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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
 Or
 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.
  Commonwealth of Puerto Rico
    
    66-0573197(State or Other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)
 19 West McKinley Street, Mayagüez, Puerto Rico
    
    00680(Address of Principal Executive Offices)
    
    (Zip Code)
 (787) 834-8000
  Common Stock ($1.00 par value per share)
    
    New York Stock Exchange(Title of Each Class)
    
    (Name of Each Exchange on Which Registered)
  Preferred Stock ($1.00 par value per share)*
    
    The NASDAQ Stock Market LLC(Title of Each Class)
    
    (Name of Each Exchange on Which Registered)
 
 *
    
    A Form 25 delisting the above-listed series of preferred stock was filed on May 12, 2008. o þ
 o þ
 o þ
 o o
 o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
 None




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TABLE OF CONTENTS
 PART IITEM 1. BUSINESS
    
    
    2ITEM 1A. RISK FACTORS
    
    
    28ITEM 1B. UNRESOLVED STAFF COMMENTS
    
    
    38ITEM 2. PROPERTIES
    
    
    38ITEM 3. LEGAL PROCEEDINGS
    
    
    39ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    41PART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    42ITEM 6. SELECTED FINANCIAL DATA
    
    
    47ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
    
    
    49ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    126ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    126ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
    
    
    201ITEM 9A. CONTROLS AND PROCEDURES
    
    
    201ITEM 9B. OTHER INFORMATION
    
    
    204PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
    
    
    205ITEM 11. EXECUTIVE COMPENSATION
    
    
    214ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
    
    
    230ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
    
    
    232ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    233PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
    
    
    236SIGNATURES
    
    
    239EX-10.12EX-21.1EX-23.1EX-23.2EX-31.1EX-31.2EX-32.1EX-32.2




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ITEM 1.
    
    BUSINESS
        2




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
    
    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.
   
    
    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.
  3




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Accounting by Creditors for Impairment of a Loan
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Impaired Loans
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Accounting for Derivative
Instruments and Hedging Activities
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The Fair Value Option for Financial Assets and Financial Liabilities- Including an Amendment of
FASB Statement No. 115
 11




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Fair Value Measurements
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Current Fiscal Situation
     Settlement with Tax Authorities
  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
  15




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
    
    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
  16




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Transactions with Affiliates of Lehman Brothers Inc.
   Deposit Insurance Risk-Based Assessments
   Reverse Stock Split
    17




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ITEM 1A.
    
    RISK FACTORS
   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.
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We rely heavily on brokered deposits to meet our liquidity needs.
    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.
  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.
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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.
   We may face adverse consequences if Westernbank is not categorized as a well-capitalized
institution.
 We rely
heavily on brokered deposits to meet our liquidity needs.
 Regulators could take additional adverse actions against the Company or Westernbank as a result of
the Consent Orders.
    30




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The soundness of other financial services institutions may adversely affect our credit risk.
  Difficult market conditions have adversely affected our industry.
  
    
    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.
  
    
    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.
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
    
    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.
  We may not be able to raise additional capital necessary to fund our growth and remain
adequately-capitalized.
  The increase in the FDIC deposit insurance premiums is expected to cause 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.
  32




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We are subject to pending litigation that, if decided against us, could require us to pay
substantial judgments, settlements or other penalties.
  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.
  Westernbank is exposed to commercial lending credit risk.
  33




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Concentration exposure to a number of material borrowers may cause a material adverse effect on
our business, financial condition and results of operations.
   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.
  Our business is concentrated in Puerto Rico and continued weakness of the Puerto Rico economy may
continue to adversely affect our financial performance.
   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.
  34




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Item 9A.
Controls and Procedures Item 9A. Controls and Procedures
 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.
  There is a lack of public disclosure concerning the Company.
  Our delay in filing all required financial statements may adversely affect our ability to attract
customers, investors and employees.
  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.
  We have counterparty exposure to Lehman Brothers Inc. in connection with certain securities
repurchase agreements.
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Our performance is subject to interest rate risk.
  Future operating losses may require us to adjust the valuation allowance against our deferred tax
assets.
  Changes to business strategy to diversify our revenue and liquidity sources may not be successful.
  
    
    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.
  36




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
    
    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
  Competition with other financial institutions could adversely affect our profitability.
  Changes in statutes and regulations, including tax laws and rules, could adversely affect us.
  The imposition of additional property tax payments in Puerto Rico may further deteriorate our
commercial, consumer and mortgage loan portfolios.
  Changes in accounting standards issued by the Financial Accounting Standards Board or other
standard-setting bodies may adversely affect our financial statements.
  37




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Natural disasters and geopolitical events beyond our control could adversely affect us.
  Applicable laws restrict our ability to pay dividends.
  Provisions of our charter and applicable law may prevent a change of control.
  The loss of a key employee may adversely affect our prospects.
  
 ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 2.
    
    PROPERTIES
   38




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
    
    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.
  
   Shareholder Securities Class Action. Hildenbrand v. W Holding Company, Inc., et al. Webb v. W Holding Company, Inc., et al. Saavedra v. W Holding
Company, Inc., et al. Hildenbrand
 Hildenbrand
      39




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Shareholder Derivative Action. Wylie v. Stipes,
et al., and W Holding Company, Inc.
 Wylie
   SEC Informal Inquiry.
 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):
 Kachkar, et al v.
Westernbank Puerto Rico Inyx v.
Westernbank, et al. th Kachkar and Benkovitch v. Westernbank Puerto Rico th Inyx, Inc. v. Westernbank Puerto
Rico, et. al .
   th
     th
 th
  40




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st
       
   
    
    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.
   For
    
    
    128,140,337Against
    
    
    17,830,730Abstain
    
    
    190,121Total Shares
    
    
    146,161,188
  41




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Quarter ended
    
    High(1)
    
    Low(1)September 2009
    
    $
    14.74
    
    
    $
    9.12June 2009
    
    
    27.61
    
    
    
    8.56March 2009
    
    
    16.97
    
    
    
    6.24December 2008
    
    $
    32.50
    
    
    $
    7.29September 2008 (2)
    
    
    49.00
    
    
    
    23.00June 2008 (2)
    
    
    61.00
    
    
    
    42.50March 2008 (2)
    
    
    79.50
    
    
    
    50.50December 2007(2)
    
    $
    118.50
    
    
    $
    37.50September 2007 (2)
    
    
    149.00
    
    
    
    91.50June 2007 (2)
    
    
    282.50
    
    
    
    125.00March 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.   IssuancePrice andLiquidation
    
    
    
    
    
    
    Proceeds FromIssuance
    
    
    
    
    Dividend
    
    
    Preference
    
    
    Shares
    
    
    Issuance, Net of
    
    
    IssuanceYear
    
    
    Type of Preferred Stock
    
    Rate
    
    
    Per Share
    
    
    Issued
    
    
    Issuance Costs
    
    
    Costs1998
    
    
    Convertible, 1998 Series A
    
    
    7.125
    %
    
    $
    25
    
    
    
    1,219,000
    
    
    $
    29,143,000
    
    
    $
    1,332,0001999
    
    
    Non-convertible, 1999
Series B
    
    
    7.250
    
    
    
    25
    
    
    
    2,001,000
    
    
    
    48,273,000
    
    
    
    1,752,0002001
    
    
    Non-convertible, 2001
Series C
    
    
    7.600
    
    
    
    25
    
    
    
    2,208,000
    
    
    
    53,103,000
    
    
    
    2,097,0002001
    
    
    Non-convertible, 2001
Series D
    
    
    7.400
    
    
    
    25
    
    
    
    1,791,999
    
    
    
    43,238,000
    
    
    
    1,562,0002002
    
    
    Non-convertible, 2002
Series E
    
    
    6.875
    
    
    
    25
    
    
    
    1,725,000
    
    
    
    41,463,000
    
    
    
    1,662,0002003
    
    
    Non-convertible, 2003
Series F
    
    
    6.700
    
    
    
    25
    
    
    
    4,232,000
    
    
    
    102,192,000
    
    
    
    3,608,0002003
    
    
    Non-convertible, 2003
Series G
    
    
    6.900
    
    
    
    25
    
    
    
    2,640,000
    
    
    
    63,671,000
    
    
    
    2,329,0002004
    
    
    Non-convertible, 2004
Series H
    
    
    6.700
    
    
    
    50
    
    
    
    2,675,500
    
    
    
    129,311,000
    
    
    
    4,464,0002005
    
    
    Non-convertible, 2004
Series H
    
    
    6.700
    
    
    
    50
    
    
    
    401,300
    
    
    
    19,450,000
    
    
    
    615,000Total
    
    
    
    
    
    
    
    
    
    
    18,893,799
    
    
    $
    529,844,000
    
    
    $
    19,421,000
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Record date
    
    Payable date
    
    Amount per share(1) (2)Year 2008January 31, 2008
    
    February 15, 2008
    
    $
    0.2083February 28, 2008
    
    March 15, 2008
    
    
    0.2083March 30, 2008
    
    April 17, 2008
    
    
    0.2083April 30, 2008
    
    May 15, 2008
    
    
    0.2083May 31, 2008
    
    June 15, 2008
    
    
    0.2083June 29, 2008
    
    July 17, 2008
    
    
    0.2083July 31, 2008
    
    August 15, 2008
    
    
    0.2083August 31, 2008
    
    September 17, 2008
    
    
    0.2083September 28, 2008
    
    October 15, 2008
    
    
    0.2083October 31, 2008
    
    November 15, 2008
    
    
    0.2083November 30, 2008
    
    December 17, 2008
    
    
    0.2083December 31, 2008
    
    January 15, 2008
    
    
    0.2083Total
    
    
    
    
    $2.5000Year 2007January 31, 2007
    
    February 15, 2007
    
    $
    0.7915February 28, 2007
    
    March 15, 2007
    
    
    0.7915March 30, 2007
    
    April 17, 2007
    
    
    0.7915April 30, 2007
    
    May 15, 2007
    
    
    0.7915May 31, 2007
    
    June 15, 2007
    
    
    0.7915June 29, 2007
    
    July 17, 2007
    
    
    0.7915July 31, 2007
    
    August 15, 2007
    
    
    0.7915August 31, 2007
    
    September 17, 2007
    
    
    0.7915September 28, 2007
    
    October 15, 2007
    
    
    0.7915October 31, 2007
    
    November 15, 2007
    
    
    0.7915November 30, 2007
    
    December 17, 2007
    
    
    0.7915December 31, 2007
    
    January 15, 2008
    
    
    0.7915Total
    
    
    
    
    $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.   43




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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 12/03
    
    12/04
    
    12/05
    
    12/06
    
    12/07
    
    12/08W Holding Company, Inc.
    
    
    100.00
    
    
    
    175.95
    
    
    
    223.85
    
    
    
    122.85
    
    
    
    91.57
    
    
    
    19.99Dow Jones US index
    
    
    100.00
    
    
    
    130.75
    
    
    
    146.45
    
    
    
    155.72
    
    
    
    179.96
    
    
    
    190.77Dow 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. 45




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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
    
    
    $
    591,376Interest expense
    
    
    663,369
    
    
    
    785,126
    
    
    
    681,419
    
    
    
    483,747
    
    
    
    314,219Net interest income
    
    
    142,924
    
    
    
    285,063
    
    
    
    308,371
    
    
    
    309,458
    
    
    
    277,157Provision 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
    
    
    
    240,466Noninterest income
    
    
    60,655
    
    
    
    47,798
    
    
    
    37,098
    
    
    
    35,820
    
    
    
    53,628Noninterest expenses
    
    
    (195,809
    )
    
    
    (163,409
    )
    
    
    (124,518
    )
    
    
    (108,230
    )
    
    
    (100,125
    )Income (loss) before
income taxes
    
    
    (59,736
    )
    
    
    (108,110
    )
    
    
    130,071
    
    
    
    157,042
    
    
    
    193,969Income taxes
    
    
    54,286
    
    
    
    39,772
    
    
    
    (70,492
    )
    
    
    (33,547
    )
    
    
    (22,093
    )Net income (loss)
    
    
    (5,450
    )
    
    
    (68,338
    )
    
    
    59,579
    
    
    
    123,495
    
    
    
    171,876Preferred stock dividends
    
    
    36,910
    
    
    
    36,910
    
    
    
    36,911
    
    
    
    36,985
    
    
    
    27,158Income (loss)
attributable to common
stockholders
    
    $
    (42,360
    )
    
    $
    (105,248
    )
    
    $
    22,668
    
    
    $
    86,510
    
    
    $
    144,718Share Data:Basic earnings (loss)
per common share (1)
    
    $
    (12.84
    )
    
    $
    (31.92
    )
    
    $
    6.89
    
    
    $
    26.37
    
    
    $
    44.30Diluted earnings (loss)
per common share (1)
    
    $
    (12.84
    )
    
    $
    (31.92
    )
    
    $
    6.74
    
    
    $
    25.61
    
    
    $
    42.80Cash dividends declared
per common share (1)(2)
    
    $
    2.50
    
    
    $
    9.50
    
    
    $
    9.50
    
    
    $
    9.30
    
    
    $
    7.19Cash dividends declared
on common shares
    
    $
    8,245
    
    
    $
    31,327
    
    
    $
    31,236
    
    
    $
    30,575
    
    
    $
    23,502Period end number of
common shares
outstanding (1)
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,290
    
    
    
    3,282
    
    
    
    3,278Weighted average number
of common
shares outstanding (1)
    
    
    3,298
    
    
    
    3,297
    
    
    
    3,288
    
    
    
    3,280
    
    
    
    3,267Weighted average number
of common shares
outstanding on a fully
diluted basis (1)
    
    
    3,298
    
    
    
    3,297
    
    
    
    3,361
    
    
    
    3,412
    
    
    
    3,409Dividend 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
 47




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##### Table of Contents



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
    
    
    
    28.79Operating expenses to total end-of-period assets
    
    
    1.28
    
    
    
    0.91
    
    
    
    0.73
    
    
    
    0.67
    
    
    
    0.70Net yield on interest-earning assets
    
    
    0.88
    
    
    
    1.63
    
    
    
    1.88
    
    
    
    2.08
    
    
    
    2.22Balance Sheet Data:Total assets
    
    $
    15,282,897
    
    
    $
    17,926,711
    
    
    $
    17,074,144
    
    
    $
    16,112,273
    
    
    $
    14,321,620Money market instruments
    
    
    1,096,465
    
    
    
    942,987
    
    
    
    971,633
    
    
    
    803,655
    
    
    
    1,066,779Investments securities held to maturity,
securities available for sale and trading
securities
    
    
    4,708,211
    
    
    
    7,077,198
    
    
    
    7,028,120
    
    
    
    7,079,191
    
    
    
    6,929,260Loans-net
    
    
    8,667,717
    
    
    
    9,209,911
    
    
    
    8,554,177
    
    
    
    7,765,191
    
    
    
    5,917,352Total liabilities
    
    
    14,367,530
    
    
    
    16,930,475
    
    
    
    15,926,801
    
    
    
    14,958,386
    
    
    
    13,244,061Total deposits
    
    
    11,002,173
    
    
    
    10,496,501
    
    
    
    9,337,063
    
    
    
    8,375,609
    
    
    
    6,244,170Borrowings
    
    
    3,281,074
    
    
    
    6,284,158
    
    
    
    6,483,449
    
    
    
    6,468,461
    
    
    
    6,931,385Total preferred equity
    
    
    530,838
    
    
    
    530,838
    
    
    
    530,838
    
    
    
    530,926
    
    
    
    511,744Total common equity
    
    
    361,067
    
    
    
    360,745
    
    
    
    359,289
    
    
    
    357,454
    
    
    
    356,462Stockholders equity
    
    
    915,367
    
    
    
    996,236
    
    
    
    1,147,343
    
    
    
    1,153,887
    
    
    
    1,077,559Capital 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
    
    
    
    14.01Tier I capital to average assets
    
    
    5.26
    
    
    
    4.90
    
    
    
    6.76
    
    
    
    7.26
    
    
    
    7.69Equity-to-asset ratio (4)
    
    
    5.76
    
    
    
    6.12
    
    
    
    6.93
    
    
    
    7.33
    
    
    
    7.36Asset 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
    
    
    
    0.58Net loans charged-off to average total loans (5)
    
    
    1.34
    
    
    
    1.54
    
    
    
    0.74
    
    
    
    0.27
    
    
    
    0.34Allowance for loan losses to total loans at end
of period
    
    
    3.15
    
    
    
    3.55
    
    
    
    2.31
    
    
    
    1.79
    
    
    
    1.34Allowance for loan losses to non-performing
loans
    
    
    18.08
    
    
    
    19.07
    
    
    
    71.87
    
    
    
    95.55
    
    
    
    233.64Allowance for loan losses to non-performing
loans, excluding
loans collateralized by real estate
    
    
    183.85
    
    
    
    121.52
    
    
    
    131.08
    
    
    
    164.69
    
    
    
    3,182.27Other 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. 48




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##### Table of Contents




    
    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.
 49




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##### Table of Contents




    
    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
    
    
    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.
 50




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##### Table of Contents




    
    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.
   CRITICAL ACCOUNTING POLICIES
  
    
    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.
 51




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##### Table of Contents



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
 52




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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.
    53




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##### Table of Contents




    
    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
  54




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2008 VERSUS 2007.
  2007 VERSUS 2006.
 55




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56




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##### Table of Contents



Year ended December 31,2008
    
    
    2007
    
    
    2006Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AverageInterest
    
    

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
    
    
    
    4.02Mortgage-backed securities (4)
    
    
    115,420
    
    
    
    2,766,619
    
    
    
    4.17
    
    
    
    45,291
    
    
    
    935,269
    
    
    
    4.84
    
    
    
    28,489
    
    
    
    632,792
    
    
    
    4.50Money market instruments
    
    
    19,323
    
    
    
    713,585
    
    
    
    2.71
    
    
    
    40,833
    
    
    
    860,093
    
    
    
    4.75
    
    
    
    38,235
    
    
    
    845,375
    
    
    
    4.52Total
    
    
    806,293
    
    
    
    16,260,229
    
    
    
    4.96
    
    
    
    1,070,189
    
    
    
    17,520,879
    
    
    
    6.11
    
    
    
    989,790
    
    
    
    16,359,597
    
    
    
    6.05Interest-bearing liabilities:Deposits:Retail
    
    
    66,770
    
    
    
    2,503,541
    
    
    
    2.67
    
    
    
    80,225
    
    
    
    2,540,079
    
    
    
    3.16
    
    
    
    65,500
    
    
    
    2,390,868
    
    
    
    2.74Brokered
    
    
    388,543
    
    
    
    8,132,803
    
    
    
    4.78
    
    
    
    383,073
    
    
    
    7,398,889
    
    
    
    5.18
    
    
    
    300,563
    
    
    
    6,380,663
    
    
    
    4.71Total Deposits
    
    
    455,313
    
    
    
    10,636,344
    
    
    
    4.28
    
    
    
    463,298
    
    
    
    9,938,968
    
    
    
    4.66
    
    
    
    366,063
    
    
    
    8,771,531
    
    
    
    4.17Federal funds purchased and
repurchase agreements
    
    
    205,076
    
    
    
    4,851,329
    
    
    
    4.23
    
    
    
    315,030
    
    
    
    6,289,605
    
    
    
    5.01
    
    
    
    307,463
    
    
    
    6,290,818
    
    
    
    4.89Advances from FHLB
    
    
    2,980
    
    
    
    55,409
    
    
    
    5.38
    
    
    
    5,691
    
    
    
    102,684
    
    
    
    5.54
    
    
    
    7,893
    
    
    
    147,780
    
    
    
    5.34Borrowings 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
    
    
    
    4.48Net interest income
    
    $
    142,924
    
    
    
    
    
    
    
    
    
    
    $
    285,063
    
    
    
    
    
    
    
    
    
    
    $
    308,371Interest rate spread
    
    
    
    
    
    
    
    
    
    
    0.69
    %
    
    
    
    
    
    
    
    
    
    
    1.31
    %
    
    
    
    
    
    
    
    
    
    
    1.57
    %Net interest-earning assets
    
    
    
    
    
    $
    717,147
    
    
    
    
    
    
    
    
    
    
    $
    1,171,402
    
    
    
    
    
    
    
    
    
    
    $
    1,149,468Net 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. 57




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Year ended December 31,2008 vs. 2007
    
    
    2007 vs. 2006Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(In thousands)Interest income:Loans
    
    $
    (46
    )
    
    $
    (154,186
    )
    
    $
    (154,232
    )
    
    $
    70,540
    
    
    $
    (7,870
    )
    
    $
    62,670Investment 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
    
    
    
    16,802Money market instruments
    
    
    (6,107
    )
    
    
    (15,403
    )
    
    
    (21,510
    )
    
    
    648
    
    
    
    1,950
    
    
    
    2,598Total
increase (decrease) in interest income
    
    
    (28,796
    )
    
    
    (235,100
    )
    
    
    (263,896
    )
    
    
    83,256
    
    
    
    (2,857
    )
    
    
    80,399Interest expense:Deposits:Retail
    
    
    (1,139
    )
    
    
    (12,316
    )
    
    
    (13,455
    )
    
    
    4,269
    
    
    
    10,456
    
    
    
    14,725Brokered
    
    
    24,728
    
    
    
    (19,258
    )
    
    
    5,470
    
    
    
    50,896
    
    
    
    31,614
    
    
    
    82,510Total
    
    
    23,589
    
    
    
    (31,574
    )
    
    
    (7,985
    )
    
    
    55,165
    
    
    
    42,070
    
    
    
    97,235Federal funds purchased and
repurchase agreements
    
    
    (65,322
    )
    
    
    (44,632
    )
    
    
    (109,954
    )
    
    
    (59
    )
    
    
    7,626
    
    
    
    7,567Advances from FHLB
    
    
    (2,549
    )
    
    
    (162
    )
    
    
    (2,711
    )
    
    
    (2,512
    )
    
    
    310
    
    
    
    (2,202
    )Borrowings under line of credit
    
    
    (1,107
    )
    
    
    
    
    
    
    (1,107
    )
    
    
    1,107
    
    
    
    
    
    
    
    1,107Total
increase (decrease) in interest expense
    
    
    (45,389
    )
    
