UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005~~

OR For the Quarterly Period Ended June 30, 2009

o Commission ~~TRANSITION~~File ~~REPORT~~Number ~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)~~001-16799

For the transition period from to

Commission File Number 000-27377

W HOLDING COMPANY, INC.

(Exact name of Registrant as Specified in its Charter)

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


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

19 West McKinley Street Mayagüez, Puerto Rico ~~00681~~ 00680 (Address of Principal Executive Offices) (Zip Code)


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of ~~1934~~l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ o NO oþ

Indicate by check mark whether the registrant ishas ansubmitted ~~accelerated~~electronically ~~filer~~and ~~(as~~posted ~~defined~~on inits corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 12405 of Regulation S-~~b-2~~T (§ 229.405 of this chapter) during the preceeding 12 months (or for such shorter period that the ~~Exchange~~registrant ~~Act~~was required to submit and post such files). YES þo NO o

AsIndicate ofby ~~July 31,~~check ~~2005~~mark whether the registrant is a large accelerated filer, ~~there~~an ~~were~~accelerated ~~164~~filer,~~059~~ a non-accelerated filer,~~071~~ ~~shares~~or ~~outstanding~~smaller ofreporting company. See the ~~Registrant’s~~definitions ~~Common~~of ~~Stock,~~“large accelerated ~~$1.00~~filer”, ~~par~~“accelerated ~~value~~filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock: 3,297,815 outstanding as of November 30, 2009.

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONTENTS

	Page
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)		1
Consolidated Statements of Financial Condition as of June 30, 2005 and December 31, 2004		1
Condensed Consolidated Statements of Financial Condition as of June 30, 2009 and December 31, 2008		1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2005 and 2004		2
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008		2
Consolidated Statements of Changes in Stockholders’ Equity and of Comprehensive Income for the Six Months Ended June 30, 2005 and 2004		3
Condensed Consolidated Statements of Changes in Stockholders’ Equity and Condensed Consolidated Statements of Comprehensive Income (Loss) for the Six Months Ended June 30, 2009 and 2008		3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004		4-5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008		4
Notes to Consolidated Financial Statements		6-30
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		~~31-66~~60
Item 3. Quantitative and Qualitative Disclosures About Market Risk		~~66-69~~112
Item 4. Controls and Procedures		70
Item 4T. Controls and Procedures		112
PART II OTHER INFORMATION:
Item 1. Legal Proceedings		70114
Item 4. Submission of Matters to a Vote of Security Holders		71
Item 1A. Risk Factors		114
Item 6. Exhibits		72115
SIGNATURES		73116
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.1
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-31.2
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.1
EX-32.2 SECTION 906 CERTIFICATION OF CFO
EX-32.2

Forward—Looking Information

Certain statements in this Quarterly Report on Form 10-Q, especially within Management’s Discussion and Analysis of Financial Condition and Results of Operations, include forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In general, the word or phrases “may”, “should”, “will”, “expect”, “anticipate”, “estimate”, “project”, “intend”, “continue”, “believe” or similar expressions are intended to identify forward-looking statements. In addition, certain disclosures and information customarily provided by financial institutions, such as analysis of the adequacy of the allowance for loan losses or an analysis of the interest rate sensitivity of the Company’s assets and liabilities, are inherently based upon predictions of future events and circumstances. Although the Company makes such statements based on assumptions which it believes to be reasonable, there can be no assurance that actual results will not differ materially from the Company’s expectations. Important factors which could cause its results to differ from any results which might be projected, forecasted or estimated, based on such forward-looking statements include, but are not limited to: (i) general economic and competitive conditions in the markets in which the Company operates, and the risks inherent in its operations; (ii) the Company’s ability to manage its credit risk and control its operating expenses, increase interest-earning assets and non-interest income, and maintain its net interest margin; (iii) fluctuations in interest rate and inflation; and (iv) the level of demand for new and existing products. Investors should refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 as well as Item 1A of Part II of this Quarterly Report on Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Company is subject. Should one or more of these risks or uncertainties materialize, other risks or uncertainties arise, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements. Except as required by applicable law, the Company does not intend, and specifically disclaims any obligation, to update forward—looking statements.

Part I. Financial Information

Item 1. Financial Statements

W HOLDING COMPANY, INC. AND SUBSIDIARIES

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

	June 30,			December 31,
	2005			2004
	2009			2008
ASSETS
Cash and due from banks	$	~~105~~56,~~692~~035		$	7768,~~752~~368
Money market instruments:
Federal funds sold and resell agreements		757,580			1,017,303
Interest-bearing deposits in banks		589,432			1,096,465
Interest-bearing deposits in banks		54,816			49,476
Investment securities available for sale, at fair value with an amortized cost of $3,812,809 in 2009 and $3,713,645 in 2008		3,808,935			3,670,241
Investment securities available for sale, at fair value with an amortized costof $2,228 in 2005 and $8,093 in 2004		2,192			7,881
Investment securities held to maturity, at amortized cost with a fair value of $581,213 in 2009 and $1,020,837 in 2008		613,894			1,037,970
Investment securities held to maturity, at amortized cost with a fair value of$6,809,704 in 2005 and $6,836,897 in 2004		6,904,828			6,921,379
Federal Home Loan Bank stock, at cost		38,752			64,190
Federal Home Loan Bank stock, at cost		35,300			52,195
Residential mortgage loans held for sale, at lower of cost or fair value		39,562			18,871
Residential mortgage loans held for sale, at lower of cost or fair value		1,637			1,633
Loans, net of allowance for loan losses of $240,832 in 2009 and $282,089 in 2008		8,590,479			8,667,717
Loans, net of allowance for loan losses of $84,442 in 2005 and $80,066 in 2004		7,115,400			5,941,233
Accrued interest receivable		47,393			56,224
Accrued interest receivable		98,741			88,285
Foreclosed real estate held for sale, net of allowance of $3,267 in 2009 and $3,104 in 2008		101,981			98,570
Foreclosed real estate held for sale, net of allowance of $178 in 2005 and $306 in 2004		3,134			3,811
Other real estate held for sale, net		1,204			5,462
Premises and equipment, net		~~111~~127,~~791~~458			~~110~~120,~~051~~796
Deferred income taxes, net		32154,~~820~~481			31155,~~027~~661
Other assets		48220,~~113~~642			34222,~~636~~362
TOTAL	$	1514,~~272~~390,~~044~~248		$	1415,~~336~~282,~~662~~897
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	~~294~~289,~~264~~198		$	~~249~~250,~~368~~380
Interest-bearing and related accrued interest payable		7,207,985			5,981,843
Interest-bearing and related accrued interest payable, includes $14,312 in 2009 and $109,944 in 2008 of deposits measured at fair value		9,924,787			10,751,793
Total deposits		710,~~502~~213,~~249~~985			611,~~231~~002,~~211~~173
Federal funds purchased and repurchase agreements		6,289,406			6,683,527
Repurchase agreements		2,710,424			3,204,142
Advances from Federal Home Loan Bank		~~172~~92,000			~~211~~42,000
Mortgage note payable		3634,~~645~~642			3634,~~858~~932
Advances from borrowers for taxes and insurance		6,697			6,513
Securities purchased but not yet received		301,875			—
Accrued expenses and other liabilities		102,613			85,874
Advances from borrowers for taxes and insurance		12,005			11,759
Total liabilities		14,109,610			13,254,983
Accrued expenses and other liabilities		79,158			72,524
Total liabilities		13,444,089			14,367,530
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock — $1.00 par value per share (liquidation preference - $531,113 in 2005 and $511,744 in 2004); authorized 50,000,000 shares in 2005 and 20,000,000 shares in 2004; issued and outstanding 18,167,711 shares in 2005 and 17,794,251 shares in 2004		18,168			17,794
Preferred stock — $1.00 par value per share (liquidation preference - $530,838 in 2009 and 2008); authorized 50,000,000 shares; issued and outstanding 18,156,709 shares in 2009 and 2008		18,157			18,157
Common stock — $1.00 par value per share; authorized 500,000,000 shares in 2005 and 300,000,000 shares in 2004; issued and outstanding 164,051,203 shares in 2005 and 163,918,835 shares in 2004		164,051			163,919
Common stock — $1.00 par value per share; authorized 500,000,000 shares; issued and outstanding 3,297,815 shares in 2009 and 3,298,138 shares in 2008		3,298			3,298
Paid-in capital		~~705~~870,~~713~~603			~~686~~870,~~493~~450
Retained earnings:
Reserve fund		7078,~~018~~389			6078,~~672~~389
Undivided profits		204,520			153,013
Accumulated losses		(23,954	)		(13,939	)
Accumulated other comprehensive loss, net of income tax		(36334	)		(~~212~~40,988	)
Total stockholders’ equity		1946,~~162,434~~159			1915,~~081,679~~367
TOTAL	$	1514,~~272~~390,~~044~~248		$	1415,~~336~~282,~~662~~897

See notes to condensed consolidated financial statements.

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
INTEREST INCOME:
Loans, including loan fees	$	115,251		$	142,115		$	235,511		$	298,588
Investment securities		1,737			22,645			5,212			69,028
Mortgage-backed securities		33,241			29,507			69,106			40,970
Money market instruments		1,456			4,753			2,252			12,907

Total interest income		151,685			199,020			312,081			421,493

INTEREST EXPENSE:
Deposits		94,939			111,762			197,627			229,827
Federal funds purchased and repurchase agreements		28,055			53,777			57,078			113,497
Advances from Federal Home Loan Bank		627			677			1,243			1,721

Total interest expense		123,621			166,216			255,948			345,045

NET INTEREST INCOME		28,064			32,804			56,133			76,448
PROVISION FOR LOAN LOSSES		11,124			14,346			19,979			29,303

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		16,940			18,458			36,154			47,145

NONINTEREST INCOME:
Service and other charges on loans		2,293			2,717			4,534			5,202
Service charges on deposit accounts		2,140			2,983			4,532			6,052
Other fees and commissions		4,948			5,687			10,077			11,489
Net gain (loss) on derivative instruments and deposits measured at fair value		(26	)		1,766			746			1,222
Net gain on sales and valuation of loans held for sale, securities, and other assets		18,318			13,493			37,280			14,329

Total noninterest income		27,673			26,646			57,169			38,294

NONINTEREST EXPENSES:
Salaries and employees’ benefits		13,432			15,915			28,644			32,862
Equipment		2,851			3,341			6,132			6,799
Deposits insurance premium and supervisory examination		19,009			3,727			28,567			6,621
Occupancy		2,201			2,757			4,305			5,302
Advertising		2,073			1,461			3,685			4,293
Printing, postage, stationery and supplies		886			1,217			1,756			2,192
Telephone		779			788			1,313			1,580
Net loss from operations of foreclosed real estate held for sale		168			331			534			109
Municipal taxes		2,799			2,473			5,524			4,784
Professional fees		3,719			2,625			7,449			8,095
Other		5,910			7,113			11,256			14,148

Total noninterest expenses		53,827			41,748			99,165			86,785

INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES		(9,214	)		3,356			(5,842	)		(1,346	)
PROVISION (CREDIT) FOR INCOME TAXES		(3,889	)		2,258			(1,128	)		(35,056	)

NET INCOME (LOSS)		(5,325	)		1,098			(4,714	)		33,710
LESS DIVIDENDS TO PREFERRED STOCKHOLDERS		—			9,227			4,614			18,455

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(5,325	)	$	(8,129	)	$	(9,328	)	$	15,255

BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE	$	(1.61	)	$	(2.46	)	$	(2.83	)	$	4.63

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
INTEREST INCOME:
Loans, including loan fees	$	114,904		$	76,792		$	214,568		$	150,065
Investment securities		61,314			50,963			121,992			98,383
Mortgage-backed securities		8,492			9,257			17,265			19,498
Money market instruments		9,690			4,004			18,886			7,477
Total interest income		194,400			141,016			372,711			275,423
INTEREST EXPENSE:
Deposits		54,769			33,965			98,973			65,424
Federal funds purchased and repurchase agreements		55,998			31,030			106,677			61,376
Advances from Federal Home Loan Bank		1,841			1,457			3,822			2,854
Total interest expense		112,608			66,452			209,472			129,654
NET INTEREST INCOME		81,792			74,564			163,239			145,769
PROVISION FOR LOAN LOSSES		5,000			10,821			11,000			19,762
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		76,792			63,743			152,239			126,007
NONINTEREST INCOME:
Service and other charges on loans		2,604			2,423			4,931			4,798
Service charges on deposit accounts		2,174			2,018			4,149			3,919
Other fees and commissions		3,139			2,658			5,969			5,159
Net gain on sales and valuation of loans, securities and other assets		171			142			314			273
Gain (loss) on derivative instruments		104			(236	)		65			(236	)
Total noninterest income		8,192			7,005			15,428			13,913
TOTAL NET INTEREST INCOME AND NONINTEREST INCOME		84,984			70,748			167,667			139,920
NONINTEREST EXPENSES:
Salaries and employees’ benefits		11,497			9,001			22,179			18,145
Equipment		2,331			2,505			4,564			4,802
Deposits insurance premium and supervisory examination		827			687			1,625			1,359
Occupancy		1,887			1,685			3,634			3,346
Advertising		3,095			3,398			4,818			5,864
Printing, postage, stationery and supplies		814			874			1,598			1,674
Telephone		579			598			1,056			1,187
Net (gain) loss from operations of foreclosed real estate held for sale		(126	)		332			(206	)		573
Municipal taxes		1,078			899			2,155			1,797
Other		5,543			5,262			10,374			10,140
Total noninterest expenses		27,525			25,241			51,797			48,887
INCOME BEFORE PROVISION FOR INCOME TAXES		57,459			45,507			115,870			91,033
PROVISION FOR INCOME TAXES:
Current		12,118			6,683			23,298			13,553
Deferred credit		(423	)		(2,199	)		(1,793	)		(4,036	)
Total provision for income taxes		11,695			4,484			21,505			9,517
NET INCOME	$	45,764		$	41,023		$	94,365		$	81,516
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	36,559		$	34,280		$	75,841		$	67,999
BASIC EARNINGS PER COMMON SHARE	$	0.22		$	0.21	(1)	$	0.46		$	0.42	(1)
DILUTED EARNINGS PER COMMON SHARE	$	0.22		$	0.20	(1)	$	0.45		$	0.40	(1)

See notes to condensed consolidated financial statements.

(1) Adjusted to reflect the three-for-two stock split and a 2% stock dividend on our common stock declared in December 2004 and both distributed on January 10, 2005.

See notes to consolidated financial statements.

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (IN THOUSANDS)

AND OF COMPREHENSIVE INCOME (UNAUDITED) (IN THOUSANDS)


	Six Months Ended
	June 30,
	2009			2008
Changes in Stockholders’ Equity:
Preferred stock:
Balance at beginning of year	$	18,157		$	18,157

Balance at end of period		18,157			18,157

Common stock:
Balance at beginning of year		3,298			3,298

Balance at end of period		3,298			3,298

Paid-in capital:
Balance at beginning of year		870,450			870,128
Stock-based compensation expense		153			133

Balance at end of period		870,603			870,261

Reserve fund:
Balance at beginning of year		78,389			78,389
Transfer from undivided profits		—			3,997

Balance at end of period		78,389			82,386

Undivided profits (accumulated losses):
Balance at beginning of year		(13,939	)		31,383
Cumulative impact of change in accounting for financial assets and liabilities at fair value (SFAS No. 159 - See Note 1)		—			5,283

Balance at beginning of year — as adjusted		(13,939	)		36,666
Net income (loss)		(4,714	)		33,710
Cash dividends on common stock		(687	)		(4,122	)
Cash dividends on preferred stock		(4,614	)		(18,455	)
Transfer to reserve fund		—			(3,997	)

Balance at end of period		(23,954	)		43,802

Accumulated other comprehensive loss, net of income tax:
Balance at beginning of year		(40,988	)		(5,119	)
Other comprehensive income (loss)		40,654			(107,894	)

Balance at end of period		(334	)		(113,013	)


Total Stockholders’ Equity	$	946,159		$	904,891


Comprehensive Income (Loss):
Net income (loss)	$	(4,714	)	$	33,710

Other comprehensive income (loss):
Unrealized net gains (losses) on securities available for sale:
Unrealized gains (losses) arising during the period		76,616			(118,476	)
Reclassification adjustment for losses (gains) included in net income (loss)		(37,086	)		57

		39,530			(118,419	)

Unrealized net gains on cash flow hedge derivatives - (fixed- price purchase contract):
Unrealized gains arising during the period:		4,333			—
Reclassification adjustment for gains included in net income (loss)		—			—

		4,333			—

Sub-total		43,863			(118,419	)


Income tax effect		(3,209	)		10,525

Other comprehensive income (loss)		40,654			(107,894	)


Total Comprehensive Income (Loss)	$	35,940		$	(74,184	)

	Six Months Ended
	June 30,
	2005			2004
Changes in Stockholders’ Equity:
Preferred stock:
Balance at beginning of period	$	17,794		$	15,396
Issuance of preferred stock		401			—
Conversion of preferred stock		(27	)		(104	)
Balance at end of period		18,168			15,292
Common stock:
Balance at beginning of period		163,919			106,290
Issuance of common stock upon conversion of preferred stock		97			236
Issuance of common stock upon exercise of stock options		35			215
Balance at end of period		164,051			106,741
Paid-in capital:
Balance at beginning of period		686,493			514,800
Stock options exercised		65			754
Effect of stock options granted to employees		176			527
Issuance of common stock upon conversion of preferred stock		(70	)		(132	)
Issuance of preferred stock		19,049			—
Balance at end of period		705,713			515,949
Reserve fund:
Balance at beginning of period		60,672			43,375
Transfer from undivided profits		9,346			8,213
Balance at end of period		70,018			51,588
Undivided profits:
Balance at beginning of period		153,013			149,581
Net income		94,365			81,516
Cash dividends on common stock		(14,988	)		(11,736	)
Cash dividends on preferred stock		(18,524	)		(13,517	)
Transfer to reserve fund		(9,346	)		(8,213	)
Balance at end of period		204,520			197,631
Accumulated other comprehensive loss, net of income tax:
Balance at beginning of period		(212	)		(933	)
Other comprehensive income, net of income tax for the period		176			112
Balance at end of period		(36	)		(821	)
Total Stockholders’ Equity	$	1,162,434		$	886,380
Comprehensive Income:
Net income	$	94,365		$	81,516
Other comprehensive income, net of income tax:
Unrealized net gains on securities available for sale:
Unrealized gains arising during the period		176			156
Reclassification adjustments for gains included in net income		—			(59	)
		176			97
Income tax effect		—			15
Increase in other comprehensive income, net of income tax		176			112
Total Comprehensive Income	$	94,541		$	81,628

See notes to condensed consolidated financial statements.

See notes to consolidated financial statements.

W HOLDING COMPANY, INC. AND ~~SUBSIDIARIES~~SUBISIDIARIES

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

(IN THOUSANDS)


	Six Months Ended
	June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(4,714	)	$	33,710
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Provision (credit) for:
Loan losses		19,979			29,303
Unfunded loan commitments		89			—
Deferred income tax		(2,028	)		(2,502	)
Foreclosed real estate held for sale		163			63
Depreciation and amortization of:
Premises and equipment		4,720			4,096
Mortgage servicing rights		202			143
Stock-based compensation expense		153			133
Amortization of premium (discount)-net, on:
Investment securities available for sale		(108	)		(1,782	)
Mortgage-backed securities available for sale		4,520			165
Investment securities held to maturity		195			(12,551	)
Mortgage-backed securities held to maturity		350			(15	)
Loans		9			13
Amortization of discount on deposits		1,242			1,407
Amortization of net deferred loan origination fees		(4,392	)		(4,277	)
Net loss (gain) on sale and in valuation of:
Investment securities available for sale		(37,086	)		57
Called investment securities held to maturity		—			3
Mortgage loans held for sale		(194	)		(6	)
Derivative instruments		138			(1,879	)
Deposits measured at fair value		(864	)		2,939
Foreclosed real estate held for sale		138			(170	)
Other real estate held for sale		—			(13,746	)
Loans		—			261
Premises and equipment		(44	)		(31	)
Other assets		—			(2,299	)
Capitalization of servicing rights		(266	)		(225	)
Originations of mortgage loans held for sale		(41,828	)		(29,997	)
Proceeds from sales of mortgage loans held for sale		21,331			17,504
Decrease (increase) in:
Trading securities		—			799
Accrued interest receivable		8,831			33,288
Other assets		(1,031	)		(21,370	)
Increase (decrease) in:
Accrued interest on deposits and borrowings		(30,274	)		(30,939	)
Other liabilities		12,233			(32,334	)

Net cash used in operating activities		(48,536	)		(30,239	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in banks		507,033			21,125
Net increase in federal funds sold and resell agreements		—			(177,100	)
Cancellation of resell agreements over three months		—			429,238
Investment securities available for sale:
Maturities, prepayments and calls		283,892			990,352
Proceeds from sales		1,801,355			98,343
Purchases		(1,849,863	)		(4,570,210	)
Investment securities held to maturity:
Maturities, prepayments and calls		372,125			30,406,610
Purchases		—			(26,583,727	)
Mortgage-backed securities held to maturity:
Maturities, prepayments and calls		51,406			4,535
Loans:
Sales		—			12,783
Loan principal collections, net of originations		54,781			113,490
Purchases of derivative options		(2,095	)		(507	)
Proceeds from derivative instruments		4,395			8,061
Proceeds from sales of foreclosed real estate held for sale		3,145			451
Proceeds from sales of other real estate held for sale		—			19,675
Additions to premises and equipment		(6,734	)		(4,450	)
Proceeds from sales of premises and equipment		94			31
Proceeds from sales of other assets		—			2,299
Purchases of Federal Home Loan Bank stock		(21,646	)		(48,715	)
Redemptions of Federal Home Loan Bank stock		47,084			21,874

Net cash provided by investing activities		1,244,972			744,158

Forward	$	1,196,436		$	713,919

	Six Months Ended
	June 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	94,365		$	81,516
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for:
Loan losses		11,000			19,762
Losses on foreclosed real estate held for sale		(108	)		545
Deferred income tax		(1,793	)		(4,036	)
Depreciation and amortization on:
Premises and equipment		3,450			3,555
Mortgage servicing rights		247			205
Stock options granted to employees		176			527
Amortization of premium (discount), net on:
Investment securities available for sale		51			297
Investment securities held to maturity		(985	)		(732	)
Mortgage-backed securities held to maturity		253			913
Loans		599			639
Amortization of discount on deposits		2,067			1,643
Amortization of net deferred loan origination fees		(9,062	)		(4,837	)
Net gain on sale and in valuation of:
Investment securities available for sale		—			(59	)
Mortgage loans held for sale		(140	)		(249	)
Derivative instruments		(963	)		(662	)
Foreclosed real estate held for sale		(183	)		(33	)
Capitalization of servicing rights		(133	)		(72	)
Originations of mortgage loans held for sale		(10,630	)		(11,894	)
Sales of mortgage loans held for sale		10,026			8,268
Decrease (increase) in:
Trading securities		608			3,192
Accrued interest receivable		(10,456	)		(8,680	)
Other assets		(9,515	)		(11,111	)
Increase (decrease) in:
Accrued interest on deposits and borrowings		20,808			1,243
Other liabilities		12,506			(14,539	)
Net cash provided by operating activities		112,188			65,401
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits in banks		(5,340	)		(33,453	)
Net decrease in federal funds sold and resell agreements		259,723			112,327
Resell agreements with original maturities over three months:
Purchases		—			(250,000	)
Collections		—			200,000
Investment securities available for sale:
Sales		—			24,996
Purchases		—			(124,937	)
Maturities, prepayments and calls		5,814			31,931
Investment securities held to maturity:
Maturities, prepayments and calls		2,661,318			7,979,000
Purchases		(2,664,981	)		(8,870,472	)
Mortgage-backed securities held to maturity:
Maturities, prepayments and calls		70,843			151,454
Purchases		(49,897	)		(55,080	)
Loans:
Purchases		(600,468	)		(150,069	)
Loans originations and principal collections, net		(575,596	)		(583,384	)
Purchases of derivative options		(2,798	)		(4,657	)
Cash paid on terminated swaps		(252	)		—
Proceeds from sales of foreclosed real estate held for sale		1,103			424
Additions to premises and equipment		(4,885	)		(7,115	)
Redemptions of Federal Home Loan Bank stock		16,907			3,500
Purchases of Federal Home Loan Bank stock		(12	)		(5,000	)
Net cash used in investing activities		(888,521	)		(1,580,535	)
Forward	$	(776,333	)	$	(1,515,134	)
				(Continued)

See notes to condensed consolidated financial statements.

(Continued)

W HOLDING COMPANY, INC. AND SUBSIDIARIES

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

	Six Months Ended
	June 30,
	2005			2004
	2009			2008
Forward	$	~~(776~~1,~~333~~196,436	)	$	(1713,~~515,134~~919	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		1,250,744			696,342
Net increase (decrease) in deposits		(753,345	)		348,142
Net increase (decrease) in federal funds purchased and repurchase agreements		(1221,~~593,345~~648	)		1826,~~017,271~~508
Repurchase agreements with original maturities over three months:
Proceeds		3,519,142			942,955
Payments		(272,070	)		(1,803,575	)
Payments		(2,319,917	)		(1,162,953	)
Net increase (decrease) in advances from Federal Home Loan Bank		50,000			(60,000	)
Advances from Federal Home Loan Bank:
Repayments of mortgage note payable		(290	)		(262	)
Proceeds		—			158,000
Cash paid on matured embedded derivatives		(4,136	)		(7,649	)
Payments		(39,000	)		(128,000	)
Net increase (decrease) in advances from borrowers for taxes and insurance		246			(325	)
Payments of mortgage note payable		(212	)		(181	)
Dividends paid		(7,526	)		(24,502	)
Net increase in advances from borrowers for taxes and insurance		184			517
Net cash used in financing activities		(1,208,769	)		(721,663	)
Dividends paid		(32,676	)		(24,909	)
NET DECREASE IN CASH AND DUE FROM BANKS		(12,333	)		(7,744	)
Issuance of preferred stock		19,253			—
CASH AND DUE FROM BANKS, BEGINNING OF YEAR		68,368			153,473
Proceeds from stock options exercised		100			969
CASH AND DUE FROM BANKS, END OF PERIOD	$	56,035		$	145,729
Net cash provided by financing activities		804,273			1,500,011
NET CHANGE IN CASH AND DUE FROM BANKS		27,940			(15,123	)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD		77,752			92,811
CASH AND DUE FROM BANKS, END OF PERIOD	$	105,692		$	77,688
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and other borrowings	$	~~188~~276,~~086~~998		$	~~128~~364,~~409~~812
Income taxes		~~16,524~~851			1511,~~531~~864
Noncash activities:
Accrued dividends payable		~~4,136~~—			32,~~081~~225
Increase in other comprehensive income		176			112
Net change in other comprehensive income (loss)		40,654			(107,894	)
Mortgage loans securitized and transferred to:
Securities purchased but not yet received		301,875			—
Trading securities		608			5,774
Mortgage loans securitized and transferred to trading securities		—			799
Mortgage-backed securities held to maturity		—			2,305
Transfer from :
Transfer from loans to foreclosed real estate held for sale		859			1,005
Loans to foreclosed real estate held for sale		8,128			82,438
Mortgage loans originated to finance the sale of foreclosed real estate held for sale		726			175
Undivided profits to reserve fund		—			3,997
Unpaid additions to premises and equipment		939			154
Premises and equipments to other real estate held for sale		—			12,181
Transfer from undivided profits to reserve fund		9,346			8,213
Other real este held for sale to premises and equipments		4,258			—
Effect in valuation of derivatives and their hedged items:
Mortgage loans originated to finance the sale of foreclosed real estate held for sale		1,267			417
Increase in loans		775			—
Unpaid additions to premises and equipment		577			207
Increase (decrease) in other assets		1,246			(3,019	)
Effect of derivative transactions:
Increase in deposits		6,925			5,717
Decrease (increase) in other assets		(21	)		10,301
Decrease in other liabilities		(3,170	)		(3,678	)
Decrease in deposits		(2,456	)		(2,082	)
Conversion of preferred stock into common stock:
Decrease in other liabilties		(2,582	)		(6,581	)
Increase in common stock		97			236
Decrease in paid in capital		(70	)		(132	)
Decrease in preferred stock		(27	)		(104	)

See notes to condensed consolidated financial statements.

(Concluded)

W HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

W Holding Company, Inc. (the “Company”) is a ~~financial~~bank holding company offering a full range of financial services. The business of the Company is conducted ~~primarily~~ through its wholly -owned ~~commercial~~ 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~~is ~~founded as~~ a ~~savings~~commercial ~~institution~~bank inchartered ~~1958~~under ~~operating in~~ the ~~western~~laws ~~and~~of ~~southwestern~~the ~~regions~~Commonwealth of Puerto Rico effective November 30, ~~focusing~~1994. onOriginally, ~~retail~~Westernbank ~~banking~~was organized as a federally chartered mutual savings and ~~emphasizing~~loan ~~long-term~~association ~~fixed-rate~~in ~~residential mortgage~~1958, ~~loans~~and onin ~~one-to-four~~January 1984 ~~family~~became ~~residential~~a federal ~~properties~~mutual savings bank. In ~~1994~~February 1985, ~~Westernbank~~the ~~changed~~savings ~~its charter~~bank towas ~~become~~converted ato ~~full-service~~the ~~commercial~~stock ~~bank~~form of ownership. Westernbank offers a full range of business and consumer financial services, including banking, trust and brokerage services. ~~Westernbank~~and ~~Insurance Corp~~placing insurances. isOn ~~a general insurance agent placing property~~May 19, ~~casualty~~2008, ~~life~~the ~~and disability insurance. The~~Company ~~assets,~~contributed ~~liabilities,~~100% ~~revenues~~of ~~and~~its ~~expenses~~ownership ofin Westernbank Insurance Corp. at(“WIC”) ~~June 30,~~to ~~2005~~Westernbank. ~~and December 31,~~WIC ~~2004,~~is ~~and~~a general ~~for~~insurance ~~the~~agent ~~three~~placing ~~and~~property, ~~six month periods ended June 30~~casualty, ~~2005~~life and ~~2004,~~disability ~~were not significant~~insurances.

