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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2005
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
1934
 Commission File No. 000-27377
 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
    
    00681(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 in Which Registered)
   
 þ o
 o þ
 o þ
 o
 
 þ o o
  o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESEXHIBIT INDEXEX-3.1 ARTICLES OF INCORPORATIONEX-10.12 PAYMENT AGREEMENTEX-10.13 DESCRIPTION OF ARRANGEMENT FOR DIRECTORS FEESEX-10.14 EXECUTIVE OFFICERS COMPENSATION SCHEDULEEX-21.1 SUBSIDIARIES OF THE REGISTRANTEX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1 CEO CERTIFICATION PURSUANT TO SECTION 302EX-31.2 CFO CERTIFICATION PURSUANT TO SECTION 302EX-32.1 CEO CERTIFICATION PURSUANT TO SECTION 906EX-32.2 CFO CERTIFICATION PURSUANT TO SECTION 906    Table of Contents    
  
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At December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Commercial real estate  mortgage (1)
    
    $
    4,260,258
    
    
    
    54.5
    %
    
    $
    3,154,679
    
    
    
    53.3
    %
    
    $
    2,261,465
    
    
    
    48.3
    %
    
    $
    1,647,602
    
    
    
    38.9
    %
    
    $
    1,115,700
    
    
    
    39.3
    %Residential real estate  mortgage (2)
    
    
    1,298,535
    
    
    
    16.6
    
    
    
    879,056
    
    
    
    14.9
    
    
    
    894,007
    
    
    
    19.1
    
    
    
    844,803
    
    
    
    22.5
    
    
    
    847,462
    
    
    
    29.9Construction  mortgage
    
    
    505,760
    
    
    
    6.5
    
    
    
    328,145
    
    
    
    5.5
    
    
    
    202,600
    
    
    
    4.3
    
    
    
    181,266
    
    
    
    4.8
    
    
    
    117,957
    
    
    
    4.2Commercial, industrial and agricultural (1)
    
    
    1,013,092
    
    
    
    13.0
    
    
    
    768,604
    
    
    
    13.0
    
    
    
    524,747
    
    
    
    11.2
    
    
    
    384,200
    
    
    
    15.2
    
    
    
    378,696
    
    
    
    13.3Consumer and others (3) (4)
    
    
    830,384
    
    
    
    10.6
    
    
    
    866,934
    
    
    
    14.6
    
    
    
    861,907
    
    
    
    18.4
    
    
    
    743,600
    
    
    
    19.8
    
    
    
    416,953
    
    
    
    14.7Total loans
    
    
    7,908,029
    
    
    
    101.2
    
    
    
    5,997,418
    
    
    
    101.3
    
    
    
    4,744,726
    
    
    
    101.3
    
    
    
    3,801,471
    
    
    
    101.2
    
    
    
    2,876,768
    
    
    
    101.4Allowance for loan losses
    
    
    (92,406
    )
    
    
    (1.2
    )
    
    
    (80,066
    )
    
    
    (1.3
    )
    
    
    (61,608
    )
    
    
    (1.3
    )
    
    
    (47,114
    )
    
    
    (1.2
    )
    
    
    (38,364
    )
    
    
    (1.4
    )Loan  net
    
    $
    7,815,623
    
    
    
    100.0
    %
    
    $
    5,917,352
    
    
    
    100.0
    %
    
    $
    4,683,118
    
    
    
    100.0
    %
    
    $
    3,754,357
    
    
    
    100.00
    %
    
    $
    2,838,404
    
    
    
    100.00
    %
 
 (1)
    
    Includes $1.3 billion, $831.1 million, $641.1 million, $427.7 million and $255.8 million of Westernbank Business Credit division outstanding
loans at December 31, 2005, 2004, 2003, 2002 and 2001, respectively. Westernbank Business Credit began operations in 2001.(2)
    
    Includes fixed and floating interest rate loans to two mortgage originators in Puerto Rico mainly secured by mortgages on one-to-four family residential properties
as follows: $1.14 billion, $745.0 million, $750.6 million, $701.6 million, and $685.3 million at December 31, 2005, 2004, 2003, 2002 and 2001, respectively.(3)
    
    Includes $135.0 million, $144.0 million, $155.6 million and $117.4 million of Expresso of Westernbank division outstanding loans at
December 31, 2005, 2004, 2003 and 2002, respectively. Expresso of Westernbank began operations on July 10, 2002.(4)
    
    Includes $585.9 million, $585.2 million, $521.6 million, $447.9 million and $167.9 million collateralized by real estate at December 31, 2005,
2004, 2003, 2002, 2001, respectively.    3




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MaturitiesAfter one year to five years
    
    
    After five years(In thousands)Balance outstanding at
    
    
    One year or
    
    
    Fixed
    
    
    Variable
    
    
    Fixed
    
    
    VariableDecember 31, 2005
    
    
    less
    
    
    interest
    
    
    interest
    
    
    interest
    
    
    interestCommercial real estate  mortgage
    
    $
    4,260,258
    
    
    $
    1,014,204
    
    
    $
    526,953
    
    
    $
    870,825
    
    
    $
    75,903
    
    
    $
    1,772,373Residential real estate  mortgage
    
    
    1,298,535
    
    
    
    4,640
    
    
    
    17,125
    
    
    
    31
    
    
    
    199,828
    
    
    
    1,076,911
    (1)Construction  mortgage
    
    
    505,760
    
    
    
    273,367
    
    
    
    
    
    
    
    232,393
    
    
    
    
    
    
    
    Commercial, industrial and agricultural
    
    
    1,013,092
    
    
    
    312,002
    
    
    
    39,575
    
    
    
    551,083
    
    
    
    5,771
    
    
    
    104,661Consumer and others
    
    
    830,384
    
    
    
    124,489
    
    
    
    178,696
    
    
    
    11,095
    
    
    
    82,877
    
    
    
    433,227Total
    
    $
    7,908,029
    
    
    $
    1,728,702
    
    
    $
    762,349
    
    
    $
    1,665,427
    
    
    $
    364,379
    
    
    $
    3,387,172
 
 (1)
    
    Includes $1.08 billion of floating interest rate (three month LIBOR plus a
spread) loans to two mortgage originators in Puerto Rico mainly secured by
mortgage loans for one-to-four family residential properties.     4




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TM TM
      5




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December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Commercial real estate  mortgage and
commercial, industrial and agricultural loans
    
    $
    55,585
    
    
    $
    25,417
    
    
    $
    24,142
    
    
    $
    13,567
    
    
    $
    7,947Residential real estate mortgage and construction loans
    
    
    2,125
    
    
    
    1,730
    
    
    
    2,259
    
    
    
    2,026
    
    
    
    2,735Consumer loans
    
    
    6,288
    
    
    
    7,122
    
    
    
    4,845
    
    
    
    3,812
    
    
    
    3,431Total non-performing loans
    
    
    63,998
    
    
    
    34,269
    
    
    
    31,246
    
    
    
    19,405
    
    
    
    14,113Foreclosed real estate held for sale
    
    
    4,137
    
    
    
    3,811
    
    
    
    4,082
    
    
    
    3,679
    
    
    
    3,013Total non-performing loans and foreclosed
real estate held for sale
    
    $
    68,135
    
    
    $
    38,080
    
    
    $
    35,328
    
    
    $
    23,084
    
    
    $
    17,126Interest that would have been recorded if the
loans had not been classified as
non-performing
    
    $
    4,916
    
    
    $
    3,557
    
    
    $
    2,500
    
    
    $
    1,102
    
    
    $
    1,123Interest recorded on non-performing loans
    
    $
    743
    
    
    $
    243
    
    
    $
    583
    
    
    $
    775
    
    
    $
    1,716Total non-performing loans as a percentage
of total loans at end of period
    
    
    0.81
    %
    
    
    0.58
    %
    
    
    0.66
    %
    
    
    0.51
    %
    
    
    0.49
    %Total non-performing loans and foreclosed real estate
held for sale as a percentage of total assets at end of period
    
    
    0.42
    %
    
    
    0.27
    %
    
    
    0.31
    %
    
    
    0.28
    %
    
    
    0.29
    %
 6




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The Formula Allowance
 
 
 Specific Allowances for Identified Problem Loans and Portfolio Segments
 Accounting by Creditors for Impairment of a Loan
 The Unallocated Allowance
 7




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YEAR ENDED DECEMBER 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Balance, beginning of year
    
    $
    80,066
    
    
    $
    61,608
    
    
    $
    47,114
    
    
    $
    38,364
    
    
    $
    28,928Loans charged-off:Commercial real estate  mortgage and commercial
industrial and agricultural loans (1)
    
    
    (8,233
    )
    
    
    (5,433
    )
    
    
    (2,479
    )
    
    
    (3,389
    )
    
    
    (2,970
    )Residential real estate-mortgage and
construction loans
    
    
    (121
    )
    
    
    (297
    )
    
    
    (184
    )
    
    
    
    
    
    
    (228
    )Consumer loans (2)
    
    
    (13,809
    )
    
    
    (16,473
    )
    
    
    (12,203
    )
    
    
    (4,576
    )
    
    
    (3,840
    )Total loans charged-off
    
    
    (22,163
    )
    
    
    (22,203
    )
    
    
    (14,866
    )
    
    
    (7,965
    )
    
    
    (7,038
    )Recoveries of loans previously
charged-off:Commercial real estate  mortgage and commercial
industrial and agricultural loans
    
    
    1,008
    
    
    
    1,844
    
    
    
    1,141
    
    
    
    584
    
    
    
    133Residential real estate-mortgage and
construction loans
    
    
    212
    
    
    
    206
    
    
    
    372
    
    
    
    190
    
    
    
    175Consumer loans (3)
    
    
    2,283
    
    
    
    1,920
    
    
    
    799
    
    
    
    858
    
    
    
    996Total recoveries of loans previously charged-off
    
    
    3,503
    
    
    
    3,970
    
    
    
    2,312
    
    
    
    1,632
    
    
    
    1,304Net loans charged-off
    
    
    (18,660
    )
    
    
    (18,233
    )
    
    
    (12,554
    )
    
    
    (6,333
    )
    
    
    (5,734
    )Provision for loan losses
    
    
    31,000
    
    
    
    36,691
    
    
    
    27,048
    
    
    
    15,083
    
    
    
    12,278Allowance acquired on loans purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,892Balance, end of period
    
    $
    92,406
    
    
    $
    80,066
    
    
    $
    61,608
    
    
    $
    47,114
    
    
    $
    38,364Ratios:Allowance for loan losses to total loans at end of period
    
    
    1.17
    %
    
    
    1.34
    %
    
    
    1.30
    %
    
    
    1.24
    %
    
    
    1.33
    %Provision for loan losses to net loans
charged-off
    
    
    166.13
    %
    
    
    201.23
    %
    
    
    215.45
    %
    
    
    238.17
    %
    
    
    214.13
    %Recoveries of loans to loans charged-off in
previous period
    
    
    15.78
    %
    
    
    26.71
    %
    
    
    29.03
    %
    
    
    23.19
    %
    
    
    24.31
    %Net loans charged-off to average total loans (4)
    
    
    0.27
    %
    
    
    0.34
    %
    
    
    0.29
    %
    
    
    0.19
    %
    
    
    0.23
    %Allowance for loans losses to
non-performing loans
    
    
    144.39
    %
    
    
    233.64
    %
    
    
    197.17
    %
    
    
    242.80
    %
    
    
    271.83
    %
 
 (1)
    
    Includes a $5.3 million partial charged-off in 2005 and a $505,000 charged-off in 2002 of
Westernbank Business Credit division, consisting of two loans originally acquired in the
purchased loan portfolio from Congress Credit, a subsidiary of First Union National Bank
N.A., on June 15, 2001.(2)
    
    Includes $9.8 million, $12.4 million, $7.9 million and $62,000 of Expresso of Westernbank
charge-offs, for the years ended December 31, 2005, 2004, 2003 and 2002, respectively.
Expresso of Westernbank began operations on July 10, 2002.(3)
    
    Includes $1.1 million, $1.0 million and $17,000 of Expresso of Westernbank recoveries, for the
years ended December 31, 2005, 2004 and 2003, respectively.(4)
    
    Average loans were computed using beginning and period-end balances.   9




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AT DECEMBER 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Allowance for credit losses:Commercial real estate  mortgage and
commercial, industrial and agricultural loans (1)
    
    $
    72,723
    
    
    $
    58,208
    
    
    $
    41,400
    
    
    $
    31,671
    
    
    $
    24,397Residential real estate mortgage
and construction loans
    
    
    3,275
    
    
    
    407
    
    
    
    415
    
    
    
    443
    
    
    
    494Consumer loans (2)
    
    
    14,430
    
    
    
    19,425
    
    
    
    17,472
    
    
    
    12,004
    
    
    
    8,203Unallocated
    
    
    1,978
    
    
    
    2,026
    
    
    
    2,321
    
    
    
    2,996
    
    
    
    5,270Total allowance for loan losses
    
    $
    92,406
    
    
    $
    80,066
    
    
    $
    61,608
    
    
    $
    47,114
    
    
    $
    38,364Loan portfolio composition percentages:Commercial real estate  mortgage and
commercial, industrial and agricultural loans
    
    
    66.68
    %
    
    
    65.42
    %
    
    
    58.72
    %
    
    
    53.45
    %
    
    
    51.95
    %Residential real estate mortgage
and construction loans
    
    
    22.82
    %
    
    
    20.13
    %
    
    
    23.11
    %
    
    
    26.99
    %
    
    
    33.56
    %Consumer loans
    
    
    10.50
    %
    
    
    14.45
    %
    
    
    18.17
    %
    
    
    19.56
    %
    
    
    14.49
    %Total loans
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %Allowance coverage ratio at
end of year:Applicable to:Commercial real estate  mortgage and
commercial, industrial and agricultural loans
    
    
    1.38
    %
    
    
    1.48
    %
    
    
    1.49
    %
    
    
    1.56
    %
    
    
    1.63
    %Residential real estate mortgage
and construction loans
    
    
    0.18
    %
    
    
    0.03
    %
    
    
    0.04
    %
    
    
    0.04
    %
    
    
    0.05
    %Consumer loans
    
    
    1.74
    %
    
    
    2.24
    %
    
    
    2.03
    %
    
    
    1.61
    %
    
    
    1.97
    %Unallocated (as a percentage
of total loans)
    
    
    0.03
    %
    
    
    0.03
    %
    
    
    0.05
    %
    
    
    0.08
    %
    
    
    0.18
    %Total loans
    
    
    1.17
    %
    
    
    1.34
    %
    
    
    1.30
    %
    
    
    1.24
    %
    
    
    1.33
    %
 
 (1)
    
    Includes an allowance of $30.0 million, $12.9 million, $6.6 million, $4.5 million and $3.1 million for Westernbank Business Credit loans
at December 31, 2005, 2004, 2003, 2002 and 2001, respectively. Westernbank Business Credit began operations in 2001.(2)
    
    Includes an allowance of $8.4 million, $13.8 million, $10.0 million and $1.5 million for Expresso of Westernbank loans portfolio at
December 31, 2005, 2004, 2003 and 2002, respectively. Expresso of Westernbank began operations on July 10, 2002.  11




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2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands)Investment in impaired loans:Covered by a valuation allowance
    
    $
    32,542
    
    
    $
    29,975
    
    
    $
    28,217
    
    
    $
    26,074
    
    
    $
    21,996Do not require a valuation allowance
    
    
    49,069
    
    
    
    24,200
    
    
    
    22,088
    
    
    
    24,515
    
    
    
    20,482Total
    
    $
    81,611
    
    
    $
    54,175
    
    
    $
    50,305
    
    
    $
    50,589
    
    
    $
    42,478Valuation allowance for impaired loans
    
    $
    14,185
    
    
    $
    8,412
    
    
    $
    4,646
    
    
    $
    4,752
    
    
    $
    4,181Average investment in impaired loans
    
    $
    61,113
    
    
    $
    46,509
    
    
    $
    46,676
    
    
    $
    46,147
    
    
    $
    20,293Interest collected and recognized as
income on impaired loans
    
    $
    4,044
    
    
    $
    2,460
    
    
    $
    2,452
    
    
    $
    4,041
    
    
    $
    1,716
     12




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2005
    
    
    2004
    
    
    2003(In thousands)Held to maturity :US Government and agencies obligations
    
    $
    6,314,316
    
    
    $
    6,004,849
    
    
    $
    4,463,493Puerto Rico Government and agencies obligations
    
    
    31,824
    
    
    
    34,822
    
    
    
    34,500Commercial paper
    
    
    
    
    
    
    
    
    
    
    174,976Corporate notes
    
    
    26,429
    
    
    
    51,418
    
    
    
    51,409Mortgage-backed securities
    
    
    701,456
    
    
    
    830,290
    
    
    
    999,332Total
    
    
    7,074,025
    
    
    
    6,921,379
    
    
    
    5,723,710Available for sale:Collateralized mortgage obligations (CMOs)
    
    
    185
    
    
    
    7,881
    
    
    
    49,910Equity securities  common stock
    
    
    4,981
    
    
    
    
    
    
    
    5,170Total
    
    
    5,166
    
    
    
    7,881
    
    
    
    55,080Total investments
    
    $
    7,079,191
    
    
    $
    6,929,260
    
    
    $
    5,778,790
 13




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2005
    
    
    2004
    
    
    2003(In thousands)Available for sale:CMOs issued or guaranteed by the Federal National
Mortgage Association (FNMA)
    
    $
    185
    
    
    $
    6,116
    
    
    $
    29,948CMOs issued or guaranteed by the Federal Home
Loan Mortgage Corporation (FHLMC)
    
    
    
    
    
    
    1,765
    
    
    
    19,962Total available for sale
    
    
    185
    
    
    
    7,881
    
    
    
    49,910Held to maturity:Government National Mortgage Association (GNMA) certificates
    
    
    8,082
    
    
    
    9,881
    
    
    
    9,753FHLMC certificates
    
    
    4,180
    
    
    
    5,663
    
    
    
    7,297FNMA certificates
    
    
    2,828
    
    
    
    3,642
    
    
    
    4,542CMOs certificates issued or guaranteed by FHLMC
    
    
    607,659
    
    
    
    706,632
    
    
    
    885,408CMOs certificates issued or guaranteed by FNMA
    
    
    78,707
    
    
    
    104,441
    
    
    
    84,322CMOs other
    
    
    
    
    
    
    31
    
    
    
    168Asset-backed securities
    
    
    
    
    
    
    
    
    
    
    7,842Total held to maturity
    
    
    701,456
    
    
    
    830,290
    
    
    
    999,332Total mortgage and asset-backed securities
    
    $
    701,641
    
    
    $
    838,171
    
    
    $
    1,049,242
  14




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Carrying
    
    
    Weightedamount
    
    
    average yield(Dollars in thousands)US Government and agencies obligations:Due within one year
    
    $
    279,827
    
    
    
    3.41
    %Due after one year through five years
    
    
    5,823,489
    
    
    
    3.97Due after five years through ten years
    
    
    211,000
    
    
    
    4.146,314,316
    
    
    
    3.95Puerto Rico Government and agencies obligations:Due within one year
    
    
    3,000
    
    
    
    5.00Due after one year through five years
    
    
    17,903
    
    
    
    4.51Due after five years through ten years
    
    
    10,921
    
    
    
    4.6331,824
    
    
    
    4.60Other:Due within one year
    
    
    5,000
    
    
    
    6.13Due after ten years
    
    
    21,429
    
    
    
    8.3326,429
    
    
    
    7.91Total
    
    
    6,372,569
    
    
    
    3.97Mortgage-backed securities
    
    
    701,641
    
    
    
    4.25Equity securities
    
    
    4,981
    
    
    
    2.26Total
    
    $
    7,079,191
    
    
    
    3.99
    %
     15




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(In thousands)3 months or less
    
    $
    155,300over 3 months through 6 months
    
    
    79,265over 6 months through 12 months
    
    
    70,845over 12 months
    
    
    98,594Total
    
    $
    404,004
  2005
    
    
    2004
    
    
    2003Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Averageamount
    
    
    rate
    
    
    amount
    
    
    rate
    
    
    amount
    
    
    rate(Dollars in thousands)Time deposits
    
    $
    6,004,119
    
    
    
    3.64
    %
    
    $
    4,630,244
    
    
    
    3.12
    %
    
    $
    3,784,026
    
    
    
    3.18
    %Savings deposits
    
    
    802,994
    
    
    
    2.09
    %
    
    
    784,589
    
    
    
    2.14
    %
    
    
    605,854
    
    
    
    2.15
    %Interest bearing demand
deposits
    
    
    200,804
    
    
    
    2.88
    %
    
    
    200,190
    
    
    
    2.63
    %
    
    
    160,015
    
    
    
    2.55
    %Noninterest bearing demand
deposits
    
    
    368,688
    
    
    
    
    
    
    
    306,710
    
    
    
    
    
    
    
    227,358
    
    
    
    $
    7,376,605
    
    
    
    3.27
    %
    
    $
    5,921,733
    
    
    
    2.81
    %
    
    $
    4,777,253
    
    
    
    2.87
    %
 17




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BORROWINGS
  December
31,2005
    
    
    2004
    
    
    2003(In thousands)Federal funds purchased and repurchase agreements (1)
    
    $
    6,260,029
    
    
    $
    6,683,527
    
    
    $
    5,046,045Advances from Federal Home Loan Bank (FHLB)
    
    
    172,000
    
    
    
    211,000
    
    
    
    146,000Mortgage note payable
    
    
    36,432
    
    
    
    36,858
    
    
    
    37,234$
    6,468,461
    
    
    $
    6,931,385
    
    
    $
    5,229,279
 
 (1)
    
    Federal funds purchased amounted to $75.0 million at December 31, 2004, at a
weighted average interest rate of 2.37%, and mature the next business day.
No such borrowings were outstanding at December 31, 2005 and 2003.     18




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##### Table of Contents



2005
    
    2004
    
    2003(Dollars in thousands)Federal funds purchased:Balance at end of year
    
    $
    
    
    
    $
    75,029
    
    
    $
    Weighted-average interest rate at year end
    
    
    
    
    
    
    2.37
    %
    
    
    Monthly average outstanding balance
    
    $
    8,851
    
    
    $
    23,753
    
    
    $
    8,500Weighted-average interest rate for the year
    
    
    2.43
    %
    
    
    1.95
    %
    
    
    1.34
    %Maximum month-end balance
    
    $
    40,039
    
    
    $
    95,005
    
    
    $
    75,000Repurchase agreements:Balance at end of year
    
    $
    1,545,725
    
    
    $
    4,138,257
    
    
    $
    1,648,891Weighted-average interest rate at year end
    
    
    4.34
    %
    
    
    2.30
    %
    
    
    1.21
    %Monthly average outstanding balance
    
    $
    2,377,629
    
    
    $
    2,377,042
    
    
    $
    1,093,921Weighted-average interest rate for the year
    
    
    3.03
    %
    
    
    1.67
    %
    
    
    1.24
    %Maximum month-end balance
    
    $
    3,514,422
    
    
    $
    4,206,540
    
    
    $
    1,717,184Advances from FHLB:Balance at end of year
    
    $
    50,000
    
    
    $
    25,000
    
    
    $
    40,000Weighted-average interest rate at year end
    
    
    4.45
    %
    
    
    2.41
    %
    
    
    1.20
    %Monthly average outstanding balance
    
    $
    21,923
    
    
    $
    21,250
    
    
    $
    31,917Weighted-average interest rate for the year
    
    
    3.49
    %
    
    
    1.65
    %
    
    
    1.33
    %Maximum month-end balance
    
    $
    50,000
    
    
    $
    50,000
    
    
    $
    64,000Total short-term borrowings:Balance at end of year
    
    $
    1,595,725
    
    
    $
    4,238,286
    
    
    $
    1,688,891Weighted-average interest rate at year end
    
    
    4.34
    %
    
    
    2.30
    %
    
    
    1.21
    %Monthly average outstanding balance
    
    $
    2,408,403
    
    
    $
    2,422,045
    
    
    $
    1,134,338Weighted-average interest rate for the year
    
    
    3.03
    %
    
    
    1.67
    %
    
    
    1.24
    %Maximum month-end balance
    
    $
    3,579,461
    
    
    $
    4,238,286
    
    
    $
    1,832,184
   Accounting for Derivative
Instruments and Hedging Activities
 19




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20




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Off-balance sheet credit related financial instruments
   21




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##### Table of Contents



YEAR ENDED DECEMBER 31,2005
    
    
    2004
    
    
    2003Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AverageInterest
    
    
    balance (1)
    
    
    Yield / Rate
    
    
    Interest
    
    
    balance (1)
    
    
    Yield / Rate
    
    
    Interest
    
    
    balance (1)
    
    
    Yield / Rate(Dollars in Thousands)Normal Spread:Interest-earning assets:Loans, including loan
fees (2)
    
    $
    479,042
    
    
    $
    6,986,626
    
    
    
    6.86
    %
    
    $
    322,164
    
    
    $
    5,401,955
    
    
    
    5.96
    %
    
    $
    275,848
    
    
    $
    4,278,468
    
    
    
    6.45
    %Investment securities (3)
    
    
    247,533
    
    
    
    6,267,159
    
    
    
    3.95
    
    
    
    212,213
    
    
    
    5,400,997
    
    
    
    3.93
    
    
    
    134,273
    
    
    
    3,571,299
    
    
    
    3.76Mortgage and asset-
backed securities (4)
    
    
    32,321
    
    
    
    752,839
    
    
    
    4.29
    
    
    
    37,489
    
    
    
    935,421
    
    
    
    4.01
    
    
    
    40,140
    
    
    
    998,257
    
    
    
    4.02Money market instruments
    
    
    36,433
    
    
    
    950,980
    
    
    
    3.83
    
    
    
    19,510
    
    
    
    745,828
    
    
    
    2.62
    
    
    
    11,633
    
    
    
    534,444
    
    
    
    2.18Total
    
    
    795,329
    
    
    
    14,957,604
    
    
    
    5.32
    
    
    
    591,376
    
    
    
    12,484,201
    
    
    
    4.74
    
    
    
    461,894
    
    
    
    9,382,468
    
    
    
    4.92Interest-bearing liabilities:Deposits
    
    
    241,268
    
    
    
    7,376,605
    
    
    
    3.27
    
    
    
    166,237
    
    
    
    5,921,733
    
    
    
    2.81
    
    
    
    137,271
    
    
    
    4,777,253
    
    
    
    2.87Federal funds purchased and
repurchase agreements
    
    
    234,791
    
    
    
    6,398,451
    
    
    
    3.67
    
    
    
    141,414
    
    
    
    5,676,595
    
    
    
    2.49
    
    
    
    101,652
    
    
    
    3,891,972
    
    
    
    2.61Advances from FHLB
    
    
    7,688
    
    
    
    184,153
    
    
    
    4.17
    
    
    
    6,568
    
    
    
    164,245
    
    
    
    4.00
    
    
    
    6,037
    
    
    
    137,838
    
    
    
    4.38Other borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142
    
    
    
    3,698
    
    
    
    3.84Total
    
    
    483,747
    
    
    
    13,959,209
    
    
    
    3.47
    
    
    
    314,219
    
    
    
    11,762,573
    
    
    
    2.67
    
    
    
    245,102
    
    
    
    8,810,761
    
    
    
    2.78Net interest income
    
    $
    311,582
    
    
    
    
    
    
    
    
    
    
    $
    277,157
    
    
    
    
    
    
    
    
    
    
    $
    216,792Interest rate spread
    
    
    
    
    
    
    
    
    
    
    1.85
    %
    
    
    
    
    
    
    
    
    
    
    2.07
    %
    
    
    
    
    
    
    
    
    
    
    2.14
    %Net interest-earning assets
    
    
    
    
    
    $
    998,395
    
    
    
    
    
    
    
    
    
    
    $
    721,628
    
    
    
    
    
    
    
    
    
    
    $
    571,707Net yield on interest-earning
assets (5)
    
    
    
    
    
    
    
    
    
    
    2.08
    %
    
    
    
    
    
    
    
    
    
    
    2.22
    %
    
    
    
    
    
    
    
    
    
    
    2.31
    %Ratio of interest-earning assets
to interest-bearing liabilities
    
    
    
    
    
    
    107.15
    %
    
    
    
    
    
    
    
    
    
    
    106.13
    %
    
    
    
    
    
    
    
    
    
    
    106.49
    %Tax Equivalent Spread:Interest-earning assets
    
    $
    795,329
    
    
    $
    14,957,604
    
    
    
    5.32
    %
    
    $
    591,376
    
    
    $
    12,484,201
    
    
    
    4.74
    %
    
    $
    461,894
    
    
    $
    9,382,468
    
    
    
    4.92
    %Tax equivalent adjustment
    
    
    41,305
    
    
    
    
    
    
    
    0.27
    
    
    
    53,555
    
    
    
    
    
    
    
    0.43
    
    
    
    31,522
    
    
    
    
    
    
    
    0.34Interest-earning assets -
tax equivalent
    
    
    836,634
    
    
    
    14,957,604
    
    
    
    5.59
    
    
    
    644,931
    
    
    
    12,484,201
    
    
    
    5.17
    
    
    
    493,416
    
    
    
    9,382,468
    
    
    
    5.26Interest-bearing liabilities
    
    
    483,747
    
    
    $
    13,959,209
    
    
    
    3.47
    
    
    
    314,219
    
    
    $
    11,762,573
    
    
    
    2.67
    
    
    
    245,102
    
    
    $
    8,810,761
    
    
    
    2.78Net interest income
    
    $
    352,887
    
    
    
    
    
    
    
    
    
    
    $
    330,712
    
    
    
    
    
    
    
    
    
    
    $
    248,314Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.12
    %
    
    
    
    
    
    
    
    
    