    
    (76,368
    )
    
    
    (121,757
    )
    
    
    53,701
    
    
    
    50,006
    
    
    
    103,707Increase (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
   2008 VERSUS 2007.
  58




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2007 VERSUS 2006.
 59




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60




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61




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NONINTEREST INCOME
   Year ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Service and other charges on loans
    
    $
    10,364
    
    
    $
    12,687
    
    
    $
    12,527Service charges on deposit accounts
    
    
    11,712
    
    
    
    12,397
    
    
    
    9,976Other fees and commissions
    
    
    21,858
    
    
    
    20,313
    
    
    
    15,104Net gain on derivative instruments and
deposits measured at fair value
    
    
    3,125
    
    
    
    1,308
    
    
    
    632Gain on trading account securities
    
    
    
    
    
    
    92
    
    
    
    164Net 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.
 2007 VERSUS 2006.
 62




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NONINTEREST EXPENSES
  Year ended December 31,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Salaries and employees benefits
    
    $
    65,191
    
    
    $
    60,436
    
    
    $
    54,378Equipment expenses
    
    
    13,868
    
    
    
    13,244
    
    
    
    11,610Deposits insurance premium and supervisory examination
    
    
    16,384
    
    
    
    10,398
    
    
    
    3,770Occupancy
    
    
    10,586
    
    
    
    9,383
    
    
    
    8,482Advertising
    
    
    7,095
    
    
    
    8,641
    
    
    
    9,140Printing, postage, stationery and supplies
    
    
    4,289
    
    
    
    3,860
    
    
    
    3,654Telephone
    
    
    2,632
    
    
    
    2,068
    
    
    
    2,275Net loss (gain) from operations of foreclosed real estate held for sale
    
    
    2,233
    
    
    
    182
    
    
    
    (270
    )Municipal taxes
    
    
    10,585
    
    
    
    8,775
    
    
    
    6,218Professional fees
    
    
    19,845
    
    
    
    17,884
    
    
    
    3,819Provision for claim receivable
    
    
    14,406
    
    
    
    
    
    
    
    Other
    
    
    28,695
    
    
    
    28,538
    
    
    
    21,442Total noninterest expenses
    
    $
    195,809
    
    
    $
    163,409
    
    
    $
    124,518
 2008
VERSUS 2007.
      63




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2007 VERSUS 2006.
       PROVISION (CREDIT) FOR INCOME TAXES
  64




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Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN No. 48)
 65




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2008 VERSUS 2007.
  Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income
Taxes
   2007 VERSUS 2006.
  66




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NET INCOME (LOSS)
  67




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FINANCIAL CONDITION
 LOANS
   At December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Amount
    
    
    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
    
    
    
    14.9Construction loans
    
    
    1,439,224
    
    
    
    16.6
    
    
    
    1,429,125
    
    
    
    15.5
    
    
    
    722,789
    
    
    
    8.4
    
    
    
    505,760
    
    
    
    6.5
    
    
    
    328,145
    
    
    
    5.5Commercial, industrial and
agricultural (1)
    
    
    716,514
    
    
    
    8.3
    
    
    
    851,423
    
    
    
    9.3
    
    
    
    1,245,541
    
    
    
    14.6
    
    
    
    1,003,673
    
    
    
    12.9
    
    
    
    768,604
    
    
    
    13.0Consumer  secured by real estate
    
    
    494,556
    
    
    
    5.7
    
    
    
    482,961
    
    
    
    5.1
    
    
    
    447,593
    
    
    
    5.3
    
    
    
    542,769
    
    
    
    7.0
    
    
    
    542,080
    
    
    
    9.2Consumer  other
    
    
    233,858
    
    
    
    2.7
    
    
    
    257,914
    
    
    
    2.9
    
    
    
    362,360
    
    
    
    4.2
    
    
    
    287,615
    
    
    
    3.7
    
    
    
    324,854
    
    
    
    5.4Total loans
    
    
    8,949,806
    
    
    
    103.3
    
    
    
    9,548,631
    
    
    
    103.7
    
    
    
    8,756,357
    
    
    
    102.4
    
    
    
    7,906,603
    
    
    
    101.8
    
    
    
    5,997,418
    
    
    
    101.3Allowance 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.  Total Commercial Loans
    68




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##### Table of Contents



(In thousands)Loans for residential housing projects:High-rise (1)
    
    $
    163,473Mid-rise (2)
    
    
    208,792Single-family detach
    
    
    288,434Mix
    
    
    153,534Total for residential housing projects
    
    
    814,233Construction loans to individuals secured by residential properties
    
    
    7,266Land loans
    
    
    315,286Loans for commercial projects:Hospitals and other healthcare services
    
    
    109,138Shopping malls
    
    
    51,929Manufacturing
    
    
    27,303Hotels
    
    
    35,666Piers
    
    
    27,372Others
    
    
    54,784Total before net deferred fees and allowance for loan losses
    
    
    1,442,977Net deferred fees
    
    
    (3,753
    )Total construction loan portfolio, gross
    
    
    1,439,224Allowance 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. 69




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(Dollars inthousands)Total undisbursed funds under existing commitments
    
    $
    298,691Construction loans in non-accrual status
    
    $
    523,093Net charge-offs  Construction loans
    
    $
    12,721Allowance for loan losses  Construction loans
    
    $
    110,777Non-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
    %
  (In thousands)Under $300,000
    
    $
    263,702$300,000 - $600,000
    
    
    249,001Over $600,000
    
    
    301,530Total
    
    $
    814,233
 Residential Real Estate Loans
   Consumer Loans
  70




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##### Table of Contents



MaturitiesAfter one year to five years
    
    
    After five yearsBalance
    
    
    One year or
    
    
    Fixed
    
    
    Variable
    
    
    Fixed
    
    
    Variableoutstanding
    
    
    less
    
    
    interest
    
    
    interest
    
    
    interest
    
    
    interest(In thousands)Commercial real estate loans
    
    $
    5,100,483
    
    
    $
    1,977,611
    
    
    $
    218,752
    
    
    $
    373,489
    
    
    $
    106,924
    
    
    $
    2,423,707Residential real estate loans
    
    
    965,171
    
    
    
    10,482
    
    
    
    80,553
    
    
    
    27,045
    
    
    
    846,977
    
    
    
    114Construction loans
    
    
    1,439,224
    
    
    
    983,847
    
    
    
    8,124
    
    
    
    367,086
    
    
    
    7,168
    
    
    
    72,999Commercial, industrial and agricultural
    
    
    716,514
    
    
    
    477,667
    
    
    
    36,767
    
    
    
    149,264
    
    
    
    1,542
    
    
    
    51,274Consumer  secured by real estate
    
    
    494,556
    
    
    
    10,289
    
    
    
    35,454
    
    
    
    10,765
    
    
    
    66,968
    
    
    
    371,080Consumer  other
    
    
    233,858
    
    
    
    110,905
    
    
    
    98,190
    
    
    
    9
    
    
    
    23,692
    
    
    
    1,062Total
    
    $
    8,949,806
    
    
    $
    3,570,801
    
    
    $
    477,840
    
    
    $
    927,658
    
    
    $
    1,053,271
    
    
    $
    2,920,236
        71




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##### Table of Contents



NON-PERFORMING LOANS, TROUBLED DEBT RESTRUCTURINGS AND FORECLOSED REAL ESTATE HELD FOR SALE
   Accounting by Debtors and Creditors of Troubled Debt
Restructurings Accounting by Creditors for Impairment of a Loan
 72




---



##### Table of Contents



December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Commercial real estate loans (1)
    
    $
    825,504
    
    
    $
    1,058,189
    
    
    $
    120,527
    
    
    $
    55,807
    
    
    $
    24,988Residential real estate loans
    
    
    43,106
    
    
    
    3,071
    
    
    
    1,641
    
    
    
    2,125
    
    
    
    1,730Construction loans
    
    
    523,093
    
    
    
    429,387
    
    
    
    
    
    
    
    
    
    
    
    Commercial, industrial and agricultural loans (2)
    
    
    148,446
    
    
    
    274,753
    
    
    
    149,831
    
    
    
    83,781
    
    
    
    429Consumer  secured by real estate
    
    
    14,890
    
    
    
    6,670
    
    
    
    4,904
    
    
    
    4,204
    
    
    
    5,035Consumer  other
    
    
    4,992
    
    
    
    3,983
    
    
    
    4,405
    
    
    
    2,084
    
    
    
    2,087Total non-performing loans
    
    
    1,560,031
    
    
    
    1,776,053
    
    
    
    281,308
    
    
    
    148,001
    
    
    
    34,269Foreclosed real estate held for sale
    
    
    98,570
    
    
    
    10,971
    
    
    
    5,917
    
    
    
    4,137
    
    
    
    3,811Total non-performing loans and foreclosed real estate held for sale
    
    $
    1,658,601
    
    
    $
    1,787,024
    
    
    $
    287,225
    
    
    $
    152,138
    
    
    $
    38,080Interest that would have been recorded if the loans had
not been classified as non-performing
    
    $
    90,704
    
    
    $
    48,974
    
    
    $
    20,009
    
    
    $
    5,525
    
    
    $
    3,557Interest recorded on non-performing loans
    
    $
    25,874
    
    
    $
    17,068
    
    
    $
    5,046
    
    
    $
    743
    
    
    $
    243Total 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.    73




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74




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##### Table of Contents



ALLOWANCE FOR LOAN LOSSES
    Accounting by Creditors for Impairment of a Loan
    75




---



##### Table of Contents



Year ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Balance, beginning of year
    
    $
    338,720
    
    
    $
    202,180
    
    
    $
    141,412
    
    
    $
    80,066
    
    
    $
    61,608Loans 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
    
    
    
    746Residential real estate-mortgage loans
    
    
    147
    
    
    
    87
    
    
    
    66
    
    
    
    212
    
    
    
    206Construction loans
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial, industrial and agricultural loans
    
    
    1,082
    
    
    
    721
    
    
    
    161
    
    
    
    252
    
    
    
    1,098Consumer  other
    
    
    1,940
    
    
    
    1,764
    
    
    
    2,252
    
    
    
    2,283
    
    
    
    1,920Total recoveries of loans previously charged-off
    
    
    3,705
    
    
    
    3,162
    
    
    
    5,164
    
    
    
    3,503
    
    
    
    3,970Net 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
    
    
    
    36,691Balance, end of year
    
    $
    282,089
    
    
    $
    338,720
    
    
    $
    202,180
    
    
    $
    141,412
    
    
    $
    80,066Ratios: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. Provision for Loan Losses
  76




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##### Table of Contents



At December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004Net 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
    %
       77




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##### Table of Contents



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
    
    
    $
    36,306Residential real estate loans
    
    
    3,948
    
    
    
    4,532
    
    
    
    4,654
    
    
    
    3,275
    
    
    
    407Construction loans
    
    
    110,777
    
    
    
    117,281
    
    
    
    3,616
    
    
    
    4,059
    
    
    
    3,715Commercial, industrial and agricultural loans (2)
    
    
    38,273
    
    
    
    51,028
    
    
    
    132,144
    
    
    
    73,288
    
    
    
    18,187Consumer  secured by real estate
    
    
    2,787
    
    
    
    2,963
    
    
    
    2,262
    
    
    
    1,276
    
    
    
    2,156Consumer  other
    
    
    11,196
    
    
    
    11,513
    
    
    
    9,767
    
    
    
    13,154
    
    
    
    17,269Unallocated
    
    
    
    
    
    
    
    
    
    
    2,739
    
    
    
    1,978
    
    
    
    2,026Total allowance for loan losses
    
    $
    282,089
    
    
    $
    338,720
    
    
    $
    202,180
    
    
    $
    141,412
    
    
    $
    80,066Loan 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. 78




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##### Table of Contents



Troubled Debt Restructurings
   Impaired Loans
    79




---



##### Table of Contents



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
    
    
    $
    23,908Construction loans
    
    
    440,847
    
    
    
    396,960
    
    
    
    
    
    
    
    
    
    
    
    Commercial, industrial and agricultural loans (2)
    
    
    70,749
    
    
    
    395,882
    
    
    
    22,267
    
    
    
    7,913
    
    
    
    6,067Sub-total
    
    
    901,146
    
    
    
    922,001
    
    
    
    237,302
    
    
    
    115,319
    
    
    
    29,975Do 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
    
    
    
    24,200Sub-total
    
    
    570,030
    
    
    
    866,545
    
    
    
    31,425
    
    
    
    49,439
    
    
    
    24,200Total
    
    $
    1,471,176
    
    
    $
    1,788,546
    
    
    $
    268,727
    
    
    $
    164,758
    
    
    $
    54,175Valuation allowance for impaired loans:Commercial real estate loans (5)
    
    $
    49,121
    
    
    $
    31,766
    
    
    $
    93,144
    
    
    $
    42,350
    
    
    $
    6,846Construction 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
    
    
    $
    8,412Percentage 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
    
    
    $
    19,111Construction 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
    
    
    $
    46,509Interest collected and recognized as incomeon 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.   80




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##### Table of Contents



INVESTMENTS
        81




---



##### Table of Contents



2008
    
    
    2007
    
    
    2006(In thousands)Held to maturity :US Government and agencies obligations (USGOs)
    
    $
    372,311
    
    
    $
    5,927,530
    
    
    $
    6,314,091Puerto Rico Government and agencies obligations (PRGOs)
    
    
    13,312
    
    
    
    10,207
    
    
    
    11,663Corporate notes
    
    
    21,436
    
    
    
    21,436
    
    
    
    21,433Mortgage-backed securities
    
    
    630,911
    
    
    
    639,024
    
    
    
    660,392Total
    
    
    1,037,970
    
    
    
    6,598,197
    
    
    
    7,007,579Available for sale:USGOs
    
    
    307,880
    
    
    
    
    
    
    
    PRGOs
    
    
    11,456
    
    
    
    15,305
    
    
    
    18,050Mortgage-backed securities
    
    
    3,347,993
    
    
    
    461,790
    
    
    
    Equity securities  common stock
    
    
    2,912
    
    
    
    1,906
    
    
    
    2,491Total
    
    
    3,670,241
    
    
    
    479,001
    
    
    
    20,541Total investments
    
    $
    4,708,211
    
    
    $
    7,077,198
    
    
    $
    7,028,120
  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
    
    
    
    7,140FHLMC certificates
    
    
    1,942
    
    
    
    2,444
    
    
    
    3,055FNMA certificates
    
    
    2,691
    
    
    
    3,014
    
    
    
    3,358CMOs certificates issued or guaranteed by FHLMC
    
    
    551,802
    
    
    
    556,547
    
    
    
    573,735CMOs certificates issued or guaranteed by FNMA
    
    
    68,902
    
    
    
    70,765
    
    
    
    73,104Total held to maturity
    
    
    630,911
    
    
    
    639,024
    
    
    
    660,392Total mortgage-backed securities
    
    $
    3,978,904
    
    
    $
    1,100,814
    
    
    $
    660,392
 82




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##### Table of Contents



2008
    
    2007Amortized
    
    Fair
    
    Amortized
    
    FairCost
    
    Value
    
    Cost
    
    Value(In thousands)GNMA
    
    $
    2,990,112
    
    
    $
    2,959,670
    
    
    $
    6,254
    
    
    $
    6,417FHLMC
    
    
    568,072
    
    
    
    551,284
    
    
    
    775,469
    
    
    
    721,484FNMA
    
    
    467,085
    
    
    
    452,057
    
    
    
    524,515
    
    
    
    516,091FHLB
    
    
    677,470
    
    
    
    679,883
    
    
    
    5,625,984
    
    
    
    5,617,919
  Carrying
    
    
    Weightedamount
    
    
    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
    
    
    
    4.14680,191
    
    
    
    3.19Puerto Rico Government and agencies obligations:Due within one year
    
    
    470
    
    
    
    3.80Due after one year through five years
    
    
    23,803
    
    
    
    4.10Due after five years through ten years
    
    
    495
    
    
    
    4.8624,768
    
    
    
    4.11Other:Due after ten years
    
    
    21,436
    
    
    
    8.33Total
    
    
    726,395
    
    
    
    3.37Mortgage-backed securities
    
    
    3,978,904
    
    
    
    3.88Equity securities
    
    
    2,912
    
    
    
    1.67Total
    
    $
    4,708,211
    
    
    
    3.80
    %
  83




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##### Table of Contents



DEPOSITS
   84




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##### Table of Contents



(In thousands)3 months or less
    
    $
    136,476over 3 months through 6 months
    
    
    73,269over 6 months through 12 months
    
    
    119,943over 12 months
    
    
    119,433Total
    
    $
    449,121
  2008
    
    
    2007
    
    
    2006Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Averageamount
    
    
    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
  December 31,2008
    
    
    2007
    
    
    2006(In thousands)Federal funds purchased and repurchase agreements (1)
    
    $
    3,204,142
    
    
    $
    6,146,693
    
    
    $
    6,320,481Advances from Federal Home Loan Bank (FHLB)
    
    
    42,000
    
    
    
    102,000
    
    
    
    127,000Mortgage 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.   85




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86




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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
    
    
    $
    3,077Weighted-average interest rate for the year
    
    
    4.44
    %
    
    
    5.17
    %
    
    
    4.69
    %Maximum month-end balance
    
    $
    
    
    
    $
    100,000
    
    
    $
    40,000Repurchase agreements:Balance at end of year
    
    $
    779,142
    
    
    $
    1,364,075
    
    
    $
    1,070,582Weighted-average interest rate at year end
    
    
    1.20
    %
    
    
    4.85
    %
    
    
    5.33
    %Monthly average outstanding balance
    
    $
    1,001,358
    
    
    $
    1,497,932
    
    
    $
    1,731,600Weighted-average interest rate for the year
    
    
    2.64
    %
    
    
    5.19
    %
    
    
    4.97
    %Maximum month-end balance
    
    $
    1,559,157
    
    
    $
    2,771,592
    
    
    $
    2,282,650Advances from FHLB:Balance at end of year
    
    $
    
    
    
    $
    60,000
    
    
    $
    25,000Weighted-average interest rate at year end
    
    
    
    %
    
    
    4.52
    %
    
    
    5.43
    %Monthly average outstanding balance
    
    $
    14,923
    
    
    $
    29,615
    
    
    $
    33,462Weighted-average interest rate for the year
    
    
    3.65
    %
    
    
    4.99
    %
    
    
    5.01
    %Maximum month-end balance
    
    $
    58,000
    
    
    $
    60,000
    
    
    $
    50,000Borrowings 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
    
    
    $
    1,095,582Weighted-average interest rate at year end
    
    
    1.20
    %
    
    
    4.81
    %
    
    
    5.33
    %Monthly average outstanding balance
    
    $
    1,023,973
    
    
    $
    1,567,013
    
    
    $
    1,768,139Weighted-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
  87




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REGULATORY CAPITAL RATIOS
      88




---



##### Table of Contents



Minimum To BeMinimum
    
    Well Capitalized UnderCapital
    
    Prompt CorrectiveActual
    
    Requirement
    
    Action ProvisionsAmount
    
    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/AWesternbank
    
    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/AWesternbank
    
    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/AWesternbank
    
    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/AWesternbank
    
    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/AWesternbank
    
    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/AWesternbank
    
    864,605
    
    4.82
    
    718,115
    
    
    4
    
    
    $897,644
    
    5%
    89




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##### Table of Contents



BUSINESS SEGMENT REVIEW
    Westernbank Puerto Rico
   
    
    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.
 90




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
    
    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
   91




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
    
    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
   
    
    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
 92




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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.
  QUARTERLY FINANCIAL INFORMATION
  93




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2008
Quarterly Condensed Consolidated Statements of Operations (Unaudited)
 For the 2008 three months endedMarch 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
    
    
    $
    129,048Investment securities
    
    
    46,383
    
    
    
    22,645
    
    
    
    19,596
    
    
    
    13,393Mortgage-backed securities
    
    
    11,463
    
    
    
    29,507
    
    
    
    37,639
    
    
    
    36,811Money market instruments
    
    
    8,154
    
    
    
    4,753
    
    
    
    4,513
    
    
    
    1,903Total interest income
    
    
    222,473
    
    
    
    199,020
    
    
    
    203,645
    
    
    
    181,155Interest expense:Deposits
    
    
    118,065
    
    
    
    111,762
    
    
    
    112,536
    
    
    
    112,950Federal funds purchased and repurchase agreements
    
    
    59,720
    
    
    
    53,777
    
    
    
    52,051
    
    
    
    39,528Advances from Federal Home Loan Bank
    
    
    1,044
    
    
    
    677
    
    
    
    630
    
    
    
    629Total interest expense
    
    
    178,829
    
    
    
    166,216
    
    
    
    165,217
    
    
    
    153,107Net interest income
    
    
    43,644
    
    
    
    32,804
    
    
    
    38,428
    
    
    
    28,048Provision for loan losses
    
    
    14,957
    
    
    
    14,346
    
    
    
    15,382
    
    
    
    22,821Net interest income after provision for loan losses
    
    
    28,687
    
    
    
    18,458
    
    
    
    23,046
    
    
    
    5,227Noninterest income:Service and other charges on loans
    
    
    2,485
    
    
    
    2,717
    
    
    
    2,549
    
    
    
    2,613Service charges on deposit accounts
    
    
    3,069
    
    
    
    2,983
    
    
    
    2,851
    
    
    
    2,809Other fees and commissions
    
    
    5,802
    
    
    
    5,687
    
    
    
    5,504
    
    
    
    4,865Net gain (loss) on derivative instruments and
deposits measured at fair value
    
    
    (544
    )
    
    
    1,766
    
    
    
    1,622
    
    
    
    281Net gain (loss) on sales and valuation of loans,
securities, and other assets
    
    
    836
    
    
    
    13,493
    
    
    
    (2,655
    )
    
    
    1,922Total noninterest income
    
    
    11,648
    
    
    
    26,646
    
    
    
    9,871
    
    
    
    12,490Total net interest income and noninterest income
    
    
    40,335
    
    
    
    45,104
    
    
    
    32,917
    
    
    
    17,717Noninterest expenses:Salaries and employees benefits
    
    
    16,947
    
    
    
    15,915
    
    
    