In July 2000, the Company became a financial holding company under the Bank Holding Company Act. (“BHC Act”). As a financial holding company, the Company iswas permitted to engage in financial related activities, including insurance and securities activities, provided that the Company and its banking subsidiary ~~meet~~ met certain regulatory standards. On May 20, 2008, the Company withdrew its financial holding company status under the BHC Act. As a result, effective on such date the Company’s activities are limited to those deemed closely related to banking by the Board of Governors of the Federal Reserve System (the “FRB”).

Westernbank operates through 53a ~~full~~network ~~service~~of ~~branch~~48 ~~offices~~bank branches (including 10 Expresso of Westernbank branches) located throughout Puerto Rico, including 3325 in the Western and Southwestern regions, 7 14 in the ~~Northeastern~~San ~~region~~Juan metropolitan area, 127 in the ~~San Juan~~Northeastern ~~Metropolitan area~~region, and ~~one~~2 in the Eastern region, and a website on the Internet. ~~Westernbank traditional~~On ~~banking operations include retail operations~~October 3, ~~such as its branches~~2008, ~~including~~ the ~~branches~~ Congress of the ~~Expresso~~United ~~division,~~States ~~together~~of ~~with~~America ~~consumer loans, mortgage loans, commercial loans~~approved ~~(excluding~~ the ~~asset-based~~Emergency ~~lending~~Economic ~~operations),~~Stabilization ~~investments~~Act ~~(treasury) and~~of ~~deposit products. Besides the traditional banking operations~~2008, ~~Westernbank~~pursuant ~~operates~~to ~~through~~which ~~four~~among other ~~divisions:~~things, the amount ~~Westernbank~~of ~~International~~deposit ~~Division,~~insurance ~~which~~provided isby anthe ~~International~~Federal ~~Banking~~Deposit ~~Entity~~Insurance Corporation (the “~~IBE~~FDIC”) ~~under the~~was ~~Puerto~~temporarily ~~Rico~~increased ~~Act~~from ~~No. 52 of August 11~~$100,000 ~~1989,~~to ~~as amended~~$250,000 ~~known~~per asdepositor ~~the~~until ~~International Banking Regulatory Act~~December 31, ~~which~~2009. ~~offers~~On ~~commercial and related services~~May 20, ~~and treasury and investment~~ ~~activities outside of Puerto Rico; Westernbank Business Credit~~2009, ~~which~~President ~~specializes~~Barack inObama ~~commercial business~~signed ~~loans~~legislation ~~secured~~that ~~principally~~extended bythis ~~commercial~~temporary ~~real~~increase ~~estate~~to $250,000 through ~~accounts receivable~~December 31, ~~inventory~~2013. ~~and equipment;~~ Westernbank’s ~~Trust Division~~deposits, ~~which~~including ~~offers~~Individual aRetirement ~~full array of trust services; and Expresso of~~Accounts ~~Westernbank~~(“IRAs”), aare ~~division~~insured ~~which~~by ~~specializes~~the inDeposit ~~small,~~Insurance ~~unsecured~~Fund ~~consumer loans up to $15~~(“DIF”),~~000~~ ~~and~~which ~~real estate~~is ~~collateralized~~administered ~~consumer~~by ~~loans~~the upFDIC, up to $~~150~~250,000 ~~through~~per ~~19 full-service branches~~depositor.

Westernbank’s ~~World~~traditional ~~Plaza,~~banking ~~Inc.~~operations ~~(“WWPI”),~~include aretail ~~wholly~~operations, ~~owned~~such ~~subsidiary~~as ofits ~~Westernbank~~branches, ~~owns and operates~~ ~~Westernbank~~including ~~World~~the ~~Plaza,~~branches aof ~~23-story~~the ~~office~~Expresso ~~building~~division, ~~including~~together ~~its~~with ~~related~~consumer ~~parking facility~~loans, ~~located~~ inmortgage ~~Hato Rey~~loans, commercial ~~Puerto~~loans ~~Rico,~~(excluding the ~~main~~Asset-Based ~~Puerto~~Lending ~~Rican~~Unit ~~business~~operations), ~~district.~~investments ~~Westernbank World Plaza~~(treasury) and ~~serves~~deposit asproducts. Besides the ~~Company’s~~traditional ~~San~~banking ~~Juan~~operations, ~~metropolitan~~at ~~area~~June 30, ~~headquarters~~2009, ~~for~~ Westernbank~~’s regional~~ ~~commercial~~operated ~~lending~~four ~~office~~other ~~and headquarters for the Westernbank Business Credit and Expresso of Westernbank~~ divisions~~. Westernbank also owns 100% of the~~:

~~voting~~• ~~shares~~Westernbank ofInternational ~~SRG Net~~Division, ~~Inc.,~~which ais an International Banking Entity (“IBE”) under the Puerto Rico ~~corporation~~Act ~~that~~No. ~~operates~~52 anof ~~electronic~~August ~~funds transfer~~11, ~~network.~~1989, ~~The~~as ~~assets~~amended, ~~liabilities~~known as the International Banking Center Regulatory Act, ~~revenues~~which offers commercial banking and ~~expenses~~related services, and treasury and investment activities outside of ~~SRG~~Puerto ~~Net,~~Rico; ~~Inc.~~• atWesternbank ~~June 30~~Trust Division, ~~2005 and~~which ~~December 31~~offers a full array of trust services; • Expresso of Westernbank, ~~2004~~a division which specializes in small, ~~and~~unsecured ~~for~~consumer ~~the~~loans ~~three~~up to $15,000 and ~~six~~real ~~month~~estate ~~periods~~collateralized ~~ended~~consumer ~~June 30~~loans up to $150,000; ~~2005~~• and ~~2004~~Westernbank International Trade Services, ~~were not~~established ~~significant~~during the first quarter of year 2006, a division which specializes in international trade products and services.

~~The~~In accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and banking industry practices (See Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – on the Company’s Consolidated Financial Statements as of December 31addition, ~~2004~~Westernbank ~~and~~operates ~~2003, and for each of~~ the ~~three years in the period ended December 31, 2004, included in the Company’s Annual Report on Form 10~~Asset-~~K).~~Based ~~The unaudited~~Lending ~~Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management~~Unit, ~~the unaudited Consolidated Financial Statements include all adjustments (~~which ~~consist~~specializes of normal recurring accruals) necessary to present fairly the consolidated financial condition as of June 30, 2005 and December 31, 2004, the results of operations for the three and six months ended June 30, 2005 and 2004, and changes in ~~stockholders’ equity and of comprehensive income and cash flows for~~commercial ~~the~~business ~~six~~loans ~~months~~secured ~~ended~~principally ~~June 30,~~by ~~2005~~commercial ~~and~~real 2004. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. Financial information as of December 31estate, ~~2004,~~accounts ~~has been derived from the audited Consolidated Financial Statements of the Company. The result of operations for the three and six months ended June 30~~receivable, ~~2005~~inventories and ~~2004 and cash flows for the six months ended June 30, 2005 and 2004,~~ ~~are~~machinery ~~not necessarily indicative of the results to be expected for the full year. For further information, refer to the Consolidated Financial Statements~~ and ~~footnotes thereto for the year ended December 31, 2004, included in the Company’s Annual Report on Form 10-K~~equipment.

~~Following~~Westernbank isowns a100% ~~summary~~ of the ~~most~~voting ~~recent~~shares ~~accounting policies adopted by the Company~~of:

In• ~~December 2003~~Westernbank World Plaza, ~~the~~Inc. ~~Accounting~~(“WWPI”), ~~Standards~~which ~~Executive~~owns ~~Committee~~and ofoperates ~~the~~Westernbank ~~American~~World ~~Institute~~Plaza, ~~of Certified~~a ~~Public~~23-story ~~Accountants~~office ~~issued~~building, ~~Statement~~including ofits ~~Position~~related ~~(“SOP”)~~parking ~~03-3~~facility, ~~Accounting~~located ~~for~~in ~~Certain Loans~~Hato ~~and~~Rey, ~~Debt~~Puerto ~~Securities~~Rico, ~~Acquired~~the inmain aPuerto ~~Transfer~~Rican business district. ~~SOP~~• ~~03-3~~SRG ~~addresses~~Net, ~~the~~Inc., ~~accounting~~a ~~for~~Puerto ~~acquired loans~~Rico corporation that ~~show~~operates ~~evidence~~an electronic funds transfer network. The assets, liabilities, revenues and expenses of ~~having~~SRG ~~deteriorated~~Net, inInc. ~~terms~~at June 30, 2009 and December 31, 2008, and for each of ~~credit~~the ~~quality~~three ~~since~~and ~~their~~six ~~origination (i~~months period ended June 30, 2009 and 2008, were not significant.e. ~~impaired~~• ~~loans~~Westernbank Financial Center Corp (“WFCC”)., ~~SOP~~which ~~03-3~~was ~~requires~~incorporated ~~acquired~~under ~~loans~~the laws of the State of Florida to beconduct ~~recorded~~commercial atlending ~~their~~and ~~fair~~other ~~value~~related ~~defined as~~activities in the ~~present~~United ~~value~~States of ~~future~~America. ~~cash~~WFCC ~~flows.~~commenced ~~SOP~~operations ~~03-3~~in ~~prohibits~~February 2007, was largely inactive, and was closed during the ~~carryover~~third quarter of an2008. ~~allowance~~WFCC’s ~~for loan~~main ~~losses~~asset onconsisted ~~certain~~of ~~acquired~~a ~~loans~~commercial asloan ~~credit~~of ~~losses~~$34.7 ~~are~~million ~~considered~~at inJune ~~the~~30, ~~future~~2008. ~~cash~~The ~~flows assessment.~~assets, ~~SOP~~liabilities, ~~03-3~~revenues isand ~~effective~~expenses of WFCC as of and for ~~loans~~the ~~that~~three ~~are~~and ~~acquired~~six inmonths ~~fiscal~~ended ~~years~~June ~~beginning~~30, ~~after December 15~~2008, ~~2004~~were not significant. ~~SOP~~• ~~03-3~~Westernbank ~~did~~Insurance ~~not~~Corp., ~~have~~a ~~any~~general ~~effect~~insurance onagent placing property, casualty, life and disability insurances. On May 19, 2008, the Company’s ~~financial~~contributed ~~position~~100% orof ~~results~~ its ownership in WIC to Westernbank. The assets, liabilities, revenues and expenses of ~~operations~~WIC at June 30, 2009 and December 31, 2008, and for the three and six months ended June 30, 2009 and 2008, were not significant.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and banking industry practices. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The (unaudited) Condensed Consolidated Financial Statements have been prepared in conformity with the accounting policies stated in the Company’s Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments (which consist of normal recurring accruals) necessary to present fairly the consolidated financial condition as of June 30, 2009 and December 31, 2008, the consolidated results of operations for the three and six months ended June 30, 2009 and 2008, the consolidated changes in stockholders’ equity and comprehensive income (loss), and cash flows

~~whether~~for anthe ~~investment~~six ismonths ~~impaired.~~ended AnJune 30, ~~investment~~2009 ~~is considered~~and ~~impaired~~2008. ifAll ~~its~~significant ~~fair~~intercompany ~~value~~balances isand transactions ~~less~~have ~~than~~been ~~its~~eliminated ~~cost.~~in ~~Step~~the 2:accompanying ~~Evaluate~~unaudited ~~whether~~condensed anconsolidated ~~impairment is other-than-temporary~~financial statements. ~~For equity~~Certain ~~securities~~information and ~~debt~~footnote ~~securities~~disclosures ~~that~~normally ~~can~~included ~~contractually~~in befinancial ~~prepaid~~statements prepared ~~or otherwise settled~~ in ~~such~~ aaccordance ~~way~~with ~~that~~GAAP ~~the~~have ~~investor~~been ~~would~~condensed ~~not~~or ~~recover~~omitted ~~substantially~~pursuant ~~all~~to ofSEC ~~its~~rules ~~cost, an impairment is~~and ~~presumed~~regulations. toManagement bebelieves ~~other-than-temporary~~that ~~unless:~~ the ~~investor~~disclosures ~~has~~made ~~the~~are ~~ability~~adequate ~~and intent~~ to ~~hold~~make the information ~~investment~~presented ~~for~~not amisleading. ~~reasonable~~Financial ~~period~~information as of ~~time~~December 31, ~~sufficient~~2008, ~~for~~has abeen ~~forecasted~~derived ~~market~~from ~~price recovery of~~ the ~~investment,~~audited ~~and~~Consolidated ~~evidence~~Financial ~~indicating~~Statements ~~that the cost~~ of the ~~investment~~Company. isThe ~~recoverable~~results ~~within a reasonable period~~ of ~~time~~operations ~~outweighs~~for ~~evidence to~~ the ~~contrary.~~three and ~~For~~six ~~other~~months ~~debt~~ended ~~securities~~June 30, ~~an impairment~~2009 isand ~~deemed~~2008 ~~other-than-temporary~~and ~~if:~~ the ~~investor~~cash ~~does~~flows ~~not~~for ~~have~~ the ~~ability~~six ~~and~~months ~~intent~~ended toJune 30, ~~hold~~2009 ~~the~~and ~~investment until a forecasted market price recovery (may mean until maturity)~~2008, orare itnot ~~is probable~~necessarily ~~that~~indicative of the ~~investor~~results ~~will~~to be ~~unable~~expected tofor ~~collect all amounts due according to~~ the ~~contractual terms~~full ~~of the debt security~~year. ~~Step~~The accompanying 3:unaudited Ifcondensed ~~the~~financial ~~impairment~~statements isshould ~~other-than-temporary,~~be ~~recognize~~read in ~~earnings~~ anconjunction ~~impairment~~with ~~loss equal to~~ the ~~difference between the investment cost and its fair value.~~ ~~The~~Company’s ~~fair~~Annual ~~value~~Report ofon ~~the~~Form ~~investment~~10-K ~~then~~for ~~becomes~~ the ~~new~~year ~~cost~~ended ~~basis of the investment and cannot be adjusted for subsequent recoveries in fair value~~December 31, ~~unless required by other authoritative literature~~2008.

~~On September 30, 2004, the Financial~~ Accounting ~~Standards~~Pronouncements ~~Board~~Recently ~~(“FASB”) issued FSP EITF Issue~~Adopted 03-01-1, which delayed the effective date for the measurement and recognition guidance of an impairment loss that is other-than-temporary (i.e. steps 2 and 3 of the impairment model) contained in paragraphs 10-20 of EITF 03-1. Application of these paragraphs is deferred. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The guidance in paragraphs 6 to 9 of EITF 03-1 (i.e. step 1 of the impairment model), as well as the disclosure requirements in paragraphs 21 and 22 have not been deferred and should be applied based on the transition provisions in EITF 03-1. Based on the composition of the investment portfolio held at June 30, 2005, EITF 03-1 is not expected to have a material effect on the Company’s financial position or results of operations.

In ~~December~~September ~~2004~~2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. ~~153~~157, ~~Exchanges~~Fair ofValue ~~Nonmonetary~~Measurements. ~~Assets~~This —Statement andefines ~~amendment~~fair ofvalue, ~~APB~~establishes ~~Opinion~~a ~~No. 29.~~framework ~~The~~for ~~guidance~~measuring infair ~~APB~~value ~~Opinion~~and ~~No. 29,~~expands ~~Accounting~~disclosures ~~for~~about ~~Nonmonetary~~fair ~~Transactions, is~~value ~~based~~measurements. onThis ~~the~~Statement ~~principle~~emphasizes that ~~exchanges~~fair ofvalue ~~nonmonetary~~is ~~assets~~a market-based measurement and should be determined ~~measured~~ based on ~~the~~assumptions ~~fair value~~that ofa ~~the~~market ~~assets~~participant ~~exchanged~~would use when pricing an asset or liability. ~~The~~This ~~guidance~~Statement inclarifies that ~~Opinion,~~market ~~however,~~participant ~~included~~assumptions ~~certain~~should ~~exceptions~~include assumptions toabout ~~that~~risk ~~principle~~as well as the effect of a restriction on the sale or use of an asset. ~~This~~Additionally, this Statement ~~amends~~establishes ~~Opinion~~a 29fair tovalue ~~eliminate~~hierarchy that provides the ~~exception~~highest ~~for~~priority ~~nonmonetary~~to quoted ~~exchanges~~prices ofin ~~similar~~active ~~productive~~markets ~~assets~~ and ~~replaces~~the itlowest ~~with~~priority ato ~~general~~unobservable ~~exception~~data. ~~for~~The ~~exchanges~~adoption of SFAS No. 157 ~~nonmonetary~~at ~~assets~~January 1, ~~that~~2008 dodid not have ~~commercial~~a ~~substance.~~material Aimpact ~~nonmonetary~~on ~~exchange~~the ~~has~~Company’s ~~commercial~~condensed consolidated financial ~~substance~~position ifor ~~the~~results ~~future~~of ~~cash~~operations. ~~flows~~In ofFebruary 2008, the ~~entity~~FASB ~~are~~issued ~~expected~~Staff toPosition ~~change~~(“FSP”) ~~significantly~~No. FAS 157-2, asEffective aDate ~~result~~ of ~~the~~FASB ~~exchange~~Statement No. 157, ~~This~~which ~~Statement~~delayed ~~shall~~the beeffective ~~applied~~date ~~prospectively~~of SFAS No. 157 for non-financial assets and isnon-financial ~~effective~~liabilities, except for ~~nonmonetary~~items that are recognized or ~~asset~~disclosed ~~exchanges~~at ~~occurring~~fair value in the financial statements on a recurring basis (at least annually), to fiscal ~~periods~~years beginning after ~~June~~November 15, ~~2005~~2008. ~~Earlier~~The ~~application~~adoption ~~is permitted~~of SFAS No. 157 for ~~nonmonetary~~non-financial assets ~~asset~~and ~~exchanges~~non-financial ~~occurring~~liabilities inat ~~fiscal~~January 1, ~~periods~~2008, ~~beginning~~did ~~after~~not have a material impact on the Company’s ~~date~~condensed consolidated financial position or results of operations. In October 2008, the ~~issuance~~FASB ofissued ~~this~~FSP ~~Statement~~No. FAS 157-4, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS No. ~~153~~157 in a market that is not active ~~expected~~and toillustrates ~~have~~key aconsiderations ~~material~~in ~~effect~~determining on the ~~Company’s~~fair value. FSP No. FAS 157-4 was effective upon issuance, including prior periods for which financial ~~position~~statements orhad ~~results~~not been issued. The adoption of ~~operations~~FSP No. FAS 157-4 did not have any impact on the Company’s condensed consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities- Including an Amendment of FASB Statement No. 115. This Statement permits an entity to choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis. Once an entity has elected to record eligible items at fair value, the decision is irrevocable and the entity should report unrealized gains and losses on items for which the fair value option has been elected in earnings. SFAS No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Eligible items that are measured at fair

Invalue ~~December 2004,~~must ~~the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, that will require compensation costs related to share-based payment transactions to~~ be ~~recognized~~displayed inon the ~~financial~~ ~~statements.~~face ~~With limited exceptions, the amount~~ of ~~compensation cost will be measured based on~~ the ~~grant-date~~statements ~~fair value~~ of ~~the~~financial ~~equity or liability instruments issued~~condition. InThe ~~addition, liability~~Company ~~awards will be remeasured each reporting period. Compensation cost will be recognized~~adopted ~~over the period that an employee provides service in exchange for the award.~~ SFAS No. ~~123(R) replaces~~159 ~~FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123 (R) will be effective~~ on January 1, ~~2006,~~2008 and ~~applies~~recorded toa ~~all awards granted after this effective date and to awards modified, repurchased, or cancelled after that date. The~~ cumulative effect ofadjustment ~~initially applying this statement, if any, is recognized as~~ of ~~the required effective date~~$5. ~~Entities that used the fair-value-based method for either recognition or disclosure under SFAS No.~~3 ~~123~~million ~~will apply this revised statement using a modified version of prospective application. Under~~ that ~~transition~~ ~~method,~~was ~~for~~credited ~~the~~to ~~portion~~retained ofearnings ~~outstanding~~and ~~awards~~decreased ~~for which the requisite service has not yet been rendered~~deposits, ~~compensation~~other ~~cost~~assets isand ~~recognized~~deferred onincome ~~or after the required effective date based on the~~tax ~~grant-date~~asset ~~fair~~by ~~value of those awards calculated under SFAS No~~$12.9 ~~123 for either recognition or pro forma disclosures. For periods before the required effective date~~million, those entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by SFAS No$4.2 ~~123.~~million ~~SFAS~~and No$3.4 ~~123(R) is not expected to have a significant effect on the Company’s financial position or results of operations since the Company only has employee stock options and it follows since January 1~~million, ~~2003~~respectively. ~~the~~See ~~fair~~Note ~~value method under the modified prospective application allowed by the provisions of SFAS No~~17. ~~148.~~

OnIn ~~May~~March 302008, ~~2005,~~ the FASB issued SFAS No. ~~154~~161, ~~Accounting~~Disclosures ~~Changes~~about ~~and~~Derivative ~~Error~~Instruments ~~Corrections,~~and aHedging ~~replacement~~Activities of— ~~APB~~an ~~No. 20~~amendment ~~and~~of FASB Statement No. 3,133. ~~which~~This ~~changes~~Statement ~~the~~enhances ~~requirements~~required ~~for~~disclosures regarding ~~the~~derivatives ~~accounting~~ and ~~reporting~~ ofhedging aactivities, ~~change~~including inenhanced ~~accounting~~disclosures ~~principle.~~regarding ~~SFAS~~how: ~~No.~~(a) ~~154 applies to all voluntary changes in accounting principle as well as to changes required by~~ an ~~accounting pronouncement that does not~~ ~~include~~entity ~~specific~~uses ~~transition~~derivative ~~provisions.~~instruments; ~~This statement eliminates the requirement in APB Opinion No.~~(b) ~~20,~~derivative ~~Accounting~~instruments ~~Changes,~~and torelated ~~include~~hedged ~~the~~items ~~cumulative effect of changes in accounting principle in~~are ~~the~~accounted ~~income~~for ~~statement~~under ~~in the period of change. Instead, to enhance the comparability of prior period financial statements,~~ SFAS No. ~~154~~133 ~~requires~~and ~~that~~its ~~changes~~related ~~in accounting principle be retrospectively applied. Under retrospective application~~interpretations, ~~the~~and ~~new~~(c) derivative ~~accounting principle is applied as of the~~instruments ~~beginning~~and ofrelated ~~the~~hedged ~~first~~items ~~period~~affect ~~presented~~an asentity’s iffinancial ~~that~~position, ~~principle~~financial ~~had~~performance, ~~always been used. The cumulative effect of the change is reflected in the carrying value of assets~~ and ~~liabilities as of the first~~cash ~~period presented and the offsetting adjustments are recorded to opening retained earnings~~flows. ~~Each period~~This ~~presented~~Statement is ~~adjusted~~effective tofor ~~reflect~~financial ~~the~~statements ~~period-specific~~issued ~~effects~~for offiscal ~~applying~~years ~~the~~and ~~change. Only~~interim ~~direct~~periods ~~effects~~beginning ofafter ~~the~~November 15, ~~change~~2008, ~~will~~with beearly ~~included in the retrospective~~ application; ~~all indirect effects will be recognized in the period of change~~encouraged. IfThe itCompany ~~is impracticable to determine the~~early ~~cumulative~~adopted ~~effect for all prior periods,~~ the ~~new~~disclosure ~~accounting~~framework ~~principle~~dictated ~~should~~by bethis ~~applied~~Statement asduring ~~if it were adopted prospectively from the earliest date practicable~~2008.

~~Under~~In ~~SFAS~~April 2009, the FASB issued FSP No. ~~154~~FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSB reiterates that fair value is the price that would be received to sell an asset or paid to transfer a ~~change~~liability in ~~reporting~~an ~~entity~~orderly transaction (that is, ~~also~~not ~~retrospectively~~a ~~applied~~forced liquidation asor ofdistressed ~~the beginning~~sale) ofbetween market participants at the ~~first~~measurement ~~period~~date ~~presented~~under current market conditions. AThis ~~change~~FSB inprovides ~~accounting~~additional ~~estimate~~guidance ~~continues~~and toutilizes bea ~~accounted~~two-step process to ~~for~~determine whether there has been a significant decrease in the ~~period~~volume and level of ~~change,~~activity ~~and~~for ~~future~~an asset ~~periods~~or ifliability ~~necessary.~~when Acompared ~~change~~with innormal ~~accounting~~market ~~estimate~~activity ~~that~~for the asset or liability, and whether a transaction is ~~effected~~not byorderly. aIf ~~change~~it inis ~~accounting~~determined ~~principle~~that ~~(e.g.,~~there has been a ~~change~~significant decrease in ~~method~~the volume and level of ~~depreciation)~~activity ~~will~~for bethe asset or liability in relation to normal ~~accounted~~market activity for asthe aasset ~~change~~or inliability, ~~estimate~~transactions or quoted prices may not be determinative of fair value. AAccordingly, ~~correction~~further analysis of anthe ~~error~~transactions ~~continues~~or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be ~~reported~~necessary byto estimate fair value ~~restating~~in ~~prior~~accordance ~~period~~with ~~financial~~SFAS ~~statements~~No. 157, asFair Value Measurements. This FSP is effective for interim and annual reporting periods ending after June 15, 2009 on a prospective basis. Early adoption is permitted for periods ending after March 15, 2009. The adoption of FSP No. FAS 157-4 in the ~~beginning~~second quarter of 2009 did not have a material impact on the ~~first~~Company’s ~~period~~condensed ~~presented~~consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends the recognition and measurement guidance related to other-than-temprorary impairment (“OTTI”) for debt securities. This FSP requires that an OTTI shall be recognized in earnings if the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Company does not intend to sell the security, and it is not likely that the Company will be required to sell the security before recovery of its cost basis, the OTTI related to credit losses shall be recognized in earnings, and the OTTI related to all other factors shall be recorded in other comprehensive income (loss), net of applicable taxes. An entity shall recognize the cumulative effect of initially applying this FSP as an adjustment to the opening balance of retained earnings, net of applicable taxes, with a corresponding adjustment to accumulated other comprehensive income (loss). This FSP is effective for interim and annual reporting periods ending after June 15, 2009 and should be applied to existing and new investments held by an entity as of the beginning of the interim period in which it is adopted.

~~This statement~~The ~~carries~~FSP ~~forward~~also ~~the~~requires ~~provisions~~increased ofand ~~FASB~~more ~~Statement No. 3,~~timely ~~Reporting~~disclosures ~~Accounting~~regarding ~~Changes~~expected incash ~~Interim~~flows, ~~Financial~~credit ~~Statements~~losses, —and an ~~amendment~~aging of ~~APB~~securities ~~Opinion No. 28,~~with ~~that govern~~unrealized ~~reporting accounting changes in interim financial statements~~losses. ~~SFAS~~This ~~No. 154~~FSP isdoes ~~effective~~not ~~for~~amend existing ~~accounting~~recognition ~~changes~~ and ~~corrections~~measurement ofguidance ~~errors~~related ~~made~~to inother-than-temporary ~~fiscal~~impairments ~~years~~of ~~beginning after December 15,~~equity ~~2005~~securities. ~~Early~~The ~~adoption~~FSP is ~~permitted~~effective for ~~accounting~~interim ~~changes~~ and ~~corrections~~annual ofreporting ~~errors~~periods ~~made~~ending inafter ~~fiscal~~June 15, ~~years~~2009, ~~beginning~~with ~~after~~early ~~the~~adoption ~~date~~permitted ~~the~~for ~~Statement~~periods ~~was~~ending ~~issued.~~after ~~SFAS~~March 15, No2009. ~~154~~ ~~does~~The ~~not~~adoption ~~change~~of ~~the~~FSP ~~transition~~No. FAS ~~provisions~~115-2 ofand ~~any~~FAS ~~existing~~124-2 ~~accounting pronouncements, including those that are~~ in ~~a transition phase as of~~ the ~~effective~~second ~~date~~quarter of ~~this~~2009 ~~statement.~~did ~~SFAS No. 154 is~~ not ~~expected to~~ have a material ~~effect~~impact on the Company’s ~~financial~~condensed ~~position~~consolidated ~~and~~financial ~~results of operations~~statements.

OnIn ~~June~~April 292009, ~~2005,~~ the FASB issued ~~final FASB Staff Position (“~~FSP”) No. FAS ~~150~~107-5.1 ~~The FSP clarifies that freestanding warrants~~ and ~~other~~APB ~~similar~~28-1, ~~instruments~~Interim onDisclosures ~~shares~~about ~~that~~Fair ~~are redeemable~~Value ~~(either~~of ~~puttable~~Financial orInstruments. ~~mandatorily~~This ~~redeemable)~~FSP ~~should~~amends ~~be accounted for as liabilities under~~ SFAS ~~No. 150~~107, ~~regardless~~Disclosures ofabout ~~the~~Fair ~~timing~~Value of ~~the redemption feature or price~~Financial Instruments, ~~even~~and ~~though~~APB ~~the~~Opinion ~~underlying shares may be classified as equity (or temporary equity under SEC Accounting Series Release~~ No. ~~268~~28, ~~Redeemable~~ ~~Preferred~~Interim ~~Stocks).~~Financial ~~The~~Reporting, ~~FSP indicates that these instruments are liabilities (even if the obligation is conditional) because they embody obligations~~ to ~~repurchase~~require ~~the~~disclosures ~~issuer’s~~about ~~shares and~~fair ~~may~~value ~~require a transfer~~ of ~~assets.~~financial ~~Options~~instruments orin ~~similar~~interim ~~instruments~~financial ~~originally~~statements ~~issued~~ as ~~employee compensation,~~well ~~which~~as ~~are~~in noannual ~~longer dependent on employment, are not within the scope of the final~~financial ~~FSP~~statements. ~~The~~This ~~FASB~~FSP ~~made~~is ~~this~~effective ~~scope~~for ~~change~~interim ~~because~~and ~~they~~annual ~~are~~reporting ~~working~~periods onending aafter ~~separate FSP under which these~~June 15, ~~instruments~~2009, ~~would~~with ~~continue~~early toadoption bepermitted ~~accounted~~ for ~~under~~periods ~~Statement~~ending ~~123(R)~~after ~~(rather~~March 15, ~~than~~2009. ~~other~~This ~~GAAP~~FSP ~~such~~does not asrequire ~~Statement~~disclosures ~~150).~~for ~~This~~earlier ~~FSP~~periods ispresented ~~effective~~ for ~~the~~comparative ~~first~~purposes ~~reporting~~at ~~period~~initial ~~beginning~~adoption. In periods after ~~June 30~~initial adoption, ~~2005.~~ If this FSP ~~results~~requires incomparative ~~changes~~disclosures toonly ~~previously~~for ~~reported~~periods ~~information, the cumulative effect~~ending ~~should~~subsequent ~~be reported according~~ to ~~the~~initial ~~transition~~adoption. ~~provisions~~The ofCompany ~~Statement~~adopted ~~150.~~ FSP No. ~~FAS 150~~107-51 ~~is not~~and ~~expected~~APP to28-1 ~~have~~in ~~a material effect on~~ the ~~Company’s~~second quarter ~~financial~~of ~~position~~2009. ~~and~~See ~~results~~Note ~~of operations~~17.

