in light of the continuing downturn in the economy of Puerto Rico, which has been in recession since 2006. These steps included segregating origination, underwriting and credit administration functions, setting portfolio limits and applying stricter underwriting guidelines, among others. In addition, as part of the preparation of the 2007 and 2008 consolidated financial statements, during the second half of 2008 and continuing in 2009, the Company’s internal loan review function examined the entire construction and commercial loan relationships over $3.0 million using appraisals, the majority of which were done in 2007 or more recently, for each impaired loan. The Company’s determination of valuation allowances was mainly based on a collateral dependant analysis, which reflects the value of the property in its present condition after appropriate deductions for selling costs. The loan loss provision for 2007 included the incorporation of such appraisals in the calculation of the specific allowances. Another factor includes that, as a result of the strategies adopted by the Company since the middle of 2007, the Company has been able to reduce the outstanding principal balance of Westernbank’s loan portfolio by $383.4 million, from $8.6 billion at December 31, 2007, to $8.2 billion at December 31, 2008. The increase in the provision for loan losses for 2007, when compared to 2006, is mainly attributable to higher non-performing and impaired loans coupled with higher net loans charged-off and specific reserves recognized during the period in the segment commercial and construction loan portfolios due to the effects of the continuing downturn in the economy of Puerto Rico, which has been in recession since 2006.


	•		Noninterest income for the year ended December 31, 2008 was $55.3 million compared to $39.3 million and $29.4 million for the years ended December 31, 2007 and 2006, respectively. The increase in noninterest income for 2008, as compared to 2007, was mainly the result of an increase of $13.1 million in net gain (loss) on sales of loans, securities and others. During 2008, the Company sold certain land lots originally held for future branch development and recognized a gain on sale of $14.7 million. The increase in noninterest income for 2007, as compared to 2006, was driven by an increase of $7.4 million in service fees and other fees and commissions due to higher activity resulting from the Company’s overall growing volume of business, and an increase of $1.9 million on net gain on sales and valuation of loans, securities, and other assets.

Westernbank International

Westernbank International operates as an IBE under the International Banking Center Regulatory Act. Westernbank Financial Center Corp. was incorporated to carry out commercial lending and other related activities in the United States of America and commenced operations in February 2007. The operations of Westernbank Financial Center Corp. were closed in the third quarter of 2008. Westernbank International’s business activities consist of commercial banking and related services, and treasury and investment activities outside of Puerto Rico. As of December 31, 2008 and 2007, and for the three-year period ended December 31, 2008, substantially all of Westernbank International’s business activities consisted of investments in securities by the U.S. Government or U.S. sponsored agencies, money market instruments with entities located in the United States, and certain asset-based loans originated by the Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division. Investment securities held by Westernbank International amounted to $1.9 billion and $2.4 billion at December 31, 2008 and 2007, respectively. These securities principally consisted of investment in U.S. Government agencies, FHLMC and FNMA. There are no investments in residual tranches. At December 31, 2008 and 2007, management concluded that there was no other-than-temporary impairment on Westernbank International’s investment securities portfolio.

Westernbank International made use of securities sold under agreements to repurchase in order to obtain funding, primarily through investment banks and brokerage firms. Securities sold under agreements to repurchase are collateralized with investment securities. Westernbank International had $1.4 billion in securities sold under agreements to repurchase outstanding at December 31, 2008, at a weighted average interest rate of 3.2%. Westernbank International securities sold under agreements to repurchase

outstanding as of December 31, 2008, mature as follows: $505.0 million within 30 days; $298.0 million within 31 days to one year; $338.5 million in 2010; and $224.5 million in 2012.

The highlights of the Westernbank International segment’s financial results for the years ended December 31, 2008, 2007, and 2006 include the following:


	•		Total net interest income and noninterest income (loss) for the year ended December 31, 2008 was $21.0 million compared to an income of $12.0 million and a loss of $21.1 million for the years ended December 31, 2007 and 2006, respectively. The increase for 2008, when compared to previous year, was primarily attributable to a lower interest expense due to a decrease in the average balance of securities sold under agreements, coupled with a decrease in the provision for loan losses. The variance in 2007, when compared to 2006, was due to a lower provision for loan losses.

•

Net interest income for the year ended December 31, 2008 was $20.9 million compared to $15.1 million and $19.4 million for the years ended December 31, 2007 and 2006, respectively. The increase in net interest income for year 2008, as compared to 2007, was mainly due to a decrease in interest expense due to a decrease in the average balance of high-cost securities sold under agreements to repurchase, which caused the segment’s net yield-earned on interest-earning assets to increase. The decrease in net interest income for the year 2007, when compared to the previous year, was primarily attributable to a reduction in the net yield earned on net interest-earning assets, offset in part by an increase in the average balance on net interest-earning assets.

•

The provision (credit) for loan losses for the year ended December 31, 2008 was $(1.5) million compared to $3.7 million and $41.4 million for the years ended December 31, 2007 and 2006, respectively. The positive variance in 2008, as compared to 2007, was due to the payoff of the entire loan portfolio of Westernbank International during 2008. The decrease of $37.7 million in the provision for loan losses for 2007, as compared to 2006, was mainly the result of significant specific allowances taken on non-performing and impaired loan relationships during 2006. During the year ended December 31, 2006, the Company established valuation allowances for certain classified asset based loan relationships.

•

Noninterest income (loss) for the year ended December 31, 2008 was $(1.4) million compared to $592,000 and $858,000 for the years ended December 31, 2007 and 2006, respectively. The negative variance in noninterest income for the year ended December 31, 2008, when compared to the same period in 2007, was mainly the result of a $1.5 million loss in the sale of certain investment securities. The sale of investment securities was part of the Company’s decision to deleverage its balance sheet to strengthen regulatory capital ratios.. The fluctuation in noninterest income for the year 2007, when compared to 2006, was mainly attributable to services and other charges on loans based on the level of loan activity in the segment.

Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division

The business activities of the Asset-Based Lending Unit consist of commercial business loans secured principally by commercial real estate, accounts receivable, inventory and equipment. Loans receivable, net held by Asset-Based Lending Unit, as of December 31, 2008 and 2007 amounted to $743.4 million and $899.1 million, respectively.

The highlights of the Asset-Based Lending Unit segment’s financial results for the years ended December 31, 2008, 2007, and 2006 include the following:

•

Total net interest income and noninterest income (loss) for the year ended December 31, 2008 was $(16.9) million compared to an income of $10.4 million and $2.7 million for the years ended December 31, 2007 and 2006, respectively. The negative variance in 2008 when compared to 2007 was mainly attributable to a reduction of net interest income due principally to a reduction in net yield on interest-earning assets. In 2007, the segment total net interest income and noninterest income increased by $7.7 million when compared to 2006 mainly due to a reduction in the provision for loan losses.

•

Net interest income for the year ended December 31, 2008 was $10.1 million compared to $30.2 million and $44.9 million for the years ended December 31, 2007 and 2006, respectively. The decrease in net interest income for years 2008 and 2007, as compared to 2007 and 2006, respectively, was primarily attributable to a reduction in the net yield earned on interest-earning assets coupled with a decrease in the average balance on interest-earning assets.

•

The provision for loan losses for the year ended December 31, 2008 amounted to $28.7 million, excluding the provision (credit) for loan losses for those asset-based loans held by Westernbank International, an increase of $6.3 million, when

compared to 2007. The increase is the result of slight increases in the specific allowance taken on certain non-performing and impaired loan relationships. The provision for loan losses for the year ended December 31, 2007 was $22.4 million compared to $44.8 million for the year ended December 31, 2006. The decrease in provision for loan losses for 2007 was mainly the result of significant specific allowances taken on non-performing and impaired loan relationships during 2006.

•

Noninterest income for the year ended December 31, 2008, 2007, and 2006 was $1.7 million, $2.6 million, and $2.6 million, respectively. The decrease in noninterest income is the result of lower service and other charges on loans due to a decrease in the loan portfolio of the Asset-Based Lending Unit.

Substantially all of the Company’s business activities are with customers located in the United States of America and its territories (mainly in the Commonwealth of Puerto Rico). Revenues from external customers attributed to all foreign countries (Canada and United Kingdom) amounted to $603,000 and $1,556,000 for the years ended December 31, 2007 and 2006, respectively, and none for the year ended December 31, 2008. In addition, all of the Company’s long-lived assets are located in Puerto Rico.

QUARTERLY FINANCIAL INFORMATION

The following tables summarize the Company’s condensed consolidated financial condition and results of operations for each of the quarters of the years ended December 31, 2008, 2007 and 2006.

2008 Quarterly Condensed Consolidated Statements of Operations (Unaudited)


	For the 2008 three months ended
	March 31			June 30			September 30			December 31
	(Dollars and shares in thousands, except per share data)
Interest income:
Loans, including loan fees	$	156,473		$	142,115		$	141,897		$	129,048
Investment securities		46,383			22,645			19,596			13,393
Mortgage-backed securities		11,463			29,507			37,639			36,811
Money market instruments		8,154			4,753			4,513			1,903

Total interest income		222,473			199,020			203,645			181,155


Interest expense:
Deposits		118,065			111,762			112,536			112,950
Federal funds purchased and repurchase agreements		59,720			53,777			52,051			39,528
Advances from Federal Home Loan Bank		1,044			677			630			629

Total interest expense		178,829			166,216			165,217			153,107

Net interest income		43,644			32,804			38,428			28,048
Provision for loan losses		14,957			14,346			15,382			22,821

Net interest income after provision for loan losses		28,687			18,458			23,046			5,227


Noninterest income:
Service and other charges on loans		2,485			2,717			2,549			2,613
Service charges on deposit accounts		3,069			2,983			2,851			2,809
Other fees and commissions		5,802			5,687			5,504			4,865
Net gain (loss) on derivative instruments and deposits measured at fair value		(544	)		1,766			1,622			281
Net gain (loss) on sales and valuation of loans, securities, and other assets		836			13,493			(2,655	)		1,922

Total noninterest income		11,648			26,646			9,871			12,490

Total net interest income and noninterest income		40,335			45,104			32,917			17,717


Noninterest expenses:
Salaries and employees’ benefits		16,947			15,915			17,064			15,265
Equipment		3,458			3,341			3,337			3,732
Deposit insurance premium and supervisory examination		2,894			3,727			3,957			5,806
Occupancy		2,545			2,757			2,601			2,683
Advertising		2,832			1,461			1,650			1,152
Professional Fees		5,470			2,625			5,848			5,902
Provision for claim receivable		—			—			485			13,921
Other		10,891			11,922			11,124			14,497

Total noninterest expenses		45,037			41,748			46,066			62,958

Income (loss) before provision (credit) for income taxes		(4,702	)		3,356			(13,149	)		(45,241	)

Provision (credit) for income taxes:
Current		(33,314	)		760			189			471
Deferred credit		(4,000	)		1,498			(2,259	)		(17,631	)

Total provision (credit) for income taxes		(37,314	)		2,258			(2,070	)		(17,160	)

Net income (loss)		32,612			1,098			(11,079	)		(28,081	)
Less dividends to preferred stockholders		9,228			9,228			9,228			9,226

Income (loss) attributable to common stockholders	$	23,384		$	(8,130	)	$	(20,307	)	$	(37,307	)


Share Data:
Basic earnings (loss) per common share (1)	$	7.09		$	(2.46	)	$	(6.16	)	$	(11.31	)

Diluted earnings (loss) per common share (1)	$	7.08		$	(2.46	)	$	(6.16	)	$	(11.31	)

Cash dividends declared on common stock (1)	$	2,061		$	2,062		$	2,061		$	2,061

Cash dividends declared per common share (1)	$	0.62		$	0.63		$	0.62		$	0.62

Weighted average number of common shares outstanding (1)		3,298			3,298			3,298			3,298

Weighted average number of common shares outstanding on a diluted basis (1)		3,298			3,298			3,298			3,298

Dividend payout ratio (1)		8.81	%		(25.36)	%		(10.15)	%		(5.52)	%


(1)		Adjusted to reflect a one-for-fifty reverse stock split declared on November 7, 2008 and effective on December 1, 2008.

2007 Quarterly Condensed Consolidated Statements of Operations (Unaudited)


	For the 2007 three months ended
	March 31			June 30			September 30			December 31
	(Dollars and shares in thousands, except per share data)
Interest Income:
Loans, including loan fees	$	180,568		$	183,090		$	182,327		$	177,780
Investment securities		66,522			66,570			64,660			62,548
Mortgage-backed securities		6,931			11,941			13,574			12,845
Money market instruments		10,120			9,846			10,354			10,513

Total interest income		264,141			271,447			270,915			263,686


Interest Expense:
Deposits		107,506			114,036			118,802			122,954
Federal funds purchased and repurchase agreements		76,224			80,927			82,203			75,676
Advances from Federal Home Loan Bank		1,455			1,432			1,444			1,360
Borrowings under line of credit		272			499			336			—

Total interest expense		185,457			196,894			202,785			199,990


Net interest income		78,684			74,553			68,130			63,696
Provision for loan losses		34,481			73,404			21,703			147,974

Net interest income (loss) after provision for loan losses		44,203			1,149			46,427			(84,278	)


Noninterest income:
Service and other charges on loans		3,211			3,418			2,768			3,290
Service charges on deposit accounts		2,930			3,073			3,262			3,132
Other fees and commissions		3,962			4,774			6,143			5,434
Net gain (loss) on derivative instruments		640			(1,165	)		816			1,017
Net gain (loss) on sales and valuation of loans, securities and other assets		265			1,031			273			(476	)

Total noninterest income		11,008			11,131			13,262			12,397


Noninterest expenses:
Salaries and employees’ benefits		15,418			14,861			14,434			15,723
Equipment		3,194			3,149			3,385			3,516
Deposits insurance premium and supervisory examination		1,985			3,138			2,882			2,393
Occupancy		2,199			2,297			2,486			2,401
Advertising		2,194			1,824			1,850			2,773
Professional fees		1,376			1,228			8,502			6,778
Other		8,647			9,311			11,131			14,334

Total noninterest expenses		35,013			35,808			44,670			47,918


Income (Loss) before provision for income taxes		20,198			(23,528	)		15,019			(119,799	)

Provision (credit) for income taxes:
Current		13,816			13,202			9,082			(2,262	)
Deferred credit		(6,325	)		(16,677	)		(4,279	)		(46,329	)

Total provision (credit) for income taxes		7,491			(3,475	)		4,803			(48,591	)

Net Income (Loss)		12,707			(20,053	)		10,216			(71,208	)
Less dividends to preferred stockholders		9,228			9,227			9,228			9,227

Income (Loss) attributable to common stockholders	$	3,479		$	(29,280	)	$	988		$	(80,435	)


Share data:
Basic earnings (loss) per common share (1)	$	1.06		$	(8.88	)	$	0.30		$	(24.39	)
Diluted earnings (loss) per common share (1)	$	1.04		$	(8.88	)	$	0.30		$	(24.39	)
Cash dividends declared per common share (1)	$	2.37		$	2.38		$	2.38		$	2.38
Weighted average number of common shares outstanding (1)		3,294			3,298			3,298			3,298
Weighted average number of common shares outstanding on a fully diluted basis (1)		3,351			3,298			3,298			3,298
Dividend payout ratio		224.98	%		(26.76	)%		934.01	%		(9.74	)%


(1)		Adjusted to reflect a one-for-fifty reverse stock split declared on November 7, 2008 and effective on December 1, 2008.

2006 Quarterly Condensed Consolidated Statements of Operations (Unaudited)


	For the 2006 three months ended
	March 31			June 30			September 30			December 31
	(Dollars and shares in thousands, except per share data)
Interest income:
Loans, including loan fees	$	147,593		$	157,993		$	172,366		$	183,143
Investment securities		64,896			65,721			65,562			65,792
Mortgage-backed securities		7,278			7,180			7,036			6,995
Money market instruments		8,936			9,698			10,409			9,192

Total interest income		228,703			240,592			255,373			265,122


Interest expense:
Deposits		79,478			88,844			96,693			101,048
Federal funds purchased and repurchase agreements		70,830			76,058			80,184			80,391
Advances from Federal Home Loan Bank		2,061			2,147			2,169			1,516

Total interest expense		152,369			167,049			179,046			182,955


Net interest income		76,334			73,543			76,327			82,167
Provision for loan losses		7,606			17,722			37,819			27,733

Net interest income after provision for loan losses		68,728			55,821			38,508			54,434

Noninterest income:
Service and other charges on loans		2,954			3,182			3,015			3,376
Service charges on deposit accounts		2,258			2,464			2,555			2,699
Other fees and commissions		3,452			3,703			3,832			4,117
Net gain (loss) on derivative instruments		353			(793	)		585			487
Net gain (loss) on sales and valuation of loans, securities and other assets		167			(922	)		204			(590	)

Total noninterest income		9,184			7,634			10,191			10,089


Noninterest expenses:
Salaries and employees’ benefits		13,659			13,347			12,561			14,811
Equipment		2,648			2,759			3,145			3,058
Deposits insurance premium and supervisory examination		893			902			963			1,012
Occupancy		1,974			2,055			2,213			2,240
Advertising		2,798			2,485			1,732			2,125
Professional fees		396			374			1,018			2,031
Other		7,043			8,701			8,805			8,770

Total noninterest expenses		29,411			30,623			30,437			34,047


Income before provision for income taxes		48,501			32,832			18,262			30,476

Provision for income taxes:
Current		17,223			17,387			23,554			18,435
Deferred credit		(281	)		(1,742	)		(5,234	)		1,150

Total provision for income taxes		16,942			15,645			18,320			19,585

Net income (loss)		31,559			17,187			(58	)		10,891
Less dividends to preferred stockholders		9,229			9,228			9,228			9,226

Income (Loss) attributable to common stockholders	$	22,330		$	7,959		$	(9,286	)	$	1,665


Share data:
Basic earnings (loss) per common share (1)	$	6.80		$	2.42		$	(2.82	)	$	0.51
Diluted earnings (loss) per common share (1)	$	6.62		$	2.37		$	(2.82	)	$	0.50
Cash dividends declared per common share (1)	$	2.37		$	2.37		$	2.37		$	2.38
Weighted average number of common shares outstanding (1)		3,283			3,288			3,290			3,290
Weighted average number of common shares outstanding on a fully diluted basis (1)		3,404			3,364			3,290			3,357
Dividend payout ratio		34.93	%		98.10	%		(84.12	)%		469.87	%


(1)		Adjusted to reflect a one-for-fifty reverse stock split declared on November 7, 2008 and effective on December 1, 2008.

2008 Quarterly Condensed Consolidated Statements of Financial Condition (Unaudited)


	As of
	March 31			June 30			September 30			December 31
	2008			2008			2008			2008
	(Dollars in thousands)
Assets:
Cash and due from banks	$	97,455		$	145,729		$	71,567		$	68,368
Money market instruments:
Federal funds sold and resell agreements		669,892			634,562			626,100			—
Interest-bearing deposits in banks		120,176			35,162			167,873			1,096,465
Investment securities available for sale, at fair value		1,391,002			3,843,657			3,769,717			3,670,241
Investment securities held to maturity, at amortized cost		4,003,772			2,783,342			2,138,295			1,037,970
Federal Home Loan Bank stock, at cost		40,782			76,295			69,590			64,190
Residential mortgage loans held for sale, at lower of cost or fair value		8,924			18,201			11,755			18,871
Loans-net		9,058,487			8,976,316			8,860,099			8,667,717
Accrued interest receivable		61,112			67,401			67,742			56,224
Foreclosed real estate held for sale, net		99,079			92,680			98,657			98,570
Other real estate held for sale, net		—			6,252			6,252			5,462
Premises and equipment, net		129,966			117,380			119,870			120,796
Deferred income taxes, net		134,889			143,826			146,487			155,661
Other assets		117,413			107,980			236,507			222,362

Total Assets	$	15,932,949		$	17,048,783		$	16,390,511		$	15,282,897


Liabilities:
Deposits:
Noninterest-bearing	$	289,534		$	288,201		$	268,491		$	250,380
Interest-bearing and related accrued interest payable		10,013,304			10,508,603			10,754,621			10,751,793

Total deposits		10,302,838			10,796,804			11,023,112			11,002,173
Federal fund purchased and repurchase agreements		4,401,294			5,169,626			4,323,170			3,204,142
Advances from Federal Home Loan Bank		80,000			42,000			42,000			42,000
Mortgage note payable		35,331			35,203			35,073			34,932
Accrued expenses and other liabilities		99,512			100,259			90,023			84,283

Total Liabilities		14,918,975			16,143,892			15,513,378			14,367,530
STOCKHOLDERS’ EQUITY:
Preferred stock		18,157			18,157			18,157			18,157
Common stock (1)		3,298			3,298			3,298			3,298
Paid-in capital (1)		870,195			870,261			870,359			870,450
Retained earnings:
Reserve fund		81,613			82,386			81,034			78,389
Undivided profits		54,764			43,802			22,786			(13,939	)
Accumulated other comprehensive income (loss), net		(14,053	)		(113,013	)		(118,501	)		(40,988	)

Total stockholders’ equity		1,013,974			904,891			877,133			915,367

TOTAL	$	15,932,949		$	17,048,783		$	16,390,511		$	15,282,897


(1)		As adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

2007 Quarterly Condensed Consolidated Statements of Financial Condition (Unaudited)


	As of
	March 31		June 30			September 30			December 31
	2007		2007			2007			2007
	(Dollars in thousands)
ASSETS
Cash and due from banks	$	107,847	$	99,334		$	94,492		$	153,473
Money market instruments:
Federal funds sold and resell agreements		809,502		707,150			817,220			886,700
Interest-bearing deposits in banks		9,540		26,447			84,771			56,287
Investment securities available for sale		21,565		509,265			490,894			479,001
Investment securities held to maturity		7,273,193		7,081,467			6,903,227			6,598,197
Federal Home Loan Bank stock, at cost		33,482		32,682			34,662			49,453
Residential mortgage loans held for sale		4,135		5,490			3,398			6,500
Loans, net		8,823,892		8,960,055			9,174,111			9,209,911
Accrued interest receivable		113,892		118,384			116,049			105,377
Foreclosed real estate held for sale, net		6,223		8,465			9,375			10,971
Premises and equipment, net		125,866		127,111			128,833			129,591
Deferred income taxes, net		66,681		83,492			87,842			134,177
Other assets		55,661		69,853			95,206			107,073

TOTAL	$	17,451,479	$	17,829,195		$	18,040,080		$	17,926,711


LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	328,776	$	339,248		$	320,804		$	317,753
Interest-bearing and related accrued interest payable		9,631,248		9,601,619			10,011,670			10,178,748

Total deposits		9,960,024		9,940,867			10,332,474			10,496,501
Federal funds purchased and repurchase agreements		6,052,049		6,494,477			6,329,474			6,146,693
Advances from Federal Home Loan Bank		102,000		102,000			102,000			102,000
Borrowings under line of credit		32,500		34,030			—			—
Mortgage note payable		35,836		35,717			35,596			35,465
Advances from borrowers for taxes and insurance		8,236		10,455			8,511			11,539
Accrued expenses and other liabilities		126,500		118,065			148,405			138,277

Total liabilities		16,317,145		16,735,611			16,956,460			16,930,475

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock		18,157		18,157			18,157			18,157
Common stock (1)		3,298		3,298			3,298			3,298
Paid-in capital (1)		869,825		869,953			870,031			870,128
Retained earnings:
Reserve fund		79,613		78,389			78,395			78,389
Undivided profits		162,387		126,496			119,646			31,383
Accumulated other comprehensive income (loss), net		1,054		(2,709	)		(5,907	)		(5,119	)

Total stockholders’ equity		1,134,334		1,093,584			1,083,620			996,236

TOTAL	$	17,451,479	$	17,829,195		$	18,040,080		$	17,926,711


(1)		As adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

2006 Quarterly Condensed Consolidated Statements of Financial Condition (Unaudited)


	As of
	March 31			June 30			September 30		December 31
	2006			2006			2006		2006
	(Dollars in thousands)
ASSETS
Cash and due from banks	$	81,508		$	118,501		$	92,243	$	105,027
Money market instruments:
Federal funds sold and resell agreements		776,415			931,497			841,716		950,573
Interest-bearing deposits in banks		70,042			39,056			15,472		21,060
Trading securities		1,613			1,608			—		—
Investment securities available for sale		3,231			23,266			20,998		20,541
Investment securities held to maturity		7,401,352			6,979,875			7,011,611		7,007,579
Federal Home Loan Bank stock, at cost		42,968			43,562			42,932		37,982
Residential mortgage loans held for sale		1,687			2,320			7,298		11,379
Loans, net		7,969,937			8,124,486			8,370,536		8,554,177
Accrued interest receivable		101,269			111,572			110,828		120,311
Foreclosed real estate held for sale, net		4,003			4,725			5,433		5,917
Premises and equipment, net		118,961			120,537			122,420		124,648
Deferred income taxes, net		52,936			54,787			59,887		58,689
Other assets		44,807			51,192			56,930		56,261

TOTAL	$	16,670,729		$	16,606,984		$	16,758,304	$	17,074,144


LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	288,500		$	305,992		$	315,088	$	373,634
Interest-bearing and related accrued interest payable		8,639,353			8,515,168			8,698,018		8,963,429

Total deposits		8,927,853			8,821,160			9,013,106		9,337,063
Federal funds purchased and repurchase agreements		6,245,713			6,313,993			6,315,566		6,320,481
Advances from Federal Home Loan Bank		162,000			157,000			137,000		127,000
Mortgage note payable		36,310			36,201			36,090		35,968
Advances from borrowers for taxes and insurance		6,314			8,450			7,284		9,862
Accrued expenses and other liabilities		123,571			100,690			96,152		96,427

Total liabilities		15,501,761			15,437,494			15,605,198		15,926,801

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock		18,157			18,157			18,157		18,157
Common stock (1)		3,285			3,290			3,290		3,290
Paid-in capital (1)		867,506			868,299			868,478		868,680
Retained earnings:
Reserve fund		75,604			78,221			78,165		78,389
Undivided profits		204,426			201,961			184,918		178,543
Accumulated other comprehensive income (loss), net		(10	)		(438	)		98		284

Total stockholders’ equity		1,168,968			1,169,490			1,153,106		1,147,343

TOTAL	$	16,670,729		$	16,606,984		$	16,758,304	$	17,074,144


(1)		As adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

2008 Quarterly Condensed Consolidated Statements of Cash Flows (Unaudited)


	Three			Six			Nine			Twelve
	months ended			months ended			months ended			months ended
	March 31, 2008			June 30, 2008			September 30, 2008			December 31, 2008
	(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	32,612		$	33,710		$	22,631		$	(5,450	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Provision (credit) for:
Loan losses		14,957			29,303			44,685			67,506
Unfunded loan commitments		—			—			—			(1,146	)
Claim receivable		—			—			485			14,406
Deferred income tax		(3,999	)		(2,502	)		(4,762	)		(22,392	)
Foreclosed real estate held for sale		(56	)		63			63			2,082
Depreciation and amortization of:
Premises and equipment		2,477			4,096			7,437			9,920
Mortgage servicing rights		62			143			208			279
Stock-based compensation expense		67			133			231			322
Amortization of premium (discount)-net, on:
Investment securities available for sale		(1,636	)		(1,782	)		(1,425	)		(1,315	)
Mortgage-backed securities available for sale		—			165			353			727
Investment securities held to maturity		(5,539	)		(12,551	)		(15,875	)		(16,262	)
Mortgage-backed securities held to maturity		27			(15	)		33			82
Loans		7			13			18			23
Amortization of discount on deposits		724			1,407			2,039			2,696
Amortization of net deferred loan origination fees		(2,063	)		(4,277	)		(6,281	)		(8,470	)
Net loss (gain) on sale and in valuation of:
Investment securities available for sale		—			57			53			(505	)
Called investment securities held to maturity		—			3			2,814			3,116
Mortgage loans held for sale		(221	)		(6	)		(627	)		(853	)
Derivative instruments		(4,876	)		(1,879	)		(2,801	)		(6,160	)
Deposits measured at fair value		6,208			2,939			3,266			6,908
Foreclosed real estate held for sale		(293	)		(170	)		(238	)		(356	)
Other real estate held for sale		—			(13,746	)		(13,746	)		(14,656	)
Loans		261			261			261			261
Premises and equipment		(28	)		(31	)		(31	)		(44	)
Other assets		(2,299	)		(2,299	)		(2,299	)		(2,299	)
Capitalization of servicing rights		(123	)		(225	)		(461	)		(516	)
Originations of mortgage loans held for sale		(12,932	)		(29,997	)		(41,175	)		(52,486	)
Proceeds from sales of mortgage loans held for sale		9,930			17,504			32,363			36,784
Decrease (increase) in:
Trading securities		—			799			4,184			4,184
Accrued interest receivable		39,576			33,288			32,476			44,465
Other assets		(11,578	)		(21,370	)		(11,258	)		(5,096	)
Decrease in:
Accrued interest on deposits and borrowings		(27,521	)		(30,939	)		(41,788	)		(42,234	)
Other liabilities		(37,094	)		(32,334	)		(35,607	)		(45,040	)

Net cash used in operating activities		(3,350	)		(30,239	)		(24,774	)		(31,519	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits in banks		(63,889	)		21,125			(111,586	)		(1,040,178	)
Net decrease (increase) in federal funds sold and resell agreements		(26,900	)		(177,100	)		(287,200	)		336,700
Cancellation of resell agreements over three months		243,708			429,238			547,800			550,000
Investment securities available for sale:
Maturities, prepayments and calls		666,615			990,352			1,157,864			1,518,384
Proceeds from sales		26,495			98,343			98,343			398,924
Purchases		(1,612,500	)		(4,570,210	)		(4,670,210	)		(5,145,793	)
Investment securities held to maturity:
Maturities, prepayments and calls		13,580,220			30,406,610			37,175,008			38,564,022
Purchases		(10,981,712	)		(26,583,727	)		(33,282,682	)		(33,572,029	)
Mortgage-backed securities held to maturity:
Maturities, prepayments and calls		1,430			4,535			6,786			8,032
Loans:
Sales		12,783			12,783			12,783			12,783
Loans principal collections, net of originations		37,582			113,490			209,958			378,338
Purchases of derivative instruments		—			(507	)		(507	)		(615	)
Proceeds from derivative instruments		1,451			8,061			9,124			9,261
Proceeds from sales of foreclosed real estate held for sale		134			451			906			2,456
Proceeds from sales of other real estate held for sale		—			19,675			19,675			21,375
Additions to premises and equipment		(3,250	)		(4,450	)		(10,262	)		(13,809	)
Proceeds from sale of premises and equipment		28			31			31			94
Proceeds from sale of other assets		2,299			2,299			2,299			2,299
Purchases of Federal Home Loan Bank stock		—			(48,715	)		(50,740	)		(50,965	)
Redemptions of Federal Home Loan Bank stock		8,672			21,874			30,604			36,229

Net cash provided by investing activities		1,893,166			744,158			857,994			2,015,508


Forward	$	1,889,816		$	713,919		$	833,220		$	1,983,989

(continued)

100

2008 Quarterly Condensed Consolidated Statements of Cash Flows (Unaudited)


	Three			Six			Nine			Twelve
	months ended			months ended			months ended			months ended
	March 31, 2008			June 30, 2008			September 30, 2008			December 31, 2008
				(Dollars in thousands)

Forward	$	1,889,816		$	713,919		$	833,220		$	1,983,989


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		(162,404	)		348,142			582,383			556,375
Net increase in federal funds purchased and repurchase agreements		58,176			826,508			413,250			272,522
Repurchase agreements with original maturities over three months:
Payments		(1,803,575	)		(1,803,575	)		(1,803,575	)		(2,181,875	)
Cancellations		—			—			—			(600,000	)
Net decrease in advances from Federal Home Loan Bank		(22,000	)		(60,000	)		(60,000	)		(60,000	)
Repayments of mortgage note payable		(134	)		(262	)		(392	)		(533	)
Cash paid on matured embedded derivatives		(62	)		(7,649	)		(8,578	)		(8,724	)
Net increase in advances from borrowers for taxes and insurance		(2,622	)		(325	)		(2,423	)		220
Dividends paid		(13,213	)		(24,502	)		(35,791	)		(47,079	)


Net cash used in financing activities		(1,945,834	)		(721,663	)		(915,126	)		(2,069,094	)


NET DECREASE IN CASH AND DUE FROM BANKS		(56,018	)		(7,744	)		(81,906	)		(85,105	)

CASH AND DUE FROM BANKS, BEGINNING OF PERIOD		153,473			153,473			153,473			153,473


CASH AND DUE FROM BANKS, END OF PERIOD	$	97,455		$	145,729		$	71,567		$	68,368

(concluded)

101

2008 VERSUS 2007

FIRST QUARTER ENDED MARCH 31, 2008 VERSUS FIRST QUARTER ENDED MARCH 31, 2007

Net income for the quarter ended March 31, 2008 amounted to $32.6 million, compared to net income of $12.7 million for the same period in 2007. The Company’s financial performance was principally impacted by a positive variance in the provision for income taxes due to agreements reached with tax authorities, lower net interest income as a result of a decrease in the net yield earned on interest-earning assets, lower provision for loan losses, higher noninterest expenses due to increases in professional fees, and slightly higher noninterest income due to higher activity resulting from the Company’s overall growing volume of business.

The highlights and key drivers of the Company’s financial results for the quarter ended March 31, 2008 as compared to the quarter ended March 31, 2007 included the following:

	•		Net income for the quarter ended March 31, 2008 was $32.6 million compared to $12.7 million for the quarter ended March 31, 2007. After the payment of preferred stock dividends, net income attributable to common stockholders was $23.4 million for the quarter ended March 31, 2008 compared to $3.5 million for the same period in 2007.

	•		Diluted earnings per share for the quarter ended March 31, 2008 was $7.08 compared to $1.04 for the quarter ended March 31, 2007.

	•		Net interest income for the quarter ended March 31, 2008 was $43.6 million compared to $78.7 million for the same period in 2007, a decrease of $35.0 million or 45%. The decrease in net interest income for the first quarter of 2008, compared to 2007, was principally due to a decrease in the net yield on interest-earnings assets coupled with a decrease in the Company’s average interest-earning assets. The decrease in the net yield on interest-earning assets was principally due to a decrease in the average rate earned by the Company on its interest-earning assets, primarily due to repricing of commercial loans on a lower rate environment and to an increase in non-performing loans, offset in part by a slight decrease in the average rate paid by the Company on its interest-bearing liabilities. The decrease in the Company’s average interest-earning assets was principally due to prepayments received in the Company’s investment portfolio.

	•		The provision for loan losses for the quarter ended March 31, 2008 was $15.0 million compared to $34.5 million for the first quarter of 2007. The decrease in the provision for loan losses was mainly due to a reduction in non-performing and impaired loans. The decrease was the result of steps taken by the Company since the middle of 2007 to mitigate the overall credit risks underlying the Company’s commercial loan portfolio in light of the continuing downturn in the economy of Puerto Rico.

	•		Noninterest income for the quarter ended March 31, 2008 was $11.6 million compared to $11.0 million for the quarter ended March 31, 2007, an increase of $640,000 million or 6%. The increase in noninterest income was mainly due to higher activity resulting from the Company’s overall growing volume of business. Specifically, the increase was driven by higher credit card fees as a result of higher merchant fees due to an increase in assessment rates and higher automatic teller machine fees as a result of the imposition of a usage fee to non-bank customers.

	•		Noninterest expenses for the quarter ended March 31, 2008 were $45.0 million, an increase of $10.0 million or 29% when compared to noninterest expenses of $35.0 million for the quarter ended March 31, 2007. The increase in total noninterest expenses for 2008 was mainly due to: (1) an increase in $4.1 million in professional fees due to legal, accounting and consulting fees associated with the internal review conducted by the Company’s Audit Committee as a result of the restatement announcement and other related legal and regulatory proceedings, (2) an increase of $1.5 million in salaries and employees’ benefits related to the Company’s expansion in all of its business areas, and (3) an increase of $0.9 million in deposit insurance premium and supervisory examination due to an increase in premiums assessed by the FDIC.

	•		The provision (credit) for income taxes for the quarter ended March 31, 2008 was a benefit of $(37.3) million compared to an expense of $7.5 million for the same period in 2007, a favorable variance of $44.8 million. The favorable variance was mainly due agreements reached with tax authorities that resulted on a benefit of $33.3 million coupled with lower taxable income.

	•		Total assets at March 31, 2008 were $15.9 billion compared to $17.5 billion at March 31, 2007, a decrease of $1.5 billion or 9%. The decrease in total assets was primarily driven by a decrease of $1.9 billion in the Company’s investment portfolio due to the Company’s decision to deleverage its balance sheet to strengthen capital ratios, offset in part by an increase of $234.6 million in the Company’s loan portfolio due to the growth of the Company’s business.

	•		Total liabilities at March 31, 2008 were $14.9 billion compared to $16.3 billion at March 31, 2007, a decrease of $1.4 billion or 9%. The decrease in total liabilities was primarily driven by a decrease of $1.7 billion or 27% in federal funds purchased and repurchase agreements due to the Company’s decision to deleverage its balance sheet coupled with a decrease of $22.0 million in advances from FHLB, offset in part by an increase of $342.8 million in deposits, mainly brokered deposits.

102

•

Total stockholders’ equity at March 31, 2008 was $1.0 billion compared to $1.1 billion at March 31, 2007, a decrease of $120.4 million or 11%. The decrease in total stockholders’ equity was driven by dividends declared on the Company’s common and preferred shares, net other comprehensive losses recognized, and the cumulative effect of the adoption of FIN No. 48 which resulted in a charge to retained earnings of $10.6 million at January 1, 2007.

SECOND QUARTER ENDED JUNE 30, 2008 VERSUS SECOND QUARTER ENDED JUNE 30, 2007

Net income for the quarter ended June 30, 2008 amounted to $1.1 million, compared to a net loss of $20.1 million for the same period in 2007. The Company’s financial performance was principally impacted by lower provision for loan losses, lower net interest income as a result of a decrease in the net yield earned on interest-earning assets, higher noninterest income due to the sale of certain land lots originally held for future branch development, a negative variance in the provision for income taxes due to variances in deferred tax assets, and higher noninterest expenses due to increases in salaries and employees’ benefits and professional fees.

The highlights and key drivers of the Company’s financial results for the quarter ended June 30, 2008 as compared to the quarter ended June 30, 2007 included the following:

	•		Net income for the quarter ended June 30, 2008 was $1.1 million compared to a net loss of $20.1 million for the same quarter in 2007. After the payment of preferred stock dividends, net loss attributable to common stockholders was $8.1 million for the quarter ended June 30, 2008 compared to a net loss of $29.3 million for the same period in 2007.

	•		Diluted loss per share for the quarter ended June 30, 2008 was $2.46 compared to a diluted loss per share of $8.88 for the quarter ended June 30, 2007.

	•		Net interest income for the quarter ended June 30, 2008 was $32.8 million compared to $74.6 million for the same period in 2007, a decrease of $41.7 million or 56%. The decrease in net interest income for the second quarter of 2008, compared to 2007, was principally due to a decrease in the net yield on interest-earnings assets coupled with a decrease in the Company’s average interest-earning assets. The decrease in the net yield on interest-earning assets was principally due to a decrease in the average rate earned by the Company on its interest-earning assets, primarily due to repricing of commercial loans on a lower rate environment and to an increase in non-performing loans, offset in part by a decrease in the average rate paid by the Company on its interest-bearing liabilities, mainly repurchase agreements and deposits (including brokered). The decrease in the Company’s average interest-earning assets was principally due to prepayments received in the Company’s investment portfolio and the Company’s decision to deleverage its balance sheet to strengthen regulatory capital ratios.

	•		The provision for loan losses for the quarter ended June 30, 2008 was $14.3 million compared to $73.4 million for the second quarter of 2007, a decrease of $59.1 million or 80%. The decrease during the second quarter of 2008, when compared to same quarter in 2007, was mainly driven by, steps taken by the Company since the middle of 2007 to mitigate the overall credit risks underlying the Company’s commercial loan portfolio in light of the continuing downturn in the economy of Puerto Rico and the effect of a specific reserve for an impaired relationship in the Company’s asset-based loan portfolio taken during the second quarter of 2007.

	•		Noninterest income for the quarter ended June 30, 2008 was $26.6 million compared to $11.1 million for the quarter ended June 30, 2007, an increase of $15.5 million or 139%. The increase in noninterest income was mainly the result of the sale of certain land lots originally held for future branch development, which resulted on a gain on sale of $14.7 million.

	•		Noninterest expenses for the quarter ended June 30, 2008 were $41.7 million, an increase of $5.9 million or 17% when compared to noninterest expenses of $35.8 million for the quarter ended June 30, 2007. The increase in total noninterest expenses for 2008 was mainly due to: (1) an increase of $1.1 million in salaries and employees’ benefits related to the Company’s expansion in all of its business areas, (2) an increase of $1.4 million in professional fees due to legal, accounting and consulting fees associated with the internal review conducted by the Company’s Audit Committee as a result of the restatement announcement and other related legal and regulatory proceedings, (3) an increase of $0.6 million in deposit insurance premium and supervisory examination due to an increase in premiums assessed by the FDIC, and (4) an increase of $0.6 million in municipal taxes due to higher volume of business.

	•		The provision for income taxes for the quarter ended June 30, 2008 was $2.3 million compared to a benefit of $3.5 million for the same period in 2007. The negative variance in 2008 was primarily due to a higher provision for deferred taxes, offset in part by a decrease in the current provision for income taxes. The increase in deferred tax provision was mainly attributable to temporary differences related to the allowance for loan losses. The decrease in the current provision for income taxes for 2008, when compared to 2007, is attributed to lower taxable income.

	•		Total assets at June 30, 2008 were $17.0 billion compared to $17.8 billion at June 30, 2007, a decrease of $780.4 million or 4%. The decrease in total assets was primarily driven by a decrease of $963.7 million in the Company’s investment portfolio

103

			due to prepayments received and the Company’s decision to deleverage its balance sheet, offset in part by an increase of $84.2 million in foreclosed real estate held for sale, due mainly to the foreclosure of a troubled commercial relationship.

	•		Total liabilities at June 30, 2008 were $16.1 billion compared to $16.7 billion at June 30, 2007, a decrease of $591.7 million or 4%. The decrease in total liabilities was primarily driven by a decrease of $1.3 billion or 24% in federal funds purchased and repurchase agreements due to the Company’s decision to deleverage its balance sheet coupled with a decrease of $60.0 million in advances from FHLB, offset in part by an increase of $855.9 million or 9% in deposits, mainly brokered deposits.

	•		Total stockholders’ equity at June 30, 2008 was $904.9 million compared to $1.1 billion at June 30, 2007, a decrease of $188.7 million or 17%. The decrease in total stockholders’ equity was primarily driven by net losses recognized, dividends declared on the Company’s common and preferred shares, and net other comprehensive losses recognized.

THIRD QUARTER ENDED SEPTEMBER 30, 2008 VERSUS THIRD QUARTER ENDED SEPTEMBER 30, 2007

Net income (loss) for the quarter ended September 30, 2008 amounted to $(11.1) million, compared to a net income of $10.2 million for the same period in 2007. The Company’s financial performance was principally impacted by lower net interest income as a result of a decrease in the net yield earned on interest-earning assets, a lower noninterest income due mainly to losses on investment securities associated with the termination of agreements between the Company and affiliates of Lehman Brothers Holdings, Inc (“LBHI”), and slightly higher noninterest expenses due to increases in salaries and employees’ benefits and professional fees and deposit insurance premium, partially offset by a lower provision for loan losses due mainly to decreases increases in non-performing loans and a positive variance in the provision for income taxes due mainly to lower current income taxes.

The highlights and key drivers of the Company’s financial results for the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007 included the following:

	•		Net income (loss) for the quarter ended September 30, 2008 was $(11.1) million compared to a net income of $10.2 million for the quarter ended September 30, 2007. After the payment of preferred stock dividends, net loss attributable to common stockholders was $(20.3) million or the quarter ended September 30, 2008 compared to net income of $988,000 for the same period in 2007.

	•		Diluted loss per share for the quarter ended September 30, 2008 was $6.16 compared to diluted earnings per share of $0.30 for the quarter ended September 30, 2007.

	•		Net interest income for the quarter ended September 30, 2008 was $38.4 million compared to $68.1 million for the same period in 2007, a decrease of $29.7 million or 44%. The decrease in net interest income for the third quarter of 2008, compared to the same period in 2007, was principally due to a significant decrease in the net yield on interest-earning assets coupled with a decrease in the Company’s average interest-earning assets. The decrease in the net yield on interest-earning assets was principally due to a decrease in the average rate earned by the Company on its interest-earning assets, primarily due to repricing of commercial loans on a lower rate environment and to an increase in non-performing loans, offset in part by a decrease in the average rate paid by the Company on its interest-bearing liabilities, mainly repurchase agreements and deposits (including brokered). The decrease in the Company’s average interest-earning assets was principally due to prepayments received in the Company’s investment portfolio and the Company’s decision to deleverage its balance sheet to strengthen regulatory capital ratios.

	•		The provision for loan losses for the quarter ended September 30, 2008 was $15.4 million compared to $21.7 million for the third quarter of 2007, a decrease of $6.3 million or 29%. The decrease during the third quarter of 2008, as compared to same quarter in 2007, was mainly driven by steps taken by the Company since the middle of 2007 to mitigate the overall credit risks underlying the Company’s commercial loan portfolio in light of the continuing downturn in the economy of Puerto Rico.

	•		Noninterest income for the quarter ended September 30, 2008 was $9.9 million compared to $13.3 million for the quarter ended September 30, 2007, a decrease of $3.4 million or 26%. The decrease in noninterest income was mainly the result of a charge of $3.3 million on investment securities associated with the termination of agreements the Company had with affiliates of LBHI after LBHI filed for bankruptcy during the third quarter of 2008.

	•		Noninterest expenses for the quarter ended September 30, 2008 was $46.1 million, an increase of $1.4 million or 3% when compared to noninterest expenses of $44.7 million for the quarter ended September 30, 2007. The slight increase in total noninterest expenses for the third quarter of 2008 was mainly due to: (1) an increase of $2.6 million in salaries and employees’ benefits related to the Company’s expansion in all of its business areas, (2) an increase of $1.1 million in deposit insurance premium and supervisory examination due to an increase in premiums assessed by the FDIC, (3) a loss of $0.5 million recognized during the quarter, as a result of the termination of certain derivatives transactions with Lehman Brothers Special Financing, Inc. (refer to Part I, Item I. Business, Recent Significant Events section of this Annual Report on Form 10-K), and (4) an increase of $0.3 million in telephone expenses due to expansion of the Company’s operations; offset in part by a decrease of $2.7 million

104

			in professional fees due to the curtailment of legal, accounting and consulting activities and fees associated with the internal review conducted by the Company’s Audit Committee that commenced during the third quarter of 2007.

	•		The provision (credit) for income taxes for the quarter ended September 30, 2008 was a benefit of $2.1 million compared to an expense of $4.8 million for the same period in 2007. The decrease in the provision for income taxes in 2008 was primarily due to a decrease in the current provision for income taxes, mainly due to lower taxable income, offset in part with a decrease in deferred tax benefit mainly attributable to temporary differences related to the allowance for loan losses.

	•		Total assets at September 30, 2008 were $16.4 billion compared to $18.0 billion at September 30, 2007, a decrease of $1.6 billion or 9%. The decrease in total assets was primarily driven by a decrease of $1.5 billion in the Company’s investment portfolio due to prepayments received and the Company’s decision to deleverage its balance sheet coupled with a decrease of $314.0 million in the Company’s loan portfolio due to the Company’s decision to curtail major commercial lending during the summer of 2007, offset in part by an increase of $89.3 million in foreclosed real estate held for sale, due mainly to the foreclosure of a troubled commercial relationship.

	•		Total liabilities at September 30, 2008 were $15.5 billion compared to $17.0 billion at September 30, 2007, a decrease of $1.4 billion or 9%. The decrease in total liabilities was primarily driven by a decrease of $2.0 billion or 32% in federal funds purchased and repurchase agreements due to the Company’s decision to deleverage its balance sheet coupled with a decrease of $60.0 million in advances from FHLB, offset in part by an increase of $690.6 million or 7% in deposits, mainly brokered deposits, due to the Company’s decision to increase its liquidity.