    
    2.50
    %
    
    
    
    
    
    
    
    
    
    
    2.48
    %Net yield on interest-
earning assets (5)
    
    
    
    
    
    
    
    
    
    
    2.36
    %
    
    
    
    
    
    
    
    
    
    
    2.65
    %
    
    
    
    
    
    
    
    
    
    
    2.65
    %
 
 (1)
    
    Average balance on interest-earning assets and interest-bearing liabilities is
computed using daily monthly average balances during the periods.(2)
    
    Average loans exclude non-performing loans. Loans fees, net amounted to $17.9 million;
$10.6 million and $8.7 million for the years ended December 31, 2005, 2004 and 2003, 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. 22




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Year ended December 31,2005 vs. 2004
    
    
    2004 vs. 2003Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(In thousands)Interest income:Loans
    
    $
    103,874
    
    
    $
    53,004
    
    
    $
    156,878
    
    
    $
    64,831
    
    
    $
    (18,515
    )
    
    $
    46,316Investment securities (1)
    
    
    34,205
    
    
    
    1,115
    
    
    
    35,320
    
    
    
    71,641
    
    
    
    6,299
    
    
    
    77,940Mortgage and asset-backed
securities (2)
    
    
    (8,138
    )
    
    
    2,970
    
    
    
    (5,168
    )
    
    
    (2,519
    )
    
    
    (132
    )
    
    
    (2,651
    )Money market instruments
    
    
    6,294
    
    
    
    10,629
    
    
    
    16,923
    
    
    
    5,216
    
    
    
    2,661
    
    
    
    7,877Total increase (decrease)
in interest income
    
    
    136,235
    
    
    
    67,718
    
    
    
    203,953
    
    
    
    139,169
    
    
    
    (9,687
    )
    
    
    129,482Interest expense:Deposits
    
    
    44,875
    
    
    
    30,156
    
    
    
    75,031
    
    
    
    32,048
    
    
    
    (3,082
    )
    
    
    28,966Federal funds purchased and
repurchase agreements
    
    
    19,785
    
    
    
    73,592
    
    
    
    93,377
    
    
    
    44,217
    
    
    
    (4,455
    )
    
    
    39,762Advances from FHLB
    
    
    822
    
    
    
    298
    
    
    
    1,120
    
    
    
    972
    
    
    
    (441
    )
    
    
    531Other borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142
    )
    
    
    
    
    
    
    (142
    )Total increase (decrease) in
interest expense
    
    
    65,482
    
    
    
    104,046
    
    
    
    169,528
    
    
    
    77,095
    
    
    
    (7,978
    )
    
    
    69,117Increase (decrease) in
net interest income
    
    $
    70,753
    
    
    $
    (36,328
    )
    
    $
    34,425
    
    
    $
    62,074
    
    
    $
    (1,709
    )
    
    $
    60,365
 
 (1)
    
    Includes available for sale securities.(2)
    
    Includes trading and available for sale securities.  YEAR ENDED DECEMBER 31, (1)2005
    
    2004
    
    2003Return on assets (2)
    
    
    1.07
    %
    
    
    1.33
    %
    
    
    1.12
    %Return on common stockholders equity (3)
    
    
    20.53
    
    
    
    28.79
    
    
    
    22.37Dividend payout ratio to common stockholders (4)
    
    
    24.25
    
    
    
    16.24
    
    
    
    20.50Equity-to-asset ratio (5)
    
    
    7.45
    
    
    
    7.36
    
    
    
    7.13
 
 (1)
    
    Averages computed using beginning and period-end balances.(2)
    
    Net income divided by average total assets.(3)
    
    Income available to common stockholders divided by average common stockholders equity.(4)
    
    Common stockholders dividend declared divided by income
available to common stockholders.(5)
    
    Average equity divided by average total assets. 23




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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
  Redemption Price per ShareDecember 31,
    
    Series A
    
    Series B
    
    Series C
    
    Series D
    
    Series E
    
    Series F
    
    Series G
    
    Series H2006
    
    $
    25.00
    
    
    $
    25.00
    
    
    $
    25.50
    
    
    $
    25.50
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2007
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.25
    
    
    
    25.25
    
    
    
    25.50
    
    
    
    
    
    
    
    
    
    
    
    2008
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.25
    
    
    
    25.50
    
    
    
    25.50
    
    
    
    2009
    
    
    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
     32




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceBeginning of year
    
    
    7,111,398
    
    
    $
    3.02
    
    
    
    7,439,966
    
    
    $
    3.02
    
    
    
    8,610,416
    
    
    $
    2.99Options granted
    
    
    790,000
    
    
    
    10.65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    (56,113
    )
    
    
    2.85
    
    
    
    (328,568
    )
    
    
    2.95
    
    
    
    (1,170,450
    )
    
    
    2.85Options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    End of year
    
    
    7,845,285
    
    
    $
    3.79
    
    
    
    7,111,398
    
    
    $
    3.02
    
    
    
    7,439,966
    
    
    $
    3.02
        33




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##### Table of Contents



34




---



##### Table of Contents



We have experienced significant growth in recent years
  Westernbank is subject to default risk in its loan portfolio
  Westernbank is exposed to commercial and consumer credit risks
  Our performance is subject to interest rate risk
  Increases in interest rates may reduce the value of the Company and Westernbanks loans and
securities holdings
  Competition with other financial institutions could adversely affect our profitability
  35




---



##### Table of Contents



Changes in statutes and regulations, including tax laws and rules, could adversely affect us
  We are subject to the general risks associated with the Puerto Rico economy
  Applicable laws restrict our ability to pay dividends
  Provisions of our charter and applicable law may prevent a change of control
  A prolonged economic downturn or recession would likely result in a reduction of Westernbanks loan
origination activity which would adversely affect our financial results
  The loss of a key employee may adversely affect our prospects
  36




---



##### Table of Contents




    
    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, 2005, was $51.4 million.
  
    
   37




---



##### Table of Contents



Quarter Ended
    
    High (1)
    
    Low (1)December 2005
    
    $
    9.47
    
    
    $
    7.33September 2005
    
    
    11.50
    
    
    
    9.32June 2005
    
    
    10.23
    
    
    
    8.09March 2005
    
    
    15.29
    
    
    
    9.88December 2004 (2)
    
    $
    15.41
    
    
    $
    11.74September 2004 (2)
    
    
    12.46
    
    
    
    10.60June 2004 (2)
    
    
    12.33
    
    
    
    10.29March 2004 (2)
    
    
    13.75
    
    
    
    11.95
 
 (1)
    
    Prices in table are rounded.(2)
    
    Adjusted to reflect a three-for-two stock split and 2% stock
dividend declared in December  2004 and distributed on January 10, 2005.      38




---



##### Table of Contents



RECORD DATE
    
    
    
    PAYABLE DATE
    
    
    
    
    
    
    AMOUNT PER SHARE(1)YEAR 2005January 31, 2005
    
    
    
    February 15, 2005
    
    
    
    
    
    $
    0.01198February 28, 2005
    
    
    
    March 15, 2005
    
    
    
    
    
    
    0.01583March 31, 2005
    
    
    
    April 15, 2005
    
    
    
    
    
    
    0.01583April 28, 2005
    
    
    
    May 16, 2005
    
    
    
    
    
    
    0.01583May 31, 2005
    
    
    
    June 15, 2005
    
    
    
    
    
    
    0.01583June 30, 2005
    
    
    
    July 15, 2005
    
    
    
    
    
    
    0.01583July 31, 2005
    
    
    
    August 15, 2005
    
    
    
    
    
    
    0.01583August 31, 2005
    
    
    
    September 15, 2005
    
    
    
    
    
    
    0.01583September 30, 2005
    
    
    
    October 17, 2005
    
    
    
    
    
    
    0.01583October 31, 2005
    
    
    
    November 15, 2005
    
    
    
    
    
    
    0.01583November 30, 2005
    
    
    
    December 15, 2005
    
    
    
    
    
    
    0.01583December 30, 2005
    
    
    
    January 16, 2006
    
    
    
    
    
    
    0.01583Total
    
    
    
    
    
    
    
    
    
    
    
    $
    0.18611YEAR 2004 (2)January 31, 2004
    
    
    
    February 17, 2004
    
    
    
    
    
    $
    0.01198February 29, 2004
    
    
    
    March 15, 2004
    
    
    
    
    
    
    0.01198March 31, 2004
    
    
    
    April 15, 2004
    
    
    
    
    
    
    0.01198April 30, 2004
    
    
    
    May 17, 2004
    
    
    
    
    
    
    0.01198May 31, 2004
    
    
    
    June 13, 2004
    
    
    
    
    
    
    0.01198June 30, 2004
    
    
    
    July 15, 2004
    
    
    
    
    
    
    0.01198July 31, 2004
    
    
    
    August 16, 2004
    
    
    
    
    
    
    0.01198August 31, 2004
    
    
    
    September 15, 2004
    
    
    
    
    
    
    0.01198September 30, 2004
    
    
    
    October 15, 2004
    
    
    
    
    
    
    0.01198October 29, 2004
    
    
    
    November 15, 2004
    
    
    
    
    
    
    0.01198November 30, 2004
    
    
    
    December 15, 2004
    
    
    
    
    
    
    0.01198December 31, 2004
    
    
    
    January 18, 2005
    
    
    
    
    
    
    0.01198Total
    
    
    
    
    
    
    
    
    
    
    
    $
    0.14376
 
 (1)
    
    Prices in table are rounded to five decimal cents(2)
    
    Adjusted to reflect a three-for-two stock split and 2% stock
dividend declared in December 2004 and distributed on January 10, 2005. Dividend Restrictions
 39




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##### Table of Contents



Number of securities remaining available forNumber of securities to be
    
    
    
    
    
    future issuance under equity compensationissued upon exercise of
    
    
    Weighted-average exercise
    
    
    plans (excluding securities reflected in columnoutstanding options (1) (2)
    
    
    price of outstanding options (1)
    
    
    (a)) (1)(a)
    
    
    (b)
    
    
    (c)6,887,910
    
    
    $
    3.79
    
    
    
    5,347,254
 
 (1)
    
    Adjusted to reflect a three-for-two stock split and 2% stock dividend declared in December 2004 and distributed on January 10, 2005; the three-for-two stock split and 2% stock
dividend declared in November 2003 and distributed
on December 10, 2003; and the three-for-two stock split declared
in June 2002 and
distributed on July 10, 2002.(2)
    
    Excludes 1,555,131 shares issued upon exercise of stock options through December 31,
2005.     40




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(As Restated)(2)
    
    
    (As Restated)(2)
    
    
    (As Restated)(2)
    
    
    (As Restated)(2)(Amounts in thousands, except per share data)Income Statement Data:Interest income
    
    $
    795,329
    
    
    $
    591,376
    
    
    $
    461,894
    
    
    $
    385,734
    
    
    $
    343,335Interest expense
    
    
    483,747
    
    
    
    314,219
    
    
    
    245,102
    
    
    
    252,673
    
    
    
    232,764Net interest income
    
    
    311,582
    
    
    
    277,157
    
    
    
    216,792
    
    
    
    133,061
    
    
    
    110,571Provision for loan losses
    
    
    (31,000
    )
    
    
    (36,691
    )
    
    
    (27,048
    )
    
    
    (15,083
    )
    
    
    (12,278
    )Net interest income after provision for loan losses
    
    
    280,582
    
    
    
    240,466
    
    
    
    189,744
    
    
    
    117,978
    
    
    
    98,293Noninterest income
    
    
    35,820
    
    
    
    53,628
    
    
    
    25,295
    
    
    
    59,244
    
    
    
    26,579Noninterest expenses
    
    
    (108,230
    )
    
    
    (100,125
    )
    
    
    (84,821
    )
    
    
    (73,917
    )
    
    
    (60,310
    )Income before income taxes
    
    
    208,172
    
    
    
    193,969
    
    
    
    130,218
    
    
    
    103,305
    
    
    
    64,562Income taxes
    
    
    (45,086
    )
    
    
    (22,093
    )
    
    
    (19,263
    )
    
    
    (16,585
    )
    
    
    (6,151
    )Income before cumulative effect of change in accounting principle
    
    
    163,086
    
    
    
    171,876
    
    
    
    110,955
    
    
    
    86,720
    
    
    
    58,411Cumulative effect on change in accounting for
derivative instruments, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,215Net income
    
    
    163,086
    
    
    
    171,876
    
    
    
    110,955
    
    
    
    86,720
    
    
    
    59,626Preferred stock dividends
    
    
    36,985
    
    
    
    27,158
    
    
    
    21,593
    
    
    
    13,774
    
    
    
    10,264Income available to common stockholders
    
    $
    126,101
    
    
    $
    144,718
    
    
    $
    89,362
    
    
    $
    72,946
    
    
    $
    49,362Share Data:Basic earnings per common share (1)
    
    $
    0.77
    
    
    $
    0.89
    
    
    $
    0.56
    
    
    $
    0.48
    
    
    $
    0.34Diluted earnings per common share (1)
    
    $
    0.74
    
    
    $
    0.86
    
    
    $
    0.54
    
    
    $
    0.48
    
    
    $
    0.34Cash dividend declared per common share (1) (3)
    
    $
    0.19
    
    
    $
    0.14
    
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.07Period end number of common shares outstanding (1)
    
    
    164,098
    
    
    
    163,919
    
    
    
    162,624
    
    
    
    159,992
    
    
    
    145,721Weighted average number of common
shares outstanding (1)
    
    
    164,024
    
    
    
    163,348
    
    
    
    160,734
    
    
    
    150,712
    
    
    
    145,727Weighted average number of common shares
outstanding on a fully diluted basis (1)
    
    
    170,619
    
    
    
    170,443
    
    
    
    165,330
    
    
    
    152,491
    
    
    
    146,139Cash dividends declared on common shares
    
    $
    30,575
    
    
    $
    23,502
    
    
    $
    18,322
    
    
    $
    14,045
    
    
    $
    10,375Dividends payout ratio
    
    
    24.25
    %
    
    
    16.24
    %
    
    
    20.50
    %
    
    
    19.26
    %
    
    
    21.02
    %Book value per share data (1)
    
    $
    4.04
    
    
    $
    3.45
    
    
    $
    2.70
    
    
    $
    2.25
    
    
    $
    1.41
 41




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(As Restated)(2)
    
    
    (As Restated)(2)
    
    
    (As Restated)(2)
    
    
    (As Restated)(2)(Amounts in thousands, except per share data)Performance ratios:Return on assets (4)
    
    
    1.07
    %
    
    
    1.33
    %
    
    
    1.12
    %
    
    
    1.23
    %
    
    
    1.17
    %Return on common stockholders equity (4)
    
    
    20.53
    
    
    
    28.79
    
    
    
    22.37
    
    
    
    25.84
    
    
    
    26.31Efficiency ratio
    
    
    30.67
    
    
    
    30.66
    
    
    
    32.17
    
    
    
    40.66
    
    
    
    42.79Operating expenses to total end-of-period assets
    
    
    0.67
    
    
    
    0.70
    
    
    
    0.74
    
    
    
    0.90
    
    
    
    1.02Net yield on interest-earning assets
    
    
    2.08
    
    
    
    2.22
    
    
    
    2.31
    
    
    
    1.88
    
    
    
    2.32Balance Sheet Data:Total assets
    
    $
    16,151,864
    
    
    $
    14,321,620
    
    
    $
    11,527,509
    
    
    $
    8,211,345
    
    
    $
    5,896,653Federal funds sold and resell agreements
    
    
    746,539
    
    
    
    1,017,303
    
    
    
    649,852
    
    
    
    459,147
    
    
    
    156,133Investments securities held to maturity,
securities available for sale and trading securities
    
    
    7,079,191
    
    
    
    6,929,260
    
    
    
    5,778,790
    
    
    
    3,661,944
    
    
    
    2,656,066Loans-net
    
    
    7,815,623
    
    
    
    5,917,352
    
    
    
    4,683,118
    
    
    
    3,754,357
    
    
    
    2,838,404Total liabilities
    
    
    14,958,386
    
    
    
    13,244,061
    
    
    
    10,703,131
    
    
    
    7,628,369
    
    
    
    5,511,056Total deposits
    
    
    8,375,609
    
    
    
    6,244,170
    
    
    
    5,397,676
    
    
    
    4,306,784
    
    
    
    3,244,683Federal funds purchased and repurchase agreements
    
    
    6,260,029
    
    
    
    6,683,527
    
    
    
    5,046,045
    
    
    
    3,097,341
    
    
    
    2,059,646Stockholders equity
    
    
    1,193,478
    
    
    
    1,077,559
    
    
    
    824,378
    
    
    
    582,976
    
    
    
    385,597Capital Ratios:Total capital to risk-weighted assets
    
    
    13.13
    %
    
    
    14.90
    %
    
    
    13.90
    %
    
    
    12.79
    %
    
    
    11.44
    %Tier I capital to risk-weighted assets
    
    
    12.30
    
    
    
    14.01
    
    
    
    13.06
    
    
    
    11.94
    
    
    
    10.52Tier I capital to average assets
    
    
    7.48
    
    
    
    7.69
    
    
    
    7.18
    
    
    
    7.19
    
    
    
    7.13Equity-to-asset ratio (4)
    
    
    7.45
    
    
    
    7.36
    
    
    
    7.13
    
    
    
    6.87
    
    
    
    6.26Asset Quality Ratios:Total
non-performing loans and foreclosed real estate
held for sale as a percentage of total assets at end of period
    
    
    0.42
    %
    
    
    0.27
    %
    
    
    0.31
    %
    
    
    0.28
    %
    
    
    0.29
    %Total non-performing loans as a percentage of
loans at end of period
    
    
    0.81
    
    
    
    0.58
    
    
    
    0.66
    
    
    
    0.51
    
    
    
    0.49Net loans charged-off to average total loans (5)
    
    
    0.27
    
    
    
    0.34
    
    
    
    0.29
    
    
    
    0.19
    
    
    
    0.23Allowance for loan losses to total loans at end of period
    
    
    1.17
    
    
    
    1.34
    
    
    
    1.30
    
    
    
    1.24
    
    
    
    1.33Allowance for loan losses to non-performing loans
    
    
    144.39
    
    
    
    233.64
    
    
    
    197.17
    
    
    
    242.80
    
    
    
    271.83
 
 (1)
    
    Adjusted to reflect a three-for-two stock split and 2% stock
dividend declared in December 2004 and distributed on January 10, 2005; the
three-for-two stock split and 2% stock dividend declared in
November 2003 and distributed
on December 10, 2003; and the three-for-two stock split declared in June 2002 and distributed
on July 10, 2002.(2)
    
    See Note 25 to the consolidated financial statements for information about the restatement.(3)
    
    Cash dividends amounts are rounded.(4)
    
    The return on assets is computed 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. 42




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##### Table of Contents



FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 OVERVIEW
   43




---



##### Table of Contents



RESULTS OF OPERATIONS
 NET INTEREST INCOME
   2005 VERSUS 2004.
  44




---



##### Table of Contents



2004 VERSUS 2003.
   45




---



##### Table of Contents



YEAR ENDED DECEMBER 31,2005
    
    
    2004
    
    
    2003Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AverageInterest
    
    
    balance (1)
    
    
    Yield / Rate
    
    
    Interest
    
    
    balance (1)
    
    
    Yield / Rate
    
    
    Interest
    
    

balance (1)
    
    
    Yield / Rate(Dollars in Thousands)Normal Spread:Interest-earning assets:Loans,
including loan fees (2)
    
    $
    479,042
    
    
    $
    6,986,626
    
    
    
    6.86
    %
    
    $
    322,164
    
    
    $
    5,401,955
    
    
    
    5.96
    %
    
    $
    275,848
    
    
    $
    4,278,468
    
    
    
    6.45
    %Investment
securities (3)
    
    
    247,533
    
    
    
    6,267,159
    
    
    
    3.95
    
    
    
    212,213
    
    
    
    5,400,997
    
    
    
    3.93
    
    
    
    134,273
    
    
    
    3,571,299
    
    
    
    3.76Mortgage
and asset-
backed
securities (4)
    
    
    32,321
    
    
    
    752,839
    
    
    
    4.29
    
    
    
    37,489
    
    
    
    935,421
    
    
    
    4.01
    
    
    
    40,140
    
    
    
    998,257
    
    
    
    4.02Money market instruments
    
    
    36,433
    
    
    
    950,980
    
    
    
    3.83
    
    
    
    19,510
    
    
    
    745,828
    
    
    
    2.62
    
    
    
    11,633
    
    
    
    534,444
    
    
    
    2.18Total
    
    
    795,329
    
    
    
    14,957,604
    
    
    
    5.32
    
    
    
    591,376
    
    
    
    12,484,201
    
    
    
    4.74
    
    
    
    461,894
    
    
    
    9,382,468
    
    
    
    4.92Interest-bearing liabilities:Deposits
    
    
    241,268
    
    
    
    7,376,605
    
    
    
    3.27
    
    
    
    166,237
    
    
    
    5,921,733
    
    
    
    2.81
    
    
    
    137,271
    
    
    
    4,777,253
    
    
    
    2.87Federal funds purchased and
repurchase agreements
    
    
    234,791
    
    
    
    6,398,451
    
    
    
    3.67
    
    
    
    141,414
    
    
    
    5,676,595
    
    
    
    2.49
    
    
    
    101,652
    
    
    
    3,891,972
    
    
    
    2.61Advances from FHLB
    
    
    7,688
    
    
    
    184,153
    
    
    
    4.17
    
    
    
    6,568
    
    
    
    164,245
    
    
    
    4.00
    
    
    
    6,037
    
    
    
    137,838
    
    
    
    4.38Other borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142
    
    
    
    3,698
    
    
    
    3.84Total
    
    
    483,747
    
    
    
    13,959,209
    
    
    
    3.47
    
    
    
    314,219
    
    
    
    11,762,573
    
    
    
    2.67
    
    
    
    245,102
    
    
    
    8,810,761
    
    
    
    2.78Net interest income
    
    $
    311,582
    
    
    
    
    
    
    
    
    
    
    $
    277,157
    
    
    
    
    
    
    
    
    
    
    $
    216,792Interest rate spread
    
    
    
    
    
    
    
    
    
    
    1.85
    %
    
    
    
    
    
    
    
    
    
    
    2.07
    %
    
    
    
    
    
    
    
    
    
    
    2.14
    %Net interest-earning assets
    
    
    
    
    
    $
    998,395
    
    
    
    
    
    
    
    
    
    
    $
    721,628
    
    
    
    
    
    
    
    
    
    
    $
    571,707Net yield on interest-earning
assets (5)
    
    
    
    
    
    
    
    
    
    
    2.08
    %
    
    
    
    
    
    
    
    
    
    
    2.22
    %
    
    
    
    
    
    
    
    
    
    
    2.31
    %Ratio of interest-earning assets
to interest-bearing liabilities
    
    
    
    
    
    
    107.15
    %
    
    
    
    
    
    
    
    
    
    
    106.13
    %
    
    
    
    
    
    
    
    
    
    
    106.49
    %Tax Equivalent Spread:Interest-earning assets
    
    $
    795,329
    
    
    $
    14,957,604
    
    
    
    5.32
    %
    
    $
    591,376
    
    
    $
    12,484,201
    
    
    
    4.74
    %
    
    $
    461,894
    
    
    $
    9,382,468
    
    
    
    4.92
    %Tax equivalent adjustment
    
    
    41,305
    
    
    
    
    
    
    
    0.27
    
    
    
    53,555
    
    
    
    
    
    
    
    0.43
    
    
    
    31,522
    
    
    
    
    
    
    
    0.34Interest-earning assets -
tax equivalent
    
    
    836,634
    
    
    
    14,957,604
    
    
    
    5.59
    
    
    
    644,931
    
    
    
    12,484,201
    
    
    
    5.17
    
    
    
    493,416
    
    
    
    9,382,468
    
    
    
    5.26Interest-bearing liabilities
    
    
    483,747
    
    
    $
    13,959,209
    
    
    
    3.47
    
    
    
    314,219
    
    
    $
    11,762,573
    
    
    
    2.67
    
    
    
    245,102
    
    
    $
    8,810,761
    
    
    
    2.78Net interest income
    
    $
    352,887
    
    
    
    
    
    
    
    
    
    
    $
    330,712
    
    
    
    
    
    
    
    
    
    
    $
    248,314Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.12
    %
    
    
    
    
    
    
    
    
    
    
    2.50
    %
    
    
    
    
    
    
    
    
    
    
    2.48
    %Net yield on interest-
earning assets (5)
    
    
    
    
    
    
    
    
    
    
    2.36
    %
    
    
    
    
    
    
    
    
    
    
    2.65
    %
    
    
    
    
    
    
    
    
    
    
    2.65
    %
 
 (1)
    
    Average balance on interest-earning assets and interest-bearing liabilities is
computed using daily monthly average balances during the periods.(2)
    
    Average loans exclude non-performing loans. Loans fees, net amounted to $17.9 million;
$10.6 million and $8.7 million for the years ended December 31, 2005, 2004 and 2003, 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. 46




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Year ended December 31,2005 vs. 2004
    
    
    2004 vs. 2003Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(In thousands)Interest income:Loans
    
    $
    103,874
    
    
    $
    53,004
    
    
    $
    156,878
    
    
    $
    64,831
    
    
    $
    (18,515
    )
    
    $
    46,316Investment securities (1)
    
    
    34,205
    
    
    
    1,115
    
    
    
    35,320
    
    
    
    71,641
    
    
    
    6,299
    
    
    
    77,940Mortgage and asset-backed
securities (2)
    
    
    (8,138
    )
    
    
    2,970
    
    
    
    (5,168
    )
    
    
    (2,519
    )
    
    
    (132
    )
    
    
    (2,651
    )Money market instruments
    
    
    6,294
    
    
    
    10,629
    
    
    
    16,923
    
    
    
    5,216
    
    
    
    2,661
    
    
    
    7,877Total increase (decrease)
in interest income
    
    
    136,235
    
    
    
    67,718
    
    
    
    203,953
    
    
    
    139,169
    
    
    
    (9,687
    )
    
    
    129,482Interest expense:Deposits
    
    
    44,875
    
    
    
    30,156
    
    
    
    75,031
    
    
    
    32,048
    
    
    
    (3,082
    )
    
    
    28,966Federal funds purchased and
repurchase agreements
    
    
    19,785
    
    
    
    73,592
    
    
    
    93,377
    
    
    
    44,217
    
    
    
    (4,455
    )
    
    
    39,762Advances from FHLB
    
    
    822
    
    
    
    298
    
    
    
    1,120
    
    
    
    972
    
    
    
    (441
    )
    
    
    531Other borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142
    )
    
    
    
    
    
    
    (142
    )Total increase (decrease) in
interest expense
    
    
    65,482
    
    
    
    104,046
    
    
    
    169,528
    
    
    
    77,095
    
    
    
    (7,978
    )
    
    
    69,117Increase (decrease) in
net interest income
    
    $
    70,753
    
    
    $
    (36,328
    )
    
    $
    34,425
    
    
    $
    62,074
    
    
    $
    (1,709
    )
    
    $
    60,365
 
 (1)
    
    Includes available for sale securities.(2)
    
    Includes trading and available for sale securities. PROVISION FOR LOAN LOSSES
   47




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48




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NONINTEREST INCOME
   NONINTEREST EXPENSES
      49




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PROVISION FOR INCOME TAXES
   NET INCOME
  FINANCIAL CONDITION
 LOANS
  50




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At December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Commercial real estate  mortgage (1)
    
    $
    4,260,258
    
    
    
    54.5
    %
    
    $
    3,154,679
    
    
    
    53.3
    %
    
    $
    2,261,465
    
    
    
    48.3
    %
    
    $
    1,647,602
    
    
    
    38.9
    %
    
    $
    1,115,700
    
    
    
    39.3Residential real estate  mortgage (2)
    
    
    1,298,535
    
    
    
    16.6
    
    
    
    879,056
    
    
    
    14.9
    
    
    
    894,007
    
    
    
    19.1
    
    
    
    844,803
    
    
    
    22.5
    
    
    
    847,462
    
    
    
    29.9Construction  mortgage
    
    
    505,760
    
    
    
    6.5
    
    
    
    328,145
    
    
    
    5.5
    
    
    
    202,600
    
    
    
    4.3
    
    
    
    181,266
    
    
    
    4.8
    
    
    
    117,957
    
    
    
    4.2Commercial, industrial and agricultural (1)
    
    
    1,013,092
    
    
    
    13.0
    
    
    
    768,604
    
    
    
    13.0
    
    
    
    524,747
    
    
    
    11.2
    
    
    
    384,200
    
    
    
    15.2
    
    
    
    378,696
    
    
    
    13.3Consumer and others (3) (4)
    
    
    830,384
    
    
    
    10.6
    
    
    
    866,934
    
    
    
    14.6
    
    
    
    861,907
    
    
    
    18.4
    
    
    
    743,600
    
    
    
    19.8
    
    
    
    416,953
    
    
    
    14.7Total loans
    
    
    7,908,029
    
    
    
    101.2
    
    
    
    5,997,418
    
    
    
    101.3
    
    
    
    4,744,726
    
    
    
    101.3
    
    
    
    3,801,471
    
    
    
    101.2
    
    
    
    2,876,768
    
    
    
    101.4Allowance for loan losses
    
    
    (92,406
    )
    
    
    (1.2
    )
    
    
    (80,066
    )
    
    
    (1.3
    )
    
    
    (61,608
    )
    
    
    (1.3
    )
    
    
    (47,114
    )
    
    
    (1.2
    )
    
    
    (38,364
    )
    
    
    (1.4
    )Loan  net
    
    $
    7,815,623
    
    
    
    100.0
    %
    
    $
    5,917,352
    
    
    
    100.0
    %
    
    $
    4,683,118
    
    
    