2In May 2009, the FASB issued SFAS No. 165, ~~EARNINGS~~Subsequent ~~PER~~Events, ~~SHARE~~which ~~AND~~establishes ~~CAPITAL~~general ~~TRANSACTIONS~~standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued. SFAS 165 reflects the principles underpinning previous subsequent event guidance in existing accounting literature and US Auditing Standards (AU) Section 560, “Subsequent Events,” therefore the Company’s adoption of SFAS No. 165 should not result in significant changes in the subsequent events that the Company’s reports either through recognition or disclosure in the condensed consolidated financial statements. SFAS No. 165 requires the Company’s to disclose the date through which it has evaluated subsequent events, which for public entities, is the date the financial statements are issued. This SFAS became effective for interim and annual reporting periods ending after June 15, 2009. The adoption of SFAS No. 165 in the second quarter of 2009 did not have any impact on the Company’s condensed consolidated financial statements.

~~Basic~~Accounting ~~earnings~~Pronouncements ~~per~~To ~~share~~Be ~~represents income attributable to common stockholders divided by the~~Adopted weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. SFAS No. 166 removes the concept of a “qualifying special-purpose entity” (QSPE), changes the requirements for derecognizing financial assets, and requires additional disclosures about transfers of financial assets and a transferor’s continuing involvement in transferred financial assets. This Statement is effective for interim and annual periods beginning after November 15, 2009, with early adoption prohibited. The adoption of SFAS No. 166 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 amends the methodology for determining the primary beneficiary (and therefore consolidator) of a variable interest entity (“VIE”) and will require such assessment to be performed on an ongoing basis. Under SFAS No. 167, the primary beneficiary of a VIE is defined as the enterprise that has both (1) the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or

~~Basic~~receive benefits from the VIE that could potentially be significant to the VIE. These amendments affect all entities currently within the scope of FIN No. 46(R), as well as qualifying special-purpose entities (“QSPEs”) that are currently excluded from the scope of FIN No. 46(R). SFAS No. 167 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and ~~diluted~~any ~~earnings~~significant ~~per~~changes ~~common~~in ~~share~~risk ~~were~~exposure ~~computed~~due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. SFAS No. 167 will be effective as ~~follows:~~of the beginning of the first fiscal year that begins after November 15, 2009. The adoption of SFAS No. 167 is not expected to have any effect on the Company’s condensed consolidated financial statements.

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2005		2004			2005		2004
	(Amounts in thousands, except per share data)
Basic and diluted earnings per common share:
Net income	$	45,764	$	41,023		$	94,365	$	81,516
Less preferred stock dividends		9,205		6,743			18,524		13,517
Income attributable to common stockholders — basic		36,559		34,280			75,841		67,999
Plus convertible preferred stock dividends		220		307			452		645
Income attributable to common stockholders — diluted	$	36,779	$	34,587		$	76,293	$	68,644
Weighted average number of common shares outstandingduring the period		164,030		163,312	(1)		163,986		163,123	(1)
Dilutive potential common shares — stock options		4,758		5,078	(1)		5,069		5,210	(1)
Assumed conversion of preferred stock		1,722		2,425	(1)		1,722		2,425	(1)
Total		170,510		170,815			170,777		170,758
Basic earnings per common share	$	0.22	$	0.21	(1)	$	0.46	$	0.42	(1)
Diluted earnings per common share	$	0.22	$	0.20	(1)	$	0.45	$	0.40	(1)

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of Statement 168 in the third quarter of 2009 will not have a material impact on the Company’s condensed consolidated financial statements.

~~(1)~~In ~~Adjusted~~August 2009, the FASB updated the Codification in connection with the fair value measurement of liabilities to ~~reflect~~clarify that in circumstances in which a quoted price in an active market for the identical ~~three-~~liability is not available, a reporting entity is required to measure fair value using either the quoted price of the identical liability when traded as an asset, quoted prices for~~-two~~ similar ~~stock~~liabilities ~~split~~or ~~and~~similar liabilities when traded as assets, or another valuation technique that is consistent with the principles of fair value measurement. Two examples would be an income approach, such as a 2%present ~~stock~~value ~~dividend~~technique, or a market approach, such as a technique that is based on ~~our~~the ~~common~~amount ~~stock~~at ~~declared~~the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The amendments in ~~December~~this update ~~2004~~also ~~and~~clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendments in this update also clarify that both ~~distributed~~a onquoted ~~January~~price 10in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market, ~~2005~~when no adjustment to the quoted price of the asset are required, are Level 1 fair value measurements. This update is effective for the first reporting period (including interim periods) beginning after its issuance. The adoption of this guidance in the fourth quarter of 2009 is not expected to have any impact on the Company’s condensed consolidated financial statements.

OnIn ~~January~~September 32009, ~~2005,~~ the ~~Company~~FASB ~~issued~~updated ~~401,300~~the ~~shares~~Codification ofto ~~its~~reflect ~~2004~~SEC ~~Series H~~staff ~~preferred~~pronouncements ~~stock~~on ~~under an over~~earnings-~~allotment~~per-share ~~option~~calculations. ~~granted~~According to the ~~underwriter.~~update, ~~The~~the ~~preferred~~SEC ~~shares~~staff ~~were~~believes ~~issued~~that atwhen a public ~~price~~company ofredeems ~~$50.00~~preferred ~~per~~shares, ~~share.~~the ~~Proceeds~~difference ~~from~~between ~~this~~the ~~issuance~~fair ~~amounted~~value of the consideration transferred to ~~$19,412,000,~~the ~~net~~holders of ~~$653,000~~the ofpreferred stock and the carrying amount on the balance sheet after issuance costs. of the preferred stock should be added to or subtracted from

On February 10, 2005, one of the Company’s executive officers exercised 35,113 options under the Company’s 1999 Qualified Option Plan at an exercise price of $2.85 per share.

During the six month period ended June 30, 2005, 27,840 shares of the Company’s convertible preferred stock Series A were converted into 97,255 shares of the Company’s common stock.

On May 27, 2005, the stockholders of the Company approved the amendment 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.

3net income before doing an earnings-per-share calculation. ~~DIVIDENDS~~The ~~DECLARED~~SEC’s ~~PER~~staff ~~COMMON~~also ~~SHARE~~thinks it is not appropriate to aggregate preferred shares with different dividend yields when trying to determine whether the “if-converted” method is dilutive to the earnings-per-share calculation. The guidance is effective for new share lending arrangements for interim and annual periods beginning on or after June 15, 2009. For existing arrangements, the guidance is effective for fiscal years beginning on or after December 15, 2009 and must be applied retrospectively for arrangements outstanding as of the effective date. The adoption of this guidance is not expected to have any impact on the Company’s condensed consolidated financial statements.

The Company’s Board of Directors has adopted an ongoing policy that provides for the distribution of dividends to common shareholders on the basis of a percentage of the average earnings for the last two preceding years2. ~~The~~EARNINGS ~~same~~(LOSS) PER ~~are paid monthly on the 15th day of each month for~~SHARE ~~stockholders of record as of the last day of the preceding month.~~

OnIn ~~January~~accordance with SFAS No. 20128, ~~2005~~Earnings Per Share, basic earnings per share is computed by dividing income (loss) attributable to common stockholders by the ~~Company’s~~weighted-average ~~board~~number of ~~directors~~common shares ~~approved~~outstanding anduring ~~increase~~the inperiod. ~~its~~Diluted ~~annual~~earnings ~~dividend~~per share is computed by dividing income ~~payments~~(loss) attributable to common stockholders ~~for~~as ~~2005~~adjusted to ~~$0.19~~add ~~per~~back ~~share~~dividends on convertible preferred stock, by the weighted-average number of common and potentially dilutive common shares outstanding during the period. ~~This~~Potentially ~~represents~~dilutive ancommon ~~increase~~shares represent assumed conversion of outstanding 32convertible preferred stock, which are determined using the if-converted method, and outstanding stock options, which are determined using the treasury stock method.~~14%~~ ~~over~~The effect of convertible preferred stock (33,674 shares in the ~~dividends~~three ~~paid~~and six months ended June 30, 2009 and 2008, as adjusted to reflect the reverse stock split approved on November 7, 2008 and effective on December 1, 2008) was antidilutive in ~~2004~~2009 and 2008. The number of stock options outstanding at June 30, 2009 and 2008 were 113,535 and 134,369 respectively. In 2009 and 2008, no potentially dilutive common shares resulted from the stock options because the exercise price of the options was greater than the average market price of common stock.

~~The~~Basic ~~Company’s~~and ~~cash~~diluted ~~dividends~~earnings (loss) per common share ~~declared for the six months ended June 30, 2005 and 2004,~~ were computed as follows:

RECORD DATE	PAYABLE DATE		AMOUNT PER SHARE (1)
	Three Months Ended							Six Months Ended
2005
	June 30,							June 30,
January 31, 2005	February 15, 2005		$	0.01198
	2009				2008			2009			2008
February 28, 2005	March 15, 2005			0.01583
	(Amounts in thousands, except							(Amounts in thousands, except
March 31, 2005	April 15, 2005			0.01583
	per share data)							per share data)
April 30, 2005	May 16, 2005			0.01583
Basic and diluted earnings (loss) per common share:
May 31, 2005	June 15, 2005			0.01583
Net income (loss)	$	(5,325	)		$	1,098		$	(4,714	)	$	33,710
June 30, 2005	July 15, 2005			0.01583
Less preferred stock dividends		—				9,227			4,614			18,455
Total			$	0.09113
Income (loss) attributable to common stockholders — basic and diluted	$	(5,325	)		$	(8,129	)	$	(9,328	)	$	15,255
2004(2)
Weighted average number of common shares outstanding during the period — basic and diluted		3,298				3,298			3,298			3,298
January 31, 2004	February 17, 2004		$	0.01198
Basic and diluted earnings (loss) per common share	$	(1.61	)		$	(2.46	)	$	(2.83	)	$	4.63
February 29, 2004	March 15, 2004			0.01198
March 31, 2004	April 15, 2004			0.01198
April 30, 2004	May 17, 2004			0.01198
May 31, 2004	June 13, 2004			0.01198
June 30, 2004	July 15, 2004			0.01198
Total			$	0.07188

(1)		Dividend amounts in the table are rounded.
(2)		Adjusted to reflect the three-for-two stock split and a 2% stock dividend on our common stock declared in December 2004 and both distributed on January 10, 2005.

43. ~~INVESTMENT~~DIVIDENDS ~~SECURITIES~~DECLARED PER COMMON SHARE

The ~~amortized~~Company’s ~~cost,~~cash ~~gross~~dividends ~~unrealized~~per ~~gains~~share ~~and~~declared ~~losses~~for ~~and~~the ~~fair~~six ~~value~~months ofended ~~investment~~June 30, ~~securities~~2009 ~~were~~and 2008 were as follows:

			Gross		Gross
RECORD DATE	PAYABLE DATE		AMOUNT PER SHARE(1)
	Amortized		Unrealized		Unrealized		Fair
2009
June 30, 2005	Cost		Gains		Losses		Value
January 30, 2009	February 16, 2009		$	0.2083
	(In thousands)
2008 (2)
Available for sale:
January 31, 2008	February 15, 2008		$	0.2083
Collateralized mortgage obligations (CMO’s) issued or guaranteed by Federal National Mortgage Association (FNMA)	$	2,228	$	—	$	36	$	2,192
February 28, 2008	March 15, 2008			0.2083
Held to maturity:
March 30, 2008	April 17, 2008			0.2083
U.S. Government and agencies obligations	$	6,009,489	$	683	$	49,891	$	5,960,281
April 30, 2008	May 15, 2008			0.2083
Puerto Rico Government and agencies obligations		34,823		299		357		34,765
May 31, 2008	June 15, 2008			0.2083
Corporate notes		51,425		1,279		—		52,704
June 29, 2008	July 17, 2008			0.2083
Subtotal		6,095,737		2,261		50,248		6,047,750
Total			$	1.2498
Mortgage-backed securities:
Government National Mortgage Association (GNMA) certificates		8,825		331		1		9,155
Federal Home Loan Mortgage Corporation (FHLMC) certificates		4,986		223		—		5,209
FNMA certificates		3,169		165		—		3,334
CMO’s issued or guaranteed by FHLMC		693,198		—		46,116		647,082
CMO’s issued or guaranteed by FNMA		98,913		12		1,751		97,174
Subtotal		809,091		731		47,868		761,954
Total	$	6,904,828	$	2,992	$	98,116	$	6,809,704


(1)		Dividends amounts in the table are rounded.

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

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

Refer to Note 19 — “Contingencies — Regulatory Matters” below for a description of certain regulatory agreements entered into with the FDIC, the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (“OCIF”) and the Board of Governors of the Federal Reserve System (the “FRB”) and the regulatory restrictions on the payment of dividends imposed by the agreements.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2004	Cost		Gains		Losses		Value
	(In thousands)
Available for sale:
CMO’s issued or guaranteed by FNMA	$	6,298	$	—	$	182	$	6,116
CMO’s issued or guaranteed by FHLMC		1,795		—		30		1,765
Total	$	8,093	$	—	$	212	$	7,881
Held to maturity:
U.S. Government and agencies obligations	$	6,004,849	$	6,181	$	32,457	$	5,978,573
Puerto Rico Government and agencies obligations		34,822		303		540		34,585
Corporate notes		51,418		2,280		—		53,698
Subtotal		6,091,089		8,764		32,997		6,066,856
Mortgage-backed securities:
GNMA certificates		9,881		484		—		10,365
FHLMC certificates		5,663		334		—		5,997
FNMA certificates		3,642		245		—		3,887
CMO’s issued or guaranteed by FHLMC		706,632		14		58,171		648,475
CMO’s issued or guaranteed by FNMA		104,441		20		3,175		101,286
CMO’s other		31		—		—		31
Subtotal		830,290		1,097		61,346		770,041
Total	$	6,921,379	$	9,861	$	94,343	$	6,836,897

4. ACCUMULATED OTHER COMPRENSIVE LOSS, NET

~~The~~Accumulated ~~amortized~~other ~~cost~~comprehensive ~~and~~loss, ~~fair~~net ~~value~~ of ~~investment~~income ~~securities held to maturity at June 30~~tax, ~~2005, by~~consisted ~~contractual~~of ~~maturity~~the ~~(excluding mortgage-backed securities) are shown below~~following:

	Amortized			Fair
	June 30,			December 31,
	Cost			Value
	2009			2008
	(In thousands)
Due within one year	$	28,000		$	28,001
Unrealized net losses on investment securities available for sale, net of income tax of $143,000 in 2009 and $2,415,000 in 2008	$	(4,017	)	$	(40,988	)
Due after one year through five years		5,489,009			5,441,658
Unrealized net gains on cash flow hedge derivatives (fixed-price purchase contracts), net of income tax of $650,000 in 2009		3,683			—
Due after five years through ten years		555,950			554,147
Total	$	(334	)	$	(40,988	)
Due after ten years		22,778			23,944
Subtotal		6,095,737			6,047,750
Mortgage-backed securities		809,091			761,954
Total	$	6,904,828		$	6,809,704

5. MONEY MARKET INSTRUMENTS

At June 30, 2009 and December 31, 2008, money market instruments included $589.4 million and $1.1 billion, respectively, in interest bearing deposits with other banks. At June 30, 2009 and December 31, 2008, the Company maintained $582.1 million and $1.1 billion, respectively, in interest-bearing deposits with the Federal Reserve Bank of New York. Restricted interest bearing deposits with other banks amounted to $3.6 million at June 30, 2009 and December 31, 2008. In addition, interest bearing deposits with other banks amounting to $400,000 were pledged to the Puerto Rico Treasury Department for Westernbank’s International Division at June 30, 2009 and December 31, 2008.

~~The Company’s investment portfolio as of June 30, 2005, consisted principally of U~~6.~~S. Government~~ ~~and~~INVESTMENT ~~agencies obligations, Puerto Rico Government and agencies obligations, and~~SECURITIES mortgage-backed securities issued or guaranteed by FHLMC, FNMA or GNMA. There were no investment securities other than those referred to above in unrealized loss position as of June 30, 2005. These unrealized losses relate to interest rate changes. Investment securities with prepayment provisions did not have significant unamortized premiums at June 30, 2005. As management has the ability to hold debt securities until maturity, or for the foreseeable future, if classified as available for sale, no declines are deemed to be other-than-temporary at June 30, 2005.

The ~~Company~~amortized ~~uses~~cost, ~~certain~~gross ~~methods~~unrealized gains and ~~assumptions~~losses inand ~~estimating~~ fair ~~values~~value of ~~financial instruments.~~investment ~~(See~~securities ~~Note 20. FAIR VALUE OF FINANCIAL INSTRUMENTS of the Company’s Consolidated~~were ~~Financial Statements~~ as ~~of December 31, 2004 and 2003, and for each of the three years in the~~follows: ~~period ended December 31, 2004, included in the Company’s Annual Report on Form 10-K).~~

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2009	Cost		Gains		Losses		Value
	(In thousands)
Available for sale:
U.S. Government and agencies obligations (USGO’s)	$	195,774	$	744	$	1,560	$	194,958
Puerto Rico Government and agencies obligations (PRGO’s)		11,212		284		—		11,496


Subtotal		206,986		1,028		1,560		206,454


Mortgage-backed securities:
Government National Mortgage Association (GNMA) certificates		1,768,014		6,773		8,530		1,766,257
Collateralized mortgage obligations (CMO’s) issued and guaranteed by GNMA		1,461,120		7,294		165		1,468,249
CMO’s issued and guaranteed by Federal National Mortgage Association (FNMA)		361,459		—		7,574		353,885
CMO’s issued and guaranteed by Federal Home Loan Mortgage Corporation (FHLMC)		13,324		—		267		13,057


Subtotal		3,603,917		14,067		16,536		3,601,448


Equity securities — common stock		1,906		—		873		1,033


Total	$	3,812,809	$	15,095	$	18,969	$	3,808,935


Held to maturity:
PRGO’s	$	13,303	$	41	$	17	$	13,327
Corporate notes		21,436		—		11,116		10,320


Subtotal		34,739		41		11,133		23,647


Mortgage-backed securities:
GNMA certificates		5,085		223		—		5,308
FHLMC certificates		1,755		122		—		1,877
FNMA certificates		2,576		156		—		2,732
CMO’s issued and guaranteed by FHLMC		506,326		1,431		24,022		483,735
CMO’s issued and guaranteed by FNMA		63,413		910		409		63,914


Subtotal		579,155		2,842		24,431		557,566

Total	$	613,894	$	2,883	$	35,564	$	581,213

See Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for recent developments on the measurement and recognition guidance on other-than-temporary impairments.

5. LOANS


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2008	Cost		Gains		Losses		Value
			(In thousands)
Available for sale:
USGO’s	$	306,259	$	1,621	$	—	$	307,880
PRGO’s		11,122		335		—		11,457


Subtotal		317,381		1,956		—		319,337


Mortgage-backed securities:
GNMA Certificates		523,339		3,332		295		526,376
CMO’s issued and guaranteed by GNMA		2,461,199		124		33,796		2,427,527
CMO’s issued and guaranteed by FNMA		395,492		—		15,054		380,438
CMO’s issued and guaranteed by FHLMC		14,328		—		677		13,651


Subtotal		3,394,358		3,456		49,822		3,347,992


Equity securities — common stock		1,906		1,006		—		2,912


Total	$	3,713,645	$	6,418	$	49,822	$	3,670,241


Held to maturity:
USGO’s	$	372,311	$	793	$	—	$	373,104
PRGO’s		13,312		3		167		13,148
Corporate notes		21,436		—		1,870		19,566


Subtotal		407,059		796		2,037		405,818


Mortgage-backed securities:
GNMA certificates		5,574		195		2		5,767
FHLMC certificates		1,942		88		—		2,030
FNMA certificates		2,691		118		1		2,808
CMO’s issued and guaranteed by FHLMC		551,802		788		16,987		535,603
CMO’s issued and guaranteed by FNMA		68,902		607		698		68,811


Subtotal		630,911		1,796		17,688		615,019


Total	$	1,037,970	$	2,592	$	19,725	$	1,020,837

The loan portfolio consisted of the following:

	June 30,			December 31,
	2005			2004
	(In thousands)
REAL ESTATE LOANS SECURED BY FIRST MORTGAGES:
Commercial real estate	$	3,696,946		$	3,167,439
Residential real estate, mainly one-to-four family residences		1,420,917			903,967
Construction and land acquisition		389,287			331,221
Total		5,507,150			4,402,627
Plus (less):
Undisbursed portion of loans in process		(2,849	)		(3,076	)
Premium on loans purchased		587			690
Deferred loan fees — net		(14,275	)		(14,480	)
Total		(16,537	)		(16,866	)
Real estate loans — net		5,490,613			4,385,761
OTHER LOANS:
Commercial loans		852,805			768,845
Consumer loans:
Loans on deposits		29,510			29,587
Credit cards		51,637			53,268
Installment		780,572			789,095
Plus (less):
Premium on loans purchased		865			1,337
Deferred loan fees — net		(6,160	)		(6,594	)
Other loans — net		1,709,229			1,635,538
TOTAL LOANS		7,199,842			6,021,299
ALLOWANCE FOR LOAN LOSSES		(84,442	)		(80,066	)
LOANS — NET	$	7,115,400		$	5,941,233

The ~~total~~amortized ~~investment~~cost ~~in impaired commercial~~ and ~~construction loans at June 30, 2005 and December 31, 2004, was $59,575,000 and $54,175,000, respectively. All impaired commercial and construction loans were measured based on the~~ fair value of ~~collateral~~investment atsecurities ~~June 30,~~available ~~2005~~for ~~and December 31,~~sale ~~2004. Impaired commercial~~ and ~~construction~~held ~~loans amounting~~ to ~~$35,570,000 and~~ ~~$29,975,000~~maturity at June 30, ~~2005 and December 31~~2009, ~~2004, respectively, were covered~~ by acontractual ~~valuation allowance~~maturity of(excluding $8,550,000 and $8,412,000, respectively. Impaired commercial and construction loans amounting to $24,005,000 at June 30, 2005, and $24,200,000 at December 31, 2004, did not require a valuation allowance in accordance with SFAS No. 114. The average investment in impaired commercial and construction loans for the sixmortgage-~~month~~backed ~~periods ended June 30~~securities), ~~2005 and 2004, amounted to $55,237,000 and $43,788,000, 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~~shown ~~or interest~~below. ~~Interest on impaired commercial and construction loans collected and~~ ~~recognized as income for the six-month periods ended June 30, 2005 and 2004, amounted to $1,720,000 and $40,000, respectively.~~

6. PLEDGED ASSETS


	Available For Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
			(In thousands)
Due within one year	$	100,000	$	100,064	$	470	$	470
Due after one year through five years		33,652		34,616		12,348		12,369
Due after five years through ten years		73,334		71,774		485		488
Due after ten years		—		—		21,436		10,320


Subtotal		206,986		206,454		34,739		23,647

Mortgage-backed securities		3,603,917		3,601,448		579,155		557,566

Equity securities		1,906		1,033		—		—


Total	$	3,812,809	$	3,808,935	$	613,894	$	581,213

At June 30, 2005, residential and commercial mortgage loans, investment securities (held to maturity and available for sale) and money market instruments amounting to $982,215,000, $6,224,468,000, and $8,767,000, respectively, were pledged to secure public funds, individual retirement accounts, repurchase agreements, commercial letters of credit, advances and borrowings from the Federal Home Loan Bank and the Federal Reserve Bank of New York, interest rate swap agreements, and to comply with the requirements of the Puerto Rico Treasury Department (for Westernbank International Division). Pledged investment securities amounting to $6,143,912,000 at June 30, 2005, can be repledged.

7. DEPOSITS

Deposits consisted of the following:

	June 30,		December 31,
	2005		2004
	(In thousands)
Noninterest bearing accounts	$	294,264	$	249,368
Passbook accounts		792,315		829,424
NOW accounts		302,246		269,716
Super NOW accounts		33,535		33,864
Money market accounts		132		100
Certificates of deposit		6,035,808		4,818,892
Total		7,458,300		6,201,364
Accrued interest payable		43,949		29,847
Total	$	7,502,249	$	6,231,211

The weighted average interest rate of all deposits at June 30, 2005 and December 31, 2004, was approximately 3.12% and 2.75%, respectively.

8.The ~~INCOME~~following ~~TAXES~~tables show the Company’s available for sale and held to maturity investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2009 and December 31, 2008:

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.


	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross		Number of
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Investment
June 30, 2009	Value		Losses		Value		Losses		Value		Losses		Positions
							(In thousands)
Available for sale:

USGO’s	$	71,774	$	1,560	$	—	$	—	$	71,774	$	1,560		2


Mortgage-backed securities:
GNMA certificates		980,229		8,530		—		—		980,229		8,530		17
CMO’s issued and guaranteed by GNMA		66,570		165		—		—		66,570		165		2
CMO’s issued and guaranteed by FNMA		—		—		353,885		7,574		353,885		7,574		11
CMO’s issued and guaranteed by FHLMC		—		—		13,057		267		13,057		267		1


Subtotal		1,046,799		8,695		366,942		7,841		1,413,741		16,536		31


Equity securities		1,033		873		—		—		1,033		873		1


Total	$	1,119,606	$	11,128	$	366,942	$	7,841	$	1,486,548	$	18,969		34


Held to maturity:
PRGO’s	$	—	$	—	$	5,004	$	17	$	5,004	$	17		2
Corporate notes		2,160		2,085		8,160		9,031		10,320		11,116		3


Subtotal		2,160		2,085		13,164		9,048		15,324		11,133		5


Mortgage-backed securities:
CMO’s issued and guaranteed by FHLMC		—		—		381,386		24,022		381,386		24,022		5
CMO’s issued and guaranteed by FNMA		—		—		18,002		409		18,002		409		7


Subtotal		—		—		399,388		24,431		399,388		24,431		12


Total	$	2,160	$	2,085	$	412,552	$	33,479	$	414,712	$	35,564		17

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.

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. Management estimated that the provisions of the Act did not have an effect on the Company’s financial position at June 30, 2005 and December 31, 2004, or the results of operations for the six month periods ended June 30, 2005 and 2004.

A reconciliation of the provision for income taxes computed by applying the Puerto Rico income tax statutory rate to the tax provision as reported for the three and six months ended June 30, 2005 and 2004, is as follows:


	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross		Number of
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Investment
December 31, 2008	Value		Losses		Value		Losses		Value		Losses		Positions
	(In thousands)
Available for sale:

Mortgage-backed securities:
GNMA certificates	$	235,547	$	295	$	—	$	—	$	235,547	$	295		6
CMO’s issued and guaranteed by GNMA		2,365,960		33,796		—		—		2,365,960		33,796		42
CMO’s issued and guaranteed by FNMA		—		—		380,439		15,054		380,439		15,054		11
CMO’s issued and guaranteed by FHLMC		—		—		13,651		677		13,651		677		1


Total	$	2,601,507	$	34,091	$	394,090	$	15,731	$	2,995,597	$	49,822	$	60


Held to maturity:
PRGO’s	$	3,905	$	45	$	8,770	$	122	$	12,675	$	167		12
Corporate notes		4,096		148		15,470		1,722		19,566		1,870		3


Subtotal		8,001		193		24,240		1,844		32,241		2,037		15


Mortgage-backed securities:
GNMA certificates		139		2		—		—		139		2		2
FNMA certificates		67		1		—		—		67		1		1
CMO’s issued and guaranteed by FHLMC		13,588		204		462,737		16,783		476,325		16,987		9
CMO’s issued and guaranteed by FNMA		—		—		30,128		698		30,128		698		3


Subtotal		13,794		207		492,865		17,481		506,659		17,688		15



Total	$	21,795	$	400	$	517,105	$	19,325	$	538,900	$	19,725		30

	Three Months												Six Months
	2005						2004						2005						2004
				% of Pre-tax						% of Pre-tax						% of Pre-tax						% of Pre-tax
	Amount			Income			Amount			Income			Amount			Income			Amount			Income
	(Dollars in thousands)
Computed at Puerto Rico statutory rate	$	22,409			39	%	$	17,748			39	%	$	45,189			39	%	$	35,503			39	%
Effect on provision of:
Exempt interest income, net		(9,908	)		(17	)		(11,546	)		(25	)		(21,751	)		(19	)		(23,805	)		(26	)
Net nondeductible expenses		36			—			27			—			92			—			38			—
Other		(842	)		(2	)		(1,745	)		(4	)		(2,025	)		(1	)		(2,219	)		(3	)
Provision for income taxes as reported	$	11,695			20	%	$	4,484			10	%	$	21,505			19	%	$	9,517			10	%

Available-for-sale and held-to-maturity securities are reviewed at least quarterly for possible other-than-temporary impairment (“OTTI”). If the fair value of an available-for-sale or held-to-maturity security is less than its amortized cost basis, the Company must determine whether an OTTI has occurred. Under GAAP, the recognition and measurement requirements related to OTTI differ for debt and equity securities.