    17,064
    
    
    
    15,265Equipment
    
    
    3,458
    
    
    
    3,341
    
    
    
    3,337
    
    
    
    3,732Deposit insurance premium and supervisory examination
    
    
    2,894
    
    
    
    3,727
    
    
    
    3,957
    
    
    
    5,806Occupancy
    
    
    2,545
    
    
    
    2,757
    
    
    
    2,601
    
    
    
    2,683Advertising
    
    
    2,832
    
    
    
    1,461
    
    
    
    1,650
    
    
    
    1,152Professional Fees
    
    
    5,470
    
    
    
    2,625
    
    
    
    5,848
    
    
    
    5,902Provision for claim receivable
    
    
    
    
    
    
    
    
    
    
    485
    
    
    
    13,921Other
    
    
    10,891
    
    
    
    11,922
    
    
    
    11,124
    
    
    
    14,497Total noninterest expenses
    
    
    45,037
    
    
    
    41,748
    
    
    
    46,066
    
    
    
    62,958Income (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
    
    
    
    471Deferred 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
    
    
    
    9,226Income (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
    
    
    $
    2,061Cash dividends declared per common share (1)
    
    $
    0.62
    
    
    $
    0.63
    
    
    $
    0.62
    
    
    $
    0.62Weighted average number of
common shares outstanding (1)
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298Weighted average number of common
shares outstanding on a diluted basis (1)
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298Dividend 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. 94




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2007 Quarterly Condensed Consolidated Statements of Operations (Unaudited)
 For the 2007 three months endedMarch 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
    
    
    $
    177,780Investment securities
    
    
    66,522
    
    
    
    66,570
    
    
    
    64,660
    
    
    
    62,548Mortgage-backed securities
    
    
    6,931
    
    
    
    11,941
    
    
    
    13,574
    
    
    
    12,845Money market instruments
    
    
    10,120
    
    
    
    9,846
    
    
    
    10,354
    
    
    
    10,513Total interest income
    
    
    264,141
    
    
    
    271,447
    
    
    
    270,915
    
    
    
    263,686Interest Expense:Deposits
    
    
    107,506
    
    
    
    114,036
    
    
    
    118,802
    
    
    
    122,954Federal funds purchased and repurchase agreements
    
    
    76,224
    
    
    
    80,927
    
    
    
    82,203
    
    
    
    75,676Advances from Federal Home Loan Bank
    
    
    1,455
    
    
    
    1,432
    
    
    
    1,444
    
    
    
    1,360Borrowings under line of credit
    
    
    272
    
    
    
    499
    
    
    
    336
    
    
    
    Total interest expense
    
    
    185,457
    
    
    
    196,894
    
    
    
    202,785
    
    
    
    199,990Net interest income
    
    
    78,684
    
    
    
    74,553
    
    
    
    68,130
    
    
    
    63,696Provision for loan losses
    
    
    34,481
    
    
    
    73,404
    
    
    
    21,703
    
    
    
    147,974Net 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
    
    
    
    3,290Service charges on deposit accounts
    
    
    2,930
    
    
    
    3,073
    
    
    
    3,262
    
    
    
    3,132Other fees and commissions
    
    
    3,962
    
    
    
    4,774
    
    
    
    6,143
    
    
    
    5,434Net gain (loss) on derivative instruments
    
    
    640
    
    
    
    (1,165
    )
    
    
    816
    
    
    
    1,017Net 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
    
    
    
    12,397Noninterest expenses:Salaries and employees benefits
    
    
    15,418
    
    
    
    14,861
    
    
    
    14,434
    
    
    
    15,723Equipment
    
    
    3,194
    
    
    
    3,149
    
    
    
    3,385
    
    
    
    3,516Deposits insurance premium and supervisory examination
    
    
    1,985
    
    
    
    3,138
    
    
    
    2,882
    
    
    
    2,393Occupancy
    
    
    2,199
    
    
    
    2,297
    
    
    
    2,486
    
    
    
    2,401Advertising
    
    
    2,194
    
    
    
    1,824
    
    
    
    1,850
    
    
    
    2,773Professional fees
    
    
    1,376
    
    
    
    1,228
    
    
    
    8,502
    
    
    
    6,778Other
    
    
    8,647
    
    
    
    9,311
    
    
    
    11,131
    
    
    
    14,334Total noninterest expenses
    
    
    35,013
    
    
    
    35,808
    
    
    
    44,670
    
    
    
    47,918Income (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
    
    
    
    9,227Income
(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
    
    
    $
    2.38Weighted average number of common
shares outstanding (1)
    
    
    3,294
    
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298Weighted average number of common shares
outstanding on a fully diluted basis (1)
    
    
    3,351
    
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298Dividend 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. 95




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##### Table of Contents



2006 Quarterly Condensed Consolidated Statements of Operations (Unaudited)
 For the 2006 three months endedMarch 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
    
    
    $
    183,143Investment securities
    
    
    64,896
    
    
    
    65,721
    
    
    
    65,562
    
    
    
    65,792Mortgage-backed securities
    
    
    7,278
    
    
    
    7,180
    
    
    
    7,036
    
    
    
    6,995Money market instruments
    
    
    8,936
    
    
    
    9,698
    
    
    
    10,409
    
    
    
    9,192Total interest income
    
    
    228,703
    
    
    
    240,592
    
    
    
    255,373
    
    
    
    265,122Interest expense:Deposits
    
    
    79,478
    
    
    
    88,844
    
    
    
    96,693
    
    
    
    101,048Federal funds purchased and repurchase agreements
    
    
    70,830
    
    
    
    76,058
    
    
    
    80,184
    
    
    
    80,391Advances from Federal Home Loan Bank
    
    
    2,061
    
    
    
    2,147
    
    
    
    2,169
    
    
    
    1,516Total interest expense
    
    
    152,369
    
    
    
    167,049
    
    
    
    179,046
    
    
    
    182,955Net interest income
    
    
    76,334
    
    
    
    73,543
    
    
    
    76,327
    
    
    
    82,167Provision for loan losses
    
    
    7,606
    
    
    
    17,722
    
    
    
    37,819
    
    
    
    27,733Net interest income after
provision for loan losses
    
    
    68,728
    
    
    
    55,821
    
    
    
    38,508
    
    
    
    54,434Noninterest income:Service and other charges on loans
    
    
    2,954
    
    
    
    3,182
    
    
    
    3,015
    
    
    
    3,376Service charges on deposit accounts
    
    
    2,258
    
    
    
    2,464
    
    
    
    2,555
    
    
    
    2,699Other fees and commissions
    
    
    3,452
    
    
    
    3,703
    
    
    
    3,832
    
    
    
    4,117Net gain (loss) on derivative instruments
    
    
    353
    
    
    
    (793
    )
    
    
    585
    
    
    
    487Net 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
    
    
    
    10,089Noninterest expenses:Salaries and employees benefits
    
    
    13,659
    
    
    
    13,347
    
    
    
    12,561
    
    
    
    14,811Equipment
    
    
    2,648
    
    
    
    2,759
    
    
    
    3,145
    
    
    
    3,058Deposits insurance premium and supervisory examination
    
    
    893
    
    
    
    902
    
    
    
    963
    
    
    
    1,012Occupancy
    
    
    1,974
    
    
    
    2,055
    
    
    
    2,213
    
    
    
    2,240Advertising
    
    
    2,798
    
    
    
    2,485
    
    
    
    1,732
    
    
    
    2,125Professional fees
    
    
    396
    
    
    
    374
    
    
    
    1,018
    
    
    
    2,031Other
    
    
    7,043
    
    
    
    8,701
    
    
    
    8,805
    
    
    
    8,770Total noninterest expenses
    
    
    29,411
    
    
    
    30,623
    
    
    
    30,437
    
    
    
    34,047Income before provision for income taxes
    
    
    48,501
    
    
    
    32,832
    
    
    
    18,262
    
    
    
    30,476Provision for income taxes:Current
    
    
    17,223
    
    
    
    17,387
    
    
    
    23,554
    
    
    
    18,435Deferred credit
    
    
    (281
    )
    
    
    (1,742
    )
    
    
    (5,234
    )
    
    
    1,150Total provision for income taxes
    
    
    16,942
    
    
    
    15,645
    
    
    
    18,320
    
    
    
    19,585Net
income (loss)
    
    
    31,559
    
    
    
    17,187
    
    
    
    (58
    )
    
    
    10,891Less dividends to preferred stockholders
    
    
    9,229
    
    
    
    9,228
    
    
    
    9,228
    
    
    
    9,226Income
(Loss) attributable to common stockholders
    
    $
    22,330
    
    
    $
    7,959
    
    
    $
    (9,286
    )
    
    $
    1,665Share data:Basic earnings (loss) per common share (1)
    
    $
    6.80
    
    
    $
    2.42
    
    
    $
    (2.82
    )
    
    $
    0.51Diluted earnings (loss) per common share (1)
    
    $
    6.62
    
    
    $
    2.37
    
    
    $
    (2.82
    )
    
    $
    0.50Cash dividends declared per common share (1)
    
    $
    2.37
    
    
    $
    2.37
    
    
    $
    2.37
    
    
    $
    2.38Weighted average number of common
shares outstanding (1)
    
    
    3,283
    
    
    
    3,288
    
    
    
    3,290
    
    
    
    3,290Weighted average number of common shares
outstanding on a fully diluted basis (1)
    
    
    3,404
    
    
    
    3,364
    
    
    
    3,290
    
    
    
    3,357Dividend 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. 96




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##### Table of Contents



2008 Quarterly Condensed Consolidated Statements of Financial Condition (Unaudited)
 As ofMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312008
    
    
    2008
    
    
    2008
    
    
    2008(Dollars in thousands)Assets:Cash and due from banks
    
    $
    97,455
    
    
    $
    145,729
    
    
    $
    71,567
    
    
    $
    68,368Money 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
    
    
    
    1,096,465Investment securities available for sale, at fair value
    
    
    1,391,002
    
    
    
    3,843,657
    
    
    
    3,769,717
    
    
    
    3,670,241Investment securities held to maturity, at amortized cost
    
    
    4,003,772
    
    
    
    2,783,342
    
    
    
    2,138,295
    
    
    
    1,037,970Federal Home Loan Bank stock, at cost
    
    
    40,782
    
    
    
    76,295
    
    
    
    69,590
    
    
    
    64,190Residential mortgage loans held for sale, at lower of
cost or fair value
    
    
    8,924
    
    
    
    18,201
    
    
    
    11,755
    
    
    
    18,871Loans-net
    
    
    9,058,487
    
    
    
    8,976,316
    
    
    
    8,860,099
    
    
    
    8,667,717Accrued interest receivable
    
    
    61,112
    
    
    
    67,401
    
    
    
    67,742
    
    
    
    56,224Foreclosed
real estate held for sale, net
    
    
    99,079
    
    
    
    92,680
    
    
    
    98,657
    
    
    
    98,570Other real
estate held for sale, net
    
    
    
    
    
    
    6,252
    
    
    
    6,252
    
    
    
    5,462Premises and equipment, net
    
    
    129,966
    
    
    
    117,380
    
    
    
    119,870
    
    
    
    120,796Deferred income taxes, net
    
    
    134,889
    
    
    
    143,826
    
    
    
    146,487
    
    
    
    155,661Other assets
    
    
    117,413
    
    
    
    107,980
    
    
    
    236,507
    
    
    
    222,362Total Assets
    
    $
    15,932,949
    
    
    $
    17,048,783
    
    
    $
    16,390,511
    
    
    $
    15,282,897Liabilities:Deposits:Noninterest-bearing
    
    $
    289,534
    
    
    $
    288,201
    
    
    $
    268,491
    
    
    $
    250,380Interest-bearing and related accrued interest payable
    
    
    10,013,304
    
    
    
    10,508,603
    
    
    
    10,754,621
    
    
    
    10,751,793Total deposits
    
    
    10,302,838
    
    
    
    10,796,804
    
    
    
    11,023,112
    
    
    
    11,002,173Federal fund purchased and repurchase agreements
    
    
    4,401,294
    
    
    
    5,169,626
    
    
    
    4,323,170
    
    
    
    3,204,142Advances from Federal Home Loan Bank
    
    
    80,000
    
    
    
    42,000
    
    
    
    42,000
    
    
    
    42,000Mortgage note payable
    
    
    35,331
    
    
    
    35,203
    
    
    
    35,073
    
    
    
    34,932Accrued expenses and other liabilities
    
    
    99,512
    
    
    
    100,259
    
    
    
    90,023
    
    
    
    84,283Total Liabilities
    
    
    14,918,975
    
    
    
    16,143,892
    
    
    
    15,513,378
    
    
    
    14,367,530STOCKHOLDERS EQUITY:Preferred stock
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157Common stock (1)
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298Paid-in capital (1)
    
    
    870,195
    
    
    
    870,261
    
    
    
    870,359
    
    
    
    870,450Retained earnings:Reserve fund
    
    
    81,613
    
    
    
    82,386
    
    
    
    81,034
    
    
    
    78,389Undivided 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
    
    
    
    915,367TOTAL
    
    $
    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. 97




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##### Table of Contents



2007 Quarterly Condensed Consolidated Statements of Financial Condition (Unaudited)
 As ofMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312007
    
    
    2007
    
    
    2007
    
    
    2007(Dollars in thousands)ASSETSCash and due from banks
    
    $
    107,847
    
    
    $
    99,334
    
    
    $
    94,492
    
    
    $
    153,473Money market instruments:Federal funds sold and resell agreements
    
    
    809,502
    
    
    
    707,150
    
    
    
    817,220
    
    
    
    886,700Interest-bearing deposits in banks
    
    
    9,540
    
    
    
    26,447
    
    
    
    84,771
    
    
    
    56,287Investment securities available for sale
    
    
    21,565
    
    
    
    509,265
    
    
    
    490,894
    
    
    
    479,001Investment securities held to maturity
    
    
    7,273,193
    
    
    
    7,081,467
    
    
    
    6,903,227
    
    
    
    6,598,197Federal Home Loan Bank stock, at cost
    
    
    33,482
    
    
    
    32,682
    
    
    
    34,662
    
    
    
    49,453Residential mortgage loans held for sale
    
    
    4,135
    
    
    
    5,490
    
    
    
    3,398
    
    
    
    6,500Loans, net
    
    
    8,823,892
    
    
    
    8,960,055
    
    
    
    9,174,111
    
    
    
    9,209,911Accrued interest receivable
    
    
    113,892
    
    
    
    118,384
    
    
    
    116,049
    
    
    
    105,377Foreclosed real estate held for sale, net
    
    
    6,223
    
    
    
    8,465
    
    
    
    9,375
    
    
    
    10,971Premises and equipment, net
    
    
    125,866
    
    
    
    127,111
    
    
    
    128,833
    
    
    
    129,591Deferred income taxes, net
    
    
    66,681
    
    
    
    83,492
    
    
    
    87,842
    
    
    
    134,177Other assets
    
    
    55,661
    
    
    
    69,853
    
    
    
    95,206
    
    
    
    107,073TOTAL
    
    $
    17,451,479
    
    
    $
    17,829,195
    
    
    $
    18,040,080
    
    
    $
    17,926,711LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing
    
    $
    328,776
    
    
    $
    339,248
    
    
    $
    320,804
    
    
    $
    317,753Interest-bearing and related accrued interest payable
    
    
    9,631,248
    
    
    
    9,601,619
    
    
    
    10,011,670
    
    
    
    10,178,748Total deposits
    
    
    9,960,024
    
    
    
    9,940,867
    
    
    
    10,332,474
    
    
    
    10,496,501Federal funds purchased and repurchase agreements
    
    
    6,052,049
    
    
    
    6,494,477
    
    
    
    6,329,474
    
    
    
    6,146,693Advances from Federal Home Loan Bank
    
    
    102,000
    
    
    
    102,000
    
    
    
    102,000
    
    
    
    102,000Borrowings under line of credit
    
    
    32,500
    
    
    
    34,030
    
    
    
    
    
    
    
    Mortgage note payable
    
    
    35,836
    
    
    
    35,717
    
    
    
    35,596
    
    
    
    35,465Advances from borrowers for taxes and insurance
    
    
    8,236
    
    
    
    10,455
    
    
    
    8,511
    
    
    
    11,539Accrued expenses and other liabilities
    
    
    126,500
    
    
    
    118,065
    
    
    
    148,405
    
    
    
    138,277Total liabilities
    
    
    16,317,145
    
    
    
    16,735,611
    
    
    
    16,956,460
    
    
    
    16,930,475COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157Common stock (1)
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298Paid-in capital (1)
    
    
    869,825
    
    
    
    869,953
    
    
    
    870,031
    
    
    
    870,128Retained earnings:Reserve fund
    
    
    79,613
    
    
    
    78,389
    
    
    
    78,395
    
    
    
    78,389Undivided profits
    
    
    162,387
    
    
    
    126,496
    
    
    
    119,646
    
    
    
    31,383Accumulated 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
    
    
    
    996,236TOTAL
    
    $
    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. 98




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##### Table of Contents



2006 Quarterly Condensed Consolidated Statements of Financial Condition (Unaudited)
 As ofMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312006
    
    
    2006
    
    
    2006
    
    
    2006(Dollars in thousands)ASSETSCash and due from banks
    
    $
    81,508
    
    
    $
    118,501
    
    
    $
    92,243
    
    
    $
    105,027Money market instruments:Federal funds sold and resell agreements
    
    
    776,415
    
    
    
    931,497
    
    
    
    841,716
    
    
    
    950,573Interest-bearing deposits in banks
    
    
    70,042
    
    
    
    39,056
    
    
    
    15,472
    
    
    
    21,060Trading securities
    
    
    1,613
    
    
    
    1,608
    
    
    
    
    
    
    
    Investment securities available for sale
    
    
    3,231
    
    
    
    23,266
    
    
    
    20,998
    
    
    
    20,541Investment securities held to maturity
    
    
    7,401,352
    
    
    
    6,979,875
    
    
    
    7,011,611
    
    
    
    7,007,579Federal Home Loan Bank stock, at cost
    
    
    42,968
    
    
    
    43,562
    
    
    
    42,932
    
    
    
    37,982Residential mortgage loans held for sale
    
    
    1,687
    
    
    
    2,320
    
    
    
    7,298
    
    
    
    11,379Loans, net
    
    
    7,969,937
    
    
    
    8,124,486
    
    
    
    8,370,536
    
    
    
    8,554,177Accrued interest receivable
    
    
    101,269
    
    
    
    111,572
    
    
    
    110,828
    
    
    
    120,311Foreclosed real estate held for sale, net
    
    
    4,003
    
    
    
    4,725
    
    
    
    5,433
    
    
    
    5,917Premises and equipment, net
    
    
    118,961
    
    
    
    120,537
    
    
    
    122,420
    
    
    
    124,648Deferred income taxes, net
    
    
    52,936
    
    
    
    54,787
    
    
    
    59,887
    
    
    
    58,689Other assets
    
    
    44,807
    
    
    
    51,192
    
    
    
    56,930
    
    
    
    56,261TOTAL
    
    $
    16,670,729
    
    
    $
    16,606,984
    
    
    $
    16,758,304
    
    
    $
    17,074,144LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing
    
    $
    288,500
    
    
    $
    305,992
    
    
    $
    315,088
    
    
    $
    373,634Interest-bearing and related accrued interest payable
    
    
    8,639,353
    
    
    
    8,515,168
    
    
    
    8,698,018
    
    
    
    8,963,429Total deposits
    
    
    8,927,853
    
    
    
    8,821,160
    
    
    
    9,013,106
    
    
    
    9,337,063Federal funds purchased and repurchase agreements
    
    
    6,245,713
    
    
    
    6,313,993
    
    
    
    6,315,566
    
    
    
    6,320,481Advances from Federal Home Loan Bank
    
    
    162,000
    
    
    
    157,000
    
    
    
    137,000
    
    
    
    127,000Mortgage note payable
    
    
    36,310
    
    
    
    36,201
    
    
    
    36,090
    
    
    
    35,968Advances from borrowers for taxes and insurance
    
    
    6,314
    
    
    
    8,450
    
    
    
    7,284
    
    
    
    9,862Accrued expenses and other liabilities
    
    
    123,571
    
    
    
    100,690
    
    
    
    96,152
    
    
    
    96,427Total liabilities
    
    
    15,501,761
    
    
    
    15,437,494
    
    
    
    15,605,198
    
    
    
    15,926,801COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157Common stock (1)
    
    
    3,285
    
    
    
    3,290
    
    
    
    3,290
    
    
    
    3,290Paid-in capital (1)
    
    
    867,506
    
    
    
    868,299
    
    
    
    868,478
    
    
    
    868,680Retained earnings:Reserve fund
    
    
    75,604
    
    
    
    78,221
    
    
    
    78,165
    
    
    
    78,389Undivided profits
    
    
    204,426
    
    
    
    201,961
    
    
    
    184,918
    
    
    
    178,543Accumulated other comprehensive income (loss), net
    
    
    (10
    )
    
    
    (438
    )
    
    
    98
    
    
    
    284Total stockholders equity
    
    
    1,168,968
    
    
    
    1,169,490
    
    
    
    1,153,106
    
    
    
    1,147,343TOTAL
    
    $
    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. 99




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##### Table of Contents



2008 Quarterly Condensed Consolidated Statements of Cash Flows (Unaudited)
 Three
    
    
    Six
    
    
    Nine
    
    
    Twelvemonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedMarch 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
    
    
    
    67,506Unfunded loan commitments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,146
    )Claim receivable
    
    
    
    
    
    
    
    
    
    
    485
    
    
    
    14,406Deferred income tax
    
    
    (3,999
    )
    
    
    (2,502
    )
    
    
    (4,762
    )
    
    
    (22,392
    )Foreclosed real estate held for sale
    
    
    (56
    )
    
    
    63
    
    
    
    63
    
    
    
    2,082Depreciation and amortization of:Premises and equipment
    
    
    2,477
    
    
    
    4,096
    
    
    
    7,437
    
    
    
    9,920Mortgage servicing rights
    
    
    62
    
    
    
    143
    
    
    
    208
    
    
    
    279Stock-based compensation expense
    
    
    67
    
    
    