    100.0
    %
    
    $
    3,754,357
    
    
    
    100.00
    %
    
    $
    2,838,404
    
    
    
    100.00
 
 (1)
    
    Includes $1.3 billion, $831.1 million, $641.1 million, $427.7 million and $255.8 million of Westernbank Business Credit division outstanding
loans at December 31, 2005, 2004, 2003, 2002 and 2001, respectively. Westernbank Business Credit began operations in 2001.(2)
    
    Includes fixed and floating interest rate loans to two mortgage originators in Puerto Rico mainly secured by mortgages on one-to-four family residential properties
as follows: $1.14 billion, $745.0 million, $750.6 million, $701.6 million, and $685.3 million at December 31, 2005, 2004, 2003, 2002 and 2001, respectively.(3)
    
    Includes $135.0 million, $144.0 million, $155.6 million and $117.4 million of Expresso of Westernbank division outstanding loans at
December 31, 2005, 2004, 2003 and 2002, respectively. Expresso of Westernbank began operations on July 10, 2002.(4)
    
    Includes $585.9 million, $585.2 million, $521.6 million, $447.9 million and $167.9 million collateralized by real estate at December 31, 2005,
2004, 2003, 2002, 2001, respectively.  51




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MaturitiesAfter one year to five years
    
    
    After five years(In thousands)Balance outstanding at
    
    
    One year or
    
    
    Fixed
    
    
    Variable
    
    
    Fixed
    
    
    VariableDecember 31, 2005
    
    
    less
    
    
    interest
    
    
    interest
    
    
    interest
    
    
    interestCommercial real estate  mortgage
    
    $
    4,260,258
    
    
    $
    1,014,204
    
    
    $
    526,953
    
    
    $
    870,825
    
    
    $
    75,903
    
    
    $
    1,772,373Residential real estate  mortgage
    
    
    1,298,535
    
    
    
    4,640
    
    
    
    17,125
    
    
    
    31
    
    
    
    199,828
    
    
    
    1,076,911
    (1)Construction  mortgage
    
    
    505,760
    
    
    
    273,367
    
    
    
    
    
    
    
    232,393
    
    
    
    
    
    
    
    Commercial, industrial and agricultural
    
    
    1,013,092
    
    
    
    312,002
    
    
    
    39,575
    
    
    
    551,083
    
    
    
    5,771
    
    
    
    104,661Consumer and others
    
    
    830,384
    
    
    
    124,489
    
    
    
    178,696
    
    
    
    11,095
    
    
    
    82,877
    
    
    
    433,227Total
    
    $
    7,908,029
    
    
    $
    1,728,702
    
    
    $
    762,349
    
    
    $
    1,665,427
    
    
    $
    364,379
    
    
    $
    3,387,172
 
 (1)
    
    Includes $1.08 billion of floating interest rate (three month LIBOR plus a
spread) loans to two mortgage originators in Puerto Rico mainly
secured by mortgage loans for one-to-four family residential properties. 52




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NON-PERFORMING LOANS AND FORECLOSED REAL ESTATE HELD FOR SALE
    December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Commercial real estate  mortgage and
commercial, industrial and agricultural loans
    
    $
    55,585
    
    
    $
    25,417
    
    
    $
    24,142
    
    
    $
    13,567
    
    
    $
    7,947Residential real estate mortgage and construction loans
    
    
    2,125
    
    
    
    1,730
    
    
    
    2,259
    
    
    
    2,026
    
    
    
    2,735Consumer loans
    
    
    6,288
    
    
    
    7,122
    
    
    
    4,845
    
    
    
    3,812
    
    
    
    3,431Total non-performing loans
    
    
    63,998
    
    
    
    34,269
    
    
    
    31,246
    
    
    
    19,405
    
    
    
    14,113Foreclosed real estate held for sale
    
    
    4,137
    
    
    
    3,811
    
    
    
    4,082
    
    
    
    3,679
    
    
    
    3,013Total non-performing loans and foreclosed
real estate held for sale
    
    $
    68,135
    
    
    $
    38,080
    
    
    $
    35,328
    
    
    $
    23,084
    
    
    $
    17,126Interest that would have been recorded if the
loans had not been classified as
non-performing
    
    $
    4,916
    
    
    $
    3,557
    
    
    $
    2,500
    
    
    $
    1,102
    
    
    $
    1,123Interest recorded on non-performing loans
    
    $
    743
    
    
    $
    243
    
    
    $
    583
    
    
    $
    775
    
    
    $
    1,716Total non-performing loans as a percentage
of total loans at end of period
    
    
    0.81
    %
    
    
    0.58
    %
    
    
    0.66
    %
    
    
    0.51
    %
    
    
    0.49
    %Total non-performing loans and foreclosed real estate
held for sale as a percentage of total assets at end of period
    
    
    0.42
    %
    
    
    0.27
    %
    
    
    0.31
    %
    
    
    0.28
    %
    
    
    0.29
    %
 54




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ALLOWANCE FOR LOAN LOSSES
  The Formula Allowance
 
 
 Specific Allowances for Identified Problem Loans and Portfolio Segments
 Accounting by Creditors for Impairment of a Loan
 The Unallocated Allowance
 55




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YEAR ENDED DECEMBER 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Balance, beginning of year
    
    $
    80,066
    
    
    $
    61,608
    
    
    $
    47,114
    
    
    $
    38,364
    
    
    $
    28,928Loans charged-off:Commercial real estate  mortgage and commercial
industrial and agricultural loans (1)
    
    
    (8,233
    )
    
    
    (5,433
    )
    
    
    (2,479
    )
    
    
    (3,389
    )
    
    
    (2,970
    )Residential real estate-mortgage and
construction loans
    
    
    (121
    )
    
    
    (297
    )
    
    
    (184
    )
    
    
    
    
    
    
    (228
    )Consumer loans (2)
    
    
    (13,809
    )
    
    
    (16,473
    )
    
    
    (12,203
    )
    
    
    (4,576
    )
    
    
    (3,840
    )Total loans charged-off
    
    
    (22,163
    )
    
    
    (22,203
    )
    
    
    (14,866
    )
    
    
    (7,965
    )
    
    
    (7,038
    )Recoveries of loans previously
charged-off:Commercial real estate  mortgage and commercial
industrial and agricultural loans
    
    
    1,008
    
    
    
    1,844
    
    
    
    1,141
    
    
    
    584
    
    
    
    133Residential real estate-mortgage and
construction loans
    
    
    212
    
    
    
    206
    
    
    
    372
    
    
    
    190
    
    
    
    175Consumer loans (3)
    
    
    2,283
    
    
    
    1,920
    
    
    
    799
    
    
    
    858
    
    
    
    996Total recoveries of loans previously charged-off
    
    
    3,503
    
    
    
    3,970
    
    
    
    2,312
    
    
    
    1,632
    
    
    
    1,304Net loans charged-off
    
    
    (18,660
    )
    
    
    (18,233
    )
    
    
    (12,554
    )
    
    
    (6,333
    )
    
    
    (5,734
    )Provision for loan losses
    
    
    31,000
    
    
    
    36,691
    
    
    
    27,048
    
    
    
    15,083
    
    
    
    12,278Allowance acquired on loans purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,892Balance, end of period
    
    $
    92,406
    
    
    $
    80,066
    
    
    $
    61,608
    
    
    $
    47,114
    
    
    $
    38,364Ratios:Allowance for loan losses to total loans at end of period
    
    
    1.17
    %
    
    
    1.34
    %
    
    
    1.30
    %
    
    
    1.24
    %
    
    
    1.33
    %Provision for loan losses to net loans
charged-off
    
    
    166.13
    %
    
    
    201.23
    %
    
    
    215.45
    %
    
    
    238.17
    %
    
    
    214.13
    %Recoveries of loans to loans charged-off in
previous period
    
    
    15.78
    %
    
    
    26.71
    %
    
    
    29.03
    %
    
    
    23.19
    %
    
    
    24.31
    %Net loans charged-off to average total loans (4)
    
    
    0.27
    %
    
    
    0.34
    %
    
    
    0.29
    %
    
    
    0.19
    %
    
    
    0.23
    %Allowance for loans losses to
non-performing loans
    
    
    144.39
    %
    
    
    233.64
    %
    
    
    197.17
    %
    
    
    242.80
    %
    
    
    271.83
    %
 
 (1)
    
    Includes a $5.3 million partial charged-off in 2005 and a $505,000 charged-off in 2002 of
Westernbank Business Credit division, consisting of two loans originally acquired in the
purchased loan portfolio from Congress Credit, a subsidiary of First Union National Bank
N.A., on June 15, 2001.(2)
    
    Includes $9.8 million, $12.4 million, $7.9 million and $62,000 of Expresso of Westernbank
charge-offs, for the years ended December 31, 2005, 2004, 2003 and 2002, respectively.
Expresso of Westernbank began operations on July 10, 2002.(3)
    
    Includes $1.1 million, $1.0 million and $17,000 of Expresso of Westernbank recoveries, for the
years ended December 31, 2005, 2004 and 2003, respectively.(4)
    
    Average loans were computed using beginning and period-end balances.   57




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##### Table of Contents



AT DECEMBER 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Allowance for credit losses:Commercial real estate  mortgage and
commercial, industrial and agricultural loans (1)
    
    $
    72,723
    
    
    $
    58,208
    
    
    $
    41,400
    
    
    $
    31,671
    
    
    $
    24,397Residential real estate mortgage
and construction loans
    
    
    3,275
    
    
    
    407
    
    
    
    415
    
    
    
    443
    
    
    
    494Consumer loans (2)
    
    
    14,430
    
    
    
    19,425
    
    
    
    17,472
    
    
    
    12,004
    
    
    
    8,203Unallocated
    
    
    1,978
    
    
    
    2,026
    
    
    
    2,321
    
    
    
    2,996
    
    
    
    5,270Total allowance for loan losses
    
    $
    92,406
    
    
    $
    80,066
    
    
    $
    61,608
    
    
    $
    47,114
    
    
    $
    38,364Loan portfolio composition percentages:Commercial real estate  mortgage and
commercial, industrial and agricultural loans
    
    
    66.68
    %
    
    
    65.42
    %
    
    
    58.72
    %
    
    
    53.45
    %
    
    
    51.95
    %Residential real estate mortgage
and construction loans
    
    
    22.82
    %
    
    
    20.13
    %
    
    
    23.11
    %
    
    
    26.99
    %
    
    
    33.56
    %Consumer loans
    
    
    10.50
    %
    
    
    14.45
    %
    
    
    18.17
    %
    
    
    19.56
    %
    
    
    14.49
    %Total loans
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %Allowance coverage ratio at
end of year:Applicable to:Commercial real estate  mortgage and
commercial, industrial and agricultural loans
    
    
    1.38
    %
    
    
    1.48
    %
    
    
    1.49
    %
    
    
    1.56
    %
    
    
    1.63
    %Residential real estate mortgage
and construction loans
    
    
    0.18
    %
    
    
    0.03
    %
    
    
    0.04
    %
    
    
    0.04
    %
    
    
    0.05
    %Consumer loans
    
    
    1.74
    %
    
    
    2.24
    %
    
    
    2.03
    %
    
    
    1.61
    %
    
    
    1.97
    %Unallocated (as a percentage
of total loans)
    
    
    0.03
    %
    
    
    0.03
    %
    
    
    0.05
    %
    
    
    0.08
    %
    
    
    0.18
    %Total loans
    
    
    1.17
    %
    
    
    1.34
    %
    
    
    1.30
    %
    
    
    1.24
    %
    
    
    1.33
    %
 
 (1)
    
    Includes an allowance of $30.0 million, $12.9 million, $6.6 million, $4.5 million and $3.1
million for Westernbank Business Credit loans at December 31, 2005, 2004, 2003, 2002 and 2001,
respectively. Westernbank Business Credit began operations in 2001.(2)
    
    Includes an allowance of $8.4 million, $13.8 million, $10.0 million and $1.5 million for
Expresso of Westernbank loans portfolio at December 31, 2005, 2004, 2003 and 2002, respectively.
Expresso of Westernbank began operations on July 10, 2002.  59




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2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands)Investment in impaired loans:Covered by a valuation allowance
    
    $
    32,542
    
    
    $
    29,975
    
    
    $
    28,217
    
    
    $
    26,074
    
    
    $
    21,996Do not require a valuation allowance
    
    
    49,069
    
    
    
    24,200
    
    
    
    22,088
    
    
    
    24,515
    
    
    
    20,482Total
    
    $
    81,611
    
    
    $
    54,175
    
    
    $
    50,305
    
    
    $
    50,589
    
    
    $
    42,478Valuation allowance for impaired loans
    
    $
    14,185
    
    
    $
    8,412
    
    
    $
    4,646
    
    
    $
    4,752
    
    
    $
    4,181Average investment in impaired loans
    
    $
    61,113
    
    
    $
    46,509
    
    
    $
    46,676
    
    
    $
    46,147
    
    
    $
    20,293Interest collected and recognized as
income on impaired loans
    
    $
    4,044
    
    
    $
    2,460
    
    
    $
    2,452
    
    
    $
    4,041
    
    
    $
    1,716
   INVESTMENTS
   60




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##### Table of Contents



2005
    
    
    2004(In thousands)Held to maturity :US Government and agencies obligations
    
    $
    6,314,316
    
    
    $
    6,004,849Puerto Rico Government and agencies obligations
    
    
    31,824
    
    
    
    34,822Corporate notes
    
    
    26,429
    
    
    
    51,418Mortgage-backed securities
    
    
    701,456
    
    
    
    830,290Total
    
    
    7,074,025
    
    
    
    6,921,379Available for sale:Collateralized mortgage obligations (CMOs)
    
    
    185
    
    
    
    7,881Equity securities  common stock
    
    
    4,981
    
    
    
    Total
    
    
    5,166
    
    
    
    7,881Total investments
    
    $
    7,079,191
    
    
    $
    6,929,260
 61




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##### Table of Contents



2005
    
    
    2004(In thousands)Available for sale:CMOs issued or guaranteed by the Federal NationalMortgage Association (FNMA)
    
    $
    185
    
    
    $
    6,116CMOs issued or guaranteed by the Federal HomeLoan Mortgage Corporation (FHLMC)
    
    
    
    
    
    
    1,765Total available for sale
    
    
    185
    
    
    
    7,881Held to maturity:Government National Mortgage Association (GNMA) certificates
    
    
    8,082
    
    
    
    9,881FHLMC certificates
    
    
    4,180
    
    
    
    5,663FNMA certificates
    
    
    2,828
    
    
    
    3,642CMOs certificates issued or guaranteed by FHLMC
    
    
    607,659
    
    
    
    706,632CMOs certificates issued or guaranteed by FNMA
    
    
    78,707
    
    
    
    104,441CMOs other
    
    
    
    
    
    
    31Total held to maturity
    
    
    701,456
    
    
    
    830,290Total mortgage-backed securities
    
    $
    701,641
    
    
    $
    838,171
   Carrying
    
    
    Weightedamount
    
    
    average yield(Dollars in thousands)US Government and agencies obligations:Due within one year
    
    $
    279,827
    
    
    
    3.41
    %Due after one year through five years
    
    
    5,823,489
    
    
    
    3.97Due after five years through ten years
    
    
    211,000
    
    
    
    4.146,314,316
    
    
    
    3.95Puerto Rico Government and agencies obligations:Due within one year
    
    
    3,000
    
    
    
    5.00Due after one year through five years
    
    
    17,903
    
    
    
    4.51Due after five years through ten years
    
    
    10,921
    
    
    
    4.6331,824
    
    
    
    4.60Other:Due within one year
    
    
    5,000
    
    
    
    6.13Due after ten years
    
    
    21,429
    
    
    
    8.3326,429
    
    
    
    7.91Total
    
    
    6,372,569
    
    
    
    3.97Mortgage-backed securities
    
    
    701,641
    
    
    
    4.25Equity securities
    
    
    4,981
    
    
    
    2.26Total
    
    $
    7,079,191
    
    
    
    3.99
    %
 62




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63




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DEPOSITS
     (In thousands)3 months or less
    
    $
    155,300over 3 months through 6 months
    
    
    79,265over 6 months through 12 months
    
    
    70,845over 12 months
    
    
    98,594Total
    
    $
    404,004
 64




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Averageamount
    
    
    rate
    
    
    amount
    
    
    rate
    
    
    amount
    
    
    rate(Dollars in thousands)Time deposits
    
    $
    6,004,119
    
    
    
    3.64
    %
    
    $
    4,630,244
    
    
    
    3.12
    %
    
    $
    3,784,026
    
    
    
    3.18
    %Savings deposits
    
    
    802,994
    
    
    
    2.09
    %
    
    
    784,589
    
    
    
    2.14
    %
    
    
    605,854
    
    
    
    2.15
    %Interest bearing demand
deposits
    
    
    200,804
    
    
    
    2.88
    %
    
    
    200,190
    
    
    
    2.63
    %
    
    
    160,015
    
    
    
    2.55
    %Noninterest bearing demand
deposits
    
    
    368,688
    
    
    
    
    
    
    
    306,710
    
    
    
    
    
    
    
    227,358
    
    
    
    $
    7,376,605
    
    
    
    3.27
    %
    
    $
    5,921,733
    
    
    
    2.81
    %
    
    $
    4,777,253
    
    
    
    2.87
    %
 BORROWINGS
  December
31,2005
    
    
    2004
    
    
    2003(In thousands)Federal funds purchased and repurchase agreements (1)
    
    $
    6,260,029
    
    
    $
    6,683,527
    
    
    $
    5,046,045Advances from Federal Home Loan Bank (FHLB)
    
    
    172,000
    
    
    
    211,000
    
    
    
    146,000Mortgage note payable
    
    
    36,432
    
    
    
    36,858
    
    
    
    37,234$
    6,468,461
    
    
    $
    6,931,385
    
    
    $
    5,229,279
 
 (1)
    
    Federal funds purchased amounted to $75.0 million at December 31, 2004, at a
weighted average interest rate of 2.37%, and mature the next business day.
No such borrowings were outstanding at December 31, 2005 and 2003.     65




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##### Table of Contents



2005
    
    2004
    
    2003(Dollars in thousands)Federal funds purchased:Balance at end of year
    
    $
    
    
    
    $
    75,029
    
    
    $
    Weighted-average interest rate at year end
    
    
    
    
    
    
    2.37
    %
    
    
    Monthly average outstanding balance
    
    $
    8,851
    
    
    $
    23,753
    
    
    $
    8,500Weighted-average interest rate for the year
    
    
    2.43
    %
    
    
    1.95
    %
    
    
    1.34
    %Maximum month-end balance
    
    $
    40,039
    
    
    $
    95,005
    
    
    $
    75,000Repurchase agreements:Balance at end of year
    
    $
    1,545,725
    
    
    $
    4,138,257
    
    
    $
    1,648,891Weighted-average interest rate at year end
    
    
    4.34
    %
    
    
    2.30
    %
    
    
    1.21
    %Monthly average outstanding balance
    
    $
    2,377,629
    
    
    $
    2,377,042
    
    
    $
    1,093,921Weighted-average interest rate for the year
    
    
    3.03
    %
    
    
    1.67
    %
    
    
    1.24
    %Maximum month-end balance
    
    $
    3,514,422
    
    
    $
    4,206,540
    
    
    $
    1,717,184Advances from FHLB:Balance at end of year
    
    $
    50,000
    
    
    $
    25,000
    
    
    $
    40,000Weighted-average interest rate at year end
    
    
    4.45
    %
    
    
    2.41
    %
    
    
    1.20
    %Monthly average outstanding balance
    
    $
    21,923
    
    
    $
    21,250
    
    
    $
    31,917Weighted-average interest rate for the year
    
    
    3.49
    %
    
    
    1.65
    %
    
    
    1.33
    %Maximum month-end balance
    
    $
    50,000
    
    
    $
    50,000
    
    
    $
    64,000Total short-term borrowings:Balance at end of year
    
    $
    1,595,725
    
    
    $
    4,238,286
    
    
    $
    1,688,891Weighted-average interest rate at year end
    
    
    4.34
    %
    
    
    2.30
    %
    
    
    1.21
    %Monthly average outstanding balance
    
    $
    2,408,403
    
    
    $
    2,422,045
    
    
    $
    1,134,338Weighted-average interest rate for the year
    
    
    3.03
    %
    
    
    1.67
    %
    
    
    1.24
    %Maximum month-end balance
    
    $
    3,579,461
    
    
    $
    4,238,286
    
    
    $
    1,832,184
 STOCKHOLDERS EQUITY
    66




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LIQUIDITY AND CAPITAL RESOURCES
     67




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##### Table of Contents



Due after one
    
    
    Due after threeDue within one
    
    
    year through
    
    
    years through five
    
    
    Due after fiveyear
    
    
    three years
    
    
    years
    
    
    years
    
    
    Total(In thousands)Short-term borrowings
    
    $
    1,595,725
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,595,725Long-term borrowings
    
    
    20,454
    
    
    
    2,527,124
    
    
    
    1,020,207
    
    
    
    1,304,951
    
    
    
    4,872,736Operating lease obligations
    
    
    2,195
    
    
    
    2,945
    
    
    
    1,300
    
    
    
    2,263
    
    
    
    8,703Total contractual obligations
    
    $
    1,618,374
    
    
    $
    2,530,069
    
    
    $
    1,021,507
    
    
    $
    1,307,214
    
    
    $
    6,477,164
   PAYMENTS DUE BY PERIODLess than oneTotal
    
    
    year
    
    
    2-5 years(In thousands)Unused lines of credit
    
    $
    334,870
    
    
    $
    198,661
    
    
    $
    136,209Commercial letters of credit
    
    
    23,822
    
    
    
    23,822
    
    
    
    Commitments to extend credit
    
    
    630,995
    
    
    
    120,061
    
    
    
    510,934Total
    
    $
    989,687
    
    
    $
    342,544
    
    
    $
    647,143
  CRITICAL ACCOUNTING POLICIES
  68




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##### Table of Contents




    
    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 its consolidated financial statements. In estimating the allowance for
loan losses, management utilizes historical experience as well as other factors
including the effect of changes in the local real estate market on collateral values,
the effects on the loan portfolio of current economic indicators and their probable
impact on borrowers and increases or decreases in nonperforming and impaired loans.
Changes in these factors may cause managements estimate of the allowance to increase or
decrease and result in adjustments to the Companys provision for loan losses. See
Financial Condition  Allowance for Loan Losses and Note 1  Summary of Significant
Accounting Policies to the consolidated financial statements for a detailed
description of the Companys estimation process and methodology related to the allowance
for loan losses.
    
    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. The Company considers various factors in
determining whether it should recognize an impairment charge, including, but not limited
to the length of time and the extent the fair value of the security has been below its
cost basis, 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 maturity. See
Financial Condition  Investments and Note 1  Summary of Significant Accounting
Policies to the consolidated financial statements for a detailed description of
the Companys estimation process and methodology related to other-than-temporary
impairments.
    
    Financial instruments Certain financial instruments including derivatives and
investment securities available-for-sale are recorded at fair value and unrealized gains
and losses are recorded in other comprehensive income or noninterest income as
appropriate. Fair values are based on listed market prices, if available. If listed
market prices are not available, fair value is determined based on other relevant
factors including price quotations for similar instruments. Fair value of certain
derivative contracts are derived from an independent valuation model and periodically
compared to quoted market prices. See Note 1  Summary of Significant Accounting
Policies to the consolidated financial statements for a detailed description of
the Companys estimation process and methodology related to the financial instruments.
    
    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
 Contingencies
 See Note 1  Summary of Significant Accounting Policies to the consolidated
financial statements for a detailed description of the Companys estimation process and methodology
related to certain liabilities and contingencies.
 69




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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting for Asset Retirement Obligations
 Accounting for Costs Associated with Exit or
Disposal Activities Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)
 Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of
FASB Interpretation No. 34 .
 Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 .
 Amendment of Statement No. 133 on Derivative
Instruments and Hedging Activities . Accounting for Derivative Instruments and Hedging Activities .
 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
 70




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##### Table of Contents



Accounting for Certain
Loans and Debt Securities Acquired in a Transfer.
 The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments Accounting for Certain Investments in Debt and Equity Securities Effective Date of Paragraphs 10-20 of EITF 03-01 The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments Recognition of Other-Than-Temporary Impairment upon
the Planned Sale of a Security Whose Cost Exceeds Fair Value
 Application of Accounting
Principles to Loan Commitments
 Exchanges of Nonmonetary Assets  an
amendment of APB Opinion No. 29 Accounting for Nonmonetary
Transactions
 Share-Based Payment
 Accounting for
Conditional Asset Retirement Obligations  an interpretation of FASB Statement No. 143
 71




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##### Table of Contents



Accounting Changes and Error Corrections  a
Replacement of APB Opinion No. 20 and FASB Statement No. 3 Accounting Changes Reporting Accounting Changes in Interim Financial
Statements
 Redeemable Preferred Stocks
 72




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##### Table of Contents



Accounting for Certain Hybrid Financial
Instruments
 Accounting for Servicing of Financial Assets , Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities Accounting for Certain Investments in Debt and Equity Securities
 
  OFF-BALANCE SHEET ARRANGEMENTS
  CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 LIQUIDITY AND CAPITAL RESOURCES
 MARKET RISK
   73




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##### Table of Contents



Change in Interest Rate
    
    Expected NII (1)
    
    Amount Change
    
    % Change+200 Basis Points
    
    $
    260,777
    
    
    $
    (24,367
    )
    
    
    (8.55
    )%Base Scenario
    
    
    285,144
    
    
    
    
    
    
    
    -200 Basis Points
    
    
    275,494
    
    
    
    (9,650
    )
    
    
    (3.38
    )%
  Change in Interest Rate
    
    Expected NII (1)
    
    Amount Change
    
    % Change+200 Basis Points
    
    $
    268,838
    
    
    $
    (49,112
    )
    
    
    (15.45
    )%Base Scenario
    
    
    317,950
    
    
    
    
    
    
    
    -100 Basis Points
    
    
    307,734
    
    
    
    (10,216
    )
    
    
    (3.21
    )%
 
 (1)
    
    The NII figures exclude the effect of the amortization of loan fees. Given the fed fund rate of
4.25% and 2.25% at December 31, 2005 and 2004, respectively, a linear 200 and 100 points decrease
for 2005 and 2004, respectively, was modeled in the estimated change in interest rate.   74




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##### Table of Contents



ECONOMIC CONDITIONS, MARKET AREA AND COMPETITION
      75




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Internal ControlIntegrated Framework
 
 
 76




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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 2005 AND 2004
 (As Restated See Note 25)2005
    
    
    2004ASSETSCash and due from banks
    
    $
    97,612
    
    
    $
    77,752Money market instruments:Federal funds sold and resell agreements
    
    
    746,539
    
    
    
    1,017,303Interest-bearing deposits in banks
    
    
    57,116
    
    
    
    49,476Investment securities available for sale, at fair value with an amortized
cost of $5,156 in 2005 and $8,093 in 2004
    
    
    5,166
    
    
    
    7,881Investment securities held to maturity, at amortized cost with a
fair value of $6,851,089 in 2005 and $6,836,897 in 2004
    
    
    7,074,025
    
    
    
    6,921,379Federal Home Loan Bank stock, at cost
    
    
    42,798
    
    
    
    52,195Residential mortgage loans held for sale, at lower of cost or fair value
    
    
    1,539
    
    
    
    1,633Loans, net of allowance for loan losses of $92,406 in 2005
and $80,066 in 2004
    
    
    7,815,623
    
    
    
    5,917,352Accrued interest receivable
    
    
    105,882
    
    
    
    88,285Foreclosed real estate held for sale, net of allowance of
$227 in 2005 and $306 in 2004
    
    
    4,137
    
    
    
    3,811Premises and equipment, net
    
    
    117,623
    
    
    
    110,051Deferred income taxes, net
    
    
    41,111
    
    
    
    33,661Other assets
    
    
    42,693
    
    
    
    40,841TOTAL
    
    $
    16,151,864
    
    
    $
    14,321,620LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing
    
    $
    277,099
    
    
    $
    249,368Interest-bearing and related accrued interest payable
    
    
    8,098,510
    
    
    
    5,994,802Total deposits
    
    
    8,375,609
    
    
    
    6,244,170Federal funds purchased and repurchase agreements
    
    
    6,260,029
    
    
    
    6,683,527Advances from Federal Home Loan Bank
    
    
    172,000
    
    
    
    211,000Mortgage note payable
    
    
    36,432
    
    
    
    36,858Advances from borrowers for taxes and insurance
    
    
    7,867
    
    
    
    6,513Accrued expenses and other liabilities
    
    
    106,449
    
    
    
    61,993Total liabilities
    
    
    14,958,386
    
    
    
    13,244,061COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock  $1.00 par value per share (liquidation preference  $530,926 in
2005 and $511,744 in 2004); authorized 50,000,000 shares in 2005 and 20,000,000
shares in 2004; issued and outstanding 18,160,259 shares in 2005 and 17,794,251
shares in 2004
    
    
    18,160
    
    
    
    17,794Common stock  $1.00 par value per share; authorized 500,000,000 shares in 2005
and 300,000,000 shares in 2004; issued and outstanding 164,098,237 shares in
2005 and 163,918,835 shares in 2004
    
    
    164,098
    
    
    
    163,919Paid-in capital
    
    
    706,122
    
    
    
    686,493Retained earnings:Reserve fund
    
    
    76,443
    
    
    
    60,260Undivided profits
    
    
    228,648
    
    
    
    149,305Accumulated other comprehensive income (loss), net of income tax
    
    
    7
    
    
    
    (212
    )Total stockholders equity
    
    
    1,193,478
    
    
    
    1,077,559TOTAL
    
    $
    16,151,864
    
    
    $
    14,321,620
  77




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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 (As Restated
See Note 25)
    