For debt securities, if the Company intends to sell the debt security or will more likely than not be required to sell the debt security before recovery of the entire amortized cost basis, then an InOTTI ~~July~~has ~~2005~~occurred, and the ~~Puerto~~Company ~~Rico~~must ~~Legislature~~recognize ~~approved~~through aearnings ~~bill~~the ~~for~~entire aOTTI, ~~transitory~~which is ~~additional~~calculated ~~tax~~as the difference between the fair value of 2the debt security and its amortized cost basis.5% onHowever, ~~net~~even ~~taxable~~if ~~income~~the ~~for~~Company ~~all~~does ~~corporations~~not ~~that~~intend ~~would~~to ~~effectively~~sell the debt security and will not likely be ~~increase~~required to sell the ~~statutory~~debt ~~tax~~security ~~rate~~before ~~from~~recovery ~~39%~~of its entire amortized cost basis, the Company must evaluate expected cash flows to ~~41.5%~~be ~~for~~received ~~two~~and ~~years~~determine if a credit loss has occurred. ~~This~~ ~~bill~~In ~~was~~the ~~subject~~event toof a credit loss, the credit component of the impairment is recognized through ~~approval~~earnings byand the ~~Governor~~non-credit component is recognized through accumulated other comprehensive income (loss). During the three and six months ended June 30, 2009 and 2008, the Company did not recognize OTTI on any of ~~Puerto~~its ~~Rico~~available-for-sale or held-to-maturity debt securities.

On August 1, 2005, the Governor of Puerto Rico converted this bill into Law No. 41. This 2.5% transitory additional tax is effective for taxable years 2005 and 2006 and has a retroactive effect to January 1, 2005. The Company estimates the retroactive effect of this bill would be an increase of $1.6 million in its income tax provision for the six months ended June 30, 2005. This effect will be recorded through earnings in the quarter ending September 30, 2005, period that includes the enactment date of the bill.

Also, early in August 2005, the Governor of Puerto Rico resubmitted to the Puerto Rico Legislature a draft of a bill to impose an additional transitory income tax of 4% on net interest income, as defined, applicable to Puerto Rico financial institutions. This transitory additional tax, if approved, is expected to be also in effect for two years. The proposal excludes from the definition of net interest income, exempt interest earned from obligations of the United States, of any state or territory of the United States or political subdivision, the District of Columbia, the Commonwealth of Puerto Rico or any instrumentality or political subdivision; including all interest expense allocable to exempt income. There is no assurance that this proposal will not be approved or significant changes made before it is signed into law. The final impact of this proposal will depend on the final bill, if approved, and the actual distribution of taxable and exempt income in each applicable year.

Deferred income tax assets, net as of June 30, 2005 and December 31, 2004, consisted of the following:

	2005		2004
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	31,805	$	30,098
Capital losses on sale of investment securities, expire in 2008		4,858		4,912
Net operating loss carryfowards, expire through 2009		500		620
Unrealized loss in valuation of derivative instruments		187		415
Other		41		172
Total deferred tax assets		37,391		36,217
Less valuation allowance		4,408		5,032
Subtotal		32,983		31,185
Less other deferred tax liabilities		163		158
Deferred income tax assets, net	$	32,820	$	31,027

~~Realization~~For ofequity ~~deferred~~securities, ~~tax~~the ~~assets~~Company’s ismanagement ~~dependent~~evaluates the securities in an unrealized loss position in the available-for-sale portfolio for OTTI on ~~generating~~the ~~sufficient~~basis ~~future~~of ~~taxable~~the ~~income~~duration of the decline orin ~~capital~~value ~~gains.~~of ~~The~~the ~~amount~~security and severity of that decline as well as the ~~deferred~~Company’s ~~tax~~intent ~~assets~~and ~~considered~~ability to ~~realizable~~hold ~~could~~these besecurities ~~reduced~~for a period of time sufficient to allow for any anticipated recovery in the ~~near~~market ~~term~~value. ifIf ~~estimates~~it is determined that the impairment on an equity security is other than temporary, an impairment loss equal to the difference between the carrying value of ~~future~~the ~~taxable~~security and ~~income~~its orfair ~~capital~~value ~~gains~~is ~~are~~recognized in earnings. During the three and six months ended June 30, 2009 and 2008, the Company did not ~~met~~recognize OTTI on any of its available-for-sale equity securities.

9The Company’s investment portfolio as of June 30, 2009 and December 31, 2008, consisted principally of U.S. ~~OFF~~Government and agencies obligations, Puerto Rico Government and agencies obligations, and mortgage-~~BALANCE~~backed ~~SHEET~~securities ~~ACTIVITIES~~issued or guaranteed by GNMA, FHLMC or FNMA. In addition, the Company does not have investments in residual tranches.

InAt ~~the~~June 30, ~~normal~~2009 ~~course~~and ofDecember 31, ~~business~~2008, the ~~Company~~unrealized ~~becomes~~loss aposition ~~party~~relates to ~~credit related financial~~ ~~instruments~~interest ~~with~~rate ~~off-balance~~changes ~~sheet~~and ~~risk~~not to ~~meet~~credit ~~the~~deterioration ~~financing~~of ~~needs~~any of ~~its~~the ~~customers~~securities issuers. ~~These~~The Company ~~financial~~assessed ~~instruments~~the ~~include~~ratings ~~commitments~~of tothe ~~extend~~different ~~credit~~agencies ~~and~~for ~~commercial~~the ~~letters~~mortgage-backed ofsecurities, ~~credit.~~noting ~~These instruments~~that ~~involve~~at June 30, to2009 ~~varying~~and ~~degrees~~December 31, ~~elements~~2008, all of ~~credit~~them ~~and~~have ~~interest~~maintained ~~rate~~the ~~risk~~highest inrating ~~excess~~by ofall the ~~amount~~rating ~~recognized~~agencies inand ~~the~~reflect ~~consolidated~~a ~~statements~~stable ~~of financial condition~~outlook. The ~~contract~~aggregate orunrealized ~~notional amounts~~gross losses of ~~those~~the investment ~~instruments~~securities ~~reflect~~available ~~the~~for ~~extent~~sale ofand ~~involvement~~held ~~the~~to ~~Company~~maturity ~~has~~amounted into ~~particular~~$54.5 million and $69.5 ~~classes~~million ofat ~~financial~~June 30, ~~instruments~~2009 and December 31, 2008, respectively.

~~The~~Proceeds ~~Company’s~~from ~~exposure~~sales ~~to credit loss in the event~~ of ~~nonperformance~~investment bysecurities ~~the~~available ~~other party to the financial instrument~~ for ~~commitments~~sale ~~to extend credit, commitments under credit card arrangements, commercial letters of credit~~ and ~~commitments to purchase loans is represented by~~ the ~~contractual notional~~respective ~~amount~~gross ~~of those instruments, which do not necessarily represent the amounts potentially~~realized ~~subject~~gains ~~to risk. In addition, the measurement of the risks associated with these instruments is meaningful only when all related~~ and ~~offsetting~~losses ~~transactions~~for ~~are identified. The Company uses~~ the ~~same~~ ~~credit~~six ~~policies~~months inended ~~making~~June 30, ~~commitments~~2009 and ~~conditional~~2008, ~~obligations~~were as ~~it does for on-balance~~follows: ~~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.


	2009		2008
	(In thousands)
Proceeds from sales	$	1,801,355	$	98,343
Gross realized gains		37,086		22
Gross realized losses		—		79

~~Commercial~~Unencumbered ~~letters~~investment ofsecurities ~~credit~~available ~~are~~for ~~conditional~~sale ~~commitments~~and ~~issued~~held byto ~~the~~maturity ~~Company~~at onJune 30, ~~behalf of a~~2009, ~~customer~~amounted ~~authorizing a third party~~ to ~~draw~~$924,676,000 ~~drafts~~and on$348,292,000, ~~the~~respectively, ~~Company~~after uptaking tointo aaccount ~~stipulated~~the ~~amount~~investment securities ~~and~~pledged ~~with specified~~described ~~terms~~in ~~and~~Note ~~conditions~~8.

~~The~~7. ~~contract amount of financial instruments, whose amounts represent credit risk at June 30, 2005~~LOANS ~~and December 31, 2004, was as follows:~~

	2005		2004
	(In thousands)
Commitments to extend credit:
Fixed rates	$	8,469	$	7,576
Variable rates		554,440		504,510
Unused lines of credit:
Commercial		145,871		177,893
Credit cards and other		139,483		138,736
Commercial letters of credit		17,918		27,784
Commitments to purchase mortgage loans		—		600,000
Total	$	866,181	$	1,456,499

The loans portfolio consisted of the following:

Such commitments will be funded in the normal course of business from the Company’s principal sources of funds.


	June 30,			December 31,
	2009			2008
	(In thousands)
REAL ESTATE LOANS SECURED BY MORTGAGES ON:
Commercial real estate	$	5,019,311		$	5,105,663
Residential real estate, mainly one-to-four family residences		981,754			985,564
Construction and land acquisition		1,382,050			1,446,191


Subtotal		7,383,115			7,537,418


Plus (less):
Undisbursed portion of loans in process		(1,747	)		(3,214	)
Premium on loans purchased		33			42
Deferred loan fees — net		(26,239	)		(29,303	)


Subtotal		(27,953	)		(32,475	)


Real estate loans — net		7,355,162			7,504,943


OTHER LOANS:
Commercial, industrial and agricultural loans		707,442			721,987
Consumer loans:
Loans on deposits		28,639			28,753
Credit cards		50,272			49,301
Installment		694,086			649,961
Less deferred loan fees — net		(4,290	)		(5,139	)


Other loans — net		1,476,149			1,444,863


TOTAL LOANS		8,831,311			8,949,806

ALLOWANCE FOR LOAN LOSSES		(240,832	)		(282,089	)


LOANS — NET	$	8,590,479		$	8,667,717

10At June 30, 2009, commercial real estate loans totaled $5.0 billion. ONIn general, commercial real estate loans are considered by management to be of somewhat greater risk of collectibility due principally to the size and risk concentration of such loan and for non-~~BALANCE~~owner ~~SHEET~~occupied commercial ~~DERIVATIVE~~real ~~INSTRUMENTS~~estate ~~AND~~due ~~HEDGING~~to ~~ACTIVITIES~~the dependency on income production or future development of the real estate. The Company’s commercial real estate loan portfolio is mostly comprised of loans to owner-occupied borrowers in which the real estate collateral is taken as a secondary source of repayment. At June 30, 2009, commercial real estate loans to owner-occupied borrowers amounted to 77%. Non-owner occupied commercial real estate loans are principally collateralized by property dedicated to wholesale, retail and rental business activities.

~~Derivative~~Commercial ~~Financial~~lending, ~~Instruments~~including commercial real estate, asset-based, unsecured business and construction, generally carry a greater risk than consumer lending, including residential real estate, because such loans are typically larger in size and more risk is concentrated in a single borrower. In addition, the borrower’s ability to repay a commercial loan or a construction loan depends, in the case of a commercial loan, on the successful operation of the business or the property securing the loan and, in the case of a construction loan, on the successful completion

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~~and ~~swap~~sale ~~contracts~~or ~~involves~~operation ~~not~~of ~~only~~ the ~~risk~~project. Substantially all of ~~dealing~~the ~~with~~Company’s ~~counterparties~~borrowers and ~~their~~properties ~~ability~~and toother ~~meet~~collateral ~~the~~securing ~~terms of~~ the ~~contracts~~commercial, ~~but~~real ~~also~~estate ~~the~~mortgage ~~interest~~and ~~rate~~consumer ~~risk~~loans ~~associated with unmatched positions. Interest rate swaps~~ are ~~the most common type of derivative contracts that the~~located ~~Company~~in ~~utilizes~~Puerto Rico.

~~Indexed~~At ~~options~~June 30, ~~are~~2009, ~~contracts~~Westernbank ~~that~~has ~~the~~a ~~Company~~significant ~~enters~~lending ~~into~~concentration inwith ~~order~~an aggregate unpaid principal balance of $385.7 million to ~~receive~~a commercial group in Puerto Rico, which exceeds the loan-to-one ~~average~~borrower limit. Westernbank has explored various alternatives to decrease its exposure ~~appreciation~~to ofthis borrower to comply with the ~~month~~loan-to-one ~~end~~borrower ~~value~~limitation. ofHowever, due to the ~~Standard~~credit tightening &propelled ~~Poor’s~~by ~~500~~the ~~Composite~~current ~~Stock~~economic ~~Index~~environment, ~~over~~efforts ahave not materialized. ~~specified~~Westernbank ~~period~~continues to pursue other actions in ~~exchange~~order ~~for~~to ~~the~~reduce ~~payment~~such ofexcess. aAs ~~premium~~of ~~when~~June 30, ~~the~~2009, this ~~contract~~loan relationship is ~~initiated~~not impaired. ~~The~~For this violation, Westernbank paid a penalty of $50,000 ~~credit~~during ~~risk~~2008. ~~inherent~~There incan ~~the~~be ~~indexed~~no ~~options~~assurance isthat the ~~risk~~Commissioner ~~that~~of the ~~exchange~~OCIF ~~party~~will ~~may~~not ~~default~~take further actions on this issue.

~~Fair~~The ~~Value~~outstanding ~~Hedging~~principal ~~Instruments~~balance of non-performing loans at June 30, 2009 and December 31, 2009 amounted to $1,539,850,000 and $1,560,031,000, respectively. The interest that would have been recorded if the loans had not been classified as non-performing amounted to $31,618,000 and $27,859,000 for the six months ended June 30, 2009 and 2008, respectively. Interest collected and recognized as income on non-performing loans amounted to $18,645,000 and $22,510,000 for the six months ended June 30, 2009 and 2008.

The ~~Company~~following ~~currently~~table ~~utilizes~~presents ~~interest rate swaps to convert its fixed-rate certificates of deposit or firm commitments to originate certificates of deposit (liabilities) to~~ a ~~variable~~reconciliation ~~rate. By entering into the swap, the principal amount~~ of ~~the~~changes ~~hedged~~in ~~item would remain unchanged but~~ the ~~interest~~ ~~payment~~allowance ~~streams~~for ~~would~~loan ~~change.~~losses ~~These~~for ~~swaps mature between one to twenty years with a right by~~ the ~~counterparty to call them after the first anniversary. The Company has an identical right to~~ ~~call~~three ~~the~~and ~~certificates~~six ofmonths ~~deposit.~~ended ~~Decisions to convert fixed-rate certificates of deposits or firm commitments to originate certificates of deposit (liabilities)~~June ~~to variable rate are made primarily by consideration of the asset/liability mix of the Company~~30, ~~the~~2009 ~~desired asset/liability sensitivity~~ and ~~by interest rate levels.~~2008:

The notional amount of the interest rate swaps used to hedge the fixed rate certificates of deposit and the firm commitments to originate certificates of deposit amounted to $607,898,000 and $778,105,000 at June 30, 2005 and December 31, 2004, respectively. Firm commitments to originate certificates of deposit at December 31, 2004, amounted to $20,000,000. No firm commitments were outstanding at June 30, 2005. At June 30, 2005, the fair value of these derivatives qualifying for fair value hedge represented an unrealized net loss of $7.1 million, which was recorded as “Accrued expenses and other liabilities”, before right to offset effect, and as a decrease to the hedged “Deposits” in the accompanying consolidated statements of financial condition. At December 31, 2004, the fair value of these derivatives qualifying for fair value hedge represented an unrealized net loss of $13.0 million, which was recorded as “Accrued expenses and other liabilities”, before right to offset effect, and as a decrease to the hedged “Deposits” of $12.9 million and as an increase in “Other assets” of $101,000 in the accompanying consolidated statements of financial condition.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
				(In thousands)
Balance, beginning of period	$	271,300		$	338,967		$	282,089		$	338,720
Provision for loan losses		11,124			14,346			19,979			29,303
Recoveries of loans previously charged-off		591			1,405			1,646			2,190
Charge-off of uncollectible accounts		(42,183	)		(26,816	)		(62,882	)		(42,311	)

Balance, end of period	$	240,832		$	327,902		$	240,832		$	327,902

The Company purchases fixed rate residential mortgage loans for its portfolio. Fixed rate loans expose the Company to variability in their fair value due to changes in the level of interest rates. Management believes that it is prudent to limit the variability in the fair value of a portion of its fixed rate loan portfolio. It is the Company’s objective to hedge the change in fair value of fixed rate mortgage loans at coverage levels that are appropriate, given the anticipated or existing interest rate levels and other market considerations, as well as the relationship of changes in this asset to other assets of the Company. To meet this objective, the Company enters into contracts to purchase fixed rate residential mortgage loans with a third party. The third party agrees to provide the Company a return at a floating rate of interest (three month LIBOR plus a spread) even though the contractual terms of the loans are fixed rate in nature. This provision is effectively an interest rate swap (balance guarantee swap). Since the contracts meet the sale accounting provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial

~~Assets~~The ~~and~~following ~~Extinguishments~~table ofsets ~~Liabilities,~~forth ~~SFAS~~information ~~No. 133~~regarding ~~and related interpretations required that these interest rate swaps be accounted for separately. Since~~ the ~~hedged~~investment ~~item and the hedging instrument have identical critical terms, no ineffectiveness is assumed and the fair value changes~~ in ~~the~~impaired ~~interest rate swaps are recorded as changes in the value of both the interest rate swaps and the mortgage~~ loans~~. At June 30, 2005 and December 31, 2004, the notional amount of these interest~~: rate swaps which equals the principal balance of the mortgage loans amounted to $1,130,076,000 and $600,848,000, respectively; the weighted average receive floating rate at period end was 4.78% and 3.65%, respectively; the weighted average pay fixed rate at period end was 6.73% and 7.39%, respectively; and the floating rate spread ranged from 120 to 165 basis points over the three month LIBOR rate.

At June 30, 2005 and December 31, 2004, the fair value of these derivatives qualifying for fair value hedge represented an unrealized loss of $24.7 million and $23.9 million, respectively, which was recorded as “Accrued expenses and other liabilities” and as an increase to “Loans” in the accompanying consolidated statements of financial condition.


	June 30,		December 31,
	2009		2008
	(In thousands)
Investment in impaired loans:
Covered by a valuation allowance	$	815,754	$	901,146
Do not require a valuation allowance		679,457		570,030

Total	$	1,495,211	$	1,471,176

Impaired non-performing loans	$	1,366,172	$	1,364,192

Valuation allowance for impaired loans	$	97,396	$	131,018

Derivative Instruments not Designated as Hedge


	Six months ended June 30,
	2009		2008
	(In thousands)
Average investment in impaired loans	$	1,459,416	$	1,660,824

Interest collected and recognized as income on non-performing and impaired loans	$	18,511	$	21,190

The Company ~~offers~~engages ~~its~~in ~~customers~~the ~~certificates~~restructuring of ~~deposit which contain an embedded derivative tied to~~ the ~~performance~~debt of ~~the~~borrowers ~~Standard~~who &are ~~Poor’s~~delinquent ~~500~~due ~~Composite Stock Index that is bifurcated from the~~to ~~host~~economic ~~deposit~~or ~~and~~legal ~~recognized~~reasons, inif the ~~consolidated~~Company ~~statements~~determines ofthat ~~financial~~it ~~condition~~is in ~~accordance with SFAS No. 133. At~~ the ~~end~~best ofinterest ~~five~~for ~~years,~~both the ~~depositor will receive a specified percent of the~~ ~~average~~Company ~~increase~~and of the ~~month-end~~borrower ~~value~~to ofdo ~~the stock index~~so. IfIn ~~such~~some ~~index decreases~~cases, ~~the~~due ~~depositor receives~~to the ~~principal~~nature ~~without~~of ~~any interest. The Company uses option and interest rate swap agreements with major broker dealer companies to manage its exposure to~~ the ~~stock~~borrower’s ~~market. Under the~~financial ~~option agreements~~condition, the ~~Company~~restructure ~~will~~or ~~receive~~loan ~~the~~modification ~~average~~fits ~~increase in~~ the ~~month-end~~definition ~~value~~ of ~~the index~~Troubled inDebt ~~exchange~~Restructuring (“TDR”) ~~for~~as ~~the~~defined ~~payment~~by ~~of a premium when~~ the ~~contract~~SFAS ~~is initiated~~No. ~~Under the terms of the swap agreements~~ 15, ~~the~~Accounting ~~Company~~by ~~also~~Debtors ~~will~~and ~~receive~~Creditors ~~the~~of ~~average~~Troubled ~~increase~~Debt Restructurings. inSuch ~~the~~restructures ~~month-end~~are ~~value~~identified ~~of the~~as ~~index~~TDRs inand ~~exchange~~accounted for abased ~~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~~provisions ~~hedge~~SFAS ~~accounting~~No. 114, ~~these~~Accounting ~~derivative~~by ~~instruments~~Creditors ~~are~~for ~~marked~~Impairment toof ~~market~~a ~~through earnings~~Loan.

~~Information~~The ~~pertaining~~following totable ~~the~~set ~~notional~~forth ~~amounts~~commercial ofloans ~~the~~that ~~Company’s~~fit ~~derivative~~the ~~instruments~~definition ~~not designated as hedge as~~ of ~~June 30~~TDR, ~~2005~~ and ~~December 31,~~therefore ~~2004,~~have been ~~was~~accounted for as ~~follows~~TDR:

	Notional Amount
	June 30,		December 31,
	2005		2004
	2009		2008
	(In thousands)
Interest rate swaps (unmatched portion)	$	8,302	$	8,895
Performing loans	$	21,007	$	4,768
Interest rate swaps used to manage exposure to the stock market		36,329		36,329
Non-performing loans		140,313		118,137
Embedded options on stock indexed deposits		127,806		112,407
Total	$	161,320	$	122,905
Purchased options used to manage exposure to the stock market on stock indexed deposits		93,936		78,212
Total	$	266,373	$	235,843

8. PLEDGED ASSETS

At June 30, 2009, residential and commercial mortgage loans amounting to $1,096,129,000 (see Note 13) and investment securities available for sale and held to maturity amounting to $2,884,259,000 and $265,602,000, respectively, were pledged to secure public funds (see Note 10), individual retirement accounts (see Note 10), repurchase agreements (see Note 11), advances and borrowings from the Federal Home Loan Bank (“FHLB”) (see Note 12), interest rate swap agreements (see Note 16), and pledged to the Federal Reserve Bank of New York ($2,912,000). Pledged investment securities available for sale and held to maturity amounting to $2,803,972,000 and $252,877,000, respectively, at June 30, 2009 can be repledged.

~~At June 30, 2005, the fair value of derivatives not qualifying as a hedge represented an unrealized net loss of $1~~9.~~5 million~~ ~~and~~CLAIM ~~was~~RECEIVABLE ~~recorded~~FROM asLEHMAN ~~part~~BROTHERS ofHOLDINGS ~~“Other assets” of $14~~INC.~~3 million, as~~ part of “Deposits” of $15.7 million and as part of “Accrued expenses and other liabilities” of $83,000, before right to offset effect, in the accompanying consolidated statements of financial condition.

AtWesternbank ~~December 31,~~has ~~2004,~~counterparty ~~the~~exposure ~~fair~~to ~~value~~affiliates of ~~derivatives~~Lehman ~~not~~Brothers ~~qualifying~~Holdings asInc. (“LBHI”), which filed a ~~hedge~~voluntary ~~represented~~petition ~~an unrealized~~for ~~net~~relief ~~loss~~under Chapter 11 of ~~$2.7 million~~the Bankruptcy Code on September 15, 2008 in connection with certain securities repurchase agreements and ~~was~~derivative ~~recorded~~transactions. Lehman asBrothers ~~part~~Special ofFinancing ~~“Other~~Inc. ~~assets~~(“LBSF”) ofwas ~~$12.1 million,~~the ascounterparty to the Company on certain ~~part~~interest rate swap and cap agreements guaranteed by LBHI. The filing of ~~“Deposits”~~bankruptcy by LBHI was an event of ~~$14~~default under the agreements.5 On September ~~million~~19, 2008, the Company terminated all agreements with LBSF and asreplaced ~~part~~them ofwith ~~“Accrued~~another ~~expenses~~counterparty under similar terms and ~~other~~conditions. ~~liabilities”~~In connection with such termination, the Company had an unsecured counterparty exposure with LBSF of approximately $~~254~~484,~~000,~~600. ~~before~~This ~~right~~unsecured toexposure ~~offset~~was ~~effect,~~written-off induring the ~~accompanying~~third ~~consolidated~~quarter ~~statements~~ of ~~financial~~ ~~condition~~2008.

~~The~~In ~~right~~addition, Lehman Brothers Inc. (“LBI”) was the counterparty to ~~offset~~the ~~effect~~Company on certain sale of securities under agreements to repurchase. On September 19, 2008, LBI was placed in a Securities Investor Protection Act (“SIPA”) liquidation proceeding after the filing for ~~all~~bankruptcy ~~derivative~~of ~~instruments~~its parent LBHI. The filing of the SIPA liquidation proceeding was an event of default under the repurchase agreements resulting in their termination as of September 19, 2008. The termination of the agreements caused the Company to recognize the unrealized loss on the value of the securities subject to the agreements, resulting in a $43.13 million ~~and~~charge during the third quarter of 2008. Westernbank also has an aggregate exposure of $6139.92 million ~~was~~representing the amount by which the ~~recorded~~value atof ~~June~~Westernbank securities delivered to LBI exceeds the amount owed to LBI under repurchase agreements. On January 3027, ~~2005~~2009, ~~and~~Westernbank ~~December~~filed customer claims with the trustee in LBI’s SIPA liquidation proceeding. On June 311, ~~2004~~2009, ~~respectively,~~Westernbank asfiled aamended ~~decrease~~customer claims with the trustee. Management evaluated this receivable in accordance with the guidance provided by SFAS No. 5, “~~Other~~Accounting ~~assets~~for Contingencies”, and related pronouncements. In making this determination, ~~“Accrued~~management ~~expenses~~consulted with legal counsel and ~~other~~technical ~~liabilities”~~experts. inAs a result of its evaluation, the Company ~~accompanying~~recognized ~~consolidated~~a ~~statements~~loss of ~~financial~~$13.9 million against the $139.2 million owed by LBI as of December 31, 2008. Determining the loss amount required management to use considerable judgment and assumptions, and is based on the facts currently available. As additional information on the LBI’s SIPA liquidation proceeding becomes available, the Company may need to recognize additional losses. A material difference between the amount claimed and the amount ultimately recovered would have a material adverse effect on the Company’s and Westernbank’s financial condition and results of operations, and could cause the Company’s and Westernbank’s regulatory capital ratios to fall below the minimum to be categorized as well capitalized.

~~Other~~The ~~Derivative~~Company ~~Instruments~~expects ~~Information~~to receive from the LBI’s SIPA trustee notices of determination (i) denying the Company’s claims for treatment as a customer with respect to the securities held by LBI under the repurchase financing agreements, and (ii) converting the Company’s claim to a general creditor claim. As such time, the Company expects to file objections in court to this determination by the LBI’s SIPA trustee.

A summary of the types of swaps used, excluding those used to manage exposure to the stock market and to the variability in the fair value of fixed rate residential mortgage loans, and their terms at June 30, 2005 and December 31, 2004, follows:

	2005			2004
	(Dollars in thousands)
Pay floating/receive fixed:
Notional amount	$	616,200		$	787,000
Weighted average receive rate at period end		4.69	%		4.09	%
Weighted average pay rate at period end		3.27	%		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, excluding balance guarantee swaps, during the six months ended June 30, 2005, follows:

Balance at December 31, 2004	$	823,329
New swaps		30,000
Called and matured swaps		(200,800	)
Balance at June 30, 2005	$	652,529

At10. ~~June 30, 2005, the maturities of interest rate swaps, embedded options and purchased~~DEPOSITS ~~options by year were as follows:~~

Year Ending			Embedded		Purchased		Balance
December 31,	Swaps		Options		Options		Guarantee Swaps
	(In thousands)
2005	$	—	$	—	$	—	$	—
2006		61,329		36,644		1,623		—
2007		7,500		26,504		27,149		—
2008		—		21,133		21,571		—
2009		30,500		27,599		27,868		—
Thereafter		553,200		15,926		15,725		1,130,076
Total	$	652,529	$	127,806	$	93,936	$	1,130,076

Deposits consisted of the following:

Swap agreements amounting to $568,200,000 at June 30, 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 hedged certificates of deposit). During the six months ended June 30, 2005, various counterparties of swap agreements exercised their option to cancel their swaps and the Company immediately exercised its option to call the hedged certificates of deposit. No gains or losses resulted from above cancellations.


	June 30, 2009		December 31, 2008
	(In thousands)
Noninterest bearing accounts	$	289,197	$	250,380
Passbook accounts		675,926		670,224
NOW accounts		292,642		275,530
Super NOW accounts		18,454		18,656
Money market accounts		39		37
Certificates of deposit (1)		8,852,205		9,672,333

Total		10,128,463		10,887,160
Accrued interest payable (2)		85,522		115,013

Total	$	10,213,985	$	11,002,173

At June 30, 2005, the carrying value of the specific collateral held by the counterparties consisted of money market instruments of $8,767,000.


(1)		Includes brokered deposits with contractual principal balance of $14.5 million and $109.3 million and measured at fair value of $14.3 million and $109.9 million, excluding accrued interest, at June 30, 2009 and December 31, 2008, respectively.

(2)		Includes $32,000 and $708,000 of accrued interest payable on brokered deposits measured at fair value at June 30, 2009 and December 31, 2008, respectively.

11The weighted average interest rate of all deposits at June 30, 2009 and December 31, 2008, was approximately 3.61% ~~STOCK~~and ~~OPTION~~4.09%, ~~PLANS~~respectively. At June 30, 2009, the aggregate amount of deposits in denominations of $100,000 or more was $919,948,000 ($891,917,000 at December 31, 2008). Certificates of deposit include brokered deposits of $7,678,891,000 and $8,475,504,000 at June 30, 2009 and December 31, 2008, respectively.