    133
    
    
    
    231
    
    
    
    322Amortization 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
    
    
    
    727Investment securities held to maturity
    
    
    (5,539
    )
    
    
    (12,551
    )
    
    
    (15,875
    )
    
    
    (16,262
    )Mortgage-backed securities held to maturity
    
    
    27
    
    
    
    (15
    )
    
    
    33
    
    
    
    82Loans
    
    
    7
    
    
    
    13
    
    
    
    18
    
    
    
    23Amortization of discount on deposits
    
    
    724
    
    
    
    1,407
    
    
    
    2,039
    
    
    
    2,696Amortization 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
    
    
    
    3,116Mortgage 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
    
    
    
    6,908Foreclosed 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
    
    
    
    261Premises 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
    
    
    
    36,784Decrease (increase) in:Trading securities
    
    
    
    
    
    
    799
    
    
    
    4,184
    
    
    
    4,184Accrued interest receivable
    
    
    39,576
    
    
    
    33,288
    
    
    
    32,476
    
    
    
    44,465Other 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
    )
    
    
    336,700Cancellation of resell agreements over three months
    
    
    243,708
    
    
    
    429,238
    
    
    
    547,800
    
    
    
    550,000Investment securities available for sale:Maturities, prepayments and calls
    
    
    666,615
    
    
    
    990,352
    
    
    
    1,157,864
    
    
    
    1,518,384Proceeds from sales
    
    
    26,495
    
    
    
    98,343
    
    
    
    98,343
    
    
    
    398,924Purchases
    
    
    (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
    
    
    
    38,564,022Purchases
    
    
    (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
    
    
    
    8,032Loans:Sales
    
    
    12,783
    
    
    
    12,783
    
    
    
    12,783
    
    
    
    12,783Loans
principal collections, net of originations
    
    
    37,582
    
    
    
    113,490
    
    
    
    209,958
    
    
    
    378,338Purchases of derivative instruments
    
    
    
    
    
    
    (507
    )
    
    
    (507
    )
    
    
    (615
    )Proceeds from derivative instruments
    
    
    1,451
    
    
    
    8,061
    
    
    
    9,124
    
    
    
    9,261Proceeds from sales of foreclosed real estate held for sale
    
    
    134
    
    
    
    451
    
    
    
    906
    
    
    
    2,456Proceeds from sales of other real estate held for sale
    
    
    
    
    
    
    19,675
    
    
    
    19,675
    
    
    
    21,375Additions to premises and equipment
    
    
    (3,250
    )
    
    
    (4,450
    )
    
    
    (10,262
    )
    
    
    (13,809
    )Proceeds from sale of premises and equipment
    
    
    28
    
    
    
    31
    
    
    
    31
    
    
    
    94Proceeds from sale of other assets
    
    
    2,299
    
    
    
    2,299
    
    
    
    2,299
    
    
    
    2,299Purchases 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
    
    
    
    36,229Net cash
provided by investing activities
    
    
    1,893,166
    
    
    
    744,158
    
    
    
    857,994
    
    
    
    2,015,508Forward
    
    $
    1,889,816
    
    
    $
    713,919
    
    
    $
    833,220
    
    
    $
    1,983,989
  100




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##### Table of Contents



2008 Quarterly Condensed Consolidated Statements of Cash Flows (Unaudited)
 Three
    
    
    Six
    
    
    Nine
    
    
    Twelvemonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedMarch 31, 2008
    
    
    June 30, 2008
    
    
    September 30, 2008
    
    
    December 31, 2008(Dollars in thousands)Forward
    
    $
    1,889,816
    
    
    $
    713,919
    
    
    $
    833,220
    
    
    $
    1,983,989CASH FLOWS FROM FINANCING ACTIVITIES:Net increase (decrease) in deposits
    
    
    (162,404
    )
    
    
    348,142
    
    
    
    582,383
    
    
    
    556,375Net increase in federal funds purchased
and repurchase agreements
    
    
    58,176
    
    
    
    826,508
    
    
    
    413,250
    
    
    
    272,522Repurchase 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
    )
    
    
    220Dividends 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
    
    
    
    153,473CASH AND DUE
FROM BANKS, END OF PERIOD
    
    $
    97,455
    
    
    $
    145,729
    
    
    $
    71,567
    
    
    $
    68,368
  101




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##### Table of Contents



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 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




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##### Table of Contents




    
    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 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
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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 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
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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 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.
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
    
    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 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.
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
    
    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 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.
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
    
    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
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
    
    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.
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FOURTH QUARTER ENDED DECEMBER 31, 2007 VERSUS FOURTH QUARTER ENDED DECEMBER 31, 2006
   
    
    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




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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
   Risks Definition
        Audit Committee
  111




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Risk Management Program
     
    
    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
  
    
    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




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##### Table of Contents




    
    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
       113




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Market Risk & Interest Rate Risk
     114




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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.    Liquidity Risk
  115




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116




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##### Table of Contents



(In thousands)3 months or less
    
    $
    136,476over 3 months through 6 months
    
    
    73,269over 6 months through 12 months
    
    
    119,943over 12 months
    
    
    119,433Total
    
    $
    449,121
  Due after one
    
    
    Due after threeDue within one
    
    
    year through
    
    
    years through
    
    
    Due after fiveyear
    
    
    three years
    
    
    five years
    
    
    years
    
    
    Total(In thousands)Short-term borrowings
    
    $
    779,142
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    779,142Long-term borrowings
    
    
    638,432
    
    
    
    1,639,000
    
    
    
    224,500
    
    
    
    
    
    
    
    2,501,932Operating lease obligations
    
    
    2,493
    
    
    
    4,249
    
    
    
    2,658
    
    
    
    3,100
    
    
    
    12,500Total contractual obligations
    
    $
    1,420,067
    
    
    $
    1,643,249
    
    
    $
    227,158
    
    
    $
    3,100
    
    
    $
    3,293,574
   117




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Less than oneyear
    
    
    2-5 years
    
    
    Total(In thousands)Unused lines of credit
    
    $
    119,830
    
    
    $
    144,603
    
    
    $
    264,433Standby letters of credit
    
    
    31,222
    
    
    
    
    
    
    
    31,222Commercial letters of credit
    
    
    4,289
    
    
    
    
    
    
    
    4,289Commitments to extend credit
    
    
    13,632
    
    
    
    307,969
    
    
    
    321,601Total
    
    $
    168,973
    
    
    $
    452,572
    
    
    $
    621,545
   Operational Risk
    Legal Risk
  118




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Reputational Risk
  Concentration Risk
   Impact of Inflation and Changing Prices
   119




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Accounting Pronouncements Recently Adopted
 Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS No. 140 and SFAS No. 133
 Accounting for Servicing of Financial Assets, an
amendment to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities Accounting for Certain Investments in Debt and Equity Securities
 120




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Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes Definition of Settlement in FASB FIN No. 48
 Financial Statements  Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
 Fair Value Measurements Effective Date of FASB Statement No. 157 Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active
 121




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The Fair Value Option for Financial Assets and
Financial Liabilities- Including an Amendment of FASB Statement No. 115
 Amendment of FASB Interpretation
No. 39
 Written Loan Commitments Recorded at Fair Value
through Earnings Application of Accounting Principles to Loan
Commitments
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133.
 The Hierarchy of Generally Accepted Accounting
Principles. The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.
 Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities Consolidation of
Variable Interest Entities
 122




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Amendments to the Impairment Guidance
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
 Accounting Pronouncements To Be Adopted
 Business Combinations Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statementsan Amendment to ARB No. 51
 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities Earnings per Share
 Equity Method Investment Accounting Considerations
 123




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##### Table of Contents



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 Fair Value Measurements
 Recognition and Presentation
of Other-Than-Temporary Impairments
 Interim Disclosures about Fair
Value of Financial Instruments Disclosures about Fair Value of Financial
Instruments Interim Financial Reporting
 Subsequent Events
 Accounting for Transfers of Financial Assetsan
amendment of FASB Statement No. 140
 124




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Amendments to FASB Interpretation No. 46(R)
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles
 OFF-BALANCE SHEET ARRANGEMENTS
  MANAGEMENT CERTIFICATIONS
   125




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ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Independent Registered Public Accounting Firm
 
    Commitments and Contingencies, Regulatory Matters,
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115
 Internal Control  Integrated Framework
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Accounting for Uncertainty in Income
Taxes  an interpretation of Statement of Financial Accounting Standards No. 109
 
 126




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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
    
    
    2007ASSETSCash and due from banks
    
    $
    68,368
    
    
    $
    153,473Money market instruments:Federal funds sold and resell agreements
    
    
    
    
    
    
    886,700Interest-bearing deposits in banks
    
    
    1,096,465
    
    
    
    56,287Investment 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
    
    
    
    479,001Investment 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
    
    
    
    6,598,197Federal Home Loan Bank stock, at cost
    
    
    64,190
    
    
    
    49,453Residential mortgage loans held for sale, at lower of cost or fair value
    
    
    18,871
    
    
    
    6,500Loans, net of allowance for loan losses of $282,089 in 2008 and $338,720 in
2007
    
    
    8,667,717
    
    
    
    9,209,911Accrued interest receivable
    
    
    56,224
    
    
    
    105,377Foreclosed real estate held for sale, net of valuation allowance of
$3,104 in 2008 and $1,022 in 2007
    
    
    98,570
    
    
    
    10,971Other real estate held for sale, net
    
    
    5,462
    
    
    
    Premises and equipment, net
    
    
    120,796
    
    
    
    129,591Deferred income taxes, net
    
    
    155,661
    
    
    
    134,177Other assets
    
    
    222,362
    
    
    
    107,073TOTAL
    
    $
    15,282,897
    
    
    $
    17,926,711LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing
    
    $
    250,380
    
    
    $
    317,753Interest-bearing and related accrued interest payable, includes
$109,944 of deposits measured at fair value in 2008
    
    
    10,751,793
    
    
    
    10,178,748Total deposits
    
    
    11,002,173
    
    
    
    10,496,501Federal funds purchased and repurchase agreements
    
    
    3,204,142
    
    
    
    6,146,693Advances from Federal Home Loan Bank
    
    
    42,000
    
    
    
    102,000Mortgage note payable
    
    
    34,932
    
    
    
    35,465Advances from borrowers for taxes and insurance
    
    
    11,759
    
    
    
    11,539Accrued expenses and other liabilities
    
    
    72,524
    
    
    
    138,277Total liabilities
    
    
    14,367,530
    
    
    
    16,930,475COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS 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
    
    
    
    18,157Common 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
    
    
    
    3,298Paid-in capital
    
    
    870,450
    
    
    
    870,128Retained earnings:Reserve fund
    
    
    78,389
    
    
    
    78,389Undivided profits (accumulated losses)
    
    
    (13,939
    )
    
    
    31,383Accumulated other comprehensive loss, net of income tax
    
    
    (40,988
    )
    
    
    (5,119
    )Total stockholders equity
    
    
    915,367
    
    
    
    996,236TOTAL
    
    $
    15,282,897
    
    
    $
    17,926,711
  127




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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
    
    
    2006INTEREST INCOME:Loans, including loan fees
    
    $
    569,533
    
    
    $
    723,765
    
    
    $
    661,095Investment securities
    
    
    102,017
    
    
    
    260,300
    
    
    
    261,971Mortgage-backed securities
    
    
    115,415
    
    
    
    45,287
    
    
    
    28,445Money market instruments
    
    
    19,323
    
    
    
    40,833
    
    
    
    38,235Trading securities
    
    
    5
    
    
    
    4
    
    
    
    44Total interest income
    
    
    806,293
    
    
    
    1,070,189
    
    
    
    989,790INTEREST EXPENSE:Deposits
    
    
    455,313
    
    
    
    463,298
    
    
    
    366,063Federal funds purchased and repurchase agreements
    
    
    205,076
    
    
    
    315,030
    
    
    
    307,463Advances from Federal Home Loan Bank
    
    
    2,980
    
    
    
    5,691
    
    
    
    7,893Borrowings under line of credit
    
    
    
    
    
    
    1,107
    
    
    
    Total interest expense
    
    
    663,369
    
    
    
    785,126
    
    
    
    681,419NET INTEREST INCOME
    
    
    142,924
    
    
    
    285,063
    
    
    
    308,371PROVISION FOR LOAN LOSSES
    
    
    67,506
    
    
    
    277,562
    
    
    
    90,880NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    75,418
    
    
    
    7,501
    
    
    
    217,491NONINTEREST INCOME:Service and other charges on loans
    
    
    10,364
    
    
    
    12,687
    
    
    
    12,527Service charges on deposit accounts
    
    
    11,712
    
    
    
    12,397
    
    
    
    9,976Other fees and commissions
    
    
    21,858
    
    
    
    20,313
    
    
    
    15,104Net gain on derivative instruments and deposits measured at fair value
    
    
    3,125
    
    
    
    1,308
    
    
    
    632Net 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
    
    
    
    37,098NONINTEREST EXPENSES:Salaries and employees benefits
    
    
    65,191
    
    
    
    60,436
    
    
    
    54,378Equipment expense
    
    
    13,868
    
    
    
    13,244
    
    
    
    11,610Deposits insurance premium and supervisory examination
    
    
    16,384
    
    
    
    10,398
    
    
    
    3,770Occupancy
    
    
    10,586
    
    
    
    9,383
    
    
    
    8,482Advertising
    
    
    7,095
    
    
    
    8,641
    
    
    
    9,140Printing, postage, stationery and supplies
    
    
    4,289
    
    
    
    3,860
    
    
    
    3,654Telephone
    
    
    2,632
    
    
    
    2,068
    
    
    
    2,275Net loss (gain) from operations of foreclosed real estate held for sale
    
    
    2,233
    
    
    
    182
    
    
    
    (270
    )Municipal taxes
    
    
    10,585
    
    
    
    8,775
    
    
    
    6,218Professional fees
    
    
    19,845
    
    
    
    17,884
    
    
    
    3,819Provision for claim receivable
    
    
    14,406
    
    
    
    
    
    
    
    Other
    
    
    28,695
    
    
    
    28,538
    
    
    
    21,442Total noninterest expenses
    
    
    195,809
    
    
    
    163,409
    
    
    
    124,518INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES
    
    
    (59,736
    )
    
    
    (108,110
    )
    
    
    130,071PROVISION (CREDIT) FOR INCOME TAXES
    
    
    (54,286
    )
    
    
    (39,772
    )
    
    
    70,492NET INCOME (LOSS)
    
    
    (5,450
    )
    
    
    (68,338
    )
    
    
    59,579LESS DIVIDENDS TO PREFERRED STOCKHOLDERS
    
    
    36,910
    
    
    
    36,910
    
    
    
    36,911INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
    
    $
    (42,360
    )
    
    $
    (105,248
    )
    
    $
    22,668BASIC EARNINGS (LOSS) PER COMMON SHARE
    
    $
    (12.84
    )
    
    $
    (31.92
    )
    
    $
    6.89DILUTED EARNINGS (LOSS) PER COMMON SHARE
    
    $
    (12.84
    )
    
    $
    (31.92
    )
    
    $
    6.74
  128




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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
    
    
    2006CHANGES IN STOCKHOLDERS EQUITY:Preferred stock:Balance at beginning of year
    
    $
    18,157
    
    
    $
    18,157
    
    
    $
    18,160Conversion of preferred stock
    
    
    
    
    
    
    
    
    
    
    (3
    )Balance at end of year
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157Common stock:Balance at beginning of year
    
    
    3,298
    
    
    
    3,290
    
    
    
    3,282Issuance of common stock upon exercise of
stock options
    
    
    
    
    
    
    8
    
    
    
    8Balance at end of year
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,290Paid-in capital:Balance at beginning of year
    
    
    870,128
    
    
    
    868,680
    
    
    
    866,938Stock options exercised
    
    
    
    
    
    
    1,241
    
    
    
    1,064Stock-based compensation expense
    
    
    322
    
    
    
    207
    
    
    
    675Issuance of common stock upon conversion of
preferred stock
    
    
    
    
    
    
    
    
    
    
    3Balance at end of year
    
    
    870,450
    
    
    
    870,128
    
    
    
    868,680Reserve fund:Balance at beginning of year
    
    
    78,389
    
    
    
    78,389
    
    
    
    72,484Transfer from undivided profits
    
    
    
    
    
    
    
    
    
    
    5,905Balance at end of year
    
    
    78,389
    
    
    
    78,389
    
    
    
    78,389Undivided profits (accumulated losses):Balance at beginning of year
    
    
    31,383
    
    
    
    178,543Cumulative 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
    
    
    
    193,016Net income (loss)
    
    
    (5,450
    )
    
    
    (68,338
    )
    
    
    59,579Cash 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
    
    
    
    178,543Accumulated other comprehensive income (loss),
net of income tax:Balance at beginning of year
    
    
    (5,119
    )
    
    
    284
    
    
    
    7Other comprehensive income (loss)
    
    
    (35,869
    )
    
    
    (5,403
    )
    
    
    277Balance at end of year
    
    
    (40,988
    )
    
    
    (5,119
    )
    
    
    284TOTAL STOCKHOLDERS EQUITY
    
    $
    915,367
    
    
    $
    996,236
    
    
    $
    1,147,343COMPREHENSIVE INCOME (LOSS):Net income (loss)
    
    $
    (5,450
    )
    
    $
    (68,338
    )
    
    $
    59,579Other 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
    )
    
    
    345Income tax effect
    
    
    2,469
    
    
    
    117
    
    
    
    (68
    )Other comprehensive income (loss)
    
    
    (35,869
    )
    
    
    (5,403
    )
    
    
    277TOTAL COMPREHENSIVE INCOME (LOSS)
    
    $
    (41,319
    )
    
    $
    (73,741
    )
    
    $
    59,856
  129




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##### Table of Contents



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
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (5,450
    )
    
    $
    (68,338
    )
    
    $
    59,579Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Provision (credit) for:Loan losses
    
    
    67,506
    
    
    
    277,562
    
    
    
    90,880Unfunded 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
    
    
    
    222Depreciation and amortization of:Premises and equipment
    
    
    9,920
    
    
    
    9,549
    
    
    
    8,696Mortgage servicing rights
    
    
    279
    
    
    
    296
    
    
    
    329Stock-based compensation expense
    
    
    322
    
    
    
    207
    
    
    
    675Amortization 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
    
    
    
    261Loans
    
    
    23
    
    
    
    47
    
    
    
    860Amortization of discount on deposits
    
    
    2,696
    
    
    
    774
    
    
    
    1,460Amortization 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
    
    
    
    750Called investment securities held to maturity
    
    
    3,116
    
    
    
    
    
    
    
    Held-to-maturity securities other-than-temporarily
impaired
    
    
    
    
    
    
    
    
    
    
    1,063Mortgage 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
    
    
    
    16,562Decrease (increase) in:Trading securities
    
    
    4,184
    
    
    
    3,723
    
    
    
    5,814Accrued 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
    
    
    
    46,917Other liabilities
    
    
    (45,040
    )
    
    
    35,674
    
    
    
    (10,190
    )Net cash provided by (used in) operating activities
    
    
    (31,519
    )
    
    
    133,289
    
    
    
    128,851CASH FLOWS FROM INVESTING ACTIVITIES:Net decrease (increase) in interest-bearing deposits in banks
    
    
    (1,040,178
    )
    
    
    (35,227
    )
    
    
    36,056Net 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
    
    
    
    4,794Proceeds from sales
    
    
    398,924
    
    
    
    
    
    
    
    1,928Purchases
    
    
    (5,145,793
    )
    
    
    (500,003
    )
    
    
    Investment securities held to maturity:Maturities, prepayments and calls
    
    
    38,564,022
    
    
    
    63,082,335
    
    
    
    49,887,013Purchases
    
    
    (33,572,029
    )
    
    
    (62,674,241
    )
    
    
    (49,864,760
    )Mortgage-backed securities held to maturity:Maturities, prepayments and calls
    
    
    8,032
    
    
    
    21,193
    
    
    
    41,991Loans: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
    
    
    
    33Cash paid on terminated swaps
    
    
    
    
    
    
    
    
    
    
    (164
    )Proceeds from sales of foreclosed real estate held for sale
    
    
    2,456
    
    
    
    2,513
    
    
    
    1,567Proceeds 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
    
    
    
    7,975Net cash provided by (used in) investing activities
    
    
    2,015,508
    
    
    
    (941,865
    )
    
    
    (978,458
    )Forward
    
    $
    1,983,989
    
    
    $
    (808,576
    )
    
    $
    (849,607
    )
   130




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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
    
    
    2006Forward
    
    $
    1,983,989
    
    
    $
    (808,576
    )
    
    $
    (849,607
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    556,375
    
    
    
    1,124,911
    
    
    
    907,140Net 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
    
    
    
    2,066,295Payments
    
    
    (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 withoriginal 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
    
    
    
    1,995Dividends paid
    
    
    (47,079
    )
    
    
    (68,231
    )
    
    
    (68,140
    )Proceeds from stock options exercised
    
    
    
    
    
    
    1,249
    
    
    
    1,072Net cash provided by (used in) financing activities
    
    
    (2,069,094
    )
    
    
    857,022
    
    
    
    857,022NET CHANGE IN CASH AND DUE FROM BANKS
    
    
    (85,105
    )
    
    
    48,446
    
    
    
    7,415CASH AND DUE FROM BANKS, BEGINNING OF YEAR
    
    
    153,473
    
    
    
    105,027
    
    
    
    97,612CASH AND DUE FROM BANKS, END OF YEAR
    
    $
    68,368
    
    
    $
    153,473
    
    
    $
    105,027SUPPLEMENTAL DISCLOSURES OF CASH FLOWINFORMATION:Cash paid during the year for:Interest on deposits and other borrowings
    
    $
    685,353
    
    
    $
    747,389
    
    
    $
    617,153Income taxes
    
    
    12,475
    
    
    
    49,235
    
    
    
    82,190Noncash activities (see Note 13):Accrued dividends payable
    
    
    2,225
    
    
    
    4,149
    
    
    
    4,142Net change in other comprehensive income (loss)
    
    
    (35,869
    )
    
    
    (5,403
    )
    
    
    277Mortgage loans securitized and transferred to:Trading securities
    
    
    4,184
    
    
    
    3,723
    
    
    
    7,419Mortgage-backed securities held to maturity
    
    
    
    
    
    
    
    
    
    
    1,189Transfer from:Trading securities to available for sale securities
    
    
    
    
    
    
    
    
    
    
    1,605Investment securities held to maturity to available
for sale securities
    
    
    
    
    
    
    
    
    
    
    20,552Mortgage loans held for sale to loans
    
    
    
    
    
    
    9,055
    
    
    
    Loans to foreclosed real estate held for sale
    
    
    93,118
    
    
    
    8,211
    
    
    
    4,826Premises and equipment to other real estate held
for sale
    
    
    12,181
    
    
    
    
    
    
    
    Undivided profits to reserve fund
    
    
    
    
    
    
    
    
    
    
    5,905Mortgage loans originated to finance the sale of
foreclosed
real estate held for sale
    
    
    1,365
    
    
    
    668
    
    
    
    1,728Unpaid additions to premises and equipment
    
    
    137
    
    
    
    591
    
    
    
    562Effect of derivative transactions:Decrease (increase) in other assets
    
    
    3,931
    
    
    
    (12,065
    )
    
    
    (7,424
    )Increase (decrease) in deposits
    
    
    (4,210
    )
    
    
    13,308
    
    
    
    8,197Increase (decrease) in other liabilities
    
    
    1,027
    
    
    
    (1,123
    )
    
    
    (838
    )Conversion of preferred stock into common stock:Common stock
    
    
    
    
    
    
    
    
    
    
    13Paid-in capital
    
    
    
    
    
    
    
    
    
    
    (10
    )Preferred stock
    
    
    
    
    
    
    
    
    
    
    (3
    )
   131




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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:
     
    
    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.
   