    
    (As Restated See Note 25)2005
    
    
    2004
    
    
    2003INTEREST INCOME:Loans, including loan fees
    
    $
    479,042
    
    
    $
    322,164
    
    
    $
    275,848Investment securities
    
    
    247,533
    
    
    
    212,213
    
    
    
    134,273Mortgage and asset-backed securities
    
    
    32,315
    
    
    
    37,446
    
    
    
    40,092Money market instruments
    
    
    36,433
    
    
    
    19,510
    
    
    
    11,633Trading securities
    
    
    6
    
    
    
    43
    
    
    
    48Total interest income
    
    
    795,329
    
    
    
    591,376
    
    
    
    461,894INTEREST EXPENSE:Deposits
    
    
    241,268
    
    
    
    166,237
    
    
    
    137,271Federal funds purchased and repurchase agreements
    
    
    234,791
    
    
    
    141,414
    
    
    
    101,652Advances from Federal Home Loan Bank
    
    
    7,688
    
    
    
    6,568
    
    
    
    6,037Other borrowings
    
    
    
    
    
    
    
    
    
    
    142Total interest expense
    
    
    483,747
    
    
    
    314,219
    
    
    
    245,102NET INTEREST INCOME
    
    
    311,582
    
    
    
    277,157
    
    
    
    216,792PROVISION FOR LOAN LOSSES
    
    
    31,000
    
    
    
    36,691
    
    
    
    27,048NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
    
    
    280,582
    
    
    
    240,466
    
    
    
    189,744NONINTEREST INCOME:Service and other charges on loans
    
    
    11,577
    
    
    
    10,106
    
    
    
    10,795Service charges on deposit accounts
    
    
    8,636
    
    
    
    7,969
    
    
    
    7,053Other fees and commissions
    
    
    13,182
    
    
    
    10,536
    
    
    
    9,983Net gain on derivative instruments
    
    
    1,878
    
    
    
    22,388
    
    
    
    18,413Net gain (loss) on sales and valuation of loans, securities,
and other assets
    
    
    547
    
    
    
    2,629
    
    
    
    (20,949
    )Total noninterest income
    
    
    35,820
    
    
    
    53,628
    
    
    
    25,295TOTAL NET INTEREST INCOME AND NONINTEREST INCOME
    
    
    316,402
    
    
    
    294,094
    
    
    
    215,039NONINTEREST EXPENSES:Salaries and employees benefits
    
    
    46,653
    
    
    
    38,317
    
    
    
    33,840Equipment
    
    
    9,554
    
    
    
    9,445
    
    
    
    9,044Deposits insurance premium and supervisory examination
    
    
    3,370
    
    
    
    2,907
    
    
    
    2,392Occupancy
    
    
    7,640
    
    
    
    6,694
    
    
    
    6,603Advertising
    
    
    9,160
    
    
    
    10,508
    
    
    
    6,698Printing, postage, stationery and supplies
    
    
    3,128
    
    
    
    3,206
    
    
    
    3,253Telephone
    
    
    1,853
    
    
    
    2,315
    
    
    
    2,279Net loss (gain) from operations of foreclosed real estate held for sale
    
    
    (402
    )
    
    
    418
    
    
    
    205Municipal taxes
    
    
    4,708
    
    
    
    3,953
    
    
    
    3,600Other
    
    
    22,566
    
    
    
    22,362
    
    
    
    16,907Total noninterest expenses
    
    
    108,230
    
    
    
    100,125
    
    
    
    84,821INCOME BEFORE PROVISION FOR INCOME TAXES
    
    
    208,172
    
    
    
    193,969
    
    
    
    130,218PROVISION FOR INCOME TAXES
    
    
    45,086
    
    
    
    22,093
    
    
    
    19,263NET INCOME
    
    
    163,086
    
    
    
    171,876
    
    
    
    110,955LESS DIVIDENDS TO PREFERRED STOCKHOLDERS
    
    
    36,985
    
    
    
    27,158
    
    
    
    21,593INCOME AVAILABLE TO COMMON
STOCKHOLDERS
    
    $
    126,101
    
    
    $
    144,718
    
    
    $
    89,362BASIC EARNINGS PER COMMON SHARE
    
    $
    0.77
    
    
    $
    0.89
    
    
    $
    0.56DILUTED EARNINGS PER COMMON SHARE
    
    $
    0.74
    
    
    $
    0.86
    
    
    $
    0.54
  78




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W HOLDING COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 (As Restated 
    
    
    (As Restated See Note 25)
    
    
    See Note 25)2005
    
    
    2004
    
    
    2003CHANGES IN STOCKHOLDERS EQUITY:Preferred stock:Balance at beginning of year
    
    $
    17,794
    
    
    $
    15,396
    
    
    $
    8,943Issuance of preferred stock
    
    
    401
    
    
    
    2,675
    
    
    
    6,872Conversion of preferred stock
    
    
    (35
    )
    
    
    (277
    )
    
    
    (419
    )Balance at end of year
    
    
    18,160
    
    
    
    17,794
    
    
    
    15,396Common stock:Balance at beginning of year
    
    
    163,919
    
    
    
    106,290
    
    
    
    68,346Stock split
    
    
    
    
    
    
    54,640
    
    
    
    34,737Stock dividend
    
    
    
    
    
    
    2,142
    
    
    
    2,083Purchase and retirement of common stock
    
    
    
    
    
    
    
    
    
    
    (2
    )Issuance of common stock upon conversion of preferred stock
    
    
    123
    
    
    
    632
    
    
    
    626Issuance of common stock upon exercise of stock options
    
    
    56
    
    
    
    215
    
    
    
    500Balance at end of year
    
    
    164,098
    
    
    
    163,919
    
    
    
    106,290Paid-in capital:Balance at beginning of year
    
    
    686,493
    
    
    
    514,800
    
    
    
    319,106Issuance of preferred stock
    
    
    19,049
    
    
    
    126,715
    
    
    
    158,991Stock dividend
    
    
    
    
    
    
    43,684
    
    
    
    33,076Stock options exercised
    
    
    104
    
    
    
    754
    
    
    
    2,834Stock-based compensation expense
    
    
    564
    
    
    
    895
    
    
    
    1,031Issuance of common stock upon conversion of preferred stock
    
    
    (88
    )
    
    
    (355
    )
    
    
    (207
    )Purchase and retirement of common stock
    
    
    
    
    
    
    
    
    
    
    (31
    )Balance at end of year
    
    
    706,122
    
    
    
    686,493
    
    
    
    514,800Reserve fund:Balance at beginning of year  as previously reported
    
    
    
    
    
    
    
    
    
    
    32,011Prior period
adjustment (see Note 25)
    
    
    
    
    
    
    
    
    
    
    (177
    )Balance at beginning of year  as restated
    
    
    60,260
    
    
    
    42,962
    
    
    
    31,834Transfer from undivided profits
    
    
    16,183
    
    
    
    17,298
    
    
    
    11,128Balance at end of year
    
    
    76,443
    
    
    
    60,260
    
    
    
    42,962Undivided profits:Balance at beginning of year  as previously reported
    
    
    
    
    
    
    
    
    
    
    157,442Prior period
adjustment (see Note 25)
    
    
    
    
    
    
    
    
    
    
    (1,595
    )Balance at beginning of year  as restated
    
    
    149,305
    
    
    
    145,863
    
    
    
    155,847Net income
    
    
    163,086
    
    
    
    171,876
    
    
    
    110,955Cash dividends on common stock
    
    
    (30,575
    )
    
    
    (23,502
    )
    
    
    (18,322
    )Cash dividends on preferred stock
    
    
    (36,985
    )
    
    
    (27,158
    )
    
    
    (21,593
    )Transfer to reserve fund
    
    
    (16,183
    )
    
    
    (17,298
    )
    
    
    (11,128
    )Stock split
    
    
    
    
    
    
    (54,643
    )
    
    
    (34,737
    )Stock dividend
    
    
    
    
    
    
    (45,833
    )
    
    
    (35,159
    )Balance at end of year
    
    
    228,648
    
    
    
    149,305
    
    
    
    145,863Accumulated other comprehensive income (loss), net of income tax:Balance at beginning of year
    
    
    (212
    )
    
    
    (933
    )
    
    
    (1,100
    )Other comprehensive income
    
    
    219
    
    
    
    721
    
    
    
    167Balance at end of year
    
    
    7
    
    
    
    (212
    )
    
    
    (933
    )TOTAL STOCKHOLDERS EQUITY
    
    $
    1,193,478
    
    
    $
    1,077,559
    
    
    $
    824,378COMPREHENSIVE INCOME:Net income
    
    $
    163,086
    
    
    $
    171,876
    
    
    $
    110,955Other
comprehensive income:Unrealized net gains (losses) on securities available for sale:Unrealized gains (losses) arising during the period
    
    
    222
    
    
    
    828
    
    
    
    (7,512
    )Reclassification adjustment for losses (gains) included in net income
    
    
    
    
    
    
    (128
    )
    
    
    7,671222
    
    
    
    700
    
    
    
    159Income tax effect
    
    
    (3
    )
    
    
    21
    
    
    
    8Other comprehensive income
    
    
    219
    
    
    
    721
    
    
    
    167TOTAL COMPREHENSIVE INCOME
    
    $
    163,305
    
    
    $
    172,597
    
    
    $
    111,122
  79




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W HOLDING COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 (As Restated
See Note 25)
    
    
    (As Restated See Note 25)2005
    
    
    2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    163,086
    
    
    $
    171,876
    
    
    $
    110,955Adjustments to reconcile net income to net cash provided
by operating activities:Provision (credit) for:Loan losses
    
    
    31,000
    
    
    
    36,691
    
    
    
    27,048Losses (gains) on foreclosed real estate held for sale
    
    
    (59
    )
    
    
    553
    
    
    
    37Deferred income tax
    
    
    (7,452
    )
    
    
    (6,089
    )
    
    
    (10,083
    )Depreciation and amortization on:Premises and equipment
    
    
    7,093
    
    
    
    7,034
    
    
    
    7,293Foreclosed real estate held for sale
    
    
    
    
    
    
    
    
    
    
    308Mortgage servicing rights
    
    
    488
    
    
    
    424
    
    
    
    648Stock-based compensation expense
    
    
    564
    
    
    
    895
    
    
    
    1,031Amortization of premium (discount), net on:Investment securities available for sale
    
    
    68
    
    
    
    393
    
    
    
    14Investment securities held to maturity
    
    
    (4,900
    )
    
    
    (1,551
    )
    
    
    (1,953
    )Mortgage-backed securities held to maturity
    
    
    846
    
    
    
    1,136
    
    
    
    4,292Loans
    
    
    1,181
    
    
    
    1,320
    
    
    
    1,481Amortization of discount on deposits
    
    
    4,337
    
    
    
    3,796
    
    
    
    2,750Amortization of net deferred loan origination fees
    
    
    (16,303
    )
    
    
    (9,994
    )
    
    
    (8,581
    )Net loss (gain) on sale and in valuation of:Investment securities available for sale
    
    
    
    
    
    
    (128
    )
    
    
    7,671Impairment of investment securities held to maturity
    
    
    
    
    
    
    
    
    
    
    15,701Called investment securities held to maturity
    
    
    
    
    
    
    (525
    )
    
    
    Mortgage loans held for sale
    
    
    (334
    )
    
    
    (1,649
    )
    
    
    (2
    )Derivative instruments
    
    
    4,008
    
    
    
    (3,341
    )
    
    
    (1,199
    )Foreclosed real estate held for sale
    
    
    (476
    )
    
    
    (305
    )
    
    
    (797
    )Capitalization of servicing rights
    
    
    (257
    )
    
    
    (904
    )
    
    
    (1,544
    )Originations of mortgage loans held for sale
    
    
    (19,955
    )
    
    
    (30,499
    )
    
    
    (17,515
    )Sales of mortgage loans held for sale
    
    
    15,742
    
    
    
    23,428
    
    
    
    Decrease (increase) in:Trading securities
    
    
    4,700
    
    
    
    8,383
    
    
    
    22,403Accrued interest receivable
    
    
    (17,597
    )
    
    
    (12,718
    )
    
    
    (28,914
    )Other assets
    
    
    521
    
    
    
    2,138
    
    
    
    1,877Increase (decrease) in:Accrued interest on deposits and borrowings
    
    
    54,497
    
    
    
    12,257
    
    
    
    4,265Other liabilities
    
    
    26,385
    
    
    
    (14,762
    )
    
    
    4,361Net cash provided by operating activities
    
    
    247,183
    
    
    
    187,859
    
    
    
    141,547CASH FLOWS FROM INVESTING ACTIVITIES:Net increase in interest-bearing deposits in banks
    
    
    (7,640
    )
    
    
    (11,709
    )
    
    
    (20,308
    )Net decrease (increase) in federal funds sold and resell agreements
    
    
    270,764
    
    
    
    (17,452
    )
    
    
    9,295Resell agreements with original maturities over three months:Purchases
    
    
    
    
    
    
    (550,000
    )
    
    
    (350,000
    )Collections
    
    
    
    
    
    
    200,000
    
    
    
    150,000Investment securities available for sale:Maturities, prepayments and calls
    
    
    7,834
    
    
    
    42,505
    
    
    
    182,410Sales
    
    
    
    
    
    
    130,066
    
    
    
    50,803Purchases
    
    
    (4,965
    )
    
    
    (124,938
    )
    
    
    (83,261
    )Investment securities held to maturity:Maturities, prepayments and calls
    
    
    17,111,348
    
    
    
    14,602,463
    
    
    
    21,450,415Purchases
    
    
    (17,387,928
    )
    
    
    (15,967,622
    )
    
    
    (23,340,101
    )Mortgage-backed securities held to maturity:Maturities, prepayments and calls
    
    
    177,885
    
    
    
    225,783
    
    
    
    821,058Purchases
    
    
    (49,897
    )
    
    
    (55,081
    )
    
    
    (1,223,736
    )Loans:Loan originations and principal collections, net
    
    
    (1,915,587
    )
    
    
    (1,266,027
    )
    
    
    (1,000,501
    )Sales
    
    
    
    
    
    
    
    
    
    
    50,959Purchases of derivative options
    
    
    (2,905
    )
    
    
    (4,872
    )
    
    
    (3,384
    )Cash paid on terminated swaps
    
    
    (252
    )
    
    
    
    
    
    
    Proceeds from sales of foreclosed real estate held for sale
    
    
    1,869
    
    
    
    1,494
    
    
    
    882Additions to premises and equipment
    
    
    (13,971
    )
    
    
    (13,553
    )
    
    
    (14,450
    )Redemptions of Federal Home Loan Bank stock
    
    
    16,907
    
    
    
    8,490
    
    
    
    3,572Purchases of Federal Home Loan Bank stock
    
    
    (7,510
    )
    
    
    (20,935
    )
    
    
    Net cash used in investing activities
    
    
    (1,804,048
    )
    
    
    (2,821,388
    )
    
    
    (3,316,347
    )Forward
    
    $
    (1,556,865
    )
    
    $
    (2,633,529
    )
    
    $
    (3,174,800
    )
  80




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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 (As Restated See Note 25)
    
    
    (As Restated See Note 25)2005
    
    
    2004
    
    
    2003Forward
    
    $
    (1,556,865
    )
    
    $
    (2,633,529
    )
    
    $
    (3,174,800
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    2,085,606
    
    
    
    833,791
    
    
    
    1,086,251Net increase (decrease) in federal funds purchased
and repurchase agreements
    
    
    (1,150,707
    )
    
    
    1,365,526
    
    
    
    (326,280
    )Repurchase agreements with original maturities over three months:Proceeds
    
    
    5,188,072
    
    
    
    6,531,812
    
    
    
    2,740,548Payments
    
    
    (4,460,863
    )
    
    
    (6,259,856
    )
    
    
    (465,564
    )Advances from Federal Home Loan Bank:Proceeds
    
    
    
    
    
    
    293,000
    
    
    
    189,000Payments
    
    
    (39,000
    )
    
    
    (228,000
    )
    
    
    (163,000
    )Payments of mortgage note payable
    
    
    (426
    )
    
    
    (376
    )
    
    
    (588
    )Line of credit:Proceeds
    
    
    
    
    
    
    
    
    
    
    50,000Payments
    
    
    
    
    
    
    
    
    
    
    (50,000
    )Net increase in advances from borrowers for taxes
and insurance
    
    
    1,354
    
    
    
    2,206
    
    
    
    1,109Repurchase of common stock for retirement
    
    
    
    
    
    
    
    
    
    
    (33
    )Dividends paid
    
    
    (66,724
    )
    
    
    (50,097
    )
    
    
    (39,109
    )Issuance of preferred stock
    
    
    19,253
    
    
    
    129,495
    
    
    
    165,863Proceeds from stock options exercised
    
    
    160
    
    
    
    969
    
    
    
    3,334Net cash provided by financing activities
    
    
    1,576,725
    
    
    
    2,618,470
    
    
    
    3,191,531NET CHANGE IN CASH AND DUE FROM BANKS
    
    
    19,860
    
    
    
    (15,059
    )
    
    
    16,731CASH AND DUE FROM BANKS, BEGINNING OF YEAR
    
    
    77,752
    
    
    
    92,811
    
    
    
    76,080CASH AND DUE FROM BANKS, END OF YEAR
    
    $
    97,612
    
    
    $
    77,752
    
    
    $
    92,811SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:Cash paid during the year for:Interest on deposits and other borrowings
    
    $
    412,671
    
    
    $
    286,918
    
    
    $
    223,649Income taxes
    
    
    32,379
    
    
    
    45,742
    
    
    
    18,943Noncash activities:Accrued dividends payable
    
    
    4,136
    
    
    
    3,300
    
    
    
    2,737Net change in other comprehensive income
    
    
    219
    
    
    
    721
    
    
    
    167Mortgage loans securitized and transferred to:Trading securities
    
    
    4,700
    
    
    
    8,489
    
    
    
    22,403Mortgage-backed securities held to maturity
    
    
    
    
    
    
    2,305
    
    
    
    Transfer from held to maturity to available for sale
    
    
    
    
    
    
    
    
    
    
    51,671Transfer from loans to foreclosed real estate held for sale
    
    
    4,172
    
    
    
    3,015
    
    
    
    3,288Mortgage loans originated to finance the sale of foreclosed
real estate held for sale
    
    
    2,734
    
    
    
    1,545
    
    
    
    2,455Unpaid additions to premises and equipment
    
    
    1,328
    
    
    
    191
    
    
    
    16Transfer from undivided profits to reserve fund
    
    
    16,183
    
    
    
    17,298
    
    
    
    11,128Effect of
derivative transactions:Increase (decrease) in other assets
    
    
    (1,412
    )
    
    
    (11
    )
    
    
    5,102Increase in deposits
    
    
    (4,490
    )
    
    
    (6,368
    )
    
    
    (4,947
    )Decrease (increase) in other liabilities
    
    
    (3,613
    )
    
    
    7,768
    
    
    
    (2,709
    )Conversion of preferred stock into common stock:Common stock
    
    
    123
    
    
    
    632
    
    
    
    626Paid in capital
    
    
    (88
    )
    
    
    (355
    )
    
    
    (207
    )Preferred stock
    
    
    (35
    )
    
    
    (277
    )
    
    
    (419
    )
 See notes to consolidated financial statements.
    
    (concluded)
 81




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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 1.
    
    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:W Holding Company, Inc. (the Company) is a financial holding company offering a full range of
financial services. The business of the Company is conducted primarily through its wholly owned
commercial bank subsidiary, Westernbank Puerto Rico (Westernbank or the Bank). The
Companys other direct subsidiary is Westernbank Insurance Corp. The Company was organized
under the laws of the Commonwealth of Puerto Rico in February 1999 to become the bank holding
company of Westernbank. Westernbank was founded as a savings institution in 1958 operating in
the western and southwestern regions of Puerto Rico, focusing on retail banking and emphasizing
long-term fixed-rate residential mortgage loans on one-to-four family residential properties.
In 1994, Westernbank changed its charter to become a full-service commercial bank. Westernbank
offers a full range of business and consumer financial services, including banking, trust and
brokerage services. Westernbank Insurance Corp. is a general insurance agent placing property,
casualty, life and disability insurance. The assets, liabilities, revenues and expenses of
Westernbank Insurance Corp. at December 31, 2005 and 2004 and for each of the three years in
the period ended December 31, 2005, were not significant.In July 2000, the Company became a financial holding company under the Bank Holding Company
Act. As a financial holding company, the Company is permitted to engage in financial related
activities, including insurance and securities activities, provided that the Company and its
banking subsidiary meet certain regulatory standards.Westernbank operates through 55 full service branch offices located throughout Puerto Rico,
including 33 in the Western and Southwestern regions, 7 in the Northeastern region, 13 in the
San Juan metropolitan area, and 2 in the Eastern region, and a website on the Internet.
Westernbanks traditional banking operations include retail operations, such as its branches,
including the branches of the Expresso division, together with consumer loans, mortgage loans,
commercial loans (excluding the asset-based lending operations), investments (treasury) and
deposit products. Besides the traditional banking operations, Westernbank operates through four
other divisions: Westernbank International Division, which is an International Banking Entity
(IBE) under the Puerto Rico Act No. 52 of August 11, 1989, as amended, known as the
International Banking Regulatory Act, which offers commercial and related services, and
treasury and investment activities outside of Puerto Rico; Westernbank Business Credit, which
specializes in commercial business loans secured principally by commercial real estate,
accounts receivable, inventory and equipment; Westernbank Trust Division, which offers a full
array of trust services; and 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, through 20 full-service branches.Westernbank World Plaza, Inc. (WWPI), a wholly owned subsidiary of Westernbank, 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.
Westernbank World Plaza serves as the Companys San Juan metropolitan area headquarters for
Westernbanks regional commercial lending office and headquarters for the Westernbank Business
Credit and Expresso of Westernbank divisions. Westernbank also owns 100% of the voting shares
of SRG Net, Inc., a Puerto Rico corporation that operates an electronic funds transfer network.
The assets, liabilities, revenues and expenses of SRG Net, Inc. at December 31, 2005 and 2004,
and for each of the three years in the period ended December 31, 2005, were not significant.
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The accounting and reporting policies of the Company conform to accounting principles generally
accepted in the United States of America and banking industry practices. Following is a summary
of the Companys most significant accounting policies:Principles of Consolidation- The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Westernbank Puerto Rico and Westernbank Insurance
Corp. All significant intercompany transactions and balances have been eliminated.Use of Estimates- The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.Significant Group Concentrations of Credit Risk- Most of the Companys business activities are
with customers located within Puerto Rico. Notes 2 and 3 discuss the types of securities that
the Company invests in; Note 4 discusses the types of lending that the Company engages in; and
Note 19 discusses the types of derivative instruments that the Company enters into. The
Company does not have any significant concentration in any one industry or customer, except as
discussed in Note 4.Cash and Cash Equivalents- For purposes of presentation in the consolidated statements of cash
flows, cash and cash equivalents are those amounts included in the statements of financial
condition as cash and due from banks.Interest-Bearing Deposits in Banks, Federal Funds Sold and Federal Funds Purchased-
Interest-bearing deposits in banks, federal funds sold and federal funds purchased are carried
at cost and mature the next business date.Securities- 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 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 income. The
cost of securities sold is based on the specific identification method. Available-for-sale and
held-to-maturity securities are reviewed at least quarterly for possible other-than-temporary
impairment. The review includes an analysis of the facts and circumstances of each individual
investment such as the severity of loss, the length of time the fair value has been below cost,
the expectation for that securitys performance, the credit worthiness of the issuer and the
Companys intent and ability to hold the security. 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 income.The impairment analysis on the mortgage and other asset-backed securities is done placing
special emphasis on the analysis of the trustee and collateral manager monthly reports, on
sensitivity and expected cash flow analysis made by major brokerage houses and on the credit
worthiness of the issuer. The Company also considers its intent and ability to hold these
securities. If management believes, based on the analysis, that the principal and interest
obligations on any mortgage and other asset-backed security will not be received in a timely
manner, the security is written down to fair value based on available secondary market prices
from broker/dealers.
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The equity securities and corporate notes impairment analyses are performed and reviewed
quarterly based on the latest financial information and any supporting research report made by
major brokerage houses. These analyses are subjective and based, among other things, on
relevant financial data such as capitalization, cash flows, liquidity, systematic risk, and
debt outstanding. Management also considers the industry trends, the historical performance of
the stock, as well as the Companys intent to hold the security. If management believes 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.Residential Mortgage Loans Held for Sale Residential mortgage loans originated and intended
for sale in the secondary market are carried at the lower of aggregate cost or fair value.
Fair value is based on the contract price at which the mortgage loans will be sold. The Company
generally has commitments to sell residential mortgage loans held for sale in the secondary
market. Net unrealized losses are recognized through a valuation allowance by charges to
income. Realized gains or losses on these loans are determined using the specific
identification method. Commitments to sell residential loans held for sale in the secondary
market were not significant at December 31, 2005 and 2004.Loans- Loans that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted
for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated
loans. Interest income is accrued on the unpaid principal balance computed using the effective
interest method. Loan origination fees, net of certain direct origination costs, are deferred
and recognized as an adjustment of the related loan yield using the interest method or a method
which approximates the interest method. Discounts and premiums on purchased loans are amortized
to income over the expected lives of the loans using methods that approximate the interest
method.The accrual of interest on loans is discontinued when there is a clear indication the
borrowers cash flow may not be sufficient to meet payments as they become due, but in no event
is it recognized after 90 days in arrears on payments of principal or interest. When a loan is
placed on nonaccrual status, all previously accrued and unpaid interest is charged against
income and the loan is accounted for on the cash method thereafter, until qualifying for return
to accrual status. Generally, a loan is returned to accrual status when all delinquent interest
and principal payments become current in accordance with the terms of the loan agreement or
when the loan is both well secured and in the process of collection and collectibility is no
longer doubtful. Consumer loans that have principal and interest payments that have become past
due one hundred and twenty days and credit cards and other consumer revolving lines of credit
that have principal and interest payments that have become past due one hundred and eighty days
are charged-off to the allowance for loan losses.Allowance for Loan Losses The Company maintains an allowance to absorb probable loan losses
inherent in the portfolio. The allowance for loan losses is maintained at a level the Company
considers to be adequate to absorb probable loan losses, based on evaluations of the
collectibility and historical loss experience of loans. Estimates of losses inherent in the
loan portfolio involve the exercise of judgment and the use of assumptions. This evaluation is
inherently subjective as it requires estimates that are susceptible to significant revision as
more information becomes available. The allowance is increased by a provision for loan losses,
which is charged to expense and reduced by charge-offs, net of recoveries. Provisions for loan
losses are based on the Companys review of the historical loan loss experience and such
factors that, in managements judgment, deserve consideration under existing economic
conditions in estimating probable loan losses. Changes in the allowance relating to impaired
loans are charged or credited to the provision for loan losses. Because of uncertainties
inherent in the estimation process, managements estimate of credit losses in the loan
portfolio and the related allowance may change in the near term.
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The allowance for loan losses is based on ongoing quarterly assessments of the probable
estimated losses inherent in the loan portfolio. The Company follows a systematic methodology
to establish and evaluate the adequacy of the allowance for loan losses. This methodology
consists of several key elements. Larger commercial and construction loans that exhibit
probable or observed credit weaknesses are subject to individual review. Where appropriate,
allowances are allocated to individual loans based on managements estimate of the borrowers
ability to repay the loan given the availability of collateral, other sources of cash flow and
legal options available to the Company.Included in the review of individual loans are those 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 fair value of
the underlying collateral. Commercial business, commercial real estate and construction loans,
exceeding $500,000, are individually evaluated for impairment. Other loans are evaluated in
homogeneous groups and collectively evaluated for impairment. Loans that are recorded at fair
value or at the lower of cost or fair value are not evaluated for impairment. Impaired loans
for which the discounted cash flows or collateral value exceeds its carrying value do not
require an allowance. The Company evaluates the collectibility of both principal and interest
when assessing the need for loss accrual.Historical loss rates are applied to other commercial and construction loans not subject to
specific allowance allocations. The loss rates are generally derived from historical loss
trends for three to five years.Homogeneous loans, such as consumer installments, residential mortgage loans, and credit cards
are not individually risk graded. Allowances are established for each pool of loans based on
the expected net charge-offs for one year. Loss rates are based on the average net charge-off
history for one to three years by loan category.Historical loss rates may be adjusted for significant factors that, in managements judgment,
reflect the impact of any current condition on loss recognition. Factors that management
considers in the analysis include the effect of the national and local economies, trends in the
nature and volume of loans (delinquencies, charge-offs, non-accrual and problem loans), asset
quality trends, changes in the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and the Companys internal
credit examiners.An unallocated allowance is maintained to recognize the imprecision in estimating and measuring
loss when evaluating allowances for individual loans or pools of loans. Allowances on
individual loans and historical loss rates are reviewed quarterly and adjusted as necessary
based on changing borrower and/or collateral conditions and actual collection and charge-off
experience.The Company has not substantively changed any aspect of its overall approach in the
determination of the allowance for loan losses. There have been no material changes in
assumptions or estimation techniques as compared to prior years that impacted the determination
of the current year allowance for loan losses.Foreclosed Real Estate Held for Sale- Assets acquired through, or in lieu of, loan foreclosure
are held for sale and are carried at the lower of cost or fair value less cost to sell. All
properties are periodically evaluated by management. Reductions in fair value and revenue and
expenses from the operations of such properties are included in noninterest expenses as net
gain (loss) from operations of foreclosed real estate held for sale.Premises and Equipment- Premises and equipment, including leasehold improvements, are stated
at cost, less accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which range from two to 40
years.
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Impairment of Long-Lived Assets
 Transfers of Financial Assets 
 Mortgage Servicing Rights
  Stock Option Plans Accounting for Stock-Based Compensation  Transition and
Disclosure, an amendment of FASB Statement No. 123 Accounting for Stock Issued to Employees,
 Income Taxes
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Financial Instruments:
 
    
    Derivative Financial Instruments- As part of the Companys asset/liability
management, the Company uses interest-rate contracts, which include interest-rate exchange
agreements (swaps) and option agreements, to hedge various exposures or to modify interest
rate characteristics of various statement of financial condition items.The Company accounts for its derivatives under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. This Standard requires recognition of all
derivatives as either assets or liabilities in the statement of financial condition and
requires measurement of those instruments at fair value through adjustments to either
accumulated other comprehensive income (loss) or current earnings or both, as appropriate.
The Company designates derivative instruments as either a fair value hedge, cash flow hedge or as a derivative
instrument not designated as a hedge. For a fair value hedge, changes in the fair value of
the derivative instrument and changes in the fair value of the hedged asset or liability or
of an unrecognized firm commitment attributable to the hedged risk are recorded in current
period net income. For a cash flow hedge, changes in the fair value of the derivative
instrument, to the extent that it is effective, are recorded in accumulated other
comprehensive income (loss) and subsequently reclassified to net income in the same
period(s) that the hedged transaction impacts net income. For all hedging relationships,
derivative gains and losses that are not effective in hedging the changes in fair value or
expected cash flows of the hedged item are recognized immediately in current period net
income. Similarly, the changes in fair value of derivative instruments that do not qualify
for hedge accounting under SFAS No. 133 are also reported in current period net income, in
noninterest income.The net cash settlements on derivatives that qualify for hedge accounting are recorded in
interest income or interest expense, based on the item being hedged. The net cash
settlements on derivatives that do not qualify for hedge accounting are reported in
noninterest income.The Company formally documents the relationship between hedging instruments and hedged
items, as well as the risk management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivative instruments that are designated
as fair value or cash flow hedges to specific assets and liabilities on the statement of
financial condition or to specific firm commitments or forecasted transactions along with a
formal assessment at both inception of the hedge and on an ongoing basis as to the
effectiveness of the derivative instrument in offsetting changes in fair values or cash
flows of the hedged item. The Company discontinues hedge accounting prospectively when it
is determined that the derivative is or will no longer be effective in offsetting changes
in the fair value or cash flows of the hedged item, the derivative expires, is sold, or
terminated, or management determines that designation of the derivative as a hedging
instrument is no longer appropriate.When hedge accounting is discontinued, the future gains and losses arising from any change
in fair value of the derivative are recorded as noninterest income. When a fair value hedge
is discontinued, the hedged asset or liability is no longer adjusted for changes in fair
value and the existing basis adjustment is amortized or accreted over the remaining life of
the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or
forecasted transaction is still expected to occur, gains or losses that were accumulated in
other comprehensive income are amortized or accreted into earnings over the same periods
which the hedged transactions would have affected earnings.
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The fair values of the indexed option contracts and the interest rate swaps used to manage
the exposure to the stock market were obtained from dealer quotes. In the case of other
interest rate swaps, the fair values were based upon an independent valuation model and
periodically compared to dealer quotes. The fair values produced by this
proprietary valuation model is in part theoretical and therefore can vary between
derivative dealers and are not necessarily reflective of the actual price at which the
contract could be traded. Small changes in assumptions can result in significant changes in
valuation. The risks inherent in the determination of the fair value of a derivative may
result in income statement volatility.
    