	•		Total stockholders’ equity at September 30, 2008 was $877.1 million compared to $1.1 billion at September 30, 2007, a decrease of $206.5 million or 19%. The decrease in total stockholders’ equity was primarily driven by net losses incurred, dividends declared on the Company’s common and preferred shares and net other comprehensive losses recognized in the Corporation’s securities available-for-sale portfolio.

FOURTH QUARTER ENDED DECEMBER 31, 2008 VERSUS FOURTH QUARTER ENDED DECEMBER 31, 2007

Net loss for the quarter ended December 31, 2008 amounted to $28.1 million, compared to a net loss of $71.2 million for the same period in 2007. The Company’s financial performance was principally impacted by lower provision for loan losses due to decreases in non-performing loans, mainly in the Company’s construction loan portfolio, and the Company’s loan portfolio, lower income tax benefits mainly due to a decrease in deferred tax benefits, lower net interest income mainly as a result of a decrease in the Company’s net yield on interest-earning assets, lower noninterest income due mainly to losses on investment securities, and higher noninterest expenses due mainly to the recognition of a provision for claim receivable.

The highlights and key drivers of the Company’s financial results for the quarter ended December 31, 2008 as compared to the quarter ended December 31, 2007 included the following:

	•		Net loss for the quarter ended December 31, 2008 was $28.1 million compared to a net loss of $71.2 million for the quarter ended December 30, 2007. After the payment of preferred stock dividends, net loss attributable to common stockholders was of $37.3 million for the quarter ended December 31, 2008 compared to a net loss attributable to common stockholders of $80.4 million for the same period in 2007.

	•		Diluted loss per share for the quarter ended December 31, 2008 was $11.31 compared to diluted loss per share of $24.39 for the quarter ended December 31, 2007.

	•		Net interest income for the quarter ended December 31, 2008 was $28.0 million compared to $63.7 million for the same period in 2007, a decrease of $35.6 million or 56%. The decrease in net interest income for the fourth quarter of 2008, compared to the same period in 2007, was principally due to a significant decrease in the net yield on interest-earning assets coupled with a decrease in the Company’s average interest-earning assets. The decrease in the net yield on interest-earning assets was principally due to a decrease in the average rate earned by the Company on its interest-earning assets, primarily due to repricing of commercial loans on a lower rate environment and to an increase in non-performing loans, offset in part by a decrease in the average rate paid by the Company on its interest-bearing liabilities, mainly repurchase agreements and deposits (including brokered). The decrease in the Company’s average interest-earning assets was principally due to prepayments and paid-offs received in the Company’s investment and loan portfolios.

	•		The provision for loan losses for the quarter ended December 31, 2008 was $22.8 million compared to $148.0 million for the fourth quarter of 2007, a decrease of $125.2 million. The decrease in the provision for loan losses reflects primarily variances in reserves related to the allowance for loan losses for the Company’s construction loan portfolio. Specifically, during fourth quarter of 2007, as a result of worsening macroeconomic conditions in Puerto Rico, the Company was required to allocate specific reserves for a number of its construction loans, causing a significant increase in the provision for loan losses.

105


	•		Noninterest income for the quarter ended December 31, 2008 was $12.5 million, compared to $12.4 million for the quarter ended December 30, 2007. The slight increase was mainly due to a positive variance of $2.4 million on net on sales and valuations of loans, securities, and other assets, almost offset by an overall decrease in service and other charges on loans, services charges on deposit accounts, and other fees and commissions, mainly due to lower activity associated with the Company’s overall volume of business. Net gain on derivative instruments and deposits measured at fair value decreased by $735,000 as a result of the mark to market of such positions.


	•		Noninterest expenses for the quarter ended December 31, 2008 was $63.0 million, an increase of $15.0 million or 31% when compared to noninterest expenses of $47.9 million for the quarter ended December 31, 2007. The increase in noninterest expenses for the fourth quarter was mainly due to the recognition of a loss of $13.9 million against the $139.2 million owed by LBI as of December 31, 2008 and the increase of $3.4 million in deposit insurance premium and supervisory examination due to an increase in premiums assessed by the FDIC. Such increases were partially offset by a decrease of $5.7 million in professional fees due to lower legal, accounting and consulting fees due to, among other things, the conclusion of the internal review conducted by the Company’s Audit Committee as a result of the restatement announcement and other legal and regulatory matters; process to file all required reports under the federal securities laws and the settlement of legal and regulatory matters and a decrease of $1.6 million in advertising due to the Company’s decision to curtail investment in marketing efforts in light of the current economic environment.

	•		The provision (credit) for income taxes for the quarter ended December 31, 2008 was a benefit of $17.2 million compared to a benefit of $48.6 million for the same period in 2007. The decrease in income tax benefit to a decrease in deferred tax benefit mainly due to temporary differences related to the allowance for loan losses mainly related to the construction loan portfolio.

	•		Total assets at December 31, 2008 were $15.3 billion compared to $17.9 billion at December 31, 2007, a decrease of $2.6 billion or 15%. The decrease in total assets was primarily driven by a decrease of $2.4 billion in the Company’s investment portfolio due to prepayments received and the Company’s decision to deleverage its balance sheet coupled with a decrease of $542.2 million in the Company’s loan portfolio due to the Company’s decision to curtail major commercial lending during the summer of 2007.

	•		Total liabilities at December 31, 2008 were $14.4 billion compared to $16.9 billion at December 31, 2007, a decrease of $2.6 billion or 15%. The decrease in total liabilities was primarily driven by a decrease of $2.9 billion or 48% in federal funds purchased and repurchase agreements due to the Company’s decision to deleverage its balance sheet coupled with a decrease of $60.0 million in advances from FHLB, offset in part by an increase of $505.7 million or 5% in deposits, mainly brokered deposits, due to the Company’s decision to increase its liquidity.

	•		Total stockholders’ equity at December 31, 2008 was $915.4 million compared to $996.2 million at December 31, 2007, a decrease of $80.9 million or 8%. The decrease in total stockholders’ equity was primarily driven by net losses incurred during the fourth quarter of 2008, dividends declared on the Company’s common and preferred shares, and net other comprehensive losses recognized due to changes in the valuation of the Corporation’s securities available-for-sale portfolio.

2007 VERSUS 2006

FIRST QUARTER ENDED MARCH 31, 2007 VERSUS FIRST QUARTER ENDED MARCH 31, 2006

Net income for the quarter ended March 31, 2007 amounted to $12.7 million, compared to net income of $31.6 million for the same period in 2006. Westernbank’s financial performance was principally impacted by higher provision for loan losses due to increases in non-performing loans, lower provision for income taxes, higher noninterest expenses due to increases in professional fees, salaries and employees’ benefits, deposit insurance premium and supervisory examination, higher net interest income as a result of an increase in the Company’s average interest-earning assets, and slightly higher noninterest income due to higher activity resulting from the Company’s overall growing volume of business.

The highlights and key drivers of the Company’s financial results for the quarter ended March 31, 2007 as compared to the quarter ended March 31, 2006 included the following:

•

Net income for the quarter ended March 31, 2007 was $12.7 million compared to $31.6 million for the quarter ended March 31, 2006. After the payment of preferred stock dividends, net income attributable to common stockholders was of $3.5 million for the quarter ended March 31, 2007 compared to $22.3 million for the same period in 2006.

106

	•		Diluted earnings per share for the quarter ended March 31, 2007 was $1.04 compared to $6.62 for the quarter ended March 31, 2006.

	•		Net interest income for the quarter ended March 31, 2007 was $78.7 million compared to $76.3 million for the same period in 2006, an increase of $2.4 million or 3.08%. The slight increase in net interest income for the first quarter of 2007, compared to 2006, was principally due to an increase in the Company’s average interest-earning assets offset in part by a decrease in net yield on interest-earning assets. The increase in average interest-earning assets was primarily driven by a rise in the average loan portfolio, particularly in the Commercial and C&I loan portfolios, offset in part by a decrease in the Company’s investment portfolio. The decrease in the net yield on interest earning assets was principally due to an increase in average rate paid by the Company on its interest-bearing liabilities offset in part by an increase in the average yield earned on its interest-earning assets.

	•		The provision for loan losses for the quarter ended March 31, 2007 was $34.5 million compared to $7.6 million for the first quarter of 2006. The increase in the provision for loan losses for 2007 is mainly attributable to increasing trends in non-performing loans in the Company’s asset-based lending portfolios coupled with the growth of the Company’s loan portfolios. The increase in non-performing loans in 2007 compared to 2006 is mainly due to the effects of the downturn in the economy of Puerto Rico.

	•		Noninterest income for the quarter ended March 31, 2007 was $11.0 million compared to $9.2 million for the quarter ended March 31, 2006, an increase of $1.8 million or 19.86%. The increase in noninterest income was mainly due to higher activity resulting from the Company’s overall growing volume of business.

	•		Noninterest expenses for the quarter ended March 31, 2007 were $35.0 million, an increase of $5.6 million or 19.05% when compared to noninterest expenses of $29.4 million for the quarter ended March 31, 2006. The increase in total noninterest expenses for 2007 was mainly due to: increases in salaries and employees’ benefits related to the Company’s expansion in all of its business areas, and increases in deposit insurance premium and supervisory examination due to an increase in premiums assessed by the FDIC.

	•		The provision for income taxes for the quarter ended March 31, 2007 was $7.5 million compared to $16.9 million for the same period in 2006, a decrease of $9.5 million or 55.78%. The decrease in the provision for income taxes was mainly due to lower taxable income during 2007 coupled with an increase in deferred tax benefits and the expiration of transitory income taxes enacted by the government of Puerto Rico that expired on December 31, 2006.

	•		Total assets at March 31, 2007 were $17.45 billion compared to $16.67 billion at March 31, 2006, an increase of $780.8 million or 4.68%. The increase in total assets was primarily driven by an increase of $854.0 million in the Company’s loan portfolio due to the growth of the Company’s business, offset in part by a decrease of $111.4 million in the Company’s investment portfolio and a decrease of $27.4 million in the Company’s money market investments.

	•		Total liabilities at March 31, 2007 were $16.32 billion compared to $15.50 billion at March 31, 2006, an increase of $815.4 million or 5.26%. The increase in total liabilities was primarily driven by an increase of $1.03 billion in deposits, mainly brokered deposits, offset in part by a decrease of $193.7 million in federal funds purchased and repurchase agreements and a decrease of $60.0 million in advances from FHLB.

	•		Total stockholders’ equity at March 31, 2007 was $1.13 billion compared to $1.17 billion at March 31, 2006, a decrease of $34.6 million or 2.96%. The decrease in total stockholders’ equity was primarily driven by net losses, dividends declared on the Company’s common and preferred shares and the cumulative effect of the adoption of FIN No. 48 which resulted in a charge to retained earnings of $10.6 million at January 1, 2007.

SECOND QUARTER ENDED JUNE 30, 2007 VERSUS SECOND QUARTER ENDED JUNE 30, 2006

Net loss for the quarter ended June 30, 2007 amounted to $20.1 million, compared to net income of $17.2 million for the same period in 2006. Westernbank’s financial performance was principally impacted by higher provision for loan losses due to increases in non-performing loans and growth of the Company’s loan portfolio, higher noninterest expenses due to increases in professional fees, salaries and employees’ benefits, deposit insurance premium and supervisory examination lower provision for income taxes, higher noninterest income due to higher activity resulting from the Company’s overall growing volume of business, and higher net interest income as a result of an increase in the Company’s average interest-earning assets.

The highlights and key drivers of the Company’s financial results for the quarter ended June 30, 2007 as compared to the quarter ended June 30, 2006 included the following:

•

Net loss for the quarter ended June 30, 2007 was $20.1 million compared to a net income of $17.2 million for the same quarter in 2006. After the payment of preferred stock dividends, net loss attributable to common stockholders was of $29.3 million for the quarter ended June 30, 2007 compared to a net income of $8.0 million for the same period in 2006.

107

	•		Diluted loss per share for the quarter ended June 30, 2007 was $8.88 compared to diluted earnings per share of $2.37 for the quarter ended June 30, 2006.

	•		Net interest income for the quarter ended June 30, 2007 was $74.6 million compared to $73.5 million for the same period in 2006, an increase of $1.0 million or 1.37%. The slight increase in net interest income for the second quarter of 2007, compared to 2006, was principally due to an increase in the Company’s average interest-earning assets offset in part by a decrease in net yield on interest-earning assets. The increase in average interest-earning assets was primarily driven by a rise in the average loan portfolio, particularly in the Commercial and C&I loan portfolios, coupled with an increase in the Company’s investment portfolio due to the Company’s decision to lessen the repricing and maturity mismatch of the Company’s investment portfolio and its funding by investing in long term securities. The decrease in the net yield on interest earning assets was principally due to an increase in average rate paid by the Company on its interest-bearing liabilities offset in part by an increase in the average yield earned on its interest-earning assets.

	•		The provision for loan losses for the quarter ended June 30, 2007 was $73.4 million compared to $17.7 million for the second quarter of 2006, an increase of $55.7 million or 314.20%. The increase in the provision for loan losses for 2007 is mainly attributable to increasing trends in non-performing loans in the Company’s construction loan and asset-based lending portfolios coupled with the growth of the Company’s loan portfolios. The increase in non-performing loans in 2007 compared to 2006 is mainly due to the effects of the downturn in the economy of Puerto Rico.

	•		Noninterest income for the quarter ended June 30, 2007 was $11.1 million compared to $7.6 million for the quarter ended June 30, 2006, an increase of $3.5 million or 45.81%. The increase in noninterest income is the result of an increase of $1.9 million on service fees and other fees and commissions due to higher activity associated with the Company’s overall growing volume of business and a positive variance of $2.0 million in net gain (loss) on sales and valuations of loans, securities, and other assets. For the quarter ended June 30, 2006, management concluded that $21.6 million of its investments in Puerto Rico Government Obligations were other-than-temporarily impaired and recorded a loss of $1.1 million. There were no such charges in 2007.

	•		Noninterest expenses for the quarter ended June 30, 2007 were $35.8 million, an increase of $5.2 million or 16.93% when compared to noninterest expenses of $30.6 million for the quarter ended June 30, 2006. The increase in total noninterest expenses for 2007 was mainly due to: an increase of $1.5 million in salaries and employees’ benefits related to the Company’s expansion in all of its business areas, an increase of $2.2 million in deposit insurance premium and supervisory examination due to an increase in premiums assessed by the FDIC, and an increase in $854,000 in professional fees due to legal, accounting and consulting fees associated with the internal review conducted by the Company’s Audit Committee as a result of the restatement announcement and other related legal and regulatory proceedings.

	•		The provision for income taxes for the quarter ended June 30, 2007 was a benefit of $3.5 million compared to an expense of $15.6 million for the same period in 2006. The positive variance in 2007 was primarily due to an increase in deferred tax benefits coupled with a decrease in the current provision for income taxes. The increase in deferred tax benefits for 2007 is mainly attributable to temporary differences related to the allowance for loan losses. The decrease in the current provision for income taxes for 2007, when compared to 2006, is attributed to lower taxable income coupled with the expiration of transitory income taxes enacted by the government of Puerto Rico that expired on December 31, 2006.

	•		Total assets at June 30, 2007 were $17.83 billion compared to $16.61 billion at June 30, 2006, an increase of $1.22 billion or 7.36%. The increase in total assets was primarily driven by an increase of $835.6 million in the Company’s loan portfolio due to the growth of the Company’s business coupled with an increase of $586.0 million in the Company’s investment portfolio, offset in part by a decrease of $237.0 million in the Company’s money market investments.

	•		Total liabilities at June 30, 2007 were $16.74 billion compared to $15.44 billion at June 30, 2006, an increase of $1.30 billion or 8.41%. The increase in total liabilities was primarily driven by an increase of $1.12 billion in deposits, mainly brokered deposits, coupled with an increase of $180.5 million in federal funds purchased and repurchase agreements, offset in part by a decrease of $55.0 million in advances from FHLB.

	•		Total stockholders’ equity at June 30, 2007 was $1.09 billion compared to $1.17 billion at June 30, 2006, a decrease of $75.9 million or 6.49%. The decrease in total stockholders’ equity was primarily driven by net losses, dividends declared on the Company’s common and preferred shares, and the cumulative effect of the adoption of FIN No. 48 which resulted in a charge to retained earnings of $10.6 million at January 1, 2007.

THIRD QUARTER ENDED SEPTEMBER 30, 2007 VERSUS THIRD QUARTER ENDED SEPTEMBER 30, 2006

Net income for the quarter ended September 30, 2007 amounted to $10.2 million, compared to net loss of $58,000 for the same period in 2006. Westernbank’s financial performance was principally impacted by lower provision for loan losses due to a specific reserve for an impaired relationship taken during the third quarter of 2006, higher noninterest expenses due to increases in professional fees, salaries and employees’ benefits, deposit insurance premium and supervisory examination, lower provision for income taxes,

108

higher noninterest income due to higher activity resulting from the Company’s overall growing volume of business, and lower net interest income as a result of a decrease in the Company’s net yield on interest-earning assets.

The highlights and key drivers of the Company’s financial results for the quarter ended September 30, 2007 as compared to the quarter ended September 30, 2006 included the following:

	•		Net income for the quarter ended September 30, 2007 was $10.2 million compared to net loss of $58,000 for the quarter ended September 30, 2006. After the payment of preferred stock dividends, net loss income (loss) attributable to common stockholders was $988,000 for the quarter ended September 30, 2007 compared to $9.3 million for the same period in 2006.

	•		Diluted earnings per share for the quarter ended September 30, 2007 was $0.30 compared to diluted loss per share of $2.82 for the quarter ended September 30, 2006.

	•		Net interest income for the quarter ended September 30, 2007 was $68.1 million compared to $4.8 million for the same period in 2006, a decrease of $8.2 million or 10.74%. The decrease in net interest income for the third quarter of 2007, compared to the same period in 2006, was principally due to a significant decrease in the net yield on interest-earning assets, offset in part by an increase in the Company’s average interest-earning assets. The decrease in net yield on interest-earning assets was principally due to the refunding of the Company’s interest-bearing liabilities at higher rates, in particular the Company’s brokered deposits, coupled with declining loan yields attributable to a higher balance of loans in non-accrual status. The increase in average interest-earning assets was primarily driven by a rise in the average loan portfolio, particularly in the Commercial and C&I loan portfolios, coupled with an increase in the Company’s investment portfolio.

	•		The provision for loan losses for the quarter ended September 30, 2007 was $21.7 million compared to $37.8 million for the third quarter of 2006, a decrease of $16.1 million or 42.61%. The decrease in the provision for loan losses for 2007 is mainly attributable to a specific reserve for an impaired relationship taken during the third quarter of 2006. During the third quarter of 2006, the Company’s provision for loan losses increased due to an impairment of $17.1 million on a specific relationship in the Company’s asset-based loan portfolio. The decrease in the provision for loan losses in the third quarter of 2007 when compared to other quarters in 2007 was mainly due to the impact of the Inyx loan which mainly affect periods before the third quarter of 2007.

	•		Noninterest income for the quarter ended September 30, 2007 was $13.3 million compared to $10.2 million for the quarter ended September 30, 2006, an increase of $3.1 million or 30.13%. The increase in noninterest income is the result of an increase of $2.8 million on service fees and other fees and commissions due to higher activity associated with the Company’s overall growing volume of business and an increase of $69,000 in net gain (loss) on sales and valuations of loans, securities, and other assets.

	•		Noninterest expenses for the quarter ended September 30, 2007 was $44.7 million, an increase of $14.2 million or 46.75% when compared to noninterest expenses of $30.4 million for the quarter ended September 30, 2006. The increase in total noninterest expenses for the third quarter of 2007 was mainly due to: (1) an increase in $7.5 million in professional fees due to legal, accounting and consulting fees associated with the internal review conducted by the Company’s Audit Committee as a result of the restatement announcement and other related legal and regulatory proceedings, (2) an increase of $1.9 million in salaries and employees’ benefits related to the Company’s expansion in all of its business areas, and (3) an increase of $1.9 million in deposit insurance premium and supervisory examination due to an increase in premiums assessed by the FDIC.

	•		The provision for income taxes for the quarter ended September 30, 2007 was $4.8 million compared to an expense of $18.3 million for the same period in 2006. The decrease in the provision for income taxes in 2007 was primarily due to a decrease in the current provision for income taxes, mainly due to lower taxable income coupled with the expiration of transitory income taxes enacted by the government of Puerto Rico on December 31, 2006.

	•		Total assets at September 30, 2007 were $18.04 billion compared to $16.76 billion at September 30, 2006, an increase of $1.28 billion or 7.65%. The increase in total assets was primarily driven by an increase of $803.6 million in the Company’s loan portfolio due to the growth of the Company’s business, an increase of $361.5 million in the Company’s investment portfolio, and an increase of $44.8 million in the Company’s money market investments.

	•		Total liabilities at September 30, 2007 were $16.96 billion compared to $15.61 billion at September 30, 2006, an increase of $1.35 billion or 8.66%. The increase in total liabilities was primarily driven by an increase of $1.32 billion in deposits, mainly brokered deposits, offset in part by a decrease of $35.0 million in advances from FHLB.

	•		Total stockholders’ equity at September 30, 2007 was $1.08 billion compared to $1.15 billion at September 30, 2006, a decrease of $69.5 million or 6.03%. The decrease in total stockholders’ equity was primarily driven by net losses, dividends declared on the Company’s common and preferred shares, a negative variance in the Company’s accumulated other comprehensive income associated with the valuation of the Corporation’s securities available-for-sale portfolio, and the cumulative effect of the adoption of FIN No. 48 which resulted in a charge to retained earnings of $10.6 million at January 1, 2007.

109

FOURTH QUARTER ENDED DECEMBER 31, 2007 VERSUS FOURTH QUARTER ENDED DECEMBER 31, 2006

Net loss for the quarter ended December 31, 2007 amounted to $71.2 million, compared to a net income of $10.9 million for the same period in 2006. Westernbank’s financial performance was principally impacted by higher provision for loan losses due to increases in non-performing loans, mainly in the Company’s construction loan portfolio, and the growth of the Company’s loan portfolio, positive variances in the provision for income taxes mainly due to an increase in deferred tax benefits, lower net interest income as a result of a decrease in the Company’s net yield on interest-earning assets, higher noninterest expenses due to increases in professional fees, salaries and employees’ benefits, deposit insurance premium and supervisory examination, and higher noninterest income due to higher activity resulting from the Company’s overall growing volume of business.

The highlights and key drivers of the Company’s financial results for the quarter ended December 31, 2007 as compared to the quarter ended December 31, 2006 included the following:

	•		Net loss for the quarter ended December 31, 2007 was $71.2 million compared to a net income of $10.9 million for the quarter ended December 30, 2006. After the payment of preferred stock dividends, net loss attributable to common stockholders was of $80.4 million for the quarter ended December 31, 2007 compared to a net income of $1.7 million for the same period in 2006.

	•		Diluted loss per share for the quarter ended December 31, 2007 was $24.39 compared to diluted earnings per share of $0.50 for the quarter ended December 31, 2006.

	•		Net interest income for the quarter ended December 31, 2007 was $63.7 million compared to $82.2 million for the same period in 2006, a decrease of $18.5 million or 22.48%. The decrease in net interest income for the fourth quarter of 2007, compared to the same period in 2006, was principally due to a significant decrease in the net yield on interest-earning assets, offset in part by an increase in the Company’s average interest-earning assets. The decrease in net yield on interest-earning assets was principally due to the refunding of the Company’s interest-bearing liabilities at higher rates, in particular the Company’s brokered deposits, coupled with declining loan yields attributable to a higher balance of loans in non-accrual status. The increase in average interest-earning assets was primarily driven by a rise in the average loan portfolio, particularly in the Commercial and C&I loan portfolios.

	•		The provision for loan losses for the quarter ended December 31, 2007 was $148.0 million compared to $27.7 million for the fourth quarter of 2006, an increase of $120.2 million. The increase in the provision loan losses was principally due to higher impaired and non-performing loans, mainly attributed to the construction loan portfolio and the asset-based lending portfolio of the Company.

	•		Noninterest income for the quarter ended December 31, 2007 was $12.4 million compared to $10.1 million for the quarter ended December 30, 2006, an increase of $2.3 million or 22.88%. The increase in noninterest income is the result of an increase of $1.7 million on service fees and other fees and commissions due to higher activity associated with the Company’s overall growing volume of business and a favorable variance of $114,000 in net loss on sales and valuations of loans, securities, and other assets.

	•		Noninterest expenses for the quarter ended December 31, 2007 was $47.9 million, an increase of $13.9 million or 40.74% when compared to noninterest expenses of $34.0 million for the quarter ended December 31, 2006. The increase in total noninterest expenses for the fourth quarter of 2007 was mainly due to: (1) an increase in $4.7 million in professional fees due to legal, accounting and consulting fees associated with the internal review conducted by the Company’s Audit Committee as a result of the restatement announcement and other related legal and regulatory proceedings, (2) an increase of $1.4 million in deposit insurance premium and supervisory examination due to an increase in premiums assessed by the FDIC, and (3) an increase of $912,000 in salaries and employees’ benefits related to the Company’s expansion in all of its business areas.

	•		The provision for income taxes for the quarter ended December 31, 2007 was a benefit of $48.6 million compared to an expense of $19.6 million for the same period in 2006. The positive variance in the provision for income taxes in 2007 was primarily due to an increase in deferred tax benefits coupled with positive variances in the Company’s current provision for income taxes. The increase in deferred tax benefits for 2007 is mainly attributable to temporary differences related to the allowance for loan losses, specifically the allowance for construction loans. The positive variance in the current provision for income taxes, mainly due to lower taxable income coupled with the expiration of transitory income taxes enacted by the government of Puerto Rico on December 31, 2006.

	•		Total assets at December 31, 2007 were $17.93 billion compared to $17.07 billion at December 31, 2006, an increase of $852.6 million or 4.99%. The increase in total assets was primarily driven by an increase of $655.7 million in the Company’s loan portfolio due to the growth of the Company’s business.

	•		Total liabilities at December 31, 2007 were $16.93 billion compared to $15.93 billion at December 31, 2006, an increase of $1.00 billion or 6.30%. The increase in total liabilities was primarily driven by an increase of $1.16 billion in deposits,

110

			mainly brokered deposits, offset in part by a decrease of $173.8 million in federal funds purchased and repurchased agreements, and a decrease of $25.0 million in advances from FHLB.

	•		Total stockholders’ equity at December 31, 2007 was $996.2 million compared to $1.15 billion at December 31, 2006, a decrease of $151.1 million or 13.17%. The decrease in total stockholders’ equity was primarily driven by net losses incurred during 2007 due to increases in the provision for loan losses, dividends declared on the Company’s common and preferred shares, and a negative variance in the Company’s accumulated other comprehensive income associated with the valuation of the Corporation’s securities available-for-sale portfolio.

RISK MANAGEMENT

General

Effective management of risk is an integral part of the Company’s business and critical to the Company’s safety and soundness. Risks are inherent in virtually all aspects of the Company’s business activities and operations. Consequently, an effective risk management program is fundamental to the success of the Company. Risk management is an ongoing process and a state of mind that is present at all levels throughout the Company. The Company’s risk management process involves all employees, management, senior management and the Company’s Board of Directors in order to be effective and strengthen the Company’s ability to identify, measure, monitor and control risk.

The Company has established a risk management program to monitor, evaluate and manage the principal risks assumed in conducting its activities. The Company’s business is exposed to the following seven categories of risks: (1) credit risk, (2) market & interest rate risk, (3) liquidity risk, (4) operational risk, (5) legal risk, (6) reputational risk and (7) concentration risk.

Risks Definition

Credit Risk — arises from the potential that a borrower or counterparty will fail to perform an obligation.

Market Risk & Interest Rate Risk — is the risk to the Company’s condition resulting from adverse movements in market rates or prices, such as interest rates, foreign-exchange rates, or equity prices.

Liquidity Risk — is the potential that the Company will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding, or the potential that the Company cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions.

Operational Risk — arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses.

Legal Risk — arises from the potential that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively affect the operations or condition of the Company.

Reputational Risk — is the potential risk that negative publicity regarding the Company’s business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions.

Concentration Risk — is the potential risk to the Company of conducting its operations in a geographically concentrated area.

Audit Committee

The Company’s Audit Committee is appointed by the Board of Directors (the “Board”) to assist the Board in its oversight of the risk management processes related to compliance, operations, internal audit function, external financial reporting and internal control over financial reporting process. In performing this function, the Audit Committee is assisted by the Company’s Senior Management.

111

Risk Management Program

The Company’s risk management program, which is approved by its Board of Directors, is designed to balance a strong Company oversight with well-defined independent risk management functions within each business unit. The main objective of the Company’s risk management program is to ensure that all employees, management and Senior Management and processes are organized in a way that promotes a cross-functional approach to risk management and that controls are in place to better manage the Company’s risks and comply with legal and regulatory requirements. As a result, the Company’s risk management program has always been an ongoing process and a state of mind that is present at all levels within the Company. The risk management program is administered by the Company’s Risk Management Committee.

The Company’s senior managers of each business unit are responsible and accountable for identifying, measuring and managing key risks within their business units consistent with the Company’s policies. The Company’s Risk Management Committee is responsible for supporting the Company’s Chief Risk Officer in measuring and managing the Company’s aggregate risk profile. The Chief Risk Officer is responsible for establishing the Company’s overall risk management structure and providing an independent evaluation and oversight of the Company’s risk management activities. The Company’s Risk Management Committee executes management’s oversight role regarding risk management. This committee has been designed to ensure that the appropriate authorities, resources, responsibilities and reporting are in place to support an effective risk management program. The Company’s Risk Management Committee consists of various senior executive officers of the Company, including its Chief Executive Officer and Chief Financial Officer. The Company’s Risk Management Committee is responsible for ensuring that the Company’s overall risk profile is consistent with the Company’s objectives and risk tolerance levels.

The Company’s Internal Audit group provides an objective and independent assessment of the design and execution of the Company’s internal control system, including management systems, risk management, policies and procedures, among other.

As part of the Company’s risk management program, the Company has various risk management related committees. These committees are jointly responsible, along with the Risk Management Committee, for ensuring adequate risk measurement and management in their respective areas of authority. At the management level, these committees include:

•

Assets & Liabilities Committee — oversees interest rate and market risk, liquidity management and other related matters.

•

Steering Committee — is responsible for the oversight of and counsel on matters related to information technology including the development of information management policies and procedures throughout the Company.

•

Compliance and Risk Management Committee — is responsible for the oversight of federal and local regulatory compliance.

•

Delinquency Committee — is responsible for the periodic reviews of (1) past due loans, (2) overdrafts, (3) non-accrual loans and (4) adversely classified loans.

•

Lending Committees — at different approval levels, each committee is responsible for approving loan credits consistent with the Company’s policies and procedures.

Executive Officers

The following officers play a key role in the Company’s risk management process:

	•		Chief Executive Officer (the “CEO”) — in combination with the Company’s Chief Operating Officer is responsible for the overall risk management structure.

	•		Chief Operating Officer — responsible for the day-to-day operations and in combination with the CEO is responsible for the overall risk management structure.

	•		Chief Risk Officer — responsible for the oversight of the risk management organization as well as risk management program processes.

	•		Chief Credit Risk Officer — manages the Company’s credit risk program.

112

	•		Chief Financial Officer — in combination with the Company’s Treasurer, manages the Company’s interest, market and liquidity risks programs and in combination with the Chief Accounting Officer is responsible for the implementation of accounting policies and practices in accordance with accounting principles generally accepted in the Unites States of America and applicable regulatory requirements.

	•		Chief Accounting Officer — responsible for the development and implementation of the Company’s accounting policies and practices and the review and monitoring of critical accounts and transactions to ensure that they are managed in accordance with accounting principles generally accepted in the United States of America and applicable regulatory requirements.

Credit Risk Management

The Company is subject to credit risk mainly with respect to its loan portfolio and off-balance sheet instruments, mainly loan commitments and derivatives. Loans represent amounts that the Company has the intent and ability to hold for the foreseeable future or until maturity or pay-off and, therefore, the Company is at risk for the term of the loan.

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 from the cash flow generated by 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.

Loan commitments represent commitments to extend credit, subject to specific conditions, for specific amounts and maturities. These commitments may expose the Company to credit risk and subject to the same review and approval process as for loans. Refer to the “-Liquidity Risk” section below for further details.

The Company may use derivative instruments as part of its interest rate risk management strategy including interest rate swaps and indexed options. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments and the value of the derivative 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 fair value of a derivative is based on the estimated amount the Company would receive or pay to terminate the derivative contract, taking into account the current interest rates and the creditworthiness of the counterparty. The fair value of the derivatives is reflected on the Company’s statements of financial condition as derivative assets and derivative liabilities.

113

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers. For further details and information in the Company’s derivative credit risk exposure, refer to the “Market and Interest Rate Risk” section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report on Form 10-K.

The Company may also encounter risk of default in relation to its investment securities portfolio. Investments securities held by the Company are principally mortgage-backed securities and U.S. Treasury and agency securities. Thus, a substantial portion of these instruments are guaranteed by mortgages, a U.S. government-sponsored entity or the full faith and credit of the U.S. government and are deemed to be of the highest credit quality.

For further information on the Company’s credit exposure and related analysis and ratios refer to “Loans” and “ Non-performing loans and foreclosed real estate held for sale” sections in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” Section of this Annual Report on Form 10-K.

Market Risk & Interest Rate Risk

Market Risk & Interest Rate Risk is the risk to a company resulting from adverse movements in market rates or prices, such as interest rates, foreign-exchange rates, or equity prices. Management considers interest rate risk to be the Company’s primary market risk exposure. 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. For further information on the Company’s credit exposure and related analysis and ratios refer to “-Allowance for Loan Losses” above.

Interest rate risk is addressed by the Company’s Assets & Liabilities Committee (“ALCO”), which includes the full Board 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 of 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 and net interest income in the event of hypothetical changes in interest rates. For net portfolio value exposure, the Company measures the impact of immediate, sustained and parallel 200 basis points increase or decrease (shock) in the yield curve. For net interest rate risk exposure, the Company measures sensitivity in net interest income assuming a gradual upward and downward interest rate movements of 200 and 100 basis points over a one-year period. 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 Company’s policies, 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.

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. As a general rule, 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 soon after origination. In addition, the Company enters into certain derivative financial instruments to hedge various exposures or to modify interest rate characteristics of various statements of financial condition items. For instance, the Company enters into interest rate swaps to modify the interest rate characteristic of certain fixed-rate brokered certificates of deposit. This structured variable rate funding matches well with the Company strategy of having a large floating rate commercial loan portfolio. See “Note 19 — Derivative Instruments and Hedging Activities — Notes to Consolidated Financial Statements, included herein in Part II, Item 8.

114

The tables below show the risk profile of the Company plus 200-basis point or minus 100-basis point parallel and gradual increase or decrease, respectively, of interest rates, as of December 31, 2008.


Change in Interest Rate	Expected NII (1)		Amount Change		% Change
	(Dollars in thousands)
+200 Basis Points	$	209,441	$	5,935		2.92	%
Base Scenario		203,506		—		—
-100 Basis Points (2)		207,180		3,674		1.81	%


(1)		The NII (net interest income) figures exclude the effect of the amortization of loan fees.

(2)		Due to the low interest rate environment, the Company only modeled a 100-basis point downward adjustment.

At December 31, 2008, the Company’s interest rate risk profile was fairly neutral with only modest changes expected either on a 200 basis upward rate scenario or 100 basis point downward rate scenario. 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 take into account changes which management would undertake to realign its portfolio.

The Company is also exposed to basis risk, the risk of changing spreads between certain categories of indexed assets and liabilities. The primary risk faced by the Company is the risk that the spread between Prime loan rates and short-term funding rates (LIBOR) will narrow over time. Specifically, the Company’s loan portfolios are primarily tied to Prime rates while the Company’s funding is primarily tied to LIBOR, thus the Company’s net interest income declines in periods of narrowing spreads. During 2008, due to the financial crisis that affected the banking system and financial markets, the spread between Prime rates and LIBOR narrowed significantly causing the Company’s net interest income to decrease.

The Company’s investment portfolio at December 31, 2008, had an average contractual maturity of 25 months. The Company’s interest rate risk model takes into consideration the callable feature of certain investment securities. Assuming that all call features are exercised, the Company’s investment portfolio as of December 31, 2008, had a remaining average maturity of seven months. During the first half of 2008, approximately $5.5 billion of U.S. Government agency notes with an average yield of 3.97% were called. The Company reinvested part of the proceeds in U.S. Government agency notes, mortgage-backed securities, and collateralized mortgage obligations amounting to approximately $3.30 billion at an average yield of 4.12% during the first half of 2008. As of December 31, 2008, the Company still has in its investment portfolio approximately $1.1 billion in U.S. Government agency notes with embedded call options. Lower reinvestment rates and a time lag between calls, prepayments and/or the maturity of investments and actual reinvestment of proceeds into new investments might affect net interest income in the future. These risks are directly linked to future period market interest rate fluctuations.

Liquidity Risk

Liquidity risk is the risk that the Company will be unable to meet its obligations as they become due because of an inability to liquidate assets or obtain adequate funding, or the potential that the Company cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions. The Company’s need for liquidity is affected by loan demand, net changes in deposit levels and 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 monitors its liquidity in accordance with guidelines established by the ALCO and applicable regulatory requirements. The Company’s liquidity metrics are reviewed monthly by the ALCO 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.

115

In an effort to support the Company’s liquidity needs in the face of adverse market conditions, the Company has developed a Liquidity Contingency Plan (“LCP”) to provide a roadmap to alternative funding sources in the event that there are shortfalls in funding projections or if a liquidity crisis arises. The LCP is an integral part of the Company’s/Bank’s Liquidity Policy and is designed to help the Company and the Bank manage routine and extraordinary fluctuations in liquidity.

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. At December 31, 2008, the Company had $1.2 billion and $1.0 billion of cash or cash equivalent reserves and unpledged assets, respectively, that could be used as collateral for borrowing, respectively.

At December 31, 2008, Westernbank did not have outstanding line of credit agreements. As of December 31, 2007, Westernbank had line of credit agreements with four commercial banks permitting Westernbank to borrow a maximum aggregate amount of $225.0 million. There were no borrowings outstanding as of December 31, 2007, under such lines of credit. The agreements provided for unsecured advances to be used by Westernbank on an overnight basis. During 2008, these lines of credit agreements amounting to $225.0 million were cancelled.

Liquidity is derived from liabilities by maintaining a variety of funding sources, including deposits, advances and borrowings from the FHLB of New York and other short and long-term borrowings, such as federal funds purchased and repurchase agreements. Other borrowings limits are determined annually by each counterparty and depend on the Company’s financial condition and delivery of acceptable collateral securities. The Company may be required to provide additional collateral based on the fair value of the underlying securities. In addition, the Company utilizes the broker deposits market as a source of cost effective source of fund in addition to local market deposit inflows. An adequately-capitalized bank, by regulation, may not accept deposits from brokers unless it applies for and receives a waiver from the FDIC. The Company also uses the FHLB as a funding source, issuing notes payable, such as advances, and other borrowings, such as repurchase agreements, through its FHLB member subsidiary, Westernbank. This funding source requires Westernbank to maintain a minimum amount of qualifying collateral with a fair value of at least 110% and 105% of the outstanding advances and repurchase agreements, respectively. As of December 31, 2008, the Company has outstanding $42.0 million of advances from the FHLB. During 2008, the Company reviewed its real estate residential and commercial collateral to increase its ability to borrow from the FHLB. As explained above, at December 31, 2008, the Company’s borrowing capacity with the FHLB increased to $510.0 million from $39.0 million at December 31, 2007.

The Company utilizes the broker deposits market as a source of cost effective deposit funding in addition to local market deposit inflows. These deposits represent a large portion of the Company’s funding since these deposits provide the flexibility of selecting short, medium and long term maturities to better match the Company’s asset/liability management strategies. Typically, brokered deposits tend to be highly rate-sensitive deposits, and therefore, these are considered to be a less stable source of funding for an institution as compared to deposits generated primarily in a bank’s local markets. Brokered deposits come primarily from brokers that provide intermediary services for banks and investors, therefore providing banks, such as Westernbank, increased access to a broad range of potential depositors who have no relationship with Westernbank and who actively seek the attractive returns and issuer diversification.

Due to the competitive market for deposits in Puerto Rico, coupled with generally low interest rates in the United States, the rates paid by Westernbank on these deposits are often lower than those paid for local market area retail deposits. The Puerto Rico deposit market is more challenging than the deposit market on the U.S. mainland. Puerto Rico has a relatively stable population base, a number of very competitive local banks looking to expand, and a large proportion of citizens that do not have bank accounts. Also, the difference between the tax rate on interest earned from bank deposits, versus the much lower tax rate on returns from investments held in local mutual funds, preferred stock and local GNMAs makes those other investments more attractive than deposits to some investors. These dynamics present significant challenges for gathering and retaining local retail deposits. The result is a high cost local deposits market. The Company believes that the benefits of brokered deposits outweigh the risk of deposit instability. The availability of additional brokered deposits depends on a variety of factors including market conditions and the Company’s and Westernbank’s overall financial condition. An adequately-capitalized bank, by regulation, may not accept deposits from brokers unless it applies for and receives a waiver from the FDIC. If Westernbank is not able to renew or roll over existing brokered deposits on satisfactory terms, the Company liquidity will be adversely impacted. During the year ended December 31, 2008, Westernbank returned to “well-capitalized” status and was well-capitalized at December 31, 2008. However in May 2009, W Holding Company, Inc. and Westernbank entered into Consent Orders with the Board of Governors of the Federal Reserve System, the FDIC and the Office of the Commissioner. For a detailed description of these orders and the effect on the Bank’s well-capitalized status, please refer to Part I, Item 1, “ Business-Recent Significant Events”, in this Annual Report on Form 10-K.

116

At December 31, 2008, Westernbank had total deposits of $11.0 billion, of which $670.2 million or 6% consisted of savings deposits, $294.2 million or 3% consisted of interest bearing demand deposits, $250.4 million or 2.28% consisted of noninterest bearing deposits, and $9.8 billion or 89% consisted of time deposits and related accrued interest. Time deposits include brokered deposits amounting to $8.6 billion as of December 31, 2008. These accounts have historically been a stable source of funds. Refer to “Part I, Item 1. Business-Recent Significant Events”, in this Annual Report on Form 10-K for recent significant events related to the Company’s brokered deposit program.

At December 31, 2008, the scheduled maturities of time deposits in amounts of $100,000 or more are as follows:


	(In thousands)
3 months or less	$	136,476
over 3 months through 6 months		73,269
over 6 months through 12 months		119,943
over 12 months		119,433

Total	$	449,121

CONTRACTUAL OBLIGATIONS AND COMMITMENTS — Payments due, excluding interest, due by period for the Company’s contractual obligations (other than deposit liabilities) at December 31, 2008 are presented below:


			Due after one		Due after three
	Due within one		year through		years through		Due after five
	year		three years		five years		years		Total
	(In thousands)
Short-term borrowings	$	779,142	$	—	$	—	$	—	$	779,142
Long-term borrowings		638,432		1,639,000		224,500		—		2,501,932
Operating lease obligations		2,493		4,249		2,658		3,100		12,500

Total contractual obligations	$	1,420,067	$	1,643,249	$	227,158	$	3,100	$	3,293,574

Unrecognized tax benefits amounted to $2.0 million and $44.0 million at December 31, 2008 and 2007, respectively. Uncertain income tax positions mainly relate to income which could be subject to special flat income tax rates in a tax jurisdiction outside of Puerto Rico, and certain expense deductions taken in income tax returns. For further detail on the a liability for income taxes related to unrecognized tax benefits, refer to Note 11 to notes to the consolidated financial statements, included herein in Part II, Item 8.

Such commitments will be funded in the normal course of business from the Company’s principal source of funds. At December 31, 2008, the Company had $6.2 billion in time deposits that mature within twelve months.

117

The maturity distribution of the Company’s financial instruments with off-balance sheet risk expiring by period at December 31, 2008, is presented below:


	Less than one
	year		2-5 years		Total
	(In thousands)
Unused lines of credit	$	119,830	$	144,603	$	264,433
Standby letters of credit		31,222		—		31,222
Commercial letters of credit		4,289		—		4,289
Commitments to extend credit		13,632		307,969		321,601


Total	$	168,973	$	452,572	$	621,545

Due to the nature of the Company’s unfunded 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.

The Company’s liquidity plan contemplates alternative sources of funding that could provide significant amounts of funding at reasonable cost. The alternative sources of liquidity include the sale of assets; including commercial loan participations and residential mortgage loans, among others.

Operational Risk

The Company faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products. Coupled with external influences such as market conditions, security risks, and legal risk, the potential for operational losses has increased. In order to mitigate and control operational risk, the Company has developed, and continues to enhance, specific internal controls, policies and procedures that are designated to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these mechanisms is to provide reasonable assurance that the Company’s business operations are functioning within the policies and limits established by management and the Board.

In connection with the preparation and filing of this Form 10-K, the Company, under the supervision and with the participation of 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. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2008 as a result of the material weaknesses in internal control over financial reporting. Please refer to Item 9A. CONTROL AND PROCEDURES included herein in Part II.

The Company classifies operational risk into five major areas: Inadequate Information Systems Risk, Operational Problems, Breaches in Internal Controls & Fraud, Unforeseen Catastrophes and New Line of Business. The Company has specialized business areas, such as the Information Security, Legal Department, Accounting Department, Internal Audit Function, Compliance Department, Information Technology and Operations, to assist the different lines of business in the development and implementation of specific risk management practices. In addition, management identifies, measures, monitors and controls operational risk through periodic reviews of procedures, internal controls, fraud risk assessment process, data processing systems, contingency plans, and other operating practices. This review helps reduce the likelihood of errors and breakdown in controls, improve the control of risk and the effectiveness of the systems, and prevent unsound business practices.

Legal Risk

Legal risk arises from the potential that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively affect the operations or condition of an organization. The Company’s management is responsible for minimizing the risks inherent in executing financial contracts and possible lawsuits. As a result, the Company has established specific communication guidelines, an in-house legal function and outside legal counselors. In general, these procedures are designed to ensure the enforceability of the Company’s contracts and to avoid adverse judgments and lawsuits. For purposes of addressing the Company’s Legal Risk at all levels, the Company has segregated Legal Risk in three major areas: (1) Unenforceable Contracts, (2) Lawsuits, and (3)

118

Adverse Judgments. The Company has established comprehensive internal control policies and procedures based on legal and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. In addition, the Company has specialized business areas, such as the Internal Legal Department, Accounting Department, Internal Audit Function and Compliance Department, that assist different lines of business in the development and implementation of specific risk management practices.

Reputational Risk

Reputational risk is the potential that negative publicity regarding the Company’s business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions. Management has established and continues to enhance its internal control policies and procedures to assess, monitor and manage its reputational risk. The most significant responsibilities fall within the Company’s Senior Executive Officers, the Compliance department, the Internal Audit department and the Comptroller’s department.

Concentration Risk

The Company conducts its operations in a geographically concentrated area, as its main market is Puerto Rico. Substantially all of the properties and other collateral securing our real estate, commercial and consumer loans are also located in Puerto Rico. Consequently, the Company financial condition and results of operations are highly dependent on economic conditions in Puerto Rico. The Puerto Rico economy is in the midst of a prolonged economic recession since the second quarter of 2006. The ongoing economic environment and uncertainties in Puerto Rico may continue to have an adverse effect on the quality of our loan portfolios and may result in a rise in delinquency rates and charge offs, until the economic condition in Puerto Rico improves. These concerns may also impact growth in interest and non interest income. Although management utilizes its best judgment in providing for loan losses, there can be no assurance that management has accurately estimated the level of probable loan losses or that will not have to increase its provisions for loan losses in the future as a result of future increases in non-performing loans or for other reasons beyond its control. Any such increases in our provision for loan losses could have a material adverse impact on our future financial condition and results of operations. Also, a potential reduction in consumer spending may impact growth in other interest and non-interest revenue sources.