    
    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




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##### Table of Contents




    
    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.
  Principles of Consolidation
 Use of Estimates
 Significant Group Concentrations of Credit Risk
 Revenue Recognition
 
    
    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.
    133




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##### Table of Contents



Cash and Cash Equivalents
 Interest-Bearing Deposits in Banks and Federal Funds Sold
 Securities Classification and Related Values
 Other-Than-Temporary Impairments
   Residential Mortgage Loans Held for Sale
 134




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##### Table of Contents



Loans
  Allowance for Loan Losses
   Accounting by Creditors
for Impairment of a Loan
  135




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##### Table of Contents



Allowance for Losses on Unfunded Commitments
 Foreclosed Real Estate Held for Sale
 Other Real Estate Held For Sale
  Premises and Equipment
  136




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##### Table of Contents



Impairment of Long-Lived Assets
 Transfers of Financial Assets 
 Mortgage Servicing Rights
  Stock Option Plans
 Income Taxes
 Financial Instruments:
  Derivative Financial Instruments
 Accounting for Derivative
Instruments and Hedging Activities,
 137




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##### Table of Contents



 Off-Balance Sheet Credit Related Financial Instruments
 Earnings (Loss) per Share Earnings Per Share,
 138




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##### Table of Contents



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
    )
    
    $
    59,579Less preferred stock dividends
    
    
    (36,910
    )
    
    
    (36,910
    )
    
    
    (36,911
    )Income (loss) attributable to common stockholders  basic
    
    
    (42,360
    )
    
    
    (105,248
    )
    
    
    22,668Plus convertible preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    Income (loss) attributable to common stockholders  diluted
    
    $
    (42,360
    )
    
    $
    (105,248
    )
    
    $
    22,668Weighted 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
    
    
    
    3,361Basic 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) 
 Accounting Pronouncements Recently Adopted
 Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS No. 140 and SFAS No. 133
 Accounting for Servicing of Financial Assets, an
amendment to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities Accounting
for Certain Investments in Debt and Equity Securities
 139




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Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes Definition of Settlement in FASB FIN No. 48
 Financial Statements  Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
 Fair Value Measurements Effective Date of FASB Statement No. 157 Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active
 140




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##### Table of Contents



The Fair Value Option for Financial Assets and
Financial Liabilities- Including an Amendment of FASB Statement No. 115
 Amendment of FASB Interpretation
No. 39
 Written Loan Commitments Recorded at Fair Value
through Earnings Application of Accounting Principles to Loan
Commitments
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133.
 The Hierarchy of Generally Accepted Accounting
Principles. The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.
 Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities Consolidation of
Variable Interest Entities
 141




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##### Table of Contents



Amendments to the Impairment Guidance
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
 Accounting Pronouncements To Be Adopted
 Business Combinations Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statementsan Amendment to ARB No. 51
 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities Earnings per Share
 Equity Method Investment Accounting Considerations
 142




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##### Table of Contents



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 Fair Value Measurements
 Recognition and Presentation
of Other-Than-Temporary Impairments
 Interim Disclosures about Fair
Value of Financial Instruments Disclosures about Fair Value of Financial
Instruments Interim Financial Reporting
 Subsequent Events
 Accounting for Transfers of Financial Assetsan
amendment of FASB Statement No. 140
 143




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##### Table of Contents



Amendments to FASB Interpretation No. 46(R)
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles
 2. MONEY MARKET INSTRUMENTS:
   144




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##### Table of Contents



(In thousands)Federal funds sold:Citibank N.A.  Puerto Rico
    
    $
    214,700Economic Development Bank for Puerto Rico
    
    
    22,000BNP Paribas S.A.
    
    
    50,000Bank of America
    
    
    50,000Subtotal
    
    
    336,700Resell agreements:Credit Suisse First Boston
    
    
    500,000Citibank N.A.  Puerto Rico
    
    
    50,000Subtotal
    
    
    550,000Total
    
    $
    886,700
  FairValue ofReceivable
    
    
    UnderlyingUnderlying Collateral
    
    Balance
    
    
    Collateral(In thousands)Investment securities:U.S. Government and
agencies obligations
    
    $
    494,824
    
    
    $
    529,514Mortgage-backed securities:Federal Home Loan MortgageCorporation (FHLMC) certificates
    
    
    52,324
    
    
    
    53,945Federal National MortgageAssociation (FNMA) certificates
    
    
    2,852
    
    
    
    3,176Total  excluding accrued
interest receivable
    
    $
    550,000
    
    
    $
    586,635Accrued interest receivable
on resell agreements
    
    $
    2,890
 145




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##### Table of Contents



Collateral SoldCollateral
    
    
    under RepurchaseReceived
    
    
    Agreements(In thousands)Investment securities:U.S. Government and agencies obligations
    
    $
    529,514
    
    
    $
    529,514Mortgage-backed securities:FNMA certificates
    
    
    3,176
    
    
    
    3,176FHLMC certificates
    
    
    53,945
    
    
    
    53,945Subtotal
    
    
    57,121
    
    
    
    57,121Total
    
    $
    586,635
    
    
    $
    586,635
  146




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3. INVESTMENT SECURITIES:
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2008
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available for sale:U.S. Government and agencies obligations (USGOs)
    
    $
    306,259
    
    
    $
    1,621
    
    
    $
    
    
    
    $
    307,880Puerto Rico Government and agencies obligations (PRGOs)
    
    
    11,122
    
    
    
    335
    
    
    
    
    
    
    
    11,457Subtotal
    
    
    317,381
    
    
    
    1,956
    
    
    
    
    
    
    
    319,337Mortgage-backed securities:Collateralized mortgage obligations (CMOs) issued
and guaranteed by Government National Mortgage
Association (GNMA)
    
    
    2,984,538
    
    
    
    3,456
    
    
    
    34,091
    
    
    
    2,953,903CMOs issued and guaranteed by FNMA
    
    
    395,492
    
    
    
    
    
    
    
    15,054
    
    
    
    380,438CMOs issued and guaranteed by FHLMC
    
    
    14,328
    
    
    
    
    
    
    
    677
    
    
    
    13,651Subtotal
    
    
    3,394,358
    
    
    
    3,456
    
    
    
    49,822
    
    
    
    3,347,992Equity securities  common stock
    
    
    1,906
    
    
    
    1,006
    
    
    
    
    
    
    
    2,912Total
    
    $
    3,713,645
    
    
    $
    6,418
    
    
    $
    49,822
    
    
    $
    3,670,241Held to maturity:USGOs
    
    $
    372,311
    
    
    $
    793
    
    
    $
    
    
    
    $
    373,104PRGOs
    
    
    13,312
    
    
    
    3
    
    
    
    167
    
    
    
    13,148Corporate notes
    
    
    21,436
    
    
    
    
    
    
    
    1,870
    
    
    
    19,566Subtotal
    
    
    407,059
    
    
    
    796
    
    
    
    2,037
    
    
    
    405,818Mortgage-backed securities:GNMA certificates
    
    
    5,574
    
    
    
    195
    
    
    
    2
    
    
    
    5,767FHLMC certificates
    
    
    1,942
    
    
    
    88
    
    
    
    
    
    
    
    2,030FNMA certificates
    
    
    2,691
    
    
    
    118
    
    
    
    1
    
    
    
    2,808CMOs issued and guaranteed by FHLMC
    
    
    551,802
    
    
    
    788
    
    
    
    16,987
    
    
    
    535,603CMOs issued and guaranteed by FNMA
    
    
    68,902
    
    
    
    607
    
    
    
    698
    
    
    
    68,811Subtotal
    
    
    630,911
    
    
    
    1,796
    
    
    
    17,688
    
    
    
    615,019Total
    
    $
    1,037,970
    
    
    $
    2,592
    
    
    $
    19,725
    
    
    $
    1,020,837
 147




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2007
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available for sale:PRGOs
    
    $
    14,946
    
    
    $
    359
    
    
    $
    
    
    
    $
    15,305Mortgage-backed securities:CMOs issued and guaranteed by FNMA
    
    
    450,736
    
    
    
    
    
    
    
    5,258
    
    
    
    445,478CMOs issued and guaranteed by FHLMC
    
    
    16,478
    
    
    
    
    
    
    
    166
    
    
    
    16,312Subtotal
    
    
    467,214
    
    
    
    
    
    
    
    5,424
    
    
    
    461,790Equity securities  common stock
    
    
    1,906
    
    
    
    
    
    
    
    
    
    
    
    1,906Total
    
    $
    484,066
    
    
    $
    359
    
    
    $
    5,424
    
    
    $
    479,001Held to maturity:USGOs
    
    $
    5,927,530
    
    
    $
    925
    
    
    $
    10,057
    
    
    $
    5,918,398PRGOs
    
    
    10,207
    
    
    
    
    
    
    
    280
    
    
    
    9,927Corporate notes
    
    
    21,436
    
    
    
    316
    
    
    
    201
    
    
    
    21,551Subtotal
    
    
    5,959,173
    
    
    
    1,241
    
    
    
    10,538
    
    
    
    5,949,876Mortgage-backed securities:GNMA certificates
    
    
    6,254
    
    
    
    163
    
    
    
    
    
    
    
    6,417FHLMC certificates
    
    
    2,444
    
    
    
    96
    
    
    
    
    
    
    
    2,540FNMA certificates
    
    
    3,014
    
    
    
    97
    
    
    
    1
    
    
    
    3,110CMOs issued and guaranteed by FHLMC
    
    
    556,547
    
    
    
    288
    
    
    
    53,351
    
    
    
    503,484CMOs issued and guaranteed by FNMA
    
    
    70,765
    
    
    
    
    
    
    
    3,262
    
    
    
    67,503Subtotal
    
    
    639,024
    
    
    
    644
    
    
    
    56,614
    
    
    
    583,054Total
    
    $
    6,598,197
    
    
    $
    1,885
    
    
    $
    67,152
    
    
    $
    6,532,930
  Available for Sale
    
    
    Held to MaturityAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value(In thousands)Due within one year
    
    $
    101,100
    
    
    $
    101,354
    
    
    $
    364,256
    
    
    $
    365,049Due after one year through five years
    
    
    216,280
    
    
    
    217,982
    
    
    
    20,873
    
    
    
    20,716Due after five years through ten years
    
    
    
    
    
    
    
    
    
    
    495
    
    
    
    488Due after ten years
    
    
    
    
    
    
    
    
    
    
    21,435
    
    
    
    19,565Subtotal
    
    
    317,380
    
    
    
    319,336
    
    
    
    407,059
    
    
    
    405,818Mortgage-backed securities
    
    
    3,394,359
    
    
    
    3,347,993
    
    
    
    630,911
    
    
    
    615,019Equity securities
    
    
    1,906
    
    
    
    2,912
    
    
    
    
    
    
    
    Total
    
    $
    3,713,645
    
    
    $
    3,670,241
    
    
    $
    1,037,970
    
    
    $
    1,020,837
 148




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Less than 12 months
    
    
    12 months or more
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    Number ofFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    InvestmentDecember 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
    
    
    
    48CMOs issued and
guaranteed by FNMA
    
    
    
    
    
    
    
    
    
    
    380,439
    
    
    
    15,054
    
    
    
    380,439
    
    
    
    15,054
    
    
    
    11CMOs issued and
guaranteed by FHLMC
    
    
    
    
    
    
    
    
    
    
    13,651
    
    
    
    677
    
    
    
    13,651
    
    
    
    677
    
    
    
    1Total
    
    $
    2,601,507
    
    
    $
    34,091
    
    
    $
    394,090
    
    
    $
    15,731
    
    
    $
    2,995,597
    
    
    $
    49,822
    
    
    $
    60Held to maturity:PRGOs
    
    $
    3,905
    
    
    $
    45
    
    
    $
    8,770
    
    
    $
    122
    
    
    $
    12,675
    
    
    $
    167
    
    
    
    12Corporate notes
    
    
    4,096
    
    
    
    148
    
    
    
    15,470
    
    
    
    1,722
    
    
    
    19,566
    
    
    
    1,870
    
    
    
    3Subtotal
    
    
    8,001
    
    
    
    193
    
    
    
    24,240
    
    
    
    1,844
    
    
    
    32,241
    
    
    
    2,037
    
    
    
    15Mortgage-backed securities:GNMA certificates
    
    
    139
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    2
    
    
    
    2FNMA certificates
    
    
    67
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    1
    
    
    
    1CMOs issued and
guaranteed by FHLMC
    
    
    13,588
    
    
    
    204
    
    
    
    462,737
    
    
    
    16,783
    
    
    
    476,325
    
    
    
    16,987
    
    
    
    9CMOs issued and
guaranteed by FNMA
    
    
    
    
    
    
    
    
    
    
    30,128
    
    
    
    698
    
    
    
    30,128
    
    
    
    698
    
    
    
    3Subtotal
    
    
    13,794
    
    
    
    207
    
    
    
    492,865
    
    
    
    17,481
    
    
    
    506,659
    
    
    
    17,688
    
    
    
    15Total
    
    $
    21,795
    
    
    $
    400
    
    
    $
    517,105
    
    
    $
    19,325
    
    
    $
    538,900
    
    
    $
    19,725
    
    
    
    30
 149




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Less than 12 months
    
    
    12 months or more
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    Number ofFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    InvestmentDecember 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
    
    
    
    11CMOs issued and
guaranteed by FHLMC
    
    
    16,312
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    16,312
    
    
    
    166
    
    
    
    1Total
    
    $
    461,790
    
    
    $
    5,424
    
    
    $
    
    
    
    $
    
    
    
    $
    461,790
    
    
    $
    5,424
    
    
    
    12Held to maturity:U.S. Government and
agencies obligations
    
    $
    
    
    
    $
    
    
    
    $
    3,273,053
    
    
    $
    10,057
    
    
    $
    3,273,053
    
    
    $
    10,057
    
    
    
    33PRGOs
    
    
    
    
    
    
    
    
    
    
    9,927
    
    
    
    280
    
    
    
    9,927
    
    
    
    280
    
    
    
    10Corporate notes
    
    
    10,024
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    10,024
    
    
    
    201
    
    
    
    1Subtotal
    
    
    10,024
    
    
    
    201
    
    
    
    3,282,980
    
    
    
    10,337
    
    
    
    3,293,004
    
    
    
    10,538
    
    
    
    44Mortgage-backed securities:FNMA certificates
    
    
    1,035
    
    
    
    1
    
    
    
    72
    
    
    
    
    
    
    
    1,107
    
    
    
    1
    
    
    
    2CMOs issued and
guaranteed by FHLMC
    
    
    
    
    
    
    
    
    
    
    487,599
    
    
    
    53,351
    
    
    
    487,599
    
    
    
    53,351
    
    
    
    10CMOs issued and
guaranteed by FNMA
    
    
    
    
    
    
    
    
    
    
    67,503
    
    
    
    3,262
    
    
    
    67,503
    
    
    
    3,262
    
    
    
    6Subtotal
    
    
    1,035
    
    
    
    1
    
    
    
    555,174
    
    
    
    56,613
    
    
    
    556,209
    
    
    
    56,614
    
    
    
    18Total
    
    $
    11,059
    
    
    $
    202
    
    
    $
    3,838,154
    
    
    $
    66,950
    
    
    $
    3,849,213
    
    
    $
    67,152
    
    
    
    62
    150




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2008
    
    2007
    
    2006(In thousands)Proceeds from sales
    
    $
    398,924
    
    
    $
    
    
    
    $
    1,928Gross realized gains
    
    
    579
    
    
    
    
    
    
    
    204Gross realized losses
    
    
    74
    
    
    
    
    
    
    
    
    2008
    
    2007Amortized
    
    Fair
    
    Amortized
    
    FairCost
    
    Value
    
    Cost
    
    Value(In thousands)GNMA
    
    $
    2,990,112
    
    
    $
    2,959,670
    
    
    $
    6,254
    
    
    $
    6,417FHLMC
    
    
    568,072
    
    
    
    551,284
    
    
    
    775,469
    
    
    
    721,484FNMA
    
    
    467,085
    
    
    
    452,057
    
    
    
    524,515
    
    
    
    516,091FHLB
    
    
    677,470
    
    
    
    679,883
    
    
    
    5,625,984
    
    
    
    5,617,919
 151




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##### Table of Contents



4. LOANS:
  2008
    
    
    2007(In thousands)REAL ESTATE LOANS SECURED BY MORTGAGES ON:Commercial real estate
    
    $
    5,105,663
    
    
    $
    5,563,189Residential real estate, mainly one-to-four family residences
    
    
    985,564
    
    
    
    992,993Construction and land acquisition
    
    
    1,446,191
    
    
    
    1,437,054Subtotal
    
    
    7,537,418
    
    
    
    7,993,236Plus (less):Undisbursed portion of loans in process
    
    
    (3,214
    )
    
    
    (2,802
    )Premium on loans purchased
    
    
    42
    
    
    
    72Deferred loan fees  net
    
    
    (29,303
    )
    
    
    (33,883
    )Subtotal
    
    
    (32,475
    )
    
    
    (36,613
    )Real estate loans  net
    
    
    7,504,943
    
    
    
    7,956,623OTHER LOANS:Commercial, industrial and agricultural loans
    
    
    721,987
    
    
    
    860,137Consumer loans:Loans on deposits
    
    
    28,753
    
    
    
    35,648Credit cards
    
    
    49,301
    
    
    
    48,138Installment
    
    
    649,961
    
    
    
    656,690Less deferred loan fees  net
    
    
    (5,139
    )
    
    
    (8,605
    )Other loans  net
    
    
    1,444,863
    
    
    
    1,592,008TOTAL LOANS
    
    
    8,949,806
    
    
    
    9,548,631ALLOWANCE FOR LOAN LOSSES
    
    
    (282,089
    )
    
    
    (338,720
    )LOANS  NET
    
    $
    8,667,717
    
    
    $
    9,209,911
    152




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2008
    
    
    2007
    
    
    2006(In thousands)Outstanding principal balance
at end of year
    
    $
    1,560,031
    
    
    $
    1,776,053
    
    
    $
    281,308Interest that would have been recorded if the loans
had not been classified as non-performing
    
    $
    90,704
    
    
    $
    48,974
    
    
    $
    20,009Interest collected and recognized as income
on non-performing loans
    
    $
    25,874
    
    
    $
    17,068
    
    
    $
    5,046
     153




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2008
    
    
    2007
    
    
    2006(In thousands)Balance  at January 1
    
    $
    338,720
    
    
    $
    202,180
    
    
    $
    141,412Provision charged to income
    
    
    67,506
    
    
    
    277,562
    
    
    
    90,880Recoveries of loans previously charged-off
    
    
    3,705
    
    
    
    3,162
    
    
    
    5,164Charge-off of uncollectible accounts
    
    
    (127,842
    )
    
    
    (144,184
    )
    
    
    (35,276
    )Balance  at December 31
    
    $
    282,089
    
    
    $
    338,720
    
    
    $
    202,180
   December 31,2008
    
    
    2007(In thousands)Investment in impaired loans:Covered by a valuation allowance
    
    $
    901,146
    
    
    $
    922,001Do not require a valuation allowance
    
    
    570,030
    
    
    
    866,545Total
    
    $
    1,471,176
    
    
    $
    1,788,546Impaired non-performing loans
    
    $
    1,364,192
    
    
    $
    1,736,107Valuation 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
    
    
    $
    211,285Interest collected and recognized as
income on non-performing and impaired
loans
    
    $
    23,739
    
    
    $
    16,040
    
    
    $
    5,044
   154




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Accounting by Debtors and Creditors of Troubled Debt
Restructurings Accounting by Creditors for Impairment of a Loan
 5. FORECLOSED REAL ESTATE HELD AND OTHER REAL ESTATE HELD FOR SALE:
  2008
    
    
    2007(In thousands)Balance, foreclosed real estate held for sale:Residential (1 - 4 units)
    
    $
    10,246
    
    
    $
    5,118Commercial
    
    
    91,428
    
    
    
    6,875Total
    
    
    101,674
    
    
    
    11,993Less valuation allowance
    
    
    3,104
    
    
    
    1,022Foreclosed real estate held for sale  net
    
    $
    98,570
    
    
    $
    10,971Other real estate held for sale  land
    
    $
    5,462
    
    
    $
    
  2008
    
    
    2007
    
    
    2006(In thousands)Balance  at January 1
    
    $
    1,022
    
    
    $
    449
    
    
    $
    227Provision
    
    
    2,082
    
    
    
    573
    
    
    