    Off-Balance Sheet Credit Related Financial Instruments- In the ordinary course of
business, the Company enters into off-balance sheet credit related financial instruments
consisting of commitments to extend credit, commitments under credit
card arrangements and commercial letters of credit. Such financial
instruments are recorded in the financial statements when they are funded or related fees
are incurred or received. The Company periodically evaluates the credit risks inherent in
these commitments and commercial letters of credit, and establishes loss allowances for
such risks if and when these are deemed necessary. For the years ended December 31, 2005,
2004 and 2003, the Company did not record any loss allowances in connection with risks
involved in off-balance sheet credit related financial instruments. At December 31, 2005
and 2004, there were no additional off-balance sheet credit related financial instruments
other than those mentioned above.
 Earnings per Share Earnings Per Share
  2005
    
    
    2004
    
    
    2003(Amounts in thousands, except per share data)Basic and diluted earnings per common share:Net income
    
    $
    163,086
    
    
    $
    171,876
    
    
    $
    110,955Less preferred stock dividends
    
    
    (36,985
    )
    
    
    (27,158
    )
    
    
    (21,593
    )Income
available to common stockholders  basic
    
    
    126,101
    
    
    
    144,718
    
    
    
    89,362Plus convertible preferred stock dividends
    
    
    887
    
    
    
    1,189
    
    
    
    Income
available to common stockholders  diluted
    
    $
    126,988
    
    
    $
    145,907
    
    
    $
    89,362Weighted average number of common
shares outstanding for the year
    
    
    164,024
    
    
    
    163,348
    (1)
    
    
    160,734
    (1)Dilutive potential common shares  stock options
    
    
    4,899
    
    
    
    5,276
    (1)
    
    
    4,596
    (1)Assumed conversion of preferred stock
    
    
    1,696
    
    
    
    1,819
    (1)
    
    
    Total
    
    
    170,619
    
    
    
    170,443
    
    
    
    165,330Basic earnings per common share
    
    $
    0.77
    
    
    $
    0.89
    (1)
    
    $
    0.56
    (1)Diluted earnings per common share
    
    $
    0.74
    
    
    $
    0.86
    (1)
    
    $
    0.54
    (1)
 
 (1)
    
    Adjusted to reflect the three-for-two stock split and 2% stock dividend declared in December 2004 and distributed on January 10, 2005. 88




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Comprehensive Income 
 Recent
Accounting Pronouncements
 Accounting
for Asset Retirement Obligations
 Accounting for Costs Associated with Exit or
Disposal Activities Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)
 Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 34 .
 Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 .
 89




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Amendment of Statement No. 133 on Derivative
Instruments and Hedging Activities . Accounting for Derivative Instruments and Hedging Activities .
 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
 Accounting for Certain
Loans and Debt Securities Acquired in a Transfer.
 The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments Accounting for Certain Investments in Debt and Equity
Securities Effective Date of Paragraphs 10-20 of EITF 03-01 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments Recognition
of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds
 90




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Fair
Value
 Application of Accounting
Principles to Loan Commitments
 Exchanges of Nonmonetary Assets  an amendment
of APB Opinion No. 29 Accounting for Nonmonetary
Transactions
 Share-Based Payment
 Accounting for
Conditional Asset Retirement Obligations  an interpretation of FASB Statement No. 143
 91




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Accounting Changes and Error Corrections  a
Replacement of APB Opinion No. 20 and FASB Statement No. 3 Accounting Changes Reporting Accounting Changes in Interim Financial
Statements
 Redeemable Preferred Stocks
 92




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Accounting for Certain Hybrid Financial
Instruments
 Accounting for Servicing of Financial Assets , Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities Accounting for Certain Investments in Debt and Equity Securities
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2.
    
    FEDERAL FUNDS SOLD AND RESELL AGREEMENTS:The Company sells federal funds and enters into purchases of securities under agreements to
resell the same securities (resell agreements). These agreements are classified as secured
loans and are reflected as assets in the consolidated statements of financial condition.At December 31, 2005 and 2004, federal funds sold and resell agreements (classified by
counterparty) were as follows:
 2005
    
    
    2004(In thousands)Federal funds sold:Citibank N.A.  Puerto Rico
    
    $
    121,500
    
    
    $
    291,900Government Development Bank for Puerto Rico
    
    
    
    
    
    
    25,000Firstbank Puerto Rico
    
    
    
    
    
    
    25,000Subtotal
    
    
    121,500
    
    
    
    341,900Resell agreements:Credit Suisse First Boston
    
    
    500,000
    
    
    
    500,000UBS Financial Services Incorporated of Puerto Rico
    
    
    30,000
    
    
    
    70,396Popular Securities, Inc.
    
    
    45,039
    
    
    
    55,007Citibank N.A.  Puerto Rico
    
    
    50,000
    
    
    
    50,000Subtotal
    
    
    625,039
    
    
    
    675,403Total
    
    $
    746,539
    
    
    $
    1,017,303
 94




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2005
    
    
    2004Fair
    
    
    
    
    
    
    FairValue of
    
    
    
    
    
    
    Value ofReceivable
    
    
    Underlying
    
    
    Receivable
    
    
    UnderlyingUnderlying Collateral
    
    Balance
    
    
    Collateral
    
    
    Balance
    
    
    Collateral(In thousands)Investment securities:U.S. Government and
agencies obligations
    
    $
    5,000
    
    
    $
    5,277
    
    
    $
    
    
    
    $
    Puerto Rico Government and
agencies obligations
    
    
    30,000
    
    
    
    31,118
    
    
    
    70,396
    
    
    
    76,249U.S. municipal bonds
    
    
    40,039
    
    
    
    41,685
    
    
    
    20,522
    
    
    
    21,476Mortgage and asset-backed
securities:Federal Home Loan Mortgage
Corporation (FHLMC) certificates
    
    
    55,000
    
    
    
    54,622
    
    
    
    200,000
    
    
    
    198,694Federal National Mortgage
Association (FNMA) certificates
    
    
    495,000
    
    
    
    507,423
    
    
    
    350,000
    
    
    
    360,525Other mortgage and asset-backed
securities
    
    
    
    
    
    
    
    
    
    
    34,485
    
    
    
    35,193Total  excluding accrued
interest receivable
    
    $
    625,039
    
    
    $
    640,125
    
    
    $
    675,403
    
    
    $
    692,137Accrued interest receivable
on resell agreements
    
    $
    2,922
    
    
    
    
    
    
    $
    2,943
  2005
    
    
    2004Collateral Sold
    
    
    
    
    
    
    Collateral SoldCollateral
    
    
    under Repurchase
    
    
    Collateral
    
    
    under RepurchaseReceived
    
    
    Agreements
    
    
    Received
    
    
    Agreements(In thousands)Mortgage-backed securities:FNMA certificates
    
    $
    507,423
    
    
    $
    507,423
    
    
    $
    326,605
    
    
    $
    326,605FHLMC certificates
    
    
    54,622
    
    
    
    54,622
    
    
    
    198,694
    
    
    
    198,694Total
    
    $
    562,045
    
    
    $
    562,045
    
    
    $
    525,299
    
    
    $
    525,299
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The Company monitors the fair value of the underlying securities as compared to the
related receivable, including accrued interest, and requests additional collateral when the
fair value of the underlying collateral falls to less than the collateral requirement. The
collateral requirement is equal to 102 percent of the related receivable, including interest.
At December 31, 2005, resell agreements amounting to $75.0 million mature the next business
day, $200.0 million mature in 2009 and $350.0 million mature in 2010. At December 31, 2005,
there are $550.0 million in resell agreements where the counterparty has the option to
terminate the agreement quarterly, at each interest payment date. Securities purchased under
resell agreements may be held in safekeeping, in the name of the Company, by Citibank N.A., the
Companys custodian, or held by the counterparty. At December 31, 2005, all collateral was held
by the counterparties.3.
    
    INVESTMENT SECURITIES:The amortized cost, gross unrealized gains and losses and fair value of investment securities
at December 31, were as follows:
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available for sale:Collateralized mortgage obligations
(CMOs) issued
or guaranteed by FNMA
    
    $
    191
    
    
    $
    
    
    
    $
    6
    
    
    $
    185Equity securities  common stock
    
    
    4,965
    
    
    
    26
    
    
    
    10
    
    
    
    4,981Total
    
    $
    5,156
    
    
    $
    26
    
    
    $
    16
    
    
    $
    5,166Held to maturity:U.S. Government and agencies obligations
    
    $
    6,314,316
    
    
    $
    55
    
    
    $
    162,804
    
    
    $
    6,151,567Puerto Rico Government and
agencies obligations
    
    
    31,824
    
    
    
    132
    
    
    
    541
    
    
    
    31,415Corporate notes
    
    
    26,429
    
    
    
    1,276
    
    
    
    
    
    
    
    27,705Subtotal
    
    
    6,372,569
    
    
    
    1,463
    
    
    
    163,345
    
    
    
    6,210,687Mortgage-backed securities:GNMA certificates
    
    
    8,082
    
    
    
    187
    
    
    
    4
    
    
    
    8,265FHLMC certificates
    
    
    4,180
    
    
    
    128
    
    
    
    
    
    
    
    4,308FNMA certificates
    
    
    2,828
    
    
    
    113
    
    
    
    
    
    
    
    2,941CMOs issued or guaranteed by FHLMC
    
    
    607,659
    
    
    
    38
    
    
    
    58,080
    
    
    
    549,617CMOs issued or guaranteed by FNMA
    
    
    78,707
    
    
    
    
    
    
    
    3,436
    
    
    
    75,271Subtotal
    
    
    701,456
    
    
    
    466
    
    
    
    61,520
    
    
    
    640,402Total
    
    $
    7,074,025
    
    
    $
    1,929
    
    
    $
    224,865
    
    
    $
    6,851,089
 96




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Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available for sale:CMOs issued or guaranteed by FNMA
    
    $
    6,298
    
    
    $
    
    
    
    $
    182
    
    
    $
    6,116CMOs issued or guaranteed by FHLMC
    
    
    1,795
    
    
    
    
    
    
    
    30
    
    
    
    1,765Total
    
    $
    8,093
    
    
    $
    
    
    
    $
    212
    
    
    $
    7,881Held to maturity:U.S. Government and agencies obligations
    
    $
    6,004,849
    
    
    $
    6,181
    
    
    $
    32,457
    
    
    $
    5,978,573Puerto Rico Government and
agencies obligations
    
    
    34,822
    
    
    
    303
    
    
    
    540
    
    
    
    34,585Corporate notes
    
    
    51,418
    
    
    
    2,280
    
    
    
    
    
    
    
    53,698Subtotal
    
    
    6,091,089
    
    
    
    8,764
    
    
    
    32,997
    
    
    
    6,066,856Mortgage-backed securities:GNMA certificates
    
    
    9,881
    
    
    
    484
    
    
    
    
    
    
    
    10,365FHLMC certificates
    
    
    5,663
    
    
    
    334
    
    
    
    
    
    
    
    5,997FNMA certificates
    
    
    3,642
    
    
    
    245
    
    
    
    
    
    
    
    3,887CMOs issued or guaranteed by FHLMC
    
    
    706,632
    
    
    
    14
    
    
    
    58,171
    
    
    
    648,475CMOs issued or guaranteed by FNMA
    
    
    104,441
    
    
    
    20
    
    
    
    3,175
    
    
    
    101,286CMOs other
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    31Subtotal
    
    
    830,290
    
    
    
    1,097
    
    
    
    61,346
    
    
    
    770,041Total
    
    $
    6,921,379
    
    
    $
    9,861
    
    
    $
    94,343
    
    
    $
    6,836,897
  Held to MaturityAmortized
    
    
    FairCost
    
    
    Value(In thousands)Due within one year
    
    $
    287,827
    
    
    $
    287,956Due after one year through five years
    
    
    5,841,392
    
    
    
    5,685,564Due after five years through ten years
    
    
    221,921
    
    
    
    214,510Due after ten years
    
    
    21,429
    
    
    
    22,657Subtotal
    
    
    6,372,569
    
    
    
    6,210,687Mortgage-backed securities
    
    
    701,456
    
    
    
    640,402Total
    
    $
    7,074,025
    
    
    $
    6,851,089
 97




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Less than 12 months
    
    
    12 months or more
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    Number ofFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    InvestmentDecember 31, 2005
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Positions(In thousands)Available for sale:CMOs issued or
guaranteed by FNMA
    
    $
    
    
    
    $
    
    
    
    $
    185
    
    
    $
    6
    
    
    $
    185
    
    
    $
    6
    
    
    
    1Equity securities -
common stock
    
    
    1,320
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    1,320
    
    
    
    10
    
    
    
    4Total
    
    $
    1,320
    
    
    $
    10
    
    
    $
    185
    
    
    $
    6
    
    
    $
    1,505
    
    
    $
    16
    
    
    
    5Held to maturity:U.S. Government and
agencies obligations
    
    $
    1,242,859
    
    
    $
    20,626
    
    
    $
    4,628,856
    
    
    $
    142,178
    
    
    $
    5,871,715
    
    
    $
    162,804
    
    
    
    84Puerto Rico Government and
agencies obligations
    
    
    5,154
    
    
    
    36
    
    
    
    16,130
    
    
    
    505
    
    
    
    21,284
    
    
    
    541
    
    
    
    9Subtotal
    
    
    1,248,013
    
    
    
    20,662
    
    
    
    4,644,986
    
    
    
    142,683
    
    
    
    5,892,999
    
    
    
    163,345
    
    
    
    93Mortgage-backed securities:GNMA certificates
    
    
    1,216
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    1,216
    
    
    
    4
    
    
    
    10CMOs issued or
guaranteed by FHLMC
    
    
    29,262
    
    
    
    692
    
    
    
    505,921
    
    
    
    57,388
    
    
    
    535,183
    
    
    
    58,080
    
    
    
    11CMOs issued or
guaranteed by FNMA
    
    
    19,476
    
    
    
    469
    
    
    
    55,776
    
    
    
    2,967
    
    
    
    75,252
    
    
    
    3,436
    
    
    
    6Subtotal
    
    
    49,954
    
    
    
    1,165
    
    
    
    561,697
    
    
    
    60,355
    
    
    
    611,651
    
    
    
    61,520
    
    
    
    27Total
    
    $
    1,297,967
    
    
    $
    21,827
    
    
    $
    5,206,683
    
    
    $
    203,038
    
    
    $
    6,504,650
    
    
    $
    224,865
    
    
    
    120
 98




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Less than 12 months
    
    
    12 months or more
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    Number ofFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    InvestmentDecember 31, 2004
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Positions(In thousands)Available for sale:CMOs issued or
guaranteed by FNMA
    
    $
    6,116
    
    
    $
    182
    
    
    $
    
    
    
    $
    
    
    
    $
    6,116
    
    
    $
    182
    
    
    
    1CMOs issued or
guaranteed by FHLMC
    
    
    1,765
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    1,765
    
    
    
    30
    
    
    
    1Total
    
    $
    7,881
    
    
    $
    212
    
    
    $
    
    
    
    $
    
    
    
    $
    7,881
    
    
    $
    212
    
    
    
    2Held to maturity:U.S. Government and
agencies obligations
    
    $
    2,069,646
    
    
    $
    6,359
    
    
    $
    1,503,901
    
    
    $
    26,098
    
    
    $
    3,573,547
    
    
    $
    32,457
    
    
    
    40Puerto Rico Government and
agencies obligations
    
    
    17,493
    
    
    
    540
    
    
    
    
    
    
    
    
    
    
    
    17,493
    
    
    
    540
    
    
    
    6Subtotal
    
    
    2,087,139
    
    
    
    6,899
    
    
    
    1,503,901
    
    
    
    26,098
    
    
    
    3,591,040
    
    
    
    32,997
    
    
    
    46Mortgage-backed securities:CMOs issued or
guaranteed by FHLMC
    
    
    41,553
    
    
    
    810
    
    
    
    592,513
    
    
    
    57,361
    
    
    
    634,066
    
    
    
    58,171
    
    
    
    12CMOs issued or
guaranteed by FNMA
    
    
    39,430
    
    
    
    888
    
    
    
    56,148
    
    
    
    2,287
    
    
    
    95,578
    
    
    
    3,175
    
    
    
    5Subtotal
    
    
    80,983
    
    
    
    1,698
    
    
    
    648,661
    
    
    
    59,648
    
    
    
    729,644
    
    
    
    61,346
    
    
    
    17Total
    
    $
    2,168,122
    
    
    $
    8,597
    
    
    $
    2,152,562
    
    
    $
    85,746
    
    
    $
    4,320,684
    
    
    $
    94,343
    
    
    
    63
   99




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##### Table of Contents



2005
    
    2004
    
    2003(In thousands)Proceeds from sales
    
    $
    
    
    
    $
    130,066
    
    
    $
    50,803Gross realized gains
    
    
    
    
    
    
    128
    
    
    
    1,313Gross realized losses
    
    
    
    
    
    
    
    
    
    
    8,984
     100




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##### Table of Contents



4.
    
    LOANS:
 The loan portfolio at December 31, consisted of the following:
 2005
    
    
    2004(In thousands)REAL ESTATE LOANS SECURED BY MORTGAGES ON:Commercial real estate
    
    $
    4,270,856
    
    
    $
    3,167,439Residential real estate, mainly
one-to-four-family residences
    
    
    1,299,558
    
    
    
    880,086Construction and land acquisition
    
    
    516,552
    
    
    
    331,221Total
    
    
    6,086,966
    
    
    
    4,378,746Plus (less):Undisbursed portion of loans in process
    
    
    (4,043
    )
    
    
    (3,076
    )Premium on loans purchased
    
    
    503
    
    
    
    690Deferred loan fees  net
    
    
    (18,872
    )
    
    
    (14,480
    )Total
    
    
    (22,412
    )
    
    
    (16,866
    )Real estate loans  net
    
    
    6,064,554
    
    
    
    4,361,880OTHER LOANS:Commercial, industrial and agricultural
    
    
    1,022,030
    
    
    
    768,845Consumer and others:Loans on deposits
    
    
    30,738
    
    
    
    29,587Credit cards
    
    
    49,352
    
    
    
    53,268Installment
    
    
    749,905
    
    
    
    789,095Plus (less):Premium on loans purchased
    
    
    393
    
    
    
    1,337Deferred loan fees  net
    
    
    (8,943
    )
    
    
    (6,594
    )Other loans  net
    
    
    1,843,475
    
    
    
    1,635,538TOTAL LOANS
    
    
    7,908,029
    
    
    
    5,997,418ALLOWANCE FOR LOAN LOSSES
    
    
    (92,406
    )
    
    
    (80,066
    )LOANS  NET
    
    $
    7,815,623
    
    
    $
    5,917,352
 The Company originated commercial real estate loans, including construction loans, during
2005 amounting to $1,742,126,000. The outstanding balances of these loans totaled
$4,270,856,000 at December 31, 2005. In general, commercial real estate mortgage loans are
considered by management to be of somewhat greater risk of uncollectibility due to the
dependency on income production or future development of the real estate. The commercial real
estate loans are principally collateralized by property dedicated to wholesale, retail and
rental business activities.
 101




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##### Table of Contents



The Company has a significant lending concentration of $1.05 billion
in one mortgage originator in Puerto Rico at December 31, 2005. Westernbank has outstanding
$88.7 million with another mortgage originator in Puerto Rico for a total loans granted to
mortgage originators amounting to $1.14 billion at December 31, 2005. These commercial loans
are secured by 14,428 individual mortgage loans on residential and commercial real estate with
an average principal balance of $78,900 each. The mortgage originators
had always paid the loans in accordance with their terms and
conditions. On March 16, 2006, Westernbank obtained a waiver
from the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto
Rico with respect to the statutory limit for individual borrowers (loan to one borrower limit)
(see Note 13).At December 31, 2005 and 2004, residential real estate
included $1.14 billion and $745.0 million, respectively, of fixed
and floating interest rate loans to two mortgage originators in
Puerto Rico, mainly secured by mortgages on one-to-four family
residential properties.Foreign loans, mainly in Canada and in the United Kingdom, amounted to $64,113,000 and
$2,237,000 at December 31, 2005 and 2004, respectively.At December 31, 2005, residential and commercial loans amounting to $576,714,000 were pledged
to secure advances from the Federal Home Loan Bank (see Note 10).The Company originates residential mortgage loans for portfolio investment or sale in the
secondary market. During the period of origination, residential mortgage loans are designated
as held for either sale or investment purposes. Residential mortgage loans held for sale are
carried at the lower of cost or fair value. At December 31, 2005 and 2004, residential mortgage
loans with a cost of $1,584,000 and $1,642,000, respectively, were designated as held for sale.The following table reflects the outstanding principal balance of non-accrual loans and the
corresponding effect on earnings:
 2005
    
    
    2004
    
    
    2003(In thousands)Outstanding principal balance
at end of year
    
    $
    63,998
    
    
    $
    34,269
    
    
    $
    31,246Interest that would have been recorded
if the loans had been performing and not been
classified as non-accrual
    
    $
    4,916
    
    
    $
    3,557
    
    
    $
    2,500
 Residential mortgage loans serviced for others are not included in the consolidated statements
of financial condition. At December 31, 2005 and 2004, the unpaid principal balance of these
loans amounted to $271,870,000 and $296,626,000, respectively. Servicing loans for others
generally consists of collecting payments, maintaining escrow accounts, disbursing payments to
investors and foreclosure processing. Loan servicing income includes servicing fees from
investors and certain charges collected from borrowers, such as late payment fees. In
connection with the loans serviced for others, the Company held borrowers escrow balances of
$894,000 and $1,013,000 at December 31, 2005 and 2004, respectively.Mortgage servicing rights, included as other assets, amounted to $3,070,000 and $3,302,000 at
December 31, 2005 and 2004, respectively. In 2005, 2004 and 2003, the Company capitalized
mortgage servicing rights amounting to $257,000, $904,000, and $1,544,000, respectively.
Amortization of mortgage servicing rights was $488,000, $424,000, and $648,000 in 2005, 2004,
and 2003, respectively. At December 31, 2005 and 2004, the carrying value of mortgage
servicing rights approximates fair value.
 102




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##### Table of Contents



In the normal course of business, the Company engages in business transactions with its
directors, executive officers, principal shareholders and organizations associated with them.
Loans to related parties, mainly mortgage loans for purchase of the principal residence, are
substantially on the same terms as loans to non-related parties. The aggregate amount of loans
outstanding to related parties at December 31, 2005 and 2004 totaled $831,000 and $797,000,
respectively.Changes in the allowance for loan losses are summarized below:
 2005
    
    
    2004
    
    
    2003(In thousands)Balance  at January 1
    
    $
    80,066
    
    
    $
    61,608
    
    
    $
    47,114Provision charged to income
    
    
    31,000
    
    
    
    36,691
    
    
    
    27,048Recoveries
of loans previously written off
    
    
    3,503
    
    
    
    3,970
    
    
    
    2,312Write-off of uncollectible accounts
    
    
    (22,163
    )
    
    
    (22,203
    )
    
    
    (14,866
    )Balance  at December 31
    
    $
    92,406
    
    
    $
    80,066
    
    
    $
    61,608
 The total investment in impaired commercial and construction loans at December 31, 2005 and
2004 was $81,611,000 and $54,175,000, respectively. All impaired commercial and construction
loans were measured based on the fair value of collateral at December 31, 2005 and 2004.
Impaired commercial and construction loans amounting to $32,542,000 and $29,975,000 at December
31, 2005 and 2004, respectively, were covered by a valuation allowance of $14,185,000 and
$8,412,000, respectively. Impaired commercial and construction loans amounting to $49,069,000
and $24,200,000 at December 31, 2005 and 2004, respectively, did not require a valuation
allowance. The average investment in impaired commercial and construction loans during the
years ended December 31, 2005, 2004 and 2003, amounted to $61,113,000, $46,509,000 and
$46,676,000, respectively. The Companys policy is to recognize interest income related to
impaired loans on a cash basis, when these are over 90 days in arrears on payments of principal
or interest. Interest on impaired commercial and construction loans collected and recognized
as income during the years ended December 31, 2005, 2004 and 2003, amounted to $4,044,000,
$2,460,000 and $2,452,000, respectively.
 5.
    
    FORECLOSED REAL ESTATE HELD FOR SALE:
 Foreclosed real estate held for sale at December 31, consisted of the following:
 2005
    
    
    2004(In thousands)Balance, foreclosed real estate held for sale:Residential (1 - 4 units)
    
    $
    895
    
    
    $
    1,739Commercial
    
    
    3,469
    
    
    
    2,378Total
    
    
    4,364
    
    
    
    4,117Less valuation allowance
    
    
    227
    
    
    
    306Foreclosed real estate held for sale  net
    
    $
    4,137
    
    
    $
    3,811
 103




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##### Table of Contents



Changes in the allowance for foreclosed real estate held for sale are summarized below:
 2005
    
    
    2004
    
    
    2003(In thousands)Balance  at January 1
    
    $
    306
    
    
    $
    28
    
    
    $
    51Provision (credit)
    
    
    (59
    )
    
    
    553
    
    
    
    37Write-offs
    
    
    (20
    )
    
    
    (275
    )
    
    
    (60
    )Balance  at December 31
    
    $
    227
    
    
    $
    306
    
    
    $
    28
 6.
    
    PREMISES AND EQUIPMENT:
 Premises and equipment at December 31, consisted of the following:
 2005
    
    
    2004(In thousands)Land and improvements
    
    $
    30,388
    
    
    $
    30,019Buildings and improvements
    
    
    63,520
    
    
    
    54,958Furniture and equipment
    
    
    25,167
    
    
    
    20,633Leasehold improvements
    
    
    14,524
    
    
    
    11,744Construction in progress
    
    
    5,470
    
    
    
    10,079Total
    
    
    139,069
    
    
    
    127,433Less accumulated depreciation and amortization
    
    
    21,446
    
    
    
    17,382Total
    
    $
    117,623
    
    
    $
    110,051
 Depreciation and amortization expense for the years ended December 31, 2005, 2004 and 2003,
amounted to $7,093,000, $7,034,000 and $7,293,000, respectively.
 7.
    