Westernbank has a significant lending concentration with an aggregate unpaid principal balance of $405.3 million to a commercial group in Puerto Rico, which exceeds the loan-to-one borrower limit. Westernbank has explored various alternatives to decrease its exposure to this borrower to comply with the loan-to-one borrower limitation. However, due to the credit tightening propelled by the current economic environment, efforts have not materialized. Westernbank continues to pursue other actions in order to reduce such excess. For this violation, Westernbank paid a penalty of $50,000 during 2008. As of December 31, 2008, this loan relationship was not impaired. There can be no assurance that the Commissioner will not take further actions on this issue.

Impact of Inflation and Changing Prices

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

Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a greater impact on a financial institution’s performance than the effects of general levels of inflation. Interest rate movements are not necessarily correlated with changes in the prices of goods and services.

119

Accounting Pronouncements Recently Adopted

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS No. 140 and SFAS No. 133. SFAS No. 155 permits the Company to elect to measure any hybrid financial instrument at fair value (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under SFAS No. 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. The Statement is effective for all instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of the Company’s fiscal year that begins after September 15, 2006, with earlier adoption permitted as of the beginning of the Company’s 2006 fiscal year, provided that financial statements for any interim period of that fiscal year have not yet been issued. The adoption of SFAS No. 155 at January 1, 2007 did not have any effect on the Company’s consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities to (1) require the recognition of a servicing asset or servicing liability under specified circumstances, (2) require that, if practicable, all separately recognized servicing assets and liabilities be initially measured at fair value, (3) create a choice for subsequent measurement of each class of servicing assets or liabilities by applying either the amortization method or the fair value method, and (4) permit the one-time reclassification of securities identified as offsetting exposure to changes in fair value of servicing assets or liabilities from available-for-sale securities to trading securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In addition, SFAS No. 156 amends SFAS No. 140 to require significantly greater disclosure concerning recognized servicing assets and

120

liabilities. SFAS No. 156 was effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, with early adoption permitted. The adoption of SFAS No. 156 at January 1, 2007 did not have a material impact on the Company’s consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109. FIN No. 48 also prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with FIN No. 48 is a two-step process. The first step is a recognition process to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to be recognized in the financial statements. In May 2007, the FASB issued FSP No. FIN 48-1, Definition of Settlement in FASB FIN No. 48. FSP No. FIN 48-1 amends FIN No. 48 to provide guidance on determining whether a tax position is “effectively settled” for the purpose of recognizing previously unrecognized tax benefits. The concept of “effectively settled” replaces the concept of “ultimately settled” originally issued in FIN No. 48. The tax position can be considered “effectively settled” upon completion of an examination by the taxing authority if the entity does not plan to appeal or litigate any aspect of the tax position and it is remote that the taxing authority would examine any aspect of the tax position. For effectively settled tax positions, the full amount of the tax benefit can be recognized. The guidance in FSP No. FIN 48-1 was effective upon initial adoption of FIN No. 48. The Company adopted FIN No. 48 on January 1, 2007 and recorded a cumulative effect adjustment of $10.6 million that was charged to retained earnings to increase the liability for uncertain income tax positions and the deferred income tax asset by $12.5 million and $1.9 million, respectively.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. This SAB provides guidance on the consideration of prior year misstatements in determining whether the current year’s financial statements are materially misstated. In providing this guidance, the SEC staff references both the “iron curtain” and “rollover” approaches to quantifying a current year misstatement for purposes of determining materiality. The iron curtain approach focuses on how the current year’s statement of financial condition would be affected in correcting misstatements without considering the year in which the misstatement originated. The rollover approach focuses on the amount of the misstatements that originated in the current year’s income statement. The SEC staff indicates that registrants should quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. Registrants may either restate their financials for any material misstatements arising from the application of this SAB or recognize a cumulative effect of applying SAB No. 108 within the current year opening balance in retained earnings. The adoption of SAB No. 108 at January 1, 2007 did not have any impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability. This Statement clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset. Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The adoption of SFAS No. 157 at January 1, 2008 did not have a material impact on the Company’s consolidated financial position or results of operations. In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008. The adoption of SFAS No. 157 for non-financial assets and non-financial liabilities at January 1, 2008, did not have a material impact on the Company’s consolidated financial position or results of operations. In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS No. 157 in a market that is not active and illustrates key considerations in determining the fair value. FSP No. FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of FSP No. FAS 157-3 did not have any impact on the Company’s consolidated financial statements.

121

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities- Including an Amendment of FASB Statement No. 115. This Statement permits an entity to choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis. Once an entity has elected to record eligible items at fair value, the decision is irrevocable and the entity should report unrealized gains and losses on items for which the fair value option has been elected in earnings. SFAS No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Eligible items that are measured at fair value must be displayed on the face of the statement of financial condition. The Company adopted SFAS No. 159 on January 1, 2008 and recorded a cumulative effect adjustment of $5.3 million that was credited to retained earnings and decreased deposits, other assets and deferred income tax asset by $12.9 million, $4.2 million and $3.4 million, respectively.

In April 2007, the FASB issued Staff Position FSP FIN 39-1, Amendment of FASB Interpretation No. 39, which defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. It also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of financial position. In addition, FSP FIN 39-1 permits the offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. The adoption of FSP FIN 39-1 at January 1, 2008 did not have any impact on the Company’s consolidated financial statements.

In November 2007, the SEC issued SAB No. 109, Written Loan Commitments Recorded at Fair Value through Earnings. This SAB supersedes SAB No. 105, Application of Accounting Principles to Loan Commitments, and expresses the current view of the staff that, consistent with guidance in SFAS No. 156 and SFAS No. 159, the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. Additionally, this SAB expands the SAB No. 105 view that internally-developed intangible assets should not be recorded as part of the fair value for any written loan commitments that are accounted for at fair value through earnings. The adoption of SAB No. 109 at January 1, 2008 did not have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. This Statement enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity use derivative instruments; (b) derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company early adopted the disclosure framework dictated by this Statement during 2008.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. Prior to the issuance of SFAS No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (“SAS”) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS No. 162 provides the GAAP hierarchy to the entities instead of the auditor as provided by SAS No. 69 because the entities (not their auditors) are responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Any effect of applying the provisions of SFAS No. 162 should be reported as a change in accounting principle in accordance with SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of SFAS No. 162 did not impact the Company’s current accounting policies or the Company’s consolidated financial statements.

In December 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. The purpose of this FSP is to improve disclosures by public entities and enterprises until the pending amendments to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FIN 46(R), Consolidation of Variable Interest Entities, are finalized and approved by the FASB. The FSP amends Statement No. 140 to require public entities to provide additional disclosures about transfers of financial assets and variable interests in qualifying special-purpose entities. It also amends FIN No.

122

46(R) to require public enterprises to provide additional disclosures about their involvement with variable interest entities. This FSP is effective for reporting periods ending after December 15, 2008. The adoption of FSP No. 140-4 and FIN 46(R)-8 did not have a significant impact on the Company’s consolidated financial statements as the Company is not materially involved in the transfer of financial assets through securitization and asset-backed financing arrangements, nor has involvement with variable interest entities.

In January 2009, the FASB issued FSP No. EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20, which applies to beneficial interest within the scope of EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets. This FSP amends the impairment guidance of EITF No. 99-20 to align with SFAS No. 115 and other related impairment guidance. The FSP became effective for interim and annual reporting periods ending after December 15, 2008, and must be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The adoption of FSP No. EITF 99-20-1 did not have any impact on the Company’s consolidated financial statements.

Accounting Pronouncements To Be Adopted

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations which replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting (formerly referred to as purchase method) be used for all business combinations and that an acquirer be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as of the date that the acquirer achieves control. This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values. This Statement requires the acquirer to generally recognize acquisition-related costs and restructuring costs separately from the business combination as period expenses. This Statement is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with early adoption prohibited. The adoption of SFAS No. 141(R) will impact the accounting and reporting of business combinations for which the acquisition date is on or after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an Amendment to ARB No. 51. This Statement establishes new accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. SFAS No. 160 also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. In addition, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary shall be initially measured at fair value, with the gain or loss on the deconsolidation of the subsidiary measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment. SFAS No. 160 also clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. The Statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in paragraphs 60 and 61 of SFAS No. 128, Earnings per Share. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP. Early application is not permitted. The adoption of FSP No. EITF 03-6-1 is not expected to have any effect on the Company’s consolidated financial statements.

In November 2008, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 08-6, Equity Method Investment Accounting Considerations. The EITF clarifies the accounting for certain transactions and impairment considerations involving equity method investments. This EITF applies to all investments accounted for under the equity method. EITF Issue 08-6 provides guidance on how: (1) the initial carrying value of an equity method investment should be determined; (2) an impairment assessment of

123

an underlying indefinite-lived intangible asset of an equity method investment should be performed; (3) an equity method investee’s issuance of shares should be accounted for, and (4) to account for a change in an investment from the equity method to the cost method. This EITF will be effective in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. The adoption of EITF Issue 08-6 is not expected to have any effect on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSB reiterates that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This FSB provides additional guidance and utilizes a two-step process to determine whether there has been a significant decrease in the volume and level of activity for an asset or liability when compared with normal market activity for the asset or liability, and whether a transaction is not orderly. If it is determined that there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability, transactions or quoted prices may not be determinative of fair value. Accordingly, further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with SFAS No. 157, Fair Value Measurements. This FSP is effective for interim and annual reporting periods ending after June 15, 2009 on a prospective basis. Early adoption is permitted for periods ending after March 15, 2009. The adoption of FSP No. FAS 157-4 is not expected to have a material effect on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends the recognition and measurement guidance related to other-than-temprorary impairment (“OTTI”) for debt securities. This FSP requires that an OTTI shall be recognized in earnings if the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Company does not intend to sell the security, and it is not likely that the Company will be required to sell the security before recovery of its cost basis, the OTTI related to credit losses shall be recognized in earnings, and the OTTI related to all other factors shall be recorded in other comprehensive income (loss), net of applicable taxes. An entity shall recognize the cumulative effect of initially applying this FSP as an adjustment to the opening balance of retained earnings, net of applicable taxes, with a corresponding adjustment to accumulated other comprehensive income (loss). This FSP is effective for interim and annual reporting periods ending after June 15, 2009 and should be applied to existing and new investments held by an entity as of the beginning of the interim period in which it is adopted. The FSP also requires increased and more timely disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company is currently evaluating the impact of the adoption of FSP No. FAS 115-2 and FAS 124-2 on its consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending subsequent to initial adoption.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued. SFAS 165 reflects the principles underpinning previous subsequent event guidance in existing accounting literature and US Auditing Standards (AU) Section 560, “Subsequent Events,” therefore the Company’s adoption of SFAS No. 165 should not result in significant changes in the subsequent events that the Company’s reports either through recognition or disclosure in the consolidated financial statements. SFAS No. 165 requires the Company’s to disclose the date through which it has evaluated subsequent events, which for public entities, is the date the financial statements are issued. The adoption of SFAS No. 165 is not expected to have any effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. SFAS No. 166 removes the concept of a “qualifying special-purpose entity” (QSPE), changes the requirements for derecognizing financial assets, and requires additional disclosures about transfers of financial assets and a transferor’s continuing

124

involvement in transferred financial assets. This Statement is effective for interim and annual periods beginning after November 15, 2009, with early adoption prohibited. The adoption of SFAS No. 166 is not expected to have a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 amends the methodology for determining the primary beneficiary (and therefore consolidator) of a variable interest entity (“VIE”) and will require such assessment to be performed on an ongoing basis. Under SFAS No. 167, the primary beneficiary of a VIE is defined as the enterprise that has both (1) the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE.. This amendment affects all entities currently within the scope of FIN No. 46(R), as well as qualifying special-purpose entities (“QSPEs”) that are currently excluded from the scope of FIN No. 46(R). SFAS No. 167 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. SFAS No. 167 will be effective as of the beginning of the first fiscal year that begins after November 15, 2009. The adoption of SFAS No. 167 is not expected to have any effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification as the single source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of Statement 168 in the third quarter of 2009 will not have a material impact on the Company’s consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2008, the Company had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the registrant’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

MANAGEMENT CERTIFICATIONS

Because the Company’s common stock is listed on the NYSE, the Company’s Chief Executive Officer is required to make, and he has made an annual certification to the NYSE stating that he was not aware of any violation by the Company of the corporate governance listing standards of the NYSE. The Company’s Chief Executive Officer made his annual certification to that effect to the NYSE as of December 23, 2008.

On October 28, 2009, the Company’s Chief Executive Officer and Chief Financial Officer have filed with the SEC the certifications required by Section 302 of the Sarbanes–Oxley Act of 2002 as Exhibits 31.1 and 31.2 to the Company’s Form 10-K for the year ended December 31, 2008.

125


ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required herein is incorporated by reference to the information included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk & Interest Rate Risk” in this Form 10-K.


ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
W Holding Company, Inc.
Mayagüez, Puerto Rico

We have audited the accompanying consolidated statement of financial condition of W Holding Company, Inc. and Subsidiaries (the “Company”) as of December 31, 2008, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive loss and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of W Holding Company, Inc. and Subsidiaries as of December 31, 2008, and the results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

At December 31, 2008, the Company had nonperforming assets of approximately $1.67 billion or 10.9% of total assets and brokered deposits of approximately $8.5 billion or 77.3% of total deposits. As discussed in Note 13, Commitments and Contingencies, Regulatory Matters, the Company is subject to various bank regulatory agreements that require the bank to reduce the level of nonperforming assets and obtain approval every six months from regulators to continue to accept brokered deposits.

As discussed in Note 1 to the accompanying consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”as of January 1, 2008.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 28, 2009 expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ BDO Seidman, LLP
San Juan, Puerto Rico
October 28, 2009
Stamp No. 2450252
Affixed to original

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated statement of financial condition of W Holding Company, Inc. and subsidiaries (the “Company”) as of December 31, 2007, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income (loss), and cash flows for the years ended December 31, 2007 and 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of W Holding Company, Inc. and subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for the years ended December 31, 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the accompanying consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes — an interpretation of Statement of Financial Accounting Standards No. 109 as of January 1, 2007.

/s/ DELOITTE & TOUCHE LLP
San Juan, Puerto Rico
March 13, 2009
Stamp No. 2458648
affixed to original.

126

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, 2008 AND 2007


	2008			2007
ASSETS
Cash and due from banks	$	68,368		$	153,473
Money market instruments:
Federal funds sold and resell agreements		—			886,700
Interest-bearing deposits in banks		1,096,465			56,287
Investment securities available for sale, at fair value with an amortized cost of $3,713,645 in 2008 and $484,066 in 2007		3,670,241			479,001
Investment securities held to maturity, at amortized cost with a fair value of $1,020,837 in 2008 and $6,532,930 in 2007		1,037,970			6,598,197
Federal Home Loan Bank stock, at cost		64,190			49,453
Residential mortgage loans held for sale, at lower of cost or fair value		18,871			6,500
Loans, net of allowance for loan losses of $282,089 in 2008 and $338,720 in 2007		8,667,717			9,209,911
Accrued interest receivable		56,224			105,377
Foreclosed real estate held for sale, net of valuation allowance of $3,104 in 2008 and $1,022 in 2007		98,570			10,971
Other real estate held for sale, net		5,462			—
Premises and equipment, net		120,796			129,591
Deferred income taxes, net		155,661			134,177
Other assets		222,362			107,073


TOTAL	$	15,282,897		$	17,926,711


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:
Deposits:
Noninterest-bearing	$	250,380		$	317,753
Interest-bearing and related accrued interest payable, includes $109,944 of deposits measured at fair value in 2008		10,751,793			10,178,748

Total deposits		11,002,173			10,496,501
Federal funds purchased and repurchase agreements		3,204,142			6,146,693
Advances from Federal Home Loan Bank		42,000			102,000
Mortgage note payable		34,932			35,465
Advances from borrowers for taxes and insurance		11,759			11,539
Accrued expenses and other liabilities		72,524			138,277

Total liabilities		14,367,530			16,930,475


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:
Preferred stock — $1.00 par value per share (liquidation preference — $530,838 in 2008 and 2007); authorized 50,000,000 shares; issued and outstanding 18,156,709 shares in 2008 and 2007		18,157			18,157
Common stock — $1.00 par value per share; authorized 500,000,000 shares; issued and outstanding 3,298,138 shares in 2008 and 2007		3,298			3,298
Paid-in capital		870,450			870,128
Retained earnings:
Reserve fund		78,389			78,389
Undivided profits (accumulated losses)		(13,939	)		31,383
Accumulated other comprehensive loss, net of income tax		(40,988	)		(5,119	)

Total stockholders’ equity		915,367			996,236


TOTAL	$	15,282,897		$	17,926,711

See notes to consolidated financial statements.

127

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006


	2008			2007			2006
INTEREST INCOME:
Loans, including loan fees	$	569,533		$	723,765		$	661,095
Investment securities		102,017			260,300			261,971
Mortgage-backed securities		115,415			45,287			28,445
Money market instruments		19,323			40,833			38,235
Trading securities		5			4			44

Total interest income		806,293			1,070,189			989,790

INTEREST EXPENSE:
Deposits		455,313			463,298			366,063
Federal funds purchased and repurchase agreements		205,076			315,030			307,463
Advances from Federal Home Loan Bank		2,980			5,691			7,893
Borrowings under line of credit		—			1,107			—

Total interest expense		663,369			785,126			681,419

NET INTEREST INCOME		142,924			285,063			308,371
PROVISION FOR LOAN LOSSES		67,506			277,562			90,880

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		75,418			7,501			217,491

NONINTEREST INCOME:
Service and other charges on loans		10,364			12,687			12,527
Service charges on deposit accounts		11,712			12,397			9,976
Other fees and commissions		21,858			20,313			15,104
Net gain on derivative instruments and deposits measured at fair value		3,125			1,308			632
Net gain (loss) on sales and valuation of loans held for sale, securities, and other assets		13,596			1,093			(1,141	)

Total noninterest income		60,655			47,798			37,098

NONINTEREST EXPENSES:
Salaries and employees’ benefits		65,191			60,436			54,378
Equipment expense		13,868			13,244			11,610
Deposits insurance premium and supervisory examination		16,384			10,398			3,770
Occupancy		10,586			9,383			8,482
Advertising		7,095			8,641			9,140
Printing, postage, stationery and supplies		4,289			3,860			3,654
Telephone		2,632			2,068			2,275
Net loss (gain) from operations of foreclosed real estate held for sale		2,233			182			(270	)
Municipal taxes		10,585			8,775			6,218
Professional fees		19,845			17,884			3,819
Provision for claim receivable		14,406			—			—
Other		28,695			28,538			21,442

Total noninterest expenses		195,809			163,409			124,518

INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES		(59,736	)		(108,110	)		130,071
PROVISION (CREDIT) FOR INCOME TAXES		(54,286	)		(39,772	)		70,492

NET INCOME (LOSS)		(5,450	)		(68,338	)		59,579
LESS DIVIDENDS TO PREFERRED STOCKHOLDERS		36,910			36,910			36,911

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(42,360	)	$	(105,248	)	$	22,668

BASIC EARNINGS (LOSS) PER COMMON SHARE	$	(12.84	)	$	(31.92	)	$	6.89

DILUTED EARNINGS (LOSS) PER COMMON SHARE	$	(12.84	)	$	(31.92	)	$	6.74

See notes to consolidated financial statements.

128

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006


	2008			2007			2006
CHANGES IN STOCKHOLDERS’ EQUITY:
Preferred stock:
Balance at beginning of year	$	18,157		$	18,157		$	18,160
Conversion of preferred stock		—			—			(3	)

Balance at end of year		18,157			18,157			18,157

Common stock:
Balance at beginning of year		3,298			3,290			3,282
Issuance of common stock upon exercise of stock options		—			8			8

Balance at end of year		3,298			3,298			3,290

Paid-in capital:
Balance at beginning of year		870,128			868,680			866,938
Stock options exercised		—			1,241			1,064
Stock-based compensation expense		322			207			675
Issuance of common stock upon conversion of preferred stock		—			—			3

Balance at end of year		870,450			870,128			868,680

Reserve fund:
Balance at beginning of year		78,389			78,389			72,484
Transfer from undivided profits		—			—			5,905

Balance at end of year		78,389			78,389			78,389

Undivided profits (accumulated losses):
Balance at beginning of year		31,383			178,543
Cumulative impact of changes in accounting for:
Financial assets and liabilities at fair value (SFAS No. 159 — See Note 1)		5,283			—
Uncertainties in income taxes (FIN No. 48 — See Note 1)		—			(10,585	)

Balance at beginning of year — as adjusted		36,666			167,958			193,016
Net income (loss)		(5,450	)		(68,338	)		59,579
Cash dividends on common stock		(8,245	)		(31,327	)		(31,236	)
Cash dividends on preferred stock		(36,910	)		(36,910	)		(36,911	)
Transfer to reserve fund		—			—			(5,905	)

Balance at end of year		(13,939	)		31,383			178,543

Accumulated other comprehensive income (loss), net of income tax:
Balance at beginning of year		(5,119	)		284			7
Other comprehensive income (loss)		(35,869	)		(5,403	)		277

Balance at end of year		(40,988	)		(5,119	)		284

TOTAL STOCKHOLDERS’ EQUITY	$	915,367		$	996,236		$	1,147,343

COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	(5,450	)	$	(68,338	)	$	59,579

Other comprehensive income (loss):
Unrealized net gains (losses) on securities available for sale:
Unrealized losses arising during the period		(37,833	)		(6,105	)		(201	)
Reclassification adjustment for losses (gains) included in net income (loss)		(505	)		585			546

		(38,338	)		(5,520	)		345
Income tax effect		2,469			117			(68	)

Other comprehensive income (loss)		(35,869	)		(5,403	)		277

TOTAL COMPREHENSIVE INCOME (LOSS)	$	(41,319	)	$	(73,741	)	$	59,856

See notes to consolidated financial statements.

129

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006


	2008			2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(5,450	)	$	(68,338	)	$	59,579
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision (credit) for:
Loan losses		67,506			277,562			90,880
Unfunded loan commitments		(1,146	)		1,146			—
Claim receivable		14,406			—			—
Deferred income tax		(22,392	)		(73,610	)		(6,107	)
Foreclosed real estate held for sale		2,082			573			222
Depreciation and amortization of:
Premises and equipment		9,920			9,549			8,696
Mortgage servicing rights		279			296			329
Stock-based compensation expense		322			207			675
Amortization of premium (discount)-net, on:
Investment securities available for sale		(1,315	)		(250	)		(142	)
Mortgage-backed securities available for sale		727			—			—
Investment securities held to maturity		(16,262	)		(20,081	)		(18,484	)
Mortgage-backed securities held to maturity		82			175			261
Loans		23			47			860
Amortization of discount on deposits		2,696			774			1,460
Amortization of net deferred loan origination fees		(8,470	)		(17,095	)		(15,795	)
Net loss (gain) on sale and in valuation of:
Investment securities available for sale		(505	)		—			(204	)
Available-for-sale securities other-than-temporarily impaired		—			585			750
Called investment securities held to maturity		3,116			—			—
Held-to-maturity securities other-than-temporarily impaired		—			—			1,063
Mortgage loans held for sale		(853	)		(531	)		(291	)
Derivative instruments		(6,160	)		(1,428	)		(1,525	)
Deposits measured at fair value		6,908			—			—
Foreclosed real estate held for sale		(356	)		(601	)		(634	)
Other real estate held for sale		(14,656	)		—			—
Loans		261			(250	)		—
Premises and equipment		(44	)		(857	)		—
Other assets		(2,299	)		—			—
Capitalization of servicing rights		(516	)		(303	)		(285	)
Originations of mortgage loans held for sale		(52,486	)		(27,242	)		(33,530	)
Proceeds from sales of mortgage loans held for sale		36,784			19,875			16,562
Decrease (increase) in:
Trading securities		4,184			3,723			5,814
Accrued interest receivable		44,465			14,934			(14,429	)
Other assets		(5,096	)		(40,631	)		(3,601	)
Increase (decrease) in:
Accrued interest on deposits and borrowings		(42,234	)		19,386			46,917
Other liabilities		(45,040	)		35,674			(10,190	)

Net cash provided by (used in) operating activities		(31,519	)		133,289			128,851

CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits in banks		(1,040,178	)		(35,227	)		36,056
Net decrease (increase) in federal funds sold and resell agreements		336,700			63,873			(204,034	)
Cancellation of resell agreements over three months		550,000			—			—
Investment securities available for sale:
Maturities, prepayments and calls		1,518,384			35,788			4,794
Proceeds from sales		398,924			—			1,928
Purchases		(5,145,793	)		(500,003	)		—
Investment securities held to maturity:
Maturities, prepayments and calls		38,564,022			63,082,335			49,887,013
Purchases		(33,572,029	)		(62,674,241	)		(49,864,760	)
Mortgage-backed securities held to maturity:
Maturities, prepayments and calls		8,032			21,193			41,991
Loans:
Sales		12,783			157,146			—
Loan originations, net of principal collections		378,338			(1,071,632	)		(869,915	)
Purchases of derivative options		(615	)		(2,016	)		(1,296	)
Proceeds from derivative options		9,261			3,483			33
Cash paid on terminated swaps		—			—			(164	)
Proceeds from sales of foreclosed real estate held for sale		2,456			2,513			1,567
Proceeds from sales of other real estate held for sale		21,375			—			—
Additions to premises and equipment		(13,809	)		(14,724	)		(16,486	)
Proceeds from sale of premises and equipment		94			1,118			—
Proceeds from sale of other assets		2,299			—			—
Purchases of Federal Home Loan Bank stock		(50,965	)		(16,772	)		(3,160	)
Redemptions of Federal Home Loan Bank stock		36,229			5,301			7,975

Net cash provided by (used in) investing activities		2,015,508			(941,865	)		(978,458	)

Forward	$	1,983,989		$	(808,576	)	$	(849,607	)

See notes to consolidated financial statements.

(continued)

130

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006


	2008			2007			2006
Forward	$	1,983,989		$	(808,576	)	$	(849,607	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		556,375			1,124,911			907,140
Net increase (decrease) in federal funds purchased and repurchase agreements		272,522			2,040,825			(475,143	)
Repurchase agreements with original maturities over three months:
Proceeds		—			250,000			2,066,295
Payments		(2,181,875	)		(2,464,613	)		(1,530,700	)
Cancellations		(600,000	)		—			—
Net increase (decrease) in advances from Federal Home Loan Bank		(60,000	)		35,000			(25,000	)
Payments of advances from Federal Home Loan Bank with
original maturities over three months		—			(60,000	)		(20,000	)
Borrowings under line of credit:
Proceeds		—			34,030			—
Payments		—			(34,030	)		—
Repayments of mortgage note payable		(533	)		(503	)		(464	)
Cash paid on matured embedded derivatives		(8,724	)		(3,293	)		(33	)
Net increase in advances from borrowers for taxes and insurance		220			1,677			1,995
Dividends paid		(47,079	)		(68,231	)		(68,140	)
Proceeds from stock options exercised		—			1,249			1,072


Net cash provided by (used in) financing activities		(2,069,094	)		857,022			857,022


NET CHANGE IN CASH AND DUE FROM BANKS		(85,105	)		48,446			7,415

CASH AND DUE FROM BANKS, BEGINNING OF YEAR		153,473			105,027			97,612


CASH AND DUE FROM BANKS, END OF YEAR	$	68,368		$	153,473		$	105,027


SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest on deposits and other borrowings	$	685,353		$	747,389		$	617,153
Income taxes		12,475			49,235			82,190
Noncash activities (see Note 13):
Accrued dividends payable		2,225			4,149			4,142
Net change in other comprehensive income (loss)		(35,869	)		(5,403	)		277
Mortgage loans securitized and transferred to:
Trading securities		4,184			3,723			7,419
Mortgage-backed securities held to maturity		—			—			1,189
Transfer from:
Trading securities to available for sale securities		—			—			1,605
Investment securities held to maturity to available for sale securities		—			—			20,552
Mortgage loans held for sale to loans		—			9,055			—
Loans to foreclosed real estate held for sale		93,118			8,211			4,826
Premises and equipment to other real estate held for sale		12,181			—			—
Undivided profits to reserve fund		—			—			5,905
Mortgage loans originated to finance the sale of foreclosed real estate held for sale		1,365			668			1,728
Unpaid additions to premises and equipment		137			591			562
Effect of derivative transactions:
Decrease (increase) in other assets		3,931			(12,065	)		(7,424	)
Increase (decrease) in deposits		(4,210	)		13,308			8,197
Increase (decrease) in other liabilities		1,027			(1,123	)		(838	)
Conversion of preferred stock into common stock:
Common stock		—			—			13
Paid-in capital		—			—			(10	)
Preferred stock		—			—			(3	)

See notes to consolidated financial statements.

(concluded)

131

W HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

W Holding Company, Inc. (the “Company”) is a bank holding company offering a full range of financial services. The business of the Company is conducted through its wholly-owned commercial bank subsidiary, Westernbank Puerto Rico (“Westernbank” or the “Bank”). 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 is a commercial bank chartered under the laws of the Commonwealth of Puerto Rico effective November 30, 1994. Originally, Westernbank was organized as a federally chartered mutual savings and loan association in 1958, and in January 1984 became a federal mutual savings bank. In February 1985, the savings bank was converted to the stock form of ownership. Westernbank offers a full range of business and consumer financial services, including banking, trust and brokerage services and placing insurances. On May 19, 2008, the Company contributed 100% of its ownership in Westernbank Insurance Corp. (“WIC”) to Westernbank. WIC is a general insurance agent placing property, casualty, life and disability insurances.

Westernbank operates through a network of 48 bank branches (including 10 Expresso of Westernbank branches) located throughout Puerto Rico, including 25 in the Western and Southwestern regions, 14 in the San Juan metropolitan area, 7 in the Northeastern region, and 2 in the Eastern region, and a website on the Internet. On October 3, 2008, the Congress of the United States of America approved the Emergency Economic Stabilization Act of 2008, pursuant to which among other things, the amount of deposit insurance provided by the Federal Deposit Insurance Corporation (the “FDIC”) was temporarily increased from $100,000 to $250,000 per depositor until December 31, 2009. On May 20, 2009, President Barack Obama signed legislation that extended this temporary increase to $250,000 through December 31, 2013. Westernbank’s deposits, including Individual Retirement Accounts (“IRAs”), are insured by the Deposit Insurance Fund (“DIF”), which is administered by the FDIC, up to $250,000 per depositor.

Westernbank’s traditional banking operations include 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 Unit operations), investments (treasury) and deposit products. Besides the traditional banking operations, at December 31, 2008, Westernbank operated four other 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 Center Regulatory Act, which offers commercial banking and related services, and treasury and investment activities outside of Puerto Rico;

	•		Westernbank Trust Division, which offers a full array of trust services;

	•		Expresso of Westernbank, a division which specializes in small, unsecured consumer loans up to $15,000 and real estate collateralized consumer loans up to $150,000;

	•		and Westernbank International Trade Services, established during the first quarter of year 2006, a division which specializes in international trade products and services.

In the first quarter of 2008, Westernbank Business Credit Division, which specializes in commercial business loans secured principally by commercial real estate, accounts receivable, inventories and machinery and equipment, was integrated into the operations of the commercial loans department of Westernbank under the name of Asset-Based Lending Unit.

Westernbank owns 100% of the voting shares of:

•

Westernbank World Plaza, Inc. (“WWPI”), which owns and operates Westernbank World Plaza; a 23-story office building, including its related parking facility, located in Hato Rey, Puerto Rico, the main Puerto Rican business district.

132

	•		SRG Net, Inc., a Puerto Rico corporation that operates an electronic funds transfer network. The assets, liabilities, revenues and expenses of SRG Net, Inc. at December 31, 2008 and 2007, and for each of the three years in the period ended December 31, 2008, were not significant.

	•		Westernbank Financial Center Corp (“WFCC”), which was incorporated under the laws of the State of Florida to conduct commercial lending and other related activities in the United States of America. WFCC commenced operations in February 2007, was largely inactive, and was closed during the third quarter of 2008. WFCC’s main asset consisted of a commercial loan of $33.1 million at December 31, 2007. The assets, liabilities, revenues and expenses of WFCC as of and for the years ended December 31, 2008 and 2007, were not significant.

	•		Westernbank Insurance Corp. (“WIC”) a general insurance agent placing property, casualty, life and disability insurances, primarily to mortgage customers of the Company. On May 19, 2008, the Company contributed 100% of its ownership in WIC to Westernbank. The assets, liabilities, revenues and expenses of WIC at December 31, 2008 and 2007, and for each of the three years in the period ended December 31, 2008, were not significant.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and banking industry practices. Following is a summary of the Company’s most significant accounting policies:

Principles of Consolidation — The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Westernbank Puerto Rico and Westernbank Insurance Corp (until May 19, 2008). All intercompany transactions and balances have been eliminated.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Company’s most significant estimates are the allowance for loan losses, the other-than temporary impairments, the valuation of financial instruments and the income tax and contingencies accruals.

Significant Group Concentrations of Credit Risk — Most of the Company’s business activities are with customers located within Puerto Rico. Notes 2 and 3 discuss the types of securities that the Company invests in; Note 4 discusses the types of lending that the Company engages in; and Note 19 discusses the types of derivative instruments that the Company enters into. The Company does not have any significant concentration in any one industry or customer, except as discussed in Note 4.

Revenue Recognition — The Company earns net interest and noninterest income, including fees, from various sources, including:

	•		Lending,

	•		Securities portfolio,

	•		Trust Services,

	•		Trade services, including standby letters of credit,

	•		Customers deposits,

	•		Loan servicing,

	•		Sales of loans and securities,

	•		Securities and derivative activities; and

	•		Insurance agent activities.

Interest earned on interest-earning assets (investment securities and loans) is recognized by the Company based on the effective yield of the earning-asset using the effective interest method. The amortization or accretion of premiums or discounts on investment securities is deducted or added to interest income based on the interest method over the outstanding period of the related securities. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method or a method which approximates the interest method. Discounts/Premiums on purchased loans are accreted/amortized to income over the expected term of the loan using the interest method.

Trust activity fees are generally based on a percentage of the fair value of the assets under management and recognized as income as they are earned.

Trade servicing fees are primarily based on predetermined percentages or rates based on the contractual notional amounts and recognized as income as they are earned.

133

Service and other charges on loans and deposit accounts and other fees and commissions are recognized as income as they are collected.

Loan servicing fees, are based on a percentage of the principal balances of the loans serviced; and are credited to income as they are earned, based on contractual terms.

Commissions for life insurance policies are deferred and systematically amortized to income over the life of the related insurance contract since the insurance and lending activities are integral parts of the same transaction. Commission income for all other policies is recognized on the effective date of the policies.

Gains on the sale of securities and loans are recognized on a trade-date basis.

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

Interest-Bearing Deposits in Banks and Federal Funds Sold — Interest-bearing deposits in banks and federal funds sold are carried at cost and mature within the next two business days.

Securities Classification and Related Values - Securities are classified as held-to-maturity, available-for-sale or trading on the date of purchase. Only those securities classified as held-to-maturity, and which management has the intent and ability to hold to maturity, are reported at amortized cost. Available-for-sale and trading securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in accumulated other comprehensive income (loss) and noninterest income, respectively. The fair value of a security is determined based on quotations received from pricing service firms and/or securities dealers. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Realized securities gains or losses are reported within noninterest income in the consolidated statements of operations. The cost of securities sold is based on the specific identification method. The assessment of fair value applies to certain of the Company’s assets and liabilities, including the investment portfolio. Fair values are volatile and are affected by factors such as market interest rates, prepayment speeds and discount rates.

Other-Than-Temporary Impairments — The Company reviews its investment securities for impairment on a quarterly basis or earlier if other factors indicative of potential impairment exist. An impairment charge in the consolidated statements of operations is recognized when the decline in the fair value of the securities below their cost basis is judged to be other-than-temporary.

Impairment analyses for equity securities and corporate notes are performed 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, systemic 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. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the consolidated statements of operations.

Residential Mortgage Loans Held for Sale — Residential mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value. Fair value is based on the contract price at which the mortgage loans could be sold in the secondary market. The Company generally has commitments to sell residential mortgage loans held for sale in the secondary market. Net unrealized losses are recognized through a valuation allowance by charges to income. Realized gains or losses on these loans are determined using the specific identification method. Due to changing market conditions or other factors, management’s intent with respect to the disposition of the loan may change, and accordingly, loans previously classified as held for sale may be reclassified into held in portfolio. Loans transferred between loans held for sale and held in portfolio classifications are recorded at the lower of cost or market at the date of transfer. Commitments to sell residential loans held for sale in the secondary market were not significant at December 31, 2008 and 2007.

134

Loans — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off, are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance computed using the effective interest method. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method or a method which approximates the interest method. Discounts and premiums on purchased loans are amortized to income over the expected term of the loan using methods that approximate the interest method. When a decision is made to sell or securitize a loan that was not originated or initially acquired with the intent to sell or securitize, the loan is reclassified from held in portfolio into held for sale. Loans transferred from held in portfolio to held-for-sale portfolio classifications are recorded at the lower of cost or market at the date of transfer.

The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flows may not be sufficient 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 a loan is placed on nonaccrual status, all previously accrued and unpaid interest is charged against income and the loan is accounted for on the cash-basis method or for certain high loan-to-value loans on the cost recovery method, until qualifying for return to accrual status. Generally, a loan is returned to accrual status when all delinquent interest and principal payments become current in accordance with the terms of the loan agreement or when the loan is both well secured and in the process of collection and collectibility is no longer doubtful. Consumer loans that have principal and interest payments that have become past due one hundred and twenty days and credit cards and other consumer revolving lines of credit that have principal and interest payments that have become past due one hundred and eighty days are charged-off against the allowance for loan losses.

Allowance for Loan Losses — The Company maintains an allowance to absorb probable loan losses inherent in the portfolio. The allowance is maintained at a level the Company considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectibility and historical loss experience of loans. Credit losses are charged and recoveries are credited to the allowance. Provisions for loan losses are based on the Company’s review of the historical credit loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses.

General allowances based on loss rates are applied to commercial and construction loans which are not impaired and thus not subject to specific allowance allocations. The loss rates are generally derived from two or three year historical net charge-off by loan category adjusted for significant qualitative factors that, in management’s judgment, are necessary to reflect losses inherent in the portfolio. These qualitative factors include, among others: the effect of the national and local economies; trends in loans growth; trends in the impaired and delinquent loans; risk management and loan administration; changes in concentration of loans to one obligor; changes in the internal lending policies and credit standards; and examination results from bank examiners and the Company’s internal credit examiners.

135

Homogeneous loans, such as consumer installments, residential mortgage loans, and credit cards are not individually reviewed. General allowances are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are generally based on the higher of current year or the average of the last two to three year historical net charge-offs by loan category, adjusted for significant qualitative factors that, in management’s judgment, are necessary to reflect losses inherent in the portfolio. These qualitative factors include: the effect of the national and local economies; trends in the delinquent loans; risk management practices; collection practices; and changes in the internal lending policies and credit standards.

Allowance for Losses on Unfunded Commitments — The allowance for losses on unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of financial condition. The determination of the adequacy of the allowance is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience and credit risk grading. Net adjustments to the allowance for losses on unfunded commitments are included in other noninterest expense in the consolidated statements of operations.

Foreclosed Real Estate Held for Sale — Assets acquired through, or in lieu of, loan foreclosure are held for sale and are carried at the lower of cost or fair value less costs to sell. All properties are evaluated on a quarterly basis by management. Provisions for decline in fair value, gains (losses) on sales, and revenue and expenses from the operations of such properties are included in noninterest expenses as net gain (loss) from operations of foreclosed real estate held for sale.

Other Real Estate Held For Sale — Long-term assets to be sold by the Company are classified as held for sale if the following criteria are met: (i) management, having the authority to approve the action, commits to a plan to sell the asset; (ii) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; (iv) the sale of the asset and transfer of the asset is probable, and transfer of the asset is expected to qualify for recognition as completed sale, within one year; (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Assets classified as held for sale are recorded at lower-of-cost or fair value less costs to sell, recording a loss and adjusting book value. In the event the asset is not sold, it shall be registered at the lower of book value prior to reclassification to held for sale adjusted for the unrecognized depreciation and the fair value of the asset.

Premises and Equipment — Premises and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from two to forty years.

Amortization of leasehold improvements is computed using the straight-line method over the lives of the related leases or the estimated useful lives of the related assets, whichever is shorter. Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense as incurred.

136

Impairment of Long-Lived Assets — The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No indications of impairment are evident as a result of such review during 2008, 2007 and 2006.

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

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

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

Stock Option Plans — The Company follows the fair value method of accounting for stock-based employee compensation of SFAS No. 123 (revised 2004). In this regard, compensation cost is measured based on the grant-date fair value of the award and recognized over the service period.

Income Taxes — Deferred income taxes are accounted for using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating and capital losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Financial Instruments:

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

The Company accounts for its derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This Statement requires recognition of all derivatives as either assets or liabilities in the statements of financial condition and requires measurement of those instruments at fair value through adjustments to either accumulated other comprehensive income (loss) or current earnings or both, as appropriate. On the date the Company enters into a derivative contract, the Company designates derivative instruments as either a fair value hedge, cash flow hedge or as a derivative instrument not designated as a hedge. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment attributable to the hedged risk are recorded in current period net income (loss). For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in accumulated other comprehensive income (loss) and subsequently reclassified to net income in the same period(s) that the hedged transaction impacts net income. For all hedging relationships, derivative gains and losses that are not effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current period net income (loss). Similarly, the changes in fair value of derivative instruments that do not qualify for hedge accounting under SFAS No. 133 are also reported in current period net income, in noninterest income.

137

Prior to entering into a hedge transaction, Company formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the statements of financial condition or to specific firm commitments or forecasted transactions along with a formal assessment at both inception of the hedge and on an ongoing basis as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. The Company discontinues hedge accounting prospectively when it is determined that the derivative is or will no longer be effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative expires, is sold, or terminated, or management determines that designation of the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued, the future gains and losses arising from any change in fair value of the derivative are recorded as noninterest income in the consolidated statements of operations. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transaction is still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized or accreted into earnings over the same periods which the hedged transactions would have affected earnings.

• Off-Balance Sheet Credit Related Financial Instruments — In the ordinary course of business, the Company enters into off-balance sheet credit related financial instruments consisting of commitments to extend credit, commitments under credit card arrangements and standby and commercial letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. The Company periodically evaluates the credit risks inherent in these commitments and standby and commercial letters of credit, and establishes loss allowances for such risks if and when these are deemed necessary.

Earnings (Loss) per Share — In accordance with SFAS No. 128, Earnings Per Share, basic earnings per share is computed by dividing income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing income (loss) attributable to common stockholders as adjusted to add back dividends on convertible preferred stock, by the weighted-average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares represent assumed conversion of outstanding convertible preferred stock, which are determined using the if-converted method, and outstanding stock options, which are determined using the treasury stock method. The effect of convertible preferred stock (33,674 shares in 2008, 2007 and 2006, as adjusted to reflect the reverse stock split approved on November 7, 2008 and effective on December 1, 2008) was antidilutive in 2008, 2007 and 2006. The effect of stock options was antidilutive in 2008, 2007 and dilutive in 2006. In 2008, there were no common share equivalents for stock options that could potentially dilute earnings per share. The effect of common share equivalents for stock options (24,346 shares in 2007 and 73,432 in 2006, as adjusted to reflect the reverse stock split approved on November 7, 2008 and effective on December 1, 2008) was antidilutive in 2007 and dilutive in 2006.

138

Basic and diluted earnings (loss) per common share were computed as follows:


	2008			2007			2006
	(Amounts in thousands, except per share data)
Basic and diluted earnings (loss) per common share:
Net income (loss)	$	(5,450	)	$	(68,338	)	$	59,579
Less preferred stock dividends		(36,910	)		(36,910	)		(36,911	)


Income (loss) attributable to common stockholders — basic		(42,360	)		(105,248	)		22,668
Plus convertible preferred stock dividends		—			—			—

Income (loss) attributable to common stockholders — diluted	$	(42,360	)	$	(105,248	)	$	22,668


Weighted average number of common shares outstanding for the year		3,298			3,297	⁽¹⁾		3,288	⁽¹⁾

Dilutive potential common shares — stock options		—			—			73	⁽¹⁾
Assumed conversion of preferred stock		—			—			—


Total		3,298			3,297			3,361


Basic earnings (loss) per common share	$	(12.84	)	$	(31.92	) ⁽¹⁾	$	6.89	⁽¹⁾

Diluted earnings (loss) per common share	$	(12.84	)	$	(31.92	) ⁽¹⁾	$	6.74	⁽¹⁾


(1)		As adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008, and effective on December 1, 2008.

Comprehensive Income (Loss) — Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners. Accounting principles generally accepted in the United States of America require that recognized revenues, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of stockholders’ equity in the statements of financial condition, such items, along with net income (loss), are components of comprehensive income (loss). Accumulated other comprehensive income (loss), net of income tax, as of December 31, 2008 and 2007 consisted of the unrealized gain (loss) on investment securities available for sale.

Accounting Pronouncements Recently Adopted

139

beginning of an entity’s fiscal year that begins after September 15, 2006, with early adoption permitted. The adoption of SFAS No. 156 at January 1, 2007 did not have a material impact on the Company’s consolidated financial statements.

140

141

Accounting Pronouncements To Be Adopted

142

143

2. MONEY MARKET INSTRUMENTS:

At December 31, 2008 and 2007, money market instruments included $1.1 billion and $56.3 million, respectively, in interest bearing deposits with other banks. At December 31, 2008, the Company maintained $1.1 billion as interest-bearing deposit with the Federal Reserve Bank of New York. Restricted interest bearing deposits with other banks amounted to $3.6 million at December 31, 2008. In addition, interest bearing deposits with other banks amounting to $400,000 were pledged to the Puerto Rico Treasury Department for Westernbank’s International Division at December 31, 2008.

The Company sells federal funds and enters into purchases of securities under agreements to resell the same securities (“resell agreements”). These agreements are classified as secured loans and are reflected as assets in the consolidated statements of financial condition.

144

At December 31, 2008, there were no federal funds sold or resell agreements outstanding. At December 31, 2007, federal funds sold and resell agreements (classified by counterparty) were as follows:


	(In thousands)
Federal funds sold:

Citibank N.A. — Puerto Rico	$	214,700
Economic Development Bank for Puerto Rico		22,000
BNP Paribas S.A.		50,000
Bank of America		50,000


Subtotal		336,700


Resell agreements:

Credit Suisse First Boston		500,000
Citibank N.A. — Puerto Rico		50,000


Subtotal		550,000


Total	$	886,700

A summary of resell agreements as of December 31, 2007, were as follows:


			Fair
			Value of
	Receivable		Underlying
Underlying Collateral	Balance		Collateral
	(In thousands)
Investment securities:
U.S. Government and agencies obligations	$	494,824	$	529,514
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) certificates		52,324		53,945
Federal National Mortgage
Association (FNMA) certificates		2,852		3,176


Total — excluding accrued interest receivable	$	550,000	$	586,635


Accrued interest receivable on resell agreements	$	2,890

145

Information about the fair value of collateral received that the Company was permitted by contract or custom to sell or repledge at December 31, 2007, was as follows:


			Collateral Sold
	Collateral		under Repurchase
	Received		Agreements
	(In thousands)
Investment securities:
U.S. Government and agencies obligations	$	529,514	$	529,514


Mortgage-backed securities:
FNMA certificates		3,176		3,176
FHLMC certificates		53,945		53,945


Subtotal		57,121		57,121

Total	$	586,635	$	586,635

The Company monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral when the fair value of the underlying collateral falls to less than the collateral requirement. The collateral requirement was equal to 102 percent of the related receivable, including interest. Securities purchased under resell agreements may be held in safekeeping, in the name of the Company, by Citibank N.A., the Company’s custodian, or held by the counterparty.