~~The~~At ~~Company has two shareholders’ approved stock option plans~~June 30, ~~the 1999 Qualified Stock Option Plan (the “1999 Qualified Option Plan”) and the 1999 Nonqualified Stock Option Plan (the “1999 Nonqualified Option Plan”)~~2009, ~~for~~ the ~~benefit~~scheduled ofmaturities ~~employees~~ of ~~the~~certificates ~~Company and its subsidiaries. These plans offer to key officers, directors and employees an opportunity to purchase shares~~ of ~~the Company’s~~deposit ~~common~~are ~~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~~follows: 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. 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.


Year Ending
December 31,	(In thousands)
2009	$	3,432,327
2010		3,795,703
2011		886,112
2012		578,143
2013		79,483
Thereafter		80,437


Total	$	8,852,205

At June 30, 2009, the Company had pledged, investment securities held to maturity with a carrying value of $7,328,000, mortgage-backed securities held to maturity with a carrying value of $5,119,000 and investment securities available for sale with a carrying value of $59,586,000 to secure public funds, and mortgage-backed securities held to maturity with a carrying value of $166,000 as bond requirement for individual retirement accounts.

~~The Company has only three exercise prices for options granted, all of them granted at three different dates~~11. ~~The~~REPURCHASE ~~following table summarizes the exercise prices and the weighted average~~AGREEMENTS ~~remaining contractual life of the options outstanding at June 30, 2005:~~

	Outstanding				Exercisable
			Weighted
			Average
	Number of		Contract		Number of
Exercise Prices(1)	Options(1)		Life (Years)		Options(1)
$2.85		6,596,400		4.62		6,564,447
$3.35		193,124		5.88		140,454
$6.77		286,761		7.06		114,704
Total		7,076,285		4.76		6,819,605

Repurchase agreements, and the related weighted average interest rates consisted of the following:

(1) Adjusted to reflect the three-for-two stock split and a 2% stock dividend on our common stock declared in December 2004 and both distributed on January 10, 2005, the three-for-two stock split and a 2% stock dividend on our common stock declared in November 2003 and both distributed on December 10, 2003, and the three-for-two stock split on our common stock declared on June 17, 2002 and distributed on July 10, 2002.

June 30, 2009

December 31, 2008

Weighted

Average

Amount

Interest Rate

Amount

Interest Rate

(Dollars in thousands)

Repurchase agreements:

Fixed rate

2,710,424

3.91

3,204,142

3.77

~~Effective~~The ~~January 1, 2003, the~~ Company ~~changed~~enters ~~the~~into ~~method~~sales of ~~accounting~~securities ~~for~~under ~~employee~~agreements ~~stock~~to ~~options from~~repurchase the ~~intrinsic~~same ~~value~~securities (“repurchase ~~method~~agreements”). toRepurchase ~~the~~agreements ~~fair~~are ~~value~~classified ~~method.~~as ~~Under~~secured ~~the~~borrowings ~~modified~~and ~~prospective method~~are ~~selected~~reflected byas ~~the~~a ~~Company~~liability ~~under~~in the ~~provisions~~condensed consolidated statements of ~~SFAS~~financial Nocondition. ~~148,~~ Repurchase ~~compensation~~agreements ~~cost~~require the Company to bedeliver ~~recognized~~securities ~~in future~~to ~~years~~counterparties isto collateralize the ~~same~~agreements. ~~that~~The ~~would~~dealers ~~have~~may ~~been~~sell, ~~recognized~~loan ifor ~~the~~otherwise ~~recognition~~dispose ~~provisions~~ of ~~FASB~~such ~~No.~~securities to other parties ~~123~~in ~~had~~the ~~been~~normal ~~applied~~course ~~from~~of ~~its~~their ~~original~~operations, ~~effective~~and ~~date.~~have ~~Results~~agreed ~~prior~~to resell to ~~2003~~the ~~were~~Company ~~not~~the ~~restated.~~same ~~Compensation~~securities ~~expense~~at the maturities of ~~stock~~the ~~options~~agreements. ~~granted~~The Company may be required to ~~employees~~provide ~~for~~additional collateral based on the ~~three~~fair ~~month~~value ~~periods~~of ~~ended~~the underlying securities. At June 30, ~~2005 and 2004~~2009, ~~was~~the ~~$61,000~~Company ~~and~~had outstanding $~~224,000,~~2.4 billion ~~respectively,~~in ~~and~~repurchase agreements for which the ~~six~~counterparties ~~month~~have ~~periods~~the ~~ended~~option ~~June~~to ~~30,~~terminate ~~2005~~the ~~and~~agreements ~~2004,~~at ~~was~~the afirst ~~charge~~anniversary ofdate ~~$176,000~~ and ~~$527,000~~at each interest payment date thereafter.

OnRepurchase ~~February 10,~~agreements ~~2005, one of the Company’s executive officers exercised 35,113 options under the Company’s 1999 Qualified Option Plan~~ at ~~an exercise price of $2.85 per share. No options were granted during the six month period ended~~ June 30, ~~2005~~2009 ~~(see~~mature ~~Note~~as ~~13).~~follows:

12. SEGMENT INFORMATION


Year ending
December 31,	(In thousands)
2009 (1)	$	888,924
2010		942,000
2011		25,000
2012		409,500
2013		—
Thereafter		445,000


Total	$	2,710,424

~~The~~(1) ~~Company’s~~Includes 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$332.9 ~~Other~~million ~~operations~~ of ~~the~~repurchase ~~Company~~agreements ~~not reportable in either segment include Westernbank Business Credit Division,~~ which ~~specializes~~mature inwithin ~~asset-based commercial~~30 ~~business lending; Westernbank Trust Division, which offers trust services; SRG Net, Inc~~days., 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.

~~Management~~Repurchase ~~determined~~agreements ~~the~~(classified ~~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,~~counterparty) ~~nature of the products, distribution channels, and the economic characteristics of the products~~ were ~~also~~as ~~considered in the determination of the~~follows: ~~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.


	June 30, 2009				December 31, 2008
			Fair Value				Fair Value
	Borrowing		of Underlying		Borrowing		of Underlying
	Balance		Collateral		Balance		Collateral
	(In thousands)
Federal Home Loan Bank of New York	$	338,000	$	356,292	$	1,073,000	$	1,141,125
Salomon Smith Barney Inc. and affiliates		593,000		676,945		593,000		707,210
Credit Suisse First Boston LLC		672,002		752,627		532,142		600,820
J.P. Morgan Securities, Inc.		431,422		494,815		330,000		417,308
Barclays Capital, Inc.		330,000		385,715		330,000		374,508
Morgan Stanley Dean Witter		273,000		287,479		273,000		294,235
Merrill Lynch Government
Securities Inc. and affiliates		73,000		93,063		73,000		78,107


Total	$	2,710,424	$	3,046,936	$	3,204,142	$	3,613,313

~~Westernbank~~Borrowings ~~International operates as an IBE~~ under ~~the~~repurchase ~~International~~agreements ~~Banking~~were ~~Regulatory~~collateralized ~~Act. Westernbank~~as ~~International’s business activities consist of commercial banking and related services,~~follows: and treasury and investment activities outside of Puerto Rico. As of June 30, 2005 and December 31, 2004, and for the periods then ended, substantially all of Westernbank International’s business activities consisted of investment in securities and loans in the United States of America. Loans outstanding at June 30, 2005 and December 31, 2004, amounted to $168,273,000 and $122,723,000, respectively.

Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices. The accounting policies of the segments are the same as those described in the summary of significant accounting policies of the Company’ Consolidated Financial Statements as of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, included in the Company’s Annual Report on Form 10-K.


	June 30				December 31
	2009				2008
	Carrying		Fair		Carrying		Fair
Securities Underlying	Value of		Value of		Value of		Value of
Repurchase	Underlying		Underlying		Underlying		Underlying
Agreements	Collateral		Collateral		Collateral		Collateral
	(In thousands)
U.S. Government and agencies obligations (“USGO’s”) — held to maturity	$	—	$	—	$	150,755	$	151,028
USGO’s — available for sale		46,350		46,676		155,341		155,142
Mortgage-backed securities (“MBS”) — held to maturity		252,877		242,964		373,940		370,710
MBS — available for sale		2,760,502		2,757,296		2,981,040		2,936,433


Total		3,059,729	$	3,046,936		3,661,076	$	3,613,313


Accrued interest receivable of underlying securities		14,110				19,475


Total	$	3,073,839			$	3,680,551

12. LINES OF CREDIT

At June 30, 2009, the Company has an available line of credit with the FHLB of New York guaranteed with excess collateral already pledged, in the amount of $506.9 million (December 31, 2008 — $467.6 million). See Note 13 for the FHLB lines of credit terms. At June 30, 2009 and December 31, 2008, the Company did not have other outstanding lines of credit agreements.

~~The~~13. ~~financial~~ADVANCES ~~information~~FROM ~~presented~~FEDERAL ~~below~~HOME ~~was~~LOAN ~~derived~~BANK ~~from~~AND ~~the~~MORTGAGE ~~internal~~NOTE ~~management accounting~~PAYABLE ~~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 Six Months Ended
	June 30, 2005
						Total Major			Other
	Puerto Rico			International		Segments			Segments			Eliminations			Total
	(In thousands)
Interest income:
Consumer loans	$	39,272		$	—	$	39,272		$	—		$	—		$	39,272
Commercial loans		106,208			5,182		111,390			—			—			111,390
Asset-based loans		—			—		—			34,345			—			34,345
Mortgage loans		29,561			—		29,561			—			—			29,561
Treasury and investment activities		101,381			55,362		156,743			2,579			(1,179	)		158,143
Total interest income		276,422			60,544		336,966			36,924			(1,179	)		372,711
Interest expense		158,318			40,000		198,318			12,333			(1,179	)		209,472
Net interest income		118,104			20,544		138,648			24,591			—			163,239
Provision for loan losses		(6,087	)		—		(6,087	)		(4,913	)		—			(11,000	)
Noninterest income:
Service and other charges on loans, excluding asset-based lending		3,965			77		4,042			—			—			4,042
Service charges on deposit accounts		4,149			—		4,149			—			—			4,149
Trust account fees		—			—		—			609			—			609
Insurance commission fees		—			—		—			889			(5	)		884
Asset-based lending related fees		—			—		—			1,158			—			1,158
Other fees and commissions, excluding asset-based lending		4,188			19		4,207			113			(113	)		4,207
Other — gains, net		379			—		379			—			—			379
Total noninterest income		12,681			96		12,777			2,769			(118	)		15,428
Equity in income of subsidiaries		220			—		220			93,895			(94,115	)		—
Total net interest income and noninterest income	$	124,918		$	20,640	$	145,558		$	116,342		$	(94,233	)	$	167,667
Total assets at June 30, 2005	$	15,173,949		$	2,905,668	$	18,079,617		$	1,725,704		$	(4,533,277	)	$	15,272,044

Advances from Federal Home Loan Bank and mortgage note payable, and the related weighted average interest rates consisted of the following:

	For the Three Months Ended
	June 30, 2009						December 31, 2008
	June 30, 2005
				Weighted						Weighted
							Total Major			Other
				Average						Average
	Puerto Rico			International			Segments			Segments			Eliminations			Total
	Amount			Interest Rate			Amount			Interest Rate
	(In thousands)
	(Dollars in thousands)
Interest income:
ADVANCES FROM FHLB:
Consumer loans	$	20,087		$	—		$	20,087		$	—		$	—		$	20,087
Fixed rate convertible advances (0.50% to 5.93%)	$	92,000			2.96	%	$	42,000			5.87	%
Commercial loans		55,822			3,025			58,847			—			—			58,847
MORTGAGE NOTE PAYABLE	$	34,642			8.05	%	$	34,932			8.05	%
Asset-based loans		—			—			—			19,510			—			19,510
Mortgage loans		16,460			—			16,460			—			—			16,460
Treasury and investment activities		51,336			27,500			78,836			1,287			(627	)		79,496
Total interest income		143,705			30,525			174,230			20,797			(627	)		194,400
Interest expense		84,599			21,334			105,933			7,302			(627	)		112,608
Net interest income		59,106			9,191			68,297			13,495			—			81,792
Provision for loan losses		(1,793	)		—			(1,793	)		(3,207	)		—			(5,000	)
Noninterest income:
Service and other charges on loans, excluding asset-based lending		2,109			37			2,146			—			—			2,146
Service charges on deposit accounts		2,174			—			2,174			—			—			2,174
Trust account fees		—			—			—			320			—			320
Insurance commission fees		—			—			—			471			(4	)		467
Asset-based lending related fees		—			—			—			595			—			595
Other fees and commissions, excluding asset-based lending		2,204			11			2,215			56			(56	)		2,215
Other — gains, net		275			—			275			—			—			275
Total noninterest income		6,762			48			6,810			1,442			(60	)		8,192
Equity in income of subsidiaries		91			—			91			46,186			(46,277	)		—
Total net interest income and noninterest income	$	64,166		$	9,239		$	73,405		$	57,916		$	(46,337	)	$	84,984

Advances and repurchase agreements are received from the FHLB under an agreement (Note 12) whereby Westernbank is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% and 105% of the outstanding advances and repurchase agreements, respectively. At June 30, 2009, convertible advances were secured by residential and commercial mortgage loans amounting to $1,096,129,000. Also, with respect to repurchase agreements and advances from the FHLB amounting to $380.0 million at June 30, 2009, at the first anniversary date and each quarter thereafter, the FHLB has the option to convert them into replacement funding for the same or a lesser principal amount based on any funding then offered by FHLB at the then current market rates, unless the interest rate has been predetermined between FHLB and the Company. If the Company chooses not to replace the funding, it will repay the convertible advances and reverse repurchase agreements, including any accrued interest, on such optional conversion date.

At June 30, 2009 and December 31, 2008, Westernbank World Plaza, Inc., a wholly owned subsidiary of Westernbank Puerto Rico, had outstanding $34.6 million and $34.9 million, respectively, of a mortgage note, at an interest rate of 8.05% per year. The mortgage note was collateralized by a 23-story office building, including its related parking facility, located in Hato Rey, Puerto Rico. On July 12, 2009, Westernbank World Plaza, Inc. exercised the prepayment option and cancelled the mortgage note.

	As of December 31, 2004 and for the Six Months Ended
	June 30, 2004
						Total Major			Other
	Puerto Rico			International		Segments			Segments			Eliminations			Total
	(In thousands)
Interest income:
Consumer loans	$	37,748		$	—	$	37,748		$	—		$	—		$	37,748
Commercial loans		67,228			2,280		69,508			—			—			69,508
Asset-based loans		—			—		—			19,356			—			19,356
Mortgage loans		23,453			—		23,453			—			—			23,453
Treasury and investment activities		75,139			50,101		125,240			1,099			(981	)		125,358
Total interest income		203,568			52,381		255,949			20,455			(981	)		275,423
Interest expense		100,241			22,910		123,151			7,484			(981	)		129,654
Net interest income		103,327			29,471		132,798			12,971			—			145,769
Provision for loan losses		(15,984	)		—		(15,984	)		(3,778	)		—			(19,762	)
Noninterest income:
Service and other charges on loans, excluding asset-based lending		3,638			45		3,683			—			—			3,683
Service charges on deposit accounts		3,919			—		3,919			—			—			3,919
Trust account fees		—			—		—			471			—			471
Insurance commission fees		—			—		—			791			(4	)		787
Asset-based lending related fees		—			—		—			1,366			—			1,366
Other fees and commissions, excluding asset-based lending		3,650			—		3,650			113			(113	)		3,650
Other — gains, net		37			—		37			—			—			37
Total noninterest income		11,244			45		11,289			2,741			(117	)		13,913
Equity in income of subsidiaries		(350	)		—		(350	)		82,574			(82,224	)		—
Total net interest income and noninterest income	$	98,237		$	29,516	$	127,753		$	94,508		$	(82,341	)	$	139,920
Total assets at December 31, 2004	$	11,814,402		$	2,938,374	$	14,752,776		$	1,561,795		$	(1,977,909	)	$	14,336,662

Advances from FHLB and the mortgage note payable by contractual maturities at June 30, 2009, mature as follows:

	For the Three Months Ended
Year Ending	Advances			Mortgage
	June 30, 2004
December 31,	from FHLB			Note Payable (1)
						Total Major			Other
	(In thousands)
	Puerto Rico			International		Segments			Segments			Eliminations			Total
2009	$	50,000		$	291
	(In thousands)
2010		42,000			628
Interest income:
2011		—			681
Consumer loans	$	18,810		$	—	$	18,810		$	—		$	—		$	18,810
2012		—			731
Commercial loans		34,750			1,223		35,973			—			—			35,973
2013		—			801
Asset-based loans		—			—		—			10,378			—			10,378
Thereafter		—			31,510
Mortgage loans		11,632			—		11,632			—			—			11,632
Total	$	92,000		$	34,642
Treasury and investment activities		39,460			24,705		64,165			579			(521	)		64,223
Total interest income		104,652			25,928		130,580			10,957			(521	)		141,016
Interest expense		51,844			11,198		63,042			3,931			(521	)		66,452
Net interest income		52,808			14,730		67,538			7,026			—			74,564
Provision for loan losses		(9,768	)		—		(9,768	)		(1,053	)		—			(10,821	)
Noninterest income:
Service and other charges on loans, excluding asset-based lending		1,960			25		1,985			—			—			1,985
Service charges on deposit accounts		2,018			—		2,018			—			—			2,018
Trust account fees		—			—		—			268			—			268
Insurance commission fees		—			—		—			402			(4	)		398
Asset-based lending related fees		—			—		—			681			—			681
Other fees and commissions, excluding asset-based lending		1,749			—		1,749			57			(57	)		1,749
Other — gains, net		(94	)		—		(94	)		—			—			(94	)
Total noninterest income		5,633			25		5,658			1,408			(61	)		7,005
Equity in income (loss) of subsidiaries		(176	)		—		(176	)		55,026			(54,850	)		—
Total net interest income and noninterest income	$	48,497		$	14,755	$	63,252		$	62,407		$	(54,911	)	$	70,748


(1)		Mortgage note payable was cancelled on July 12, 2009.

14. INCOME TAXES

The Code provides a dividend received deduction of 100%, on dividends received from wholly owned subsidiaries subject to income taxation in Puerto Rico. The income on certain investments is exempt for income tax purposes. Also, Westernbank International division operates as an International Banking Entity (“IBE”) under the International Banking Center Regulatory Act. Under Puerto Rico tax law, an IBE can hold non-Puerto Rico assets, and earn interest on these assets, as well as generate fee income outside of Puerto Rico on a tax-exempt basis under certain circumstances. As a result, the Company’s effective tax rate is generally below the statutory rate. On March 9, 2009, the Governor of Puerto Rico signed into law Act No. 7 (“Act No. 7”), also known as Special Act Declaring a Fiscal Emergency Status to Save the Credit of Puerto Rico, which amended several sections of the Code, including sections related to the IBE Act. Act No. 7, as amended by Act No. 37 approved on July 10, 2009, imposes a series of temporary and permanent measures, including a special 5% tax on IBE net income not otherwise subject to tax under the Code. This special assessment is effective for tax years that commenced after December 31, 2008 and before January 1, 2012. The imposition of this special tax is not expected to have any effect on the Company’s Financial position or results of operations.

Pursuant to the provisions of Act No. 13 of January 8, 2004 (“Act No. 13”), ~~SUBSEQUENT~~for ~~EVENTS~~taxable years commencing after June 30, 2003, the net income earned by an IBE that operates as a unit of a bank under the Puerto Rico Banking Law, will be considered taxable and subject to income taxes at the current tax rates in the amount by which the IBE taxable income exceeds 40% in the first applicable taxable year (2004), 30% in the second year (2005) and 20% thereafter, of the taxable income of Westernbank, including its IBE taxable income. Westernbank’s IBE carries on its books securities which are, irrespective of the IBE status, tax exempt by law. Moreover, the Act provides that IBE’s operating as subsidiaries will continue to be exempt from the payment of income taxes. For the six months ended June 30, 2009 and 2008, the provisions of Act No. 13 did not have any effect on the Company’s financial position or results of operations because the Company substained a net operating loss.

OnIn ~~July 15,~~addition ~~2005,~~to the ~~Board~~tax ofimposition ~~Directors~~on ~~granted~~IBEs, toAct ~~various~~No. 7, ~~executive~~as ~~officers~~amended ~~and~~by ~~key~~Act ~~employees~~No. 37 aapproved on July 10, ~~total~~2009, also imposes a series of ~~740,000~~temporary ~~stock~~and ~~options~~permanent ~~under~~measures, including the ~~shareholders’~~imposition ~~approved~~of ~~1999~~a ~~Qualified~~5% surtax ~~Stock~~over ~~Option~~the ~~Plan. These~~total ~~stock~~income ~~options~~tax ~~will~~liability ~~become~~determined, ~~fully~~which ~~exercisable~~is ~~after~~applicable ~~five~~to ~~years~~companies ~~following~~whose combined ~~the~~income ~~grant~~exceeds ~~date~~$100,000, ~~and have~~effectively anincreasing ~~exercise~~the ~~price~~maximum ofstatutory ~~$10~~rate from 39% to 40.7195% ~~each,~~and double the ~~market~~property ~~price~~tax ofpaid on the Company’s ~~common~~real ~~stock~~estate atproperties. ~~the~~These ~~grant~~temporary ~~date~~measures are effective for tax years that commenced after December 31, 2008 and before January 1, 2012.

OnPrepaid ~~August~~income 1,tax ~~2005~~amounted to $33,417,000 ~~the~~and ~~Governor~~$33,630,000 ofat ~~Puerto~~June 30, ~~Rico~~2009 ~~signed~~and ~~Law~~December 31, No2008, respectively. 41Accrued income tax payable amounted to $2,570,000 and $3,188,000 at June 30, 2009 and December 31, ~~imposing~~2008, arespectively. ~~transitory~~Prepaid ~~additional~~income tax is included as part of “Other 2assets” and accrued income tax payable is included as part of “Accrued expenses and other liabilities” in the accompanying condensed statements of financial condition.5% onUnder ~~net~~the Puerto ~~taxable~~Rico ~~income~~tax ~~for~~code, ~~all~~the ~~corporations~~Company could use Prepaid income taxes to ~~effectively~~offset ~~increasing~~future tax liability or ask the ~~statutory~~PR taxing authority to refund the excess paid. The usage of prepaid income taxes to offset future tax ~~rate~~liability is ~~from~~not ~~39%~~subject to 41time limitation.5% The accrued income tax payable includes a liability for ~~taxable~~unrecognized ~~years~~tax ~~2005~~benefits of $1.4 million and ~~2006~~$2. ~~See~~0 million ~~Note~~at 8June 30, 2009 and December 31, 2008, respectively. The provision (credit) for income taxes for the three and six months ended June 30, 2009 and 2008, consisted of the following:


	Three months ended					Six months ended
	June 30,					June 30,
	2009			2008		2009			2008
	(In thousands)
Current provision (credit):
Puerto Rico	$	(454	)	$	219	$	(144	)	$	(21,001	)
U.S.		134			542		1,044			(11,553	)

		(320	)		761		900			(32,554	)

Deferred provision (credit)		(3,569	)		1,497		(2,028	)		(2,502	)


Total provision (credit)	$	(3,889	)	$	2,258	$	(1,128	)	$	(35,056	)

* * * * *

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

~~FINANCIAL~~Unrecognized ~~CONDITION~~tax ~~AND~~benefits ~~RESULTS~~at OFJune 30, ~~OPERATIONS~~2009 and December 31, 2008 mainly relate to certain expense deductions taken in income tax returns. The reconciliation for the three and six months ended June 30, 2009 and 2008 of the unrecognized tax benefits, including accrued interest and penalties, was as follows:

Part I — Item 2


	Three months ended					Six months ended
	June 30,					June 30,
	2009			2008		2009			2008
				(In thousands)
Balance — at the beginning of period	$	2,004		$	1,821	$	1,958		$	43,987
Gross amount of increase in unrecognized tax benefits as a result of tax positions taken during a prior period		25			35		61			70
Gross amount of decrease in unrecognized tax benefits as a result of tax positions taken during a prior period		—			—		—			(33,606	)
Gross amount of increase in unrecognized tax benefits as a result of tax positions taken during the current period		10			10		20			20
Amount of decrease in the unrecognized tax benefits relating to settlements with taxing authorities		—			—		—			(8,605	)
Reduction to unrecognized tax benefits as a result of lapse of the applicable statute of limitations		(607	)		—		(607	)		—


Balance — June 30	$	1,432		$	1,866	$	1,432		$	1,866

~~FORWARD~~During ~~LOOKING~~the ~~STATEMENTS~~six months ended June 30, 2008, the Company settled with tax authorities most of its uncertain income tax positions for $8.9 million. The resulting income tax benefit of $33.6 million was recognized as a reduction to the income tax provision in the six months ended June 30, 2008.

~~Certain~~The ~~statements~~total inamount ~~this filing and future filings by the Company, especially within Management’s Discussion and Analysis~~ of ~~Financial~~net ~~Condition~~unrecognized ~~and~~tax ~~Results~~benefits ~~of Operations~~that, ~~will~~if ~~include forward-looking statements within the meaning of the Securities Exchange Act of 1934~~recognized, aswould ~~amended. In~~affect ~~general,~~ the ~~word or phrases “will likely result”, “are expected to”, “will continue”, “is~~effective ~~anticipated”,~~income ~~“estimate”,~~tax ~~“project”,~~rate ~~“believe”~~was ~~or similar expressions are intended to identify “forward-looking statements”~~$1.4 million ~~In addition, certain disclosures~~ and ~~information~~$2.0 million ~~customarily~~at ~~provided by financial institutions~~June 30, ~~such~~2009 ~~as analysis of the adequacy of the allowance for loan losses or an analysis of the interest rate sensitivity of the Company’s assets~~ and ~~liabilities~~December 31, ~~are inherently~~2008, ~~based upon predictions of future events and circumstances~~respectively. ~~Although~~The ~~the~~ Company ~~makes~~classifies ~~such statements~~interests ~~based~~and onpenalties ~~assumptions~~related ~~which it believes~~ to beunrecognized ~~reasonable,~~tax ~~there can be no assurance that~~benefits ~~actual~~as ~~results~~a ~~will~~component ~~not differ materially from the Company’s expectations. Some~~ of ~~the important factors which could cause~~ its ~~results~~income totax ~~differ~~provision. ~~from~~The ~~any~~accrual ~~results~~for ~~which~~uncertain ~~might~~income betax ~~projected, forecasted~~positions ~~or estimated, based on such forward-looking statements include: (i) general economic and~~includes ~~competitive~~an ~~conditions~~accrual infor ~~the~~interests ~~markets in which the Company operates,~~ and ~~the~~penalties ~~risks~~of ~~inherent in its operations; (ii) the Company’s ability to manage its credit risk and control its operating expenses~~$402,000 ~~increase earning assets~~ and ~~non-interest income~~$475,000 ~~and~~at ~~maintain its net interest margin; and (iii)~~June ~~the~~30, ~~level~~2009 ~~of demand for new~~ and ~~existing products. Should one or more of these risks or~~ ~~uncertainties materialize~~December 31, ~~or should underlying assumptions prove incorrect~~2008, ~~actual results may vary materially from those described in the forward-looking statements~~respectively. ~~Except~~For ~~as required by applicable law,~~ the ~~Company~~six ~~does~~months ~~not~~ended ~~intend~~June 30, ~~and specifically disclaims any obligation~~2009, ~~to update~~the ~~forward-looking statements.~~

GENERAL

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 June 30, 2005 and December 31, 2004, and for three and six month periods ended June 30, 2005 and 2004, were not significant.

InCompany ~~July 2000,~~increased the ~~Company~~accrual ~~became~~for ainterest ~~financial~~and ~~holding~~penalties ~~company~~for ~~under~~uncertain ~~the~~income ~~Bank~~tax ~~Holding~~positions ~~Company~~by ~~Act~~$62,000. For Asthe asix ~~financial~~months ~~holding~~ended ~~company~~June 30, 2008, the Company isdecreased ~~permitted~~the toaccrual ~~engage~~for ininterest ~~financial~~and ~~related~~penalties for ~~activities~~uncertain income tax positions by $4.4 million, mainly as a result of the settlement of certain ~~including~~income ~~insurance~~tax ~~and~~positions ~~securities~~with ~~activities~~tax authorities, ~~provided~~as ~~that~~explained ~~the~~above. ~~Company~~Interest ~~and~~paid ~~its~~on ~~banking~~such ~~subsidiary~~settlement ~~meet~~amounted ~~certain~~to ~~regulatory standards~~$724,000.

AtThe ~~June 30,~~Company’s ~~2005,~~primary ~~the~~tax ~~Company~~jurisdiction ~~had~~is ~~total~~Puerto ~~assets~~Rico. ofThe ~~$15.27 billion~~Company’s primary subsidiary, Westernbank, is the entity which has recorded a ~~loan~~liability ~~portfolio-net~~for ofthese $7unrecognized tax benefits.12 In ~~billion,~~the anPuerto ~~investment~~Rico ~~portfolio~~tax jurisdiction, ~~excluding~~Westernbank’s ~~short-term~~open ~~money~~tax ~~market~~years ~~instruments,~~are of2003 $6to present.~~91 billion,~~ For uncertain ~~deposits~~foreign ofwithholdings ~~$7.50 billion~~income tax positions, ~~borrowings~~the statute of ~~$6.50 billion~~limitation ~~and~~(four ~~stockholders’~~years) ~~equity~~began ofwhen Westernbank $1filed the income tax returns in 2007 and 2008.~~16 billion.~~

~~Westernbank~~A isreconciliation ~~the second largest commercial bank in Puerto Rico, based on total assets at June 30, 2005. Westernbank operates through a network~~ of ~~53 bank branches, including 19 Expresso of Westernbank branches, located throughout Puerto Rico, primarily in~~ the ~~western~~provision and southwestern regions of the island, and a website on the Internet. Westernbank 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~~credit)~~, investments (treasury)~~ ~~and~~for ~~deposit~~income ~~products.~~taxes ~~Besides~~computed ~~the~~by ~~traditional~~applying ~~banking operations, Westernbank operates 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,~~income ~~known~~tax asstatutory ~~the~~rate International Banking Regulatory Act, which offers commercial banking and related services, and treasury and investment activities outside of Puerto Rico; Westernbank Business Credit, which specializes in commercial business loans secured principally by 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. Westernbank owns 100% of~~ the ~~voting~~tax ~~shares~~provision ofas ~~Westernbank~~reported ~~World~~was ~~Plaza,~~as ~~Inc. (“WWPI”), which owns~~follows: 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 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 June 30, 2005 and December 31, 2004, and for the three and six month periods ended June 30, 2005 and 2004, were not significant.