    222Balance  at December 31
    
    $
    3,104
    
    
    $
    1,022
    
    
    $
    449
  155




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6. PREMISES AND EQUIPMENT:
  Useful Life
    
    
    2008
    
    
    2007in Years
    
    
    (In thousands)Land and improvements
    
    
    
    
    
    $
    19,838
    
    
    $
    30,887Buildings and improvements
    
    
    1 - 40
    
    
    
    78,661
    
    
    
    76,095Furniture and equipment
    
    
    1 - 10
    
    
    
    41,169
    
    
    
    38,670Leasehold improvements
    
    
    1 - 39
    
    
    
    19,306
    
    
    
    18,661Construction in progress
    
    
    
    
    
    
    9,565
    
    
    
    4,581Total
    
    
    
    
    
    
    168,539
    
    
    
    168,894Less accumulated depreciation and amortization
    
    
    
    
    
    
    47,743
    
    
    
    39,303Total
    
    
    
    
    
    $
    120,796
    
    
    $
    129,591
   7. DEPOSITS AND INTEREST EXPENSE:
  2008
    
    
    2007(In thousands)Noninterest bearing accounts
    
    $
    250,380
    
    
    $
    317,753Passbook accounts
    
    
    670,224
    
    
    
    825,447NOW accounts
    
    
    275,530
    
    
    
    314,820Super NOW accounts
    
    
    18,656
    
    
    
    26,573Money market accounts
    
    
    37
    
    
    
    43Certificates of deposit (1)
    
    
    9,672,333
    
    
    
    8,869,237Total
    
    
    10,887,160
    
    
    
    10,353,873Accrued interest payable (2)
    
    
    115,013
    
    
    
    142,628Total
    
    $
    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.  156




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Year Ending
    
    AmountDecember 31,
    
    (In thousands)2009
    
    $
    6,165,9432010
    
    
    2,694,2092011
    
    
    440,0192012
    
    
    193,9642013
    
    
    80,465Thereafter
    
    
    97,733Total
    
    $
    9,672,333
   2008
    
    
    2007
    
    
    2006(In thousands)Passbook accounts
    
    $
    14,375
    
    
    $
    17,108
    
    
    $
    15,583NOW, Super NOW and Money
Market accounts
    
    
    6,780
    
    
    
    6,883
    
    
    
    5,829Certificates of deposit (1)
    
    
    434,158
    
    
    
    439,307
    
    
    
    344,651Total
    
    $
    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




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##### Table of Contents



8. FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS:
  2008
    
    
    2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageAmount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest Rate(Dollars in thousands)Federal funds purchased
    
    $
    
    
    
    
    
    %
    
    $
    100,000
    
    
    
    4.44
    %Repurchase agreements:Fixed rate
    
    
    3,204,142
    
    
    
    
    
    
    
    4,194,195Variable rate
    
    
    
    
    
    
    
    
    
    
    1,852,498Total repurchase agreements
    
    
    3,204,142
    
    
    
    3.77
    %
    
    
    6,046,693
    
    
    
    4.79
    %Total
    
    $
    3,204,142
    
    
    
    
    
    
    $
    6,146,693
   Year EndingDecember 31,
    
    (In thousands)2009 (1)
    
    
    $1,382,6422010
    
    
    1,597,0002011
    
    
    2012
    
    
    224,5002013
    
    
    Thereafter
    
    
    Total
    
    $
    3,204,142
 
 (1)
    
    Includes $779.1 million of repurchase agreements which mature within 30 days. 158




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##### Table of Contents



2008
    
    
    2007Fair Value
    
    
    
    
    
    
    Fair ValueBorrowing
    
    
    of Underlying
    
    
    Borrowing
    
    
    of UnderlyingBalance
    
    
    Collateral
    
    
    Balance
    
    
    Collateral(In thousands)Federal Home Loan Bank of New York
    
    $
    1,073,000
    
    
    $
    1,141,125
    
    
    $
    743,700
    
    
    $
    756,315Salomon Smith Barney Inc. and affiliates
    
    
    593,000
    
    
    
    707,210
    
    
    
    1,023,320
    
    
    
    1,084,950Credit Suisse First Boston LLC
    
    
    532,142
    
    
    
    600,820
    
    
    
    1,208,000
    
    
    
    1,299,819J.P. Morgan Securities, Inc.
    
    
    330,000
    
    
    
    417,308
    
    
    
    741,100
    
    
    
    794,718Barclays Capital, Inc.
    
    
    330,000
    
    
    
    374,508
    
    
    
    441,850
    
    
    
    470,738Morgan Stanley Dean Witter
    
    
    273,000
    
    
    
    294,235
    
    
    
    497,400
    
    
    
    513,601Merrill Lynch Government
Securities Inc. and affiliates
    
    
    73,000
    
    
    
    78,107
    
    
    
    580,125
    
    
    
    596,358Lehman Brothers Inc. and affiliates (see Note 13)
    
    
    
    
    
    
    
    
    
    
    433,198
    
    
    
    516,452BNP Paribas
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    53,008UBS Financial Services Incorporated of Puerto Rico
    
    
    
    
    
    
    
    
    
    
    328,000
    
    
    
    349,969Total
    
    $
    3,204,142
    
    
    $
    3,613,313
    
    
    $
    6,046,693
    
    
    $
    6,435,928
 159




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##### Table of Contents



2008
    
    
    2007Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairSecurities Underlying
    
    Value of
    
    
    Value of
    
    
    Value of
    
    
    Value ofRepurchase
    
    Underlying
    
    
    Underlying
    
    
    Underlying
    
    
    UnderlyingAgreements
    
    Collateral
    
    
    Collateral
    
    
    Collateral
    
    
    Collateral(In thousands)U.S. Government and agencies obligations
(USGOs)  held to maturity
    
    $
    150,755
    
    
    $
    151,028
    
    
    $
    4,946,590
    
    
    $
    4,954,333USGOs  available for sale
    
    
    155,341
    
    
    
    155,142
    
    
    
    
    
    
    
    USGOs purchased under agreements to resell
    
    
    
    
    
    
    
    
    
    
    494,174
    
    
    
    529,514Mortgage-backed securities (MBS)  held to maturity
    
    
    373,940
    
    
    
    370,710
    
    
    
    522,837
    
    
    
    449,482MBS purchased under agreements to resell
    
    
    
    
    
    
    
    
    
    
    59,076
    
    
    
    57,121MBS  available for sale
    
    
    2,981,040
    
    
    
    2,936,433
    
    
    
    450,736
    
    
    
    445,478Total
    
    
    3,661,076
    
    
    $
    3,613,313
    
    
    
    6,473,413
    
    
    $
    6,435,928Accrued interest receivable of underlying securities
    
    
    19,475
    
    
    
    
    
    
    
    58,030Total
    
    $
    3,680,551
    
    
    
    
    
    
    $
    6,531,443
 160




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##### Table of Contents



2008
    
    2007(Dollars in thousands)Federal funds purchased:Balance at end of year
    
    $
    
    
    
    $
    100,000Weighted-average interest rate at year end
    
    
    
    %
    
    
    4.44
    %Monthly average outstanding balance
    
    $
    7,692
    
    
    $
    24,308Weighted-average interest rate for the year
    
    
    4.44
    %
    
    
    5.17
    %Maximum month-end balance
    
    $
    
    
    
    $
    100,000Repurchase agreements:Balance at end of year
    
    $
    779,142
    
    
    $
    1,364,075Weighted-average interest rate at year end
    
    
    1.20
    %
    
    
    4.85
    %Monthly average outstanding balance
    
    $
    1,001,358
    
    
    $
    1,497,932Weighted-average interest rate for the year
    
    
    2.64
    %
    
    
    5.19
    %Maximum month-end balance
    
    $
    1,559,157
    
    
    $
    2,771,592Advances from FHLB:Balance at end of year
    
    $
    
    
    
    $
    60,000Weighted-average interest rate at year end
    
    
    
    %
    
    
    4.52
    %Monthly average outstanding balance
    
    $
    14,923
    
    
    $
    29,615Weighted-average interest rate for the year
    
    
    3.65
    %
    
    
    4.99
    %Maximum month-end balance
    
    $
    58,000
    
    
    $
    60,000Borrowings under line of credit:Balance at end of year
    
    $
    
    
    
    $
    Weighted-average interest rate at year end
    
    
    
    %
    
    
    
    %Monthly average outstanding balance
    
    $
    
    
    
    $
    15,158Weighted-average interest rate for the year
    
    
    
    %
    
    
    6.00
    %Maximum month-end balance
    
    $
    
    
    
    $
    34,030Total short-term borrowings:Balance at end of year
    
    $
    779,142
    
    
    $
    1,524,075Weighted-average interest rate at year end
    
    
    1.20
    %
    
    
    4.81
    %Monthly average outstanding balance
    
    $
    1,023,973
    
    
    $
    1,567,013Weighted-average interest rate for the year
    
    
    2.67
    %
    
    
    5.19
    %Maximum month-end balance
    
    $
    1,617,157
    
    
    $
    2,865,622
 9. LINES OF CREDIT:
 -
  161




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##### Table of Contents



10. ADVANCES FROM FEDERAL HOME LOAN BANK AND MORTGAGE NOTE PAYABLE:
  2008
    
    
    2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageAmount
    
    
    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
    %
   162




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##### Table of Contents



Year Ending
    
    Advances
    
    
    MortgageDecember 31,
    
    from FHLB
    
    
    Note Payable (1)(In thousands)2009
    
    $
    
    
    
    $
    5792010
    
    
    42,000
    
    
    
    6282011
    
    
    
    
    
    
    6812012
    
    
    
    
    
    
    7312013
    
    
    
    
    
    
    801Thereafter
    
    
    
    
    
    
    31,512Total
    
    $
    42,000
    
    
    $
    34,932
 
 (1)
    
    Mortgage note payable was cancelled on July 12, 2009. 11. INCOME TAXES:
      163




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##### Table of Contents



2008
    
    
    2007
    
    
    2006(In thousands)Current:Puerto Rico
    
    $
    (20,744
    )
    
    $
    23,371
    
    
    $
    66,366U.S.
    
    
    (11,150
    )
    
    
    10,467
    
    
    
    10,233(31,894
    )
    
    
    33,838
    
    
    
    76,599Deferred credit
    
    
    (22,392
    )
    
    
    (73,610
    )
    
    
    (6,107
    )Total provision (credit)
    
    $
    (54,286
    )
    
    $
    (39,772
    )
    
    $
    70,492
 164




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##### Table of Contents



Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, Accounting for Income Taxes
  2008
    
    
    2007(In thousands)Balance  January 1
    
    $
    43,987
    
    
    $
    23,345Gross amount of increase in unrecognized tax benefits as a result of
tax positions taken during a prior period
    
    
    144
    
    
    
    1,659Gross 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
    
    
    
    30,166Amount 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
   165




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##### Table of Contents



2008
    
    
    2007
    
    
    2006% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofPre-tax
    
    
    
    
    
    
    Pre-tax
    
    
    
    
    
    
    Pre-taxAmount
    
    
    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
    
    
    
    7.9Nondeductible expenses
    
    
    45
    
    
    
    0.1
    
    
    
    60
    
    
    
    0.1
    
    
    
    81
    
    
    
    0.1Differential in statutory rate on
capital gains
    
    
    (3,321
    )
    
    
    (5.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    (1,483
    )
    
    
    (2.5
    )
    
    
    (301
    )
    
    
    (0.3
    )
    
    
    4,195
    
    
    
    3.2Provision (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




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##### Table of Contents



2008
    
    
    2007(In thousands)Deferred tax assets:Allowance for loan losses
    
    $
    108,984
    
    
    $
    130,414Net 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
    
    
    
    
    
    
    2,715Unrealized loss in valuation of derivative instruments
    
    
    262
    
    
    
    3,228Allowance for losses on unfunded commitments
    
    
    
    
    
    
    447Other
    
    
    718
    
    
    
    422Total deferred tax assets
    
    
    157,065
    
    
    
    137,226Less valuation allowance
    
    
    896
    
    
    
    2,495Subtotal
    
    
    156,169
    
    
    
    134,731Less deferred tax liabilities:Deferred loan origination costs
    
    
    209
    
    
    
    220Unrealized gains on available for sale securities
    
    
    
    
    
    
    54Other
    
    
    299
    
    
    
    280Subtotal
    
    
    508
    
    
    
    554Deferred income tax asset, net
    
    $
    155,661
    
    
    $
    134,177
  2008
    
    
    2007
    
    
    2006(In thousands)Balance  at January 1
    
    $
    2,495
    
    
    $
    3,536
    
    
    $
    3,521Increase (decrease) in valuation allowance
    
    
    (1,599
    )
    
    
    (1,041
    )
    
    
    15Balance  at December 31
    
    $
    896
    
    
    $
    2,495
    
    
    $
    3,536
  167




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##### Table of Contents



12.
    
    NET GAIN (LOSS) ON SALES AND VALUATION OF LOANS HELD FOR SALE, SECURITIES AND OTHER ASSETS:
  2008
    
    
    2007
    
    
    2006(In thousands)Trading account securities, mainly related
to loans securitized
    
    $
    109
    
    
    $
    92
    
    
    $
    164Investment securities available for sale (see Note 3)
    
    
    505
    
    
    
    
    
    
    
    204Investment securities held to maturity (see Note 13)
    
    
    (3,116
    )
    
    
    
    
    
    
    Mortgage loans held for sale
    
    
    801
    
    
    
    735
    
    
    
    291Other 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
    
    
    
    13Total
    
    $
    13,596
    
    
    $
    1,093
    
    
    $
    (1,141
    )
 13. COMMITMENTS AND CONTINGENCIES:
   168




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##### Table of Contents



Year Ending
    
    MinimumDecember 31,
    
    Rent(In thousands)2009
    
    $
    2,4932010
    
    
    2,3212011
    
    
    1,9282012
    
    
    1,5202013
    
    
    1,138Thereafter
    
    
    3,100Total
    
    $
    12,500
 LAWSUITS
  
    
    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 Hildenbrandaction.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 Wylielawsuit 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




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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 11th 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 11th 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




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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 20th 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 20th 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
20th 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 1st 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




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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
     172




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OTHER
 Transactions
with Affiliates of Lehman Brothers Inc.
    14. RETIREMENT BENEFIT PLANS:
  173




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15. MINIMUM REGULATORY CAPITAL REQUIREMENTS:
     174




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Minimum To BeMinimum
    
    Well Capitalized UnderCapital
    
    Prompt CorrectiveActual
    
    Requirement
    
    Action ProvisionsAmount
    
    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/AWesternbank
    
    
    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/AWesternbank
    
    
    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/AWesternbank
    
    
    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/AWesternbank
    
    
    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/AWesternbank
    
    
    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/AWesternbank
    
    
    864,605
    
    
    
    4.82
    
    
    
    718,115
    
    
    
    4
    
    
    $
    897,644
    
    
    
    5
    %
     175




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##### Table of Contents



16. COMMON AND PREFERRED STOCK TRANSACTIONS:
    IssuancePrice andLiquidation
    
    
    
    
    
    
    Proceeds FromIssuance
    
    
    
    
    Dividend
    
    
    Preference
    
    
    Shares
    
    
    Issuance, Net of
    
    
    IssuanceYear
    
    
    Type of Preferred Stock
    
    Rate
    
    
    Per Share
    
    
    Issued
    
    
    Issuance Costs
    
    
    Costs1998
    
    
    Convertible, 1998 Series A
    
    
    7.125
    %
    
    $
    25
    
    
    
    1,219,000
    
    
    $
    29,143,000
    
    
    $
    1,332,0001999
    
    
    Non-convertible, 1999 Series B
    
    
    7.250
    
    
    
    25
    
    
    
    2,001,000
    
    
    
    48,273,000
    
    
    
    1,752,0002001
    
    
    Non-convertible, 2001 Series C
    
    
    7.600
    
    
    
    25
    
    
    
    2,208,000
    
    
    
    53,103,000
    
    
    
    2,097,0002001
    
    
    Non-convertible, 2001 Series D
    
    
    7.400
    
    
    
    25
    
    
    
    1,791,999
    
    
    
    43,238,000
    
    
    
    1,562,0002002
    
    
    Non-convertible, 2002 Series E
    
    
    6.875
    
    
    
    25
    
    
    
    1,725,000
    
    
    
    41,463,000
    
    
    
    1,662,0002003
    
    
    Non-convertible, 2003 Series F
    
    
    6.700
    
    
    
    25
    
    
    
    4,232,000
    
    
    
    102,192,000
    
    
    
    3,608,0002003
    
    
    Non-convertible, 2003 Series G
    
    
    6.900
    
    
    
    25
    
    
    
    2,640,000
    
    
    
    63,671,000
    
    
    
    2,329,0002004
    
    
    Non-convertible, 2004 Series H
    
    
    6.700
    
    
    
    50
    
    
    
    2,675,500
    
    
    
    129,311,000
    
    
    
    4,464,0002005
    
    
    Non-convertible, 2004 Series H
    
    
    6.700
    
    
    
    50
    
    
    
    401,300
    
    
    
    19,450,000
    
    
    
    615,000Total
    
    
    
    
    
    
    
    
    
    
    18,893,799
    
    
    $
    529,844,000
    
    
    $
    19,421,000
  176




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##### Table of Contents



Redemption Price per ShareDecember 31,
    
    Series A
    
    Series B
    
    Series C
    
    Series D
    
    Series E
    
    Series F
    
    Series G
    
    Series H2009
    
    $
    25.00
    
    
    $
    25.00
    
    
    $
    25.00
    
    
    $
    25.00
    
    
    $
    25.00
    
    
    $
    25.25
    
    
    $
    25.25
    
    
    $
    51.002010
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    50.502011 and thereafter
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    50.00
 17. STOCK COMPENSATION PLANS:
  177




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2008
    
    
    2007
    
    
    2006Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceBeginning of year
    
    
    139,220
    
    
    $
    169.12
    
    
    
    154,174
    
    
    $
    192.00
    
    
    
    156,906
    
    
    $
    189.50Options granted
    
    
    
    
    
    
    
    
    
    
    9,800
    
    
    
    164.01
    
    
    
    9,700
    
    
    
    298.00Options excercised
    
    
    
    
    
    
    
    
    
    
    (8,404
    )
    
    
    148.64
    
    
    
    (7,521
    )
    
    
    142.50Options forfeited
    
    
    (4,851
    )
    
    
    167.07
    
    
    
    (16,350
    )
    
    
    403.07
    
    
    
    (4,911
    )
    
    
    392.00End of year
    
    
    134,369
    
    
    $
    169.12
    
    
    
    139,220
    
    
    $
    169.12
    
    
    
    154,174
    
    
    $
    192.00
  WeightedAverageNumber of Options
    
    
    RemainingVested or
    
    
    
    
    
    
    ContractualExercise 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
    
    
    
    6.55Total
    
    
    134,369
    
    
    
    133,869
    
    
    
    126,989
    
    
    
    1.75Aggregate 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.  178




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##### Table of Contents



Year EndingDecember 31,
    
    (In thousands)2009
    
    $
    3282010
    
    
    2082011
    
    
    462012
    
    
    12Total
    
    $
    594
 18. OFF-BALANCE SHEET ACTIVITIES:
  Commitments to Extend Credit and Letters of Credit
     179




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##### Table of Contents



2008
    
    
    2007(In thousands)Commitments to extend credit:Fixed rates
    
    $
    9,389
    
    
    $
    8,424Variable rates
    
    
    312,212
    
    
    
    619,627Unused lines of credit:Commercial
    
    
    152,455
    
    
    
    244,153Credit cards and other
    
    
    111,978
    
    
    
    121,730Standby letters of credit
    
    
    31,222
    
    
    
    38,385Commercial letters of credit
    
    
    4,289
    
    
    
    6,047Total
    
    $
    621,545
    
    
    $
    1,038,366
  19. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
   180




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##### Table of Contents



The
Fair Value Option for Financial Assets and Financial Liabilities- Including an Amendment of FASB
Statement No. 115
  181




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##### Table of Contents



2008
    
    
    2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(In thousands)Fair value hedge:Included in accrued expenses and other liabilities:CD swaps
    
    $
    
    
    
    $
    
    
    
    $
    470,176
    
    
    $
    6,012Right to offset effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,391
    )Total
    
    $
    
    
    
    $
    
    
    
    $
    470,176
    
    
    $
    2,621Derivatives 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
    
    
    
    6,759Interest rate cap used to offset exposure of
interest rate cap with commercial loan borrowers
    
    
    43,251
    
    
    
    71
    
    
    
    43,350
    
    
    
    230Purchased options used to manage exposure
to the stock market on equity indexed deposits
    
    
    72,370
    
    
    
    6,806
    
    
    
    82,347
    
    
    
    25,884Right to offset effect
    
    
    
    
    
    
    (824
    )
    
    
    
    
    
    
    (3,391
    )Total
    
    $
    408,118
    
    
    $
    18,371
    
    
    $
    298,327
    
    
    $
    29,482Included in accrued expenses and other liabilities:CD swaps
    
    $
    
    
    
    $
    
    
    
    $
    91,599
    
    
    $
    753Interest rate swaps used to offset exposure of
interest rate swaps with commercial loan borrowers
    
    
    171,972
    
    
    $
    12,051
    
    
    
    172,630
    
    
    
    6,758Interest rate cap with commercial loan borrowers
    
    
    43,251
    
    
    
    27
    
    
    
    43,350
    
    
    
    230Right to offset effect
    
    
    
    
    
    
    (824
    )
    
    
    
    
    
    
    Total
    
    $
    215,223
    
    
    $
    11,254
    
    
    $
    307,579
    
    
    $
    7,741Included in deposits:Embedded options on equity indexed deposits
    
    $
    69,444
    
    
    $
    6,986
    
    
    $
    78,819
    
    
    $
    24,664
 182




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Accrued Interest2008
    
    
    2007Receivable
    
    
    Payable
    
    
    Receivable
    
    
    Payable(In thousands)CD Swaps
    
    $
    22
    
    
    $
    117
    
    
    $
    603
    
    
    $
    990Interest rate swaps with commercial loan borrowers
    
    
    158
    
    
    
    
    
    
    
    10
    
    
    