146

3. INVESTMENT SECURITIES:

The amortized cost, gross unrealized gains and losses and fair value of investment securities at December 31, 2008 and 2007, were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2008	Cost		Gains		Losses		Value
	(In thousands)
Available for sale:
U.S. Government and agencies obligations (USGO’s)	$	306,259	$	1,621	$	—	$	307,880
Puerto Rico Government and agencies obligations (PRGO’s)		11,122		335		—		11,457


Subtotal		317,381		1,956		—		319,337


Mortgage-backed securities:
Collateralized mortgage obligations (CMO’s) issued and guaranteed by Government National Mortgage Association (GNMA)		2,984,538		3,456		34,091		2,953,903
CMO’s issued and guaranteed by FNMA		395,492		—		15,054		380,438
CMO’s issued and guaranteed by FHLMC		14,328		—		677		13,651


Subtotal		3,394,358		3,456		49,822		3,347,992


Equity securities — common stock		1,906		1,006		—		2,912


Total	$	3,713,645	$	6,418	$	49,822	$	3,670,241


Held to maturity:
USGO’s	$	372,311	$	793	$	—	$	373,104
PRGO’s		13,312		3		167		13,148
Corporate notes		21,436		—		1,870		19,566


Subtotal		407,059		796		2,037		405,818


Mortgage-backed securities:
GNMA certificates		5,574		195		2		5,767
FHLMC certificates		1,942		88		—		2,030
FNMA certificates		2,691		118		1		2,808
CMO’s issued and guaranteed by FHLMC		551,802		788		16,987		535,603
CMO’s issued and guaranteed by FNMA		68,902		607		698		68,811


Subtotal		630,911		1,796		17,688		615,019

Total	$	1,037,970	$	2,592	$	19,725	$	1,020,837

147


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2007	Cost		Gains		Losses		Value
	(In thousands)
Available for sale:
PRGO’s	$	14,946	$	359	$	—	$	15,305


Mortgage-backed securities:
CMO’s issued and guaranteed by FNMA		450,736		—		5,258		445,478
CMO’s issued and guaranteed by FHLMC		16,478		—		166		16,312


Subtotal		467,214		—		5,424		461,790


Equity securities — common stock		1,906		—		—		1,906


Total	$	484,066	$	359	$	5,424	$	479,001


Held to maturity:
USGO’s	$	5,927,530	$	925	$	10,057	$	5,918,398
PRGO’s		10,207		—		280		9,927
Corporate notes		21,436		316		201		21,551


Subtotal		5,959,173		1,241		10,538		5,949,876


Mortgage-backed securities:
GNMA certificates		6,254		163		—		6,417
FHLMC certificates		2,444		96		—		2,540
FNMA certificates		3,014		97		1		3,110
CMO’s issued and guaranteed by FHLMC		556,547		288		53,351		503,484
CMO’s issued and guaranteed by FNMA		70,765		—		3,262		67,503


Subtotal		639,024		644		56,614		583,054


Total	$	6,598,197	$	1,885	$	67,152	$	6,532,930

The amortized cost and fair value of investment securities available for sale and held to maturity at December 31, 2008, by contractual maturity (excluding mortgage-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	$	101,100	$	101,354	$	364,256	$	365,049
Due after one year through five years		216,280		217,982		20,873		20,716
Due after five years through ten years		—		—		495		488
Due after ten years		—		—		21,435		19,565

Subtotal		317,380		319,336		407,059		405,818
Mortgage-backed securities		3,394,359		3,347,993		630,911		615,019
Equity securities		1,906		2,912		—		—

Total	$	3,713,645	$	3,670,241	$	1,037,970	$	1,020,837

148

The following table provides the gross unrealized losses, fair value and number of investment positions, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, at December 31, 2008 and 2007:


	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross		Number of
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Investment
December 31, 2008	Value		Losses		Value		Losses		Value		Losses		Positions
							(In thousands)
Available for sale:

Mortgage-backed securities:
CMO’s issued and guaranteed by GNMA	$	2,601,507	$	34,091	$	—	$	—	$	2,601,507	$	34,091		48
CMO’s issued and guaranteed by FNMA		—		—		380,439		15,054		380,439		15,054		11
CMO’s issued and guaranteed by FHLMC		—		—		13,651		677		13,651		677		1


Total	$	2,601,507	$	34,091	$	394,090	$	15,731	$	2,995,597	$	49,822	$	60


Held to maturity:
PRGO’s	$	3,905	$	45	$	8,770	$	122	$	12,675	$	167		12
Corporate notes		4,096		148		15,470		1,722		19,566		1,870		3


Subtotal		8,001		193		24,240		1,844		32,241		2,037		15


Mortgage-backed securities:
GNMA certificates		139		2		—		—		139		2		2
FNMA certificates		67		1		—		—		67		1		1
CMO’s issued and guaranteed by FHLMC		13,588		204		462,737		16,783		476,325		16,987		9
CMO’s issued and guaranteed by FNMA		—		—		30,128		698		30,128		698		3


Subtotal		13,794		207		492,865		17,481		506,659		17,688		15


Total	$	21,795	$	400	$	517,105	$	19,325	$	538,900	$	19,725		30

149


	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross		Number of
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Investment
December 31, 2007	Value		Losses		Value		Losses		Value		Losses		Positions
	(In thousands)
Available for sale:
CMO’s issued and guaranteed by FNMA	$	445,478	$	5,258	$	—	$	—	$	445,478	$	5,258		11
CMO’s issued and guaranteed by FHLMC		16,312		166		—		—		16,312		166		1


Total	$	461,790	$	5,424	$	—	$	—	$	461,790	$	5,424		12


Held to maturity:
U.S. Government and agencies obligations	$	—	$	—	$	3,273,053	$	10,057	$	3,273,053	$	10,057		33
PRGO’s		—		—		9,927		280		9,927		280		10
Corporate notes		10,024		201		—		—		10,024		201		1


Subtotal		10,024		201		3,282,980		10,337		3,293,004		10,538		44


Mortgage-backed securities:
FNMA certificates		1,035		1		72		—		1,107		1		2
CMO’s issued and guaranteed by FHLMC		—		—		487,599		53,351		487,599		53,351		10
CMO’s issued and guaranteed by FNMA		—		—		67,503		3,262		67,503		3,262		6


Subtotal		1,035		1		555,174		56,613		556,209		56,614		18


Total	$	11,059	$	202	$	3,838,154	$	66,950	$	3,849,213	$	67,152		62

Available-for-sale and held-to-maturity securities are reviewed at least quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the length of time and the extent to which the fair value has been below cost, the expectation for that security’s performance, the credit worthiness of the issuer and the Company’s intent and ability to hold the security to allow for any anticipated recovery in fair value. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the consolidated statements of operations. During the quarter ended June 30, 2006, management concluded that certain held-to-maturity investments in Puerto Rico Government Obligations (“PRGO’s”), with an amortized cost of $21,615,000 were other-than-temporarily impaired and recorded an impairment loss of $1.1 million. These securities were downgraded by one notch below investment grade in May 2006. As a result of the downgrade below investment grade of these PRGO’s, they were transferred to the available for sale category at their fair value of $20,552,000. In addition, during the quarters ended December 31, 2007 and 2006, the Company recorded an impairment loss of $585,000 and $750,000, respectively, on its equity securities available for sale.

The Company’s investment portfolio as of December 31, 2008, consisted principally of U.S. Government and agencies obligations, Puerto Rico Government and agencies obligations, and mortgage-backed securities issued or guaranteed by GNMA, FHLMC or FNMA. There were no investment securities other than those referred to above in a significant unrealized loss position as of December 31, 2008. In addition, the Company does not have investments in residual tranches.

150

Proceeds from sales of investment securities available for sale and the respective gross realized gains and losses for the years ended December 31, 2008, 2007 and 2006, were as follows:


	2008		2007		2006
	(In thousands)
Proceeds from sales	$	398,924	$	—	$	1,928
Gross realized gains		579		—		204
Gross realized losses		74		—		—

Unencumbered investment securities available for sale and held to maturity at December 31, 2008, amounted to $538,550,000 and $453,042,000, respectively, after taking into account the investment securities pledged to deposits (Note 7), those sold under agreements to repurchase (Note 8), those pledged to the advances from Federal Home Loan Bank (Note 10), those pledged to interest rate swap agreements (Note 19) and those pledged to the Federal Reserve Bank ($17,539,000 available for sale and $2,118,000 held to maturity). Pledged investment securities available for sale amounting to $3,099,087,000 and $450,736,000 at December 31, 2008 and 2007, respectively, can be repledged. Pledged investment securities held to maturity amounting to $524,695,000 and $5,468,940,000 at December 31, 2008 and 2007, respectively, can be repledged.

Nontaxable interest income for the years ended December 31, 2008, 2007 and 2006, amounted to $160,655,000, $352,274,000 and $347,511,000, respectively. Nontaxable interest income relates principally to interest earned on government and agencies obligations of the United States and Puerto Rico, certain mortgage-backed securities, and loans and investments of Westernbank’s International division.


	2008				2007
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In thousands)
GNMA	$	2,990,112	$	2,959,670	$	6,254	$	6,417
FHLMC		568,072		551,284		775,469		721,484
FNMA		467,085		452,057		524,515		516,091
FHLB		677,470		679,883		5,625,984		5,617,919

151

4. LOANS:

The loan portfolio at December 31, 2008 and 2007, consisted of the following:


	2008			2007
	(In thousands)
REAL ESTATE LOANS SECURED BY MORTGAGES ON:
Commercial real estate	$	5,105,663		$	5,563,189
Residential real estate, mainly one-to-four family residences		985,564			992,993
Construction and land acquisition		1,446,191			1,437,054


Subtotal		7,537,418			7,993,236


Plus (less):
Undisbursed portion of loans in process		(3,214	)		(2,802	)
Premium on loans purchased		42			72
Deferred loan fees — net		(29,303	)		(33,883	)


Subtotal		(32,475	)		(36,613	)


Real estate loans — net		7,504,943			7,956,623


OTHER LOANS:
Commercial, industrial and agricultural loans		721,987			860,137
Consumer loans:
Loans on deposits		28,753			35,648
Credit cards		49,301			48,138
Installment		649,961			656,690
Less deferred loan fees — net		(5,139	)		(8,605	)


Other loans — net		1,444,863			1,592,008


TOTAL LOANS		8,949,806			9,548,631

ALLOWANCE FOR LOAN LOSSES		(282,089	)		(338,720	)


LOANS — NET	$	8,667,717		$	9,209,911

At December 31, 2008, commercial real estate loans totaled $5.1 billion. In general, commercial real estate mortgage loans are considered by management to be of somewhat greater risk of uncollectibility due to the dependency on income production or future development of the real estate. The Company’s commercial real estate loan portfolio is mostly comprised of loans to owner-occupied real estate in which the real estate collateral is taken as a secondary source of repayment. At December 31, 2008, commercial real estate loans to owner-occupied borrowers amounted to 79%. Non-owner occupied commercial real estate loans are principally collateralized by property dedicated to wholesale, retail and rental business activities.

Commercial lending, including commercial real estate, asset-based, unsecured business and construction, generally carry a greater risk than consumer lending, including residential real estate, 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.

At December 31, 2008, Westernbank has a significant lending concentration with an aggregate unpaid principal balance of $405.3 million to a commercial group in Puerto Rico, which exceeds the loan-to-one borrower limit. Westernbank has explored various alternatives to decrease its exposure to this borrower to comply with the loan-to-one borrower limitation. However, due to the credit tightening propelled by the current economic environment, efforts have not materialized. Westernbank continues to pursue other actions in order to reduce such excess. For this violation, Westernbank paid a penalty of $50,000 during 2008. As of December 31, 2008, this loan relationship was not impaired. There can be no assurance that the Commissioner will not take further actions on this issue.

152

At December 31, 2008, residential and commercial loans amounting to $832,070,000 were pledged to secure advances from the Federal Home Loan Bank (see Note 10).

The Company originates residential mortgage loans for portfolio investment or sale in the secondary market. During the period of origination, residential mortgage loans are designated as held for either sale or investment purposes. Residential mortgage loans held for sale are carried at the lower of cost or fair value. At December 31, 2008 and 2007, residential mortgage loans with a cost of $18,880,000 and $6,525,000, respectively, were designated as held for sale.

The following table reflects the outstanding principal balance of non-performing loans and the corresponding effect on earnings at December 31, 2008, 2007 and 2006:


	2008		2007		2006
			(In thousands)
Outstanding principal balance at end of year	$	1,560,031	$	1,776,053	$	281,308


Interest that would have been recorded if the loans had not been classified as non-performing	$	90,704	$	48,974	$	20,009


Interest collected and recognized as income on non-performing loans	$	25,874	$	17,068	$	5,046

The decrease in non-performing loans, when compared to 2007, is mainly attributable to the Company’s decision to curtail major commercial lending, including construction lending, during the summer of 2007 and the application of stricter underwriting guidelines coupled with the acquisition of real estate properties in lieu of payment and/or the collection of six troubled relationships in the Company’s Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division, with an aggregate principal balance of $164.1 million. During the summer of 2007, as a result of the slowdown in the economy of Puerto Rico and after determining that one of the Bank’s largest asset-based lending relationships was impaired and that there was a significant collateral deficiency, the Company decided to curtail major commercial lending and to make adjustments to Company’s underwriting standards designed to strengthen the credit quality of its loan portfolio. The increase in non-performing loans in 2007 compared to 2006 was mainly due to increases in non-performing loans of the Company’s commercial real estate mortgage loan portfolio as well as in the construction loan portfolio. The increase is principally due to the effects of the continuing downturn in the economy of Puerto Rico, which has been in recession since 2006.

Residential mortgage loans serviced for others are not included in the consolidated statements of financial condition. At December 31, 2008 and 2007, the unpaid principal balance of these loans amounted to $275,628,000 and $260,603,000, respectively. Servicing loans for others generally consists of collecting payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. In connection with the loans serviced for others, Westernbank held borrowers’ escrow balances of $1,063,000 and $950,000 at December 31, 2008 and 2007, respectively.

Mortgage servicing rights, included as other assets, amounted to $3,270,000 and $3,033,000 at December 31, 2008 and 2007, respectively. In 2008, 2007 and 2006, the Company capitalized mortgage servicing rights amounting to $516,000, $303,000 and $285,000, respectively. Amortization of mortgage servicing rights was $279,000, $296,000 and $329,000 in 2008, 2007 and 2006, respectively. At December 31, 2008 and 2007, the carrying value of mortgage servicing rights approximates fair value.

In the normal course of business, the Company engages in business transactions with its directors, executive officers, principal shareholders and organizations associated with them. Loans to related parties, mainly mortgage loans for purchase of the principal residence, are substantially on the same terms as loans to non-related parties. The aggregate amount of loans outstanding to related parties at December 31, 2008 and 2007 totaled $971,000 and $2,481,000, respectively.

153

Changes in the allowance for loan losses are summarized below:


	2008			2007			2006
				(In thousands)
Balance — at January 1	$	338,720		$	202,180		$	141,412
Provision charged to income		67,506			277,562			90,880
Recoveries of loans previously charged-off		3,705			3,162			5,164
Charge-off of uncollectible accounts		(127,842	)		(144,184	)		(35,276	)


Balance — at December 31	$	282,089		$	338,720		$	202,180

The allowance for impaired loans is part of the allowance for loan losses. The allowance for impaired loans covers those loans for which management has determined that it is probable that the debtor will be unable to pay all the amounts due in accordance with the contractual terms of the loan agreement, and does not necessarily represent loans for which the Westernbank will incur a substantial loss.

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


	December 31,
	2008		2007
	(In thousands)
Investment in impaired loans:

Covered by a valuation allowance	$	901,146	$	922,001
Do not require a valuation allowance		570,030		866,545

Total	$	1,471,176	$	1,788,546

Impaired non-performing loans	$	1,364,192	$	1,736,107

Valuation allowance for impaired loans	$	131,018	$	175,046


	Years Ended December 31,
	2008		2007		2006
			(In thousands)
Average investment in impaired loans	$	1,598,173	$	786,100	$	211,285


Interest collected and recognized as income on non-performing and impaired loans	$	23,739	$	16,040	$	5,044

154

The Company’s policy is to recognize interest income related to impaired loans on a cash basis or cost-recovery method (for certain high loan-to-value loans), when there is a clear indication that the borrower’s cash flows may not be sufficient 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.

The Company engages in the restructuring of the debt of borrowers who are delinquent due to economic or legal reasons, if the Company determines that it is in the best interest for both the Company and the borrower to do so. In some cases, due to the nature of the borrower’s financial condition, the restructure or loan modification fits the definition of Troubled Debt Restructuring (“TDR”) as defined by the SFAS No. 15 Accounting by Debtors and Creditors of Troubled Debt Restructurings. Such restructures are identified as TDRs and accounted for based on the provisions SFAS No. 114, Accounting by Creditors for Impairment of a Loan. As of December 31, 2008 and 2007, Westernbank had commercial loans totaling $122,905,000 and $88,090,000, respectively, that fit the definition of TDR’s, and therefore have been accounted for as TDR’s. At December 31, 2008, commercial loans accounted for as TDR’s amounting to $4,768,000 were in accrual status, while the remaining $118,137,000 were in non-accrual status. At December 31, 2007, the commercial TDR loan was in non-accrual status on a cost recovery basis.

5. FORECLOSED REAL ESTATE HELD AND OTHER REAL ESTATE HELD FOR SALE:

Foreclosed real estate held and other real estates held for sale at December 31, 2008 and 2007, consisted of the following:


	2008		2007
	(In thousands)
Balance, foreclosed real estate held for sale:
Residential (1 - 4 units)	$	10,246	$	5,118
Commercial		91,428		6,875


Total		101,674		11,993
Less valuation allowance		3,104		1,022


Foreclosed real estate held for sale — net	$	98,570	$	10,971


Other real estate held for sale — land	$	5,462	$	—

Changes in the allowance for foreclosed real estate held for sale are summarized below:


	2008		2007		2006
	(In thousands)
Balance — at January 1	$	1,022	$	449	$	227
Provision		2,082		573		222


Balance — at December 31	$	3,104	$	1,022	$	449

In 2008, the Company transferred to other real estate held for sale $12.2 million of land held for future development (see Note 6). Realized gains on sale of these properties amounted to $14.7 million for the year ended December 31, 2008 and are included as part of “Net gain (loss) on sales and valuation of loans held for sale, securities and other assets” in the accompanying statements of operations.

155

6. PREMISES AND EQUIPMENT:

Premises and equipment at December 31, 2008 and 2007, consisted of the following:


	Useful Life		2008		2007
	in Years		(In thousands)
Land and improvements			$	19,838	$	30,887
Buildings and improvements		1 - 40		78,661		76,095
Furniture and equipment		1 - 10		41,169		38,670
Leasehold improvements		1 - 39		19,306		18,661
Construction in progress				9,565		4,581

Total				168,539		168,894
Less accumulated depreciation and amortization				47,743		39,303

Total			$	120,796	$	129,591

Depreciation and amortization expenses for the years ended December 31, 2008, 2007 and 2006, amounted to $9,920,000, $9,549,000 and $8,696,000, respectively.

During 2008, the Company transferred $12,181,000 of land held for future branch development to other real estate for sale. See Note 5.

7. DEPOSITS AND INTEREST EXPENSE:

Deposits at December 31, 2008 and 2007 consisted of the following:


	2008		2007
	(In thousands)
Noninterest bearing accounts	$	250,380	$	317,753
Passbook accounts		670,224		825,447
NOW accounts		275,530		314,820
Super NOW accounts		18,656		26,573
Money market accounts		37		43
Certificates of deposit (1)		9,672,333		8,869,237


Total		10,887,160		10,353,873
Accrued interest payable (2)		115,013		142,628


Total	$	11,002,173	$	10,496,501


(1)		Includes brokered deposits with contractual principal balance of $109,281,000 measured at fair value of $109,944,000, excluding accrued interest, at December 31, 2008. None as of December 31, 2007.

(2)		Includes $708,000 of accrued interest payable on brokered deposits measured at fair value at December 31, 2008. None as of December 31, 2007.

The weighted average interest rate of all deposits at December 31, 2008 and 2007 was approximately 4.09% and 4.65%, respectively. At December 31, 2008, the aggregate amount of deposits in denominations of $100,000 or more was $891,917,000 ($1,104,437,000 at December 31, 2007). Certificates of deposit include brokered deposits of $8,475,504,000 and $7,632,999,000 at December 31, 2008 and 2007, respectively. Deposits of directors, executive officers, principal shareholders and organizations associated with them amounted to $12,984,000 and $19,324,000 at December 31, 2008 and 2007, respectively.

156

At December 31, 2008, the scheduled maturities of certificates of deposit are as follows:


Year Ending	Amount
December 31,	(In thousands)
2009	$	6,165,943
2010		2,694,209
2011		440,019
2012		193,964
2013		80,465
Thereafter		97,733


Total	$	9,672,333

At December 31, 2008, the Company had pledged investment securities held to maturity with a carrying value of $37,925,000, mortgage-backed securities held to maturity with a carrying value of $5,754,000, and investment securities available for sale with a carrying value of $11,456,000 to secure public funds, and mortgage-backed securities held to maturity with a carrying value of $175,000 as bond requirement for individual retirement accounts.

A summary of interest expense on deposits for the years ended December 31, 2008, 2007 and 2006, was as follows:


	2008		2007		2006
	(In thousands)
Passbook accounts	$	14,375	$	17,108	$	15,583
NOW, Super NOW and Money Market accounts		6,780		6,883		5,829
Certificates of deposit (1)		434,158		439,307		344,651


Total	$	455,313	$	463,298	$	366,063


(1)		Includes interest expense on callable brokered certificates of deposit that have been elected to be carried at fair value under the provisions of SFAS No. 159.

157

8. FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS:

Repurchase agreements, and the related weighted average interest rates at December 31, 2008 and 2007, consisted of the following:


	2008					2007
			Weighted					Weighted
			Average					Average
	Amount		Interest Rate			Amount		Interest Rate
	(Dollars in thousands)
Federal funds purchased	$	—		—	%	$	100,000		4.44	%


Repurchase agreements:
Fixed rate		3,204,142					4,194,195
Variable rate		—					1,852,498

Total repurchase agreements		3,204,142		3.77	%		6,046,693		4.79	%


Total	$	3,204,142				$	6,146,693

The Company enters into sales of securities under agreements to repurchase the same securities (“repurchase agreements”). Repurchase agreements are classified as secured borrowings and are reflected as a liability in the consolidated statements of financial condition. At December 31, 2008, the Company had outstanding $2.4 billion in repurchase agreements for which the counterparties have the option to terminate the agreements at the first anniversary date and at each interest payment date thereafter. At December 31, 2007, repurchase agreements included $433,198,000 of long-term agreements with fixed rate step-up schedules. These repurchase agreements were cancelled in 2008 (see Note 13). During the period of such agreements, the securities were delivered to the counterparties. The dealers may have sold, loaned, or otherwise disposed of such securities to other parties in the normal course of their operations, and have agreed to resell to the Company the same securities at the maturities of the agreements. The Company may be required to provide additional collateral based on the fair value of the underlying securities.

Repurchase agreements at December 31, 2008, mature as follows:


Year Ending
December 31,	(In thousands)
2009 (1)		$1,382,642
2010		1,597,000
2011		—
2012		224,500
2013		—
Thereafter		—


Total	$	3,204,142


(1)		Includes $779.1 million of repurchase agreements which mature within 30 days.

158

At December 31, 2008 and 2007, repurchase agreements (classified by counterparty) were as follows:


	2008				2007
			Fair Value				Fair Value
	Borrowing		of Underlying		Borrowing		of Underlying
	Balance		Collateral		Balance		Collateral
	(In thousands)
Federal Home Loan Bank of New York	$	1,073,000	$	1,141,125	$	743,700	$	756,315
Salomon Smith Barney Inc. and affiliates		593,000		707,210		1,023,320		1,084,950
Credit Suisse First Boston LLC		532,142		600,820		1,208,000		1,299,819
J.P. Morgan Securities, Inc.		330,000		417,308		741,100		794,718
Barclays Capital, Inc.		330,000		374,508		441,850		470,738
Morgan Stanley Dean Witter		273,000		294,235		497,400		513,601
Merrill Lynch Government Securities Inc. and affiliates		73,000		78,107		580,125		596,358
Lehman Brothers Inc. and affiliates (see Note 13)		—		—		433,198		516,452
BNP Paribas		—		—		50,000		53,008
UBS Financial Services Incorporated of Puerto Rico		—		—		328,000		349,969


Total	$	3,204,142	$	3,613,313	$	6,046,693	$	6,435,928

159

Borrowings under repurchase agreements at December 31, 2008 and 2007, were collateralized as follows:


	2008				2007
	Carrying		Fair		Carrying		Fair
Securities Underlying	Value of		Value of		Value of		Value of
Repurchase	Underlying		Underlying		Underlying		Underlying
Agreements	Collateral		Collateral		Collateral		Collateral
	(In thousands)
U.S. Government and agencies obligations (“USGO’s”) — held to maturity	$	150,755	$	151,028	$	4,946,590	$	4,954,333
USGO’s — available for sale		155,341		155,142		—		—
USGO’s purchased under agreements to resell		—		—		494,174		529,514
Mortgage-backed securities (“MBS”) — held to maturity		373,940		370,710		522,837		449,482
MBS purchased under agreements to resell		—		—		59,076		57,121
MBS — available for sale		2,981,040		2,936,433		450,736		445,478


Total		3,661,076	$	3,613,313		6,473,413	$	6,435,928


Accrued interest receivable of underlying securities		19,475				58,030


Total	$	3,680,551			$	6,531,443

160

A summary of short-term borrowings, including federal funds purchased, repurchase agreements, advances from Federal Home Loan Bank of New York (“FHLB”) (see Note 10) and borrowings under lines of credit, and interest rates at and for the years ended December 31, 2008 and 2007, are indicated below:


	2008			2007
	(Dollars in thousands)
Federal funds purchased:
Balance at end of year	$	—		$	100,000
Weighted-average interest rate at year end		—	%		4.44	%
Monthly average outstanding balance	$	7,692		$	24,308
Weighted-average interest rate for the year		4.44	%		5.17	%
Maximum month-end balance	$	—		$	100,000

Repurchase agreements:
Balance at end of year	$	779,142		$	1,364,075
Weighted-average interest rate at year end		1.20	%		4.85	%
Monthly average outstanding balance	$	1,001,358		$	1,497,932
Weighted-average interest rate for the year		2.64	%		5.19	%
Maximum month-end balance	$	1,559,157		$	2,771,592

Advances from FHLB:
Balance at end of year	$	—		$	60,000
Weighted-average interest rate at year end		—	%		4.52	%
Monthly average outstanding balance	$	14,923		$	29,615
Weighted-average interest rate for the year		3.65	%		4.99	%
Maximum month-end balance	$	58,000		$	60,000

Borrowings under line of credit:
Balance at end of year	$	—		$	—
Weighted-average interest rate at year end		—	%		—	%
Monthly average outstanding balance	$	—		$	15,158
Weighted-average interest rate for the year		—	%		6.00	%
Maximum month-end balance	$	—		$	34,030

Total short-term borrowings:
Balance at end of year	$	779,142		$	1,524,075
Weighted-average interest rate at year end		1.20	%		4.81	%
Monthly average outstanding balance	$	1,023,973		$	1,567,013
Weighted-average interest rate for the year		2.67	%		5.19	%
Maximum month-end balance	$	1,617,157		$	2,865,622

9. LINES OF CREDIT:

At December 31, 2008, the Company has an available line of credit with the FHLB of New York guaranteed with excess collateral already pledged, in the amount of $467.6 million (2007 - $137.3 million). See Note 10 for lines of credit terms.

At December 31, 2008, the Company did not have other outstanding lines of credit agreements. As of December 31, 2007, the Company had lines of credit agreements with four commercial banks permitting the Company to borrow a maximum aggregate amount of $225,000,000. There were no borrowings outstanding as of December 31, 2007, under such lines of credit. The agreements provided for unsecured advances to be used by the Company on an overnight basis. During 2008, these lines of credit agreements amounting to $225,000,000 million were cancelled.

161

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

Advances from Federal Home Loan Bank and mortgage note payable, and the related weighted average interest rates at December 31, 2008 and 2007, consisted of the following:


	2008					2007
			Weighted					Weighted
			Average					Average
	Amount		Interest Rate			Amount		Interest Rate
	(Dollars in thousands)
ADVANCES FROM FHLB:
Fixed rate convertible advances (4.47% to 5.93%)	$	42,000		5.87	%	$	102,000		5.08	%


MORTGAGE NOTE PAYABLE	$	34,932		8.05	%	$	35,465		8.05	%

Advances and repurchase agreements (Note 8) are received from the FHLB under an agreement whereby Westernbank is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% and 105% of the outstanding advances and repurchase agreements, respectively. At December 31, 2008, convertible advances were secured by residential and commercial mortgage loans amounting to $832,070,000. At the advances’ and repurchase agreements’ first anniversary date and each quarter thereafter, the FHLB has the option to convert them into replacement funding for the same or a lesser principal amount based on any funding then offered by FHLB at the then current market rates, unless the interest rate has been predetermined between FHLB and the Company. If the Company chooses not to replace the funding, it will repay the convertible advances and reverse repurchase agreements, including any accrued interest, on such optional conversion date.

At December 31, 2008 and 2007, Westernbank World Plaza, Inc., a wholly owned subsidiary of Westernbank Puerto Rico, had outstanding $34.9 million and $35.5 million, respectively, of a mortgage note, at an interest rate of 8.05% per year until 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 greater of 13.05% or the Treasury Rate plus five percentage points; or 10.05%, depending on the fulfillment of certain conditions on the repricing date. Westernbank World Plaza, Inc. 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. On July 12, 2009, Westernbank World Plaza, Inc. exercised the prepayment option and cancelled the mortgage note.

162

Advances from FHLB and the mortgage note payable by contractual maturities at December 31, 2008, mature as follows:


Year Ending	Advances		Mortgage
December 31,	from FHLB		Note Payable (1)
	(In thousands)
2009	$	—	$	579
2010		42,000		628
2011		—		681
2012		—		731
2013		—		801
Thereafter		—		31,512


Total	$	42,000	$	34,932


(1)		Mortgage note payable was cancelled on July 12, 2009.

11. INCOME TAXES:

Under the Puerto Rico Internal Revenue Code (the “Code”), all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Company, Westernbank, Westernbank Insurance Corp. and SRG Net, Inc. 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 taxable income or deductible loss is included in the taxable income of Westernbank.

The Code provides a dividend received deduction of 100%, on dividends received from wholly owned subsidiaries subject to income taxation in Puerto Rico. The income on certain investments is exempt for income tax purposes. Also, Westernbank International division operates as an International Banking Entity (“IBE”) under the International Banking Center 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 under certain circumstances. As a result, the Company’s effective tax rate is generally below the statutory rate. On March 9, 2009, the Governor of Puerto Rico signed into law Act No. 7 (“Act No. 7”), also known as Special Act Declaring a Fiscal Emergency Status to Save the Credit of Puerto Rico, which amended several sections of the Code, including sections related to the IBE Act. Act No. 7, as amended by Act No. 37 approved on July 10, 2009, imposes a series of temporary and permanent measures, including a special 5% tax on IBEs net income not otherwise subject to tax under the Code. This special assessment is effective for tax years that commenced after December 31, 2008 and before January 1, 2012.

Pursuant to the provisions of Act No. 13 of January 8, 2004 (the “Act”), for taxable years commencing after June 30, 2003, the net income earned by an IBE that operates as a unit of a bank under the Puerto Rico Banking Law, will be considered taxable and subject to income taxes at the current tax rates in the amount by which the IBE taxable income exceeds 40% in the first applicable taxable year (2004), 30% in the second year (2005) and 20% thereafter, of the taxable income of Westernbank, including its IBE taxable income. Westernbank’s IBE carries on its books securities which are, irrespective of the IBE status, tax exempt by law. Moreover, the Act provides that IBE’s operating as subsidiaries will continue to be exempt from the payment of income taxes. For the years ended December 31, 2008 and 2006, the provisions of the Act did not have any effect on the Company’s financial position or results of operations. For the year ended December 31, 2007, the provisions of the Act resulted in an additional income tax provision of $3.8 million.

On August 1, 2005, the Government of Puerto Rico approved Law No. 41 which imposed a transitory additional surtax of 2.5% of taxable income. This transitory additional income tax was in effect for taxable years 2005 and 2006. This transitory income tax of 2.5% was initially recorded in the third quarter of 2005, and amounted to $3.8 million for the year ended December, 2006. On May

163

13, 2006, with an effective date of January 1, 2006, the Government of Puerto Rico approved Law No. 89 which imposed an additional 2.0% income tax on all companies covered by the Puerto Rico Banking Act, as amended, such as Westernbank. This transitory income tax of 2% amounted to $3.0 million for the year ended December 31, 2006. These transitory income taxes ended on December 31, 2006.

On May 16, 2006, the Government of Puerto Rico approved Law No. 98 which imposes a 5% additional tax (the “prepayment requirement”) to businesses that have a gross income in excess of $10,000,000, such as Westernbank. This tax constitutes a prepayment of income tax and can be used as a credit to the tax liability of year 2007 and thereafter. A maximum of 25% of the credit can be used in each year. This prepayment requirement was computed using Westernbank’s 2005 taxable income as the base. The prepayment requirement amounted to $6.4 million and was paid by Westernbank in July 2006. Act No. 7, as amended by Act No. 37 approved on July 10, 2009, also imposes a series of temporary and permanent measures, including the imposition of a 5% surtax over the total income tax liability determined, which is applicable to companies whose combined income exceeds $100,000, effectively increasing the maximum statutory rate from 39% to 40.95% and double the property tax paid on the Company’s real estate properties. These temporary measures are effective for tax years that commenced after December 31, 2008 and before January 1, 2012.

WFCC is a United States of America (“U.S.”) entity and accordingly is subject to income tax under the U.S. Internal Revenue Code. WFCC commenced operations in February 2007, was largely inactive, and was closed during the third quarter of 2008. In addition, Westernbank is subject to special flat income tax rates on gross income received from certain loans and investments as required by the U.S. Internal Revenue Code. These flat income tax rates (U.S.witholdings) range from 10% to 30%.

Prepaid income tax amounted to $33,630,000 and $33,021,000, at December 31, 2008 and 2007, respectively. Accrued income tax payable amounted to $3,188,000 and $47,067,000 at December 31, 2008 and 2007, respectively. Prepaid income tax is included as part of “Other assets” and income tax payable is included as part of “Accrued expenses and other liabilities” in the accompanying statements of financial condition. The accrued income tax payable includes a liability for unrecognized tax benefits of $2.0 million and $44.0 million at December 31, 2008 and 2007, respectively. The provision (credit) for income taxes for the years ended December 31, 2008, 2007 and 2006, consisted of the following:


	2008			2007			2006
				(In thousands)
Current:
Puerto Rico	$	(20,744	)	$	23,371		$	66,366
U.S.		(11,150	)		10,467			10,233

		(31,894	)		33,838			76,599
Deferred credit		(22,392	)		(73,610	)		(6,107	)


Total provision (credit)	$	(54,286	)	$	(39,772	)	$	70,492

164

Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes. The cumulative effect adjustment of $10,585,000 was charged to retained earnings to increase the accrued liability for uncertain income tax positions and the deferred income tax asset by $12,445,000 and $1,860,000, respectively. Unrecognized tax benefits mainly relate to income which could be subject to special flat income tax rates in U.S. and certain expense deductions taken in income tax returns.

The reconciliation of unrecognized tax benefits, including accrued interest and penalties, was as follows:


	2008			2007
	(In thousands)
Balance — January 1	$	43,987		$	23,345

Gross amount of increase in unrecognized tax benefits as a result of tax positions taken during a prior period		144			1,659
Gross amount of decrease in unrecognized tax benefits as a result of tax positions taken during a prior period		(33,345	)		(1,207	)
Gross amount of increase in unrecognized tax benefits as a result of tax positions taken during the current period		39			30,166
Amount of decrease in the unrecognized tax benefits relating to settlements with taxing authorities		(8,867	)		(9,394	)
Reduction to unrecognized tax benefits as a result of lapse of the applicable statute of limitations		—			(582	)


Balance — December 31	$	1,958		$	43,987

During the first quarter of 2008, the Company settled with tax authorities most of its uncertain income tax positions for $8.9 million. The resulting income tax benefit of $33.3 million was recognized as a reduction to the income tax provision in the first quarter of 2008.

The total amount of net unrecognized tax benefits that, if recognized, would affect the effective income tax rate was $2.0 million and $44.0 million at December 31, 2008 and 2007, respectively. The Company classifies interest and penalties related to unrecognized tax benefits as a component of its income tax provision. The accrual for uncertain income tax positions includes an accrual for interest and penalties of $475,000 and $5,521,000 at December 31, 2008 and 2007, respectively. During the year ended December 31, 2008, the Company decreased the accrual for interest and penalties for uncertain income tax positions by $4.1 million, mainly as a result of the settlement of certain income tax positions with tax authorities, as explained above. Interest paid on such settlement amounted to $985,000. During the year ended December 31, 2007, the Company recognized approximately $2.3 million in interest and penalties.

165

The Company’s primary tax jurisdiction is Puerto Rico. The Company’s primary subsidiary, Westernbank, is the entity which has recorded a liability for these unrecognized tax benefits. In the Puerto Rico tax jurisdiction, Westernbank’s open tax years are 2003 to present. For uncertain foreign withholdings income tax positions, the statute of limitation (four years) began when Westernbank filed the income tax returns in 2007 and 2008.

A reconciliation of the provision (credit) for income taxes computed by applying the Puerto Rico income tax statutory rate to the tax provision as reported for the years ended December 31, 2008, 2007 and 2006, was as follows:


	2008						2007						2006
				% of						% of						% of
				Pre-tax						Pre-tax						Pre-tax
	Amount			Income			Amount			Income			Amount			Income
							(Dollars in thousands)
Tax provision (credit) computed at Puerto Rico statutory rate	$	(23,297	)		(39.0	)%	$	(42,163	)		(39.0	)%	$	56,581			43.5	%

Effect on provision of:
Exempt income under (over) related expenses		6,932			11.6			(2,606	)		(2.4	)		(598	)		(0.5	)
Income tax provison (credit) related to unrecognized tax benefits or income tax contingencies (include U.S. income tax)		(33,162	)		(55.5	)		5,238			4.8			10,233			7.9
Nondeductible expenses		45			0.1			60			0.1			81			0.1
Differential in statutory rate on capital gains		(3,321	)		(5.6	)		—			—			—			—
Other		(1,483	)		(2.5	)		(301	)		(0.3	)		4,195			3.2

Provision (credit) for income tax as reported	$	(54,286	)		(90.9	)%	$	(39,772	)		(36.8	)%	$	70,492			54.2	%


Income (loss) before provision for income taxes	$	(59,736	)				$	(108,110	)				$	130,071

166

Deferred income tax assets, net as of December 31, 2008 and 2007, consisted of the following:


	2008		2007
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	108,984	$	130,414
Net operating loss carryforwards, expires in 2015		44,485		—
Unrealized losses on available for sale securities		2,616		—
Capital losses on sale of investment securities, expired in 2008		—		2,715
Unrealized loss in valuation of derivative instruments		262		3,228
Allowance for losses on unfunded commitments		—		447
Other		718		422

Total deferred tax assets		157,065		137,226
Less valuation allowance		896		2,495

Subtotal		156,169		134,731


Less deferred tax liabilities:
Deferred loan origination costs		209		220
Unrealized gains on available for sale securities		—		54
Other		299		280

Subtotal		508		554


Deferred income tax asset, net	$	155,661	$	134,177

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


	2008			2007			2006
				(In thousands)
Balance — at January 1	$	2,495		$	3,536		$	3,521
Increase (decrease) in valuation allowance		(1,599	)		(1,041	)		15


Balance — at December 31	$	896		$	2,495		$	3,536

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

167


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

Net gain (loss) on sales and valuation of loans held for sale, securities and other assets for the years ended December 31, 2008, 2007 and 2006, consisted of the following:


	2008			2007			2006
				(In thousands)
Trading account securities, mainly related to loans securitized	$	109		$	92		$	164
Investment securities available for sale (see Note 3)		505			—			204
Investment securities held to maturity (see Note 13)		(3,116	)		—			—
Mortgage loans held for sale		801			735			291
Other real estate held for sale		14,656			—			—
Loans		(261	)		—			—
Cancelled resell agreements		(1,450	)		—			—
Other-than-temporary impairment of investment securities available for sale (see Note 3)		—			(585	)		(750	)
Other-than-temporary impairment of investment securities held to maturity (see Note 3)		—			—			(1,063	)
Other		2,352			851			13


Total	$	13,596		$	1,093		$	(1,141	)

13. COMMITMENTS AND CONTINGENCIES:

In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, in consultation with internal and external legal counsels, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

At December 31, 2008, the Company is obligated under non-cancelable operating leases for banking premises. Certain leases contain escalation clauses providing for increased rental. Rent expense, including the proportionate share of maintenance expenses of common areas, administrative expenses, property taxes, utilities and insurance expenses, amounted to $3,241,000, $3,115,000, and $2,700,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

168

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


Year Ending	Minimum
December 31,	Rent
	(In thousands)
2009	$	2,493
2010		2,321
2011		1,928
2012		1,520
2013		1,138
Thereafter		3,100


Total	$	12,500

LAWSUITS

The following are the significant claims and legal actions that the Company has at December 31, 2008:

	•		Shareholder Securities Class Action. In September and October 2007, three separate complaints, entitled Hildenbrand v. W Holding Company, Inc., et al., C.A.No. 07-1886 FAB (D.P.R.), Webb v. W Holding Company, Inc., et al., C.A.No. 07-1915 FAB (D.P.R.), and Saavedra v. W Holding Company, Inc., et al., C.A.No. 07-1931 FAB (D.P.R), were filed in the United States District Court for the District of Puerto Rico as putative class actions against the Company, Westernbank and certain of their current or former officers and directors. Thereafter, all three cases were consolidated into the Hildenbrand action.

			Following the filing of motions mandated by statute, the Court appointed Felix Rivera, Jose A. Nicolao, Fundacion Rios Pasarell, Inc. and Efren E. Moreno as lead plaintiffs in Hildenbrand. Pursuant to an agreed scheduling order, the lead plaintiffs’ Consolidated Amended Complaint was filed April 28, 2008. The complaint names as defendants the Company and Westernbank, as well as current and former officers of the Company and Westernbank. The complaint alleges that the individual defendants engaged the Company and Westernbank in a fraudulent lending scheme and issued misleading information to the market, principally in connection with the timing and reporting of impairments to loans to Inyx that are described below. Plaintiffs allege that these actions artificially inflated the trading prices of the Company’s securities. The plaintiffs brought the action on behalf of all those who purchased the Company’s securities during the period between April 24, 2006 and June 26, 2007, claiming violation of Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder) by the Company, Westernbank and the individual defendants, as well as violation of Section 20(a) of the Exchange Act by the individual defendants. Plaintiffs are seeking unspecified damages for the class arising from alleged economic losses from investing in the Company’s securities.

			The Company and individual defendants filed motions to dismiss, arguing that the Consolidated Amended Complaint lacks particularized factual allegations required to state claims for securities fraud under Sections 10(b) and 20(a). Briefing on the motions was completed on September 10, 2008. On March 24, 2009, the Court denied the defendants’ motions to dismiss. On April 7, 2009, the Company and the individual defendants (except for a former officer of the Company and Westernbank) filed a motion for reconsideration or, in the alternative, for certification of an interlocutory appeal, and the former officer of the Company and Westernbank joined in that motion on April 15, 2009. Discovery was stayed while the defendants’ motion was pending. After briefing by the parties, the defendants’ motion for reconsideration and the request for certification of an interlocutory appeal were denied by the Court on July 28, 2009.

			On August 11, 2009, the Company and Westernbank filed their answer to the Consolidated Amended Complaint, denying liability and raising numerous affirmative defenses to the claims asserted against them. On August 25, 2009, all individual defendants, except for a former officer of the Company and Westernbank, filed their answers to the Consolidated Amended Complaint, also denying liability and raising numerous affirmative defenses to the claims asserted against them.

			On October 13, 2009, a former officer of the Company and Westernbank filed his answer to the Consolidated Amended Complaint, denying liability and raising numerous affirmative defenses, and also asserting cross-claims against the other defendants, including the Company and Westernbank, and third-party claims against numerous other current or former officers, directors, or shareholders. In his cross-claims, the former officer of the Company and Westernbank claims a right to indemnification for any judgment entered against him and a right to join the class as a purchaser of Company stock during the alleged class period. According to the Court’s scheduling order, issued on October 16, 2009, the defendants have until October 28, 2009 to respond to the cross-claims asserted by former officer of the Company and Westernbank. The Company and Westernbank plan to file a response by that date.

			Under the Court’s scheduling order, the initial pre-trial conference is set for the week of December 16, 2009, discovery is set to end on May 10, 2010, and trial is set to begin on August 2, 2010. As in any case, this schedule is subject to further modification if the Court later deems it appropriate.

			At this time, discovery has not yet commenced. The Company intends to vigorously defend this action.

	•		Shareholder Derivative Action. On January 11, 2008, Hunter Wylie, who claims to be a Company shareholder, filed a shareholder derivative complaint (the “Complaint”), entitled Wylie v. Stipes, et al., and W Holding Company, Inc., C.A.No. 08-1036 GAG (D.P.R.), in the United States District Court for the District of Puerto Rico, purportedly on behalf of the Company against certain of the Company’s current and former officers and directors, and named the Company as a nominal defendant. Plaintiff contends that since April 2006 the individual named defendants caused the Company to overstate the value of its loan portfolio, principally in connection with the timing and reporting of impairments to loans to Inyx that are described below, and thereby allegedly caused monetary and reputational losses to the Company. After the Company and individual defendants moved to dismiss on April 7, 2008, the plaintiff filed an Amended Complaint on June 9, 2008, alleging breach of fiduciary duty, waste of corporate assets, unjust enrichment, violation of the Title 14, Section 2727 of the laws of Puerto Rico, and a claim for reimbursement under Section 304 of the U.S. Sarbanes-Oxley Act. The Amended Complaint seeks unspecified monetary damages for the Company’s benefit from the individual defendants and a court order directing the Company to alter its governance policies. The Company and the individual defendants moved to dismiss the Amended Complaint, arguing principally that plaintiff failed to make a pre-suit demand on the Company’s Board of Directors, and thus lacks standing to proceed with this derivative action, that plaintiff otherwise failed to allege facts sufficient to state claims for relief, and that there is no private right of action under Section 304 of the Sarbanes-Oxley Act. Briefing on the motions to dismiss was completed on December 16, 2008. On February 2, 2009, the Court entered an Opinion and Order granting the motions to dismiss in part and denying them in part. The Court dismissed Count I of the Amended Complaint (claiming reimbursement under Section 304 of the Sarbanes-Oxley Act) in its entirety, dismissed Count IV (alleging unjust enrichment) as to certain defendants, and denied the motions to dismiss as to the other counts challenged therein.

			Following the Court’s February 2, 2009 Order on the motion to dismiss, the Company’s board of directors formed a Special Litigation Committee (the “SLC”) and charged it with full and exclusive authority to investigate, review and analyze the facts and circumstances that are the subject of the Wylie lawsuit and to determine what action should be taken on behalf of the Company with respect to plaintiff’s claims. The SLC has engaged the law firm of Conception, Sexton & Martinez of Coral Gables, Florida to assist in carrying out its charge. On April 22, 2009, the SLC moved the Court to stay the case to permit the SLC time to conduct its investigation and, if necessary, take action on the Company’s behalf. On June 5, 2009, the Court granted the SLC’s motion, staying the case until August 24, 2009.

169

			Subsequent to August 24, 2009, the Company filed an answer to the Amended Complaint as nominal defendant, and the remaining defendants (except for a former officer of the Company and Westernbank) filed answers to the Amended Complaint, denying liability and raising numerous affirmative defenses to the claims asserted against them, but no other litigation activities, including discovery, have commenced.

			We expect the SLC to file a report with the Court regarding the results of its investigation and what actions, if any, it is or will be taking on behalf of the Company. The Company intends to vigorously defend this action.