Westernbank seeks to differentiate itself from other banks by focusing on customer relationships and personalized service, offering customers direct access to senior management. As part of this strategy, Westernbank strives to make fast and effective decisions locally. Westernbank’s branches offer modern facilities with advanced technology and remain open to customers for longer hours compared to many other local banks, with a number of branches offering both Saturday and Sunday hours. In addition, Westernbank trains its employees to promote an effective and customer-focused sales culture. Westernbank is one of the fastest-growing commercial banks in Puerto Rico, increasing both total assets and loans at an average annual growth rate of over 26.07% for the last five fiscal years. The Company has achieved this growth while maintaining a ratio of non-performing loans to total loans and a combined delinquency on all loan portfolios for the categories of 60 days and over below 1.00%.


	Three months ended June 30,												Six months ended June 30,
	2009						2008						2009						2008
	Amount			% of Pre-tax Income			Amount			% of Pre-tax Income			Amount			% of Pre-tax Income			Amount			% of Pre-tax Income
	(Dollars in thousands)
Tax provsion (credit) computed at Puerto Rico statutory rate	$	(3,593	)		(39.0	%)	$	1,309			39.0	%	$	(2,278	)		(39.0	%)	$	(525	)		(39.0	%)
Effect on provision of:
Exempt income net of related expenses		234			2.5			1,369			40.8			46			0.8			690			51.3
Income taxes related to unrecognized tax benefits or income tax contingencies, include U.S. income tax		(438	)		(4.8	)		587			17.5			518			8.9			(32,449	)		(2,410.8	)
Nondeductible expenses		24			0.3			691			20.6			33			0.6			115			8.6
Differential in statutory rate on capital gains		—			—			(3,826	)		(114.0	)		—			—			(3,819	)		(283.7	)
Other		(116	)		(1.2	)		2,128			63.4			553			9.4			932			69.1

Provision (credit) for income taxes as reported	$	(3,889	)		(42.2	%)	$	2,258			67.3	%	$	(1,128	)		(19.3	%)	$	(35,056	)		(2604.5	%)


Income (loss) before provision for income taxes	$	(9,214	)				$	3,356					$	5,842					$	(1,346	)

~~The~~Deferred ~~Company~~income ~~continues~~tax ~~to emphasize growing Westernbank’s commercial loan portfolio through commercial real estate,~~ asset~~-based,~~ ~~unsecured~~consisted business and construction lending, as well as its consumer loan portfolio. As a result, the Company has shifted its asset composition from primarily traditional long-term fixed-rate residential mortgage loans to assets with shorter maturities and greater repricing flexibility. As of June 30, 2005, commercial loans were $4.54 billion or 63.75% (81.32% of which are collateralized by real estate) and consumer loans were $861.9 million or 12.11% (65.85% of which are collateralized by real estate) of the ~~$7.12 billion loan portfolio-net.~~following: Investment securities, excluding money market instruments, totaled $6.91 billion at June 30, 2005. Approximately 81% of the loan portfolio carries a floating rate. Floating rate loans and loans with contractual maturities of one year or less comprise approximately 88% of the loan portfolio. These loans and securities tend to have shorter maturities and reprice faster than traditional residential mortgage loans. The Company also continues to diversify and grow Westernbank’s sources of revenue, while maintaining its status as a secured lender, with approximately 84% of its loans collateralized by real estate as of June 30, 2005.

The Company is focused on the expansion of Westernbank in the San Juan metropolitan area. We have opened 12 branches in the San Juan metropolitan area since 1998, including seven Expresso of Westernbank branches in July 2002. In the first quarter of 2002, Westernbank acquired Westernbank World Plaza; a 23-story office building that is the tallest in Puerto Rico’s main business district and now serves as the Company’s San Juan metropolitan area headquarters, our regional commercial lending office and the headquarters for the Westernbank Business Credit and Expresso of Westernbank divisions. In addition, the Company continues to build upon its existing platform and further expand its fee-based businesses, including insurance brokerage, trust services and securities brokerage. On October 22, 2004, Westernbank opened its most advanced banking branch in the historic city of Old San Juan, Puerto Rico and on March 16, 2005, it opened its first mega branch in the eastern region of Puerto Rico, in the town of Humacao.


	June 30,		December 31,
	2009		2008
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	92,893	$	108,984
Net operating loss carry forwards, expire through 2016		62,819		44,485
Unrealized losses on available for sale securities		57		2,616
Unrealized loss in valuation of trading derivative instruments		232		262
Other		845		718


Total deferred tax assets		156,846		157,065
Less valuation allowance		1,225		896

Subtotal		155,621		156,169

Less deferred tax liabilities:
Deferred loan origination costs		219		209
Unrealized gains in valuation of cash flow hedge derivative instruments		650		—
Other		271		299

Subtotal		1,140		508

Deferred income tax asset, net	$	154,481	$	155,661

~~Commercial~~Changes lending, including commercial real estate and asset-based lending, unsecured business lending and construction lending, generally carry a greater risk than residential lending because such loans are typically larger in ~~size and more risk is concentrated in a single borrower. In addition,~~ the ~~borrower’s~~valuation ~~ability~~allowance tofor ~~repay~~deferred aincome ~~commercial~~tax ~~loan~~assets orfor ~~a construction loan depends, in~~ the ~~case~~ ofsix amonths ~~commercial loan, on the successful operation of the business or the property securing the~~ended ~~loan and~~June 30, in2009 ~~the~~were ~~case~~as ~~of a construction loan, on the successful completion and sale or operation of~~follows: the project. Substantially all of the Company’s borrowers and properties and other collateral securing the commercial, real estate mortgage and consumer loans are located in Puerto Rico. These loans may be subject to a greater risk of default if the Puerto Rico economy suffers adverse economic, political or business developments, or if natural disasters affect Puerto Rico.

The Company’s financial performance is reported in two primary business segments, the traditional banking operations of Westernbank Puerto Rico and the activities of Westernbank’s division known as Westernbank International. Other operations of the Company, not reportable in either segment, include Westernbank Business Credit Division; Westernbank Trust Division; SRG Net, Inc.; Westernbank Insurance Corp.; Westernbank World Plaza, Inc.; and the transactions of the parent company only, which mainly consist of other income related to the equity in the net income of its two wholly owned subsidiaries.


	(In thousands)
Balance — at January 1, 2009	$	896
Increase in valuation allowance		329



Balance — at June 30, 2009	$	1,225

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.

15. 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 condensed 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.

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

~~Westernbank~~The ~~International~~Company’s ~~business~~exposure ~~activities~~to ~~consist~~credit loss in the event of ~~commercial~~nonperformance ~~banking~~by ~~and~~the ~~related~~other ~~services~~party to the financial instrument for commitments to extend credit, commitments under credit card arrangements and ~~treasury~~standby and ~~investment~~commercial ~~activities~~letters ~~outside~~ of ~~Puerto~~credit ~~Rico.~~is Asrepresented ofby ~~June 30,~~the ~~2005~~contractual ~~and~~notional ~~December 31,~~amount of ~~2004~~those instruments, ~~and~~which ~~for~~does ~~the~~not ~~three~~necessarily ~~and~~represent ~~six~~the ~~month~~amount ~~periods~~potentially ~~ended~~subject ~~June 30,~~to ~~2005~~risk. ~~and 2004~~In addition, ~~substantially~~the ~~all~~measurement of ~~Westernbank~~ ~~International’s~~the ~~business~~risks ~~activities~~associated ~~consisted~~with ofthese ~~investment~~instruments inis ~~securities~~meaningful ~~and~~only ~~loans in~~when ~~the~~all ~~United~~related ~~States~~and ofoffsetting ~~America~~transactions are identified. AtThe ~~June 30,~~Company ~~2005,~~uses the ~~Company~~same ~~has~~credit ~~$168.3 million~~ policies in ~~loans~~making incommitments ~~the United~~and ~~States~~conditional ofobligations ~~America~~as it does for on-balance sheet instruments.

~~Established~~Commitments into ~~2001,~~extend ~~Westernbank~~credit ~~Insurance~~are ~~Corp.~~agreements isto lend to a ~~general~~customer ~~insurance~~as ~~agent~~long ~~placing~~as ~~property,~~there is no violation ~~casualty,~~of ~~life~~any ~~and~~condition ~~disability~~established ~~insurance~~in onthe ~~which~~contract. itCommitments ~~earns~~generally ~~commission~~have ~~income~~fixed expiration dates or other termination clauses and may require payment of a fee. ~~Currently,~~Since ~~most~~many of the commitments are ~~agency~~expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s ~~volume~~credit isworthiness ~~derived~~on ~~from~~a case-by-case ~~two~~basis. ~~areas~~The —amount ~~mortgage~~of ~~insurance~~collateral obtained, if deemed necessary upon extension of credit, is based on ~~residential~~management’s ~~mortgage~~credit ~~loans~~evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income producing ~~credit~~commercial ~~life~~properties. ~~insurance~~At June 30, 2009, the Company had an allowance for ~~borrowers~~unfunded loan commitments totaling $89,000 included in “Accrued expenses and liabilities” in the accompanying condensed consolidated statements of ~~personal~~financial ~~loans~~condition. At December 31, 2008, there was no such allowance for unfunded loan commitments as the exposures were adequately collateralized or were not considered significant.

~~The~~Commercial ~~Company~~letters ~~and~~of ~~its~~credit ~~wholly~~are ~~owned~~conditional ~~subsidiaries’~~commitments ~~executive~~issued ~~offices~~by ~~are~~the ~~located~~Company aton 19behalf ~~West~~of ~~McKinley~~a ~~Street,~~customer ~~Mayagüez,~~authorizing ~~Puerto~~a ~~Rico~~third ~~00681,~~party ~~and~~to ~~the~~draw ~~telephone~~drafts ~~number~~on isthe ~~(787) 834-8000. The~~ Company ~~also maintains~~up to a ~~website,~~stipulated ~~which~~amount ~~can~~and bewith specified ~~accessed~~terms atand ~~http://www~~conditions.~~wholding.com.~~

~~OVERVIEW~~The Company issues financial standby letters of credit to guarantee the performance of various customers to third parties. If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract, then, upon their request, the Company would be obligated to make the payment to the guaranteed party. In accordance with the provisions of FIN No. 45, at June 30, 2009 and December 31, 2008, the Company recorded a liability of $133,000 and $348,000, respectively, which represents the fair value of the obligation undertaken to stand ready to perform in issuing the guarantees under the standby letters of credit. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and recognized over the commitment period. The contract amounts in standby letters of credit outstanding at June 30, 2009 and December 31, 2008, shown in the table below, represent the maximum potential amount of future payments the Company could be required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Company’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Company has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these standby letters of credit.

This financial discussion contains an analysis of the consolidated financial position and financial performance of W Holding Company, Inc. and its wholly owned subsidiaries, Westernbank Puerto Rico and Westernbank Insurance Corp.

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

The main objective of the Company’s Asset and Liability Management program is to invest funds judiciously and reduce interest rate risks while optimizing net income and maintaining adequate liquidity levels. As further discussed in Item 3: “Quantitative and Qualitative Disclosures About Market Risk”, the Company uses several tools to manage the risks associated with the composition and repricing of assets and liabilities. Therefore, management has followed a conservative practice inclined towards the preservation of capital with adequate returns. The Company’s Investment Committee, which includes the entire Board of Directors and senior management, is responsible for the asset-liability management oversight. The Investment Department is responsible for implementing the policies established by the Investment Committee.

The ~~policies~~contract ~~established~~amount ~~and practices followed are intended to retain depositors’ confidence, obtain a favorable match between the maturity~~ of ~~its~~financial ~~interest-earning assets and its interest-bearing liabilities~~instruments, ~~and~~whose ~~enhance~~amounts ~~the~~represent ~~stockholders’~~credit ~~investment~~risk inwas ~~the~~as ~~Company.~~follows:

At June 30, 2005, driven by increases in the Company’s loan portfolio, total assets reached $15.27 billion. Total assets grew $935.4 million or 6.52%, from $14.34 billion at December 31, 2004, almost exclusively from the growth in the loan portfolio, partially offset by decreases in investments and short-term money market instruments. Continuing management’s strategy implemented in the latter part of 2004 and in 2005 in light of the current rising interest rate scenario and the flattening of the yield curve, the Company has continued to emphasize the growth of its loan portfolio, principally through variable rate loans, while remaining on the sideline on the investment side until investment opportunities arise.


	June 30,		December 31,
	2009		2008
	(In thousands)
Commitments to extend credit:
Fixed rates	$	15,268	$	9,389
Variable rates		192,631		312,212
Unused lines of credit:
Commercial		90,706		152,455
Credit cards and other		88,384		111,978
Standby letters of credit		30,422		31,222
Commercial letters of credit		1,226		4,289

Total	$	418,637	$	621,545

~~Loans~~At ~~receivable-net, grew by $1.17~~June ~~million or 19.76%~~30, ~~from~~2009 ~~$5.94 billion~~and at December 31, ~~2004~~2008, ~~as a result of~~ the Company’s ~~continued~~did ~~strategy~~not ofrecord ~~growing~~any ~~its~~loss ~~loan~~allowances ~~portfolio through commercial real~~in ~~estate,~~connection ~~residential~~with ~~real~~risks ~~estate,~~involved ~~construction~~in ~~and land acquisition, asset~~off-~~based~~balance ~~and~~sheet ~~other commercial loans. The investment portfolio, excluding short~~credit-~~term~~related ~~money~~financial ~~market~~ instruments, ~~remained~~other ~~relatively~~than ~~unchanged during the period~~$89,000 ~~decreasing~~allowance ~~slightly~~for bylosses ~~$22.2 million~~on orunfunded ~~0.32%,~~loan tocommitments ~~reach $6.91 billion~~recorded at June 30, ~~2005~~2009. ~~Short-term~~At ~~money market instruments also decreased by $254.4~~June ~~million or 23.85%~~30, ~~from~~2009 ~~$1.1 billion~~and at December 31, ~~2004~~2008, tothere ~~$812.4 million~~were atno ~~June 30,~~additional ~~2005. The Company has continued to shift and reposition its~~ off-balance sheet bycredit-related ~~growing its floating rate loans~~financial toinstruments ~~lessen~~other ~~the~~than ~~impact~~those ofmentioned ~~contracting margins on the investment side~~above. ~~Stockholders’ equity increased~~ by $80.8 million or 7.47%, to $1.2 billion as of June 30, 2005, compared to December 31, 2004. Such increase resulted principally from the combination of the issuance of 401,300 shares of the Company’s Series H Preferred Stock completed on January 3, 2005, providing a net capital infusion of $19.4 million, plus the net income of $94.4 million generated during the six months ended June 30, 2005. This was partially offset by dividends paid during 2005 of $15.0 million and $18.5 million on our common and preferred shares, respectively.

~~The Company has continued to manage its interest rate risk and operating expenses~~16. ~~The~~DERIVATIVE ~~efficiency ratio~~INSTRUMENTS ~~for~~AND ~~the~~HEDGING ~~three and six month periods ended June 30, 2005, was 30.68% and 29.05%, respectively.~~ACTIVITIES

~~Net~~One ~~income~~of ~~for~~ the ~~three~~main ~~months~~risks ~~ended~~facing ~~June 30,~~the ~~2005~~Company ~~increased~~is tointerest ~~$45.8 million~~rate ~~or $0.22 earnings per basic and diluted common share~~risk, upwhich ~~$4.7 million~~includes orthe ~~11.56%,~~risk ~~when compared to $41.0 million or~~that ~~$0.21~~changes ~~earnings~~in ~~per~~interest ~~basic~~rates ~~common~~will ~~share~~result ~~($0.20~~in onchanges ain ~~diluted basis) for~~ the ~~same~~value ~~period~~and in ~~2004. Earnings~~the ~~per~~cash ~~common~~flows ~~share~~of ~~for 2004 were adjusted to give effect to~~ the ~~three-for-two (3x2) stock~~ ~~split~~Company’s assets and aliabilities ~~two percent (2%) stock dividend declared in December 2004~~ and ~~both~~the ~~distributed~~risk ~~on January 10,~~that ~~2005. The increase in~~ net interest income ~~for~~will ~~the~~change ~~three~~in ~~month~~response ~~period ended June 30, 2005, when~~to ~~compared~~changes ~~to the same period~~ in ~~2004,~~interest ~~was~~rates. ~~mainly~~The ~~due~~Company tomaintains an ~~increase~~overall ~~of $7.2 million or 9.69% in net~~ interest ~~income.~~rate ~~Net~~risk ~~income~~management ~~for the six months ended June 30~~strategy that, ~~2005~~from ~~increased~~time to ~~$94.4 million~~time, ~~or $0.46~~incorporates ~~earnings~~the ~~per~~use ~~basic~~of ~~common~~derivative ~~share~~instruments ~~($0.45~~to onminimize ~~a diluted basis), up $12.9 million or 15.76% when~~significant ~~compared~~unplanned tofluctuations ~~$81.5 million~~in ~~or $0.42~~ earnings ~~per~~and ~~basic~~cash ~~common~~flows ~~share~~caused ~~($0.40~~by oninterest arate ~~diluted~~volatility. ~~basis) (as~~Additionally, ~~adjusted) for~~ the ~~six~~Company ~~months~~holds ~~ended~~derivative ~~June 30,~~instruments ~~2004. The increase in net income~~ for the ~~six~~benefit ~~month period ended June 30, 2005, when compared to the same period in 2004, was mainly due to an increase~~ of ~~$17.5 million~~its orcommercial 11customers.~~98%~~ ~~in net interest income.~~ The ~~increase in net interest income for the~~Company ~~three~~does ~~and~~not ~~six~~enter ~~month~~into ~~periods~~derivative ~~ended~~instruments ~~June 30,~~for ~~2004,~~speculative ~~was the result of higher average balances in~~purposes. ~~interest-earning assets,~~

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

The ~~partially offset~~Company byis ~~higher~~exposed ~~average~~to ~~balances~~credit-related losses in ~~interest-bearing~~the ~~liabilities~~event ~~and~~of anonperformance ~~contraction~~by inthe counterparties ~~our~~to ~~net~~these ~~interest margin~~agreements. The ~~increase~~Company incontrols ~~net~~the ~~interest~~credit ~~income,~~risk ~~combined~~of ~~with~~its afinancial ~~lower~~contracts through ~~provision~~credit ~~for~~approvals, ~~loan~~limits ~~losses~~and asmonitoring ~~a result~~procedures, ofand andoes ~~improved~~not ~~asset~~expect ~~quality,~~any ~~was~~counterparties to ~~partially~~fail ~~offset~~their byobligations. ~~increases~~The inCompany ~~noninterest~~deals ~~expenses~~only ~~and in~~with ~~the~~primary ~~provision for income taxes~~dealers.

~~Net~~Derivative ~~income~~instruments ~~attributable~~are togenerally ~~common~~negotiated ~~stockholders~~over-the-counter ~~for~~(“OTC”) ~~the~~contracts. ~~three~~Negotiated ~~and~~OTC derivatives ~~six~~are ~~month~~generally ~~periods~~entered ~~ended~~into ~~June 30,~~between two counterparties that negotiate specific agreement ~~2005~~terms, ~~increased~~including tothe ~~$36.6 million~~underlying ~~and $75.8 million~~instrument, ~~respectively~~amount, upexercise ~~$2.3 million~~price orand 6maturity.~~65%~~ ~~and~~OTC ~~$7.8~~contracts ~~million~~generally orconsist ~~11.53%~~of ~~when~~swaps, ~~compared~~caps ~~to $34.3 million~~ and ~~$68.0 million~~Standard ~~for~~& ~~the~~Poor’s ~~same~~500 ~~periods~~Composite inStock ~~2004~~Index options.

~~The~~Interest-rate ~~return~~swap oncontracts ~~assets~~generally ~~(ROA) and~~involve the ~~return~~exchange onof ~~common~~fixed ~~stockholders’~~and ~~equity~~floating-rate ~~(ROCE) for~~interest payment obligations without the ~~quarter ended~~exchange ~~June 30,~~of ~~2005,~~the ~~were~~underlying 1principal amounts.~~21%~~ ~~and~~Entering ~~23.71%,~~into interest-rate ~~respectively,~~swap ascontracts ~~compared~~involves tonot ~~1.30%~~only ~~and~~the ~~28.01%~~risk ~~reported for~~of ~~the~~dealing ~~same~~with ~~quarter~~counterparties inand ~~2004.~~their ability ~~For~~to meet the ~~six~~terms ~~months~~of ~~ended~~the ~~June 30~~contracts, ~~2005,~~but also the ~~ROA~~interest ~~and~~rate ~~the~~risk ~~ROCE~~associated ~~were~~with ~~1.27%~~unmatched ~~and 25~~positions.~~25%,~~ ~~respectively,~~Interest ~~compared~~rate toswaps ~~1.33%~~are ~~and~~the ~~28.70%,~~most ~~for~~common ~~the~~type ~~same~~of ~~period~~derivative incontracts ~~the~~that ~~prior~~the ~~year~~Company utilizes.

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

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

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

~~Net~~On ~~interest~~January 1, ~~income~~2008, ~~represents~~the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities- Including an Amendment of FASB Statement No. 115 and discontinued the use ~~main~~of ~~source~~fair value hedge accounting of SFAS No. 133 on these CD Swaps. This Statement allows entities to choose to measure certain financial assets and liabilities at fair value with any changes in fair value reflected in earnings. ofThe Company elected to measure at fair value the brokered ~~Company~~deposits being hedged with the CD Swaps. AsThe ~~further~~fair ~~discussed~~value option may be applied on an ~~Item 3:~~instrument-by-instrument ~~“Quantitative~~basis. ~~and~~One ~~Qualitative~~of ~~Disclosures~~the ofmain ~~Market~~considerations ~~Risk”,~~in the ~~Company~~determination ~~uses~~for ~~several tools~~the adoption of SFAS No. 159 was to ~~manage~~eliminate the ~~risks~~operational ~~associated~~procedures ~~with~~required by the ~~composition~~long-haul method ~~and~~of ~~repricing~~accounting in terms of ~~assets~~documentation, effectiveness assessment, and ~~liabilities~~manual procedures followed by the Company to fulfill the requirements specified by SFAS No. 133 (see Note 17).

Net interest income for the quarter ended June 30, 2005 was $81.8 million, an increase of $7.2 million or 9.69%, from $74.6 million for the same period of last year. This increase mainly resulted from an increase in the average net interest-earning assets of $171.6 million, which contributed an $18.4 million positive volume variance, which was partially offset by an $11.2 million negative rate variance. Average interest-earning assets for the second quarter of 2005 increased by $2.72 billion or 22.50%, compared to the same quarter in the previous year. The average loan portfolio increased by $1.58 billion or 30.73%, particularly in the commercial real estate, commercial business and other loans, including asset-based, and residential real estate. The average investment portfolio, excluding short-term money market instruments, increased by $783.8 million or 12.60%, primarily in tax exempt securities, such as U.S. Government and agencies obligations, as a result of the investments bought in the third quarter of 2004. Average money market instruments increased by $351.0 million or 49.53%.

For the six months ended June 30, 2005, net interest income increased from $145.8 million, to $163.2 million, an increase of $17.5 million or 11.98%. This increase mainly resulted from an increase in the average net interest-earning assets of $270.0 million, which contributed a $37.3 million positive volume variance, which was partially offset by a $19.9 million negative rate variance. Average interest-earning assets increased by $2.83 billion or 24.11%. The average loan portfolio increased by $1.48 billion or 29.42%, particularly in the commercial real estate, commercial business and other loans, including asset-based, and residential real estate. The average investment portfolio, excluding short-term money market instruments, increased by $975.8 million or 16.24%, primarily in tax exempt securities, such as U.S. Government and

~~agencies~~The ~~obligations,~~Company asoffers its customers an equity-linked certificate of deposit that has a ~~result~~return linked to the performance of the ~~investments~~Standard ~~bought~~& inPoor’s ~~the~~500 ~~third~~Composite ~~quarter~~Stock ofIndex. ~~2004~~Under SFAS No. 133, ~~Average~~a ~~money~~certificate ~~market~~of ~~instruments~~deposit ~~increased~~that bypays ~~$370.5 million~~interest orbased ~~54.26%.~~on ~~The~~changes ~~average~~on ~~yield~~an ~~earned~~equity inindex is a hybrid ~~interest-earning~~instrument ~~assets~~that ~~increased~~requires 59separation ~~basis~~into ~~points~~a ~~from~~host ~~4.68%~~contract to(the ~~5.27%,~~certificate of deposit) and 43an embedded ~~basis~~derivative ~~points~~contract ~~from 4.73%~~(written toequity 5call option).~~16%~~ At the end of five years, ~~for~~the depositor will receive a specified percent of the ~~quarter~~average ~~and~~increase ~~six~~of ~~months~~the ~~ended~~month-end ~~June 30,~~value ~~2005,~~of ~~respectively~~the stock index. If such index decreases, ~~when~~the ~~compared~~depositor ~~to prior~~receives ~~year~~the ~~periods~~principal without any interest. The ~~increase~~Company enters ininto ~~the~~an ~~average~~offsetting ~~yield~~derivative ~~was~~contract ~~mainly~~(indexed ~~due~~option toagreement ~~higher~~that ~~average~~has ~~yields earned~~a onreturn linked to the ~~loan~~performance ~~portfolio,~~of ~~higher~~the ~~reinvestment~~Standard ~~rates~~& onPoor’s ~~matured~~500 ~~and~~Composite ~~called~~Stock ~~securities~~Index) ~~and~~to ~~higher~~economically hedge the ~~yields~~exposure ~~earned~~taken onthrough ~~money~~the ~~market~~issuance ~~instruments~~of equity-linked certificates of deposit. ~~The~~Under ~~increase~~the inoption agreements, the Company will receive the average ~~yield~~increase ~~earned~~in onthe month-end value of the ~~loan~~index in ~~portfolio~~exchange ~~was~~for ~~due~~the topayment ~~higher~~of ~~volumes~~a ofpremium ~~commercial~~when ~~real~~the ~~estate~~contract ~~loans,~~is ~~residential~~initiated. ~~real~~Since ~~estate~~the ~~and~~embedded derivative ~~commercial~~and ~~business~~the ~~and~~derivative ~~other~~contract ~~loans~~entered atinto ~~floating~~by ~~rates~~the Company do not qualify for hedging accounting, these ~~coupled~~derivatives are recorded at fair value with aoffsetting ~~repricing~~gains ofand ~~the~~losses ~~existing~~recognized within ~~floating~~noninterest ~~rate~~income ~~loan~~in ~~portfolio~~the condensed consolidated statements of operations.

~~During~~The ~~the~~Company ~~six~~also ~~months~~enters ~~ended~~into ~~June 30,~~derivative ~~2005,~~contracts ~~the~~(including ~~Federal~~interest ~~Reserve~~rate ~~increased~~swaps and interest rate caps) for the ~~federal~~benefit ~~funds~~of ~~rate~~commercial bycustomers. The Company may economically hedge significant anexposures ~~additional~~related ~~100~~to ~~basis~~these ~~points~~derivatives ~~reflected~~by ~~equally~~entering oninto ~~the~~offsetting ~~Prime~~third-party ~~Rate~~contracts with approved, anreputable ~~index~~counterparties ~~used~~with bysubstantially ~~the~~matching ~~Bank~~terms. toCredit risk arises from the ~~re-price~~possible ~~most~~inability of ~~its~~counterparties ~~floating~~to ~~rate~~meet ~~loans~~the terms of their contracts. ~~Approximately~~The ~~81%~~Company’s exposure is limited to the replacement value of the ~~loan~~contracts ~~portfolio~~rather ~~carries~~than athe notional, principal or ~~floating~~contract ~~rate~~amounts. ~~Floating~~The ~~rate~~Company ~~loans~~minimizes the credit risk through credit approvals, limits, counterparty collateral and ~~loans~~monitoring ~~with~~procedures. ~~contractual~~Since ~~maturities~~these ofderivatives ~~one~~do ~~year~~not orqualify ~~less~~for ~~comprise~~hedging ~~approximately~~accounting, ~~88%~~they ofare recorded at fair value with offsetting gains and losses recognized within noninterest income in the ~~loan~~condensed ~~portfolio~~consolidated statements of operations.

~~The~~During ~~increase in~~ the ~~average interest-earning assets was in part offset by an increase in the average interest-bearing liabilities. Average interest-bearing liabilities increased from $11.26 billion for the~~ three months ended June 30, 2004, to $13.80 billion for the three months ended June 30, 2005, an increase of $2.55 billion or 22.62%. For the six month period, average interest-bearing liabilities increased from $11.03 billion in 2004, to $13.58 billion in 2005, an increase of $2.56 billion or 23.20%. The increase in average interest-bearing liabilities for the three and six months ended June 30, ~~2005,~~2009 ~~was mainly related to increases in the average balance of deposits~~ and ~~federal funds purchased and repurchase agreements. The average balance of deposits grew from $5.79 billion and $5.65 billion for the three and six month periods ended June 30~~2008, ~~2004,~~there towere ~~$7.17 billion~~no ~~and~~credit ~~$6.89 billion~~downgrades ~~for the same period in 2005, respectively, an increase~~to ofcounterparties $1.38 billion or 23.92% and $1.24 billion or 21.98%, respectively. The average balance on federal funds purchased and repurchase agreements also grew from $5.34 billion for the three month period ended June 30, 2004, to $6.44 billion in 2005, an increase of ~~$1.10 billion~~derivative ~~or 20~~contracts.~~57%. For~~ the six month period ended June 30, 2005, the average balance on federal funds purchased and repurchase agreements increased by $1.24 billion or 23.66%, from $5.25 billion in 2004, to $6.49 billion in 2005.