    2Interest rate swaps used to offset exposure of
interest rate swaps with commercial loan borrowers
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    8Total
    
    $
    180
    
    
    $
    271
    
    
    $
    613
    
    
    $
    1,000
  (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
    
    $
    14,144Interest rate swaps used to offset exposure of
interest rate swaps with commercial loan borrower
    
    
    (12,884
    )Interest rate cap with commercial loan borrower
    
    
    203Interest 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
    
    
    11,118CD swaps
    
    
    9,509Total net
gain on derivative instruments
    
    
    10,033Net 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




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##### Table of Contents



2008
    
    2007(Dollars in thousands)Pay floating/receive fixed:Notional amount
    
    $
    292,497
    
    
    $
    734,405Weighted 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
    
    
    $
    172,630Weighted 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
    %
  2008
    
    
    2007(In thousands)Balance  at January 1
    
    $
    907,035
    
    
    $
    569,275New swaps
    
    
    28,325
    
    
    
    345,260Called and matured swaps
    
    
    (470,891
    )
    
    
    (7,500
    )Balance
 at December 31
    
    $
    464,469
    
    
    $
    907,035
  Year Ending
    
    
    
    
    
    Interest Rate
    
    
    Embedded
    
    
    PurchasedDecember 31,
    
    Swaps
    
    
    Caps
    
    
    Options
    
    
    Options(In thousands)2009
    
    $
    65,100
    
    
    $
    
    
    
    $
    26,321
    
    
    $
    27,8672010
    
    
    207,450
    
    
    
    
    
    
    
    15,768
    
    
    
    16,4692011
    
    
    0
    
    
    
    
    
    
    
    7,946
    
    
    
    8,2062012
    
    
    73,930
    
    
    
    
    
    
    
    7,924
    
    
    
    8,2342013
    
    
    0
    
    
    
    86,502
    
    
    
    11,485
    
    
    
    11,595Thereafter
    
    
    117,989
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    464,469
    
    
    $
    86,502
    
    
    $
    69,444
    
    
    $
    72,371
   184




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20. FAIR VALUE MEASUREMENTS:
 Fair Value Measurements
      Fair Value Option
   185




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##### Table of Contents



Estimated Fair Value
   Disclosures about Fair Value of Financial Instruments
  Short-term Financial Assets and Liabilities 
  Investment Securities Available for Sale, Held to Maturity and Trading Securities
  Federal Home Loan Bank (FHLB) Stock
  Residential Mortgage Loans Held for Sale
  Loans
   186




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##### Table of Contents



 Mortgage Servicing Rights
  Deposits Fair Value Option
  Resell Agreements, Repurchase Agreements, Advances from FHLB and Mortgage Note Payable
  Derivative Assets and Derivative Liabilities
   Commitments to Extend Credit and Letters of Credit
 187




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##### Table of Contents



2008
    
    2007Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Financial Assets:Cash and due from banks
    
    $
    68,368
    
    
    $
    68,368
    
    
    $
    153,473
    
    
    $
    153,473Federal funds sold and resell agreements
    
    
    
    
    
    
    
    
    
    
    886,700
    
    
    
    886,079Interest-bearing deposits in banks
    
    
    1,096,465
    
    
    
    1,096,465
    
    
    
    56,287
    
    
    
    56,287Investment securities available for sale
    
    
    3,670,241
    
    
    
    3,670,241
    
    
    
    479,001
    
    
    
    479,001Investment securities held to maturity
    
    
    1,037,970
    
    
    
    1,020,837
    
    
    
    6,598,197
    
    
    
    6,532,930FHLB stock
    
    
    64,190
    
    
    
    64,190
    
    
    
    49,453
    
    
    
    49,453Residential mortgage loans held for sale
    
    
    18,871
    
    
    
    18,871
    
    
    
    6,500
    
    
    
    6,500Loans (excluding allowance for loan losses)
    
    
    8,949,806
    
    
    
    8,931,661
    
    
    
    9,548,631
    
    
    
    9,552,287Accrued interest receivable
    
    
    56,224
    
    
    
    56,224
    
    
    
    105,377
    
    
    
    105,377Mortgage servicing rights
    
    
    3,270
    
    
    
    3,270
    
    
    
    3,033
    
    
    
    3,033Derivatives, included in assets
    
    
    18,371
    
    
    
    18,371
    
    
    
    29,482
    
    
    
    29,482Other
    
    
    644
    
    
    
    644
    
    
    
    671
    
    
    
    671Financial Liabilities:Deposits:Non-interest bearing
    
    
    250,380
    
    
    
    250,380
    
    
    
    317,753
    
    
    
    317,753Interest bearing
    
    
    10,629,794
    
    
    
    10,765,630
    
    
    
    10,011,456
    
    
    
    10,164,807Embedded options on deposits
    
    
    6,986
    
    
    
    6,986
    
    
    
    24,664
    
    
    
    24,664Federal funds purchased and repurchase agreements
    
    
    3,204,142
    
    
    
    3,272,079
    
    
    
    6,146,693
    
    
    
    6,163,790Advances from FHLB
    
    
    42,000
    
    
    
    44,913
    
    
    
    102,000
    
    
    
    104,074Mortgage note payable
    
    
    34,932
    
    
    
    35,401
    
    
    
    35,465
    
    
    
    36,190Accrued interest payable
    
    
    127,141
    
    
    
    127,141
    
    
    
    172,916
    
    
    
    172,916Derivatives, included in liabilities
    
    
    11,254
    
    
    
    11,254
    
    
    
    10,362
    
    
    
    10,362Other
    
    
    12,403
    
    
    
    12,403
    
    
    
    12,210
    
    
    
    12,210Off-Balance Sheet Credit RelatedFinancial Instruments:Liabilities:Commitments to extend credit
    
    
    
    
    
    
    2,585
    
    
    
    
    
    
    
    5,168Unused lines of credit:Commercial
    
    
    462
    
    
    
    462
    
    
    
    680
    
    
    
    680Credit cards and other
    
    
    137
    
    
    
    137
    
    
    
    164
    
    
    
    164Commercial letters of credit
    
    
    348
    
    
    
    348
    
    
    
    370
    
    
    
    370
 188




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##### Table of Contents



Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Financial Assets:Investment securities available for sale(1)
    
    $
    2,912
    
    
    $
    3,667,329
    
    
    $
    
    
    
    $
    3,670,241Residential mortgage loans held for sale (1)
    
    
    
    
    
    
    1,270
    
    
    
    
    
    
    
    1,270Derivatives, included in other assets (1)
    
    
    
    
    
    
    18,371
    
    
    
    
    
    
    
    18,371Mortgage servicing rights, included in other assets (1)
    
    
    
    
    
    
    
    
    
    
    3,270
    
    
    
    3,270Financial Liabilities:Brokered deposits (2)
    
    
    
    
    
    
    109,944
    
    
    
    
    
    
    
    109,944Derivatives, included in deposits (1)
    
    
    
    
    
    
    6,986
    
    
    
    
    
    
    
    6,986Derivatives, 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.   189




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##### Table of Contents



Financial Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
  Carrying Value as of December 31, 2008
    
    Valuation Allowance asLevel 1
    
    Level 2
    
    Level 3
    
    of December 31, 2008(In thousands)Assets:Loans receivable (1)
    
    
    
    
    
    
    
    
    
    $
    772,423
    
    
    $
    128,983Foreclosed 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:
  190




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##### Table of Contents



22. QUARTERLY FINANCIAL DATA (UNAUDITED):
  2008
    
    March 31
    
    
    June 30
    
    
    September 30
    
    
    December 31Total interest income
    
    $
    222,473
    
    
    $
    199,020
    
    
    $
    203,645
    
    
    $
    181,155Total interest expense
    
    
    178,829
    
    
    
    166,216
    
    
    
    165,217
    
    
    
    153,107Net interest income
    
    
    43,644
    
    
    
    32,804
    
    
    
    38,428
    
    
    
    28,048Provision for loan losses
    
    
    14,957
    
    
    
    14,346
    
    
    
    15,382
    
    
    
    22,821Net interest income (loss) after
provision for loan losses
    
    
    28,687
    
    
    
    18,458
    
    
    
    23,046
    
    
    
    5,227Total noninterest income
    
    
    11,648
    
    
    
    26,646
    
    
    
    9,871
    
    
    
    12,490Total 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 31Total interest income
    
    $
    264,141
    
    
    $
    271,447
    
    
    $
    270,915
    
    
    $
    263,686Total interest expense
    
    
    185,457
    
    
    
    196,894
    
    
    
    202,785
    
    
    
    199,990Net interest income
    
    
    78,684
    
    
    
    74,553
    
    
    
    68,130
    
    
    
    63,696Provision for loan losses
    
    
    34,481
    
    
    
    73,404
    
    
    
    21,703
    
    
    
    147,974Net 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
    
    
    
    12,397Total 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




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192




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##### Table of Contents



2008 Quarterly Condensed Consolidated Statements of Financial Condition
 As ofMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312008
    
    
    2008
    
    
    2008
    
    
    2008ASSETSCash and due from banks
    
    $
    97,455
    
    
    $
    145,729
    
    
    $
    71,567
    
    
    $
    68,368Money 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
    
    
    
    1,096,465Investment securities available for sale
    
    
    1,391,002
    
    
    
    3,843,657
    
    
    
    3,769,717
    
    
    
    3,670,241Investment securities held to maturity
    
    
    4,003,772
    
    
    
    2,783,342
    
    
    
    2,138,295
    
    
    
    1,037,970Federal Home Loan Bank stock, at cost
    
    
    40,782
    
    
    
    76,295
    
    
    
    69,590
    
    
    
    64,190Residential mortgage loans held for sale
    
    
    8,924
    
    
    
    18,201
    
    
    
    11,755
    
    
    
    18,871Loans, net
    
    
    9,058,487
    
    
    
    8,976,316
    
    
    
    8,860,099
    
    
    
    8,667,717Accrued interest receivable
    
    
    61,112
    
    
    
    67,401
    
    
    
    67,742
    
    
    
    56,224Foreclosed real estate held for sale, net
    
    
    99,079
    
    
    
    92,680
    
    
    
    98,657
    
    
    
    98,570Other real estate held for sale, net
    
    
    
    
    
    
    6,252
    
    
    
    6,252
    
    
    
    5,462Premises and equipment, net
    
    
    129,966
    
    
    
    117,380
    
    
    
    119,870
    
    
    
    120,796Deferred income taxes, net
    
    
    134,889
    
    
    
    143,826
    
    
    
    146,487
    
    
    
    155,661Other assets
    
    
    117,413
    
    
    
    107,980
    
    
    
    236,507
    
    
    
    222,362TOTAL
    
    $
    15,932,949
    
    
    $
    17,048,783
    
    
    $
    16,390,511
    
    
    $
    15,282,897LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing
    
    $
    289,534
    
    
    $
    288,201
    
    
    $
    268,491
    
    
    $
    250,380Interest-bearing and related accrued interest payable
    
    
    10,013,304
    
    
    
    10,508,603
    
    
    
    10,754,621
    
    
    
    10,751,793Total deposits
    
    
    10,302,838
    
    
    
    10,796,804
    
    
    
    11,023,112
    
    
    
    11,002,173Federal funds purchased and repurchase agreements
    
    
    4,401,294
    
    
    
    5,169,626
    
    
    
    4,323,170
    
    
    
    3,204,142Advances from Federal Home Loan Bank
    
    
    80,000
    
    
    
    42,000
    
    
    
    42,000
    
    
    
    42,000Mortgage note payable
    
    
    35,331
    
    
    
    35,203
    
    
    
    35,073
    
    
    
    34,932Advances from borrowers for taxes and insurance
    
    
    8,916
    
    
    
    11,213
    
    
    
    9,116
    
    
    
    11,759Accrued expenses and other liabilities
    
    
    90,596
    
    
    
    89,046
    
    
    
    80,907
    
    
    
    72,524Total liabilities
    
    
    14,918,975
    
    
    
    16,143,892
    
    
    
    15,513,378
    
    
    
    14,367,530COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157Common stock (1)
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298Paid-in capital (1)
    
    
    870,195
    
    
    
    870,261
    
    
    
    870,359
    
    
    
    870,450Retained earnings:Reserve fund
    
    
    81,613
    
    
    
    82,386
    
    
    
    81,034
    
    
    
    78,389Undivided 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
    
    
    
    915,367TOTAL
    
    $
    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




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2007 Quarterly Condensed Consolidated Statements of Financial Condition
 As ofMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312007
    
    
    2007
    
    
    2007
    
    
    2007(Dollars in thousands)ASSETSCash and due from banks
    
    $
    107,847
    
    
    $
    99,334
    
    
    $
    94,492
    
    
    $
    153,473Money market instruments:Federal funds sold and resell agreements
    
    
    809,502
    
    
    
    707,150
    
    
    
    817,220
    
    
    
    886,700Interest-bearing deposits in banks
    
    
    9,540
    
    
    
    26,447
    
    
    
    84,771
    
    
    
    56,287Investment securities available for sale
    
    
    21,565
    
    
    
    509,265
    
    
    
    490,894
    
    
    
    479,001Investment securities held to maturity
    
    
    7,273,193
    
    
    
    7,081,467
    
    
    
    6,903,227
    
    
    
    6,598,197Federal Home Loan Bank stock, at cost
    
    
    33,482
    
    
    
    32,682
    
    
    
    34,662
    
    
    
    49,453Residential mortgage loans held for sale
    
    
    4,135
    
    
    
    5,490
    
    
    
    3,398
    
    
    
    6,500Loans, net
    
    
    8,823,892
    
    
    
    8,960,055
    
    
    
    9,174,111
    
    
    
    9,209,911Accrued interest receivable
    
    
    113,892
    
    
    
    118,384
    
    
    
    116,049
    
    
    
    105,377Foreclosed real estate held for sale, net
    
    
    6,223
    
    
    
    8,465
    
    
    
    9,375
    
    
    
    10,971Premises and equipment, net
    
    
    125,866
    
    
    
    127,111
    
    
    
    128,833
    
    
    
    129,591Deferred income taxes, net
    
    
    66,681
    
    
    
    83,492
    
    
    
    87,842
    
    
    
    134,177Other assets
    
    
    55,661
    
    
    
    69,853
    
    
    
    95,206
    
    
    
    107,073TOTAL
    
    $
    17,451,479
    
    
    $
    17,829,195
    
    
    $
    18,040,080
    
    
    $
    17,926,711LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing
    
    $
    328,776
    
    
    $
    339,248
    
    
    $
    320,804
    
    
    $
    317,753Interest-bearing and related accrued interest payable
    
    
    9,631,248
    
    
    
    9,601,619
    
    
    
    10,011,670
    
    
    
    10,178,748Total deposits
    
    
    9,960,024
    
    
    
    9,940,867
    
    
    
    10,332,474
    
    
    
    10,496,501Federal funds purchased and repurchase agreements
    
    
    6,052,049
    
    
    
    6,494,477
    
    
    
    6,329,474
    
    
    
    6,146,693Advances from Federal Home Loan Bank
    
    
    102,000
    
    
    
    102,000
    
    
    
    102,000
    
    
    
    102,000Borrowings under line of credit
    
    
    32,500
    
    
    
    34,030
    
    
    
    
    
    
    
    Mortgage note payable
    
    
    35,836
    
    
    
    35,717
    
    
    
    35,596
    
    
    
    35,465Advances from borrowers for taxes and insurance
    
    
    8,236
    
    
    
    10,455
    
    
    
    8,511
    
    
    
    11,539Accrued expenses and other liabilities
    
    
    126,500
    
    
    
    118,065
    
    
    
    148,405
    
    
    
    138,277Total liabilities
    
    
    16,317,145
    
    
    
    16,735,611
    
    
    
    16,956,460
    
    
    
    16,930,475COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157
    
    
    
    18,157Common stock (1)
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298
    
    
    
    3,298Paid-in capital (1)
    
    
    869,825
    
    
    
    869,953
    
    
    
    870,031
    
    
    
    870,128Retained earnings:Reserve fund
    
    
    79,613
    
    
    
    78,389
    
    
    
    78,395
    
    
    
    78,389Undivided profits
    
    
    162,387
    
    
    
    126,496
    
    
    
    119,646
    
    
    
    31,383Accumulated 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
    
    
    
    996,236TOTAL
    
    $
    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




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##### Table of Contents



23. SEGMENT INFORMATION:
        195




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##### Table of Contents



As of and for the year endedDecember 31, 2008Westernbank
    
    
    Westernbank
    
    
    Asset-Based
    
    
    Total major
    
    
    OtherPuerto Rico
    
    
    International
    
    
    Lending Unit
    
    
    segments
    
    
    Segments
    
    
    Eliminations
    
    
    Total(In thousands)Interest income:Consumer loans
    
    $
    72,615
    
    
    $
    
    
    
    $
    
    
    
    $
    72,615
    
    
    $
    
    
    
    $
    
    
    
    $
    72,615Construction loans
    
    
    52,046
    
    
    
    
    
    
    
    
    
    
    
    52,046
    
    
    
    
    
    
    
    
    
    
    
    52,046Commercial loans
    
    
    314,354
    
    
    
    1,434
    
    
    
    54,842
    
    
    
    370,630
    
    
    
    
    
    
    
    
    
    
    
    370,630Mortgage loans
    
    
    74,242
    
    
    
    
    
    
    
    
    
    
    
    74,242
    
    
    
    
    
    
    
    
    
    
    
    74,242Treasury and investment activities
    
    
    153,028
    
    
    
    81,254
    
    
    
    
    
    
    
    234,282
    
    
    
    6,015
    
    
    
    (3,537
    )
    
    
    236,760Total interest income
    
    
    666,285
    
    
    
    82,688
    
    
    
    54,842
    
    
    
    803,815
    
    
    
    6,015
    
    
    
    (3,537
    )
    
    
    806,293Interest expense
    
    
    559,022
    
    
    
    61,829
    
    
    
    44,743
    
    
    
    665,594
    
    
    
    1,312
    
    
    
    (3,537
    )
    
    
    663,369Net interest income
    
    
    107,263
    
    
    
    20,859
    
    
    
    10,099
    
    
    
    138,221
    
    
    
    4,703
    
    
    
    
    
    
    
    142,924Provision 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
    
    
    
    
    
    
    
    
    
    
    
    10,364Service charges on deposit accounts
    
    
    11,712
    
    
    
    
    
    
    
    
    
    
    
    11,712
    
    
    
    
    
    
    
    
    
    
    
    11,712Other fees
and commissions
    
    
    16,710
    
    
    
    20
    
    
    
    
    
    
    
    16,730
    
    
    
    2,052
    
    
    
    (256
    )
    
    
    18,526Trust account fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,051
    
    
    
    (127
    )
    
    
    1,924Insurance commission fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,417
    
    
    
    (9
    )
    
    
    1,408Net gain on derivative instruments and
deposits measured at fair value
    
    
    3,125
    
    
    
    
    
    
    
    
    
    
    
    3,125
    
    
    
    
    
    
    
    
    
    
    
    3,125Net gain (loss) on sales and valuation of loans
held for sale, securities and other assets
    
    
    15,046
    
    
    
    (1,450
    )
    
    
    
    
    
    
    13,596
    
    
    
    
    
    
    
    
    
    
    
    13,596Total noninterest income
    
    
    55,258
    
    
    
    (1,430
    )
    
    
    1,699
    
    
    
    55,527
    
    
    
    5,520
    
    
    
    (392
    )
    
    
    60,655Equity 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
    
    
    $
    136,073Total assets
    
    $
    14,022,308
    
    
    $
    2,033,476
    
    
    $
    765,690
    
    
    $
    16,821,474
    
    
    $
    1,628,524
    
    
    $
    (3,167,101
    )
    
    $
    15,282,897
 196




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##### Table of Contents



As of and for the year endedDecember 31, 2007Westernbank
    
    
    Westernbank
    
    
    Asset-Based
    
    
    Total major
    
    
    OtherPuerto Rico
    
    
    International
    
    
    Lending Unit
    
    
    segments
    
    
    Segments
    
    
    Eliminations
    
    
    Total(In thousands)Interest income:Consumer loans
    
    $
    78,664
    
    
    $
    
    
    
    $
    
    
    
    $
    78,664
    
    
    $
    
    
    
    $
    
    
    
    $
    78,664Commercial loans
    
    
    457,429
    
    
    
    13,378
    
    
    
    92,760
    
    
    
    563,567
    
    
    
    
    
    
    
    
    
    
    
    563,567Mortgage loans
    
    
    81,534
    
    
    
    
    
    
    
    
    
    
    
    81,534
    
    
    
    
    
    
    
    
    
    
    
    81,534Treasury and investment activities
    
    
    219,631
    
    
    
    123,398
    
    
    
    
    
    
    
    343,029
    
    
    
    6,590
    
    
    
    (3,195
    )
    
    
    346,424Total interest income
    
    
    837,258
    
    
    
    136,776
    
    
    
    92,760
    
    
    
    1,066,794
    
    
    
    6,590
    
    
    
    (3,195
    )
    
    
    1,070,189Interest expense
    
    
    604,000
    
    
    
    121,710
    
    
    
    62,605
    
    
    
    788,315
    
    
    
    6
    
    
    
    (3,195
    )
    
    
    785,126Net interest income
    
    
    233,258
    
    
    
    15,066
    
    
    
    30,155
    
    
    
    278,479
    
    
    
    6,584
    
    
    
    
    
    
    
    285,063Provision 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
    
    
    
    
    
    
    
    
    
    
    
    12,687Service charges on deposit accounts
    
    
    12,397
    
    
    
    
    
    
    
    
    
    
    
    12,397
    
    
    
    
    
    
    
    
    
    
    
    12,397Other fees
and commissions
    
    
    14,274
    
    
    
    165
    
    
    
    
    
    
    
    14,439
    
    
    
    2,225
    
    
    
    (248
    )
    
    
    16,416Trust account fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,107
    
    
    
    (124
    )
    
    
    1,983Insurance commission fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,935
    
    
    
    (21
    )
    
    
    1,914Net gain on derivative instruments
    
    
    1,308
    
    
    
    
    
    
    
    
    
    
    
    1,308
    
    
    
    
    
    
    