	•		Litigation Relating to the Inyx Loan:

			Westernbank Puerto Rico v. Kachkar, et al., 07-civ.-1606 (ADC-BJM) (D.P.R.) and member cases Inyx, Inc., et al. v. W Holding Company, Inc., et al, Civil No. 08-2428 (ADC-BJM) and Kachkar, et al. v. Westernbank Puerto Rico, Civil No. 08-2427 (ADC-BJM): Westernbank filed an initial complaint against Inyx, Inc., Jack Kachkar, Inyx’s Chief Executive Officer, and certain other officers in the United States District Court for the District of Puerto Rico on July 5, 2007, and amended the complaint on August 23, 2007. In its amended filing, Westernbank alleges violations of the U.S. Racketeer Influenced and Corrupt Organizations Act (“RICO”) and other fraud-based claims, as well as claims related to alleged breaches of certain loan agreements and guarantees. Westernbank, among other things: (a) seeks damages of over $142 million against the defendants under, among other causes of action, RICO; (b) requests payment of over $142 million from the defendants on amounts due and payable under certain loan agreements; and (c) requests that the Court order foreclosure on Westernbank’s collateral. On September 20, 2007, Westernbank moved to freeze certain of defendants’ assets. On July 23, 2008, a Report and Recommendation was issued by the Magistrate Judge recommending that Westernbank’s motion to freeze assets be granted (the “Asset Freeze Report and Recommendation”).

			All defendants moved to dismiss and certain defendants moved alternatively to stay or transfer the case to the United States District Court for the Southern District of Florida in which they had, at that time, two other cases pending. The two cases were: (1) Kachkar, et al v. Westernbank Puerto Rico (Florida Circuit Court Case No. 07-22573-CA-40) and (2) Inyx v. Westernbank, et al. (Florida Circuit Court 07-26412-CA-30). The first of these cases was filed on July 23, 2007, when Jack Kachkar and Viktoria Benkovitch filed a complaint against Westernbank in the Circuit Court for the 11^th Circuit of Miami-Dade County, Florida. The complaint alleges that Kachkar and Benkovitch should not have to perform their obligations under the guarantees, security agreements, and asset pledges they provided to Westernbank, and asserts causes of action for: (1) fraudulent inducement and damages; (2) rescission of instruments based on fraudulent conduct and/or lack of consideration; (3) slander of title and damages; and (4) violation of Florida’s Deceptive and Unfair Trade Practices Act. This action was subsequently removed to the U.S. District Court for the Southern District of Florida under the caption Kachkar and Benkovitch v. Westernbank Puerto Rico, Civil No. 07-22140-Cooke (the “Kachkar Case”). The second case was filed on August 17, 2007, when Inyx filed a complaint against Westernbank, the Company and certain current and former officers of the Company and Westernbank in the Circuit Court for the 11^th Circuit of Miami-Dade County, Florida. Inyx alleged that a promissory note and mortgage that Inyx provided to Westernbank during the course of the business relationship between the parties should be rescinded, and that Inyx should be awarded damages because Westernbank allegedly breached an oral forbearance agreement to refrain from collecting on loans it had made to Inyx and its subsidiaries, and because Westernbank failed to provide additional financing to these companies. This action was subsequently removed to the U.S. District Court for the Southern District of Florida under the caption Inyx, Inc. v. Westernbank Puerto Rico, et. al., Civil No. 07-22409-Cooke (the “Inyx Case”). On September 25, 2008, the Kachkar Case was consolidated into the Inyx Case in the United States District Court for the Southern District of Florida (the “Florida Consolidated Cases”).

			On April 17, 2008, all the transfer motions were denied. On September 5, 2008, the Magistrate Judge issued another Report and Recommendation by which he recommended that all of the defendants’ motions to dismiss be denied. On September 22, 2008, the defendants, except for Inyx, filed their respective objections to the Magistrate Judge’s Report and Recommendation concerning the motions to dismiss. On October 9, 2008, Westernbank filed its response to the defendants’ objections to this Report and Recommendation.

			On September 8, 2008, Westernbank filed a Motion for Partial Summary Judgment on the breach of contract claims. On March 3, 2009, the Magistrate Judge issued a third Report and Recommendation, this time recommending that Westernbank’s Motion for Partial Summary Judgment on the breach of contract claims be granted (the “Summary Judgment Report and Recommendation”). Among other things, the Magistrate Judge recommended that defendants Kachkar and Benkovitch be personally liable under certain personal guarantees for $100.1 million.

170

			On October 3, 2008, all of the defendants filed their respective answers to Westernbank’s Amended Complaint. Some of the defendants (Kachkar, Benkovitch, Inyx, Inc., and Green) also filed counterclaims. On December 2, 2008, Westernbank filed a motion to dismiss the original counterclaims filed by the defendants Kachkar, Benkovitch, Green and Inyx pursuant to Fed.R.Civ.P. 12(b)(6). On January 14, 2009, defendants Kachkar, Benkovitch, Inyx and Green filed amended answers to Westernbank’s First Amended Complaint and Kachkar, Benkovitch and Inyx filed amended counterclaims. Defendant Green withdrew his counterclaim against Westernbank for alleged defamation. The Amended Counterclaims can be categorized into five distinct groups. The primary set of counterclaims, raised by Inyx, Kachkar, and Benkovitch, seeks enforcement of an alleged “oral forbearance and workout agreement” between Westernbank, Inyx, Kachkar, and Benkovitch related to approximately $142 million in loans that Westernbank had made to Inyx and its subsidiaries under various written loan agreements. The second subject of the counterclaims is the claim brought by Inyx alleging that Westernbank breached the agreements and otherwise breached an implied covenant of good faith and fair dealing by not giving Inyx ten days to pay the amounts then outstanding (close to $140 million), and by abruptly placing Inyx into administration in the United Kingdom. The third set of counterclaims involves allegations that Westernbank either breached a confidentiality agreement relating to Kachkar’s supposed business relationship with Mr. Saadi Gadhafi, or tortiously interfered with that relationship. A fourth set of counterclaims revolves around the allegation that Westernbank breached an unwritten escrow agreement allegedly entered into on or about the 20^th of June, 2007. The fifth and final set of counterclaims is composed of Kachkar’s and Benkovitch’s claims relating to their real estate in Florida, with respect to which they raise claims of conversion, rescission of instruments, slander of title, and violations of Florida’s Deceptive and Unfair Trade Practices Act.

			On December 23, 2008, the Florida Consolidated Cases were transferred to the District of Puerto Rico. Subsequently, on June 23, 2009, the Court granted Westernbank’s motion to consolidate Civil Case No. 07-1606 (ADC/BJM) (“Lead Case”) with the two transferred Florida cases under the following captions in the District of Puerto Rico, Civil Case Nos. 08-2427 (JAF) and 08-2428 (ADC/BJM) (“Consolidated Cases”).

			On February 18, 2009, Westernbank filed another motion to dismiss the amended counterclaims pursuant to Fed.R.Civ.P. 12(b)(6). At the request of the Court, and notwithstanding that a motion to dismiss was filed, on June 22, 2009, Westernbank filed its answers to the defendants’ Amended Counterclaims in Civil Case No. 07-1606 (ADC/BJM).

			On June 25, 2009, Westernbank filed an emergency motion to stay discovery in the pending Consolidated Cases before the Court until a ruling on the three Reports and Recommendations and motions to dismiss that were pending consideration in the Lead and Consolidated Cases. Pursuant to an Order dated July 7, 2009, the Court granted Westernbank’s request.

			On July 24, 2009, the Court ordered the Inyx Parties to re-file their objections to the Summary Judgment Report & Recommendation within the applicable 25-page limit. Also on July 24, 2009, the Court granted Westernbank five (5) working days from the filing of the Inyx Parties’ revised objections to the Summary Judgment Report and Recommendation to file its corresponding response to the same. The Inyx Parties filed their Amended Objections on July 29, 2009, to which Westernbank responded on August 5, 2009.

			On August 20, 2009, the Court issued the first opinion and order adopting in full the Report & Recommendation issued by the Magistrate Judge on September 5, 2008, thus denying the Motions to Dismiss filed by the Inyx Parties in Civil Case No. 07-1606. Also on August 20, 2009, the Court ordered the Inyx Parties to file, within 5 days of the issuance of the order, a motion setting forth the amount of the bond, if any, that should be imposed upon Westernbank in the event the Court adopted the Asset Freeze Report and Recommendation (the “August 20^th Order”).

			On August 31, 2009, the Inyx Parties filed a “Motion to Set Bond of $150 Million” (“Motion to Set Bond”). On September 1, 2009, Westernbank moved to strike the Motion to Set Bond based on the Inyx Parties’ failure to comply with the time period established by the Court in its August 20^th Order. Pursuant to an order issued on that same date, the Inyx Parties’ Motion to Set Bond was stricken from the record (the “Order Striking the Bond Motion”).

			Also on September 1, 2009, the Court issued its second opinion and order, this time adopting in full the Asset Freeze Report and Recommendation and, consequently, granting Westernbank’s Motion to Freeze Assets (the “Asset Freeze Opinion and Order”).

			On September 9, 2009, the Inyx Parties filed a Motion for Reconsideration whereby they request the Court to reconsider its Asset Freeze Opinion and Order (the “First Motion for Reconsideration”). On September 10, 2009, the Inyx Parties filed a motion to stay the Asset Freeze Opinion and Order pending the disposition of the First Motion for Reconsideration. On September 11, 2009, the Inyx Parties filed a motion requesting the Court to reconsider its September 1^st Order Striking the Bond Motion (the “Second Motion for Reconsideration”). On September 15, 2009, the Inyx Parties’ filed a motion to stay the Asset Freeze Order pending the disposition of the Second Motion for Reconsideration.

			On September 22, 2009, the Court issued a third opinion and order, this time adopting in full the Summary Judgment Report and Recommendation, thus granting Westernbank’s breach of contract claims.

			On September 23, 2009, Westernbank filed a motion for voluntary dismissal without prejudice against co-defendants Colin Hunter and Steven Handley, as a result of a confidential settlement agreement reached with them. On September 28, 2009, the Court granted this motion and entered Partial Judgment dismissing Westernbank’s claims against co-defendants Colin Hunter and Steven Handley, without prejudice, pursuant to the terms and conditions of the confidential settlement agreement.

171

			On September 28, 2009, Westernbank also filed its oppositions to the defendants’ First and Second Motions for Reconsideration and the motion to stay the Asset Freeze Opinion and Order.

			On October 1, 2009, defendants Inyx, Inc., Kachkar, Benkovitch and Rima Goldschmidt filed a motion requesting, among other things, that the Court produce to them the confidential settlement agreement entered into by Westernbank and co-defendants Hunter and Handley, which Westernbank had submitted under seal to the Court on September 23, 2009, as part of the filings related to the voluntary dismissal without prejudice of the claims against said co-defendants. On October 2, 2009, Westernbank filed its response to the arguments raised in the motion requesting disclosure of the settlement agreement, and produced said agreement to Inyx, Inc., Kachkar, Benkovitch and Goldschmidt. Thus, on October 14, 2009, the Court issued an order finding as moot the motion for disclosure of the settlement agreement.

			On October 5, 2009, defendants filed a motion to strike from the record Westernbank’s oppositions to the First and Second Motions for Reconsideration, and Westernbank opposed on October 19, 2009. The motion to strike the First and Second Motions for Reconsideration is still pending before the Court’s consideration.

			Finally, on October 12, 2009, Westernbank filed a Motion for Partial Summary Judgment on the Fraud Guarantees executed by defendants. Defendants have until October 29, 2009, to file their response in opposition to this motion for summary judgment.

REGULATORY MATTERS

The SEC has requested information and documentation relating to the Company’s loans to Inyx and the Company has provided that information and the documents to the SEC Staff on a voluntary basis.

The Company, as a Puerto Rico chartered bank holding company, and its subsidiaries are each subject to extensive federal and local government supervision and regulation relating to its bank holding company status and the banking and insurance businesses. There are laws and regulations that restrict transactions between the Company and its subsidiaries. In addition, the Company benefits from favorable tax treatment of activities relating to the Westernbank’s International Division. Any change in such regulations, whether by applicable regulators or as a result of legislation subsequently enacted by the Congress of the United States or the applicable local legislature, could have a substantial impact on the companies’ operations.

On February 27, 2008, the Board of Directors of Westernbank, the Office of the Commissioner of Financial Institutions of Puerto Rico (the “OCIF”) and the FDIC reached an agreement (the “Informal Agreement”) which establishes timeframes for the completion of corrective and remedial measures which have been previously identified and are in process of completion. The Informal Agreement provides that the Board of Directors of Westernbank will, among other things, conduct management and loan reviews; review and make any necessary revisions to Westernbank’s asset/liability and investment policies; ensure the Westernbank’s compliance with the Bank Secrecy Act (“BSA”) and Westernbank’s BSA Compliance Program; correct all apparent violations of laws and regulations; formulate a plan to improve asset quality; submit and implement a profit and budget plan; develop and submit a capital plan to remain well-capitalized; and establish a compliance committee to monitor and coordinate compliance with the agreement. As described in Note 4, Westernbank has a significant lending concentration with an aggregate unpaid principal balance of $405.3 million at December 31, 2008 to a commercial group in Puerto Rico, which exceeds the statutory limit for loans to individual borrowers and continues to be a violation of the agreement. On May 20, 2008, a penalty of $50,000 was imposed by the OCIF. As of December 31, 2008, this loan relationship was not impaired. There can be no assurance that the OCIF and the FDIC will not take further action on this issue.

172

In May 2009, Westernbank entered into a Consent Order (the “Consent Order”) with the FDIC and the OCIF and (ii) on the same date, W Holding Company, Inc. entered into a Written Agreement with the Board of Governors of the Federal Reserve System (the “Written Agreement”, and, together with the Consent Order, the “Orders”). The Orders formalize the Informal Agreement under which Westernbank has operated since February of 2008.

The Orders do not impose penalties or fines on the Company or Westernbank. The Orders require the Company and Westernbank to take various affirmative actions, including, but not limited to, strengthening the Bank’s and the Company’s Boards of Directors by increasing the number of independent directors; strengthening Westernbank’s management team; submitting a capital, budget, profit and liquidity contingency plans; obtaining approvals prior to paying any dividends; submitting a written plan to reduce and monitor Westernbank’s problem and adversely classified loans; eliminating from Westernbank’s books, by collection or charge-offs, all items or portions of items classified “Loss” as a result of the FDIC’s 2008 examination; submitting loan policies and procedures for regulatory approval; restricting credit advances to adversely classified borrowers; establishing an adequate and effective appraisal compliance program; and maintaining an adequate allowance for loan losses.

In addition to the aforementioned actions, the Consent Order requires Westernbank to maintain a Tier 1 leverage ratio of not less than 5.5% as of the date of the Consent Order, 5.75% at September 30, 2009 and 6.0% at March 31, 2010. Although Westernbank complies with the quantitative definition of a well capitalized institution, by virtue of having a capital directive within the Consent Order, the Bank was deemed to be adequately capitalized. Simultaneously with the Consent Order, the FDIC granted Westernbank a renewable six month waiver expiring November 30, 2009 for the issuance of brokered deposits. No assurance can be given that the Orders would not have a material adverse effect on the Company or Westernbank.

OTHER

Transactions with Affiliates of Lehman Brothers Inc.

The cancellation of the repurchase financing agreements and derivative transactions with LBHI resulted in the following noncash activities recorded in 2008: (1) decrease in investment securities held to maturity by $576,597,000; (2) decrease in accrued interest receivable by $4,688,000; (3) increase in other assets by $139,210,000; (4) decrease in repurchase agreements by $433,198,000; (5) decrease in accrued interest payable by $3,541,000; and (6) decrease in accrued expenses and other liabilities by $1,520,000.

14. RETIREMENT BENEFIT PLANS:

The Company has a non-contributory deferred profit-sharing plan, covering substantially all of its employees, which provides for retirement and disability benefits. The Company’s contribution to the profit-sharing plan is discretionary. The Company’s contributions for the years ended December 31, 2008, 2007 and 2006 were $250,000 for each year.

173

The Company has a defined contribution plan under Section 1165(e) of the Puerto Rico Treasury Department Internal Revenue Code, covering all full-time employees of the Company who have one year of service and are twenty-one years or older. Under the provisions of this Plan, participants may contribute each year from 2% to 10% of their compensation after deducting social security, up to the maximum deferral amount specified by local law. The Company contributes 50 percent of the first 6 percent of base compensation that a participant contributes to the Plan. Participants are immediately vested in their contributions plus actual earnings thereon. The Company’s contributions plus actual earnings thereon are 100 percent vested after three years of credited service. In case of death or disability, a participant or his/her beneficiary will be 100 percent vested regardless of the number of years of credited service. The Company’s contributions for the years ended December 31, 2008, 2007 and 2006, amounted to $609,000, $565,000 and $595,000, respectively.

15. MINIMUM REGULATORY CAPITAL REQUIREMENTS:

The Company is subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as amended, which is administered by the Board of Governors of the Federal Reserve System. Westernbank is regulated by the Federal Deposit Insurance Corporation and by the Office of the Commissioner of Financial Institutions of Puerto Rico. On October 3, 2008, the Congress of the United States of America approved the Emergency Economic Stabilization Act of 2008, pursuant to which, among other things, the amount of deposit insurance, excluding Individual Retirement Accounts (“IRAs”), provided by the FDIC was temporarily increased from $100,000 to $250,000 per depositor until December 31, 2009, which was subsequently extended to December 31, 2013. Westernbank’s deposits, including IRAs, are insured by the Deposit Insurance Fund, which is administered by the FDIC, up to $250,000 per depositor. In addition, on November 21, 2008, the FDIC issued a final rule regarding the Temporary Liquidity Guarantee Program (“TLGP”). Under the TLGP, the FDIC provides full insurance coverage of non-interest bearing deposit transaction accounts of participating institutions until June 30, 2010 and guaranties of qualifying senior unsecured debt.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and Westernbank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2008, that the Company and Westernbank meet all capital adequacy requirements to which they are subject.

174

The Company’s and Westernbank’s actual capital amounts and ratios as of December 31, 2008 and 2007, are also presented in the table below:


											Minimum To Be
						Minimum					Well Capitalized Under
						Capital					Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in thousands)
As of December 31, 2008:

Total Capital to Risk Weighted Assets:
Consolidated	$	948,259		10.24	%	$	741,081		8	%		N/A		N/A
Westernbank		933,042		10.09			740,110		8		$	925,137		10	%

Tier I Capital to Risk Weighted Assets:
Consolidated	$	830,412		8.96	%	$	370,541		4	%		N/A		N/A
Westernbank		815,344		8.81			370,055		4		$	555,082		6	%

Tier I Capital to Average Assets:
Consolidated	$	830,412		5.26	%	$	631,134		4	%		N/A		N/A
Westernbank		815,344		5.19			628,808		4		$	786,010		5	%

As of December 31, 2007:

Total Capital to Risk Weighted Assets:
Consolidated	$	1,028,775		9.06	%	$	908,293		8	%		N/A		N/A
Westernbank		1,008,782		8.89			907,287		8		$	1,134,109		10	%

Tier I Capital to Risk Weighted Assets:
Consolidated	$	884,424		7.79	%	$	454,146		4	%		N/A		N/A
Westernbank		864,605		7.62			453,585		4		$	680,377		6	%

Tier I Capital to Average Assets:
Consolidated	$	884,424		4.90	%	$	721,576		4	%		N/A		N/A
Westernbank		864,605		4.82			718,115		4		$	897,644		5	%

In December 2007, the Company made a $60.0 million capital infusion to Westernbank.

At December 31, 2008, Westernbank was considered a “well-capitalized” institution under the FDIC’s Capital Adequacy Guidelines. As explained before, in May 2009, Westernbank entered into a Consent Order with the FDIC and the OCIF. The Consent Order requires Westernbank to maintain a Tier 1 leverage ratio of not less than 5.5% as of the date of the Consent Order, 5.75% at September 30, 2009 and 6.0% at March 31, 2010. As a result of having a capital directive, Westernbank was deemed to be adequately capitalized in May 2009. Westernbank was also considered adequately capitalized under the FDIC’s Capital Adequacy Guidelines as of December 31, 2007. As of June 30, 2009, Westernbank’s Tier 1 leverage ratio was 6.16%. No assurance can be given that the Consent Order would not have a material adverse effect on the Company or Westernbank. See Note 13 for disclosures regarding regulatory matters.

During the third quarter of 2009, to strengthen Westernbank’s regulatory capital ratios, the Company transferred to Westernbank from its investment portfolio certain securities that yielded a capital infusion of $13.5 million to Westernbank. The Company’s ability to pay dividends to its stockholders and other activities can be restricted if its capital falls below levels established by the Federal Reserve guidelines. In addition, any bank holding company whose capital falls below levels specified in the guidelines can be required to implement a plan to increase capital. Furthermore, the Company’s ability to pay dividend is restricted by the Orders entered into the Board of Governors of the Federal Reserve System, the FDIC and the OCIF.

175

and on the Company’s common shares and all of the outstanding series of its preferred shares, effective with the payment on March 16, 2009 and applicable to stockholders of record as of February 27, 2009, as a measure to strengthen the Company and Westernbank’s capital positions.

16. COMMON AND PREFERRED STOCK TRANSACTIONS:

On November 7, 2008, the stockholders of the Company approved an amendment to the Company’s Certificate of Incorporation to effect a reverse stock split at a specific ratio to be determined by the Company’s board of directors in its sole discretion within the range of one-for-ten to one-for-fifty. On November 14, 2008, the Company’s board of directors declared a one-for-fifty reverse split on its common stock for the stockholders of record as of December 1, 2008. All financial statement data and references to average number of shares outstanding, per share amounts, common shares issued and stock option information have been retrospectively adjusted to reflect the reverse stock split.

During years 2007 and 2006, the Company issued 8,404 shares; and 7,521 shares (as adjusted to reflect the reverse stock split declared on November 14, 2008 and effective on December 1, 2008) of common stock, respectively, upon the exercise of stock options by several of the Company’s executive officers (see Note 17). No options were exercised in 2008.

The Company has issued the following non-cumulative, monthly income preferred stock:


						Issuance
						Price and
						Liquidation				Proceeds From
Issuance			Dividend			Preference		Shares		Issuance, Net of		Issuance
Year		Type of Preferred Stock	Rate			Per Share		Issued		Issuance Costs		Costs

	1998	Convertible, 1998 Series A		7.125	%	$	25		1,219,000	$	29,143,000	$	1,332,000
	1999	Non-convertible, 1999 Series B		7.250			25		2,001,000		48,273,000		1,752,000
	2001	Non-convertible, 2001 Series C		7.600			25		2,208,000		53,103,000		2,097,000
	2001	Non-convertible, 2001 Series D		7.400			25		1,791,999		43,238,000		1,562,000
	2002	Non-convertible, 2002 Series E		6.875			25		1,725,000		41,463,000		1,662,000
	2003	Non-convertible, 2003 Series F		6.700			25		4,232,000		102,192,000		3,608,000
	2003	Non-convertible, 2003 Series G		6.900			25		2,640,000		63,671,000		2,329,000
	2004	Non-convertible, 2004 Series H		6.700			50		2,675,500		129,311,000		4,464,000
	2005	Non-convertible, 2004 Series H		6.700			50		401,300		19,450,000		615,000


		Total							18,893,799	$	529,844,000	$	19,421,000

176

During 2006, 3,550 shares of the convertible preferred stock 1998 Series A were converted into 248 shares (as adjusted) of common stock. During 2008 and 2007, no shares of the convertible preferred stock 1998 Series A were converted into shares of common stock. At December 31, 2008 and 2007, the Company had outstanding 481,910 shares of its 7.125% Non-cumulative, Convertible Monthly Income Preferred Stock, Series A.

The Company may redeem, in whole or in part, at any time at the following redemption prices, if redeemed during the twelve month period beginning July 1 for the 1998 Series A, May 28 for the 1999 Series B, March 30 for the 2001 Series C, August 1 for the 2001 Series D, October 31 for the 2002 Series E, May 30 for the 2003 Series F, August 29 for the 2003 Series G and December 21 for the 2004 Series H of the years indicated below, plus accrued and unpaid dividends, if any, to the date of redemption, subject to regulatory approval:


	Redemption Price per Share
December 31,	Series A		Series B		Series C		Series D		Series E		Series F		Series G		Series H

2009	$	25.00	$	25.00	$	25.00	$	25.00	$	25.00	$	25.25	$	25.25	$	51.00
2010		25.00		25.00		25.00		25.00		25.00		25.00		25.00		50.50
2011 and thereafter		25.00		25.00		25.00		25.00		25.00		25.00		25.00		50.00

17. STOCK COMPENSATION PLANS:

The Company has two shareholders-approved 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 294,953 shares (as adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008, and for stock splits and stock dividends declared) of common stock can be granted. Also, options for up to 294,953 shares (as adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008, and for stock splits and stock dividends declared) 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 options become fully exercisable after five years following the grant date and the maximum contractual term of the options is ten years. The Company’s policy is to issue new shares when share options are exercised. 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. No options have been granted under the 1999 Nonqualified Option Plan.

177

The activity in outstanding stock options (as adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008) under the 1999 Qualified Option Plan for the years ended December 31, 2008, 2007 and 2006, is set forth below.


	2008					2007					2006
				Weighted					Weighted					Weighted
				Average					Average					Average
	Number of			Exercise		Number of			Exercise		Number of			Exercise
	Options			Price		Options			Price		Options			Price
Beginning of year		139,220		$	169.12		154,174		$	192.00		156,906		$	189.50
Options granted		—			—		9,800			164.01		9,700			298.00
Options excercised		—			—		(8,404	)		148.64		(7,521	)		142.50
Options forfeited		(4,851	)		167.07		(16,350	)		403.07		(4,911	)		392.00

End of year		134,369		$	169.12		139,220		$	169.12		154,174		$	192.00

The Company has various exercise prices for stock options granted, all of them granted at different dates under the 1999 Qualified Option Plan. The following table summarizes the exercise prices and the weighted average remaining contractual life of the options outstanding at December 31, 2008:


							Weighted
							Average
	Number of Options						Remaining
			Vested or				Contractual
Exercise Prices	Outstanding		Expected to Vest		Exercisable		Life (Years)
$142.50⁽¹⁾		117,589		117,589		117,589		1.09
$167.50⁽¹⁾		1,756		1,756		1,756		2.38
$338.50⁽¹⁾		2,224		2,224		2,224		3.55
$150.00 ⁽¹⁾		4,400		4,400		880		8.68
$302.50 ⁽¹⁾		900		900		180		8.09
$312.50 ⁽¹⁾		700		280		280		7.92
$450.00 ⁽¹⁾		100		100		60		6.94
$535.50 ⁽¹⁾		6,700		6,620		4,020		6.55


Total		134,369		133,869		126,989		1.75


Aggregate Intrinsic Value	$	—	$	—	$	—


(1)		As adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

The Company granted 9,800 and 9,700 stock options (as adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008) during 2007 and 2006, respectively. No options were granted during 2008. The weighted average of the fair value of the stock options granted in years 2007 and 2006 was $25.50 and $298.00 per stock option (as adjusted), respectively. The fair value was estimated using the Black-Scholes option pricing model with the following weighted average assumptions at the grant date: (1) the dividend yield was 7.98% in 2007 and 3.47% in 2006; (2) the expected life was 7 years based on historical experience; (3) the expected volatility was 44% in 2007 and 39% in 2006 and was obtained from published

178

external information; and, (4) the risk-free interest rate was 4.41% in 2007 and 4.68% in 2006. The weighted average of the exercise price of the stock options and the market price of the stock at the grant date was $164.01 in 2007 and $298.00 in 2006 and $129.00 in 2007 and $279.00 in 2006 (as adjusted), respectively.

The total intrinsic value of options exercised during the years ended December 31, 2007 and 2006, was $1,155,000 and $1,827,000, respectively. No options were exercised in 2008. The total fair value of options vested for the years ended December 31, 2008, 2007 and 2006 was $283,000, $285,000, and $661,000, respectively.

Stock-based employee compensation expense for the years ended December 31, 2008, 2007 and 2006 amounted to $322,000, $207,000 and $675,000, respectively. This compensation expense is non deductible for income tax purposes. At December 31, 2008, there was $594,000 of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the 1999 Qualified Option Plan. The cost is expected to be recognized as follows:


Year Ending
December 31,	(In thousands)
2009	$	328
2010		208
2011		46
2012		12


Total	$	594

18. OFF-BALANCE SHEET ACTIVITIES:

In the normal course of business, the Company becomes a party to credit related financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and commercial letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

Commitments to Extend Credit and Letters of Credit

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, commitments under credit card arrangements and standby and commercial letters of credit is represented by the contractual notional amount of those instruments, which does not necessarily represent the amount potentially subject to risk. In addition, the measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are identified. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. At December 31, 2008, there was no such allowance for unfunded loan commitments as the exposure was not considered significant. At December 31, 2007, the Company had an allowance for losses on unfunded loan commitments totaling $1.1 million included in “Accrued expenses and other liabilities” in the accompanying consolidated financial statements.

Commercial letters of credit are conditional commitments issued by the Company on behalf of a customer authorizing a third party to draw drafts on the Company up to a stipulated amount and with specified terms and conditions.

The Company issues financial standby letters of credit to guarantee the performance of various customers to third parties. If the

179

customer fails to meet its financial or performance obligation to the third party under the terms of the contract, then, upon their request, the Company would be obligated to make the payment to the guaranteed party. In accordance with the provisions of FIN No. 45, at December 31, 2008 and 2007, the Company recorded a liability of $348,000 and $370,000, respectively, which represents the fair value of the obligation undertaken to stand ready to perform in issuing the guarantees under the standby letters of credit. The fair value approximates the unearned fee received from the customer for issuing such commitments. These fees are deferred and recognized over the commitment period. The contract amounts in standby letters of credit outstanding at December 31, 2008 and 2007, shown in the table below, represent the maximum potential amount of future payments the Company could be required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Company’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Company has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these standby letters of credit.

The contract amount of financial instruments, whose amounts represent credit risk at December 31, 2008 and 2007, was as follows:


	2008		2007
	(In thousands)
Commitments to extend credit:
Fixed rates	$	9,389	$	8,424
Variable rates		312,212		619,627
Unused lines of credit:
Commercial		152,455		244,153
Credit cards and other		111,978		121,730
Standby letters of credit		31,222		38,385
Commercial letters of credit		4,289		6,047

Total	$	621,545	$	1,038,366

For the years ended December 31, 2008, 2007 and 2006, the Company did not record any loss allowances in connection with risks involved in off-balance sheet credit-related financial instruments, other than the $1.1 million allowance for losses on unfunded loan commitments recorded in 2007. At December 31, 2008 and 2007, there were no additional off-balance sheet credit-related financial instruments other than those mentioned above.

19. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

The Company’s interest rate risk management strategy involves modifying the repricing characteristics of certain financial instruments so that changes in interest rates do not adversely affect the Company’s net interest margin. Derivative instruments that the Company may use as part of its interest rate risk management strategy include interest rate swaps, indexed options and interest rate caps. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments and the value of the derivative 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 fair value of a derivative is based on the estimated amount the Company would receive or pay to terminate the derivative contract, taking into account the current interest rates and the creditworthiness of the counterparty. The fair value of the derivatives is reflected on the Company’s statements of financial condition as derivative assets and derivative liabilities.

180

Derivative instruments are generally negotiated over-the-counter (“OTC”) contracts. Negotiated OTC derivatives are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise price and maturity. OTC contracts generally consist of swaps, caps and Standard & Poor’s 500 Composite Stock Index options.

Interest rate caps represent a right to receive cash if a reference interest rate rises above a contractual strike rate; therefore, its value increases as reference interest rates rise. Interest rate caps protect against rising interest rates. The credit risk inherent in the interest rate cap is the risk that the exchange party may default.

The Company utilizes interest rate swaps (“CD Swaps”) to convert a portion of its long-term, callable, fixed-rate brokered certificates of deposit (“CDs”) or firm commitments to originate long-term, callable, fixed-rate brokered CDs to a variable rate. The purpose of entering into these CD swaps is to hedge the risk of changes in the fair value of certain brokered CDs or firm commitments to originate brokered CDs attributable to changes in the LIBOR rate (interest rate risk). The hedged brokered CDs are typically structured with terms of 3 to 20 years with a call option on the Company’s part, but no surrender option for the CD holder, other than for death or disability. The extended term of the brokered CDs minimizes liquidity risk while the option to call the CDs after the first year provides the Company with funding flexibility.

On January 3, 2006, the Company redesignated most of its CD Swaps relating to certain CDs utilizing the “long-haul” method of SFAS No. 133 and completed new contemporaneous hedging documentation. In cases in which the hedging relationship was effective, the changes in the fair value of both the hedged items (the CDs) and the interest rate swaps were recorded through earnings. At December 31, 2007, the notional amount of these CD Swaps and the principal balance of the hedged CDs amounted to $470,176,000. On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities- Including an Amendment of FASB Statement No. 115 and discontinued the use of fair value hedge accounting of SFAS No. 133 on these CD Swaps. This Statement allows entities to choose to measure certain financial assets and liabilities at fair value with any changes in fair value reflected in earnings. The Company elected to measure at fair value the brokered deposits being hedged with the CD Swaps. The fair value option may be applied on an instrument-by-instrument basis. One of the main considerations in the determination for the adoption of SFAS No. 159 was to eliminate the operational procedures required by the long-haul method of accounting in terms of documentation, effectiveness assessment, and manual procedures followed by the Company to fulfill the requirements specified by SFAS No. 133. See Note 20.

181

The Company also enters into derivative contracts (including interest rate swaps and interest rate caps) for the benefit of commercial customers. The Company may economically hedge significant exposures related to these derivatives by entering into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. The Company minimizes the credit risk through credit approvals, limits, counterparty collateral and monitoring procedures. Since these derivatives do not qualify for hedging accounting, they are recorded at fair value with offsetting gains and losses recognized within noninterest income in the consolidated statements of operations. During 2008, there were no credit downgrades to parties of derivative contracts. At December 31, 2008 and 2007, the notional amount of these interest rate swaps amounted to $343,944,000 and $345,260,000, respectively, and the notional amount of these interest rate caps amounted to $86,502,000 and $86,700,000, respectively.

The following table summarizes the fair value of derivative instruments, excluding accrued interest, and the location in the consolidated statements of financial condition as of December 31, 2008 and 2007:


	2008					2007
	Notional		Fair			Notional		Fair
	Amount		Value			Amount		Value
			(In thousands)
Fair value hedge:
Included in accrued expenses and other liabilities:
CD swaps	$	—	$	—		$	470,176	$	6,012
Right to offset effect		—		—			—		(3,391	)

Total	$	—	$	—		$	470,176	$	2,621


Derivatives not designated as hedge:
Included in other assets:
CD swaps	$	120,525	$	658		$	—	$	—
Interest rate swaps with commercial loan borrowers		171,972		11,660			172,630		6,759
Interest rate cap used to offset exposure of interest rate cap with commercial loan borrowers		43,251		71			43,350		230
Purchased options used to manage exposure to the stock market on equity indexed deposits		72,370		6,806			82,347		25,884
Right to offset effect		—		(824	)		—		(3,391	)

Total	$	408,118	$	18,371		$	298,327	$	29,482


Included in accrued expenses and other liabilities:
CD swaps	$	—	$	—		$	91,599	$	753
Interest rate swaps used to offset exposure of interest rate swaps with commercial loan borrowers		171,972	$	12,051			172,630		6,758
Interest rate cap with commercial loan borrowers		43,251		27			43,350		230
Right to offset effect		—		(824	)		—		—

Total	$	215,223	$	11,254		$	307,579	$	7,741


Included in deposits:
Embedded options on equity indexed deposits	$	69,444	$	6,986		$	78,819	$	24,664

182

Accrued interest receivable and accrued interest payable (included in accrued expenses and other liabilities) on interest rate swaps at December 31, 2008 and 2007, were as follows:


			Accrued Interest
	2008				2007
	Receivable		Payable		Receivable		Payable
			(In thousands)
CD Swaps	$	22	$	117	$	603	$	990
Interest rate swaps with commercial loan borrowers		158		—		10		2
Interest rate swaps used to offset exposure of interest rate swaps with commercial loan borrowers		—		154		—		8

Total	$	180	$	271	$	613	$	1,000

The following table summarizes the fair value of derivative instruments and the location in the consolidated statements of operations for the year ended December 31, 2008:


	(In thousands)
Derivatives not designated as hedge:
Included in net gain on derivative instruments and deposits measured at fair value:
Interest rate swaps with commercial loan borrower	$	14,144
Interest rate swaps used to offset exposure of interest rate swaps with commercial loan borrower		(12,884	)
Interest rate cap with commercial loan borrower		203
Interest rate cap used to offset exposure of interest rate cap with commercial loan borrower		(76	)
Purchased options used to manage exposure to the stock market on equity indexed deposits		(11,981	)
Embedded options on equity indexed deposits		11,118
CD swaps		9,509

Total net gain on derivative instruments		10,033
Net loss on deposits measured at fair value (see Note 20)		(6,908	)


Total net gain on derivative instruments and deposits measured at fair value	$	3,125

183

A summary of the types of swaps used and their terms at December 31, 2008 and 2007, follows:


	2008			2007
	(Dollars in thousands)
Pay floating/receive fixed:
Notional amount	$	292,497		$	734,405
Weighted average receive rate at period end		5.06	%		5.04	%
Weighted average pay rate at period end (100% floating rate over three month LIBOR, plus a spread ranging from minus .40% to plus .03%)		2.78	%		5.00	%

Pay fixed/receive floating:
Notional amount	$	171,972		$	172,630
Weighted average receive rate at period end (100% floating rate over one or three month LIBOR)		2.70	%		5.09	%
Weighted average pay rate at period end		5.30	%		5.30	%

The changes in notional amount of swaps outstanding during the years ended December 31, 2008 and 2007, follows:


	2008			2007
	(In thousands)
Balance — at January 1	$	907,035		$	569,275
New swaps		28,325			345,260
Called and matured swaps		(470,891	)		(7,500	)


Balance — at December 31	$	464,469		$	907,035

At December 31, 2008, the maturities of interest rate swaps, embedded options and purchased options by year were as follows:


Year Ending			Interest Rate		Embedded		Purchased
December 31,	Swaps		Caps		Options		Options
			(In thousands)
2009	$	65,100	$	—	$	26,321	$	27,867
2010		207,450		—		15,768		16,469
2011		0		—		7,946		8,206
2012		73,930		—		7,924		8,234
2013		0		86,502		11,485		11,595
Thereafter		117,989		—		—		—


Total	$	464,469	$	86,502	$	69,444	$	72,371

Swap agreements amounting to $105,025,000 at December 31, 2008, provide the counterparties the option to cancel the swap agreements on any interest payment date after the first anniversary (matching the call option that Westernbank has purchased on the certificates of deposit).

At December 31, 2008, the carrying value of the specific collateral held by the counterparties consisted of investment securities available for sale and held to maturity with a carrying value of $3,608,000 and $14,262,000, respectively.

184

20. FAIR VALUE MEASUREMENTS:

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on the value of identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities (e.g., brokered deposits elected for fair value option under SFAS 159) whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Effective January 1, 2008, the Company adopted SFAS No. 159, which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on an instrument-by-instrument basis (“fair value option”). Upon election of the fair value option in accordance with SFAS No. 159, subsequent changes in fair value are recorded as an adjustment to earnings. The adoption of SFAS No. 159 resulted in cumulative adjustments of: (1) $5.3 million increase to retained earnings; (2) $12.9 million decrease to deposits; (3) $4.2 million decrease to other assets; and (4) $3.4 million decrease to deferred income tax.

The disclosures required under SFAS No. 157, SFAS No. 159 and SFAS No. 107 have been included in this Note.

Fair Value Option

The Company elected on January 1, 2008 to measure at fair value certain long-term, callable brokered deposits (financial liabilities) that were hedged with interest rate swaps (“SFAS 159 Brokered CDs”) and were previously designated for fair value hedge accounting in accordance with SFAS No. 133 (see Note 19). Electing the fair value option allows the Company to eliminate the burden of complying with the requirements for hedge accounting under SFAS No. 133 (e.g., documentation and effectiveness assessment) without introducing earnings volatility. Interest rate risk on the SFAS 159 Brokered CDs continues to be economically hedged with callable interest rate swaps with the same terms and conditions. The Company did not elect the fair value option for the vast majority of other brokered deposits because these are not hedged by derivatives.

185

economically. The fair value of the CDs is computed using the outstanding principal amount. The discount rates used are based on US dollar LIBOR and swap rates. The fair value does not incorporate a credit risk spread, since the callable brokered deposits are generally for amount less than the FDIC insurance.

Interest paid/accrued on SFAS 159 Brokered CDs is recorded as part of interest expense on deposits and the accrued interest and the change in fair value of the SFAS 159 Brokered CDs are reported within deposits in the consolidated statement of financial condition. Fair value changes (excluding interest expense) are included in earnings within noninterest income in the consolidated statement of operations.

As of December 31, 2008 and January 1, 2008, deposits included callable brokered deposits measured at fair value with an aggregate fair value of $109,944,000 and $516,650,000, and carrying principal balance of $109,281,000 and $522,895,000 ($529,500,000 book value), respectively. Fair value changes included in earnings for instruments for which the fair value option was elected included losses of $6.9 million for the year ended December 31, 2008 and are reported as net gain on derivative instruments and deposits measured at fair value in the consolidated statement of operations. Accrued interest payable at December 31, 2008 and interest expense for the year ended December 31, 2008 on callable brokered deposits measured at fair value amounted to $708,000 and $12.9 million, respectively. They are reported separately from the deposit measured at fair value and from its corresponding change in fair value (see Note 7).

Estimated Fair Value

The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value for the Company.

The estimated fair value of financial instruments is subjective in nature and involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. In addition, the fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business.

The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed in these consolidated financial statements as required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments:

• Short-term Financial Assets and Liabilities — For financial instruments with a short-term or no stated maturity, at prevailing market rates and limited credit risk, carrying amounts approximate fair value. Those financial instruments include cash and due from banks, money market instruments, certain deposits (passbook accounts, money market and checking accounts), federal funds purchased and accrued interest.

• Investment Securities Available for Sale, Held to Maturity and Trading Securities — The fair values of investment securities available for sale, held to maturity and trading securities are estimated based on quotations received from pricing service firms and/or securities dealers. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

• Federal Home Loan Bank (FHLB) Stock — FHLB stock is valued at its redemption value.

• Residential Mortgage Loans Held for Sale — Fair value is based on the contract price at which the mortgage loans are expected to be sold.

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

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

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

186

• Mortgage Servicing Rights — The carrying amount of mortgage servicing rights, which is evaluated periodically for impairment, approximates the fair value (fair value is estimated considering prices for similar assets).

• Deposits — The fair value of deposits with no stated maturity, such as non-interest bearing, demand deposits, savings, NOW, and money market accounts is, for purpose of this disclosure, equal to the amount payable on demand as of the respective dates. The fair value of fixed rate certificates of deposit is based on the discounted value of contractual cash flows using current rates for certificates of deposit with similar terms and remaining maturities. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. For fair value of SFAS 159 Brokered CDs refer to “Fair Value Option” section included in this Note.

• Resell Agreements, Repurchase Agreements, Advances from FHLB and Mortgage Note Payable — The fair value of resell agreements, repurchase agreements, advances from FHLB and mortgage note payable is based on the discounted value using rates currently available to the Company for instruments with similar terms and remaining maturities.

• Derivative Assets and Derivative Liabilities —The fair value of the derivative instruments is based on an independent valuation model that uses primarily observable market parameters, such as yield curves, and takes into consideration the credit risk component, when appropriate. Derivatives are mainly composed of interest rate swaps, indexed option contracts and caps.

Although most of the derivative instruments are fully collateralized, a credit spread is considered for those that are not secured in full. The cumulative mark-to-market effect of credit risk in the valuation of derivative instruments resulted in an unrealized loss of $527,000 as of December 31, 2008.

• Commitments to Extend Credit and Letters of Credit — The fair value of commitments to extend credit and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings.

187

The following table presents the estimated carrying value and fair value of the Company’s financial instruments at December 31, 2008 and 2007:


	2008				2007
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(In thousands)
Financial Assets:
Cash and due from banks	$	68,368	$	68,368	$	153,473	$	153,473
Federal funds sold and resell agreements		—		—		886,700		886,079
Interest-bearing deposits in banks		1,096,465		1,096,465		56,287		56,287
Investment securities available for sale		3,670,241		3,670,241		479,001		479,001
Investment securities held to maturity		1,037,970		1,020,837		6,598,197		6,532,930
FHLB stock		64,190		64,190		49,453		49,453
Residential mortgage loans held for sale		18,871		18,871		6,500		6,500
Loans (excluding allowance for loan losses)		8,949,806		8,931,661		9,548,631		9,552,287
Accrued interest receivable		56,224		56,224		105,377		105,377
Mortgage servicing rights		3,270		3,270		3,033		3,033
Derivatives, included in assets		18,371		18,371		29,482		29,482
Other		644		644		671		671

Financial Liabilities:
Deposits:
Non-interest bearing		250,380		250,380		317,753		317,753
Interest bearing		10,629,794		10,765,630		10,011,456		10,164,807
Embedded options on deposits		6,986		6,986		24,664		24,664
Federal funds purchased and repurchase agreements		3,204,142		3,272,079		6,146,693		6,163,790
Advances from FHLB		42,000		44,913		102,000		104,074
Mortgage note payable		34,932		35,401		35,465		36,190
Accrued interest payable		127,141		127,141		172,916		172,916
Derivatives, included in liabilities		11,254		11,254		10,362		10,362
Other		12,403		12,403		12,210		12,210

Off-Balance Sheet Credit Related
Financial Instruments:

Liabilities:
Commitments to extend credit		—		2,585		—		5,168
Unused lines of credit:
Commercial		462		462		680		680
Credit cards and other		137		137		164		164
Commercial letters of credit		348		348		370		370

188

Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the balance of assets and liabilities measured at fair value on a recurring basis, including financial liabilities for which the Company has elected the fair value option as of December 31, 2008:


	Level 1		Level 2		Level 3		Total
			(In thousands)
Financial Assets:
Investment securities available for sale⁽¹⁾	$	2,912	$	3,667,329	$	—	$	3,670,241
Residential mortgage loans held for sale ⁽¹⁾		—		1,270				1,270
Derivatives, included in other assets ⁽¹⁾		—		18,371		—		18,371
Mortgage servicing rights, included in other assets ⁽¹⁾		—		—		3,270		3,270
Financial Liabilities:
Brokered deposits ⁽²⁾		—		109,944		—		109,944
Derivatives, included in deposits ⁽¹⁾		—		6,986		—		6,986
Derivatives, included in accrued expenses and other liabilities ⁽¹⁾		—		11,254		—		11,254


(1)		Carried at fair value prior to the adoption of SFAS No. 159.

(2)		Represents items to which the Company has elected the fair value option under SFAS No. 159.

Level 3 assets measured at fair value correspond to the mortgage servicing rights, which amounted to $3,270,000 and $3,033,000 at December 31, 2008 and 2007, respectively. In 2008, the Company capitalized mortgage servicing rights amounting to $516,000 and recognized an amortization expense of them of $279,000. The carrying amount of mortgage servicing rights, which is evaluated periodically for impairment, approximates the fair value (fair value is estimated considering prices for similar assets). In 2008, there were no level 3 liabilities measured at fair value.

There were no transfers in and/or out of Level 3 for financial instruments recorded at fair value on a recurring basis during the year ended December 31, 2008.

189

Financial Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The valuation methodologies used to measure these fair value adjustments are described above. For assets measured at fair value on a nonrecurring basis in 2008, that were still held on the statement of financial condition at period end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at December 31, 2008.


	Carrying Value as of December 31, 2008				Valuation Allowance as
	Level 1	Level 2	Level 3		of December 31, 2008
			(In thousands)
Assets:
Loans receivable ⁽¹⁾			$	772,423	$	128,983
Foreclosed real estate held for sale ⁽²⁾			$	10,030		1,341


(1)		Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral in accordance with the provisions of SFAS 114. The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. absorption rates), which are not market observable and have become significant to the fair value determination.

(2)		The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Valuation allowance is based on market valuation adjustments after the transfer from the loan portfolio to the foreclosed real estate held for sale portfolio.

21. RESERVE FUND:

The Banking Law of Puerto Rico requires that a reserve fund be established by Westernbank and that annual transfers of at least 10% of its net income be made, until such reserve fund equals its total paid-in capital on common and preferred shares. Such transfers restrict its retained earnings, which would otherwise be available for dividends.