~~Our~~In ~~overall cost of rates paid increased 90 basis points~~addition, ~~from 2.37% to 3.27%, for~~ the ~~quarter ended~~Company ~~June 30,~~designates ~~2005,~~as ~~when~~hedging ~~compared~~instruments to the ~~corresponding~~purchase ~~prior~~or ~~year~~sale ~~quarter.~~firm ~~The increase on the~~commitments ~~overall~~(fixed-price ~~cost~~purchase ofor ~~rates~~sale ~~paid~~contracts) ~~was~~in ~~primarily~~a ~~due~~cash toflow ~~increases~~hedge of ~~71 and 116 basis points on~~ the ~~average interest~~variability ~~rate~~of ~~paid on deposits and on federal funds purchased and repurchase agreements, respectively. The average interest rate paid on deposits increased from 2.35% for~~ the ~~quarter ended~~ ~~June 30,~~consideration ~~2004,~~ to ~~3.06%~~be ~~for~~paid ~~the~~or ~~same~~received ~~period~~ in ~~2005, while~~ the ~~average~~forecasted ~~interest~~purchase ~~rate~~or ~~paid~~sale ~~on federal funds purchased and repurchase agreements increased from 2.33% for the quarter ended June 30, 2004, to 3.49% for the same period in 2005. The increase in the overall cost~~ of ~~rates~~investment ~~paid was~~securities ~~partially~~that ~~offset~~will byoccur ~~lower~~upon ~~rates~~gross ~~paid~~settlement on advances from the Federal Home Loan Bank, which decreased 70 basis points from 4.60% for the quarter ended June 30, 2004, to 3.90% for the same period in 2005. For the six months ended June 30, 2005, the overall cost of ~~rates paid increased 74 basis points, from 2.37% for~~ the ~~six~~derivative ~~months~~contract ~~ended June 30, 2004, to 3~~itself.~~11% for the six months ended June~~ 30, 2005. The average interest paid on deposits increased 57 basis points, from 2.33% for the six months ended June 30, 2004, to 2.90% for the same period in 2005, while the average interest rates paid on federal funds purchased and repurchase

~~agreements~~The ~~increased~~following 95table ~~basis~~summarizes ~~points, from 2.36% for~~ the ~~six~~fair ~~months~~value ~~ended~~of ~~June 30,~~derivative ~~2004~~instruments, toexcluding ~~3.31%~~accrued ~~for the six months ended June 30, 2005. Average~~ interest ~~rate paid on advances from the Federal Home Loan Bank decreased 76 basis points~~, ~~from~~and ~~4.68% for~~ the ~~six~~location ~~months ended June 30, 2004, to 3.92% for the six months ended June 30, 2005. As explained before, during the first semester of 2005, interest rates continued rising. This pattern was reflected~~ in the ~~cost~~condensed ofconsolidated ~~the~~statements ~~Bank’s liabilities as explained herein. However, in light~~ of ~~the~~financial ~~current rising interest rate scenario,~~condition: ~~the Bank extended a portion of its liabilities to lock-in the rates for a period of three years.~~


	June 30,					December 31,
	2009					2008
	Notional		Fair			Notional		Fair
	Amount		Value			Amount		Value
			(In thousands)
Derivative designated as cash flow hedge:
Included in other assets:
Fixed-price purchase contract	$	200,000	$	4,333		$	—	$	—


Derivatives not designated as hedge:
Included in other assets:
CD swaps	$	—	$	—			120,525		658
Interest rate swaps with commercial loan borrowers		146,590		8,457			171,972		11,660
Interest rate cap used to offset exposure of interest rate cap with commercial loan borrowers		43,053		196			43,251		71
Purchased options used to manage exposure to the stock market on equity indexed deposits		56,699		2,968			72,370		6,806
Right to offset effect		—		(267	)		—		(824	)

Total	$	246,342	$	11,354		$	408,118	$	18,371


Included in accrued expenses and other liabilities:
Interest rate swaps used to offset exposure of interest rate swaps with commercial loan borrowers	$	146,590	$	8,523		$	171,972	$	12,051
Interest rate cap with commercial loan borrowers		43,053		122			43,251		27
CD swaps		17,300		293			—		—
Right to offset effect		—		(267	)		—		(824	)

Total	$	206,943	$	8,671		$	215,223	$	11,254


Included in deposits:
Embedded options on equity indexed deposits	$	54,700	$	3,353		$	69,444	$	6,986

Accrued interest receivable and accrued interest payable (included in accrued expenses and other liabilities) on interest rate swaps were as follows:


	June 30, 2009				December 31, 2008
	Accrued Interest				Accrued Interest
	Receivable		Payable		Receivable		Payable
			(In thousands)
CD Swaps	$	8	$	—	$	22	$	117
Interest rate swaps with commercial loan borrowers		399		—		158		—
Interest rate swaps used to offset exposure of interest rate swaps with commercial loan borrowers		—		399		—		154

Total	$	407	$	399	$	180	$	271

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

	Three Months Ended June 30,
	For the three months						For the six months ended
	2005									2004
	ended June 30,						June 30,
				Average			Annualized Average						Average			Annualized Average
	2009			2008			2009			2008
	Interest			Balance (1)			Yield/Rate			Interest			Balance (1)			Yield/Rate
				(In thousands)
	(Dollars in thousands)
Derivatives designated as cash flow hedge:
Normal spread:
Included in other comprehensive income:
Interest-earning assets:
Fixed-price purchase contracts	$	4,333		$	—		$	4,333		$	—
Loans, including loan fees (2)	$	114,904		$	6,732,074			6.85	%	$	76,792		$	5,149,645			5.98	%
Derivatives not designated as hedge:
Investment securities (3)		61,314			6,212,828			3.96			50,963			5,242,803			3.90
Included in net gain (loss) on derivative instruments:
Mortgage-backed securities (3)		8,492			791,230			4.30			9,257			977,443			3.80
Interest rate swaps with commercial loan borrower	$	125		$	(2,990	)	$	805		$	3,989
Money market instruments		9,690			1,059,566			3.67			4,004			708,600			2.27
Interest rate swaps used to offset exposure of interest rate swaps with commercial loan borrower		1,793			4,446			2,870			(2,416	)
Total		194,400			14,795,698			5.27			141,016			12,078,491			4.68
Interest rate cap with commercial loan borrower		(96	)		(138	)		(95	)		(22	)
Interest-bearing liabilities:
Interest rate cap used to offset exposure of interest rate cap with commercial loan borrower		126			182			125			135
Deposits		54,769			7,173,469			3.06			33,965			5,788,590			2.35
Purchased options used to manage exposure to the stock market on equity indexed deposits		183			(1,317	)		(1,537	)		(6,046	)
Federal funds purchased and repurchase agreements		55,998			6,438,876			3.49			31,030			5,340,546			2.33
Embedded options on equity indexed deposits		(382	)		1,905			1,593			5,021
Advances from FHLB		1,841			189,419			3.90			1,457			127,008			4.60
CD swaps		(2,185	)		(3,589	)		(3,879	)		3,500
Total		112,608			13,801,764			3.27			66,452			11,256,144			2.37
	$	(436	)	$	(1,501	)	$	(118	)	$	4,161
Net interest income	$	81,792								$	74,564
Interest rate spread								2.00	%								2.31	%
Net interest-earning assets				$	993,934								$	822,347
Net yield on interest-earning assets (4)								2.22	%								2.48	%
Ratio of interest-earning assets to interest-bearing liabilities					107.20	%								107.31	%
Tax equivalent spread:
Interest-earning assets	$	194,400		$	14,795,698			5.27	%	$	141,016		$	12,078,491			4.68	%
Tax equivalent adjustment		10,714			—			0.27			13,264			—			0.44
Interest-earning assets - tax equivalent		205,114		$	14,795,698			5.56			154,280		$	12,078,491			5.12
Interest-bearing liabilities		112,608		$	13,801,764			3.27			66,452		$	11,256,144			2.37
Net interest income	$	92,506								$	87,828
Interest rate spread								2.29	%								2.75	%
Net yield on interest - earning assets (4)								2.51	%								2.92	%

(1)		Average balance on interest-earning assets and interest-bearing liabilities is computed using daily monthly average balances during the period.
(2)		Average loans exclude non-performing loans. Loan fees, net amounted to $4.6 million and $2.7 million for the three-month periods ended June 30, 2005 and 2004, respectively.
(3)		Includes trading and available for sale securities.
(4)		Annualized net interest income divided by average interest-earning assets.

A summary of the types of swaps used and their terms follows:


	June 30,			December 31,
	2009			2008
	(Dollars in thousands)
Pay floating/receive fixed:
Notional amount	$	163,890		$	292,497
Weighted average receive rate at period end		5.19	%		5.06	%
Weighted average pay rate at period end (100% floating rate over three month LIBOR, plus a spread ranging from minus .40% to plus .03%)		0.93	%		2.78	%

Pay fixed/receive floating:
Notional amount	$	146,590		$	171,972
Weighted average receive rate at period end (100% floating rate over one or three month LIBOR)		0.90	%		2.70	%
Weighted average pay rate at period end		5.24	%		5.30	%

	Six Months Ended June 30,
	2005								2004
			Average			Annualized Average					Average			Annualized Average
	Interest		Balance (1)			Yield/Rate			Interest		Balance (1)			Yield/Rate
	(Dollars in thousands)
Normal spread:
Interest-earning assets:
Loans, including loan fees (2)	$	214,568	$	6,519,148			6.64	%	$	150,065	$	5,037,191			6.01	%
Investment securities (3)		121,992		6,182,362			3.98			98,383		5,016,121			3.96
Mortgage-backed securities (3)		17,265		803,377			4.33			19,498		993,799			3.96
Money market instruments		18,886		1,053,332			3.62			7,477		682,813			2.21
Total		372,711		14,558,219			5.16			275,423		11,729,924			4.73
Interest-bearing liabilities:
Deposits		98,973		6,893,460			2.90			65,424		5,651,528			2.33
Federal funds purchased and repurchase agreements		106,677		6,494,711			3.31			61,376		5,251,970			2.36
Advances from FHLB		3,822		196,508			3.92			2,854		122,884			4.68
Total		209,472		13,584,679			3.11			129,654		11,026,382			2.37
Net interest income	$	163,239							$	145,769
Interest rate spread							2.05	%							2.36	%
Net interest-earning assets			$	973,540							$	703,542
Net yield on interest-earning assets (4)							2.26	%							2.51	%
Ratio of interest-earning assets to interest-bearing liabilities				107.17	%							106.38	%
Tax equivalent spread:
Interest-earning assets	$	372,711	$	14,558,219			5.16	%	$	275,423	$	11,729,924			4.73	%
Tax equivalent adjustment		23,684		—			0.33			25,986		—			0.45
Interest-earning assets - tax equivalent		396,395	$	14,558,219			5.49			301,409	$	11,729,924			5.18
Interest-bearing liabilities		209,472	$	13,584,679			3.11			129,654	$	11,026,382			2.37
Net interest income	$	186,923							$	171,755
Interest rate spread							2.38	%							2.81	%
Net yield on interest - earning assets (4)							2.59	%							2.95	%

The changes in notional amount of swaps outstanding during the six months ended June 30, 2009 were as follows:

(1)	Average balance on interest-earning assets and interest-bearing liabilities is computed using daily monthly average balances during the period.
	(In thousands)
(2)	Average loans exclude non-performing loans. Loan fees, net amounted to $9.7 million and $5.2 million for the six-month periods ended June 30, 2005 and 2004, respectively.
Balance — at January 1, 2009	$	464,469
(3)	Includes trading and available for sale securities.
New swaps		—
(4)	Annualized net interest income divided by average interest-earning assets.
Called and matured swaps		(153,989	)
Balance — at June 30, 2009	$	310,480

At June 30, 2009, the maturities of interest rate swaps, embedded options and purchased options by year were as follows:


		Fixed-price
		Purchase				Interest Rate		Embedded		Purchased
Period Ending December 31,		Contract (1)		Swaps		Caps		Options		Options
	(In thousands)
2009		$	200,000	$	—	$	—	$	1,259	$	1,457
2010			—		206,668		—		15,571		16,469
2011			—		—		—		7,860		8,206
2012			—		73,592		—		7,843		8,234
2013			—		—		86,106		11,434		11,593
Thereafter			—		30,220		—		10,733		10,740


Total		$	200,000	$	310,480	$	86,106	$	54,700	$	56,699


(1)		Mature within 20 days.

Swap agreements amounting to $17.3 million at June 30, 2009, provide the counterparties the option to cancel the swap agreements on any interest payment date after the first anniversary (matching the call option that Westernbank has purchased on the certificates of deposit).

At June 30, 2009, the specific collateral held by the counterparties consisted of investment securities available for sale with a carrying value of $17.9 million.

17. FAIR VALUE MEASUREMENTS

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

~~The~~Level ~~following~~1 ~~table~~— ~~presents~~Quoted ~~the~~prices ~~dollar~~(unadjusted) in ~~amount~~active ofmarkets ~~changes~~for inidentical ~~interest~~assets ~~income~~or ~~and~~liabilities ~~interest~~that the ~~expense~~Company ~~for~~has the ~~major~~ability ~~components~~to ofaccess ~~interest-earning~~at the measurement date. Level 1 assets and ~~interest-bearing~~ liabilities ~~and~~include ~~distinguishes~~equity ~~between~~securities ~~the~~that ~~increase~~are ~~(decrease) related~~traded toin ~~changes~~an inactive ~~outstanding~~exchange ~~balances~~market, as well as certain U.S. Treasury and other U.S. government and agency securities and corporate debt securities that are traded by ~~changes~~dealers or brokers in ~~interest~~active ~~rates~~markets.

	Three Months Ended June 30,									Six Months Ended June 30,
	2005 vs. 2004									2005 vs. 2004
	Volume			Rate			Total			Volume			Rate			Total
							(In thousands)
Interest income:
Loans	$	25,917		$	12,195		$	38,112		$	47,561		$	16,942		$	64,503
Investment securities (1)		9,562			789			10,351			23,009			600			23,609
Mortgage-backed securities (1)		(2,546	)		1,781			(765	)		(4,445	)		2,212			(2,233	)
Money market instruments		2,529			3,157			5,686			5,246			6,163			11,409
Total increase in interest income		35,462			17,922			53,384			71,371			25,917			97,288
Interest expense:
Deposits		9,209			11,595			20,804			16,027			17,522			33,549
Federal funds purchased and repurchase agreements		7,310			17,658			24,968			16,693			28,608			45,301
Advances from FHLB		557			(173	)		384			1,328			(360	)		968
Total increase in interest expense		17,076			29,080			46,156			34,048			45,770			79,818
Increase (decrease) in net interest income	$	18,386		$	(11,158	)	$	7,228		$	37,323		$	(19,853	)	$	17,470

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on the value of identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities (e.g., brokered deposits elected for fair value option under SFAS 159) whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

~~(1)~~Level ~~Includes~~3 ~~trading~~— ~~and~~Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Company’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Company’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for ~~sale~~which ~~securities~~the fair value determination requires significant management judgment.

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

The ~~provision~~disclosures ~~for~~required ~~possible~~under ~~loan~~SFAS ~~losses amounted to $5~~No.0 ~~million for the quarter ended June 30~~157, ~~2005,~~ ~~down~~SFAS $5No.8 ~~million~~159 orand ~~53.79%,~~SFAS ~~from $10~~No.8 ~~million~~107 ~~for~~have ~~the~~been ~~same~~included ~~period~~ in ~~the previous year. For~~ ~~the~~this ~~six months ended June 30, 2005, the provision for possible loan losses amounted to $11~~Note.0 million, down from $19.8 million for the six months ended June 30, 2004, a decrease of $8.8 million or 44.34%. Even though the loan portfolio grew between periods, the decrease was attributed to the strong asset quality as evidenced by lower net charge offs and lower delinquencies in our loan portfolios during 2005, when compared to the same period in 2004.

~~The~~Fair ~~allowance~~Value ~~for loan losses is maintained at a level which, in management’s judgment, is adequate~~Option to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of various conditions as the existing general economic and business conditions affecting key lending areas; terms, nature and volume of the portfolio, credit quality trends including trends in non-performing loans expected to result from existing conditions, evaluation of the collectibility of the loan portfolio, collateral values, credit concentrations, trends in historical loss experience, specific impaired loans and delinquency trends, among other factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Although no assurance can be given, management believes that the present allowance for loan losses is adequate considering loss experience, delinquency trends and current

The Company elected on January 1, 2008 to measure at fair value certain long-term, callable brokered deposits (financial liabilities) that were hedged with interest rate swaps (“SFAS 159 Brokered CDs”) and were previously designated for fair value hedge accounting in accordance with SFAS No. 133 (see Note 16). Electing the fair value option allows the Company to eliminate the burden of complying with the requirements for hedge accounting under SFAS No. 133 (e.g., documentation and effectiveness assessment) without introducing earnings volatility.

~~economic~~Interest ~~conditions.~~rate risk ~~Management~~on ~~regularly~~the ~~reviews~~SFAS ~~the~~159 ~~Company’s~~Brokered ~~loan~~CDs ~~loss~~continues ~~allowance~~to asbe ~~its~~economically ~~loan~~hedged with callable interest rate ~~portfolio~~swaps ~~grows~~with the same terms and ~~diversifies~~conditions. ~~See~~The “—Company ~~Financial~~did ~~Condition~~not —elect ~~Allowance~~the fair value option for ~~Loan~~the vast ~~Losses”~~majority ~~herein~~of other brokered deposits because these are not hedged by derivatives.

The ~~allowance~~fair ~~for~~value ~~possible~~of ~~loan~~SFAS ~~losses~~159 ~~amounted~~Brokered toCDs ~~$84.4 million~~is asobtained offrom ~~June 30,~~non-binding ~~2005,~~third ~~and~~party ~~$80~~pricing services.1 ~~million~~The asthird ofparty ~~December 31,~~pricing ~~2004.~~service ~~The~~provider ~~increase~~determines in the ~~allowance~~fair ~~for~~value ~~loan~~of ~~losses~~the isbrokered ~~attributable~~deposits tothrough the ~~overall~~use ~~growth in the Company’s loans portfolio, particularly those~~ of ~~its~~discounted ~~commercial~~cash ~~real estate,~~flow ~~residential~~analyses ~~real~~over ~~estate,~~the ~~construction~~full ~~and~~term ~~land~~of ~~acquisition,~~the ~~asset-based and other commercial loans portfolio~~CDs. The ~~commercial~~options ~~real~~component, ~~estate loans portfolio increased from $2.78 billion~~the ascallable ~~of June 30~~feature, ~~2004,~~is tovalued ~~$3.15 billion~~using asa of“Hull-White ~~December 31,~~Interest ~~2004,~~Rate ~~and~~Tree” ~~to $3.69 billion as of June 30~~approach, ~~2005,~~ an ~~increase~~industry-standard approach offor ~~$911.2 million~~valuing orinstruments ~~32.80%~~with oninterest arate ~~year~~call tooptions. ~~year~~The ~~basis,~~model ~~and~~assumes anthat ~~increase of $534.3~~the ~~million~~embedded oroptions ~~16.94%,~~are ~~when~~exercised ~~compared to December 31, 2004~~economically. ~~Westernbank~~The ~~Business~~fair ~~Credit~~value ~~loans portfolio grew to $1.12 billion at June 30, 2005, an increase~~ of ~~$293.0 million~~the orCDs ~~35.25%,~~is ~~when~~computed ~~compared~~using tothe ~~December 31,~~outstanding ~~2004,~~principal ~~and an increase of $338~~amount.~~2 million~~ orThe ~~43.03%,~~discount ~~when~~rates ~~compared~~used toare ~~June 30,~~based ~~2004.~~on ~~The Expresso~~US ofdollar ~~Westernbank~~LIBOR ~~loans~~and ~~portfolio~~swap ~~decreased from $144~~rates.~~0 million at December 31, 2004, to~~ ~~$139.6 million~~The atfair ~~June 30,~~value ~~2005,~~does anot ~~decrease~~incorporate ~~of $4.4 million or 3.08%. On~~ a ~~year~~credit torisk ~~year basis~~spread, ~~the Expresso~~since ~~of Westernbank loans portfolio also decreased by $871,000 or 0.62%, from $140.5 million at June 30, 2004. The decrease in~~ the ~~Expresso~~callable ofbrokered ~~Westernbank~~deposits ~~loans portfolio was mainly due to~~are ~~management’s~~generally ~~strategy~~for ofamount ~~stabilizing~~less ~~charge-offs~~than as the ~~division~~FDIC ~~portfolio matures and the average yield continues to increase~~insurance.

~~Non-performing~~Interest ~~loans~~paid/accrued stand at $41.7 million or 0.58% (less than 1%) of Westernbank’s loan portfolio at June 30, 2005, relatively stable when compared to 0.57% reported at December 31, 2004. In absolute amounts, non-performing loans increased by $7.4 million, from $34.3 million as of December 31, 2004. The increase in non-performing loans mainly comes from the Company’s commercial loans portfolio. Non-performing loans on ~~the~~SFAS ~~commercial~~159 ~~loan~~Brokered ~~portfolio~~CDs ~~increased by $6.2 million, when compared to December 31, 2004. The increase~~ is ~~mainly~~recorded ~~attributed~~as topart ~~one borrower with three loans with an aggregate principal balance~~ of ~~$5.9 million.~~interest ~~All~~expense ~~loans~~on ~~are fully collateralized by real~~deposits ~~estate properties~~ and ~~did~~the ~~not~~accrued ~~require~~interest ~~any~~and ~~valuation allowance. At June 30, 2005,~~ the ~~allowance~~fair ~~for possible~~value ~~loan~~(excluding ~~losses~~accrued ~~was~~interest) ~~202.68%~~ of ~~total~~the ~~non-performing~~SFAS ~~loans~~159 ~~(reserve coverage), compared to the~~Brokered ~~233.64%~~CDs are reported atwithin ~~December 31,~~deposits ~~2004.~~in ~~Moreover, of~~ the ~~total~~condensed ~~allowance~~consolidated statement of ~~$84.4 million,~~financial $9condition.7 ~~million~~Fair isvalue ~~for~~changes ~~our~~are ~~specific~~included ~~allowance~~in ~~and~~earnings ~~the~~within ~~remaining~~noninterest ~~$74.7 million~~income isin ~~for~~the ~~our~~condensed ~~general~~consolidated statement ~~allowance~~of operations.

~~Net~~As ~~loans charged-off in the second quarter~~ of 2005 were $3.5 million or 0.20% (annualized) to average loans, a significant improvement when compared to $5.1 million or 0.39% (annualized) to average loans for the same period in 2004, a decrease of $1.6 million or 45.38%. For the six months ended June 30, ~~2005,~~2009 ~~net~~and ~~charge-offs amounted to $6.6~~December ~~million or 0.20% (annualized) to average loans~~31, ~~also a decrease of $2.3 million~~2008, ~~when~~deposits ~~compared~~included tocallable ~~$9.0 million~~brokered ordeposits ~~0.35%~~ (~~annualized) to average~~see ~~loans in 2004. The decrease in net loans charged-off for the second quarter of 2005 when~~Note ~~compared~~10) tomeasured ~~the~~at ~~same~~fair ~~quarter~~value inwith ~~2004,~~an isaggregate ~~principally~~fair ~~attributed~~value ~~to lower net charge-offs~~ of ~~consumer loans. Loans charged-off by the Expresso of Westernbank division~~$14, ~~the principal component of the consumer loans charged-off~~312,000 ~~decreased~~and ~~from~~ $~~3.4 million during the second quarter of 2004~~109, ~~to $2.4 million for the quarter of 2005~~944, ~~a decrease of $1.0 million or 41.66%. On a linked quarter comparison~~000, ~~loans charged-off by the Expresso of Westernbank division~~and ~~has~~carrying ~~stabilized~~principal atbalance ~~lower levels when compared to the higher write-off experienced in the first half~~ of ~~2004, being~~ $~~2.5 million in the fourth quarter of 2004~~14, ~~$2.1 million in the first quarter of 2005~~513,000 and $~~2.4 million in the second quarter of 2005. The delinquency ratio of the Expresso of Westernbank division portfolio at June 30~~109, ~~2005~~281,000, ~~was 2~~respectively.~~37% for the categories of 60~~

Changes in fair value and interest expense for callable brokered CD’s measured at fair value pursuant to election of the fair value option for the three and six months ended June 30, 2009 and 2008, were as follows:


	Three months ended June 30,				Six months ended June 30,
	2009		2008		2009		2008
	(In thousands)
Unrealized gains (losses) (1)	$	411	$	3,269	$	864	$	(2,939	)

Interest income expense	$	298	$	3,426	$	1,148	$	8,939


(1)		Reported in non-interest income as net gain (loss) on derivative instruments and deposits measured at fair value in the condensed consolidated statements of operations.

Estimated Fair Value

The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value for the Company.

The estimated fair value of financial instruments is subjective in nature and involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the underlying assumptions used in calculating fair value could

~~days and over.~~significantly ~~Management~~affect ~~strategy of stabilizing charge offs and increasing~~ the ~~yield~~results. ofIn ~~the Expresso loan portfolio by continuously revising its underwriting policies~~addition, ~~increasing~~ the ~~level~~fair ~~of collateralized~~value ~~loans,~~estimates ~~and~~are ~~increasing~~based ~~the~~on ~~overall~~outstanding ~~yield~~balances ~~charged has resulted in lower levels in net~~without ~~charge~~attempting ~~offs during the last three quarters and a higher yield, as measures begin~~ to ~~show~~estimate ~~positive results. The average yields of~~ the ~~Expresso~~value of ~~Westernbank~~anticipated ~~loan~~future ~~portfolio was 22~~business.~~68% at June 30,~~ ~~2005. Also, the loan portfolio of Expresso of Westernbank collateralized by real estate at June 30, 2005, already accounts for 13% of the outstanding balance.~~

~~Our~~The ~~combined~~following ~~delinquency~~methods onand ~~all~~assumptions ~~portfolios~~were ~~for~~used by the ~~categories~~Company ofin ~~60 days~~estimating ~~and~~fair ~~over~~values ~~continues to be~~of ~~below~~financial ~~our~~instruments ~~benchmark~~as ofdisclosed 1%in ~~for~~these ~~both~~condensed ~~periods,~~consolidated ~~being~~financial ~~0.65%~~statements atas ~~June 30,~~required by ~~2005,~~SFAS ~~and 0~~No.~~57% at December~~ 31107, ~~2004.~~ OnDisclosures aabout ~~year~~Fair toValue ~~year~~of ~~basis,~~Financial ~~the combined delinquency improved by 14 basis points when compared~~Instruments: ~~to 0.79% at June 30, 2004.~~

~~Noninterest~~• ~~Income~~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.

~~Noninterest~~• ~~income~~Investment ~~increased~~Securities ~~$1.2 million~~Available ~~or 16.95%~~ for ~~the three month period ended June 30~~Sale, ~~2005, when~~Held ~~compared~~ to ~~the~~Maturity ~~same~~and ~~period~~Trading inSecurities ~~2004.~~— ~~This~~The ~~increase~~fair values ~~was mainly the result~~ of anmost ~~increase~~ of ~~$818,000~~ orthe ~~11.52%~~investment onsecurities ~~service~~available ~~fees~~for sale, ~~and~~held ~~other~~to ~~fees~~maturity and ~~commissions, and a positive variance of~~trading ~~$304,000~~securities inare ~~gain~~estimated ofbased ~~derivative~~on ~~instruments~~quotations asreceived afrom ~~result~~pricing ofservice ~~improvements~~firms inand/or ~~the mark to market in~~securities ~~such positions~~dealers. ~~For~~These ~~the~~securities ~~six~~are ~~month~~generally ~~period~~classified ~~ended~~within ~~June 30,~~Level ~~2005,~~2 ~~noninterest~~of ~~income increased $1.5 million or 10.89%, when compared to~~ the ~~same~~valuation ~~period~~hierarchy ~~in 2004. This increase was mainly the result of~~and aninclude ~~increase of $1~~U.~~2 million or 8~~S.~~45%~~ onGovernment ~~service~~and ~~fees~~agencies obligations, ~~and~~Puerto ~~other~~Rico ~~fees~~Government ~~and commissions~~obligations, and a ~~positive~~mortgage-backed ~~variance~~securities. ofEquity ~~$301,000~~securities inare ~~gain~~traded ~~of derivative instruments, as explained above. The increase~~ in ~~service~~an ~~fees,~~active ~~and~~exchange ~~other~~market ~~fees~~ and ~~commissions was mainly due to higher activity associated with~~are ~~other~~classified ~~fees~~within ~~resulting~~Level ~~from~~1 ~~the Company’s overall growing volume~~ of ~~business~~the ~~and~~valuation ~~other fees generated by our asset-based lending operation~~hierarchy.

~~Noninterest~~• ~~Expenses~~Federal Home Loan Bank (FHLB) Stock — FHLB stock is valued at its redemption value.

~~Total~~• ~~noninterest~~Residential ~~expenses~~Mortgage ~~increased~~Loans ~~$2.3 million~~Held ~~or 9.05%~~ for ~~the~~Sale ~~three-month~~— ~~period~~Fair ~~ended~~value ~~June 30,~~is ~~2005,~~based ~~and~~on ~~$2.9 million or 5.95% for~~ the ~~six~~contract ~~months~~price ~~ended~~at ~~June 30, 2005, when compared to the corresponding periods in 2004. Salaries and employees’ benefits,~~ which ~~is the largest component of~~ ~~total noninterest expenses, increased $2.5 million or 27.73% for~~ the ~~second~~mortgage ~~quarter~~loans ~~of year 2005, and $4.0 million or 22.23% for the six months ended June 30, 2005, as compared to the corresponding periods in 2004. Such increases~~ are ~~attributed~~expected to ~~the~~be ~~increases~~sold ~~in personnel, normal salary increases~~ and ~~related~~are ~~employees’~~classified ~~benefits,~~within ~~principally~~Level ~~attributed~~2 ~~to our continued expansion in the San Juan Metropolitan area and our entrance to the east coast~~ of ~~Puerto Rico. On October 22, 2004 we opened our flagship mega branch in old San Juan, and on March 16, 2005, we opened our new state of~~ the ~~art mega branch in Humacao. At June 30, 2005, the Company had 1,202 full-time employees,~~valuation ~~including its executive officers, an increase of 32 employees or 2~~hierarchy.~~74% since June 30, 2004.~~

~~Advertising~~• ~~expense~~Loans ~~decreased~~— byFair ~~$303,000~~values orare ~~8.92%~~estimated for ~~the~~portfolios ~~three~~of ~~months~~loans ~~ended~~with ~~June 30,~~similar ~~2005, and~~financial $1characteristics.~~0 million~~ orLoans ~~17.84%~~are ~~for~~segregated ~~the~~by ~~six~~type ~~months~~such ~~ended~~as ~~June 30,~~residential ~~2005~~mortgage, ~~when compared to the same periods in 2004~~commercial, ~~as the Company concluded its radio~~consumer, ~~newspaper and television campaign promoting Westernbank’s~~ ~~institutional~~credit ~~image~~cards and ~~positioning~~other ~~the~~loans. ~~Company~~Each ~~for~~loan ~~its~~category ~~strategy~~is infurther ~~the~~segmented ~~San~~into ~~Juan~~fixed ~~Metropolitan~~and ~~area~~adjustable ~~that~~interest ~~was~~rate interms ~~effect~~and ~~during~~by ~~most of the year 2004~~performing, ~~partially~~nonperforming ~~offset~~and byloans ~~increases~~with payments in ~~advertising related to our 2005 IRA campaign~~arrears.