    
    
    
    
    1,308Net gain (loss) on sales and valuation of loans
held for sale, securities and other assets
    
    
    1,429
    
    
    
    
    
    
    
    250
    
    
    
    1,679
    
    
    
    (586
    )
    
    
    
    
    
    
    1,093Total noninterest income
    
    
    39,276
    
    
    
    592
    
    
    
    2,642
    
    
    
    42,510
    
    
    
    5,681
    
    
    
    (393
    )
    
    
    47,798Equity 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
    
    
    $
    55,299Total 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 endedDecember 31, 2006Westernbank
    
    
    Westernbank
    
    
    Asset-Based
    
    
    Total major
    
    
    OtherPuerto Rico
    
    
    International
    
    
    Lending Unit
    
    
    segments
    
    
    Segments
    
    
    Eliminations
    
    
    Total(In thousands)Interest income:Consumer loans
    
    $
    79,240
    
    
    $
    
    
    
    $
    
    
    
    $
    79,240
    
    
    $
    
    
    
    $
    
    
    
    $
    79,240Commercial loans
    
    
    374,353
    
    
    
    23,128
    
    
    
    98,977
    
    
    
    496,458
    
    
    
    
    
    
    
    
    
    
    
    496,458Mortgage loans
    
    
    85,397
    
    
    
    
    
    
    
    
    
    
    
    85,397
    
    
    
    
    
    
    
    
    
    
    
    85,397Treasury and investment activities
    
    
    220,226
    
    
    
    105,229
    
    
    
    
    
    
    
    325,455
    
    
    
    6,233
    
    
    
    (2,993
    )
    
    
    328,695Total interest income
    
    
    759,216
    
    
    
    128,357
    
    
    
    98,977
    
    
    
    986,550
    
    
    
    6,233
    
    
    
    (2,993
    )
    
    
    989,790Interest expense
    
    
    521,372
    
    
    
    108,917
    
    
    
    54,123
    
    
    
    684,412
    
    
    
    
    
    
    
    (2,993
    )
    
    
    681,419Net interest income
    
    
    237,844
    
    
    
    19,440
    
    
    
    44,854
    
    
    
    302,138
    
    
    
    6,233
    
    
    
    
    
    
    
    308,371Provision 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
    
    
    
    
    
    
    
    
    
    
    
    12,527Service charges on deposit accounts
    
    
    9,976
    
    
    
    
    
    
    
    
    
    
    
    9,976
    
    
    
    
    
    
    
    
    
    
    
    9,976Other fees and commisions
    
    
    9,943
    
    
    
    177
    
    
    
    
    
    
    
    10,120
    
    
    
    1,386
    
    
    
    (238
    )
    
    
    11,268Trust account fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,049
    
    
    
    (109
    )
    
    
    1,940Insurance commission fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,917
    
    
    
    (21
    )
    
    
    1,896Net gain on derivative instruments
    
    
    632
    
    
    
    
    
    
    
    
    
    
    
    632
    
    
    
    
    
    
    
    
    
    
    
    632Net 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
    )
    
    
    37,098Equity 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
    )
    
    $
    254,589Total assets
    
    $
    14,733,972
    
    
    $
    2,860,166
    
    
    $
    1,022,826
    
    
    $
    18,616,964
    
    
    $
    1,761,824
    
    
    $
    (3,304,644
    )
    
    $
    17,074,144
 197




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##### Table of Contents



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)ASSETSCash
    
    $
    342
    
    
    $
    2,020Money market instruments
    
    
    8,000
    
    
    
    3,700Dividends and other accounts receivable
from bank subsidiary
    
    
    1,962
    
    
    
    3,863Investment securities available for sale
    
    
    2,912
    
    
    
    1,906Investment securities held to maturity
    
    
    49,911
    
    
    
    55,477Investment in bank subsidiary
    
    
    899,443
    
    
    
    976,416Investment in nonbank subsidiary
    
    
    
    
    
    
    2,595Accrued interest receivable
    
    
    191
    
    
    
    261Other assets
    
    
    47
    
    
    
    30TOTAL ASSETS
    
    $
    962,808
    
    
    $
    1,046,268LIABILITIES AND
STOCKHOLDERS EQUITYLiabilities:Repurchase agreements
    
    $
    44,142
    
    
    $
    45,000Dividends payable
    
    
    2,225
    
    
    
    4,149Other liabilities
    
    
    1,074
    
    
    
    883Total liabilities
    
    
    47,441
    
    
    
    50,032Stockholders equity
    
    
    915,367
    
    
    
    996,236TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
    
    $
    962,808
    
    
    $
    1,046,268
 198




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##### Table of Contents



CONDENSED STATEMENTS OF OPERATIONS INFORMATION  (PARENT COMPANY ONLY)
 Year Ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Dividends from subsidiaries:Bank subsidiary
    
    $
    
    
    
    $
    
    
    
    $
    59,043Nonbank subsidiary
    
    
    
    
    
    
    1,000
    
    
    
    800Subtotal
    
    
    
    
    
    
    1,000
    
    
    
    59,843Interest income on investment securities
    
    
    2,478
    
    
    
    3,394
    
    
    
    3,241Total income
    
    
    2,478
    
    
    
    4,394
    
    
    
    63,084Less:Interest expense on repurchase agreements
    
    
    1,312
    
    
    
    7
    
    
    
    Net loss on sale and valuation of securities
    
    
    
    
    
    
    585
    
    
    
    688Operating expenses
    
    
    3,596
    
    
    
    2,150
    
    
    
    2,744Income before provision for income taxes and increase
in undistributed earnings (losses) of subsidiaries
    
    
    (2,430
    )
    
    
    1,652
    
    
    
    59,652Provision for income taxes
    
    
    47
    
    
    
    435
    
    
    
    268Income before increase in undistributed
earnings (losses) of subsidiaries
    
    
    (2,477
    )
    
    
    1,217
    
    
    
    59,384Increase in undistributed earnings (losses) from:Bank subsidiary
    
    
    (3,317
    )
    
    
    (69,628
    )
    
    
    Nonbank subsidiary
    
    
    344
    
    
    
    73
    
    
    
    195Net income (loss)
    
    $
    (5,450
    )
    
    $
    (68,338
    )
    
    $
    59,579
 199




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##### Table of Contents



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
    )
    
    $
    59,579Adjustments 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
    
    
    
    9,103Deferred income tax provision (credit)
    
    
    (151
    )
    
    
    211
    
    
    
    258Effect of stock options granted to employees
    
    
    322
    
    
    
    207
    
    
    
    675Amortization 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
    
    
    
    750Decrease (increase) in dividends and other accounts
receivable from bank subsidiary
    
    
    1,901
    
    
    
    (41
    )
    
    
    71Decrease (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
    
    
    
    69,561Cash 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
    
    
    
    
    
    
    
    
    
    
    1,786Investment 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
    
    
    
    1,072Dividends 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
    
    
    
    1,831Cash at end of year
    
    $
    342
    
    
    $
    2,020
    
    
    $
    1,267
 200




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##### Table of Contents



25. SUBSEQUENT EVENTS:
      
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
  
 ITEM 9A.
    
    CONTROLS AND PROCEDURES
  Evaluation of Disclosure Controls and Procedures
    201




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Managements Annual Report on Internal Control Over Financial Reporting
 Internal Control Integrated
Framework
    Credit Quality Review
  Appraisal Report Review
  Financial Closing and Reporting
  202




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Changes in Internal Control over Financial Reporting
  Actions Relating to Material Weaknesses Remediated as of the Date of this Filing
 Lending Practices
   Plan for Remediation of Material Weaknesses that Existed as of December 31, 2008
  Credit Quality Review
  203




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Appraisal Report Review
   Financial Closing and Reporting
   Report of Independent Registered Public Accounting Firm
 
 Internal Control  Integrated Framework
     
    
    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.
 
    
    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.
 
    
    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.
     
 
 ITEM 9B.
    
    OTHER INFORMATION
  204




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##### Table of Contents



ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Directors of the Company
  Positions Held with theDirector
    
    Age
    
    Company and/or WesternbankFrank 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
    
    
    DirectorHéctor L. Del Río
    
    
    55
    
    
    DirectorPedro R. Domínguez
    
    
    64
    
    
    Director and First Vice President 
Southern Region of WesternbankJuan C. Frontera
    
    
    41
    
    
    Director and Secretary of the BoardEnrique 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
  Frank C. Stipes, Esq.
 205




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##### Table of Contents



Freddy Maldonado
 Cornelius Tamboer
 Héctor L. Del Río
 Pedro R. Domínguez
 Juan C. Frontera
 Enrique González, CPA
 César A. Ruiz
 Alberto Bacó,
  206




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Executive Officers of the Company
  Officer of theAge as of
    
    Company and/orDecember 31,
    
    Westernbank
    
    Positions Held with theName
    
    2008
    
    Since
    
    Company and/or WesternbankFrank 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 WesternbankCarlos 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 WesternbankNorberto Rivera, CPA
    
    
    46
    
    
    
    2004
    
    
    Vice President Corporate Controller and Chief
Accounting Officer of the Company and
WesternbankAlfredo Archilla
    
    
    52
    
    
    
    2001
    
    
    Chief Administration Officer of the Company and
WesternbankAndrés Morgado, CPA
    
    
    50
    
    
    
    2000
    
    
    President, Westernbank Trust DivisionMigdalia 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




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##### Table of Contents



Biographical Information
  José Armando Ramírez 
 Lidio V. Soriano, CPA 
 Carlos Dávila 
 William Vidal, Esq. 
 Norberto Rivera, CPA
 Alfredo Archilla 
 Andrés Morgado, CPA 
 Migdalia Rivera 
 Mayra Hansen 
 208




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Corporate Governance Matters
    209




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##### Table of Contents



Nominating and Corporate Governance Committee
    210




---



##### Table of Contents



Executive Committee
  Compensation Committee
  Audit Committee
   211




---



##### Table of Contents



Asset & Liability Committee
  Senior Lending Credit Committee
  212




---



##### Table of Contents



Special Regulatory Compliance Committee
  Special Litigation Committee
  Stockholders Communication with Directors
  
  SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
   213




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COMPENSATION DISCUSSION AND ANALYSIS
  
    
    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
  Compensation should reward performance
  Compensation should reflect the value of the job in the marketplace
  The Companys employees should think like the Companys stockholders
  Incentive compensation should be a greater part of total compensation for more senior
positions
  214




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Determination of 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




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##### Table of Contents



Components of Executive Compensation for 2008
  Base Salary
        Christmas Bonus
  216




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End-of-Year Payments
  Special Performance Bonuses
       217




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##### Table of Contents



Stock Options
   Nonqualified Deferred Compensation Plan
  All Other Compensation
  Qualified Deferred Profit-Sharing Plan
  Qualified Defined Contribution Plan
  218




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##### Table of Contents



Car Allowances
  Business and Entertainment Expenses
  Life, Accidental Death and Dismemberment Insurance
  Severance Benefits
    (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




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##### Table of Contents



(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.
   Compensation Committee Report
  
 220




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##### Table of Contents



SUMMARY COMPENSATION TABLE
  Option
    
    All OtherAwards (3)
    
    Compensation (4)Name & Principal Position
    
    Year
    
    Salary (1) ($)
    
    Bonus (2) ($)
    
    ($)
    
    ($)
    
    Total ($)CurrentFrank C. Stipes, Esq
    
    
    2008
    
    
    $
    534,934
    
    
    $
    46,042
    
    
    $
    
    
    
    $
    64,018
    
    
    $
    644,994Chairman of the
    
    
    2007
    
    
    
    331,827
    
    
    
    29,167
    
    
    
    
    
    
    
    66,580
    
    
    
    427,574Board, Chief Executive
    
    
    2006
    
    
    
    308,942
    
    
    
    29,167
    
    
    
    
    
    
    
    69,741
    
    
    
    407,850Officer and PresidentCarlos Davila (5)
    
    
    2008
    
    
    
    394,375
    
    
    
    141,667
    
    
    
    13,204
    
    
    
    11,234
    
    
    
    560,480Chief Operating and
Officer and Chief Retail
OfficerWilliam Vidal, Esq.
    
    
    2008
    
    
    
    372,389
    
    
    
    125,000
    
    
    
    25,122
    
    
    
    54,203
    
    
    
    576,714Chief Lending Officer
    
    
    2007
    
    
    
    287,596
    
    
    
    281,250
    
    
    
    25,122
    
    
    
    56,388
    
    
    
    650,3562006
    
    
    
    233,750
    
    
    
    272,917
    
    
    
    25,122
    
    
    
    56,987
    
    
    
    588,776Andrés Morgado, CPA
    
    
    2008
    
    
    
    209,411
    
    
    
    195,833
    
    
    
    16,748
    
    
    
    59,846
    
    
    
    481,838President, Westerbank
Trust DivisionFormerFreddy Maldonado (6)
    
    
    2008
    
    
    
    352,997
    
    
    
    45,417
    
    
    
    
    
    
    
    58,915
    
    
    
    457,329Former Chief Financial Officer
    
    2007
    
    
    284,423
    
    
    
    25,000
    
    
    
    
    
    
    
    68,031
    
    
    
    377,4542006
    
    
    
    255,000
    
    
    
    25,000
    
    
    
    
    
    
    
    70,572
    
    
    
    350,572José Armando Ramírez (7)
    
    
    2008
    
    
    
    427,015
    
    
    
    600
    
    
    
    
    
    
    
    505,530
    
    
    
    933,145Former 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




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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 andFractional$100 of TotalFor Each
    
    CompensationComplete
    
    Paid to theYears of
    
    Year of
    
    Participant in theService
    
    Service
    
    Calendar Year0-5
    
    
    2
    
    
    
    16 or more
    
    
    3
    
    
    
    1Allowance forProfit Sharing
    
    
    
    
    
    Business and
    
    Use ofPlan
    
    1165(e) Plan
    
    Entertainment
    
    CompanyName
    
    Year
    
    Contribution
    
    Contribution
    
    Expenses
    
    Car
    
    Other
    
    TotalCurrentFrank C. Stipes, Esq.
    
    
    2008
    
    
    $
    2,557
    
    
    $
    4,000
    
    
    $
    52,500
    
    
    $
    4,331
    
    
    $
    630
    
    
    $
    64,0182007
    
    
    
    2,256
    
    
    
    4,000
    
    
    
    52,500
    
    
    
    6,568
    
    
    
    1,256
    
    
    
    66,5802006
    
    
    
    2,271
    
    
    
    4,000
    
    
    
    52,500
    
    
    
    9,053
    
    
    
    1,917
    
    
    
    69,741Carlos Davila
    
    
    2008
    
    
    
    1,906
    
    
    
    
    
    
    
    
    
    
    
    8,698
    
    
    
    630
    
    
    
    11,234William Vidal, Esq.
    
    
    2008
    
    
    
    1,775
    
    
    
    4,000
    
    
    
    41,250
    
    
    
    6,548
    
    
    
    630
    
    
    
    54,2032007
    
    
    
    3,669
    
    
    
    4,000
    
    
    
    41,250
    
    
    
    6,213
    
    
    
    1,256
    
    
    
    56,3882006
    
    
    
    2,848
    
    
    
    4,000
    
    
    
    41,250
    
    
    
    7,633
    
    
    
    1,256
    
    
    
    56,987Andrés Morgado, CPA
    
    
    2008
    
    
    
    1,003
    
    
    
    4,000
    
    
    
    48,000
    
    
    
    6,213
    
    
    
    630
    
    
    
    59,846FormerFreddy Maldonado
    
    
    2008
    
    
    
    1,750
    
    
    
    4,000
    
    
    
    45,000
    
    
    
    7,535
    
    
    
    630
    
    
    
    58,9152007
    
    
    
    1,956
    
    
    
    4,000
    
    
    
    45,000
    
    
    
    12,780
    
    
    
    4,295
    
    
    
    68,0312006
    
    
    
    1,939
    
    
    
    4,000
    
    
    
    45,000
    
    
    
    14,910
    
    
    
    4,723
    
    
    
    70,572José Armando Ramírez
    
    
    2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,900
    
    
    
    500,630
    (7)
    
    
    505,5302007
    
    
    
    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




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##### Table of Contents



(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.  GRANTS OF PLAN-BASED AWARDS DURING 2008
  NARRATIVE DISCLOSURE TO THE SUMMARY COMPENSATION TABLE AND
GRANTS OF PLAN BASED AWARDS TABLE
    223




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##### Table of Contents



OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2008
 Option AwardsNumber of Securities
    
    Number ofUnderlying
    
    Securities
    
    Options
    
    OptionUnexercised Options
    
    Underlying
    
    Exercise Price
    
    ExpirationName
    
    (#) Exercisable (1)
    
    Unexercised
    
    ($) (1)
    
    DateCurrentFrank C. Stipes, Esq.
    
    
    88,486
    
    
    
    
    
    
    $
    142.50
    
    
    
    1/28/2010Carlos Dávila
    
    
    800
    
    
    
    3,200
    
    
    
    150.00
    
    
    
    10/1/2017William Vidal, Esq.
    
    
    360
    
    
    
    240
    
    
    
    535.50
    
    
    
    7/15/2015Andres Morgado, CPA
    
    
    702
    
    
    
    
    
    
    
    142.50
    
    
    
    1/28/2010240
    
    
    
    160
    
    
    
    535.50
    
    
    
    7/15/2015FormerFreddy Maldonado (3)
    
    
    20,834
    
    
    
    
    
    
    
    142.50
    
    
    
    1/28/2010José 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
   Number of securities remaining available forNumber of securities to be
    
    Weighted-average exercise
    
    
    future issuance under equity compensationissued upon exercise of
    
    price of outstanding options
    
    
    plans (excluding securities reflected in columnoutstanding 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




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Nonqualified Deferred Compensation
    Retirement Benefits Plans
 Qualified Deferred Profit-Sharing Plan
     225




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##### Table of Contents



For Each Full andFractional$100 of TotalFor Each
    
    CompensationComplete
    
    Paid to the ParticipantYears of Service
    
    Year of Service
    
    in the Calendar Year0-5
    
    
    2
    
    
    
    16 or more
    
    
    3
    
    
    
    1
  Qualified Defined Contribution Plan
  Potential Payments upon Termination or Change in Control
  Change in Control Agreements
   226




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##### Table of Contents



(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
   Change in ControlName
    
    PaymentCurrentFrank C. Stipes, Esq.
    
    $
    Carlos Dávila
    
    
    1,500,000William Vidal, Esq.
    
    
    1,500,000Andres Morgado, CPA
    
    
    1,338,000FormerFreddy Maldonado
    
    
    1,500,000
 227




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##### Table of Contents



Employment Agreement with Mr. Davila
  Separation Agreement with Mr. Ramírez
   Directors Compensation
   Fees Earned or Paid in
    
    All OtherName
    
    Cash ($)
    
    Compensation ($)
    
    Total ($)Cornelius Tamboer
    
    $
    42,000
    
    
    $
    2,400
    (1)
    
    $
    44,400Hector L. Del Río (2)
    
    
    48,000
    
    
    
    2,455
    (1)
    
    
    50,455Juan C. Frontera (3)
    
    
    60,720
    
    
    
    1,200
    
    
    
    61,920Enrique González, CPA (4)
    
    
    36,000
    
    
    
    
    
    
    
    36,000Cesar 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




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##### Table of Contents



Compensation Committee Interlocks and Insider Participation
  229




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##### Table of Contents



STOCK OWNED BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
  Amount and Nature of
    
    Percent ofName 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




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##### Table of Contents



*
    
    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




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##### Table of Contents



Equity compensation plans approved by shareholders:
 Number of securities remaining availableWeighted-average exercise
    
    
    for future issuance under equityNumber of securities to be issued upon
    
    price of outstanding options
    
    
    compensation plans (excluding securitiesexercise 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.  
  Certain Relationships and Related Transactions
    232




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##### Table of Contents



Loan Policy
  Directors Independence
   
   Audit Fees
  Audit-Related Fees
  Tax Fees
  233




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##### Table of Contents



All Other Fees
   Pre-Approval Policy
       1.
    
    The service is not an audit, review or other attest service;
 2.
    
    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;
 3.
    
    Such services were not recognized at the time of the engagement to be non-audit services;
 4.
    
    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
 5.
    
    The service and fee are specifically disclosed in the Proxy Statement as meeting the de
minimis requirements.
 234




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##### Table of Contents



REPORT OF THE AUDIT COMMITTEE
     
 235




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##### Table of Contents



(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.
    
    EXHIBIT3.1
    
    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




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##### Table of Contents



NO.
    
    EXHIBIT4.7
    
    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 Fees10.13*
    
    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




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##### Table of Contents



NO.
    
    EXHIBIT10.19*
    
    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 Registrant23.1
    
    Consent of Deloitte & Touche LLP23.2
    
    Consent of BDO Seidman LLP31.1
    
    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




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##### Table of Contents



By: /s/ FRANK C. STIPES

Frank C. Stipes, Chairman of the Board,
Chief Executive Officer and President
    
    
    
    Date: October 28, 2009
  /s/ FRANK C. STIPES

Frank C. Stipes,
    
    Date: October 28, 2009Chairman of the Board, 
Chief Executive Officer and President/s/ PEDRO R. DOMINGUEZ

Pedro R. Domínguez,
    
    Date: October 28, 2009Director/s/ CORNELIUS TAMBOER

Cornelius Tamboer,
    
    Date: October 28, 2009Director/s/ HÉCTOR L. DEL RÍO

Héctor L. del Río,
    
    Date: October 28, 2009Director/s/ JUAN C. FRONTERA

Juan C. Frontera,
    
    Date: October 28, 2009Director/s/ ENRIQUE GONZALEZ

Enrique Gonzalez,
    
    Date: October 28, 2009Director/s/ ALBERTO BACÓ

Alberto Bacó
    
    Date: October 28, 2009Director/s/ LIDIO SORIANO

Lidio Soriano
    
    Date: October 28, 2009Chief Financial Officer
 239




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##### Table of Contents



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




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##### Table of Contents



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 Fees10.13*
    
    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 Registrant23.1
    
    Consent of Deloitte & Touche LLP23.2
    
    Consent of BDO Seidman LLP31.1
    
    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