190

22. QUARTERLY FINANCIAL DATA (UNAUDITED):

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


2008	March 31			June 30			September 30			December 31
Total interest income	$	222,473		$	199,020		$	203,645		$	181,155
Total interest expense		178,829			166,216			165,217			153,107

Net interest income		43,644			32,804			38,428			28,048
Provision for loan losses		14,957			14,346			15,382			22,821

Net interest income (loss) after provision for loan losses		28,687			18,458			23,046			5,227
Total noninterest income		11,648			26,646			9,871			12,490
Total noninterest expenses		(45,037	)		(41,748	)		(46,066	)		(62,958	)

Income (loss) before income taxes		(4,702	)		3,356			(13,149	)		(45,241	)
Provision (credit) for income taxes		(37,314	)		2,258			(2,070	)		(17,160	)

Net income (loss)	$	32,612		$	1,098		$	(11,079	)	$	(28,081	)


Earnings (loss) per common share:
Basic⁽¹⁾	$	7.09		$	(2.46	)	$	(6.16	)	$	(11.31	)


Diluted ⁽¹⁾	$	7.08		$	(2.46	)	$	(6.16	)	$	(11.31	)


2007	March 31			June 30			September 30			December 31
Total interest income	$	264,141		$	271,447		$	270,915		$	263,686
Total interest expense		185,457			196,894			202,785			199,990

Net interest income		78,684			74,553			68,130			63,696
Provision for loan losses		34,481			73,404			21,703			147,974

Net interest income (loss) after provision for loan losses		44,203			1,149			46,427			(84,278	)
Total noninterest income		11,008			11,131			13,262			12,397
Total noninterest expenses		(35,013	)		(35,808	)		(44,670	)		(47,918	)

Income (loss) before income taxes		20,198			(23,528	)		15,019			(119,799	)
Provision (credit) for income taxes		7,491			(3,475	)		4,803			(48,591	)

Net income (loss)	$	12,707		$	(20,053	)	$	10,216		$	(71,208	)


Earnings (loss) per common share:
Basic⁽¹⁾	$	1.06		$	(8.88	)	$	0.30		$	(24.39	)


Diluted ⁽¹⁾	$	1.04		$	(8.88	)	$	0.30		$	(24.39	)


(1)		As adjusted for the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

191

Decreases in net interest income for the quarters of 2008 and 2007 and the increases in the provision for loan losses for the fourth quarter of 2008 and the second and fourth quarters of 2007 were mainly attributed to higher impaired and non-performing loans during the quarters, mainly attributed to the construction loan portfolio and the asset-based lending loan portfolio of the Company. The decrease in the provision for loan losses in the third quarter of 2007 was mainly due to the impact of the Inyx loan which mainly affects periods before the third quarter of 2007.

The increase in noninterest income for the second quarter of 2008 was principally due to the sale of certain land lots held for sale with realized gains of $14.7 million.

The increase in noninterest expenses for the fourth quarter of 2008 was mainly due to the recognition of a loss of $13.9 million against the $139.2 million owed by affiliates of Lehman Brothers, Inc. (see Note 13). The increases in noninterest expenses in the third and fourth quarters of 2007 were mainly attributed to legal, accounting and consulting fees associated with the internal review conducted by the Company’s Audit Committee as a result of the restatement announcement and other related legal and regulatory proceedings.

The change in the provision (credit) for income taxes in the first quarter of 2008 was due to the settlement with tax authorities of most of the Company’s uncertain tax positions which resulted in an income tax benefit of $33.1 million that was recognized as a reduction to the income tax provision. In addition, changes in the provision (credit) for income taxes in quarters where the Company sustained a loss are affected by the income tax benefit of a net operating loss carryfoward. This income tax benefit is reduced by the net exempt interest income because it is based on economic net operating loss (net operating loss less net exempt income).

The changes in the provision (credit) for income taxes for 2007 were mainly attributed to the effect of income taxes which related to unrecognized tax benefits as required by FIN No. 48 (see Note 11) and the decrease in taxable income. The increase in the provision for income taxes in proportion to income before income taxes (the effective income tax rate) for the 2006 quarters is attributed to three factors. First, on May 13, 2006, with an effective date of January 1, 2006, the Puerto Rico legislature approved Law No. 89, which imposes an additional 2.0% tax on all companies covered by the Puerto Rico Banking Act, as amended, such as Westernbank. Therefore, Westernbank was then subject to a maximum statutory tax rate of 43.5%. This transitory income tax of 2% amounted to $3.0 million for the year ended December 31, 2006 (see Note 11). Second, the increase in the Company’s taxable income derived from the increase in its loan portfolio changed the proportion between exempt and taxable income, therefore increasing the Company’s effective tax rate. Third, for the year ended December 31, 2006, the Company accrued $10.2 million for income tax contingencies (see Note 11).

192

2008 Quarterly Condensed Consolidated Statements of Financial Condition


	As of
	March 31			June 30			September 30			December 31
	2008			2008			2008			2008
ASSETS
Cash and due from banks	$	97,455		$	145,729		$	71,567		$	68,368
Money market instruments:
Federal funds sold and resell agreements		669,892			634,562			626,100			—
Interest-bearing deposits in banks		120,176			35,162			167,873			1,096,465
Investment securities available for sale		1,391,002			3,843,657			3,769,717			3,670,241
Investment securities held to maturity		4,003,772			2,783,342			2,138,295			1,037,970
Federal Home Loan Bank stock, at cost		40,782			76,295			69,590			64,190
Residential mortgage loans held for sale		8,924			18,201			11,755			18,871
Loans, net		9,058,487			8,976,316			8,860,099			8,667,717
Accrued interest receivable		61,112			67,401			67,742			56,224
Foreclosed real estate held for sale, net		99,079			92,680			98,657			98,570
Other real estate held for sale, net		—			6,252			6,252			5,462
Premises and equipment, net		129,966			117,380			119,870			120,796
Deferred income taxes, net		134,889			143,826			146,487			155,661
Other assets		117,413			107,980			236,507			222,362

TOTAL	$	15,932,949		$	17,048,783		$	16,390,511		$	15,282,897


LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	289,534		$	288,201		$	268,491		$	250,380
Interest-bearing and related accrued interest payable		10,013,304			10,508,603			10,754,621			10,751,793

Total deposits		10,302,838			10,796,804			11,023,112			11,002,173
Federal funds purchased and repurchase agreements		4,401,294			5,169,626			4,323,170			3,204,142
Advances from Federal Home Loan Bank		80,000			42,000			42,000			42,000
Mortgage note payable		35,331			35,203			35,073			34,932
Advances from borrowers for taxes and insurance		8,916			11,213			9,116			11,759
Accrued expenses and other liabilities		90,596			89,046			80,907			72,524

Total liabilities		14,918,975			16,143,892			15,513,378			14,367,530

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock		18,157			18,157			18,157			18,157
Common stock (1)		3,298			3,298			3,298			3,298
Paid-in capital (1)		870,195			870,261			870,359			870,450
Retained earnings:
Reserve fund		81,613			82,386			81,034			78,389
Undivided profits (accumulated profits)		54,764			43,802			22,786			(13,939	)
Accumulated other comprehensive income (loss), net		(14,053	)		(113,013	)		(118,501	)		(40,988	)

Total stockholders’ equity		1,013,974			904,891			877,133			915,367

TOTAL	$	15,932,949		$	17,048,783		$	16,390,511		$	15,282,897


(1)		As adjusted for the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

193

2007 Quarterly Condensed Consolidated Statements of Financial Condition


	As of
	March 31		June 30			September 30			December 31
	2007		2007			2007			2007
			(Dollars in thousands)
ASSETS
Cash and due from banks	$	107,847	$	99,334		$	94,492		$	153,473
Money market instruments:
Federal funds sold and resell agreements		809,502		707,150			817,220			886,700
Interest-bearing deposits in banks		9,540		26,447			84,771			56,287
Investment securities available for sale		21,565		509,265			490,894			479,001
Investment securities held to maturity		7,273,193		7,081,467			6,903,227			6,598,197
Federal Home Loan Bank stock, at cost		33,482		32,682			34,662			49,453
Residential mortgage loans held for sale		4,135		5,490			3,398			6,500
Loans, net		8,823,892		8,960,055			9,174,111			9,209,911
Accrued interest receivable		113,892		118,384			116,049			105,377
Foreclosed real estate held for sale, net		6,223		8,465			9,375			10,971
Premises and equipment, net		125,866		127,111			128,833			129,591
Deferred income taxes, net		66,681		83,492			87,842			134,177
Other assets		55,661		69,853			95,206			107,073

TOTAL	$	17,451,479	$	17,829,195		$	18,040,080		$	17,926,711


LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	328,776	$	339,248		$	320,804		$	317,753
Interest-bearing and related accrued interest payable		9,631,248		9,601,619			10,011,670			10,178,748

Total deposits		9,960,024		9,940,867			10,332,474			10,496,501
Federal funds purchased and repurchase agreements		6,052,049		6,494,477			6,329,474			6,146,693
Advances from Federal Home Loan Bank		102,000		102,000			102,000			102,000
Borrowings under line of credit		32,500		34,030			—			—
Mortgage note payable		35,836		35,717			35,596			35,465
Advances from borrowers for taxes and insurance		8,236		10,455			8,511			11,539
Accrued expenses and other liabilities		126,500		118,065			148,405			138,277

Total liabilities		16,317,145		16,735,611			16,956,460			16,930,475

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock		18,157		18,157			18,157			18,157
Common stock (1)		3,298		3,298			3,298			3,298
Paid-in capital (1)		869,825		869,953			870,031			870,128
Retained earnings:
Reserve fund		79,613		78,389			78,395			78,389
Undivided profits		162,387		126,496			119,646			31,383
Accumulated other comprehensive income (loss), net		1,054		(2,709	)		(5,907	)		(5,119	)

Total stockholders’ equity		1,134,334		1,093,584			1,083,620			996,236

TOTAL	$	17,451,479	$	17,829,195		$	18,040,080		$	17,926,711


(1)		As adjusted for the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

194

23. SEGMENT INFORMATION:

The Company’s management monitors and manages the financial performance of three reportable business segments, the traditional banking operations of Westernbank Puerto Rico, the activities of the division known as Westernbank International, which includes the activities of Westernbank Financial Center Corp. (“Westernbank International”) and the activities of the Asset-Based Lending Unit (formerly a division known as Westernbank Business Credit (“WBC”), which specializes in asset-based commercial business lending. Other operations of the Company not reportable in those segments include: Westernbank Trust Division, which offers trust services; Westernbank International Trade Services Division, which specializes in international trade products and 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 (loss) of its wholly-owned subsidiaries.

Westernbank International operates as an IBE under the International Banking Center Regulatory Act. Westernbank Financial Center Corp. was incorporated to carry out commercial lending and other related activities in the United States of America and commenced operations in February 2007. The operation of Westernbank Financial Center Corp, was largely inactive, and was closed during the third quarter of 2008. Westernbank International’s business activities consist of commercial banking and related services, and treasury and investment activities outside of Puerto Rico. As of December 31, 2008 and 2007, and for the three year period ended December 31, 2008, substantially all of Westernbank International’s business activities consisted of investments in securities by the U.S. Government or U.S. sponsored agencies, money market instruments with entities located in the United States, certain asset-based loans originated by the Asset-Based Lending Unit and a commercial loan collateralized with real estate originated by WFCC to entities principally located in the United States of America. Investment securities held by Westernbank International amounted to $1.9 billion and $2.4 billion at December 31, 2008 and 2007, respectively. These securities principally consisted of investment in U.S. Government agencies, FHLMC and FNMA. There are no investments in residual tranches. At December 31, 2008 and 2007, management concluded that there was no other-than-temporary impairment on Westernbank International’s investment securities portfolio (see Note 3). Money market instruments amounted to $1.3 million and $589.3 million at December 31, 2008 and 2007, respectively. Money market instruments include resell agreements and interest bearing deposits with other financial institutions.

For the resell agreements, the Company monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest and requests additional collateral when the fair value of the underlying collateral falls to less than the collateral requirement. The collateral requirement was equal to 102 percent of the related receivable, including interest (see Note 2). Loans receivable-net at December 31, 2007 amounted to $79,035,000 and included foreign loans mainly to entities in the United Kingdom, amounting to $3,395,000 at December 31, 2007. No loans were outstanding at December 31, 2008.

Asset-Based Lending Unit’s business activities consist of commercial business loans secured principally by commercial real estate, accounts receivable, inventory and equipment. Loans receivable, net held by the Asset-Based Lending Unit, excluding those asset-based loans held by Westernbank International, as of December 31, 2008 and 2007 amounted to $743.4 million and $899.1 million, 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.

195

Substantially all of the Company’s business activities are with customers located in the United States of America and its territories (mainly in the Commonwealth of Puerto Rico). Revenues from external customers attributed to foreign countries (Canada and United Kingdom) amounted to $603,000 and $1,556,000 for the years ended December 31, 2007 and 2006, respectively. There were no revenues from external customers attributed to foreign countries during 2008. In addition, all of the Company’s long-lived assets are located in Puerto Rico.


	As of and for the year ended
	December 31, 2008
	Westernbank			Westernbank			Asset-Based			Total major			Other
	Puerto Rico			International			Lending Unit			segments			Segments			Eliminations			Total
										(In thousands)

Interest income:
Consumer loans	$	72,615		$	—		$	—		$	72,615		$	—		$	—		$	72,615
Construction loans		52,046			—			—			52,046			—			—			52,046
Commercial loans		314,354			1,434			54,842			370,630			—			—			370,630
Mortgage loans		74,242			—			—			74,242			—			—			74,242
Treasury and investment activities		153,028			81,254			—			234,282			6,015			(3,537	)		236,760

Total interest income		666,285			82,688			54,842			803,815			6,015			(3,537	)		806,293
Interest expense		559,022			61,829			44,743			665,594			1,312			(3,537	)		663,369

Net interest income		107,263			20,859			10,099			138,221			4,703			—			142,924

Provision for loan losses		(40,340	)		1,531			(28,697	)		(67,506	)		—			—			(67,506	)

Noninterest income, net:
Service and other charges on loans		8,665			—			1,699			10,364			—			—			10,364
Service charges on deposit accounts		11,712			—			—			11,712			—			—			11,712
Other fees and commissions		16,710			20			—			16,730			2,052			(256	)		18,526
Trust account fees		—			—			—			—			2,051			(127	)		1,924
Insurance commission fees		—			—			—			—			1,417			(9	)		1,408
Net gain on derivative instruments and deposits measured at fair value		3,125			—			—			3,125			—			—			3,125
Net gain (loss) on sales and valuation of loans held for sale, securities and other assets		15,046			(1,450	)		—			13,596			—			—			13,596

Total noninterest income		55,258			(1,430	)		1,699			55,527			5,520			(392	)		60,655

Equity in earnings (loss) of subsidiaries		1,100			—			—			1,100			(2,973	)		1,873			—

Total net interest income and noninterest income (loss)	$	123,181		$	20,960		$	(16,899	)	$	127,342		$	8,656		$	75		$	136,073


Total assets	$	14,022,308		$	2,033,476		$	765,690		$	16,821,474		$	1,628,524		$	(3,167,101	)	$	15,282,897

196


	As of and for the year ended
	December 31, 2007
	Westernbank			Westernbank			Asset-Based			Total major			Other
	Puerto Rico			International			Lending Unit			segments			Segments			Eliminations			Total
										(In thousands)

Interest income:
Consumer loans	$	78,664		$	—		$	—		$	78,664		$	—		$	—		$	78,664
Commercial loans		457,429			13,378			92,760			563,567			—			—			563,567
Mortgage loans		81,534			—			—			81,534			—			—			81,534
Treasury and investment activities		219,631			123,398			—			343,029			6,590			(3,195	)		346,424

Total interest income		837,258			136,776			92,760			1,066,794			6,590			(3,195	)		1,070,189
Interest expense		604,000			121,710			62,605			788,315			6			(3,195	)		785,126

Net interest income		233,258			15,066			30,155			278,479			6,584			—			285,063

Provision for loan losses		(251,484	)		(3,684	)		(22,394	)		(277,562	)		—			—			(277,562	)

Noninterest income, net:
Service and other charges on loans		9,868			427			2,392			12,687			—			—			12,687
Service charges on deposit accounts		12,397			—			—			12,397			—			—			12,397
Other fees and commissions		14,274			165			—			14,439			2,225			(248	)		16,416
Trust account fees		—			—			—			—			2,107			(124	)		1,983
Insurance commission fees		—			—			—			—			1,935			(21	)		1,914
Net gain on derivative instruments		1,308			—			—			1,308			—			—			1,308
Net gain (loss) on sales and valuation of loans held for sale, securities and other assets		1,429			—			250			1,679			(586	)		—			1,093

Total noninterest income		39,276			592			2,642			42,510			5,681			(393	)		47,798

Equity in loss of subsidiaries		(302	)		—			—			(302	)		(68,881	)		69,183			—

Total net interest income and noninterest income (loss)	$	20,748		$	11,974		$	10,403		$	43,125		$	(56,616	)	$	68,790		$	55,299


Total assets	$	15,414,539		$	3,179,254		$	942,479		$	19,536,272		$	1,722,225		$	(3,331,786	)	$	17,926,711


	As of and for the year ended
	December 31, 2006
	Westernbank			Westernbank			Asset-Based			Total major			Other
	Puerto Rico			International			Lending Unit			segments			Segments			Eliminations			Total
										(In thousands)

Interest income:
Consumer loans	$	79,240		$	—		$	—		$	79,240		$	—		$	—		$	79,240
Commercial loans		374,353			23,128			98,977			496,458			—			—			496,458
Mortgage loans		85,397			—			—			85,397			—			—			85,397
Treasury and investment activities		220,226			105,229			—			325,455			6,233			(2,993	)		328,695

Total interest income		759,216			128,357			98,977			986,550			6,233			(2,993	)		989,790
Interest expense		521,372			108,917			54,123			684,412			—			(2,993	)		681,419

Net interest income		237,844			19,440			44,854			302,138			6,233			—			308,371

Provision for loan losses		(4,799	)		(41,366	)		(44,715	)		(90,880	)		—			—			(90,880	)

Noninterest income, net:
Service and other charges on loans		9,259			681			2,587			12,527			—			—			12,527
Service charges on deposit accounts		9,976			—			—			9,976			—			—			9,976
Other fees and commisions		9,943			177			—			10,120			1,386			(238	)		11,268
Trust account fees		—			—			—			—			2,049			(109	)		1,940
Insurance commission fees		—			—			—			—			1,917			(21	)		1,896
Net gain on derivative instruments		632			—			—			632			—			—			632
Net loss on sales and valuation of loans held for sale, securities and other assets		(454	)		—			—			(454	)		(687	)		—			(1,141	)

Total noninterest income		29,356			858			2,587			32,801			4,665			(368	)		37,098

Equity in income of subsidiaries		193			—			—			193			60,037			(60,230	)		—

Total net interest income and noninterest income (loss)	$	262,594		$	(21,068	)	$	2,726		$	244,252		$	70,935		$	(60,598	)	$	254,589


Total assets	$	14,733,972		$	2,860,166		$	1,022,826		$	18,616,964		$	1,761,824		$	(3,304,644	)	$	17,074,144

197

24.

CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY:

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

CONDENSED STATEMENTS OF FINANCIAL CONDITION INFORMATION
(PARENT COMPANY ONLY)


	December 31,
	2008		2007
	(In thousands)
ASSETS
Cash	$	342	$	2,020
Money market instruments		8,000		3,700
Dividends and other accounts receivable from bank subsidiary		1,962		3,863
Investment securities available for sale		2,912		1,906
Investment securities held to maturity		49,911		55,477
Investment in bank subsidiary		899,443		976,416
Investment in nonbank subsidiary		—		2,595
Accrued interest receivable		191		261
Other assets		47		30

TOTAL ASSETS	$	962,808	$	1,046,268

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	44,142	$	45,000
Dividends payable		2,225		4,149
Other liabilities		1,074		883

Total liabilities		47,441		50,032
Stockholders’ equity		915,367		996,236

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	962,808	$	1,046,268

198

CONDENSED STATEMENTS OF OPERATIONS INFORMATION
(PARENT COMPANY ONLY)


	Year Ended December 31,
	2008			2007			2006
				(In thousands)
Dividends from subsidiaries:
Bank subsidiary	$	—		$	—		$	59,043
Nonbank subsidiary		—			1,000			800

Subtotal		—			1,000			59,843
Interest income on investment securities		2,478			3,394			3,241

Total income		2,478			4,394			63,084
Less:
Interest expense on repurchase agreements		1,312			7			—
Net loss on sale and valuation of securities		—			585			688
Operating expenses		3,596			2,150			2,744

Income before provision for income taxes and increase in undistributed earnings (losses) of subsidiaries		(2,430	)		1,652			59,652
Provision for income taxes		47			435			268


Income before increase in undistributed earnings (losses) of subsidiaries		(2,477	)		1,217			59,384
Increase in undistributed earnings (losses) from:
Bank subsidiary		(3,317	)		(69,628	)		—
Nonbank subsidiary		344			73			195

Net income (loss)	$	(5,450	)	$	(68,338	)	$	59,579

199

CONDENSED STATEMENTS OF CASH FLOWS INFORMATION
(PARENT COMPANY ONLY)


	Year Ended December 31,
	2008			2007			2006
				(In thousands)
Cash flows from operating activities:
Net income (loss)	$	(5,450	)	$	(68,338	)	$	59,579
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Undistributed losses (earnings) of subsidiaries		2,973			69,555			(195	)
Dividends received from subsidiaries’ prior years earnings		45,156			68,238			9,103
Deferred income tax provision (credit)		(151	)		211			258
Effect of stock options granted to employees		322			207			675
Amortization of discount on investment securities held to maturity		(9	)		(4	)		(3	)
Net gain on sale of investment securities available for sale		—			—			(62	)
Other-than-temporary impairment of available for sale securities		—			585			750
Decrease (increase) in dividends and other accounts receivable from bank subsidiary		1,901			(41	)		71
Decrease (increase) in accrued interest receivable		70			10			(7	)
Decrease (increase) in other assets		(18	)		107			(77	)
Increase (decrease) in other liabilities		190			805			(531	)

Net cash provided by operating activities		44,984			71,335			69,561


Cash flows from investing activities:
Net decrease (increase) in money market instruments		(4,300	)		11,400			(4,100	)
Proceeds from sales of investment securities available for sale		—			—			1,786
Investment securities held to maturity:
Maturities, prepayments and calls		8,570			—			—
Purchases		(2,995	)		—			—
Capital contributions to subsidiaries		—			(60,000	)		—

Net cash provided by (used in) investing activities		1,275			(48,600	)		(2,314	)


Cash flows from financing activities:
Net increase (decrease) in repurchase agreements		(858	)		45,000			—
Repayment of advances from bank subsidiary		—			—			(743	)
Proceeds from stock options exercised		—			1,249			1,072
Dividends paid		(47,079	)		(68,231	)		(68,140	)

Net cash used in financing activities		(47,937	)		(21,982	)		(67,811	)


Net change in cash		(1,678	)		753			(564	)
Cash at beginning of year		2,020			1,267			1,831

Cash at end of year	$	342		$	2,020		$	1,267

200

25. SUBSEQUENT EVENTS:

On February 17, 2009, the Company’s Board of Directors adopted a resolution to suspend the payment of dividends on the Company’s common shares and all of the outstanding series of its preferred shares, effective with the payment on March 16, 2009 and applicable to stockholders of record as of February 27, 2009, to maintain the Company’s capital position.

In May 2009, Westernbank entered into the Consent Order with the FDIC and the OCIF and (ii) on the same date, W Holding Company, Inc., the Bank Holding Company of Westernbank, entered into a Written Agreement with the Board of Governors of the Federal Reserve System. The Orders formalize an informal agreement under which Westernbank has operated since February of 2008. See Notes 13 and 15 for a summary and description of the Orders.

On October 23, 2009, one of the Company’s largest commercial loan customers suffered an explosion and fire at one of its storage facilities. As of October 28, 2009, the impact of this explosion on the commercial loan customer’s operations and the resulting impact on its ability to repay its obligation to the Company could not be determined. This incident had no impact on the Allowance for Loan Losses as of December 31, 2008.

Subsequent events have been evaluated as of October 28, 2009, the date the Company’s consolidated financial statements were issued.

******


ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

On January 22, 2009, the Audit Committee of the Board of Directors of the Company, determined not to reappoint Deloitte & Touche LLP (“Deloitte”) as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2008 or any quarterly periods therein. Information with respect to this matter is included in the Company’s report on Form 8-K filed on January 30, 2009, which information is incorporated by reference herein.


ITEM 9A.		CONTROLS AND PROCEDURES

This Report includes the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 9A includes information concerning the controls and control evaluations referred to in those certifications.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s Management to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Exchange Act Rules 13a-15(e) and 15d-15(e). In designing and evaluating the disclosure controls and procedures, Management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and Management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In connection with the preparation and filing of this Form 10-K, the Company, under the supervision and with the participation of 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. Based on this evaluation and the Company’s inability to timely file its annual and quarterly reports, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2008 as a result of the material weaknesses in internal control over financial reporting as discussed below.

To address the material weaknesses described below, the Company performed procedures to ensure the reliability of its financial reporting. As a result, Management believes that the consolidated financial statements and other financial information included in this Form 10-K fairly present, in all material respects, the Company’s financial condition, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

201

Management’s Annual Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Management and Directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Management’s assessment of the effectiveness of internal control over financial reporting is based on the criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

All internal control systems, no matter how well designed, have inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

A material weakness is a deficiency (within the meaning of the Public Company Accounting Oversight Board (United States) Auditing Standard No. 5), or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In connection with the preparation and filing of this Form 10-K, the Company’s Management evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. Based on this evaluation, Management has concluded that there were control deficiencies in the Company’s internal control over financial reporting, which individually or in combination are considered material weaknesses as of December 31, 2008. Management has identified the following material weaknesses in the Company’s internal control over financial reporting as of December 31, 2008:

Credit Quality Review

The Company lacked controls that were appropriately designed and operated effectively to ensure that certain loan relationships are reviewed timely by the Company’s Internal Loan Review Department. Specifically, the operation of the loan review controls was inadequate to identify impaired loans, designate loans to non-accrual status, and obtain updated appraisal reports for classified loans on a timely basis. This material weakness could result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.

Appraisal Report Review

The Company lacked controls that were appropriately designed and operated effectively to ensure that appraisal reports for real estate collateral are reviewed on a timely basis by a qualified officer independent of the credit function. This material weakness could result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.

Financial Closing and Reporting

The Company’s financial closing and reporting controls did not operate effectively as to ensure an effective, timely and accurate financial reporting process. Specifically, the Company did not file periodic reports on a timely basis as required by the rules of the SEC and the NYSE.

202

Based on the material weaknesses described above, Management has concluded that, as of December 31, 2008, the Company did not maintain effective internal control over financial reporting.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2008, has been audited by BDO Seidman LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting

The Company is actively engaged in the implementation of remediation efforts to improve its internal control over financial reporting and disclosure controls and procedures. However, as of December 31, 2008, the Company’s management identified a number of material weaknesses in the Company’s internal control over financial reporting. The Company’s remediation efforts are expected to continue throughout and may extend beyond 2009. Management has evaluated whether any changes in our internal control over financial reporting that occurred during the period from January 1, 2008 through December 31, 2008, have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During this period, the Company has taken and is in the process of taking the following actions to remediate the Company’s existing or remaining material weaknesses:

Actions Relating to Material Weaknesses Remediated as of the Date of this Filing

Lending Practices

The Company lacked effective controls to prevent or detect loan-underwriting decisions that did not comply with the Company’s underwriting criteria and that placed heavy reliance on favorable collateral appraisals and undue reliance on optimistic assumptions for prospective borrowers. Specifically, the design and operation of controls in this area were inadequate and resulted in certain loans being approved or extended prior to receiving final appraisal reports, or based upon collateral valuations which significantly exceeded ultimate liquidation values, or on the basis of a poorly supported analysis of the repayment capacity of the borrower. In addition, the Company made significant use of interest reserve advances to cover interest payments on delinquent loans or on loans to borrowers with financial difficulties.

During the third quarter of 2008, the Company reviewed all of its credit and risk functions. This effort has resulted in a realignment of these functions and the adoption of a Company-wide risk management process. The Company recruited a new senior officer as Chief Risk Officer (the “CRO”) with reporting responsibilities to the Audit Committee. In addition, the Company recruited and appointed a new senior officer as Chief Credit Risk Officer (the “CCRO”) with reporting responsibilities to the CRO and the Audit Committee. All credit administrative functions, (including among others, analysis, pre-closing, loan closing, credit monitoring and review, collections and workout) will be overseen by the CCRO. A senior officer was appointed as Chief Banking Officer and Commercial Lender, completely independent from the credit administrative functions, to be responsible for all new originations, extension and restructuring of commercial, construction and development loans reporting directly to the Chief Executive Officer.

Plan for Remediation of Material Weaknesses that Existed as of December 31, 2008

The following describes the continuing efforts that are being undertaken by the Company to address the material weaknesses that existed in the Company’s internal control over financial reporting as of December 31, 2008. The remediation efforts described below are specifically designed to address the material weaknesses identified by the Company’s Management and to enhance the Company’s overall corporate governance. The Company is still in the process of testing the effectiveness of the following controls, and will not make a final determination that it has completed the remediation of these remaining material weaknesses until it has completed testing of the newly implemented internal controls.

Credit Quality Review

In early 2007, the Company strengthened the Internal Loan Review Function by hiring an Internal Loan Review Officer and two other professionals with significant loan review experience. More recently, in September 2008, the Company hired a new Internal Loan Review Officer (the “ILRO”) to head the Internal Loan Review Department (the “ILRD”) with reporting responsibilities to the Company’s CRO and the Audit Committee. Among the responsibilities of the ILRO, as the ultimate responsible officer of the ILRD, is the determination of the loan classifications, the establishment of specific reserves, if any, the recommendation of loans to be placed on non-accrual status and the recommendation of loan charge-offs. The Company also hired four other loan review specialists in September 2008. Also, the Company has developed, implemented and provided a series of training programs to further strengthen the

203

Internal Loan Review Function. Review procedures continue to be enhanced to promptly identify credit weaknesses, policy exceptions and loan covenant exceptions, among others, in order to properly address the loans under review.

The ILRD completed a full review of all commercial loan relationships over $3.0 million outstanding at March 31, 2008, under the supervision and guidance of the ILRO and with the assistance of external consultants in order to determine loan classifications, establish specific reserves, if any, designate loans to non-accrual status and recommend loan charge-offs. The ILRD has also continued to actively participate in the loan classification and determination of loss reserves in the subsequent quarterly periods. In addition, the Bank’s credit monitoring functions, which cover all lending functions, are now required to obtain updated appraisal reports for all adversely classified loans in excess of $1,000,000 and continue to be involved in the credit review analysis process with enhanced communication to both, Management and the Bank’s ILRD.

The Company has implemented enhanced procedures for the Bank’s ILRD with respect to the Asset-based Lending Unit, formerly known as Westernbank Business Credit Division, loan portfolio, which include the review of the collateral information reports and the preparation of loan review and impairment analyses for all the Asset-based Lending Unit, formerly known as Westernbank Business Credit Division, loans at least on a quarterly basis, or more frequently if deemed necessary.

The ILRD policies were changed to include in the department’s scope of review 100% of loan relationships in excess of $3.0 million, internally classified loans, significant commercial loans in non-accrual status, loans criticized or classified by the auditors of the FDIC, and loans criticized by external auditors. Relationships under $3.0 million are evaluated by the Company’s CRO.

Appraisal Report Review

During the third quarter of 2008, the Company established procedures through the Department of the CCRO to ensure that appraisal reports are reviewed by a qualified officer independent of the credit function. In addition, during 2009 the Company strengthened its appraiser review function by amending the Company’s Appraisal and Evaluation Policy to assure that the policy is in compliance with all federal and state regulations.

During 2009, the Company also created an Appraisal Review Division. This is an independent unit reporting to the Company’s CCRO, staffed with experienced personnel. The Appraisal Review Department responsibilities, among others, include: (1) preparation of engagement and order appraisals; (2) revision of appraisals to ensure that appraised values submitted are properly supported, reasonable, and in compliance with all federal and state regulations, as well as the Company’s policies and procedures; (3) preparation of written review reports; (4) coordination with appraisers for any necessary corrections on appraisals prepared for the Company; and (5) providing advice and assistance to loan officers in the implementation of the Company’s appraisal policy.

Financial Closing and Reporting

During 2008, the Company’s attention was focused primarily on the restatement of its previously issued consolidated financial statements and the preparation of the 2007 consolidated financial statements. In addition, on January 28, 2009, the Audit Committee of the Board of Directors engaged BDO Seidman as its independent registered public accounting firm for the audit of the Company’s fiscal year 2008 financial statements. As a result of the appointment of BDO Seidman and the Company’s focus on completing the 2007 consolidated financial statements, the Company was unable to file its periodic reports on a timely basis as required by the rules and regulations of the SEC and the NYSE. The Company has devoted and will continue to devote significant resources towards remediating the material weaknesses set forth in this Form 10-K and becoming current with required SEC and NYSE filings.

The Audit Committee will monitor the implementation of all of the Company’s remediation measures. In addition, under the direction of the Audit Committee, Management will continue to review and make necessary changes to the overall design of the Company’s internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
of W Holding Company, Inc.
Mayagüez, Puerto Rico

We have audited W Holding Company, Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Item 9A Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:

•

These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2008 consolidated financial statements, and this report does not affect our report dated October 28, 2009 on those consolidated financial statements.

In our opinion, W Holding Company, Inc. and Subsidiaries, did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2008, based upon the COSO criteria.

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2008 and our report dated October 28, 2009 expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLP
San Juan, Puerto Rico
October 28, 2009
Stamp No. 2450253
Affixed to original


ITEM 9B.		OTHER INFORMATION

Not applicable.

204

PART III


ITEM 10.		DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors of the Company

The following table sets forth information regarding the directors of the Company. There were no arrangements or understandings pursuant to which any of these directors were selected as a director.


			Positions Held with the
Director	Age		Company and/or Westernbank
Frank C. Stipes, Esq.		53	Chairman of the Board, Chief Executive Officer and President of the Company and Westernbank (1)
Freddy Maldonado		58	Director of the Company, Chief Financial Officer of the Company and Westernbank (2)
Cornelius Tamboer		64	Director
Héctor L. Del Río		55	Director
Pedro R. Domínguez		64	Director and First Vice President — Southern Region of Westernbank
Juan C. Frontera		41	Director and Secretary of the Board
Enrique González, CPA		64	Director (3)
César A. Ruiz		73	Director (4)
Alberto Bacó		50	Director (5)


(1)		Effective August 8, 2008, Mr. Stipes assumed the position of President of the Company and Chief Executive Officer and President of Westernbank.

(2)		Effective August 8, 2008, Mr. Maldonado assumed the position of Senior Executive Vice President and Chief Financial Officer of the Company and relinquished the duties of President and Chief Investment Officer of the Company. On March 17, 2009, Mr. Maldonado resigned from his positions at the Company and as a member of the Board of Directors effective March 31, 2009.

(3)		Effective February 25, 2008, the Board of Directors of the Company appointed Mr. González as a director of the Company for a three-year term ending in 2011.

(4)		Mr. Ruiz resigned from the Board of Directors effective December 31, 2008.

(5)		Effective March 17, 2009, the Board of Directors of the Company appointed Mr. Bacó as a director of the Company for a three-year term ending in 2011.

Biographical Information

Provided below is a brief description of the principal occupation for at least the past five years of each of the Company’s directors. In addition to the descriptions below, each director has been a director of the Company since it was organized in 1999, except for Messrs. Héctor L. Del Río and Juan C. Frontera, who were appointed as directors in 2003, Mr. Freddy Maldonado, who was appointed as director in 2005, Mr. Enrique González, who was appointed as a director in 2008 and Mr. Bacó, who was appointed as a director in 2009.

Frank C. Stipes, Esq. is Chairman of the Board of Directors (the “Board”) of the Company and Westernbank; and Chief Executive Officer and President of both the Company and Westernbank. He held the positions of Chief Executive Officer and President of the Company since its founding in 1999 and of Westernbank from 1992 to July 2005. At Westernbank, he was appointed to serve as Executive Vice President in 1988; Chief Executive Officer from 1989 to 2005; Chairman of the Board in 1990; and President from

205

1992 to 2005. He also served as General Legal Counsel to Westernbank from 1981 to 1988. On March 29, 2007, Mr. Stipes assumed the positions of Chief Executive Officer and President of Westernbank and effective August 8, 2008 he assumed the position of President of the Company.

Freddy Maldonado was the Chief Financial Officer of the Company until March 2009. He held the positions of President and Chief Investment Officer of the Company from July 2005 to August 2008. Prior to that, Mr. Maldonado served as the Chief Financial Officer and Vice President of Finance and Investment of the Company since its founding in 1999 and of Westernbank since March 1992, both until July 2005, and as Chief Investment Officer of Westernbank from July 2005 to November 2006. He served as Executive Vice President of Finance and Investment and Chief Financial Officer at Ponce Federal Bank, F.S.B. from 1978 to 1992. Prior to that, Mr. Maldonado served as supervisory senior accountant at KPMG LLP. On March 17, 2009, Mr. Maldonado resigned from his positions as Senior Executive Vice President and Chief Financial Officer of the Company and Westernbank; and as a Director of Company’s Board of Directors effective March 31, 2009.

Cornelius Tamboer is the sole proprietor of Industrial Contractor/Prota Construction, S.E. a construction company. Mr Tamboer has been a director of Westernbank since 1989 and of the Company since its founding in 1999.

Héctor L. Del Río is the President and co-owner of Tamrío, Inc., a development and construction company. Tamrío, Inc. is an affiliate of Prota Construction, a company owned by Mr. Tamboer, who is also a director of the Company and Westernbank.

Pedro R. Domínguez has served as a director of Westernbank since 1992 and of the Company since its founding in 1999. Mr. Domínguez has also been Westernbank’s First Vice President for the Southern Region since 1989.

Juan C. Frontera is a sole proprietor of a retail petrol sales network and has prior banking experience. On February 28, 2007, Mr. Frontera was named the Company’s Secretary of the Board of Directors.

Enrique González, CPA is a Partner at González & Roig, a certified public accounting firm. On February 25, 2008, Mr. González was appointed as a director of the Company. Mr. González has been also appointed as the audit committee financial expert.

César A. Ruiz is a retired banker who has been a director of Westernbank since 1972 and of the Company since its founding in 1999. In addition, since April 2001 until February 28, 2007, Mr. Ruiz was the Secretary of the Board of Directors of the Company. Mr. Ruiz resigned from the Board of Directors effective December 31, 2008.

Alberto Bacó, is the President and Chief Executive Officer of Marvel International, Inc. and Bohío International Corp. Both companies are middle market manufacturing and distribution operations which specialize in branded products. Mr. Bacó also is a venture capital investor and real estate developer. Mr. Bacó previously served as the President of the Economic Development Bank of Puerto Rico. On March 17, 2009, Mr. Bacó was appointed as a director of the Company.

None of the above directors simultaneously serve as directors of other public companies.

206

Executive Officers of the Company

The following table sets forth information regarding the current executive officers of the Company as of December 31, 2008. There were no arrangements or understandings pursuant to which any of these executive officers were selected as an officer.


			Officer of the
	Age as of		Company and/or
	December 31,		Westernbank		Positions Held with the
Name	2008		Since		Company and/or Westernbank
Frank C. Stipes, Esq.		53		1988	Chairman of the Board, Chief Executive Officer and President of the Company and Westernbank (1)
Freddy Maldonado		58		1992	Former Director and Chief Financial Officer of the Company and Westernbank (2)
José Armando Ramírez		53		2007	Former Chief Financial Officer and former Chief Operating Officer of the Company and Westernbank(3)
Lidio V. Soriano, CPA		39		2008	Chief Financial Officer of the Company and Westernbank (4)
Pedro R. Domínguez		64		1989	Director and First Vice President — Southern Region of Westernbank
Carlos Dávila		45		2007	Chief Operating Officer and Chief Retail Officer of the Company and Westernbank (5)
William Vidal, Esq.		55		2000	Chief Lending Officer of Westernbank
Norberto Rivera, CPA		46		2004	Vice President Corporate Controller and Chief Accounting Officer of the Company and Westernbank
Alfredo Archilla		52		2001	Chief Administration Officer of the Company and Westernbank
Andrés Morgado, CPA		50		2000	President, Westernbank Trust Division
Migdalia Rivera		58		2002	Former President, Expresso of Westernbank (6)
Mayra Hansen		51		2008	Chief Risk Officer of the Company and Westernbank(7)


(1)		Effective August 8, 2008, Mr. Stipes assumed the positions of President of the Company.

(2)		Effective August 8, 2008, Mr. Maldonado assumed the position of Chief Financial Officer of the Company and Westernbank; and relinquished the duties of President and Chief Investment Officer of the Company. On March 17, 2009, Mr. Maldonado resigned from his positions at the Company and Westernbank and as a member of the Board of Directors effective March 31, 2009.

(3)		Mr. Ramírez served as Chief Financial Officer and Chief Operating Officer of the Company and Westernbank from September 3, 2007 to August 8, 2008.

(4)		Effective March 17, 2009, Mr. Soriano assumed the position of Chief Financial Officer of the Company and Westernbank.

(5)		Effective October 1, 2007, Mr. Dávila was retained as Chief Retail Officer of Westernbank. On October 6, 2008 Mr. Dávila was also appointed Chief Operating Officer of the Company and Westernbank.

(6)		Ms. Rivera served as President, Expresso of Westernbank until January 10, 2009.

(7)		Effective August 4, 2008, Ms. Hansen was retained as Chief Risk Officer of the Company and Westernbank.

207

Biographical Information

Provided below is a brief description of the principal occupation for at least the past five years of each of the Company’s executive officers other than Messrs. Stipes, Maldonado and Domínguez, whose biographical information is included with that of the directors above.

José Armando Ramírez — Mr. Ramírez was the Chief Financial Officer and Chief Operating Officer of the Company and Westernbank since September 3, 2007. He previously served as Executive Vice President of Strategic Planning, Corporate Development and Asset/Liability Management with National City Corporation in Cleveland Ohio. Prior to that, Mr. Ramírez served as International Officer-Senior Financial Analyst for the Bank of Boston Corporation from 1986 to 1988. On August 8, 2008, Mr. Ramírez resigned to his positions as Chief Financial Officer and Chief Operating Officer of the Company.

Lidio V. Soriano, CPA — Mr. Soriano has served as the Chief Financial Officer of the Company and Westernbank since March 17, 2009 and Senior Financial Officer since October 20, 2008. He previously served as Executive Vice President and Head of Retail and Mortgage Banking of Oriental Financial Group Inc. since September 2007. Before joining Oriental Financial Group Inc., Mr. Soriano was the Chief Financial Officer of Doral Financial Corporation, where he was in charge of Accounting, Finance, Risk Management and Investor Relations, from September 2005 to October 2006. Prior to becoming CFO, he held other senior positions at Doral Financial Corporation, including President of Doral Money, a New York based subsidiary of Doral Bank Puerto Rico. Prior to Doral, Mr. Soriano was the former head of Citibank’s consumer mortgage operations in Puerto Rico.

Carlos Dávila — Mr. Dávila is the Chief Operating Officer of the Company and Westernbank since October 6, 2008 and the Chief Retail Officer of Westernbank since October 1, 2007. Previously, he served as President and Region Manager with Citibank, N.A. in Florida and Puerto Rico from 1999 to 2007. Prior to that, Mr. Dávila served as Senior Vice President and Treasurer for First Bancorp. from 1996 to 1997. Before that, he served as Vice President of Smith Barney, a subsidiary of Citigroup Inc., from 1993 to 1996. Prior thereto, his banking experience and career dates back to 1985.

William Vidal, Esq. — Mr. Vidal has served as Chief Lending Officer of Westernbank since July 12, 2005. Mr. Vidal joined the Company on June 26, 2000, as First Vice President of the North Region. He was previously in the private practice of law, specialized in bankruptcy law, from 1978 to 2000.

Norberto Rivera, CPA — Mr. Rivera has been the Company’s Chief Accounting Officer since June 13, 2006 and Vice President Corporate Comptroller since July 12, 2005. Mr. Rivera joined the Company on May 10, 2004 as Westernbank’s Vice-President Comptroller. He previously served as a Senior Manager at Deloitte & Touche LLP from 1990 to 2004.

Alfredo Archilla — Mr. Archilla is the Chief Administration Officer of the Company since September 3, 2007. He held the position of Chief Operating Officer from February 15, 2006 to September 3, 2007. Mr. Archilla joined the Company on June 1, 2001, as Westernbank’s Vice President of Administration and Human Resources. He previously served as President and General Manager of Star Kist Caribe, Inc. from August 1987 to May 2001. Prior thereto, he served as Project Engineer at Union Carbide Graphito from 1981 to 1987.

Andrés Morgado, CPA — Mr. Morgado has served as President of Westernbank Trust Division since August 2000. He previously served as Executive Vice President of Oriental Financial Group from 1990 to 2000. Prior to that, he served as Chief Operating Officer and Trust Officer of Commercial Trust Company, Inc. from June 1988 to February 1990; Vice President of Investments of Drexel Burnham Lambert Puerto Rico from April 1987 to June 1988; and Tax Manager at Deloitte & Touche LLP from 1979 to 1987.

Migdalia Rivera — Ms. Rivera joined the Company on June 12, 2002, as President of Expresso of Westernbank. She previously served as President of CommoLoco, a subsidiary of American General Financial Group, from 1968 to 2002. Mrs. Rivera served as President, Expresso of Westernbank until January 10, 2009.

Mayra Hansen — Ms. Hansen joined the Company on August 4, 2008, as Chief Risk Officer. She previously headed the FDIC’s Puerto Rico office, from 1978 to 2007.

208

Corporate Governance Matters

Pursuant to the Company’s Bylaws, the business and affairs of the Company are managed by or under the direction of the Board of Directors. Members of the Board of Directors are kept informed of the Company’s business through discussions with the Chief Executive Officer and other officers, by reviewing materials provided to them and by participating in meetings of the Board and its committees. Currently, there are eight members of the Board. The Board is divided into three classes: Messrs. Frank C. Stipes, Esq., Héctor L. Del Río and Juan C. Frontera are in the class that was to be up for re-election in 2009; Messrs. Pedro R. Domínguez and Mr. Enrique González, CPA are in the class up for re-election in 2010; and Messrs. Cornelius Tamboer and Alberto Bacó are in the class up for re-election in 2011. Each director serves for a term ending after the third annual meeting following the annual meeting at which such director was last elected or until such director’s successor is elected and qualified. As a result of the delay in issuing the Company’s audited financial statements for the fiscal year ended December 31, 2008, the Company did not hold either its 2008 or 2009 annual meeting of stockholders. The delay was due to the need for additional time to complete the Company’s audit of its financial statements for the fiscal year ended December 31, 2008. As previously reported on the Company’s Current Report on Form 8-K filed on January 30, 2009, the Company determined not to reappoint Deloitte & Touche LLP as the Company’s independent registered public accounting firm and instead, as of January 28, 2009, the Company engaged BDO Seidman, LLP (“BDO Seidman”) as its independent registered public accounting firm. As a result of the recent appointment of BDO Seidman and the Company’s focus on completing the 2008 audit, the Company was unable to timely file its Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Accordingly, Messrs. Stipes, Del Río and Frontera Tamboer will continue to serve in their positions as directors of the Company.

The Board has a majority of independent directors. The Board has determined as of December 31, 2008, that Messrs. Cornelius Tamboer, César A. Ruiz (former director), Héctor L. Del Río, Juan C. Frontera, and Enrique González, CPA, and (as of March 17, 2009) Mr. Alberto Bacó are “independent” for purposes of Section 303A of the New York Stock Exchange (“NYSE”) Listing Standards, and that the members of the Audit Committee are also independent for purposes of Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended, and Section 303A.02 of the NYSE Listing Standards. The Board’s determinations of director independence were made in accordance with the qualification standards for independent directors included in the Company’s Corporate Governance Guidelines, as well as the NYSE listing standards. The Company’s Corporate Governance Guidelines may be found in the Investor Relations section of the Company’s website at www.wholding.com and is available in print to any stockholder upon written request to Mr. Juan C. Frontera at W Holding Company, Inc., P.O. Box 1180, Mayagüez, Puerto Rico 00681. The Board based these determinations primarily on a review of the responses the directors provided to questions regarding employment and compensation history, affiliations and family and other relationships and based on discussions with the directors.