    DEPOSITS AND INTEREST EXPENSE:
 Deposits at December 31, consisted of the following:
 2005
    
    
    2004(In thousands)Noninterest bearing accounts
    
    $
    277,099
    
    
    $
    249,368Passbook accounts
    
    
    774,727
    
    
    
    829,424NOW accounts
    
    
    288,703
    
    
    
    269,716Super NOW accounts
    
    
    30,487
    
    
    
    33,864Money market accounts
    
    
    126
    
    
    
    100Certificates of deposit
    
    
    6,933,275
    
    
    
    4,831,851Total
    
    
    8,304,417
    
    
    
    6,214,323Accrued interest payable
    
    
    71,192
    
    
    
    29,847Total
    
    $
    8,375,609
    
    
    $
    6,244,170
 104




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##### Table of Contents



The weighted average interest rate of all deposits at December 31, 2005 and 2004, was
approximately 3.60% and 2.75%, respectively. At December 31, 2005, the aggregate amount of
deposits in denominations of $100,000 or more was $996,301,000 ($875,272,000 at December 31,
2004). Certificates of deposit include brokered deposits of $5,982,140,000 and $4,159,016,000
at December 31, 2005 and 2004, respectively. Deposits of directors, executive officers,
principal shareholders and organizations associated with them amounted to $16,304,000 and
$13,112,000 at December 31, 2005 and 2004, respectively.At December 31, 2005, the scheduled maturities of certificates of deposit are as follows:
 Year Ending
    
    AmountDecember 31,
    
    (In thousands)2006
    
    $
    4,655,2462007
    
    
    874,3462008
    
    
    382,8772009
    
    
    429,3842010
    
    
    73,863Thereafter
    
    
    517,559Total
    
    $
    6,933,275
 At December 31, 2005, the Company had pledged investment securities held to maturity with a
carrying value of $51,136,000 and mortgage-backed securities held to maturity with a carrying
value of $8,277,000 to secure public funds, and mortgage-backed securities held to maturity
with a carrying value of $352,000 as bond requirement for individual retirement accounts.A summary of interest expense on deposits for the years ended December 31, follows:
 2005
    
    
    2004
    
    
    2003(In thousands)Passbook
    
    $
    16,793
    
    
    $
    16,787
    
    
    $
    13,014NOW, Super NOW and Money
Market accounts
    
    
    5,788
    
    
    
    5,267
    
    
    
    4,085Certificates of deposit
    
    
    218,687
    
    
    
    144,183
    
    
    
    120,172Total
    
    $
    241,268
    
    
    $
    166,237
    
    
    $
    137,271
 105




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##### Table of Contents



8.
    
    FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS:Federal funds purchased and repurchase agreements, and the related weighted average interest
rates at December 31, 2005 and 2004, consisted of the following:
 2005
    
    
    2004Weighted
    
    
    
    
    
    
    WeightedInterest
    
    
    
    
    
    
    InterestAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in thousands)Federal funds purchased
    
    $
    
    
    
    
    
    %
    
    $
    75,029
    
    
    
    2.37
    %Repurchase agreements:Fixed rate
    
    
    4,986,893
    
    
    
    
    
    
    
    6,096,562Variable rate
    
    
    1,273,136
    
    
    
    
    
    
    
    511,936Total repurchase agreements
    
    
    6,260,029
    
    
    
    4.38
    %
    
    
    6,608,498
    
    
    
    2.86
    %Total
    
    $
    6,260,029
    
    
    
    
    
    
    $
    6,683,527
 The Company enters into sales of securities under agreements to repurchase the same
securities (repurchase agreements). Repurchase agreements are classified as secured
borrowings and are reflected as a liability in the consolidated statements of financial
condition. At December 31, 2005 and 2004, fixed-coupon repurchase agreements include
$482,848,000 of long-term agreements with fixed rate step-up schedule. During the period of such
agreements, the securities were delivered to the counterparties. The dealers may have sold,
loaned, or otherwise disposed of such securities to other parties in the normal course of their
operations, and have agreed to resell to the Company the same securities at the maturities of
the agreements. The Company may be required to provide additional collateral based on the fair
value of the underlying securities.Repurchase agreements at December 31, 2005, mature as follows: within 30 days  $1,545,725,000;
in 2007  $651,586,000; in 2008  $1,814,520,000; in 2009  $93,000,000; in 2010  $884,000,000;
and thereafter  $1,271,198,000. At December 31, 2005, with respect to repurchase agreements
amounting to $2,568,748,000, the counterparties have the option to terminate the agreements at
the first anniversary date and each interest payment date thereafter. For FHLB repurchase
agreements, see Note 10.
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At December 31, 2005 and 2004, repurchase agreements (classified by counterparty) were as
follows:
 2005
    
    
    2004Fair Value
    
    
    
    
    
    
    Fair ValueBorrowing
    
    
    of Underlying
    
    
    Borrowing
    
    
    of UnderlyingBalance
    
    
    Collateral
    
    
    Balance
    
    
    Collateral(In thousands)UBS Financial Services Incorporated
of Puerto Rico
    
    $
    844,526
    
    
    $
    887,330
    
    
    $
    1,442,685
    
    
    $
    1,484,428Federal Home Loan Bank of New York
    
    
    534,000
    
    
    
    548,658
    
    
    
    832,893
    
    
    
    851,527Lehman Brothers Inc. and affiliates
    
    
    504,248
    
    
    
    584,833
    
    
    
    504,448
    
    
    
    604,556Merrill Lynch Government
Securities Inc. and affiliates
    
    
    771,586
    
    
    
    807,139
    
    
    
    869,340
    
    
    
    878,663Bear, Stearns and Company, Inc.
    
    
    
    
    
    
    
    
    
    
    278,391
    
    
    
    301,852Credit Suisse First Boston LLC
    
    
    1,153,250
    
    
    
    1,212,002
    
    
    
    640,154
    
    
    
    625,851Salomon Smith Barney Inc. and affiliates
    
    
    1,049,916
    
    
    
    1,074,841
    
    
    
    599,025
    
    
    
    617,572Morgan Stanley Dean Witter
    
    
    552,000
    
    
    
    560,190
    
    
    
    1,012,000
    
    
    
    1,024,200Wachovia Securities, LLC
    
    
    212,423
    
    
    
    215,943
    
    
    
    161,244
    
    
    
    165,019Doral Securities, Inc.
    
    
    
    
    
    
    
    
    
    
    49,245
    
    
    
    50,062Barclays Capital, Inc.
    
    
    95,580
    
    
    
    97,515
    
    
    
    49,450
    
    
    
    49,641J.P. Morgan Securities, Inc.
    
    
    542,500
    
    
    
    565,853
    
    
    
    169,623
    
    
    
    172,122Total
    
    $
    6,260,029
    
    
    $
    6,554,304
    
    
    $
    6,608,498
    
    
    $
    6,825,493
  2005
    
    
    2004Carrying
    
    
    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  held to maturity
    
    $
    5,601,534
    
    
    $
    5,461,880
    
    
    $
    5,596,079
    
    
    $
    5,573,172Mortgage-backed securities  held
to maturity
    
    
    597,169
    
    
    
    530,194
    
    
    
    778,287
    
    
    
    720,906Mortgage-backed securities purchased
under agreements to resell
    
    
    559,890
    
    
    
    562,045
    
    
    
    529,305
    
    
    
    525,299Mortgage-backed
securities 
available for sale
    
    
    185
    
    
    
    185
    
    
    
    6,116
    
    
    
    6,116Total
    
    
    6,758,778
    
    
    $
    6,554,304
    
    
    
    6,909,787
    
    
    $
    6,825,493Accrued interest receivable
of underlying securities
    
    
    57,031
    
    
    
    
    
    
    
    54,029Total
    
    $
    6,815,809
    
    
    
    
    
    
    $
    6,963,816
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2005
    
    2004(Dollars in thousands)Federal funds purchased:Balance at end of year
    
    $
    
    
    
    $
    75,029Weighted-average interest rate at year end
    
    
    
    
    
    
    2.37
    %Monthly average outstanding balance
    
    $
    8,851
    
    
    $
    23,753Weighted-average interest rate for the year
    
    
    2.43
    %
    
    
    1.95
    %Maximum month-end balance
    
    $
    40,039
    
    
    $
    95,005Repurchase agreements:Balance at end of year
    
    $
    1,545,725
    
    
    $
    4,138,257Weighted-average interest rate at year end
    
    
    4.34
    %
    
    
    2.30
    %Monthly average outstanding balance
    
    $
    2,377,629
    
    
    $
    2,377,042Weighted-average interest rate for the year
    
    
    3.03
    %
    
    
    1.67
    %Maximum month-end balance
    
    $
    3,514,422
    
    
    $
    4,206,540Advances from FHLB:Balance at end of year
    
    $
    50,000
    
    
    $
    25,000Weighted-average interest rate at year end
    
    
    4.45
    %
    
    
    2.41
    %Monthly average outstanding balance
    
    $
    21,923
    
    
    $
    21,250Weighted-average interest rate for the year
    
    
    3.49
    %
    
    
    1.65
    %Maximum month-end balance
    
    $
    50,000
    
    
    $
    50,000Total short-term borrowings:Balance at end of year
    
    $
    1,595,725
    
    
    $
    4,238,286Weighted-average interest rate at year end
    
    
    4.34
    %
    
    
    2.30
    %Monthly average outstanding balance
    
    $
    2,408,403
    
    
    $
    2,422,045Weighted-average interest rate for the year
    
    
    3.03
    %
    
    
    1.67
    %Maximum month-end balance
    
    $
    3,579,461
    
    
    $
    4,238,286
 9.
    
    LINES OF CREDIT:As of December 31, 2005 and 2004, Westernbank had line of credit agreements with seven and six
commercial banks, respectively, permitting Westernbank to borrow a maximum aggregate amount of
$315,000,000 and $245,000,000, mainly through federal funds purchased. There were no borrowings
outstanding as of December 31, 2005, under such lines of credit. There were $75.0 million
outstanding as of December 31, 2004, through federal funds
purchased. The agreements provide for unsecured advances to be used
by the Company on an overnight basis. The interest rate is negotiated at the time of the
transaction usually at Federal Fund rate. The credit agreements are renewable annually.
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10.
    
    ADVANCES FROM FEDERAL HOME LOAN BANK AND MORTGAGE NOTE PAYABLE:Advances from Federal Home Loan Bank (FHLB) and mortgage note payable, and the related
weighted interest rates at December 31, consisted of the following:
 2005
    
    
    2004Weighted
    
    
    
    
    
    
    WeightedInterest
    
    
    
    
    
    
    InterestAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in thousands)ADVANCES FROM FHLB:Fixed rate convertible advances
(2.41% to 6.66%)
    
    $
    92,000
    
    
    
    
    
    
    $
    131,000Variable rate convertible advances
(94% to 96% of the three-month LIBOR rate)
    
    
    80,000
    
    
    
    
    
    
    
    80,000Total advances from FHLB
    
    $
    172,000
    
    
    
    4.77
    %
    
    $
    211,000
    
    
    
    3.78
    %MORTGAGE NOTE
    
    $
    36,432
    
    
    
    8.05
    %
    
    $
    36,858
    
    
    
    8.05
    %
 Advances and repurchase agreements (Note 8) are received from the FHLB under an agreement
whereby the Company is required to maintain a minimum amount of qualifying collateral with a
fair value of at least 110% and 105% of the outstanding advances and repurchase agreements,
respectively. At December 31, 2005, convertible advances were secured by residential and
commercial mortgage loans and investment securities held to maturity amounting to $576,714,000
and $11,000,000, respectively. At the advances and repurchase agreements first anniversary
date and each quarter thereafter, the FHLB has the option to convert them into replacement
funding for the same or a lesser principal amount based on any funding then offered by FHLB at
the then current market rates, unless the interest rate has been predetermined between FHLB and
the Company. If the Company chooses not to replace the funding, it will repay the convertible
advances and reverse repurchase agreements, including any accrued interest, on such optional
conversion date.At December 31, 2005 and 2004, Westernbank World Plaza, Inc., a wholly owned subsidiary of
Westernbank Puerto Rico, had outstanding $36.4 million and $36.9 million, respectively, of a
mortgage note, at an interest rate of 8.05% per year up to September 11, 2009. Subsequent to
September 11, 2009, the mortgage note will bear interest on the then outstanding principal
balance at a rate per year equal to the greater of 13.05% or the Treasury Rate plus five
percentage points; or 10.05%, depending on the fulfillment of certain conditions on the
repricing date. Westernbank World Plaza, Inc. has a prepayment option on the repricing date,
without penalty. The mortgage note is collateralized by a 23-story office building, including
its related parking facility, located in Hato Rey, Puerto Rico.
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Advances from FHLB and the mortgage note payable by contractual maturities at December 31,
2005, were as follows:
 Year Ending
    
    Advances
    
    
    MortgageDecember 31,
    
    from FHLB
    
    
    Note Payable(In thousands)2006
    
    $
    70,000
    
    
    $
    4542007
    
    
    60,000
    
    
    
    4922008
    
    
    
    
    
    
    5262009
    
    
    
    
    
    
    5792010
    
    
    42,000
    
    
    
    628Thereafter
    
    
    
    
    
    
    33,753Total
    
    $
    172,000
    
    
    $
    36,432
 11.
    
    INCOME TAXES:Under the Puerto Rico Internal Revenue Code (the Code), all companies are treated as separate
taxable entities and are not entitled to file consolidated tax returns. The Company,
Westernbank, Westernbank Insurance Corp. and SRG Net, Inc. are subject to Puerto Rico regular
income tax or alternative minimum tax (AMT) on income earned from all sources. The AMT is
payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any
one year may be used to offset regular income tax in future years, subject to certain
limitations.Westernbank World Plaza, Inc., a wholly owned subsidiary of Westernbank, elected to be treated
as a special partnership under the Code; accordingly, its taxable income or deductible loss is
included in the taxable income of Westernbank.The Code provides a dividend received deduction of 100%, on dividends received from wholly
owned subsidiaries subject to income taxation in Puerto Rico. The income on certain investments
is exempt for income tax purposes. Also, Westernbank International division operates as an
International Banking Entity (IBE) under the International Banking Regulatory Act. Under
Puerto Rico tax law, an IBE can hold non-Puerto Rico assets, and earn interest on these assets,
as well as generate fee income outside of Puerto Rico on a tax-exempt basis under certain
circumstances. As a result, the Companys effective tax rate is substantially
below the statutory rate.Pursuant to the provisions of Act No. 13 of January 8, 2004 (the Act), for taxable years
commencing after June 30, 2003, the net income earned by an IBE that operates as a unit of a
bank under the Puerto Rico Banking Law, will be considered taxable and subject to income taxes
at the current tax rates in the amount by which the IBE taxable income exceeds 40% in the first
applicable taxable year (2004), 30% in the second year (2005) and 20% thereafter, of the
taxable income of Westernbank, including its IBE taxable income. Westernbanks IBE carries on
its books a significant amount of securities which are, irrespective of the IBE status, tax
exempt by law. Moreover, the Act provides that IBEs operating as subsidiaries will continue to
be exempt from the payment of income taxes. For the years ended December 31, 2005 and 2004,
the provisions of the Act did not have any effect on the Companys financial position or
results of operations.
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On August 1, 2005, the Governor of Puerto Rico signed Law No. 41 which imposes a transitory
additional tax of 2.5% over net taxable income. This transitory additional tax will be in
effect for taxable years 2005 and 2006 and had a retroactive effect to January 1, 2005.
Accordingly, the Company recorded an additional current income tax provision of $3.2 million
during the year ended December 31, 2005.Accrued income tax payable amounted to $22,530,000 and $2,444,000 at December 31, 2005 and
2004, respectively, and is included as part of Accrued expenses and other liabilities in the
accompanying statements of financial condition. The provision for income taxes for the years
ended December 31, consisted of the following:
 2005
    
    
    2004
    
    
    2003(In thousands)Current
    
    $
    52,538
    
    
    $
    28,182
    
    
    $
    29,346Deferred credit
    
    
    (7,452
    )
    
    
    (6,089
    )
    
    
    (10,083
    )Total
    
    $
    45,086
    
    
    $
    22,093
    
    
    $
    19,263
 A reconciliation of the provision for income taxes computed by applying the Puerto Rico
income tax statutory rate to the tax provision as reported for the years ended December 31, was
as follows:
 2005
    
    
    2004
    
    
    2003Amount
    
    
    % of Pre-tax Income
    
    
    Amount
    
    
    % of Pre-tax Income
    
    
    Amount
    
    
    % of Pre-tax Income(Dollars in thousands)Computed at Puerto Rico
statutory rate
    
    $
    86,391
    
    
    
    41.5
    %
    
    $
    75,648
    
    
    
    39.0
    %
    
    $
    50,785
    
    
    
    39.0
    %Effect on provision of:Exempt interest income, net
    
    
    (39,515
    )
    
    
    (19.0
    )
    
    
    (50,940
    )
    
    
    (26.1
    )
    
    
    (34,078
    )
    
    
    (26.1
    )Nondeductible expenses, net
    
    
    53
    
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    169
    
    
    
    Other
    
    
    (1,843
    )
    
    
    (0.8
    )
    
    
    (2,774
    )
    
    
    (1.5
    )
    
    
    2,387
    
    
    
    1.9Provision for income tax
as reported
    
    $
    45,086
    
    
    
    21.7
    %
    
    $
    22,093
    
    
    
    11.4
    %
    
    $
    19,263
    
    
    
    14.8
    %
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Deferred income tax assets (liabilities) as of December 31, consisted of the following:
 2005
    
    
    2004(In thousands)Deferred tax assets:Allowance for loan losses
    
    $
    34,910
    
    
    $
    30,098Capital losses on sale of investment securities, expire in 2008
    
    
    3,767
    
    
    
    4,912Net
operating loss carryforwards, expire through 2009
    
    
    583
    
    
    
    620Unrealized loss in valuation of derivative instruments
    
    
    5,461
    
    
    
    3,049Other
    
    
    207
    
    
    
    172Total deferred tax assets
    
    
    44,928
    
    
    
    38,851Less valuation allowance
    
    
    3,521
    
    
    
    5,032Subtotal
    
    
    41,407
    
    
    
    33,819Less other deferred tax liabilities
    
    
    296
    
    
    
    158Deferred income taxes, net
    
    $
    41,111
    
    
    $
    33,661
 Changes in the valuation allowance for deferred income tax assets were as follows:
 2005
    
    
    2004
    
    
    2003(In thousands)Balance  at January 1
    
    $
    5,032
    
    
    $
    1,718
    
    
    $
    6Increase (decrease) in valuation allowance
    
    
    (1,511
    )
    
    
    3,314
    
    
    
    1,712Balance  at December 31
    
    $
    3,521
    
    
    $
    5,032
    
    
    $
    1,718
 Realization of deferred tax assets is dependent on generating sufficient future taxable income
or capital gains. The amount of the deferred tax assets considered realizable could be reduced
in the near term if estimates of future taxable income or capital gains are not met.
 12.
    
    NET GAIN (LOSS) ON SALES AND VALUATION OF LOANS, SECURITIES AND OTHER ASSETS:
 Net gain (loss) on sales and valuation of loans, securities and other assets for the years
ended December 31, consisted of the following:
 2005
    
    
    2004
    
    
    2003(In thousands)Trading account securities, mainly related
to loans securitized
    
    $
    154
    
    
    $
    314
    
    
    $
    1,657Investment securities available for sale (see Note 3)
    
    
    
    
    
    
    128
    
    
    
    (7,671
    )Impairment of investment securities held to maturity (see Note 3)
    
    
    
    
    
    
    
    
    
    
    (15,701
    )Mortgage loans held for sale
    
    
    334
    
    
    
    1,649
    
    
    
    2Other
    
    
    59
    
    
    
    538
    
    
    
    764Total
    
    $
    547
    
    
    $
    2,629
    
    
    $
    (20,949
    )
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##### Table of Contents



13.
    
    COMMITMENTS AND CONTINGENCIES:In the ordinary course of business, the Company has various outstanding commitments and
contingent liabilities that are not reflected in the accompanying consolidated financial
statements. In addition, the Company is a defendant in certain claims and legal actions
arising in the ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the Companys financial condition or results of operations.The Company, as a Puerto Rico chartered financial holding company and its subsidiaries are each
subject to extensive federal and local government supervision and regulation relating to its
financial holding company status and the banking and insurance businesses. There are laws and
regulations that restrict transactions between the Company and its subsidiaries. In addition,
the Company benefits from favorable tax treatment of activities relating to the Westernbanks
International Division. Any change in such regulations, whether by applicable regulators or as
a result of legislation subsequently enacted by the Congress of the United States or the
applicable local legislature, could have a substantial impact on the companies operations.The Company received from the Securities and Exchange Commission (the SEC) notice of a formal
order of private investigation into matters that were the subject of a previously announced
informal inquiry by the SEC. As previously disclosed, the inquiry appears to be primarily
related to the other-than-temporary impairment charges announced by the Company in April 2003,
in connection with its investments in corporate bond and loan obligations. The Company is
cooperating fully with the SEC and will continue to do so. The Company does not expect to
comment further regarding this matter, as the formal order is a confidential document directing
a non-public investigation.On March 16, 2006, Westernbank Puerto Rico obtained a waiver from the Office of the
Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (the Commissioner)
with respect to the statutory limit for individual borrowers (loan to one borrower limit) in a
commercial loan with a mortgage originator in Puerto Rico (see Note 4). This waiver is subject
to Westernbank compliance with certain conditions. The Company
does not anticipate any problem in complying with the conditions of the waiver.At December 31, 2005, the Company is obligated under non-cancelable operating leases for
banking premises. Certain leases contain escalation clauses providing for increased rental.
Rent expense, including the proportionate share of maintenance expenses of common areas,
administrative expenses, property taxes, utilities and insurance expenses, amounted to
$2,928,000, $2,629,000, and $2,576,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
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The projected minimum rental payments under the leases with initial or remaining terms of more
than one year, without considering renewal options, and expiring through 2025 are as follows:
 Year Ending
    
    MinimumDecember 31,
    
    Rent(In thousands)2006
    
    $
    2,1952007
    
    
    1,7572008
    
    
    1,1882009
    
    
    7432010
    
    
    557Thereafter
    
    
    2,263Total
    
    $
    8,703
 14.
    
    RETIREMENT BENEFIT PLANS:The Company has a non-contributory deferred profit-sharing plan, covering substantially all of
its employees, which provides for retirement and disability benefits. The Companys
contribution to the profit-sharing plan is discretionary. The Companys contributions for the
years ended December 31, 2005, 2004 and 2003 were $250,000 for each year.The Company has a defined contribution plan under Section 1165(e) of the Puerto Rico Treasury
Department Internal Revenue Code, covering all full-time employees of the Company who have one
year of service and are twenty-one years or older. Under the provisions of this Plan,
participants may contribute each year from 2% to 10% of their compensation after deducting
social security, up to the maximum deferral amount specified by local law. The Company
contributes 50 percent of the first 6 percent of base compensation that a participant
contributes to the Plan. Participants are immediately vested in their contributions plus
actual earnings thereon. The Companys contributions plus actual earnings thereon are 100
percent vested after three years of credited service. In case of death or disability, a
participant or his/her beneficiary will be 100 percent vested regardless of the number of years
of credited service. The Companys contributions for the years ended December 31, 2005, 2004
and 2003, amounted to $434,000, $376,000 and $329,000, respectively.15.
    
    MINIMUM REGULATORY CAPITAL REQUIREMENTS:The Company is subject to examination, regulation and periodic reporting under the Bank Holding
Company Act of 1956, as amended, which is administered by the Board of Governors of the Federal
Reserve System. Westernbank is regulated by the Federal Deposit Insurance Corporation (FDIC)
and by the Office of the Commissioner of Financial Institutions of Puerto Rico. Westernbanks
deposits are insured by the Savings Association Insurance Fund and by the Bank Insurance Fund,
which are administered by the FDIC, up to $100,000 per depositor.The Federal Reserve Board has established guidelines regarding the capital adequacy of bank
holding companies, such as the Company. These requirements are substantially similar to those
adopted by the FDIC for depository institutions, such as Westernbank, as set forth below.The Company (on a consolidated basis) and Westernbank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Companys and
Westernbanks financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Westernbank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as
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calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.Quantitative measures established by regulation to ensure capital adequacy require the Company
and Westernbank to maintain minimum amounts and ratios (set forth in the following table) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined)
and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2005 and 2004, that the Company and Westernbank meet all capital adequacy
requirements to which they are subject.As of March 31, 2005 (latest examination date), Westernbank qualified as a well capitalized
institution under the regulatory framework for prompt corrective action. To be categorized as
well capitalized, an institution must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the following table. At December 31, 2005, there are no
conditions or events since the latest examination date that management believes have changed
Westernbanks category.The Companies actual capital amounts and ratios as of December 31, 2005 and 2004, are also
presented in the table below:
 Minimum To BeMinimum
    
    Well Capitalized UnderCapital
    
    Prompt CorrectiveActual
    
    Requirement
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)As of December 31, 2005:Total Capital to Risk Weighted Assets:Consolidated
    
    $
    1,282,749
    
    
    
    13.13
    %
    
    $
    781,403
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/AWesternbank
    
    
    1,208,017
    
    
    
    12.39
    
    
    
    779,851
    
    
    
    8
    
    
    $
    974,813
    
    
    
    10
    %Tier I Capital to Risk Weighted Assets:Consolidated
    
    $
    1,190,344
    
    
    
    12.30
    %
    
    $
    387,005
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/AWesternbank
    
    
    1,115,611
    
    
    
    11.55
    
    
    
    386,229
    
    
    
    4
    
    
    $
    579,344
    
    
    
    6
    %Tier I Capital to Average Assets:Consolidated
    
    $
    1,190,344
    
    
    
    7.48
    %
    
    $
    477,507
    
    
    
    3
    %
    
    
    N/A
    
    
    
    N/AWesternbank
    
    
    1,115,611
    
    
    
    7.04
    
    
    
    475,268
    
    
    
    3
    
    
    $
    792,113
    
    
    
    5
    %As of December 31, 2004:Total Capital to Risk Weighted Assets:Consolidated
    
    $
    1,154,323
    
    
    
    14.90
    %
    
    $
    619,781
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/AWesternbank
    
    
    1,016,176
    
    
    
    13.16
    
    
    
    617,541
    
    
    
    8
    
    
    $
    771,926
    
    
    
    10
    %Tier I Capital to Risk Weighted Assets:Consolidated
    
    $
    1,074,257
    
    
    
    14.01
    %
    
    $
    306,688
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/AWesternbank
    
    
    936,109
    
    
    
    12.25
    
    
    
    305,568
    
    
    
    4
    
    
    $
    458,351
    
    
    
    6
    %Tier I Capital to Average Assets:Consolidated
    
    $
    1,074,257
    
    
    
    7.69
    %
    
    $
    418,872
    
    
    
    3
    %
    
    
    N/A
    
    
    
    N/AWesternbank
    
    
    936,109
    
    
    
    6.73
    
    
    
    417,224
    
    
    
    3
    
    
    $
    695,374
    
    
    
    5
    %
 115




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The Companys ability to pay dividends to its stockholders and other activities can be
restricted if its capital falls below levels established by the Federal Reserve guidelines. In
addition, any bank holding company whose capital falls below levels specified in the guidelines
can be required to implement a plan to increase capital. Management believes that the Company
will continue to meet its capital requirements and its cash obligations as they become due and
pay dividends as they are declared.The principal source of income and funds for the Company (parent company) are dividends from its
subsidiaries. Federal and Puerto Rico banking regulations place certain restrictions on
dividends paid and loans or advances made by Westernbank to the Company. The total amount of
dividends which may be paid at any date is generally limited to the retained earnings of
Westernbank, and loans or advances are limited to 10 percent of Westernbanks capital stock and
surplus on a secured basis.During 2005, the amount of dividends Westernbank can pay to the Company without prior approval
of regulatory agencies is limited to its 2005 eligible net profits, as defined, and its adjusted
retained 2004 and 2003 net income. In addition, dividends paid by Westernbank to the Company
would be prohibited if the effect thereof would cause Westernbanks capital to be reduced below
applicable minimum capital requirements.16.
    