On February 25, 2008, the Board of Directors of the Company appointed Mr. Enrique González, CPA as director of the Company for a three-year term. Mr. González is a partner at González & Roig, a certified public accounting firm. As a practicing accountant, Mr. González has provided, and likely will continue to provide, accounting services to certain customers of Westernbank Puerto Rico. Among other clients, Mr. González also provides services on behalf of two members of the Company’s Board of Directors. In light of Mr. González’s profession, the Board of Directors determined that Mr. González will be recused from matters relating to his clients which are also clients of the Company. On March 17, 2009, the Board of Directors of the Company appointed Mr. Alberto Bacó as director of the Company for a three-year term. Mr. Bacó has a 40% ownership interest in Desarrollos Car y Al 2004, Inc. (“Desarrollos”) and is its President and Secretary. Mr. Bacó and Desarrollos are customers of, and have had transactions with, the Bank, in the ordinary course of the Bank’s business and the Bank expects to have banking transactions with each in the future. These transactions include a line of credit of $6,655,000 extended by the Bank to Desarrollos. Since the beginning of the Company’s 2008 fiscal year, the largest aggregate amount of principal outstanding at any time on the line of credit was $6,451,238. As of December 31, 2008, $2,962,818 was outstanding on this line of credit. Desarrollos paid $3,614,481 and $292,271 in principal and interest payments, respectively, during the Company’s 2008 fiscal year, and $697,918 and $96,569 in principal and interest payments, respectively, since the beginning of the Company’s 2009 fiscal year. The interest rate payable on monies borrowed under the line of credit is 5.50%. The Company has determined that this relationship would not impair Mr. Bacó’s independence as a director. In the Company’s opinion, all loans and commitments to lend pursuant to the aforementioned line of credit were made in the ordinary course of business and on substantially the same terms, including interest rates, collateral and repayment schedules, as those prevailing for comparable transactions with other persons of similar creditworthiness and did not involve more than a normal risk of collectability nor contain terms unfavorable to the Bank. There were no arrangements or understandings between Messrs. González and Bacó and any other person pursuant to which they were selected as a director.

209

The Board of Directors of Westernbank meets on a monthly basis, while the Board of Directors of the Company meets as deemed necessary. In addition, the Board of Directors of the Company has eight committees, as described below. During the year ended December 31, 2008, the Board of Directors of Westernbank met 17 times, while the Board of Directors of the Company met 15 times. Each director attended at least 75% of the aggregate of (i) the total number of Board meetings held during the calendar year 2008, and (ii) the total number of meetings held by all committees on which he or she served during the year ended December 31, 2008.

Non-management directors, all of whom were determined to be independent (as discussed above), met in executive session, presided by Mr. Juan C. Frontera, Secretary of the Board, without management once during 2008. The Board of Directors has named the members of the Audit Committee as the members of this group.

Under a process approved by the Nominating and Corporate Governance Committee of the Board of Directors for handling letters received by the Company and addressed to non-management members of the Board of Directors, the Secretary of the Board of Directors reviews all such correspondence and forwards to the Board a summary and/or copies of any such correspondence that, in the opinion of the Secretary of the Board of Directors, deals with the functions of the Board of Directors or Committees thereof or that he otherwise determines requires their attention. Mr. Juan C. Frontera is the contact for those interested parties that may want to communicate directly with a non-management director. Any interested parties may contact Mr. Frontera by written notification to W Holding Company, Inc., P.O. Box 1180, Mayagüez, Puerto Rico 00681. Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of the Company’s Audit Committee and handled in accordance with procedures established with respect to such matters (as described under “Audit Committee” below).

The Board of Directors has adopted a Code of Business Conduct and Ethics for directors, officers, and employees which may be found in the Investor Relations section of the Company’s website at www.wholding.com and is available in print to any stockholder upon written request to Mr. Juan C. Frontera at W Holding Company, Inc., P.O. Box 1180, Mayagüez, Puerto Rico 00681.

Below are the standing committees of the Board of Directors of the Company:

Nominating and Corporate Governance Committee

The Company has a Nominating and Corporate Governance Committee (“Nominating Committee”), whose members as of December 31, 2008 included Messrs. César A. Ruiz, Cornelius Tamboer, Héctor Del Río and Juan C. Frontera. Mr. Ruiz resigned from the Board of Directors effective December 31, 2008. The Board has determined that all of the members of the Nominating Committee are independent under the NYSE listing standards. The Nominating Committee develops and recommends to the Board of Directors corporate governance policies and guidelines for the Company and identifies and nominates director and committee member candidates for election to the Board of Directors and to committee membership, respectively. The Board of Directors has adopted a Nominating and Corporate Governance Committee Charter which may be found in the Investor Relations section of the Company’s website at www.wholding.com and is available in print to any stockholder upon written request to Mr. Juan C. Frontera at W Holding Company, Inc., P.O. Box 1180, Mayagüez, Puerto Rico 00681. During the year ended December 31, 2008, the Nominating Committee met two times.

The Nominating Committee considers candidates for director who are recommended by its members, by other Board members, by stockholders and by management. The Nominating Committee evaluates director candidates recommended by stockholders in the same way that it evaluates candidates recommended by its members, other members of the Board, or other persons. The Nominating Committee considers all aspects of a candidate’s qualifications in the context of the needs of the Company at that point in time with a view to creating a Board with a diversity of experience and perspectives. As set forth in the Company’s Nominating and Corporate Governance Committee Charter, the Nominating Committee is responsible for selecting individuals as director nominees who have the highest personal and professional integrity, who have demonstrated exceptional ability and judgment and who would be most effective, in conjunction with the other nominees to the Board, in collectively serving the long-term interests of the Company and its stockholders. In selecting director nominees, the Nominating Committee assesses the director’s qualifications as independent, as well as skills, knowledge, perspective, broad business judgment and leadership, relevant specific industry knowledge, business creativity and vision, experience and diversity, all in the context of an assessment of the perceived needs of the Board at that time.

As set forth in Section 13 of the Company’s Bylaws, nominations by stockholders of persons for election to the Board of Directors must be made pursuant to timely notice in writing to the Secretary of the Board of Directors of the Company. To be timely, a stockholder’s notice must be received at the principal executive offices of the Company at least 150 days prior to the annual meeting. The stockholder’s notice must set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as

210

a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Company which are beneficially owned by such person, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to proxy statement disclosure requirements under the Securities Exchange Act of 1934, as amended (including without limitation such person’s written consent to being named in the proxy statement as a nominee and to serve as a director, if elected); and (b) as to the stockholder giving notice (i) the name and address, as they appear on the Company’s books, of the stockholder proposing such nomination, and (ii) the class and number of shares of the Company which are beneficially owned by the stockholder. There have been no material changes to the Company’s procedures by which stockholders may recommend nominees to the Board of Directors since the Company last disclosed these procedures.

The Nominating Committee is empowered to engage a third party search firm to assist in the identification of candidates, but the Nominating Committee currently believes that the existing directors and executive management of the Company and its subsidiaries have significant networks of business contacts that likely will form the source from which candidates will be identified. Upon identifying a candidate for serious consideration, one or more members of the Nominating Committee would initially interview such candidate. If a candidate merits further consideration, the candidate would subsequently interview with all other Nominating Committee members (individually or as a group), meet the Company’s Chief Executive Officer and other executive officers and ultimately meet the other directors. The Nominating Committee would elicit feedback from all persons who met with the candidate and then determine whether or not to recommend the candidate.

The Nominating Committee did not hire any director search firm in 2008 or 2007 and, accordingly, paid no fees to any such company. As indicated above, however, the Nominating Committee may do so in the future if necessary.

Executive Committee

The Executive Committee is authorized to exercise the authority of the Board of Directors in the management of the Company, subject to applicable laws. As of December 31, 2008, the members of the Executive Committee were Messrs. Frank C. Stipes, Esq., César A. Ruiz, Cornelius Tamboer, Héctor Del Río and Juan C. Frontera. Mr. Ruiz resigned effective December 31, 2008. During the year ended December 31, 2008, the Executive Committee did not meet.

Compensation Committee

The Company has a Compensation Committee comprised entirely of independent directors, in accordance with the NYSE listing standards. The Compensation Committee reviews and makes determinations of the compensation of the Company’s directors and senior executive officers, and administers and implements the Company’s incentive-compensation plans and equity-based plans. The Board of Directors has adopted a Compensation Committee Charter which may be found in the Investor Relations section of the Company’s website at www.wholding.com and is available in print to any stockholder upon written request to Mr. Juan C. Frontera at W Holding Company, Inc., P.O. Box 1180, Mayagüez, Puerto Rico 00681. As of December 31, 2008, the members of the Compensation Committee were Messrs. César A. Ruiz, Cornelius Tamboer, Héctor L. Del Río and Juan C. Frontera. Mr. Alberto Bacó became a member of the Compensation Committee effective March 17, 2009 and Mr. Ruiz resigned effective December 31, 2008. During the year ended December 31, 2008, the Compensation Committee met four times.

Audit Committee

The members of the Audit Committee as of December 31, 2008 were Messrs. César A. Ruiz, Cornelius Tamboer, Héctor L. Del Río, Juan C. Frontera, Enrique Gonzalez, CPA, and Vice President General Auditor Carlos Camacho. Mr. Camacho is a non-voting participant of the Audit Committee. Mr. Alberto Bacó became a member of the Audit Committee effective March 17, 2009 and Mr. Ruiz resigned effective December 31, 2008. During the year ended December 31, 2008, the Audit Committee met 16 times.

The Board of Directors has determined that all of the directors who serve on the Audit Committee are independent pursuant to Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended, and under Section 303A.02 of the NYSE listing standards. The Board of Directors has determined that all members of the Audit Committee are financially literate, and on February 25, 2008 the Audit Committee named Mr. Enrique González as the “audit committee financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-K. As explained above, the Board of Directors has determined that Mr. Gonzalez is independent under the NYSE listing standards.

211

The Audit Committee’s functions include the following: (i) the appointment, compensation, retention and oversight of the work of the independent registered public accounting firm, reviewing the independence of that firm, reviewing with that firm the plans and results of the audit engagement of the Company and approving all auditing and non-auditing services performed by that firm; (ii) reviewing the design and effectiveness of the Company’s internal controls and similar functions; (iii) approving the annual audit plan and reviewing the results of internal audits; (iv) reviewing the Company’s financial results and SEC filings; and (v) reviewing the Company’s compliance with legal and regulatory requirements.

The Audit Committee meets periodically with management to consider the adequacy of the Company’s internal controls and financial reporting process. It also discusses these matters with the Company’s independent registered public accounting firm and with appropriate Company financial personnel. The Audit Committee reviews the Company’s financial statements and discusses them with management and the independent registered public accounting firm before those financial statements are filed with the SEC.

The Audit Committee regularly meets privately with the independent registered public accounting firm, has the sole authority to retain and dismiss that firm and periodically reviews its performance and independence from management. The independent registered public accounting firm has unrestricted access to books and records and personnel of the Company, and reports directly to the Audit Committee.

The Audit Committee’s responsibilities are described in a written charter that was adopted by the Board of Directors of the Company. The Board of Directors has reviewed and approved the Audit Committee Charter in light of the requirements, rules and regulations promulgated by the SEC as well as the listing standards of the NYSE relating to corporate governance matters. A copy of the Audit Committee Charter is available in the Investor Relations section of the Company’s website at www.wholding.com and is available in print to any stockholder upon written request to Mr. Juan C. Frontera at W Holding Company, Inc., P.O. Box 1180, Mayagüez, Puerto Rico 00681.

The Audit Committee has established the W Holding Company, Inc. Whistleblower Phone Number, a toll free hotline through which confidential complaints may be made by employees regarding: illegal or fraudulent activity; questionable accounting, internal control or auditing matters; conflicts of interest or dishonest or unethical conduct; violations of the Company’s Code of Business Conduct and Ethics; and/or any other violations of laws, rules or regulations. Complaints submitted through this process are presented to the Audit Committee to be handled in accordance with procedures adopted with respect to such matters.

Asset & Liability Committee

The Asset & Liability Committee (“ALCO”) is responsible for overseeing the Company’s and Westernbank’s interest rate and market risk, liquidity management and other related matters. Through policies designed to manage the flow of funds and the use and pricing of such funds, the ALCO Committee supervises the Investment Department’s responsibility for maintaining an acceptable interest rate spread, while assuring that the Company complies with all applicable investment and liquidity requirements. As of December 31, 2008, the ALCO Committee was composed of the entire Board of Directors of the Company and the former Chief Financial Officer Mr. Freddy Maldonado, the Company’s Chief Financial Officer, Lidio V. Soriano, CPA, the Company’s Chief Operating Officer, Carlos Dávila, Westernbank Chief Lending Officer, William Vidal, Esq., Westernbank Treasurer and Chief Investment Officer, Mr. Ramón A. Rosado, Esq., and Mr. Hiram Mesonero. The Company’s Chief Accounting Officer, Mr. Norberto Rivera, CPA, is a non-voting participant of the Investment Committee. On March 17, 2009, Mr. Maldonado resigned from his positions as Chief Financial Officer of the Company and Westernbank, and as a Director of Company’s Board of Directors effective March 31, 2009. The ALCO met 14 times during 2008.

Senior Lending Credit Committee

Prior approval of the Senior Lending Credit Committee (“SLCC”) is required for all loans in excess of $25.0 million, including the Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division. The SLCC reviews and ratifies all loans from $2.5 million to $25.0 million approved by Westernbank’s regional credit committees. The Senior Credit Committee is composed of members of the Company’s Board of Directors and senior lending officers of Westernbank. All loans in excess of $25.0 million, including the Asset-Based Lending Unit, formerly known as Westernbank Business Credit Division, approved by the SLCC are also reviewed and ratified by the Board of Directors of the Company. All loans in excess of $100.0 million require the approval of the Board of Directors of the Company. As of December 31, 2008, the members of the Senior Credit Committee are Messrs. Frank C. Stipes, Esq., Cornelius Tamboer, Héctor L. Del Río, Juan C. Frontera and Pedro R. Domínguez, and Westernbank officers Messrs. Ricardo Cortina, William Vidal, Esq., René López, CPA, (Mr. López resigned on July 14, 2009), Peter Léctora, CPA and Ms. Ana

212

Rosado. The Company’s Chief Risk Officer, Mrs. Mayra Hansen, is a non-voting participant of the Investment Committee. Mr. Alberto Bacó became a member of the Senior Credit Committee effective March 17, 2009. The Senior Credit Committee met 22 times during 2008.

Special Regulatory Compliance Committee

The Company’s Board of Directors appointed a Special Regulatory Compliance Committee to oversee Westernbank’s compliance with an agreement reached by Westernbank with regulatory authorities as to various corrective actions related to the Bank’s operations. The members of the Compliance Committee are Messrs. Cornelius Tamboer, Héctor L. Del Río and Enrique Gonzalez, CPA. The Special Regulatory Compliance Committee met 11 times during 2008.

Special Litigation Committee

The Company’s Board of Directors appointed a Special Litigation Committee composed of independent directors to review and oversee the legal proceedings initiated against the Company in connection with the restatement of the Company’s audited financial statements for years 2006 and 2005, which are fully described in the Company’s 2007 Annual Report on Form 10-K. The Special Litigation Committee was established on March 24, 2009. The members of the Special Litigation Committee are Messrs. Enrique Gonzalez and Alberto Bacó.

Stockholders Communication with Directors

Company stockholders who want to communicate with the Board or any individual director can write to:

W Holding Company, Inc.
19 West McKinley Street
Mayagüez, Puerto Rico 00680

Your letter should indicate that you are a W Holding Company stockholder. Subject to reasonable constraints of time and topics and the rules of order, stockholder communications will be presented to the Board at the next regularly scheduled meeting of the Board, or relevant committee of the Board. The Board of Directors reserves the right to determine the appropriate action to be taken, if any, in response to stockholder communication.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company’s directors and, certain of its officers, and persons who own more than ten percent of a registered class of the Company’s equity securities, file initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company with the SEC. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file.

Based solely on a review of the copies of such reports furnished to the Company or written representations that no other reports were required, the Company believes that, with respect to 2008, all Section 16(a) filing requirements applicable to its officers and directors were satisfied, except for two reports, one covering three transactions by Mr. Lidio V. Soriano, CPA, Senior Executive Vice President and Chief Financial Officer and the second covering nine transactions by Director Enrique Gonzalez, CPA, which were filed late.

213

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

In this Compensation Discussion and Analysis (“CD&A”), the Company provides an analysis of its executive compensation program, the material compensation decisions that the Company made during fiscal 2008 with respect to the named executive officers of the Company (as identified below), and the material factors that the Company considered in making those decisions. Later in this Form 10-K, beginning with the “2008 Summary Compensation Table,” you will find a series of tables containing specific information about the compensation earned or paid during fiscal 2008 to:

	•		the Company’s Chief Executive Officer (“CEO”), Mr. Frank C. Stipes, Esq.;

	•		each person who served as the principal financial officer of the Company during fiscal 2008, or Mr. Jose Armando Ramirez (from January 1, 2008 until August 8, 2008), and Mr. Freddy Maldonado (from August 8, 2008 until December 31, 2008);

	•		and the three highest paid executive officers of the Company who were serving as executive officers as of December 31, 2008, or Messrs. Carlos Dávila, Chief Operating of the Company and Westernbank and Chief Retail Officer of Westernbank, William Vidal, Esq., Chief Lending Officer of Westernbank, and Andrés Morgado, President, Westernbank Trust Division, (each individually referred to as an “NEO” and collectively referred to as the “NEOs”).

Objectives of the Company’s Compensation Program

The Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) has responsibility for approving the compensation program for the Company’s NEOs, as well as all of its executive officers generally. Generally, the compensation program for the NEOs is designed to attract, retain and reward talented executives who can contribute to the Company’s success and thereby build value for the Company’s stockholders. Specifically, the program is designed to achieve the following principles:

Compensation should reward performance

The Company’s compensation program should deliver top-tier compensation given top-tier individual and Company performance. Likewise, where individual performance falls short of expectations and/or Company’s performance lags the industry, the program should deliver lower-tier compensation. In addition, the objectives of pay-for-performance and retention must be balanced. Even in periods of temporary downturns in Company performance, the program should continue to ensure that successful, high-achieving employees will remain motivated and committed to the Company.

Compensation should reflect the value of the job in the marketplace

To attract and retain a highly skilled work force, the Company must remain competitive with the pay of other premier employers who compete with the Company for talent. The Company seeks highly competent, specialized and experienced talent, unique to the financial sector.

The Company’s employees should think like the Company’s stockholders

The Company’s employees should act in the interests of the Company’s stockholders and the best way to encourage them to do that is through an equity stake in the Company. This is done by granting stock options to key employees. Due to the recent restatement process and the late filing of the 2007 and 2008 Annual Reports on Form 10-K, the Company did not award any stock options during 2008.

Incentive compensation should be a greater part of total compensation for more senior positions

Generally, the Company believes that the proportion of an individual’s total compensation that varies with the individual and Company performance objectives should increase as the individual’s business responsibilities increase.

214

Determination of Compensation during Fiscal 2008

The Compensation Committee considered a number of different factors in determining NEO compensation during fiscal 2008.

•		Assessment of Company Performance. The Compensation Committee utilized Company performance measures in establishing total compensation ranges for the NEOs. The Committee considered certain measures of progress of the Company including asset quality, stability and soundness of operations, regulatory classification, overall loan portfolio growth, performance, quality, capital and efficiency ratios as compared to peer groups, the Company’s overall results; and management effectiveness in light of existing market conditions.

		The Company’s Chief Executive Officer recommends to the Compensation Committee the levels of achievement for the annual performance bonus compensation awards and the Compensation Committee reviews the recommended levels carefully before approving them. This is to ensure that the goals are set accurately to provide the Company’s executive officers with goals that are at a reasonably high level, but also are attainable.

•		Assessment of Individual Performance and CEO Review. Each NEO’s individual performance also had a strong impact on the compensation paid to the officer, as it does for all of the Company’s employees generally. With respect to the CEO performance, the independent directors, under the direction of the presiding director, met with the CEO in executive session at the beginning of the year to agree upon the CEO performance objectives (both individual and company objectives) for the year. At the end of the year, the independent directors met in executive session under the direction of the presiding director to conduct a performance review of the CEO based on these objectives. The results of this review for fiscal 2008 are discussed below under “Components of Executive Compensation for 2008.”

		For the other NEOs, the Compensation Committee receives a performance assessment and compensation recommendation from the CEO and also exercises its discretion and judgment based on the Committee’s interactions with each such executive officer. The Committee’s individual performance evaluation of these executives is based generally on his contribution to the Company’s performance, as well as other leadership accomplishments. The results of the reviews for the other NEOs for fiscal 2008 are also discussed below under “Components of Executive Compensation for 2008.”

•		Peer Data Review. Each year, the Compensation Committee reviews the Company’s compensation program as compared to a peer group of financial holding companies based in Puerto Rico. During fiscal 2008, the Company used the following Puerto Rican-based peer financial holding companies for benchmarking purposes: Popular, Inc., First BanCorp., Santander BanCorp, Doral Financial Corporation and R&G Financial Corporation.

		The Compensation Committee compares the peer group companies’ executive compensation programs as a whole, and also compares the pay of individual executives if the jobs are sufficiently similar to make the comparison meaningful. The Committee uses the peer group data primarily to ensure that the executive compensation program as a whole is competitive, meaning generally within the range of comparative pay of the peer group companies when the Company achieves its targeted performance levels. The Compensation Committee also reviews total executive compensation, with and without special performance bonus, in order to determine, in its discretion, what amount of a particular bonus is based strictly on performance and what, if any, is granted to the executive as part of his base salary in line with the salaries paid to other executives in equivalent peer groups positions, as mentioned before. The Committee does not specifically target or establish to pay total compensation to the NEOs at a specified percentile or range within the peer group.

•		Total Compensation Review. The Compensation Committee reviews each executive’s base pay, bonus, and stock option incentives every 18 months, with the exception of the Company’s and Westernbank’s CEO, which is reviewed annually. In addition to these primary compensation elements, the committee reviews the deferred compensation program, perquisites and other compensation, and payments that would be required under various severance and change-in-control scenarios. Following the 2008 review, the Compensation Committee determined that these elements of compensation were reasonable in the aggregate.

215

Components of Executive Compensation for 2008

For 2008, the compensation of the Company’s executives consisted of five primary components: base salary, a Christmas bonus, a special performance bonus, stock option grants and benefits package. The Company’s compensation program for the NEO’s has been designed so that a larger portion of the NEO’s total compensation is earned in the form of bonus opportunities.

Base Salary

Salaries provide executives with a sufficient, regularly-paid base level of income and help achieve the objectives outlined above by attracting and retaining our executives. Base salaries may include monthly and end-of-year payments agreed with each of the NEO’s. Base salaries are reviewed every 18 months, with the exception of the salaries of the Company’s CEO, which is reviewed annually by the Compensation Committee. As discussed, generally, base salaries are not based upon specific measures of corporate performance, but are determined by scope and complexity of the position, including current job responsibilities, the relative base salaries of the Company’s peers, and the recommendations of the Chief Executive Officer, including an evaluation of each officer’s individual performance and contribution to the Company’s financial, operational and strategic goals and objectives. Consistent with compensation practices generally applied in the financial services industry, and our compensation objectives described before, base salaries generally form a lower percentage of total compensation with a majority of each NEO’s total compensation.

For fiscal 2008, the Compensation Committee reviewed each of the NEO’s base salaries, other than the CEO’s, based on the principles identified before. After such review, the Compensation Committee concluded that base salaries were appropriate and consistent with the Company’s compensation program. Except for Messrs. Frank C. Stipes, Esq., Freddy Maldonado and Carlos Dávila, none of the other NEOs of the Company received base salary increases during 2008.

On February 20, 2008, the Company’s Compensation Committee increased Mr. Frank C. Stipes, Esq. Chief Executive Officer and President of the Company and Westernbank, annual salary from $292,500 to $600,000 annually. The salary increase was due to his re-appointment as CEO and President of the Bank and was effective retroactively to March 29, 2007, the date on which Mr. Stipes assumed his new roles. On February 25, 2008, however, Mr. Stipes voluntarily decided to adjust his annual base salary to $500,001 annually.

On August 8, 2008, Mr. Freddy Maldonado was appointed Chief Financial Officer of the Company and Westernbank. In connection with the appointment of Mr. Maldonado, the Company’s Compensation Committee set Mr. Maldonado’s annual base salary at $500,000 annually. On March 17, 2009, Mr. Maldonado resigned from his positions as Chief Financial Officer of the Company and Westernbank and as a Director of Company’s Board of Directors effective March 31, 2009.

On October 6, 2008, Mr. Carlos Dávila was appointed Chief Operating Officer of the Company and Westernbank. In connection with Mr. Dávila’s new responsibilities as a result of his promotion to Chief Operating Officer, the Company’s Compensation Committee set Mr. Dávila’s annual salary at $425,000.

New annual base salaries approved to Messrs. Stipes, Maldonado and Dávila were set by the Committee at levels similar to those paid at the same positions within the Company’s peer group.

For a further description of the base salaries paid to the NEOs during fiscal 2008, please refer to the 2008 Summary Compensation Table set forth below.

Christmas Bonus

A Christmas bonus is mandated under Puerto Rico law for all employees. The minimum amount required by law is $600 per employee. Traditionally, the Company has granted one month of salary as a Christmas Bonus to its employees, including the NEOs. For fiscal 2008, the Company granted one month of salary as the Christmas bonus to each of its NEO’s as follows: $41,667 for Mr. Frank C. Stipes, Esq., the Company’s CEO and President; $35,417 for Mr. Carlos Davila, Chief Operating of the Company and Westernbank and Chief Retail Officer of Westernbank; $27,813 for Mr. William Vidal, Esq., Westernbank Chief Lending Officer; $16,833 for Mr. Andrés Morgado, President, Westernbank Trust Division; $41,667 for Mr. Freddy Maldonado, former Chief Financial Officer and $600 for Mr. José Armando Ramírez, former Chief Financial Officer.

216

End-of-Year Payments

For year 2008, the Compensation Committee decided to make an end-of-year payment to certain officers of the Company after considering the officers’ added roles and responsibilities in light of the current regulatory and economic environment. The following end-of-year payments were made to the following NEOs: $106,250 for Mr. Carlos Dávila, Chief Operating Officer of the Company and Westernbank and Chief Retail Officer of Westernbank; $93,750 for Mr. William Vidal, Esq., Westernbank Chief Lending Officer; and $175,000 for Mr. Andrés Morgado, CPA, President, Westernbank Trust Division.

Special Performance Bonuses

In addition to the aforementioned contractually end-of-year payments, the Company typically awards an annual special performance bonus, paid in cash, to its executive officers and certain employees, including the NEOs. Only those individuals with a higher ability to directly impact the Company’s performance are eligible to receive the special performance bonus because they bear a greater proportion of the responsibility that compensation will decrease if the Company’s goals are not attained. Consistent with the Company’s objectives, the special performance bonus may fluctuate significantly from year-to-year, which stresses that results and contributions in any year affect future years.

Such bonus is granted after an assessment of the Company’s performance and growth is made for the year, both individually and compared to its peer group, which includes among other factors, asset quality, stability and soundness of operations, regulatory classification, overall loan portfolio growth, performance, quality, capital and efficiency ratios as compared to peer groups, net earnings and the Company’s overall results and management effectiveness in light of existing market conditions and the overall compensation of the executive in regard to similar positions in the industry.

The Compensation Committee may, in its discretion, (1) award special performance bonuses absent the attainment of the relevant performance goals, and (2) reduce or eliminate entirely the amount of special performance bonuses payable to any participant upon attainment of the performance goals.

Historically, the Compensation Committee has exercised its discretion each year in granting the amount of special performance bonus payable to the NEOs. As explained before, the Compensation Committee does not rely on predetermined formulas, weighted factors or a limited set of criteria in making this decision. In determining whether the maximum special performance bonus payable to a NEO, or the extent to which the award should be reduced, the Compensation Committee considers (1) management’s continuing achievement of its short and long term goals versus its strategic imperatives, (2) the executive officer’s historical and current compensation, including the number of shares of stock options previously granted to the executive officer, (3) the Company’s desired competitive market position, (4) the Company’s relative standing in the industry as a whole, and (5) the achievement of initiatives regarding growth, productivity and people previously discussed above, determined by the business function over which the executive officer has control. In evaluating the achievement of the initiatives regarding growth, productivity and people, the Compensation Committee considered the actual results of such initiatives, the extent to which the initiatives were a significant stretch goal for the individual, and whether significant unforeseen obstacles or favorable circumstances altered the expected difficulty of achieving the desired initiatives. The Compensation Committee also assessed the level of achievement against the initiatives, including the performance achievement relative to stockholder value.

The Compensation Committee determined special performance bonus payable to the NEO’s based on each individual’s contributions and responsibilities; special performance bonus to individuals with higher ability to directly impact the Company’s performance may fluctuate significantly because they bear a greater proportion of the risk that compensation will decrease if the Company’s goals are not attained.

In 2008, the Compensation Committee, based on the Company’s results of operations for the year ended December 31, 2008, decided not to award special performance bonuses to its NEOs.

217

Stock Options

The Company has two shareholder-approved 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. 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. No options have been granted under the 1999 Nonqualified Option Plan. Options granted under the 1999 Qualified Option Plan have an exercise price equal to or greater than the market value of the underlying common stock at the grant date. The options become fully exercisable after five years following the grant date and the maximum contractual term of the options is ten years.

The Compensation Committee believes that the granting of stock options, the only form of equity based award permitted under the 1999 Qualified Option Plan and 1999 Nonqualified Option Plan, is the most appropriate form of long-term compensation to executive officers, since it believes that the equity interests in the Company held by the executive officers align the interests of shareholders and management. This approach is designed to provide incentives for the creation of shareholder value over the long term since the full benefit of this component of the compensation package cannot be realized unless stock price appreciation occurs over a number of years. The Compensation Committee does not rely on predetermined formulas, weighted factors or a limited set of criteria in making its decisions of granting stock options. The Compensation Committee may, in its discretion, (1) award stock options absent the attainment of the relevant performance goals, and (2) reduce or eliminate entirely the amount of stock options to be granted upon attainment of the performance goals. Historically, the Compensation Committee has exercised its discretion each year in granting stock options to the NEO’s. During 2008, due to the restatement process and the late filing of the 2007 and 2008 Annual Reports on Forms 10-K, the Company did not award any stock options to the NEOs.

Nonqualified Deferred Compensation Plan

Westernbank has a Master Deferred Compensation Plan for a selected group of management or highly compensated employees, including each of the NEOs. The Plan and the accompanying trust are not intended to meet the requirements of Section 1165 of the PR-IRC of 1994, as amended, and therefore do not meet the funding, employee coverage, and other requirements which “qualified retirement plans” must satisfy under section 1165 of the PR-IRC. However, the Plan and the trust are intended to constitute an unfunded arrangement maintained “primarily for the purposes of providing deferred compensation for a selected group of management or highly compensated employees” for purposes of Sections 202(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). During 2008, none of the NEOs elected to participate in the Company’s Nonqualified Deferred Compensation Plan.

All Other Compensation

All other compensation for the NEOs includes perquisites and other personal benefits, including deferred profit-sharing plan contributions, 1165(e) plan matching contributions, car allowances, allowance for business and entertainment expenses and life, accidental death and dismemberment insurance premiums.

Qualified Deferred Profit-Sharing Plan

The Company has a non-contributory Deferred Profit-Sharing Plan, covering substantially all of its employees, including the NEOs, which provides for retirement and disability benefits. The Company’s contribution to the profit-sharing plan is discretionary. Participants in the Deferred Profit-Sharing Plan are vested upon completing five years of service with the Company, with no vesting prior to such time. The Company’s total contributions to the plan for the year ended December 31, 2008 were $250,000. The Company’s contributions to its NEO’s under the plan were as follows: Mr. Stipes $2,557; Mr. Dávila $1,906; Mr. Vidal $1,775; Mr. Morgado $1,003, Mr. Maldonado $1,750 in 2008. No contributions were made for Mr. Ramirez in 2008.

Qualified Defined Contribution Plan

Effective January 1, 1995, the Company added to its Profit Sharing Plan a defined contribution plan under Section 1165(e) of the PR-IRC, covering all full-time employees of the Company who have one year of service and are twenty-one years or older. Under the provisions of this Plan, participants may contribute each year from 2% to 10% of their compensation after deducting

218

social security, up to the maximum deferral amount specified by local law. The Company contributes 50 percent of the first 6 percent of base compensation, as defined, that a participant contributes to the Plan. Participants are immediately vested in their contributions plus actual earnings thereon. The Company’s contributions plus actual earnings thereon are 100 percent vested after three years of credited service. In case of death or disability, a participant or his/her beneficiary will be 100 percent vested regardless of the number of years of credited service. The Company’s contributions for 2008 amounted to $609,000. The Company contributed $4,000 with respect to each of its NEO’s under the plan in 2008, except for Messrs. Dávila and Ramírez who did not participate in the plan during 2008.

Car Allowances

The car allowance is based on the estimated use of time of the Company car by the respective NEOs as part of their normal course of business. During 2008, the NEOs benefited from the use of a company-owned vehicle with an approximate economic cost of $4,331 for Mr. Stipes; $8,698 for Mr. Dávila; $6,548 for Mr. Vidal; $6,213 for Mr. Morgado; $7,535 for Mr. Maldonado and $4,900 for Mr. Ramírez.

Business and Entertainment Expenses

The Company reimburses its executives, including the NEOs, for business and entertainment expenses. During 2008, the Company paid allowances for business and entertainment expenses to its NEO’s as follows: Mr. Stipes $52,500; Mr. Vidal $41,250; Mr. Morgado $48,000; and Mr. Maldonado $45,000. No such reimbursements were made to Messrs. Dávila and Ramírez during 2008. Given the nature of our industry, this is an important aspect of customer relationships.

Life, Accidental Death and Dismemberment Insurance

The Company provides life, accidental death and dismemberment insurance coverage to all of its employees, including its NEOs. For the NEOs, in the event that any of the conditions provided under the policy are met, the benefits provided are to be four times the NEOs annual salary rounded to the next higher $1,000, with a maximum of $505,000. Upon retirement, all insurance benefits shall terminate. During 2008, the Company paid $630 in insurance premiums on behalf of each of its NEOs.

Severance Benefits

Except in the case of a change in control of the Company under the employment agreements entered into with Messrs. José Armando Ramírez and Carlos Dávila, on August 20, 2007 and September 5, 2007, respectively, the Company is not obligated to pay severance or other benefits to the NEOs upon termination of their employment. The Company has entered into payment agreements in the event of a change in control with the following NEOs: Messrs. Carlos Dávila, William Vidal, Esq, Andrés Morgado, CPA, Freddy Maldonado and José Armando Ramírez. On each anniversary of the date of commencement of the agreements, the term of each agreement automatically extends for one year unless written notice from the Company is received not less than 60 days prior to the anniversary date advising the executive that the agreement shall not be further extended. The change in control agreement entered into with Mr. Maldonado was terminated on March 17, 2009 when he resigned from his positions as Senior Executive Vice President and Chief Financial Officer of the Company. The change in control and employment agreements entered into with Mr. Ramírez were terminated on August 8, 2008 when he resigned from his positions as Chief Financial Officer and Chief Operating Officer of the Company.

The agreements provide for severance payments in connection with or within one year after a “Change in Control” (as defined below) in the event the employee’s employment is terminated voluntarily by the employee or involuntarily by the Company without cause.

For the purposes of the agreements, a Change in Control shall be deemed to have occurred if:

	(i)		25% or more of ownership control, power to vote, or beneficial ownership of any class of voting securities of the Company is acquired by any person, either directly or indirectly or acting through one or more other persons;

	(ii)		any person (other than any person named as a proxy in connection with any solicitation on behalf of the Board) holds revocable or irrevocable proxies, as to election or removal of three or more directors of the Company, for 25% or more of the total number of voting shares of the Company;

219

	(iii)		any person has received all applicable regulatory approvals to acquire control of the Company;

	(iv)		any person has commenced a cash tender or exchange offer, or entered into an agreement or received an option, to acquire beneficial ownership of 25% or more of the total number of voting shares of the Company, whether or not any requisite regulatory approval for such acquisition has been received, provided that a change in control will not be deemed to have occurred under this clause unless the Board has made a determination that such action constitutes or will constitute a change in control; or

	(v)		as a result of, or in connection with, any cash tender or exchange offer, merger, or any other business combination, sale of assets or contested election, or any combination of the foregoing transactions, (a) the persons who were Directors of the Company before such transaction shall cease to constitute at least a majority of the Board or its successor or (b) the persons who were stockholders of the Company immediately before such transaction do not own more than 50% of the outstanding voting stock of the Company or its successor immediately after such transaction.

The special compensation to be received pursuant to a Change in Control of the Company shall be equal to three times the annual base compensation plus bonuses paid to the executive officer for the calendar year immediately preceding the year in which the Change in Control has occurred; provided, however, that in no event shall the special compensation exceed $1,500,000 for each such employee. If employment were terminated in 2009 under such circumstances following a Change in Control, $1,500,000 would be payable to Mr. Dávila, $1,500,000 to Mr. Vidal, $1,337,000 to Mr. Morgado, and $1,500,000 to Mr. Maldonado. The Company has nine similar Change in Control agreements with certain executive officers of the Company and/or Westernbank, which if their employment was terminated in 2009 under such circumstances following a Change in Control, would result in payments amounting to $6,558,000.

In connection with his appointment, Mr. Ramírez entered into an Employment Agreement which provided for a then-current annual base salary of $500,000, an annual performance-based bonus, a grant of options to purchase shares of the Company’s common stock, relocation and related expenses, not to exceed $150,000, and other fringe benefits applicable to executive personnel of the Company. In addition, the Company’s Employment Agreement with Mr. Ramírez contained provisions regarding confidentiality, proprietary information and work product. On November 26, 2008, the Company entered into a Separation Agreement with Mr. Ramírez due to his resignation from the Company on August 8, 2008. The Separation Agreement did not entitle Mr. Ramírez to any additional payments or benefits from the Company. Instead, the Company entered into the Separation Agreement with Mr. Ramírez in order to require his compliance with certain post-termination covenants, including noncompetition, nonsolicitation and confidentiality covenants, as well as to obtain a waiver and release agreement in favor of the Company. For a description of the severance payments and benefits owed to Mr. Ramírez pursuant to the terms of his Employment Agreement, see “Narrative Disclosure to the Summary Compensation Table and Grants of Plan-Based Awards Table” and the “Potential Payments Upon Termination or Change in Control” sections below.

Compensation Committee Report

The Compensation Committee evaluates and establishes compensation for executive officers and oversees the Company’s management stock option plans, the deferred compensation plans, and other management incentive and benefit programs. Management has the primary responsibility for the Company’s financial statements and reporting process, including the disclosure of executive compensation. With this in mind, we have reviewed and discussed with management the Compensation and Discussion Analysis required by Item 402(b) of Regulation S-K. Based on this review and discussion, the Compensation Committee recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in this Form 10-K for filing with the Securities and Exchange Commission.

Héctor L. Del Río
Juan C. Frontera
Cornelius Tamboer
Enrique González

220

SUMMARY COMPENSATION TABLE

The following tables set forth the compensation earned by or paid to the Company’s NEOs during the year ended December 31, 2008. The Company does not provide the following to its named executive officers: stock awards, non-equity incentive plan, defined benefits plan or employee agreements, except for Mr. Carlos Dávila, who has an employee agreement with the Company.


							Option		All Other
							Awards (3)		Compensation (4)
Name & Principal Position	Year		Salary (1) ($)		Bonus (2) ($)		($)		($)		Total ($)
Current

Frank C. Stipes, Esq		2008	$	534,934	$	46,042	$	—	$	64,018	$	644,994
Chairman of the		2007		331,827		29,167		—		66,580		427,574
Board, Chief Executive		2006		308,942		29,167		—		69,741		407,850
Officer and President

Carlos Davila (5)		2008		394,375		141,667		13,204		11,234		560,480
Chief Operating and Officer and Chief Retail Officer

William Vidal, Esq.		2008		372,389		125,000		25,122		54,203		576,714
Chief Lending Officer		2007		287,596		281,250		25,122		56,388		650,356
		2006		233,750		272,917		25,122		56,987		588,776

Andrés Morgado, CPA		2008		209,411		195,833		16,748		59,846		481,838
President, Westerbank Trust Division

Former

Freddy Maldonado (6)		2008		352,997		45,417		—		58,915		457,329
Former Chief Financial Officer	2007			284,423		25,000		—		68,031		377,454
		2006		255,000		25,000		—		70,572		350,572

José Armando Ramírez (7)		2008		427,015		600		—		505,530		933,145
Former Chief Financial Officer and Chief Operating Officer	2007			153,846		113,889		5,980		63,811		337,526


(1)		Includes (i) amounts deferred by the individual pursuant to the Company’s 1165(e) Plan, and (ii) cash payments in respect of accrued and unused vacation time. See the Compensation Discussion and Analysis above and the footnotes below for more information on the 1165(e) plan.

(2)		Amounts for each NEO, other than Messrs. Stipes, Maldonado and Ramírez, represent the end-of-year payment granted by the Compensation Committee and the Christmas bonus that is paid under Puerto Rico law. The Company has normally granted one month of salary as a Christmas bonus, although Mr. Ramírez received a Christmas bonus of $600 in 2008. No performance or any other special awards or bonuses were paid, awarded or granted to any employees or officers of the Company, as was determined by the Company’s Board of Directors.

(3)		Amounts represent, for each respective year, the dollar amount recognized by the Company for financial statement reporting purposes with respect to each NEO during the year, determined in accordance with SFAS 123(R), disregarding the estimates relating to service-based vesting conditions. A discussion of the assumptions used in calculating these values may be found in Note 17 “Stock Compensation Plans” to the Company’s consolidated financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

(4)		The table below shows the components of this column for 2008, which include perquisites and other personal benefits, including the Company’s Deferred Profit Sharing Plan contribution for each NEO, the Company’s match for each NEO 1165(e) plan contributions, business and entertainment expenses, car allowance, and other employee benefits which in the aggregate do not exceed $10,000. Amounts represent the actual amounts paid by the Company for each item of compensation. Under the provisions of the 1165(e) plan, the Company contributes 50% of the first 6% of base compensation that a participant contributes to the plan. The Company’s contributions plus actual earnings thereon are 100% vested after three years of credited service. In case of death or disability, a participant or his/her beneficiary will be 100% vested regardless of the number of years of credited service. The Company’s contributions under the 1165(e) plan during fiscal 2008 totaled $609,000. The Company contributed $4,000 with respect to each of the NEOs under the plan in fiscal 2008, except for Messrs. Dávila and Ramírez who did not participate in the

221


		plan during the year. Under the terms of the non-contributory deferred profit-sharing plan, the Company contributes each fiscal year to the plan, out of its current or accumulated after-tax net profit, an amount as determined by the Board of Directors. The Company’s contribution for any fiscal year may not exceed the maximum amount allowable as a deduction to the Company under the provisions of Section 23(p)-2 of the Puerto Rico Income Tax Act of 1954, as amended from time to time. All contributions by the Company are to be made in cash or in such property as is acceptable to the trustees under the plan (Messrs. Stipes, Maldonado and Dominquez). As of each anniversary of a participant’s employment with the Company, the Company’s contribution, and any previously unallocated forfeitures of Company contributions, are allocated to the account of each participant in the same ratio that such participant’s credited points for the calendar year bear to the total credited points of all such participants for such year. The credited points for each participant are determined on the basis of the schedule set forth below. The Company contributed an aggregate of $250,000 to the profit-sharing plan in 2008.


									For Each Full and
									Fractional
									$100 of Total
							For Each		Compensation
							Complete		Paid to the
					Years of		Year of		Participant in the
					Service		Service		Calendar Year
					0-5			2		1
					6 or more			3		1
							Allowance for
			Profit Sharing				Business and		Use of
			Plan		1165(e) Plan		Entertainment		Company
Name	Year		Contribution		Contribution		Expenses		Car		Other			Total
Current

Frank C. Stipes, Esq.		2008	$	2,557	$	4,000	$	52,500	$	4,331	$	630		$	64,018
		2007		2,256		4,000		52,500		6,568		1,256			66,580
		2006		2,271		4,000		52,500		9,053		1,917			69,741

Carlos Davila		2008		1,906		—		—		8,698		630			11,234

William Vidal, Esq.		2008		1,775		4,000		41,250		6,548		630			54,203
		2007		3,669		4,000		41,250		6,213		1,256			56,388
		2006		2,848		4,000		41,250		7,633		1,256			56,987

Andrés Morgado, CPA		2008		1,003		4,000		48,000		6,213		630			59,846

Former

Freddy Maldonado		2008		1,750		4,000		45,000		7,535		630			58,915
		2007		1,956		4,000		45,000		12,780		4,295			68,031
		2006		1,939		4,000		45,000		14,910		4,723			70,572

José Armando Ramírez		2008		—		—		—		4,900		500,630	(7)		505,530
		2007		294		—		—		5,661		57,856	(8)		63,811


(5)		Mr. Dávila has been the Chief Operating Officer and Senior Executive Vice President of the Company since October 6, 2008 and Chief Retail Officer of Westernbank since joining the Company on October 1, 2007.

222


(6)		Effective August 8, 2008, Mr. Freddy Maldonado assumed the position of Chief Financial Officer of the Company and Westernbank and relinquished the duties of President and Chief Investment Officer of the Company. On March 17, 2009, Mr. Maldonado resigned from his positions at the Company and Westernbank and at the Board of Directors effective March 31, 2009.

(7)		Mr. José Armando Ramírez served as Chief Financial Officer and Chief Operating Officer of the Company and Westernbank from September 3, 2007 until his resignation on August 8, 2008. On November 26, 2008, the Company entered into a Separation Agreement with Mr. Ramírez, effective August 8, 2008, pursuant to which, on January 12, 2009 and March 2, 2009, the Company paid Mr. Ramírez the amounts of $89,423, covering 60 days of salary ($82,692) and related accrued vacation ($6,731), and a lump sum severance payment in the amount of $500,000, respectively. Refer to “Severance Benefits” above for a discussion of the Separation Agreement.

(8)		Represents relocation expenses.

The compensation plans under which the Company grants options awards are generally described in the Compensation Discussion and Analysis section above, and include the Company’s two shareholder-approved stock option plans, the 1999 Qualified Option Plan and the 1999 Nonqualified Option Plan.

GRANTS OF PLAN-BASED AWARDS DURING 2008

During 2008, due to the recent restatement process and the late filing of the 2007 and 2008 Forms 10-K, the Company did not award any stock options to the NEO’s.

NARRATIVE DISCLOSURE TO THE SUMMARY COMPENSATION TABLE AND
GRANTS OF PLAN BASED AWARDS TABLE

The Company does not have any employment agreements with its NEOs other than Messrs. Dávila and Ramírez, the latter of whom terminated employment on August 8, 2008. For a discussion of the change in control agreements for Messrs. Dávila, Vidal, Morgado, Maldonado and Ramírez, see “Potential Payments Upon Termination or Change in Control” below.

In connection with the appointment of Mr. Ramírez on August 20, 2007, the Company and Mr. Ramírez entered into an Employment Agreement which provided for a then-current annual base salary of $500,000, an annual performance-based bonus, a grant of options to purchase shares of the Company’s common stock, relocation and related expenses, not to exceed $150,000, and other fringe benefits applicable to executive personnel of the Company. In addition, the Company’s Employment Agreement with Mr. Ramírez contained provisions regarding confidentiality, proprietary information and work product. For a description of the severance payments and benefits owed to Mr. Ramírez pursuant to the terms of his Employment Agreement and the related Separation Agreement, see the “Potential Payments Upon Termination or Change in Control” section below.

In connection with the appointment of Mr. Dávila on September 5, 2007, Westernbank and Mr. Dávila entered into an Employment Agreement which provided for a then-current annual base salary of $375,000 (subsequently increased to $425,000 on October 6, 2008), an annual performance-based bonus, a grant of options to purchase shares of the Company’s common stock, relocation and related expenses, not to exceed $25,000, and other fringe benefits applicable to executive personnel of the Company. In addition, the Company’s Employment Agreement with Mr. Dávila contains provisions regarding confidentiality, proprietary information and work product. For a description of the severance payments and benefits owed to Mr. Dávila pursuant to the terms of his Employment Agreement, see the “Potential Payments Upon Termination or Change in Control” section below.

223

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2008


	Option Awards
	Number of Securities		Number of
	Underlying		Securities		Options		Option
	Unexercised Options		Underlying		Exercise Price		Expiration
Name	(#) Exercisable (1)		Unexercised		($) (1)		Date
Current


Frank C. Stipes, Esq.		88,486		—	$	142.50		1/28/2010

Carlos Dávila		800		3,200		150.00		10/1/2017

William Vidal, Esq.		360		240		535.50		7/15/2015

Andres Morgado, CPA		702		—		142.50		1/28/2010
		240		160		535.50		7/15/2015

Former

Freddy Maldonado (3)		20,834		—		142.50		1/28/2010

José Armando Ramírez (4)		—		—		—		—


(1)		Adjusted to reflect all the Company’s stock splits and stock dividends, including most recently, the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

(2)		Unvested stock options held by Mr. Carlos Dávila vest 20% on each of the following anniversary of the grant date: October 1, 2009, October 1, 2010 and October 2011. Unvested stock options held by Messrs. William Vidal, Esq. and Andres Morgado vest 20% on each of the following anniversaries of the grant date: July 15, 2009 and July 15, 2010.

(3)		All 20,834 vested stock options held by Mr. Maldonado were forfeited in connection with his resignation in March 2009.

(4)		Stock options (4,500) granted to Mr. José Armando Ramírez, were forfeited on August 8, 2008 in connection with his resignation.

OPTION EXERCISES AND STOCK VESTED IN 2008

None of the Company’s NEOs exercised vested stock options in 2008.

The Company has two equity based compensation plans, the 1999 Qualified Stock Option Plan and the 1999 Nonqualified Stock Option Plan. Under the 1999 Qualified Stock Option Plan, options for up to 294,953 shares (as adjusted for stock splits, reverse stock splits, and stock dividends) of Common Stock may be granted. Also, options for up to 294,953 shares (as adjusted) of Common Stock, reduced by any options granted under the 1999 Qualified Stock Option Plan, may be granted under the 1999 Nonqualified Stock Option Plan. At December 31, 2008, the Company had outstanding 134,369 options (as adjusted) under the 1999 Qualified Stock Option Plan. No options have been granted under the 1999 Nonqualified Stock Option Plan. The following table provides information as of December 31, 2008, regarding shares of common stock that may be issued to key employees under the 1999 Qualified Stock Option Plan.


			Number of securities remaining available for
Number of securities to be	Weighted-average exercise		future issuance under equity compensation
issued upon exercise of	price of outstanding options		plans (excluding securities reflected in column
outstanding options (1) (2)	(1)		(a)) (1)
(a)	(b)		(c)
126,989		$166.14		113,556


(1)		Adjusted to reflect all the Company’s stock splits and stock dividends, including most recently, the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

(2)		Excludes 47,028 shares issued upon exercise of stock options through December 31, 2008.

224

Nonqualified Deferred Compensation

Westernbank has a Nonqualified Deferred Compensation Plan (the “Plan”) for a selected group of management or highly compensated employees, which includes each of the NEOs. The benefit to be derived from the Plan and the accompanying trust, is for the benefit of Westernbank employees participating in the Plan and their beneficiaries in accordance with the terms and conditions set forth in the Plan. The Plan and the trust are not intended to meet the requirements of Section 1165 of the PR-IRC of 1994, as amended, and therefore do not meet the funding, employee coverage, and other requirements which “qualified retirement plans” must satisfy under section 1165 of the PR-IRC. On the other hand, the Plan and the trust are intended to constitute an unfunded arrangement maintained “primarily for the purposes of providing deferred compensation for a selected group of management or highly compensated employees” for purposes of Sections 202(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended.

Under the Nonqualified Deferred Compensation Plan the employee or his/her beneficiaries will receive the payment of the deferred compensation, following the earlier of the deferment date, the termination of employment, the death of the employee, a financial hardship or an involuntary termination of the Plan as to the employer, all subject however, to the claims of the employer’s general creditors under federal, state and Commonwealth of Puerto Rico laws, as provided in the Plan and the trust.

The deferred compensation will equal the fair market value of the assets held in the employee account, as determined in the Plan. The employee recognizes that his or her deferred compensation payment will depend on the investment performance of the assets held in his or her employee account and the expenses, costs and fees, if any, charged against such account as provided in the Plan and the trust. In addition, the employee recognizes that the deferred compensation may be less that the deferred amount, depending on the type of assets in which the deferred amount is invested, their investment performance over the years, and the expenses, costs and fees, if any, charged against his/her employee account.

Retirement Benefits Plans

Qualified Deferred Profit-Sharing Plan

The Company has a non-contributory deferred profit-sharing plan (the “Profit Sharing Plan”), covering substantially all of its employees, which provides for retirement and disability benefits. The Profit Sharing Plan is self-administered with the retention of professional administrative services. All contributions to the Profit Sharing Plan, which are held in trust, are invested as directed by participants. As of December 31, 2008, the trustees of the Profit Sharing Plan were Messrs. Stipes, Maldonado and Domínguez. Subsequent to December 31, 2008, Messrs. Dávila and Soriano were named trustees of the Profit Sharing Plan, replacing Messrs. Maldonado (who resigned from his positions at the Company effective March 17, 2009 and at the Board of Directors effective March 31, 2009) and Domínguez. The shares of common stock of the Company held by Messrs. Stipes, Maldonado, Domínguez, Dávila and Soriano are set forth in the Beneficial Ownership table.

Participants in the Profit Sharing Plan will be vested upon completing five years of service with the Company, with no vesting prior to such time. The Profit Sharing Plan complies with amendments to the Age Discrimination in Employment Act of 1987 that mandate the elimination of provisions that require the retirement of employees at any age. Provisions in the Profit Sharing Plan allow withdrawals after three years, provided certain substantial conditions or restrictions are met.

The Company shall contribute each fiscal year to the Profit Sharing Plan out of its current or accumulated after-tax net profit such amount as shall be determined by the Board of Directors of the Company. Notwithstanding the foregoing, the Company’s contribution for any fiscal year shall not exceed the maximum amount allowable as a deduction to the Company under the provisions of Section 23 (p)-2 of the Puerto Rico Income Tax Act of 1954, as amended, or as replaced from time to time. All contributions by the Company shall be made in cash or in such property as is acceptable to the trustees.

As of each anniversary of the participant’s employment with the Company (the “Anniversary Date”), the Company’s contribution and any previously unallocated forfeitures of Company contributions are allocated to the account of each participant in the same ratio that such participant’s credited points for the calendar year bear to the total credited points of all such participants for such year.

225

On each Anniversary Date, the credited points for each participant are determined on the basis of the following schedule:


			For Each Full and
			Fractional
			$100 of Total
	For Each		Compensation
	Complete		Paid to the Participant
Years of Service	Year of Service		in the Calendar Year
0-5		2		1
6 or more		3		1

For purposes of eligibility, a Year of Service means a 12-month period, beginning on the date of hire, during which employees are paid, or entitled to payment, for 1,000 or more hours of employment. If they do not meet the 1,000 hours requirement in the first 12 months after their date of hire, they will be credited with a Year of Service for any Plan Year which begins after their date of hire during which they are credited with 1,000 or more hours. A Year of Service, for purposes of vesting, means a Plan Year during which employees were credited for 1,000 or more hours. A total of $1,664,000 was distributed to certain participants of the Profit Sharing Plan in 2008. The Company contributed $250,000 to the Plan in 2008.

Qualified Defined Contribution Plan

The Company has a defined contribution plan under Section 1165(e) of the PR-IRC (the “Defined Contribution Plan”), covering all full-time employees of the Company, including its executive officers, who have one year of service and are twenty-one years or older. Under the provisions of this Defined Contribution Plan, participants may contribute each year from 2% to 10% of their compensation after deducting social security, up to the maximum deferral amount specified by local law. The Company contributes 50 percent of the first 6 percent of base compensation that a participant contributes to the Defined Contribution Plan. Participants are immediately vested in their contributions plus actual earnings thereon. The Company’s contributions plus actual earnings thereon are 100 percent vested after three years of credited service. In case of death or disability, a participant or his/her beneficiary will be 100 percent vested regardless of the number of years of credited service. The Company’s contribution for the year ended December 31, 2008 was $609,000.

Potential Payments upon Termination or Change in Control

Other than as set forth below, if the employment of any of the Company’s NEOs is voluntarily or involuntarily terminated, no additional payments or benefits will accrue to any of them, other than what the NEO has accrued and is vested in under the benefit plans discussed before in the Compensation Discussion and Analysis above. A voluntary or involuntary termination will also not trigger an acceleration of the vesting of any of the Company’s outstanding stock options. Accordingly, any unvested stock options held by the NEO upon voluntary termination will be forfeited. In addition, a termination of employment due to death or disability does not entitle the NEOs or his/her beneficiaries to any payments or benefits that are not available to salaried employees generally.

Change in Control Agreements

The Company has entered into agreements with each of Messrs. Carlos Dávila, William Vidal, Esq., Andres Morgado, CPA and Freddy Maldonado which provide for certain payments to be made to these officers in the event of certain terminations following a “change in control” as defined below) of the Company. On each anniversary of the date of commencement of the agreements, the agreement automatically extends for one year unless written notice from the Company is received by the NEO not less than 60 days prior to the anniversary date.

Pursuant to the agreements, in the event the NEO is involuntarily terminated without cause, or upon voluntary termination by the NEO, in each case within the one year of the change in control, the Company (or its successor) is required to pay the NEO an amount equal to three times the annual base compensation then in effect plus year-end Christmas bonus and special bonus, if any, paid to the NEO during the calendar year immediately preceding the year in which the change in control occurs. The agreements provide, however, that in no event shall the special compensation payable to the NEO pursuant to the agreement exceed $1,500,000. If employment were terminated in 2009 under such circumstances following a change in control, $1,500,000 would be payable to Mr. Dávila, $1,500,000 to Mr. Vidal, $1,338,000 to Mr. Morgado, and $1,500,000 to Mr. Maldonado, $1,500,000. The change in control entered with Mr. Maldonado was terminated on March 31, 2009 when he resigned from his positions in the Company and

226

Westernbank. The Company has nine similar severance payment agreements with certain executive officers of the Company and/or Westernbank, which if their employment were terminated in 2009 under such circumstances following a change in control, would result in payments amounting to $6,558,000. The Chairman of the Board of Directors and CEO of the Company, Mr. Frank C. Stipes, Esq., has never had any such contract since he joined Westernbank and Company back in 1988 and 1999, respectively.

For the purposes of the agreements, a Change in Control shall be deemed to have occurred if:

	(i)		25% or more of ownership control, power to vote, or beneficial ownership of any class of voting securities of the Company is acquired by any person, either directly or indirectly or acting through one or more other persons;

	(ii)		any person (other than any person named as a proxy in connection with any solicitation on behalf of the Board) holds revocable or irrevocable proxies, as to election or removal of three or more directors of the Company, for 25% or more of the total number of voting shares of the Company;

	(iii)		any person has received all applicable regulatory approvals to acquire control of the Company;

	(iv)		any person has commenced a cash tender or exchange offer, or entered into an agreement or received an option, to acquire beneficial ownership of 25% or more of the total number of voting shares of the Company, whether or not any requisite regulatory approval for such acquisition has been received, provided that a change in control will not be deemed to have occurred under this clause unless the Board has made a determination that such action constitutes or will constitute a change in control; or

	(v)		as a result of, or in connection with, any cash tender or exchange offer, merger, or any other business combination, sale of assets or contested election, or any combination of the foregoing transactions, (a) the persons who were Directors of the Company before such transaction shall cease to constitute at least a majority of the Board or its successor or (b) the persons who were stockholders of the Company immediately before such transaction do not own more than 50% of the outstanding voting stock of the Company or its successor immediately after such transaction.

Estimated Payments

The following table sets forth the potential payments to the NEOs under the change in control agreements. At December 31, 2008, there was no benefit upon accelerating and vesting of stock options granted to the NEOs upon change in control as the exercise price for the unvested options exceed the market value of the stock options.

The amounts shown in the table below do not include payments and benefits to the extent they are provided on a non-discriminatory basis to salaried employees generally upon termination of employment, including accrued salary and vacation pay, distributions of plan balances under the Company’s Section 1165(e) defined contribution plan and the Company’s non-contributory Deferred Profit-Sharing Plan. The amounts shown also do not include distributions of plan balances under the Westernbank’s deferred compensation plan.


	Change in Control
Name	Payment
Current

Frank C. Stipes, Esq.	$	—
Carlos Dávila		1,500,000
William Vidal, Esq.		1,500,000
Andres Morgado, CPA		1,338,000

Former

Freddy Maldonado		1,500,000

227

Employment Agreement with Mr. Davila

Pursuant to the terms of Mr. Davila’s Employment Agreement with the Company, in the event Mr. Davila is terminated by the Company without cause or in the event Mr. Davila terminates his employment because he has been demoted from his position during the term of the Employment Agreement, Mr. Davila, in addition to his regular salary up to the date of termination, will be paid at the date of termination a lump sum severance payment equal to $375,000 plus reasonable moving, relocation and other related expenses, not to exceed $25,000. The payment will be paid upon the execution of a mutually agreeable separation and release.

Separation Agreement with Mr. Ramírez

As previously disclosed, on August 8, 2008, Mr. Ramírez resigned from his positions as Chief Financial Officer and Chief Operating Officer. As part of his resignation, he was entitled to receive $3,846 in accrued salary and $27,885 in accrued vacation, for a total of $31,731 which was paid in full on August 22, 2008.

Effective as of his resignation date, the benefits under Mr. Ramírez’s change in control agreement terminated and the unvested options held by Mr. Ramírez were forfeited. Accordingly, Mr. Ramírez did not receive, and will not receive, the stipulated amount. Pursuant to the terms of his Employment Agreement, Mr. Ramírez was entitled to receive a lump sum severance payment in the amount of $500,000, regular salary up to the date of termination, and reasonable moving, relocation and other related expenses of moving back to the United States, not to exceed $150,000. See “Narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table” above for a discussion of Mr. Ramírez’s Employment Agreement. In addition, on November 26, 2008, the Company entered into a Separation Agreement with Mr. Ramírez, effective August 8, 2008. Under the Separation Agreement, Mr. Ramírez will receive a lump sum payment in the amount of $500,000, 60 days salary in the amount of $82,692 and relocation expenses not to exceed $150,000. The Separation Agreement did not provide Mr. Ramírez with any additional payments or benefits as a result of his termination. The Separation Agreement was executed to provide the Company with the protection of a confidentiality covenant and a one-year noncompetition and nonsolicitation covenant, and required Mr. Ramírez to execute a waiver and release in favor of the Company. On January 12, 2009 and March 2, 2009, the Company paid Mr. Ramírez the amounts of $89,423, covering 60 days of salary ($82,692) and related accrued vacation ($6,731), and a lump sum severance payment in the amount of $500,000, respectively.

Director’s Compensation

Directors who are employees receive no additional compensation for serving on the Board of Directors or its committees.

In 2008, the Company provided the following annual compensation to directors who are not employees:


	Fees Earned or Paid in		All Other
Name	Cash ($)		Compensation ($)			Total ($)
Cornelius Tamboer	$	42,000	$	2,400	(1)	$	44,400
Hector L. Del Río (2)		48,000		2,455	(1)		50,455
Juan C. Frontera (3)		60,720		1,200			61,920
Enrique González, CPA (4)		36,000		—			36,000
Cesar A. Ruiz (5)		42,500		1,245			43,745


(1)		Messrs. Tamboer and Del Río receive $200 on a monthly basis as a travel allowance.

(2)		Mr. Del Río receives $500 on a monthly basis for serving as the Chairman of the Company’s Audit Committee.

(3)		Mr. Frontera receives $560 and $1,000 on a monthly basis for serving as the Secretary of the Company’s Board of Directors and of the Audit Committee, respectively. In addition, Mr Frontera is entitled to a $100 travel allowance payable on a monthly basis.

(4)		Mr. Gonzalez receives $500 on a monthly basis for serving as the Financial Expert of the Company’s Audit Committee.

(5)		Mr. Ruiz served as the Financial Expert of the Company’s Audit Committee until January 2008. As the Financial Expert of the Company’s Audit Committee Mr. Ruiz was entitled to $500 on a monthly basis. In addition, Mr. Ruiz was entitled to a $100 travel allowance payable on a monthly basis. Mr. Ruiz resigned from the Board of Directors effective December 31, 2008.

228

Each non-employee director who serves on three or more Board committees received an annual retainer of $42,000 in 2008, which was payable in 12 monthly installments of $3,500. Each non-employee member of the Board who serves on two or fewer Board committees received an annual retainer of $24,000 in 2008, which was payable in 12 monthly installments of $2,000. Employee directors do not receive additional compensation for being a Board member.

The Company has two non-voting honorary directors, Mrs. Fredeswinda G. Frontera and Mrs. Ileana García Ramírez de Arellano. Effective April 2008, each of them received a payment of $500 for each Board of Directors meeting upon attendance. Before April 2008, each of them were entitled to an annual retainer of $24,000, as they served on two or fewer Board committees. In 2008, Mrs. Frontera and Mrs. García Ramírez de Arellano received $8,000 and $8,754, respectively.

In addition to fees for attendance at Board and committee meetings, non-employee directors are eligible for health and insurance benefits, at the same level and pursuant to the same terms of all of the Company’s employees.

The Company may also reimburse the directors for their out-of-pocket expenses incurred in connection with attendance at meetings of and other activities relating to service on the Board of Directors or any committee. No reimbursements for expenses were claimed during 2008.

Compensation Committee Interlocks and Insider Participation

The Company’s executive compensation program is administered by the Compensation Committee of the Board of Directors which, as of December 31, 2008, was comprised of Messrs. Tamboer, Ruiz, Del Río and Frontera (Mr. Ruiz resigned effective December 31, 2008). During fiscal 2008, none of the members of the Compensation Committee had any relationship required to be disclosed under this caption under the rules of the SEC.

229

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

STOCK OWNED BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS

The following table sets forth certain information as of September 30, 2009, as to shares of the Company’s common stock beneficially owned by: (i) each person who is known by the Company to own more than 5% of its common stock; (ii) each of the Company’s current directors and named executive officers (as set forth in the Summary Compensation Table above); and (iii) all directors and executive officers of the Company as a group. The information contained in the table below has been obtained from the Company’s records and from information furnished to the Company by each individual. The Company knows of no person who owns, beneficially or of record, either individually or with associates, more than 5% of the Company’s common stock, except as set forth below:


	Amount and Nature of			Percent of
Name of Beneficial Owner	Beneficial Ownership(1)			Class (2)
Fredeswinda G. Frontera Honorary Directress		301,801			9.15	%
Illeana García Ramírez de Arellano Honorary Directress		285,784			8.67	%
Cornelius Tamboer Director		157,870	(3)		4.79	%
Frank C. Stipes, Esq. Chairman of the Board, Chief Executive Officer and President		294,469	(4)		8.93	%
Freddy Maldonado Former Director and Chief Financial Officer		93,031	(5)		2.82	%
Héctor L. Del Río Director		22,071	(6)		*
Juan C. Frontera Director and Secretary of the Board of Directors		31,693			*
Pedro Domínguez Director and First Vice President — Southern Region of Westernbank Puerto Rico		26,066	(7)		*
César A. Ruiz Former Director		2,506			*
Enrique González Director		421			*
Alberto Báco Director		800			*
Lidio Soriano Chief Financial Officer		1,045			*
FMR LLC		208,050	(8)		6.31	%
Thomas W. Smith		200,435	(9)		6.08	%
Scott Vassalluzzo		178,020	(9)		5.40	%
Carlos Dávila Chief Operating Officer and Chief Retail Officer		812	(10)		*
William Vidal, Esq. Chief Lending Officer		3,880	(11)		*
Andres Morgado, CPA President, Westernbank Trust Division		1,990	(12)		*
Jose Armando Ramírez Former Chief Financial Officer and Chief Operating Officer (13)		—			—

All Directors and Executive Officers as a Group (18 persons)		1,234,561			37.43	%

230


*		Represents less than 1% of the outstanding common stock.

(1)		Based upon information provided by the respective beneficial owners and filings with the Securities and Exchange Commission made pursuant to the Securities Exchange Act of 1934, as amended. Beneficial ownership is direct except as otherwise indicated by footnote. In accordance with Rule 13d-3 of the Exchange Act, a person is deemed to be the beneficial owner of a security if he or she has or shares voting power or investment power with respect to such security or has the right to acquire such ownership within 60 days. The address of each director and executive officer of the Company is c/o W Holding Company, Inc., 19 West McKinley Street, Mayaguez, Puerto Rico 00681.

(2)		Shares of common stock subject to options and convertible preferred stock currently exercisable or convertible, or exercisable or convertible within 60 days of September 30, 2009, are deemed outstanding for purposes of computing the percentage beneficially owned by the person holding such securities but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person or entity. Percentage ownership based on 3,297,815 shares of the Company’s Common Stock issued and outstanding.

(3)		Includes 49,684 shares of common stock owned by Prota Construction, S.E. of which Mr. Tamboer is the holder of 100% interest and has full voting power, and 1,874 shares of common stock owned by Tamrio, Inc., of which Mr. Tamboer is the holder of 50% interest and has shared voting power. Also includes 19,900 shares of Common Stock issuable upon the conversion of 20,000 shares of the Company’s Series A Preferred Stock owned by Mr. Tamboer. Additionally, includes 19,900 shares of Common Stock issuable upon the conversion of 20,000 shares of the Company’s Series A Preferred Stock owned by Tamrio, Inc.

(4)		Includes 825 shares of common stock owned by Mr. Stipes’ daughter and 88,486 vested stock options. Also includes 59,700 shares of Common Stock issuable upon the conversion of 60,000 shares of the Company’s Series A Preferred Stock owned by Mr. Stipes.

(5)		Includes 2,009 shares of common stock owned by Mr. Maldonado’s daughters and 20,834 vested stock options. Also includes 34,825 and 3,930 shares of the Company’s Common Stock issuable upon conversion of 35,000 and 3,950 shares of the Company’s Series A Preferred Stock owned by Mr. Maldonado and his daughters, respectively. On March 17, 2009, Mr. Maldonado resigned from his positions as Senior Executive Vice President and Chief Financial Officer of the Company and Westernbank and as a Director of Company’s Board of Directors effective March 31, 2009.

(6)		Includes 1,874 shares of common stock owned by Tamrio, Inc., of which Mr. Del Río is the holder of 50% interest and has shared voting power. Also includes 19,900 shares of the Company’s Common Stock issuable upon conversion of 20,000 shares of the Company’s Series A Preferred Stock owned by Tamrio, Inc.

(7)		Includes 7,168 vested stock options.

(8)		The Company is relying on the Schedule 13G, filed on February 17, 2009, by FMR LLC. FMR LLC’s address is 82 Devonshire Street, Boston, Massachusetts 02109. The reporting person represents that it has sole dispositive power with respect to all 208,050 shares.

(9)		The Company is relying on the Schedule 13G, filed on February 17, 2009, by Messrs. Smith and Vassalluzzo and Steven Fischer, whose address is 323 Railroad Avenue Greenwich, Connecticut 06830. The reporting persons represent that (i) Mr. Smith has the sole power to vote or to direct the vote of 50,800 shares of common stock and the sole power to dispose or to direct the disposition of 52,872 shares of common stock, (ii) Mr. Vassalluzzo has the sole power to vote or to direct the vote of 11,700 shares of common stock and the sole power to dispose or to direct the disposition of 30,457 shares of common stock. Each of Messrs. Smith and Vassalluzzo has the shared power to vote or dispose or to direct the disposition of 147,563 shares. Voting and investment authority over investment accounts established for the benefit of certain family members and friends of Messrs. Smith and Vassalluzzo is subject to each beneficiary’s right to terminate or otherwise direct the disposition of the investment account.

(10)		Includes 800 vested stock options.

(11)		Includes 360 vested stock options.

(12)		Includes 942 vested stock options.

(13)		Mr. José Armando Ramírez served as Chief Financial Officer and Chief Operating Officer of the Company from September 3, 2007 until his resignation on August 8, 2008.

231

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS AS OF DECEMBER 31, 2008

The following table provides information as of December 31, 2008, regarding shares of common stock that may be issued to key employees under the Company’s stock option plans. The 1999 Qualified Stock Option Plan and the 1999 Nonqualified Stock Option Plan are the only equity based compensation plans currently in effect. At December 31, 2008, the Company had outstanding 134,369 options (as adjusted for the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008) under the 1999 Qualified Stock Option Plan. No options have been granted under the 1999 Nonqualified Stock Option Plan.

Equity compensation plans approved by shareholders:


			Number of securities remaining available
	Weighted-average exercise		for future issuance under equity
Number of securities to be issued upon	price of outstanding options		compensation plans (excluding securities
exercise of outstanding options (1) (2)	(1)		reflected in column (a)) (1)
(a)	(b)		(c)
126,989	$	166.14		113,556


(1)		Adjusted to reflect all Company stock splits and stock dividends, including, most recently, the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008.

(2)		Excludes 47,028 shares (as adjusted) issued upon exercise of stock options through December 31, 2008.

Under the 1999 Qualified Stock Option Plan, options for up to 294,953 shares (as adjusted for stock splits, reverse stock splits and stock dividends) of Common Stock may be granted. Also, options for up to 294,953 shares (as adjusted) of Common Stock, reduced by any options granted under the 1999 Qualified Stock Option Plan, may be granted under the 1999 Nonqualified Stock Option Plan. At December 31, 2008, the Company had outstanding 126,989 options (as adjusted) under the 1999 Qualified Stock Option Plan. No options have been granted under the 1999 Nonqualified Stock Option Plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Transactions

The Company has written procedures for the review and approval of transactions between the Company, its subsidiaries and its directors and executive officers, their immediate family members and entities with which they have a position or relationship. These procedures are intended to determine whether any such related person transaction impairs the independence of a director or presents a conflict of interest on the part of a director or executive officer.

The Company annually requires each of our directors and executive officers to complete a directors’ and officers’ questionnaire that elicits information about related person transactions. The Nominating Committee and Board of Directors annually reviews all transactions and relationships disclosed in the director and officer questionnaires, and the Board of Directors makes a formal determination regarding each director’s independence under the Company’s Corporate Governance Guidelines.

Mr. Bacó, appointed as a director of the Company on March 17, 2009, has a 40% ownership interest in Desarrollos Car y Al 2004, Inc. (“Desarrollos”) and is its President and Secretary. Mr. Bacó and Desarrollos are customers of, and have had transactions with, the Bank, in the ordinary course of the Bank’s business and the Bank expects to have banking transactions with each in the future. These transactions include a line of credit of $6,655,000 extended by the Bank to Desarrollos. Since the beginning of the Company’s 2008 fiscal year, the largest aggregate amount of principal outstanding at any time on the line of credit was $6,451,238. As of December 31, 2008 and September 30, 2009, $2,962,818 and $2,350,052, respectively, was outstanding on this line of credit. Desarrollos paid $3,614,481 and $292,271 in principal and interest payments, respectively, during the Company’s 2008 fiscal year, and $697,918 and $96,569 in principal and interest payments, respectively, since the beginning of 2009 fiscal year. The interest rate payable on monies

232

borrowed under the line of credit is 5.50%. In the Company’s opinion, all loans and commitments to lend pursuant to the aforementioned line of credit were made in the ordinary course of business and on substantially the same terms, including interest rates, collateral and repayment schedules, as those prevailing for comparable transactions with other persons of similar creditworthiness and did not involve more than a normal risk of collectability nor contain terms unfavorable to the Bank.

Loan Policy

The Company’s conflict of interest policy permits only loans with a first mortgage to be provided by the Company to directors and executive officers with respect to their primary residence. Home equity and second mortgage loans are not permitted. No officer, director or employee may have any other type of loan or indebtedness with the Company, except for a credit card, unless such loan or indebtedness is fully cash collateralized. All loans to directors and executive officers were made (i) in the ordinary course of business, (ii) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (iii) did not involve more than normal risk of collectibility or present other unfavorable features. As of December 31, 2008, all loans made by Westernbank to the directors or executive officers of the Company were in compliance with these requirements.

Directors Independence

The Board has determined that the following directors, comprising a majority of our Board, are independent directors under the applicable NYSE listing standards: Cornelius Tamboer, Héctor L. Del Río, Juan C. Frontera, Enrique González, CPA, César A. Ruiz (who resigned from the Board effective December 31, 2008) and Alberto Bacó, who on March 17, 2009 was appointed director of the Company.

The Board has a standing Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, Special Litigation Committee among other standing committees. The Board has determined that all of the members of each of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Special Investigation Committee are independent under the applicable NYSE listing standards.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit and audit-related fees aggregated $4,076,000 (including $291,000 of out-of-pocket expenses) and $4,191,000 (including $221,000 of out-of-pocket expenses) for the fiscal years ended December 31, 2008 and 2007, respectively, and were composed of the following:

Audit Fees

The aggregate fees billed for the audits of the Company’s annual financial statements for the fiscal years ended December 31, 2008 and 2007, and for the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q were $4,076,000 (including $291,000 of out-of-pocket expenses) and $4,181,000 (including $221,000 of out-of-pocket expenses), respectively.

Audit-Related Fees

There were no fees billed by our principal accountant for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “—Audit Fees” above for the fiscal years ended December 31, 2008 and 2007.

Tax Fees

The aggregate fees billed by our principal accountant for professional services rendered for tax compliance, tax advice and tax planning matters for the Company during the fiscal year ended December 31, 2007 were $10,000. There were no tax fees billed by our principal accountant during the fiscal year ended December 31, 2008.

233

All Other Fees

Other than the fees set forth above in this Item 14, there were no other fees billed by BDO Seidman, LLP (for 2008) or Deloitte & Touche LLP (for 2007) for products and services provided to the Company for the fiscal years ended December 31, 2008 or December 31, 2007. As previously reported on the Company’s Current Report on Form 8-K filed on January 30, 2009, as of January 28, 2009, the Company engaged BDO Seidman, LLP as its independent registered public accounting firm.

In considering the nature of the services provided by BDO Seidman, LLP and Deloitte & Touche LLP, the Audit Committee determined that such services are compatible with the provision of independent audit services. The Audit Committee discussed these services with the independent auditor and Company management to determine that these are permitted under the rules and regulations concerning auditor independence implemented by the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants.

Pre-Approval Policy

The services performed by the independent registered public accounting firm were pre-approved in accordance with the pre-approval policy and procedures adopted by the Audit Committee. This policy describes the permitted audit, audit-related, tax and other services (collectively, the “Disclosure Categories”) that the independent registered public accounting firm may perform. The policy requires that prior to the beginning of each fiscal year, a description of the services (the “Service List”) expected to be performed by the independent registered public accounting firm in each of the Disclosure Categories in the following fiscal year be presented to the Audit Committee for approval.

Services provided by the independent registered public accounting firm during the following year that are included in the Service List were pre-approved following the policies and procedures of the Audit Committee.

Any requests for audit, audit-related, tax and other services not contemplated on the Service List must be submitted to the Audit Committee for specific pre-approval and cannot commence until such approval has been granted. Normally, pre-approval is provided at regularly scheduled meetings. However, the authority to grant specific pre-approval between meetings, as necessary, has been delegated to the Chairman of the Audit Committee. The Chairman must update the Audit Committee at the next regularly scheduled meeting of any services that were granted specific pre-approval.

In addition, although not required by the rules and regulations of the SEC, the Audit Committee generally requests a range of fees associated with each proposed service on the Service List and any services that were not originally included on the Service List. Providing a range of fees for a service incorporates appropriate oversight and control of the independent auditor relationship, while permitting the Company to receive immediate assistance from the independent registered public accounting firm when time is of the essence.

On a quarterly basis, the Audit Committee reviews the status of services and fees incurred year-to-date against the original Service List and the forecast of remaining services and fees for the fiscal year.

The policy contains a de minimis provision that operates to provide retroactive approval for permissible non-audit services under certain circumstances. The provision allows for the pre-approval requirement to be waived if all of the following criteria are met:

The service is not an audit, review or other attest service;

The aggregate amount of all such services provided under this provision constitutes no more than 5% of the total amount of revenues paid by the Company to the accountant during the fiscal year in which services are provided;

Such services were not recognized at the time of the engagement to be non-audit services;

Such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit by the Audit Committee or its designee; and

The service and fee are specifically disclosed in the Proxy Statement as meeting the de minimis requirements.

234

All Fiscal 2008 and 2007 services were pre-approved by the Audit Committee.

REPORT OF THE AUDIT COMMITTEE

We assist the Board of Directors in its oversight of the Company’s financial reporting process. In fulfilling our oversight responsibilities, we have reviewed and discussed the Company’s audited financial statements for the fiscal year ended December 31, 2008 with the Company’s management and with BDO Seidman, LLP, the Company’s independent registered public accounting firm. Management has represented to us that the financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America.

Management has primary responsibility for the Company’s financial statements and the overall reporting process, including the Company’s system of internal controls. The independent registered public accounting firm audits the annual financial statement prepared by management, expresses an opinion as to whether those financial statements fairly present, in all material respects, the financial position, results of operations and cash flows of the Company in conformity with accounting principles generally accepted in the United States of America and discusses with us their independence and any other matters they are required to discuss with us or that they believe should be raised to us. We oversee these processes, although we must rely on the information provided to us and on the representations made by management.

We have discussed with BDO Seidman, LLP, the Company’s independent registered public accounting firm, the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. We have received the written disclosures and the letter from BDO Seidman, LLP required by applicable requirements of the Public Company Accounting Oversight Board regarding BDO Seidman, LLP’s communications with the Audit Committee concerning independence, and have discussed with BDO Seidman, LLP the independence of BDO Seidman, LLP.

Based on the review and discussions described in the preceding paragraphs, the Audit Committee recommended to the Company’s Board of Directors that the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2008 be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, for filing with the SEC.

Héctor L. Del Río
Juan C. Frontera
Cornelius Tamboer
Enrique González
Alberto Báco

235

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this Report

	(1)		Index to financial statements.

			The following financial statements are incorporated by reference from Part II, Item 8 hereof:

•

Reports of Independent Registered Public Accounting Firms

•

Consolidated Statements of Financial Condition as of December 31, 2008 and 2007

•

Consolidated Statements of Operations for each of the three years in the period ended December 31, 2008

•

Consolidated Statements of Changes in Stockholders’ Equity and Consolidated Statements of Comprehensive Income (Losses) for each of the three years in the period ended December 31, 2008

•

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2008

•

Notes to Consolidated Financial Statements

	(2)		Financial Statement Schedules.

			The schedules for the Company and its subsidiaries are omitted because of the absence of conditions under which they are required, or because the information is set forth in the consolidated financial statements or the notes thereto.

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


NO.		EXHIBIT
3.1		Certificate of Incorporation (incorporated by reference herein to Exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 2005, filed on April 24, 2006).

3.2		Amended and Restated Certificate of Incorporation of W Holding Company, Inc. (incorporated by reference herein to Exhibit 3.2 to the Company’s Form 10-K for the year ended December 31, 2007, filed on March 16, 2009).

3.3		Bylaws, as amended (incorporated by reference herein to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on October 3, 2007).

4.1		Certificate of Resolution establishing the rights of the Series B Preferred Stock (incorporated by reference to Exhibit 3.1.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-4, Reg. No. 333-76975, filed on June 30, 1999).

4.2		Certificate of Resolution establishing the rights of the Series C Preferred Stock (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K as filed on March 30, 2001).

4.3		Certificate of Resolution establishing the rights of the Series D Preferred Stock (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K as filed on August 1, 2001).

4.4		Certificate of Resolution establishing the rights of the Series E Preferred Stock (incorporated herein by reference as Exhibit 4.2 to the Company’s Current Report on Form 8-K, as filed on October 31, 2002).

4.5		Certificate of Corporate Resolution establishing the rights of the Series F Preferred Stock (incorporated herein by reference as Exhibit 4.1 to the Company’s Current Report on Form 8-K, as filed on May 29, 2003).

4.6		Certificate of Corporate Resolution establishing the rights of the Series G Preferred Stock (incorporated herein by reference as Exhibit 4.1 to the Company’s Current Report on Form 8-K, as filed on August 28, 2003).

236


NO.		EXHIBIT
4.7		Certificate of Corporate Resolution designating the terms of W Holding’s Series H Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, as filed on December 17, 2004).

10.1		Form of 1999 Qualified Stock Option Plan (incorporated by reference herein to Exhibit 10.1 to the Company’s Registration Statement on Form S-4, File No. 333-76975, filed on April 23, 1999).

10.2		Form of 1999 Nonqualified Stock Option Plan (incorporated by reference herein to Exhibit 10.2 to the Company’s Registration Statement on Form S-4, File No. 333-76975, filed on April 23, 1999).

10.3*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Alfredo Archilla (incorporated by reference herein to Exhibit 10.4 to the Company’s Form 10-K for the year ended December 31, 2001, filed on March 29, 2002).

10.4*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Mike Vázquez (incorporated by reference herein to Exhibit 10.3 to the Company’s Form 10-K for the year ended December 31, 2001, filed on March 29, 2002).

10.5*		Employment Agreement between Westernbank Puerto Rico and Mrs. Migdalia Rivera (incorporated by reference herein to Exhibit 10.3 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 31, 2003).

10.6*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Andrés Morgado (incorporated by reference herein to Exhibit 10.6 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 31, 2003).

10.7*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. William Vidal (incorporated by reference herein to Exhibit 10.7 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 31, 2003).

10.8*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Pedro Domínguez (incorporated by reference herein to Exhibit 10.9 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 31, 2003).

10.9*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Freddy Maldonado (incorporated by reference herein to Exhibit 10.10 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 31, 2003).

10.10*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. José M. Biaggi (incorporated by reference herein to Exhibit 10.11 to the Company’s Current Report on Form 8-K, as filed on July 15, 2005).

10.11*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Ricardo Cortina (incorporated by reference herein to Exhibit 10.12 to the Company’s Form 10-K for the year ended December 31, 2005, filed on April 24, 2006).

10.12*		Description of Arrangement for Director Fees

10.13*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Rubén Aponte (incorporated by reference herein to Exhibit 10.15 to the Company’s Form 10-Q for the quarter ended September 30, 2006, filed on November 9, 2006).

10.14*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mrs. Yolanda S. Vicens Martínez (incorporated by reference herein to Exhibit 10.16 to the Company’s Form 10-Q for the quarter ended September 30, 2006, filed on November 9, 2006).

10.15*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mrs. Rosemarie Santiago Salcedo (incorporated by reference herein to Exhibit 10.17 to the Company’s Form 10-Q for the quarter ended September 30, 2006, filed on November 9, 2006).

10.16*		Payment Agreement in the Event of a Change in Control between W Holding Company, Inc. and Westernbank Puerto Rico, with Mr. Aurelio Emanuelli (incorporated by reference herein to Exhibit 10.19 to the Company’s Form 10-Q for the quarter ended September 30, 2006, filed on November 9, 2006).

10.17*		Payment Agreement in the Event of a Change in Control between W Holding Company, Inc. and Westernbank Puerto Rico, with Mr. Peter Lectora Soto (incorporated by reference herein to Exhibit 10.20 to the Company’s Form 10-K for the year ended December 31, 2006, filed on February 27, 2007).

10.18*		Release Agreement between Westernbank Puerto Rico and Mr. José M. Biaggi Landrón (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed on April 11, 2007).

237


NO.		EXHIBIT
10.19*		Employment Agreement between Westernbank Puerto Rico, W Holding Company, Inc. and Mr. José Armando Ramírez (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed on September 4, 2007).

10.20*		Employment Agreement between Westernbank Puerto Rico, W Holding Company, Inc. and Mr. Carlos Dávila (incorporated by reference herein to Exhibit 99.1 to the Company’s Current Report on Form 8-K, as filed on October 3, 2007).

10.21*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Carlos Dávila (incorporated by reference herein to Exhibit 99.2 to the Company’s Current Report on Form 8-K, as filed on October 3, 2007).

10.22*		Separation Agreement and General Release between W Holding Company, Inc. and Mr. José Armando Ramírez (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed on December 2, 2008).

10.23*		Employment Agreement between Westernbank Puerto Rico and Mr. Lidio Soriano (incorporated by reference herein to Exhibit 10.23 to the Company’s Form 10-K for the year ended December 31, 2007, filed on March 16, 2009).

10.24*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Lidio Soriano (incorporated by reference herein to Exhibit 10.24 to the Company’s Form 10-K for the year ended December 31, 2007, filed on March 16, 2009).

10.25		Consent Order by and between Westernbank Puerto Rico and the Federal Deposit Insurance Corporation (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on May 29, 2009).

21.1		Subsidiaries of the Registrant

23.1		Consent of Deloitte & Touche LLP

23.2		Consent of BDO Seidman LLP

31.1		CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.

32.2		CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.


*		Indicates a management contract or any compensatory plan, contract or arrangement.

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

(c)		Not applicable.

238

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

W Holding Company, Inc.


By: /s/ FRANK C. STIPES Frank C. Stipes, Chairman of the Board, Chief Executive Officer and President				Date: October 28, 2009

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


/s/ FRANK C. STIPES Frank C. Stipes,		Date: October 28, 2009
Chairman of the Board, Chief Executive Officer and President

/s/ PEDRO R. DOMINGUEZ Pedro R. Domínguez,		Date: October 28, 2009
Director

/s/ CORNELIUS TAMBOER Cornelius Tamboer,		Date: October 28, 2009
Director

/s/ HÉCTOR L. DEL RÍO Héctor L. del Río,		Date: October 28, 2009
Director

/s/ JUAN C. FRONTERA Juan C. Frontera,		Date: October 28, 2009
Director

/s/ ENRIQUE GONZALEZ Enrique Gonzalez,		Date: October 28, 2009
Director

/s/ ALBERTO BACÓ Alberto Bacó		Date: October 28, 2009
Director

/s/ LIDIO SORIANO Lidio Soriano		Date: October 28, 2009
Chief Financial Officer

239

EXHIBIT INDEX


3.1		Certificate of Incorporation (incorporated by reference herein to Exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 2005, filed on April 24, 2006).

3.2		Amended and Restated Certificate of Incorporation of W Holding Company, Inc. (incorporated by reference herein to Exhibit 3.2 to the Company’s Form 10-K for the year ended December 31, 2007, filed on March 16, 2009).

3.3		Bylaws, as amended (incorporated by reference herein to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on October 3, 2007).

4.1		Certificate of Resolution establishing the rights of the Series B Preferred Stock (incorporated by reference to Exhibit 3.1.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-4, Reg. No. 333-76975, filed on June 30, 1999).

4.2		Certificate of Resolution establishing the rights of the Series C Preferred Stock (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K as filed on March 30, 2001).

4.3		Certificate of Resolution establishing the rights of the Series D Preferred Stock (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K as filed on August 1, 2001).

4.4		Certificate of Resolution establishing the rights of the Series E Preferred Stock (incorporated herein by reference as Exhibit 4.2 to the Company’s Current Report on Form 8-K, as filed on October 31, 2002).

4.5		Certificate of Corporate Resolution establishing the rights of the Series F Preferred Stock (incorporated herein by reference as Exhibit 4.1 to the Company’s Current Report on Form 8-K, as filed on May 29, 2003).

4.6		Certificate of Corporate Resolution establishing the rights of the Series G Preferred Stock (incorporated herein by reference as Exhibit 4.1 to the Company’s Current Report on Form 8-K, as filed on August 28, 2003).

4.7		Certificate of Corporate Resolution designating the terms of W Holding’s Series H Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, as filed on December 17, 2004).

10.1		Form of 1999 Qualified Stock Option Plan (incorporated by reference herein to Exhibit 10.1 to the Company’s Registration Statement on Form S-4, File No. 333-76975, filed on April 23, 1999).

10.2		Form of 1999 Nonqualified Stock Option Plan (incorporated by reference herein to Exhibit 10.2 to the Company’s Registration Statement on Form S-4, File No. 333-76975, filed on April 23, 1999).

10.3*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Alfredo Archilla (incorporated by reference herein to Exhibit 10.4 to the Company’s Form 10-K for the year ended December 31, 2001, filed on March 29, 2002).

10.4*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Mike Vázquez (incorporated by reference herein to Exhibit 10.3 to the Company’s Form 10-K for the year ended December 31, 2001, filed on March 29, 2002).

10.5*		Employment Agreement between Westernbank Puerto Rico and Mrs. Migdalia Rivera (incorporated by reference herein to Exhibit 10.3 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 31, 2003).

10.6*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Andrés Morgado (incorporated by reference herein to Exhibit 10.6 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 31, 2003).

10.7*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. William Vidal (incorporated by reference herein to Exhibit 10.7 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 31, 2003).

10.8*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Pedro Domínguez (incorporated by reference herein to Exhibit 10.9 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 31, 2003).

10.9*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Freddy Maldonado (incorporated by reference herein to Exhibit 10.10 to the Company’s Form 10-K for the year ended December 31, 2002, filed on March 31, 2003).

10.10*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. José M. Biaggi (incorporated by reference herein to Exhibit 10.11 to the Company’s Current Report on Form 8-K, as filed on July 15, 2005).

240


10.11*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Ricardo Cortina (incorporated by reference herein to Exhibit 10.12 to the Company’s Form 10-K for the year ended December 31, 2005, filed on April 24, 2006).

10.12*		Description of Arrangement for Director Fees

10.13*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Rubén Aponte (incorporated by reference herein to Exhibit 10.15 to the Company’s Form 10-Q for the quarter ended September 30, 2006, filed on November 9, 2006).

10.14*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mrs. Yolanda S. Vicens Martínez (incorporated by reference herein to Exhibit 10.16 to the Company’s Form 10-Q for the quarter ended September 30, 2006, filed on November 9, 2006).

10.15*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mrs. Rosemarie Santiago Salcedo (incorporated by reference herein to Exhibit 10.17 to the Company’s Form 10-Q for the quarter ended September 30, 2006, filed on November 9, 2006).

10.16*		Payment Agreement in the Event of a Change in Control between W Holding Company, Inc. and Westernbank Puerto Rico, with Mr. Aurelio Emanuelli (incorporated by reference herein to Exhibit 10.19 to the Company’s Form 10-Q for the quarter ended September 30, 2006, filed on November 9, 2006).

10.17*		Payment Agreement in the Event of a Change in Control between W Holding Company, Inc. and Westernbank Puerto Rico, with Mr. Peter Lectora Soto (incorporated by reference herein to Exhibit 10.20 to the Company’s Form 10-K for the year ended December 31, 2006, filed on February 27, 2007).

10.18*		Release Agreement between Westernbank Puerto Rico and Mr. José M. Biaggi Landrón (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed on April 11, 2007).

10.19*		Employment Agreement between Westernbank Puerto Rico, W Holding Company, Inc. and Mr. José Armando Ramírez (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed on September 4, 2007).

10.20*		Employment Agreement between Westernbank Puerto Rico, W Holding Company, Inc. and Mr. Carlos Dávila (incorporated by reference herein to Exhibit 99.1 to the Company’s Current Report on Form 8-K, as filed on October 3, 2007).

10.21*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Carlos Dávila (incorporated by reference herein to Exhibit 99.2 to the Company’s Current Report on Form 8-K, as filed on October 3, 2007).

10.22*		Separation Agreement and General Release between W Holding Company, Inc. and Mr. José Armando Ramírez (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed on December 2, 2008).

10.23*		Employment Agreement between Westernbank Puerto Rico and Mr. Lidio Soriano (incorporated by reference herein to Exhibit 10.23 to the Company’s Form 10-K for the year ended December 31, 2007, filed on March 16, 2009).

10.24*		Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Lidio Soriano (incorporated by reference herein to Exhibit 10.24 to the Company’s Form 10-K for the year ended December 31, 2007, filed on March 16, 2009).

10.25		Consent Order by and between Westernbank Puerto Rico and the Federal Deposit Insurance Corporation (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on May 29, 2009).

21.1		Subsidiaries of the Registrant

23.1		Consent of Deloitte & Touche LLP

23.2		Consent of BDO Seidman LLP

31.1		CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.

32.2		CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.


*		Indicates a management contract or any compensatory plan, contract or arrangement.

241