    COMMON AND PREFERRED STOCK TRANSACTIONS:On May 27, 2005, the stockholders of the Company approved the amendments to the Companys
Certificate of Incorporation to increase the authorized shares of the Companys preferred stock,
par value $1.00 per share, from 20,000,000 shares to 50,000,000 shares, and to increase the
authorized shares of the Companys common stock, par value $1.00 per share, from 300,000,000
shares to 500,000,000 shares.On December 6, 2004, the Companys board of directors declared a three-for-two split on its
common stock, for stockholders of record as of December 31, 2004 and distributed on January 10,
2005. The effect of the stock split was a decrease in retained earnings and an increase in
common stock of approximately $54.6 million.On December 13, 2004, the Companys board of directors declared a two percent (2%) stock
dividend, for stockholders of record as of December 30, 2004 and distributed on January 10,
2005. The effect of the stock dividend was a decrease in retained earnings, an increase in
paid-in-capital and an increase in common stock of approximately $45.8 million, $43.7 million
and $2.1 million, respectively.On November 4, 2003, the Companys board of directors declared a three-for-two split on its
common stock, for stockholders of record as of November 28, 2003 and distributed on December 10,
2003. The effect of the stock split was a decrease in retained earnings and an increase in
common stock of approximately $34.7 million.On November 11, 2003, the Companys board of directors declared a two percent (2%) stock
dividend, for stockholders of record as of November 28, 2003 and distributed on December 10,
2003. The effect of the stock dividend was a decrease in retained earnings, an increase in
paid-in-capital and an increase in common stock of approximately $35.2 million, $33.1 million
and $2.1 million, respectively.During 2005, 2004 and 2003, the Company issued 56,113;
328,568 (as adjusted); and 1,170,450 (as adjusted) shares of common
stock, respectively, upon exercise of stock options by several of the Companys executive
officers (Note 17  Stock Compensation Plans).During 2003, the Company acquired and retired 2,912 (as
adjusted) shares of common stock at a cost of $33,000.
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The Company has issued the following non-cumulative, monthly income preferred stock:
 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
 The preferred stock ranks senior to the Companys common stock as to dividends and
liquidation rights. Each share of the 1998 Series A preferred stock is convertible, at the
holders option, at any time on or after the 90th day following the issue date, into
 .995 shares of the Companys common stock, subject to adjustment upon certain events. The per
share conversion ratio equates to a price of $7.12 (as adjusted for stock splits and stock
dividends declared) per share of common stock.During 2005, 2004 and 2003, 35,292; 276,994; and 419,254 shares, respectively, of the
convertible preferred stock Series A were converted into
123,289; 967,760 (as adjusted) and 1,464,741 (as adjusted) shares of
common stock, respectively. At December 31, 2005 and 2004, the Company had outstanding 485,460
and 520,752 shares, respectively, of its 7.125% Non-cumulative, Convertible Monthly Income
Preferred Stock, Series A.The Company may redeem, in whole or in part, at any time at the following redemption prices, if
redeemed during the twelve month period beginning July 1 for the 1998 Series A, May 28 for the
1999 Series B, March 30 for the 2001 Series C, August 1 for the 2001 Series D, October 31 for
the 2002 Series E, May 30 for the 2003 Series F, August 29 for the 2003 Series G and December 21
for the 2004 Series H of the years indicated below, plus accrued and unpaid dividends, if any,
to the date of redemption, subject to regulatory approval:
 Redemption Price per ShareDecember 31,
    
    Series A
    
    Series B
    
    Series C
    
    Series D
    
    Series E
    
    Series F
    
    Series G
    
    Series H2006
    
    $
    25.00
    
    
    $
    25.00
    
    
    $
    25.50
    
    
    $
    25.50
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2007
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.25
    
    
    
    25.25
    
    
    
    25.50
    
    
    
    
    
    
    
    
    
    
    
    2008
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.25
    
    
    
    25.50
    
    
    
    25.50
    
    
    
    2009
    
    
    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
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17.
    
    STOCK COMPENSATION PLANS:The Company has two shareholders approved stock option plans, the 1999 Qualified Stock Option
Plan (the 1999 Qualified Option Plan) and the 1999 Nonqualified Stock Option Plan (the 1999
Nonqualified Option Plan), for the benefit of employees of the Company and its subsidiaries.
These plans offer to key officers, directors and employees an opportunity to purchase shares of
the Companys common stock. Under the 1999 Qualified Option Plan, options for up to 14,747,670
shares (as adjusted) of common stock can be granted. Also, options for up to 14,747,670 shares
(as adjusted) of common stock, reduced by any share issued under the 1999 Qualified Option Plan
can be granted under the 1999 Nonqualified Option Plan. The option price for both plans is
determined at the grant date. Both plans will remain in effect for a term of 10 years. The
Board of Directors has sole authority and absolute discretion as to the number of stock options
to be granted, their vesting rights, and the options exercise price. The options become fully
exercisable after five years following the grant date and the maximum contractual term of the options is ten years. The Companys policy is to issue new
shares when share options are exercised. The Plans provide for a proportionate adjustment in
the exercise price and the number of shares that can be purchased in the event of a stock
split, reclassification of stock and a merger or reorganization.No options have been granted under the 1999 Nonqualified Option Plan. The activity in
outstanding options under the 1999 Qualified Option Plan for the years ended December 31, 2005,
2004 and 2003, is set forth below. The activity for the years ended December 31, 2004 and 2003
was adjusted to reflect the three-for-two stock split and 2% stock dividend declared in
December 2004 and distributed on January 10, 2005, and the three-for-two stock split and 2%
stock dividend declared in November 2003 and distributed on December 10, 2003.
 2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceBeginning of year
    
    
    7,111,398
    
    
    $
    3.02
    
    
    
    7,439,966
    
    
    $
    3.02
    
    
    
    8,610,416
    
    
    $
    2.99Options granted
    
    
    790,000
    
    
    
    10.65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    (56,113
    )
    
    
    2.85
    
    
    
    (328,568
    )
    
    
    2.95
    
    
    
    (1,170,450
    )
    
    
    2.85Options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    End of year
    
    
    7,845,285
    
    
    $
    3.79
    
    
    
    7,111,398
    
    
    $
    3.02
    
    
    
    7,439,966
    
    
    $
    3.02
 118




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The Company has five exercise prices for options granted, all of them granted at different
dates under the 1999 Qualified Option Plan. The following table summarizes the exercise prices
and the weighted average remaining contractual life of the options outstanding at December 31,
2005:
 WeightedAverageNumber of
    
    Number of
    
    RemainingOptions
    
    Options
    
    ContractExercise Prices
    
    Outstanding
    
    Exercisable
    
    Life (Years)$  2.85(1)
    
    6,575,400
    
    6,575,400
    
    4.12$  3.35(1)
    
    193,124
    
    140,454
    
    5.38$  6.77(1)
    
    286,761
    
    172,056
    
    6.55$  9.00
    
    30,000
    
    
    
    9.95$10.71
    
    760,000
    
    
    
    9.55Total
    
    7,845,285
    
    6,887,910
    
    4.79Aggregate Intrinsic Value
    
    $ 36,737,000
    
    $36,312,000
 (1)
    
    Adjusted to reflect the three-for-two stock split and 2% stock dividend declared in December 2004 and distributed on January 10, 2005, the three-for-two stock
split and 2% stock dividend declared in November 2003 and distributed on
December 10, 2003, and the three-for-two stock split declared in June 2002
and distributed on July 10, 2002. The Company granted 790,000 stock options in 2005. No stock options were granted during
2004 and 2003. The fair value of the stock options granted in year 2005 was $4.09 per stock
option. The fair value was estimated on the grant date using the Black-Scholes option pricing
model with the following weighted average assumptions: (1) the dividend yield was 1.81%; (2)
the expected life was 7 years based on historical experience; (3) the expected volatility was 39% and was obtained from published external information; and, (4) the risk-free
interest rate was 4.09%. The weighted average of the exercise price of the stock options and
the market price of the stock at the grant date was $10.65 and $10.55, respectively.The total intrinsic value of options exercised during the years ended December 31, 2005, 2004
and 2003, was $462,000, $3,262,000 and $7,402,000, respectively. The total fair value of
options vested for each of the years ended December 31, 2005, 2004 and 2003 was $1,062,000.
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##### Table of Contents



Stock-based employee compensation expense for the years ended December 31, 2005, 2004 and 2003
amounted to $564,000, $895,000 and $1,031,000, respectively. This compensation expense is non
deductible for income tax purposes. At December 31, 2005, there was $3.2 million of total
unrecognized compensation cost related to nonvested share-based compensation awards granted
under the 1999 Qualified Option Plan. The cost is expected to be recognized as follows:
 Year Ending
    
    AmountDecember 31,
    
    (In thousands)2006
    
    $
    8072007
    
    
    7252008
    
    
    6462009
    
    
    6462010
    
    
    360Total
    
    $
    3,184
 18.
    
    OFF-BALANCE SHEET ACTIVITIES:In the normal course of business, the Company becomes a party to credit related financial
instruments with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and commercial letters of credit.
These instruments involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated statements of financial condition. The
contract or notional amounts of those instruments reflect the extent of involvement the Company
has in particular classes of financial instruments.Commitments to Extend Credit and Commercial Letters of CreditThe Companys exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit, commitments under credit card
arrangements and commercial letters of credit is represented by
the contractual notional amount of those instruments, which do not necessarily represent the
amounts potentially subject to risk. In addition, the measurement of the risks associated with
these instruments is meaningful only when all related and offsetting transactions are
identified. The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company evaluates each customers
credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on managements credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and income producing commercial properties.Commercial letters of credit are conditional commitments issued by the Company on behalf of a
customer authorizing a third party to draw drafts on the Company up to a stipulated amount and
with specified terms and conditions.
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The contract amount of financial instruments, whose amounts represent credit risk at December
31, was as follows:
 2005
    
    
    2004(In thousands)Commitments to extend credit:Fixed rates
    
    $
    10,802
    
    
    $
    7,576Variable rates
    
    
    620,193
    
    
    
    1,104,510Unused lines of credit:Commercial
    
    
    197,792
    
    
    
    177,893Credit cards and other
    
    
    137,078
    
    
    
    138,736Commercial letters of credit
    
    
    23,822
    
    
    
    27,784Total
    
    $
    989,687
    
    
    $
    1,456,499
 19.
    
    ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:The Company maintains an overall interest rate risk management strategy that incorporates the
use of derivative instruments to minimize significant unplanned fluctuations in earnings and
cash flows caused by interest rate volatility. The Companys interest rate risk management
strategy may involve modifying the re-pricing characteristics of certain assets and liabilities
so that changes in interest rates do not adversely affect the net interest margin and cash
flows. Derivative instruments that the Company may use as part of its interest rate risk
management strategy include interest rate swaps and indexed options. These transactions involve
both credit and market risk. The notional amounts are amounts on which calculations, payments
and the value of the derivative are based. Notional amounts do not represent direct credit
exposures. Direct credit exposure is limited to the net difference between the calculated
amounts to be received and paid, if any. Such difference, which represents the fair value of
the derivative, is reflected on the Companys statements of financial condition as derivative
assets and derivative liabilities.The Company is exposed to credit-related losses in the event of nonperformance by the
counterparties to these agreements. The Company controls the credit risk of its financial
contracts through credit approvals, limits and monitoring procedures, and does not expect any
counterparties to fail their obligations. The Company deals only with primary dealers.Derivative instruments are generally negotiated over-the-counter (OTC) contracts. Negotiated
OTC derivatives are generally entered into between two counterparties that negotiate specific
agreement terms, including the underlying instrument, amount, exercise price and maturity.The Company enters into interest-rate swap contracts in managing its interest rate exposure.
Interest-rate swap contracts generally involve the exchange of fixed and floating-rate interest
payment obligations without the exchange of the underlying principal amounts. Entering into
interest-rate swap contracts involves not only the risk of dealing with counterparties and
their ability to meet the terms of the contracts, but also the interest rate risk associated
with unmatched positions. Interest rate swaps are the most common type of derivative contracts
that the Company utilizes.Indexed options are contracts that the Company enters into in order to receive the average
appreciation of the month end value of the Standard & Poors 500 Composite Stock Index over a
specified period in exchange for the payment of a premium when the contract is initiated. The
credit risk inherent in the indexed options is the risk that the exchange party may default.
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The Company utilizes interest rate swaps (CD Swaps) to convert a portion of its fixed-rate
brokered certificates of deposit (CDs) (liabilities) or firm commitments to originate
brokered CDs to a variable rate. The purpose of entering into these CD swaps is to hedge the
risk of changes in the fair value of certain brokered CDs or firm commitments to originate
brokered CDs attributable to changes in the LIBOR rate (interest rate risk). The Company
believes using CD swaps to convert the interest rates on brokered CDs from fixed to variable is
prudent from a risk management and business standpoint. The hedged brokered CDs are typically
structured with terms of 3 to 20 years with a call option on the
Companys part, but no surrender option
for the CD holder, other than for death or disability. The extended term of the brokered CDs
minimize liquidity risk while the option to call the CDs after 1 year provides the Company with funding
flexibility. This variable rate funding matches well with the Company strategy of having a large
floating rate commercial loan portfolio. The Company considers these CD swaps to be valuable
economic and highly effective transactions that benefit the Company.The Company offers its customers certificates of deposit which contain an embedded derivative
tied to the performance of the Standard & Poors 500 Composite Stock Index that is bifurcated
from the host deposit and recognized in the consolidated statements of financial condition in
accordance with SFAS No. 133. At the end of five years, the depositor will receive a specified
percent of the average increase of the month-end value of the stock index. If such index
decreases, the depositor receives the principal without any interest. The Company uses option
and interest rate swap agreements with major broker dealer companies to manage its exposure to
the stock market. Under the option agreements, the Company will receive the average increase in
the month-end value of the index in exchange for the payment of a premium when the contract is
initiated. Under the terms of the swap agreements, the Company also will receive the average
increase in the month-end value of the index in exchange for a quarterly fixed interest cost.
Since the embedded derivative instrument on the certificates of deposit and the option and
interest rate swap agreements do not qualify for hedge accounting, these derivative instruments
are marked to market through earnings.Information pertaining to the notional amounts of the Companys derivative instruments not
designated as hedge as of December 31, was as follows:
 Notional Amount2005
    
    
    2004(In thousands)CD swaps
    
    $
    602,187
    
    
    $
    778,105Interest rate swaps (unmatched portion)
    
    
    14,013
    
    
    
    8,895Interest rate swaps used to manage exposure
to the stock market
    
    
    36,329
    
    
    
    36,329Embedded options on stock indexed deposits
    
    
    128,075
    
    
    
    112,407Purchased options used to manage exposure
to the stock market on stock indexed deposits
    
    
    94,681
    
    
    
    78,212Total
    
    $
    875,285
    
    
    $
    1,013,948
 At December 31, 2005, the fair value of derivatives not qualifying as a hedge represented
an unrealized net loss of $20.0 million and was recorded as
part of Other assets of $10.0 million, as part of Deposits of $17.7 million and as part of
Accrued expenses and other liabilities of $12.3 million, in the accompanying 2005
consolidated statement of financial condition.
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At December 31, 2004, the fair value of derivatives not qualifying as a hedge represented an
unrealized net loss of $15.6 million and was recorded as part
of Other assets of $7.9 million, as part of Deposits of $14.6 million and as part of
Accrued expenses and other liabilities of $8.9 million, in the accompanying 2004
consolidated statement of financial condition.A summary of the types of swaps used, excluding those used to manage exposure to the stock
market, and their terms at December 31, follows:
 2005
    
    2004(Dollars in thousands)Pay floating/receive fixed:Notional amount
    
    $
    616,200
    
    
    $
    787,000Weighted average receive rate at year end
    
    
    4.73
    %
    
    
    4.09
    %Weighted average pay rate at year end
    
    
    4.32
    %
    
    
    2.35
    %Floating rate as a percentage of three month LIBOR,
plus a spread ranging from minus .40% to plus .25%
    
    
    100
    %
    
    
    100
    %
 The changes in notional amount of swaps outstanding during the years ended December 31,
follows:
 2005
    
    
    2004(In thousands)Beginning balance
    
    $
    823,329
    
    
    $
    676,329New swaps
    
    
    30,000
    
    
    
    415,500Called and matured swaps
    
    
    (200,800
    )
    
    
    (268,500
    )End balance
    
    $
    652,529
    
    
    $
    823,329
 At December 31, 2005, the maturities of interest rate swaps, embedded options and purchased
options by year were as follows:
 Year Ending
    
    
    
    
    
    Embedded
    
    
    PurchasedDecember 31,
    
    Swaps
    
    
    Options
    
    
    Options(In thousands)2006
    
    $
    61,329
    
    
    $
    36,725
    
    
    $
    1,6232007
    
    
    7,500
    
    
    
    26,348
    
    
    
    27,1502008
    
    
    
    
    
    
    21,081
    
    
    
    21,5712009
    
    
    30,500
    
    
    
    27,493
    
    
    
    27,8682010
    
    
    25,000
    
    
    
    16,428
    
    
    
    16,469Thereafter
    
    
    528,200
    
    
    
    
    
    
    
    Total
    
    $
    652,529
    
    
    $
    128,075
    
    
    $
    94,681
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Swap agreements amounting to $568,200,000 at December 31, 2005, provide the counterparties the
option to cancel the swap agreements on any interest payment date after the first anniversary
(matching the call option that the Company has purchased on brokered CDs). During the years
ended December 31, 2005 and 2004, various counterparties of swap agreements exercised their
option to cancel their swaps and the Company exercised its option to call the
hedged certificates of deposit. No gains or losses resulted from the above cancellations.At December 31, 2005, the carrying value of the specific collateral held by the counterparties
consisted of money market instruments of $14,357,000.20.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTS:The fair value of a financial instrument is the current amount that would be exchanged between
willing parties, other than in a forced liquidation. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no quoted market prices for the
Companys various financial instruments (such as loans and financial liabilities). In cases
where quoted market prices are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash flows. Accordingly,
the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS
No. 107, Disclosure about Fair Value of Financial Instruments, excludes certain financial
instruments and all non-financial instruments from its disclosure requirements. In addition,
the tax ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the estimates.
Accordingly, the aggregate fair value amounts presented should not be construed as the
underlying value of the Company.The following methods and assumptions were used by the Company in estimating fair values of
financial instruments as disclosed in these consolidated financial statements:
 
    
    Short-term Financial Assets and Liabilities For financial instruments with a
short-term or no stated maturity, at prevailing market rates and limited credit risk,
carrying amounts approximate fair value. Those financial instruments include cash and due
from banks, money market instruments, certain deposits (passbook accounts, money market
and checking accounts), federal funds purchased and accrued interest.
    
    Investment Securities Available for Sale, Held to Maturity and Trading
Securities- The fair values of investment securities available for sale, held to maturity
and trading securities are estimated based on quotations received from securities dealers.
If a quoted market price is not available, fair value is estimated using quoted market
prices for similar securities.
    
    Federal Home Loan Bank (FHLB) Stock- FHLB stock is valued at its redemption
value.
    
    Mortgage Loans Held for Sale- Fair value is based on the contract price at
which the mortgage loans are expected to be sold.
    
    Loans- Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as residential mortgage,
commercial, consumer, credit cards and other loans. Each loan category is further
segmented into fixed and adjustable interest rate terms and by performing, nonperforming
and loans with payments in arrears.The fair value of performing loans, except residential mortgages and credit card loans is
calculated by discounting scheduled cash flows through the estimated maturity dates using
estimated market discount rates that reflect the credit and interest rate risk inherent in
the loan. For performing residential mortgage loans, fair value is computed using an
estimated market rate based on secondary market sources adjusted to reflect differences in servicing and credit costs. For credit
card loans, cash flows and maturities are estimated based on contractual interest rates and
historical experience and are discounted using estimated market rates.
 124




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Fair value for significant nonperforming loans and certain loans with payments in arrears
is based on recent external appraisals of collateral. If appraisals are not available,
estimated cash flows are discounted using a rate that is commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit risk, cash flows,
and discount rates are judgmentally determined using available market information and
specific borrower information.
    
    Mortgage Servicing Rights- The carrying amount of mortgage servicing rights,
which is evaluated periodically for impairment, approximates the fair value (fair value is
estimated considering prices for similar assets).
    
    Deposits- The fair value of fixed rate certificates of deposit is based on
the discounted value of contractual cash flows using current rates for certificates of
deposit with similar terms and remaining maturities. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
    
    Resell Agreements, Repurchase Agreements, Advances from FHLB and Mortgage Note
Payable- The fair value of resell agreements, repurchase agreements, advances from FHLB
and mortgage note payable is based on the discounted value using rates currently available
to the Company for instruments with similar terms and remaining maturities.
    
    Derivative Assets and Derivative Liabilities The fair values of the indexed
option contracts and the interest rate swaps used to manage the exposure to the stock
market were obtained from dealer quotes. In the case of other interest rate swaps, the
fair values were based upon an independent valuation model.
    
    Commitments to Extend Credit and Commercial Letters of Credit- The fair value
of commitments to extend credit and commercial letters of credit are based on fees
currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties credit standings.
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The estimated fair values of the Companys financial instruments at December 31, were as
follows:
 2005
    
    2004Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Financial Assets:Cash and due from banks
    
    $
    97,612
    
    
    $
    97,612
    
    
    $
    77,752
    
    
    $
    77,752Federal funds sold and resell agreements
    
    
    746,539
    
    
    
    730,393
    
    
    
    1,017,303
    
    
    
    1,017,303Interest-bearing deposits in banks
    
    
    57,116
    
    
    
    57,116
    
    
    
    49,476
    
    
    
    49,476Investment securities available for sale
    
    
    5,166
    
    
    
    5,166
    
    
    
    7,881
    
    
    
    7,881Investment securities held to maturity
    
    
    7,074,025
    
    
    
    6,851,089
    
    
    
    6,921,379
    
    
    
    6,836,897Federal Home Loan Bank stock
    
    
    42,798
    
    
    
    42,798
    
    
    
    52,195
    
    
    
    52,195Residential mortgage loans held for sale
    
    
    1,539
    
    
    
    1,539
    
    
    
    1,633
    
    
    
    1,633Loans (excluding allowance for loan losses)
    
    
    7,908,029
    
    
    
    7,904,561
    
    
    
    5,997,418
    
    
    
    5,956,955Accrued interest receivable
    
    
    105,882
    
    
    
    105,882
    
    
    
    88,285
    
    
    
    88,285Mortgage servicing rights
    
    
    3,070
    
    
    
    3,070
    
    
    
    3,302
    
    
    
    3,302Derivative purchased options
    
    
    9,967
    
    
    
    9,967
    
    
    
    7,792
    
    
    
    7,792Financial Liabilities:Deposits:Non-interest bearing
    
    
    277,099
    
    
    
    277,099
    
    
    
    249,368
    
    
    
    249,368Interest bearing
    
    
    8,009,617
    
    
    
    7,982,554
    
    
    
    5,950,413
    
    
    
    5,925,701Embedded options on deposits
    
    
    17,701
    
    
    
    17,701
    
    
    
    14,542
    
    
    
    14,542Federal funds purchased and repurchase agreements
    
    
    6,260,029
    
    
    
    6,292,900
    
    
    
    6,683,527
    
    
    
    6,771,099Advances from FHLB
    
    
    172,000
    
    
    
    173,832
    
    
    
    211,000
    
    
    
    212,608Mortgage note payable
    
    
    36,432
    
    
    
    38,910
    
    
    
    36,858
    
    
    
    39,170Accrued interest payable
    
    
    106,613
    
    
    
    106,613
    
    
    
    51,961
    
    
    
    51,961Interest rate swaps in a net payable position
    
    
    12,256
    
    
    
    12,256
    
    
    
    8,896
    
    
    
    8,896Other
    
    
    7,867
    
    
    
    7,867
    
    
    
    6,513
    
    
    
    6,513Off-Balance Sheet Credit Related
Financial Instruments:Liabilities:Commitments to extend credit
    
    
    
    
    
    
    6,814
    
    
    
    
    
    
    
    5,345Unused lines of credit:Commercial
    
    
    317
    
    
    
    317
    
    
    
    507
    
    
    
    507Credit cards and other
    
    
    201
    
    
    
    201
    
    
    
    218
    
    
    
    218Commercial letters of credit
    
    
    238
    
    
    
    238
    
    
    
    278
    
    
    
    278
 21.
    
    RESERVE FUND:The Banking Law of Puerto Rico requires that a reserve fund be established by Westernbank and
that annual transfers of at least 10% of its net income be made, until such reserve fund equals
its total paid-in capital on common and preferred shares. Such transfers restrict its retained
earnings, which would otherwise be available for dividends.
 126




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22.
    
    QUARTERLY FINANCIAL DATA (UNAUDITED):The following is a summary of the unaudited quarterly results of operations (in thousands,
except for per share data):
 As Previously
    
    
    
    
    
    
    As Previously
    
    
    
    
    
    
    As PreviouslyReported
    
    
    As Restated(1)
    
    
    Reported
    
    
    As Restated(1)
    
    
    Reported
    
    
    As Restated(1)2005
    
    March 31
    
    
    June 30
    
    
    Sept. 30
    
    
    Dec. 31Total interest income
    
    $
    178,310
    
    
    $
    178,310
    
    
    $
    194,400
    
    
    $
    194,400
    
    
    $
    205,347
    
    
    $
    205,347
    
    
    $
    217,272Total interest expense
    
    
    96,863
    
    
    
    99,929
    
    
    
    112,608
    
    
    
    115,313
    
    
    
    124,674
    
    
    
    126,579
    
    
    
    141,926Net interest income
    
    
    81,447
    
    
    
    78,381
    
    
    
    81,792
    
    
    
    79,087
    
    
    
    80,673
    
    
    
    78,768
    
    
    
    75,346Provision for loan losses
    
    
    6,000
    
    
    
    6,000
    
    
    
    5,000
    
    
    
    5,000
    
    
    
    6,000
    
    
    
    6,000
    
    
    
    14,000Net interest income after
provision for loan losses
    
    
    75,447
    
    
    
    72,381
    
    
    
    76,792
    
    
    
    74,087
    
    
    
    74,673
    
    
    
    72,768
    
    
    
    61,346Total noninterest income
    
    
    7,235
    
    
    
    5,711
    
    
    
    8,192
    
    
    
    21,163
    
    
    
    8,307
    
    
    
    2,138
    
    
    
    6,808Total noninterest expenses
    
    
    (24,271
    )
    
    
    (24,271
    )
    
    
    (27,525
    )
    
    
    (27,525
    )
    
    
    (27,584
    )
    
    
    (27,584
    )
    
    
    (28,850
    )Income before income taxes
    
    
    58,411
    
    
    
    53,821
    
    
    
    57,459
    
    
    
    67,725
    
    
    
    55,396
    
    
    
    47,322
    
    
    
    39,304Provision for income taxes
    
    
    9,810
    
    
    
    8,020
    
    
    
    11,695
    
    
    
    15,699
    
    
    
    15,380
    
    
    
    12,232
    
    
    
    9,135Net income
    
    $
    48,601
    
    
    $
    45,801
    
    
    $
    45,764
    
    
    $
    52,026
    
    
    $
    40,016
    
    
    $
    35,090
    
    
    $
    30,169Earnings per common share:Basic
    
    $
    0.24
    
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.26
    
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.13Diluted
    
    $
    0.23
    
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.25
    
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.12
 As Previously
    
    
    
    
    
    
    As Previously
    
    
    
    
    
    
    As Previously
    
    
    
    
    
    
    As PreviouslyReported
    
    
    As Restated(1)
    
    
    Reported
    
    
    As Restated(1)
    
    
    Reported
    
    
    As Restated(1)
    
    
    Reported
    
    
    As Restated(1)2004
    
    March 31
    
    
    June 30
    
    
    Sept. 30
    
    
    Dec. 31Total interest income
    
    $
    134,407
    
    
    $
    134,407
    
    
    $
    141,016
    
    
    $
    141,016
    
    
    $
    151,545
    
    
    $
    151,545
    
    
    $
    164,408
    
    
    $
    164,408Total interest expense
    
    
    63,201
    
    
    
    69,674
    
    
    
    66,452
    
    
    
    72,531
    
    
    
    74,499
    
    
    
    79,610
    
    
    
    87,690
    
    
    
    92,404Net interest income
    
    
    71,206
    
    
    
    64,733
    
    
    
    74,564
    
    
    
    68,485
    
    
    
    77,046
    
    
    
    71,935
    
    
    
    76,718
    
    
    
    72,004Provision for loan losses
    
    
    8,941
    
    
    
    8,941
    
    
    
    10,821
    
    
    
    10,821
    
    
    
    10,379
    
    
    
    10,379
    
    
    
    6,550
    
    
    
    6,550Net interest income after
provision for loan losses
    
    
    62,265
    
    
    
    55,792
    
    
    
    63,743
    
    
    
    57,664
    
    
    
    66,667
    
    
    
    61,556
    
    
    
    70,168
    
    
    
    65,454Total noninterest income
    
    
    6,908
    
    
    
    18,365
    
    
    
    7,005
    
    
    
    495
    
    
    
    8,373
    
    
    
    23,187
    
    
    
    8,947
    
    
    
    11,581Total noninterest expenses
    
    
    (23,647
    )
    
    
    (23,647
    )
    
    
    (25,241
    )
    
    
    (25,241
    )
    
    
    (25,308
    )
    
    
    (25,308
    )
    
    
    (25,929
    )
    
    
    (25,929
    )Income before income taxes
    
    
    45,526
    
    
    
    50,510
    
    
    
    45,507
    
    
    
    32,918
    
    
    
    49,732
    
    
    
    59,435
    
    
    
    53,186
    
    
    
    51,106Provision (credit) for
income taxes
    
    
    5,032
    
    
    
    6,976
    
    
    
    4,484
    
    
    
    (426
    )
    
    
    5,489
    
    
    
    9,273
    
    
    
    7,081
    
    
    
    6,270Net income
    
    $
    40,494
    
    
    $
    43,534
    
    
    $
    41,023
    
    
    $
    33,344
    
    
    $
    44,243
    
    
    $
    50,162
    
    
    $
    46,105
    
    
    $
    44,836Earnings per common share:Basic
    
    $
    0.21
    
    
    $
    0.23
    
    
    $
    0.21
    
    
    $
    0.16
    
    
    $
    0.23
    
    
    $
    0.27
    
    
    $
    0.24
    
    
    $
    0.23Diluted
    
    $
    0.20
    
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.16
    
    
    $
    0.22
    
    
    $
    0.26
    
    
    $
    0.23
    
    
    $
    0.22
 (1)
    
    See Note 25. The increase in the provision for loan losses for the fourth quarter of 2005 was attributed
to higher net charge offs during the quarter. The decrease in the provision for loan losses for
the fourth quarter of 2004 was attributed to lower net charge offs during the quarter.
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The changes in total noninterest income for the quarterly periods of 2005 and 2004 were mainly
attributed to the change in the fair value during the period of certain interest rate swaps on a
portion of the Companys brokered deposits as a result of correcting the application of fair
value hedge accounting as explained in Note 25.The provision for income taxes in proportion to income before income taxes (the effective income
tax rate) for the 2005 quarters is higher than that for the 2004 quarters as a result of a
significant increase in the Companys taxable interest income derived from the commercial loan
portfolio and of a transitory additional tax of 2.5% over net taxable income imposed on August
1, 2005 for taxable years 2005 and 2006 with a retroactive effect to January 1, 2005 (see Note
11).23.
    
    SEGMENT INFORMATION:The Companys management monitors and manages the financial performance of two reportable
business segments, the traditional banking operations of Westernbank Puerto Rico and the
activities of the division known as Westernbank International. Other operations of the Company
not reportable in either segment include Westernbank Business Credit Division, which specializes
in asset-based commercial business lending; Westernbank Trust Division, which offers trust
services; SRG Net, Inc., which operates an electronic funds transfer network; Westernbank
Insurance Corp., which operates a general insurance agency; Westernbank World Plaza, Inc., which
operates the Westernbank World Plaza, a 23-story office building located in Hato Rey, Puerto
Rico; and the transactions of the parent company only, which mainly consist of other income
related to the equity in the net income of its two wholly owned subsidiaries. Separate
condensed financial information of the Parent Company is provided in Note 24.Management determined the reportable segments based on the internal reporting used to evaluate
performance and to assess where to allocate resources. Other factors such as the Companys
organizational structure by divisions, nature of the products, distribution channels, and the
economic characteristics of the products were also considered in the determination of the
reportable segments. The Company evaluates performance based on net interest income and other
income. Operating expenses and the provision for income taxes are analyzed on a combined basis.Westernbank Puerto Ricos traditional banking operations consist of Westernbanks retail
operations, such as its branches, including the branches of the Expresso division, together with
consumer loans, mortgage loans, commercial loans (excluding the asset-based lending operations),
investments (treasury) and deposit products. Consumer loans include loans such as personal,
collateralized personal loans, credit cards, and small loans. Commercial products consist of
commercial loans including commercial real estate, unsecured commercial and construction loans.Westernbank International operates as an IBE under the International Banking Regulatory Act.
Westernbank Internationals business activities consist of commercial banking and related
services, and treasury and investment activities outside of Puerto Rico. As of December 31,
2005, 2004 and 2003, and for the years then ended, substantially all of Westernbank
Internationals business activities consisted of investments in securities and money market
instruments of and loans to entities principally located in the United States of America.
Investment securities amounted to $1.99 billion, $2.17 billion and $2.39 billion at December 31,
2005, 2004 and 2003, respectively. These securities principally consisted of investment in U.S.
Government agencies, FHLMC and FNMA. There are no investments in residual tranches or any other
securities involving high risk characteristics. At December 31, 2005, 2004 and 2003, management
concluded that there was no other-than-temporary impairment on its investment securities
portfolio (see Note 3). Money market instruments amounted to $583.3 million, $619.5 million and
$278.5 million at December 31, 2005, 2004 and 2003, respectively. Money market instruments
include interest-bearing deposits with banks, which mature the next business day, and resell
agreements.
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For the resell agreements, the Company monitors the fair value of the underlying
securities as compared to the related receivable,
including accrued interest and requests additional collateral when the fair value of the
underlying collateral falls to less than the collateral requirement. The collateral requirement
is equal to 102 percent of the related receivable, including interest (see Note 2). Loans
outstanding at December 31, 2005, 2004 and 2003 amounted to $265,691,000, $122,723,000 and
$73,581,000, respectively, and include foreign loans mainly in Canada and in the United Kingdom,
amounting to $64,113,000, $2,237,000 and $2,485,000 at December 31, 2005, 2004 and 2003,
respectively.Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to
third parties, that is, at current market prices. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies.The financial information presented below was derived from the internal management accounting
system and does not necessarily represent each segments financial condition and results of
operations as if these were independent entities.
 As of and for the year endedDecember 31, 2005Total major
    
    
    OtherPuerto Rico
    
    
    International
    
    
    segments
    
    
    Segments
    
    
    Eliminations
    
    
    Total(In thousands)Interest income:Consumer loans
    
    $
    78,268
    
    
    $
    
    
    
    $
    78,268
    
    
    $
    
    
    
    $
    
    
    
    $
    78,268Commercial loans
    
    
    238,482
    
    
    
    13,414
    
    
    
    251,896
    
    
    
    
    
    
    
    
    
    
    
    251,896Asset-based loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,245
    
    
    
    
    
    
    
    80,245Mortgage loans
    
    
    68,633
    
    
    
    
    
    
    
    68,633
    
    
    
    
    
    
    
    
    
    
    
    68,633Treasury and investment activities
    
    
    204,917
    
    
    
    108,624
    
    
    
    313,541
    
    
    
    5,250
    
    
    
    (2,504
    )
    
    
    316,287Total interest income
    
    
    590,300
    
    
    
    122,038
    
    
    
    712,338
    
    
    
    85,495
    
    
    
    (2,504
    )
    
    
    795,329Interest expense
    
    
    362,472
    
    
    
    89,089
    
    
    
    451,561
    
    
    
    34,690
    
    
    
    (2,504
    )
    
    
    483,747Net interest income
    
    
    227,828
    
    
    
    32,949
    
    
    
    260,777
    
    
    
    50,805
    
    
    
    
    
    
    
    311,582Provision for loan losses
    
    
    (8,608
    )
    
    
    (1,615
    )
    
    
    (10,223
    )
    
    
    (20,777
    )
    
    
    
    
    
    
    (31,000
    )Noninterest income, net:Service and other charges on loans
    
    
    8,314
    
    
    
    274
    
    
    
    8,588
    
    
    
    
    
    
    
    
    
    
    
    8,588Service charges on deposit accounts
    
    
    8,636
    
    
    
    
    
    
    
    8,636
    
    
    
    
    
    
    
    
    
    
    
    8,636Other fees
and commissions
    
    
    8,876
    
    
    
    105
    
    
    
    8,981
    
    
    
    226
    
    
    
    (226
    )
    
    
    8,981Trust account fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,537
    
    
    
    (50
    )
    
    
    1,487Insurance commission fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,991
    
    
    
    (12
    )
    
    
    1,979Asset-based lending related fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,724
    
    
    
    
    
    
    
    3,724Net gain on derivative instruments
    
    
    1,878
    
    
    
    
    
    
    
    1,878
    
    
    
    
    
    
    
    
    
    
    
    1,878Net gain on
sales and valuation of loans, securities and other assets
    
    
    547
    
    
    
    
    
    
    
    547
    
    
    
    
    
    
    
    
    
    
    
    547Total noninterest income, net
    
    
    28,251
    
    
    
    379
    
    
    
    28,630
    
    
    
    7,478
    
    
    
    (288
    )
    
    
    35,820Equity in income of subsidiaries
    
    
    293
    
    
    
    
    
    
    
    293
    
    
    
    162,793
    
    
    
    (163,086
    )
    
    
    Total net interest income and
noninterest income
    
    $
    247,764
    
    
    $
    31,713
    
    
    $
    279,477
    
    
    $
    200,299
    
    
    $
    (163,374
    )
    
    $
    316,402Total assets
    
    $
    13,797,874
    
    
    $
    2,870,864
    
    
    $
    16,668,738
    
    
    $
    1,770,472
    
    
    $
    (2,287,346
    )
    
    $
    16,151,864
 129




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##### Table of Contents



As of and for the year endedDecember 31, 2004Total major
    
    
    OtherPuerto Rico
    
    
    International
    
    
    segments
    
    
    Segments
    
    
    Eliminations
    
    
    Total(In thousands)Interest income:Consumer loans
    
    $
    76,091
    
    
    $
    
    
    
    $
    76,091
    
    
    $
    
    
    
    $
    
    
    
    $
    76,091Commercial loans
    
    
    151,610
    
    
    
    5,508
    
    
    
    157,118
    
    
    
    
    
    
    
    
    
    
    
    157,118Asset-based loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,158
    
    
    
    
    
    
    
    42,158Mortgage loans
    
    
    46,796
    
    
    
    
    
    
    
    46,796
    
    
    
    
    
    
    
    
    
    
    
    46,796Treasury and investment activities
    
    
    167,093
    
    
    
    101,799
    
    
    
    268,892
    
    
    
    2,391
    
    
    
    (2,070
    )
    
    
    269,213Total interest income
    
    
    441,590
    
    
    
    107,307
    
    
    
    548,897
    
    
    
    44,549
    
    
    
    (2,070
    )
    
    
    591,376Interest expense
    
    
    249,120
    
    
    
    51,202
    
    
    
    300,322
    
    
    
    15,967
    
    
    
    (2,070
    )
    
    
    314,219Net interest income
    
    
    192,470
    
    
    
    56,105
    
    
    
    248,575
    
    
    
    28,582
    
    
    
    
    
    
    
    277,157Provision for loan losses
    
    
    (30,697
    )
    
    
    
    
    
    
    (30,697
    )
    
    
    (5,994
    )
    
    
    
    
    
    
    (36,691
    )Noninterest income, net:Service and other charges on loans
    
    
    7,115
    
    
    
    112
    
    
    
    7,227
    
    
    
    
    
    
    
    
    
    
    
    7,227Service charges on deposit accounts
    
    
    7,969
    
    
    
    
    
    
    
    7,969
    
    
    
    
    
    
    
    
    
    
    
    7,969Other fees
and commissions
    
    
    7,385
    
    
    
    10
    
    
    
    7,395
    
    
    
    226
    
    
    
    (226
    )
    
    
    7,395Trust account fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,170
    
    
    
    
    
    
    
    1,170Insurance commission fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,923
    
    
    
    (9
    )
    
    
    1,914Asset-based lending related fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,936
    
    
    
    
    
    
    
    2,936Net gain on derivative instruments
    
    
    22,388
    
    
    
    
    
    
    
    22,388
    
    
    
    
    
    
    
    
    
    
    
    22,388Net gain on
sales and valuation of loans, securities and other assets
    
    
    2,629
    
    
    
    
    
    
    
    2,629
    
    
    
    
    
    
    
    
    
    
    
    2,629Total noninterest income, net
    
    
    47,486
    
    
    
    122
    
    
    
    47,608
    
    
    
    6,255
    
    
    
    (235
    )
    
    
    53,628Equity in income (loss) of subsidiaries
    
    
    (698
    )
    
    
    
    
    
    
    (698
    )
    
    
    174,002
    
    
    
    (173,304
    )
    
    
    Total net interest income and
noninterest income
    
    $
    208,561
    
    
    $
    56,227
    
    
    $
    264,788
    
    
    $
    202,845
    
    
    $
    (173,539
    )
    
    $
    294,094Total assets
    
    $
    11,799,360
    
    
    $
    2,938,374
    
    
    $
    14,737,734
    
    
    $
    1,557,674
    
    
    $
    (1,973,788
    )
    
    $
    14,321,620
 As of and for the year endedDecember 31, 2003Total major
    
    
    OtherPuerto Rico
    
    
    International
    
    
    segments
    
    
    Segments
    
    
    Eliminations
    
    
    Total(In thousands)Interest income:Consumer loans
    
    $
    74,562
    
    
    $
    
    
    
    $
    74,562
    
    
    $
    
    
    
    $
    
    
    
    $
    74,562Commercial loans
    
    
    117,132
    
    
    
    4,250
    
    
    
    121,382
    
    
    
    
    
    
    
    
    
    
    
    121,382Asset-based loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,652
    
    
    
    
    
    
    
    33,652Mortgage loans
    
    
    46,253
    
    
    
    
    
    
    
    46,253
    
    
    
    
    
    
    
    
    
    
    
    46,253Treasury and investment activities
    
    
    95,269
    
    
    
    90,090
    
    
    
    185,359
    
    
    
    2,378
    
    
    
    (1,692
    )
    
    
    186,045Total interest income
    
    
    333,216
    
    
    
    94,340
    
    
    
    427,556
    
    
    
    36,030
    
    
    
    (1,692
    )
    
    
    461,894Interest expense
    
    
    192,819
    
    
    
    43,703
    
    
    
    236,522
    
    
    
    10,272
    
    
    
    (1,692
    )
    
    
    245,102Net interest income
    
    
    140,397
    
    
    
    50,637
    
    
    
    191,034
    
    
    
    25,758
    
    
    
    
    
    
    
    216,792Provision for loan losses
    
    
    (24,961
    )
    
    
    
    
    
    
    (24,961
    )
    
    
    (2,087
    )
    
    
    
    
    
    
    (27,048
    )Noninterest income (loss), net:Service and other charges on loans
    
    
    7,474
    
    
    
    470
    
    
    
    7,944
    
    
    
    
    
    
    
    
    
    
    
    7,944Service charges on deposit accounts
    
    
    7,053
    
    
    
    
    
    
    
    7,053
    
    
    
    
    
    
    
    
    
    
    
    7,053Other fees and commissions
    
    
    6,952
    
    
    
    11
    
    
    
    6,963
    
    
    
    221
    
    
    
    (221
    )
    
    
    6,963Trust account fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    933
    
    
    
    
    
    
    
    933Insurance commission fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,087
    
    
    
    
    
    
    
    2,087Asset-based lending related fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,851
    
    
    
    
    
    
    
    2,851Net gain on derivative instruments
    
    
    18,413
    
    
    
    
    
    
    
    18,413
    
    
    
    
    
    
    
    
    
    
    
    18,413Net loss on
sales and valuation of loans, securities and other assets
    
    
    (20,372
    )
    
    
    (577
    )
    
    
    (20,949
    )
    
    
    
    
    
    
    
    
    
    
    (20,949
    )Total noninterest income (loss), net
    
    
    19,520
    
    
    
    (96
    )
    
    
    19,424
    
    
    
    6,092
    
    
    
    (221
    )
    
    
    25,295Equity in income of subsidiaries
    
    
    594
    
    
    
    
    
    
    
    594
    
    
    
    114,755
    
    
    
    (115,349
    )
    
    
    Total net
interest income and noninterest income
    
    $
    135,550
    
    
    $
    50,541
    
    
    $
    186,091
    
    
    $
    144,518
    
    
    $
    (115,570
    )
    
    $
    215,039Total assets
    
    $
    9,260,187
    
    
    $
    2,769,292
    
    
    $
    12,029,479
    
    
    $
    1,787,212
    
    
    $
    (2,289,182
    )
    
    $
    11,527,509
 130




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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 31,2005
    
    2004(In thousands)ASSETSCash
    
    $
    1,831
    
    
    $
    2,356Money market
instruments
    
    
    11,000
    
    
    
    129,000Dividends and other accounts receivable
from bank subsidiary
    
    
    3,148
    
    
    
    3,012Investment securities available for sale
    
    
    4,981
    
    
    
    Investment securities held to maturity
    
    
    55,470
    
    
    
    5,570Investment in bank subsidiary
    
    
    1,118,675
    
    
    
    939,200Investment in nonbank subsidiary
    
    
    2,328
    
    
    
    2,214Accrued interest receivable
    
    
    264
    
    
    
    77Deferred income taxes, net
    
    
    465
    
    
    
    Other assets
    
    
    62
    
    
    
    6TOTAL ASSETS
    
    $
    1,198,224
    
    
    $
    1,081,435LIABILITIES AND
STOCKHOLDERS EQUITYLiabilities:Dividends payable
    
    $
    4,136
    
    
    $
    3,300Other liabilities
    
    
    610
    
    
    
    576Total liabilities
    
    
    4,746
    
    
    
    3,876Stockholders equity
    
    
    1,193,478
    
    
    
    1,077,559TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
    
    $
    1,198,224
    
    
    $
    1,081,435
 131




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##### Table of Contents



CONDENSED
STATEMENTS OF INCOME INFORMATION  (PARENT COMPANY ONLY)
 Year Ended December 31,2005
    
    2004
    
    2003(In thousands)Dividends from subsidiaries:Bank subsidiary
    
    $
    77,560
    
    
    $
    50,660
    
    
    $
    26,925Nonbank subsidiary
    
    
    850
    
    
    
    900
    
    
    
    1,500Subtotal
    
    
    78,410
    
    
    
    51,560
    
    
    
    28,425Interest income on investment securities
    
    
    2,746
    
    
    
    302
    
    
    
    686Total income
    
    
    81,156
    
    
    
    51,862
    
    
    
    29,111Operating expenses
    
    
    2,975
    
    
    
    2,405
    
    
    
    2,110Income before income taxes and increase
in undistributed earnings of subsidiaries
    
    
    78,181
    
    
    
    49,457
    
    
    
    27,001Provision (credit) for income taxes
    
    
    (521
    )
    
    
    34
    
    
    
    18Income before increase (decrease) in
undistributed earnings of subsidiaries
    
    
    78,702
    
    
    
    49,423
    
    
    
    26,983Increase (decrease) in undistributed earnings from :Bank subsidiary
    
    
    84,270
    
    
    
    122,328
    
    
    
    84,358Nonbank subsidiary
    
    
    114
    
    
    
    125
    
    
    
    (386
    )Net income
    
    $
    163,086
    
    
    $
    171,876
    
    
    $
    110,955
 132




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##### Table of Contents



CONDENSED STATEMENTS OF CASH FLOWS INFORMATION(PARENT COMPANY ONLY)
 Year Ended December, 312005
    
    2004
    
    2003(In thousands)Cash flows from operating activities:Net income
    
    $
    163,086
    
    
    $
    171,876
    
    
    $
    110,955Adjustments to reconcile net income
to net cash provided by operating activities:Undistributed earnings
of subsidiaries
    
    
    (84,384
    )
    
    
    (122,453
    )
    
    
    (83,972
    )Deferred income tax credit
    
    
    (469
    )
    
    
    
    
    
    
    Effect of stock options granted to employees
    
    
    564
    
    
    
    895
    
    
    
    1,031Amortization of premium (discount) on
investment securities held to maturity
    
    
    (3
    )
    
    
    (1
    )
    
    
    138Increase in dividends and other accounts
receivable from bank subsidiary
    
    
    (874
    )
    
    
    (491
    )
    
    
    (983
    )Increase in accrued interest receivable
    
    
    (187
    )
    
    
    (7
    )
    
    
    Decrease (increase) in other assets
    
    
    (56
    )
    
    
    37
    
    
    
    (43
    )Increase (decrease) in other liabilities
    
    
    228
    
    
    
    330
    
    
    
    (41
    )Net cash provided by operating activities
    
    
    77,905
    
    
    
    50,186
    
    
    
    27,085Cash flows from investing activities:Net decrease (increase) in money market instruments
    
    
    118,000
    
    
    
    (129,000
    )
    
    
    1,000Purchases of investment securities available for sale
    
    
    (4,965
    )
    
    
    
    
    
    
    Capital contributions to subsidiaries
    
    
    (95,000
    )
    
    
    
    
    
    
    (166,113
    )Investment securities held to maturity:Purchases
    
    
    (49,897
    )
    
    
    
    
    
    
    (10,867
    )Proceeds from redemptions and repayment
    
    
    
    
    
    
    
    
    
    
    19,368Net cash used in investing activities
    
    
    (31,862
    )
    
    
    (129,000
    )
    
    
    (156,612
    )Cash flows from financing activities:Advances from bank subsidiary
    
    
    743
    
    
    
    
    
    
    
    1,000Repayment of advances from bank subsidiary
    
    
    
    
    
    
    (1,000
    )
    
    
    Issuance of preferred stock
    
    
    19,253
    
    
    
    129,495
    
    
    
    165,863Repurchase of common stock for retirement
    
    
    
    
    
    
    
    
    
    
    (33
    )Proceeds from stock options exercised
    
    
    160
    
    
    
    969
    
    
    
    3,334Dividends paid
    
    
    (66,724
    )
    
    
    (50,097
    )
    
    
    (39,109
    )Net cash provided by (used in) financing activities
    
    
    (46,568
    )
    
    
    79,367
    
    
    
    131,055Net change in cash
    
    
    (525
    )
    
    
    553
    
    
    
    1,528Cash at beginning of year
    
    
    2,356
    
    
    
    1,803
    
    
    
    275Cash at end of year
    
    $
    1,831
    
    
    $
    2,356
    
    
    $
    1,803
 133




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##### Table of Contents



25.
    
    RESTATEMENT:Subsequent to the issuance of the Companys 2004 consolidated financial statements, the
Companys management determined that the accounting treatment related to certain interest rate
swap agreements under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and the accounting treatment of certain mortgage-related transactions previously
treated as purchases under SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilitiesdid not conform to generally accepted accounting
principles, as discussed below . As a result, the accompanying 2004 and 2003 consolidated
financial statements have been restated from the amounts previously reported to correct the
accounting for these transactions.Historically, the Company has entered into interest rate swap agreements (CD swaps) to hedge
the changes in fair value of certain of its brokered certificates of deposit (brokered CDs)
resulting from changes in interest rates. From the inception of the hedging relationship, the
Company applied a method of fair value hedge accounting under SFAS No. 133 to account for the
CD swaps that allowed the Company to assume no ineffectiveness in these transactions (the
so-called short-cut method). The Company has now determined that the CD swaps did not qualify
for this method because the related CD broker placement fee caused the swaps not to have a fair
value of zero at inception, which is required under SFAS No. 133
to qualify for use of the short-cut
method.Retrospectively eliminating the application of fair value hedge accounting results in the
reversal of the fair value adjustments that were made to the brokered CDs. Therefore, while the
interest rate swap continues to be recorded on the consolidated statement of financial
condition at its fair value, the brokered CD is now carried at par. In addition, the CD broker
placement fee, which was incorporated into the swap, is now separately recorded as a deferred
cost on the brokered CDs, included in other assets, and amortized through the maturity date of
the related CDs as a yield adjustment.In addition, the Company has determined that certain transactions involving real estate
mortgage loans (mortgage-related transactions), secured principally by mortgage loans on
one-to-four family residential properties, did not constitute purchases under SFAS No. 140 and
should have been presented as originations of commercial loans secured by real property.
 134




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##### Table of Contents



As
of December 31, 2004:  (In thousands)
 As PreviouslyReported
    
    
    As RestatedASSETS:Loans, net
    
    $
    5,941,233
    
    
    $
    5,917,352Deferred income taxes, net
    
    
    31,027
    
    
    
    33,661Other assets
    
    
    34,636
    
    
    
    40,841Total assets
    
    
    14,336,662
    
    
    
    14,321,620LIABILITIES
AND STOCKHOLDERS EQUITY:Deposits:Interest-bearing and related accrued interest payable
    
    
    5,981,843
    
    
    
    5,994,802Total deposits
    
    
    6,231,211
    
    
    
    6,244,170Accrued expenses and other liabilities
    
    
    85,874
    
    
    
    61,993Total liabilities
    
    
    13,254,983
    
    
    
    13,244,061Retained earnings:Reserve fund
    
    
    60,672
    
    
    
    60,260Undivided profits
    
    
    153,013
    
    
    
    149,305Total stockholders equity
    
    
    1,081,679
    
    
    
    1,077,559
 For the year ended December 31,:(Dollars in thousands except per share data)
 2004
    
    
    2003As Previously
    
    
    
    
    
    
    As PreviouslyReported
    
    As Restated
    
    
    Reported
    
    As RestatedINTEREST EXPENSE:Deposits
    
    $
    143,860
    
    
    $
    166,237
    
    
    $
    114,755
    
    
    $
    137,271Total interest expense
    
    
    291,842
    
    
    
    314,219
    
    
    
    222,586
    
    
    
    245,102NET INTEREST INCOME
    
    
    299,534
    
    
    
    277,157
    
    
    
    239,308
    
    
    
    216,792NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    262,843
    
    
    
    240,466
    
    
    
    212,260
    
    
    
    189,744NONINTEREST INCOME:Net gain (loss) on derivative instruments
    
    
    (7
    )
    
    
    22,388
    
    
    
    (236
    )
    
    
    18,413Total noninterest income
    
    
    31,233
    
    
    
    53,628
    
    
    
    6,646
    
    
    
    25,295INCOME BEFORE PROVISION FOR INCOME TAXES
    
    
    193,951
    
    
    
    193,969
    
    
    
    134,085
    
    
    
    130,218PROVISION FOR INCOME TAXES
    
    
    22,086
    
    
    
    22,093
    
    
    
    20,771
    
    
    
    19,263NET INCOME
    
    
    171,865
    
    
    
    171,876
    
    
    
    113,314
    
    
    
    110,955TOTAL COMPREHENSIVE INCOME
    
    
    172,586
    
    
    
    172,597
    
    
    
    113,481
    
    
    
    111,122BASIC EARNINGS PER COMMON SHARE
    
    
    0.89
    
    
    
    0.89
    
    
    
    0.57
    
    
    
    0.56DILUTED EARNINGS PER COMMON SHARE
    
    
    0.86
    
    
    
    0.86
    
    
    
    0.55
    
    
    
    0.54
  135




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##### Table of Contents



26.
    
    SUBSEQUENT EVENTS:On January 31, 2006, the Board of Directors granted 30,000 stock options to two officers
pursuant to the shareholders approved 1999 Qualified Option Plan (see Note 17) at an exercise
price of $10.00. The market price of the stock was $8.61 at January 31, 2006.On February 2, 2006, one of the Companys executive officers exercised 125,000 options under the
Companys 1999 Qualified Option Plan (see Note 17) at an exercise price of $2.85.On March 16, 2006 Westernbank obtained a waiver from the Office of the Commissioner of Financial
Institutions of the Commonwealth of Puerto Rico with respect to the statutory limit for
individual borrowers (loan to one borrower limit) (see Note 4).
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ITEM 9A. CONTROLS AND PROCEDURES
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MANAGEMENTS ASSESSMENT AS TO THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
   Internal
Control Integrated Framework
   
 
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
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Internal ControlIntegrated Framework Internal ControlIntegrated Framework
  
 
 
   
  
     
   
   139




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##### Table of Contents



(1)
    
    Index to financial statements.
  
    
    Report of Independent Registered Public Accounting Firm
    
    Consolidated Statements of Financial Condition as of December 31, 2005 and 2004
    
    Consolidated Statements of Income for each of
the three years in the period ended December 31, 2005
    
    Consolidated Statements of Changes in
Stockholders Equity and Consolidated Statements of Comprehensive Income for each of the three
years in the period ended December 31, 2005
    
    Consolidated Statements of Cash Flows for
each of the three years in the period ended December 31, 2005
    
    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 these 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
    
    
    Articles of Incorporation3.2
    
    
    Bylaws (incorporated by reference herein to Exhibit 4 to the
Companys Registration Statement on Form 8-A, filed on November 29, 2001.4.1
    
    
    Certificate of Resolution establishing the rights of the Series B
Preferred Stock (incorporated by reference to Exhibit 3.1.1 to the Registrants
Registration Statement on Form S-4, Reg. No. 333-76975).4.2
    
    
    Certificate of Resolution establishing the rights of the Series C
Preferred Stock (incorporated by reference to Exhibit 4.2 to the Registrant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 Registrants
Current Report on Form 8-K as filed on August 1, 2001).
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NO.
    
    EXHIBIT4.4
    
    
    Certificate of Resolution establishing the rights of the Series E
Preferred Stock (incorporated herein by reference as Exhibit 4.2 to the
Registrant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
Registrant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
Registrant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 Registrant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).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).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. Ricardo Hernández (incorporated by reference
herein to Exhibit 10.8 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. 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).10.10
    
    
    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).10.11
    
    
    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 Registrants Current Report on Form 8-K, as filed on July
15, 2005).
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NO.
    
    EXHIBIT10.12
    
    
    Payment Agreement in the Event of a Change in Control between
Westernbank Puerto Rico and Mr. Ricardo Cortina.10.13
    
    
    Description of Arrangement for Director Fees10.14
    
    
    Executive Officers Compensation Schedule21.1
    
    
    Subsidiaries of the Registrant23.1
    
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    
    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.
   142




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By: /s/ FRANK C. STIPES
    
    Date: April 24, 2006Frank C. Stipes, Chairman of theBoard and Chief Executive Officer
  /s/ FRANK C. STIPES
    
    Date: April 24, 2006Frank C. Stipes,Chairman of the Board,Chief Executive Officer/s/
CÉSAR A. RUIZ
    
    Date: April 24, 2006César A. Ruiz, Director/s/
PEDRO R. DOMÍNGUEZ
    
    Date: April 24, 2006Pedro R. Domínguez,Director/s/ CORNELIUS TAMBOER
    
    Date: April 24, 2006Cornelius Tamboer,Director/s/
HÉCTOR L. DEL RÍO
    
    Date: April 24, 2006Héctor L. del Río,Director/s/ JUAN C. FRONTERA
    
    Date: April 24, 2006Juan C. Frontera,Director/s/ FREDDY MALDONADO
    
    Date: April 24, 2006Freddy MaldonadoDirector, President and Chief InvestmentOfficer/s/
RICARDO HERNÁNDEZ
    
    Date: April 24, 2006Ricardo HernándezChief Financial Officer
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##### Table of Contents



3.1
    
    
    Articles of Incorporation.3.2
    
    
    Bylaws (incorporated by reference herein to Exhibit 4 to the
Companys Registration Statement on Form 8-A, filed on November 29, 2001.4.1
    
    
    Certificate of Resolution establishing the rights of the Series B
Preferred Stock (incorporated by reference to Exhibit 3.1.1 to the Registrants
Registration Statement on Form S-4, Reg. No. 333-76975).4.2
    
    
    Certificate of Resolution establishing the rights of the Series C
Preferred Stock (incorporated by reference to Exhibit 4.2 to the Registrant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 Registrant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
Registrant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
Registrant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
Registrant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 Registrant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).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).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).
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10.8
    
    
    Payment Agreement in the Event of a Change in Control between
Westernbank Puerto Rico and Mr. Ricardo Hernández (incorporated by reference
herein to Exhibit 10.8 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. 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).10.10
    
    
    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).10.11
    
    
    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 Registrants Current Report on Form 8-K, as filed on July
15, 2005).10.12
    
    
    Payment Agreement in the Event of a Change in Control between
Westernbank Puerto Rico and Mr. Ricardo Cortina.10.13
    
    
    Description of Arrangement for Director Fees10.14
    
    
    Executive Officers Compensation Schedule21.1
    
    
    Subsidiaries of the Registrant23.1
    
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    
    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.
 145