The fair value of performing loans, except residential mortgages and credit card loans is calculated by discounting scheduled cash flows through the estimated maturity dates using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is computed using an estimated market rate based on secondary market sources adjusted to reflect differences in servicing and credit costs. For credit card loans, cash flows and maturities are estimated based on contractual interest rates and historical experience and are discounted using estimated market rates.

Fair value for significant nonperforming loans and certain loans with payments in arrears is based on recent external appraisals of collateral. If appraisals are not available, estimated cash flows are discounted using a rate that is commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.

~~Noninterest~~• ~~expenses,~~Mortgage ~~other~~Servicing ~~than~~Rights ~~salaries~~(MSRs) ~~and~~— ~~employees’~~The ~~benefits,~~carrying ~~and~~amount ~~advertising~~of ~~discussed~~mortgage ~~above~~servicing rights, which is ~~increased~~evaluated ~~slightly~~periodically byfor ~~$91~~impairment,~~000~~ orapproximates 0the fair value.~~71%~~ ~~for~~MSRs ~~the~~do ~~second~~not ~~quarter~~trade ofin ~~2005,~~an ~~and~~active market ~~decreased~~with byreadily ~~$78,000~~observable ~~or 0~~prices.~~31%~~ MSRs are priced internally using prices for ~~the~~similar ~~six~~assets (which ~~months~~are ~~ended~~based ~~June 30,~~on ~~2005,~~discounted ascash aflow ~~result~~model with unobservable inputs). Due to the unobservable nature of valuation inputs used by valuation model, the ~~Company’s~~MSRs ~~continued~~are ~~strict~~classified ~~control~~within Level 3 of the ~~measures~~valuation hierarchy.

• Deposits — The ~~Company~~fair ~~has~~value ~~maintained~~of ~~operating~~deposits ~~expenses~~with atno ~~adequate~~stated ~~levels~~maturity, such as non-interest bearing, demand deposits, savings, NOW, and ~~achieved~~money anmarket ~~efficiency~~accounts ~~ratio~~is, for purpose of this disclosure, equal to the amount payable on demand as of 29the respective dates.~~05%~~ ~~for~~The fair value of fixed rate certificates of deposit is based on the ~~six~~discounted ~~months~~value ~~ended~~of ~~June 30,~~contractual ~~2005~~cash flows using current rates for certificates of deposit with similar terms and 30remaining maturities.~~68%~~ ~~for~~The discount rate is estimated using the ~~second~~rates ~~quarter~~currently offered for deposits of ~~year~~similar ~~2005,~~remaining maturities. For fair ~~compared~~value of SFAS 159 Brokered CDs refer to ~~30.62%~~“Fair ~~and~~Value 30Option” section included in this Note.~~91%~~ ~~for~~These deposits ~~the~~are ~~same~~classified ~~periods~~within Level 2 of ~~2004,~~the ~~respectively~~valuation hierarchy.

~~Provision~~• 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 ~~Income~~with ~~Taxes~~similar terms and remaining maturities.

~~Under~~• ~~Puerto~~Derivative ~~Rico~~Assets ~~income~~and ~~tax~~Derivative ~~laws,~~Liabilities ~~the~~—The ~~Company~~fair isvalue ~~required to pay the higher~~ of ~~an alternative minimum tax of 22% or regular statutory rates ranging from 20% to 39%. The current provision for Puerto Rico income taxes for~~ the ~~six~~derivative ~~months~~instruments ~~ended June 30, 2005, amounted to $23.3 million,~~is ~~compared~~based toon ~~$13.6 million~~an inindependent ~~the~~valuation ~~same~~model ~~period~~that ofuses ~~2004. The increase in the income before the provision for income taxes was~~ primarily ~~due~~observable tomarket ~~the~~parameters, ~~significant~~such ~~increase in the Company’s taxable~~as ~~interest~~yield ~~income~~curves, ~~derived~~and ~~from~~takes ~~increases~~into inconsideration the ~~loans portfolio. The decrease of $2.2 million in the deferred~~ credit ~~for~~risk ~~the six months ended June 30~~component, ~~2005,~~ when ~~compared~~appropriate. ~~to the prior year period, is~~Derivatives ~~attributable~~are tomainly ~~temporary~~composed ~~differences in the recognition~~ of ~~certain~~interest ~~items~~rate ~~for tax and books~~swaps, ~~principally~~ ~~changes~~indexed inoption ~~the~~contracts ~~allowance~~and ~~for loan losses~~caps. ~~Therefore,~~These ~~even though the Company’s~~derivatives ~~effective~~are ~~tax~~classified ~~rate~~within ~~increased,~~Level it2 ~~continues~~of ~~to be substantially below~~ the ~~statutory~~valuation ~~rate~~hierarchy.

InAlthough ~~July~~most ~~2005,~~of the ~~Puerto~~derivative ~~Rico~~instruments ~~Legislature~~are ~~approved~~fully acollateralized, ~~bill for~~ a ~~transitory~~credit ~~additional~~spread ~~tax~~is considered offor ~~2.5%~~those onthat ~~net~~are ~~taxable~~not ~~income~~secured ~~for~~in ~~all~~full. ~~corporations~~The ~~that~~cumulative ~~would~~mark-to-market ~~effectively~~effect ~~increase~~of ~~the~~credit ~~statutory~~risk ~~tax~~in the ~~rate~~valuation ~~from~~of ~~39%~~derivative toinstruments ~~41.5%~~resulted ~~for~~in ~~two~~an ~~years. This~~unrealized ~~bill~~gain ~~was~~(loss) of ~~subject~~$69,000 toand ~~approval~~$(527,000) as byof ~~the~~June 30, ~~Governor~~2009 ofand ~~Puerto~~December 31, ~~Rico~~2008.

On• ~~August~~Commitments 1,to ~~2005,~~Extend ~~the~~Credit ~~Governor of Puerto Rico converted this bill into Law No. 41. This 2.5% transitory additional tax is effective for taxable years 2005~~ and ~~2006~~Letters ~~and~~of ~~has~~Credit a— ~~retroactive effect to January 1, 2005.~~ The ~~Company~~fair ~~estimates~~value ~~the retroactive effect~~ of ~~this~~commitments ~~bill~~to ~~would~~extend credit beand anletters ~~increase~~ of ~~$1.6~~credit ~~million~~are ~~in its~~based ~~income~~on ~~tax~~fees ~~provision~~currently ~~for~~charged ~~the~~to ~~six~~enter ~~months~~into ~~ended~~similar ~~June 30~~agreements, taking ~~2005.~~into ~~This~~account ~~effect~~the ~~will~~remaining beterms ~~recorded~~of ~~through earnings in~~ the ~~quarter~~agreements ~~ending~~and ~~September 30, 2005, period that includes~~ the ~~enactment~~counterparties’ ~~date~~credit ~~of the bill~~standings.

Net Income

Net income increased $4.7 million or 11.56%, and $12.8 million or 15.76% for the three and six month periods ended June 30, 2005, when compared to the same periods in 2004. The increase for the three and six month periods ended June 30, 2005, primarily resulted from increases in net interest income, a lower provision for loan losses, partially offset by increases in total operating expenses and in the provision for income taxes.

FINANCIAL CONDITION

The Company had total assets of $15.27 billion as of June 30, 2005, compared to $14.34 billion as of December 31, 2004, an increase of $935.4 million or 6.52%. Loans receivable-net, grew by $1.17 billion or 19.76%, from $5.94 billion at December 31, 2004, as a result of the Company’s continued strategy of growing its loans portfolio through commercial real estate, residential real estate, construction and land acquisition, asset-based and other commercial loans. The investment portfolio, excluding money market instruments, stands at $6.91 billion at June 30, 2005, a slight decrease of $22.2 million, in comparison to December 31, 2004. As of June 30, 2005, total liabilities amounted to

~~$14.11 billion,~~The anfollowing ~~increase~~table ofpresents ~~$854.6 million~~the orestimated ~~6.45%,~~carrying ~~when compared~~value ~~to $13.25 billion as of December 31, 2004. Deposits increased $1.27 billion or 20.40%, from $6.23 billion as of December 31, 2004, to $7.50 billion as of June 30, 2005. Federal funds purchased~~ and ~~repurchase~~fair ~~agreements~~value ~~decreased $394.1 million or 5.90%, from $6.68 billion as~~ of ~~December 31,~~ ~~2004,~~the toCompany’s ~~$6.29 billion as of June 30, 2005.~~financial instruments:

Loans


	June 30,				December 31,
	2009				2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In thousands)
Financial Assets:
Cash and due from banks	$	56,035	$	56,035	$	68,368	$	68,368
Interest-bearing deposits in banks		589,432		589,432		1,096,465		1,096,465
Investment securities available for sale		3,808,935		3,808,935		3,670,241		3,670,241
Investment securities held to maturity		613,894		581,213		1,037,970		1,020,837
FHLB stock		38,752		38,752		64,190		64,190
Residential mortgage loans held for sale		39,562		39,562		18,871		18,871
Loans (excluding allowance for loan losses)		8,831,311		8,753,990		8,949,806		8,931,661
Accrued interest receivable		47,393		47,393		56,224		56,224
Mortgage servicing rights		3,334		3,334		3,270		3,270
Derivatives, included in assets		15,687		15,687		18,371		18,371
Other		106		106		644		644

Financial Liabilities:
Deposits:
Non-interest bearing		289,198		289,198		250,380		250,380
Interest bearing		9,921,434		9,905,590		10,629,794		10,765,630
Embedded options on deposits		3,353		3,353		6,986		6,986
Repurchase agreements		2,710,424		2,758,523		3,204,142		3,272,079
Advances from FHLB		92,000		94,442		42,000		44,913
Mortgage note payable		34,642		34,642		34,932		35,401
Securities purchased but not yet received		301,875		301,875		—		—
Accrued interest payable		96,867		98,867		127,141		127,141
Derivatives, included in liabilities		8,671		8,671		11,254		11,254
Other		12,062		12,062		12,403		12,403

Off-Balance Sheet Credit Related Financial Instruments:

Liabilities:
Commitments to extend credit		—		27		—		2,585
Unused lines of credit:
Commercial		208		208		462		462
Credit cards and other		163		163		137		137
Commercial letters of credit		133		133		348		348

Loans receivable-net were $7.12 billion or 46.59% of total assets at June 30, 2005, an increase of $1.17 billion or 19.76%, when compared to $5.94 billion at December 31, 2004.

The Company continues to focus on growing its commercial loans portfolio through commercial real estate, residential real estate, construction and land acquisition, asset-based and other commercial loans. As a result, the commercial real estate loan portfolio increased from $3.15 billion as of December 31, 2004, to $3.69 billion as of June 30, 2005, an increase of $534.3 million or 16.94%. Other commercial loans not collateralized by real estate were $847.4 million as of June 30, 2005, an increase of $78.8 million or 10.25%, from $768.6 million at December 31, 2004. The residential real estate mortgage loans portfolio, excluding construction loans, increased from $902.9 million at December 31, 2004, to $1.42 billion at June 30, 2005, an increase of $512.3 million or 56.73%. This increase is mainly due to the purchase of residential mortgage loans on a floating rate basis from a third party mortgage originator in Puerto Rico, as part of management’s strategy of emphasizing in growing its variable rate loans, in light of the current rising interest rate scenario. At June 30, 2005, approximately 81% of the loan portfolio carries a floating rate. Floating rate loans and loans with contractual maturities of one year or less comprise approximately 88% of the total loan portfolio.

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

As of June 30, 2005, commercial loans were 63.75% (81.32% of which is collateralized by real estate) and consumer loans were 12.11% (65.85% of which is collateralized by real estate) of the $7.12 billion loan portfolio-net. This has enabled Westernbank to shift its asset composition to assets with shorter maturities and greater repricing flexibility. The Company has also continued to diversify Westernbank’s sources of revenue, while maintaining its status as a secured lender, with approximately 84% of its loans collateralized by real estate as of June 30, 2005. At June 30, 2005, Westernbank Business Credit (asset-based lending, commercial loans principally secured by real estate (56% of them), accounts receivable, inventory and equipment) and the Expresso of Westernbank (generally unsecured consumer lending) divisions loan portfolios amounted to $1.12 billion and $139.6 million, respectively. At June 30, 2005, the average yield on Westernbank Business Credit division asset-based loans portfolio was 6.82%, while for the Expresso of Westernbank division loans portfolio, the average yield was 22.68%.

~~The~~Financial ~~following~~Assets ~~table~~and ~~sets~~Liabilities ~~forth~~Recorded ~~the~~at ~~composition~~Fair ofValue ~~Westernbank’s~~on ~~loans~~a ~~portfolio~~Recurring ~~at the dates~~Basis ~~indicated.~~

	June 30, 2005						December 31, 2004
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Residential real estate:
Mortgage, mainly 1-4 family residences	$	1,415,198			19.9	%	$	902,937			15.2	%
Construction		386,438			5.4			328,145			5.5
Commercial, industrial and agricultural (1):
Real estate		3,688,977			51.9			3,154,679			53.1
Business and others		847,364			11.9			768,604			12.9
Consumer and others (2)		861,865			12.1			866,934			14.6
Total loans		7,199,842			101.2			6,021,299			101.3
Allowance for loan losses		(84,442	)		(1.2	)		(80,066	)		(1.3	)
Loans — net	$	7,115,400			100.0	%	$	5,941,233			100.0	%

The tables below presents the balance of assets and liabilities measured at fair value on a recurring basis, including financial liabilities for which the Company has elected the fair value option as of June 30, 2009 and December 31, 2008:

(1)	Includes $1.12 billion and $831.1 million at June 30, 2005 and December 31, 2004, respectively, of Westernbank Business Credit division outstanding loans.
	Level 1		Level 2		Level 3		Total
(2)	Includes $139.6 million and $144.0 million at June 30, 2005 and December 31, 2004, respectively, of Expresso of Westernbank division outstanding loans.
June 30, 2009	(In thousands)
Financial Assets:
Investment securities available for sale (1)	$	72,806	$	3,736,129	$	—	$	3,808,935
Residential mortgage loans held for sale (1)		—		15,315		—		15,315
Derivatives, included in other assets (1)		—		15,687		—		15,687
Mortgage servicing rights, included in other assets (1)		—		—		3,334		3,334
Financial Liabilities:
Brokered Deposits (2)		—		14,312		—		14,312
Derivatives, included in deposits (1)		—		3,353		—		3,353
Derivatives, included in accrued expenses and other liabilities (1)		—		8,671		—		8,671

Residential real estate mortgage loans are mainly comprised of loans secured by first mortgages on one-to-four family residential properties. At June 30, 2005, residential mortgage loans included $11.9 million of mortgages insured or guaranteed by government agencies of the United States or Puerto Rico.


	Level 1		Level 2		Level 3		Total
December 31, 2008	(In thousands)
Financial Assets:
Investment securities available for sale (1)	$	2,912	$	3,667,329	$	—	$	3,670,241
Residential mortgage loans held for sale (1)		—		1,270		—		1,270
Derivatives, included in other assets (1)		—		18,371		—		18,371
Mortgage servicing rights, included in other assets (1)		—		—		3,270		3,270
Financial Liabilities:
Brokered Deposits (2)		—		109,944		—		109,944
Derivatives, included in deposits (1)		—		6,986		—		6,986
Derivatives, included in accrued expenses and other liabilities (1)		—		11,254		—		11,254

Westernbank originated $836.5 million of commercial real estate loans, including asset-based and construction loans, during the six month period ended June 30, 2005. At June 30, 2005, commercial real estate loans totaled $3.69 billion. In general, commercial real estate loans are considered by management to be of somewhat greater risk of uncollectibility than residential lending because such loans are typically larger in size and more risk is concentrated in a single borrower. In addition, the borrower’s ability to repay a commercial loan or a construction loan depends, in the case of a commercial loan, on the successful operation of the business or the property securing the loan and, in the case of a construction loan, on the successful completion and sale or operation of the project. Substantially all of the Company’s borrowers and properties and other collateral securing the commercial, real estate mortgage and consumer loans are located in Puerto Rico. These loans may be subject to a greater risk of default if the Puerto Rico economy suffers adverse economic, political or business developments, or if natural disasters affect Puerto Rico. At June 30, 2005, the Company maintained its status as a secured lender, with approximately 84% of its loans collateralized by real estate.


(1)		Carried at fair value prior to the adoption of SFAS No. 159.

(2)		Represents items to which the Company has elected the fair value option under SFAS No. 159.

~~The~~Level ~~portfolio~~3 ofassets ~~Consumer~~measured ~~and~~at ~~Other~~fair ~~loans~~value on a recurring basis correspond to the mortgage servicing rights, which amounted to $3,334,000 and $3,270,000 at June 30, ~~2005~~2009 and December 31, 2008, ~~consisted~~respectively ofFor ~~consumer~~the ~~loans~~six ofmonths ~~$861.9 million~~ended June 30, of2009 ~~which~~and ~~$567.5 million~~2008 ~~are~~the ~~secured~~Company bycapitalized ~~real~~mortgage servicing ~~estate~~rights amounting to $266,000 and $~~264.9 million~~225,000, ~~are~~respectively, ~~unsecured~~and ~~consumer~~recognized an amortization ~~loans~~expense ~~(consisting~~of them of $~~139~~202,000 and $143,000, respectively.~~6 million~~ ofThe ~~Expresso~~carrying amount of ~~Westernbank~~mortgage ~~division~~servicing rights, ~~unsecured~~which ~~loans~~is ~~portfolio~~evaluated periodically for impairment, ~~credit~~ ~~card~~approximates ~~loans~~the offair ~~$51.6 million~~value ~~and~~(fair ~~other~~value ~~consumer~~is estimated ~~loans~~considering ofprices ~~$73.7 million~~for similar assets). ~~and~~In ~~loans~~2008, ~~secured~~there ~~by deposits~~were inno ~~Westernbank~~level ~~totaling~~3 ~~$29~~liabilities measured at fair value.~~5 million.~~

There were no transfers in and/or out of Level 3 for financial instruments recorded at fair value on a recurring basis during the three and six moths ended June 30, 2009 and 2008.

Financial Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from

application of lower-of-cost-or-market accounting or write-downs of individual assets. The valuation ~~following~~methodologies ~~table~~used ~~summarizes~~to ~~the~~measure ~~contractual~~these fair value adjustments are described above. For ~~maturities~~assets ofmeasured ~~Westernbank’s~~at ~~total~~fair ~~loans~~value ~~for~~on a nonrecurring basis in 2009 and 2008, that were still held on the condensed ~~periods~~statements ~~indicated~~of financial condition at ~~June 30~~period end, ~~2005.~~the ~~Contractual~~following table provides the level ~~maturities~~of dovaluation ~~not~~assumptions ~~necessarily~~used ~~reflect~~to determine each adjustment and the ~~actual~~carrying ~~term~~value of athe ~~loan~~related individual assets or portfolios at June 30, ~~including~~2009 ~~prepayments~~and December 31, 2008.

			MATURITIES
	Carrying Value
					After one year to five years				After five years
June 30, 2009	Level 1		Level 2		Level 3		Valuation Allowance
			~~(In thousands)~~		(In thousands)
	Balance
Assets:
	outstanding		One year or		Fixed interest		Variable interest		Fixed interest		Variable interest
Loans receivable (1)	$	—	$	—	$	758,707	$	97,881
	at June 30, 2005		less		rates		rates		rates		rates
Foreclosed real estate held for sale (2)		—		—		21,411		3,267
Residential real estate:
Mortgage	$	1,415,198	$	7,107	$	13,434	$	41	$	180,643	$	1,213,973	(1)
Construction		386,438		195,357		—		191,081		—		—
Commercial, industrial and agricultural:
Real Estate		3,688,977		1,003,355		320,704		742,679		65,787		1,556,452
Business and other		847,364		242,152		38,794		435,904		6,908		123,606
Consumer and other		861,865		118,609		178,587		12,536		107,237		444,896
Total	$	7,199,842	$	1,566,580	$	551,519	$	1,382,241	$	360,575	$	3,338,927

(1) Includes $1.13 billion of purchased fixed rate loans in which seller guarantees the Company a return at a floating rate of interest (three month LIBOR plus a spread). See Note 10 — On Balance Sheet Derivative Instruments and Hedging Activities — Notes to Consolidated Financial Statements (unaudited).


	Carrying Value
December 31, 2008	Level 1		Level 2		Level 3		Valuation Allowance
					(In thousands)
Assets:
Loans receivable (1)	$	—	$	—	$	772,423	$	128,983
Foreclosed real estate held for sale (2)		—		—		10,030		1,341

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


(1)		Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral in accordance with the provisions of SFAS No. 114. The fair values are derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g. age and condition), which are not market observable and have become significant to the fair value determination.

(2)		The fair value is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g. absorption rates), which are not market observable. Valuation allowance is based on market valuation adjustments after the transfer from the loan portfolio to the foreclosed real estate held for sale portfolio.

~~Westernbank originates loans in accordance with written, non-discriminatory underwriting standards and loan origination procedures prescribed in the Board of Directors approved loan policies~~18. ~~Detailed~~ ~~loan~~SEGMENT ~~applications are obtained to determine the borrower’s repayment ability. Applications~~INFORMATION are verified through the use of credit reports, financial statements and other confirmation procedures. Property valuations by independent appraisers approved by the Board of Directors are required for mortgage and all real estate loans.

~~Westernbank~~The Company’s ~~Senior~~management ~~Credit~~monitors ~~Committee~~and ~~approval~~manages isthe ~~required~~financial ~~for~~performance ~~all~~of ~~loans~~three inreportable business ~~excess~~segments, the traditional banking operations of ~~$5.0 million~~Westernbank Puerto Rico, the activities of ~~($15.0 million~~the indivision known as Westernbank International, which includes the ~~case~~activities of Westernbank Financial ~~Business~~Center ~~Credit~~Corp. ~~Division~~(“Westernbank International”). ~~The~~and ~~Senior~~the ~~Credit~~activities ~~Committee~~of the Asset-Based Lending ~~also~~Unit, ~~reviews~~which ~~and~~specializes ~~ratifies~~in ~~all~~asset-based ~~loans~~commercial ~~from~~business $1lending.~~0 million~~ toOther ~~$5.0 million~~operations ~~approved~~of bythe ~~Westernbank’s~~Company ~~regional~~not ~~credit~~reportable ~~committees.~~in ~~The~~those ~~Senior~~segments ~~Credit~~include: ~~Committee~~Westernbank isTrust ~~composed~~Division, ofwhich aoffers ~~majority~~trust ofservices; Westernbank ~~the~~International ~~members~~Trade ~~of the~~Services ~~Company’s~~Division, ~~Board~~which ofspecializes ~~Directors~~in international trade products and ~~senior~~services; ~~lending~~SRG ~~officers~~Net, Inc., ~~All~~which ~~loans~~operates inan ~~excess~~electronic offunds ~~$5.0 million~~transfer network; ~~($15~~Westernbank Insurance Corp.~~0 million~~, ~~for~~which ~~Westernbank~~operates ~~Business~~a ~~Credit~~general ~~Division)~~insurance ~~approved~~agency; byWesternbank World Plaza, Inc., which operates the ~~Senior~~Westernbank ~~Credit~~World ~~Committee~~Plaza, ~~are~~a ~~also~~23-story ~~reviewed~~office ~~and~~building ~~ratified~~located byin Hato Rey, Puerto Rico; and the ~~Board~~transactions of ~~Directors.~~the ~~All~~parent company ~~loans~~only, inwhich ~~excess~~mainly consist of ~~$50.0 million require~~other income related to the ~~approval~~equity ofin the ~~Board~~net income (loss) of ~~Directors~~its wholly-owned subsidiaries.

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

~~Westernbank~~Management ~~originates~~determined ~~most~~the ofreportable ~~its~~segments ~~residential~~based ~~real~~on ~~estate~~the ~~loans~~internal asreporting ~~conforming~~used ~~loans,~~to ~~eligible for~~evaluate ~~sale~~performance inand ~~the~~to ~~secondary~~assess ~~market.~~where ~~The loan-~~to~~-value~~ ~~ratio~~allocate atresources. ~~the~~Other ~~time~~factors ofsuch ~~origination~~as onthe ~~residential~~Company’s ~~mortgages~~organizational isstructure ~~generally~~by ~~75%~~divisions, ~~except~~nature ~~that~~of ~~Westernbank~~the ~~may~~products, ~~lend~~distribution upchannels, toand ~~90%~~the economic characteristics of the ~~lower~~products ofwere also considered in the ~~purchase~~determination of the ~~price~~reportable orsegments. ~~appraised~~The ~~value~~Company ofevaluates ~~residential~~performance ~~properties~~based ifon ~~private~~net ~~mortgage~~interest ~~insurance~~income isand ~~obtained~~other income. byOperating expenses and the ~~borrower~~ provision for ~~amounts~~income intaxes ~~excess~~are ofanalyzed ~~80%~~on a combined basis.

Westernbank ~~originates~~Puerto ~~fixed~~Rico’s ~~and~~traditional ~~adjustable~~banking ~~rate~~operations ~~residential~~consist ~~mortgage~~of ~~loans~~Westernbank’s ~~secured~~retail operations, bysuch aas ~~first mortgage~~its onbranches, including the ~~borrower’s~~branches ~~real~~of ~~property~~the Expresso division, ~~payable~~together inwith consumer ~~monthly~~loans, ~~installments~~mortgage ~~for~~loans, ~~terms~~commercial ~~ranging~~loans ~~from ten~~(excluding tothe ~~forty~~asset-~~five~~based ~~years.~~lending ~~Adjustable~~operations), investments ~~rates~~(treasury) and ~~are~~deposit ~~indexed~~products. toConsumer ~~specified~~loans ~~prime~~include orloans ~~LIBOR~~such ~~rate.~~as ~~All 30 year~~personal, ~~conforming~~collateralized ~~mortgages~~personal ~~are~~loans, ~~originated~~credit ~~with~~cards, ~~the~~and ~~intent~~small ~~to sell~~loans. InCommercial ~~addition~~products toconsist ~~its residential loan~~of ~~originations,~~commercial ~~Westernbank~~loans ~~also~~including ~~purchases~~commercial ~~residential~~real ~~mortgage~~estate, ~~loans~~unsecured ~~from~~commercial ~~other~~and ~~mortgage~~construction ~~originators in Puerto Rico~~loans.

Westernbank ~~originates~~International ~~primarily~~operates ~~variable~~as ~~and~~an ~~adjustable~~IBE ~~rate~~under the International Banking Center Regulatory Act. Westernbank Financial Center Corp. was incorporated to carry out commercial ~~business~~lending and ~~real estate~~other ~~loans~~related activities in the United States of America and commenced operations in February 2007. The operations of Westernbank ~~also~~Financial ~~makes~~Center ~~real~~Corp, ~~estate~~was ~~construction~~largely ~~loans~~inactive, ~~subject~~and towas ~~firm~~closed ~~permanent~~during ~~financing~~the ~~commitments~~third quarter of 2008. Westernbank International’s business activities consist of commercial banking and related services, and treasury and investment activities outside of Puerto Rico. As of June 30 2009 and December 31, 2008, and for the three and six months ended June 30, ~~2005~~2009 and 2008, substantially all of Westernbank International’s ~~commercial~~business ~~loan~~activities ~~portfolio~~consisted ~~had~~of ainvestments ~~total delinquency~~in ~~ratio,~~securities ~~including~~by the ~~categories~~U.S. ofGovernment ~~60 days~~or U.S. sponsored agencies and ~~over,~~money market instruments with entities located in the United States of 0America.~~67%~~ ~~(less~~Investment ~~than~~securities ~~1%),~~held ~~compared~~by Westernbank International amounted to 0$1.~~55% (less~~6 billion ~~than~~and $1%).9 billion at June 30, 2009 and December 31, ~~2004~~2008, respectively. ~~For~~These ~~further~~securities ~~explanation~~principally onconsisted ~~the~~of ~~delinquency~~investment ~~ratio~~in ofU.S. ~~the~~Government agencies, ~~Company~~GNMA, FHLMC and FNMA. There are no investments in residual tranches. At June 30, 2009 and December 31, 2008, management concluded that there was no other-than-temporary impairment on Westernbank International’s ~~commercial~~investment ~~loan~~securities portfolio ~~refer~~(see Note 6). Money market instruments amounted to $779,000 ~~section~~and ~~“Non-performing~~$1.3 million ~~loans~~at June 30, 2009 and ~~foreclosed~~December 31, ~~real~~2008, respectively. Money market ~~estate~~instruments ~~held~~include ~~for~~interest ~~sale”~~bearing deposits with other financial institutions.

~~Westernbank~~Intersegment ~~offers~~sales different types of consumer loans in order to provide a full range of financial services to its customers. Within the different types of consumer loans offered by Westernbank, there are various types of secured and ~~unsecured consumer loans with varying amortization schedules. In addition~~transfers, ~~Westernbank~~if ~~makes fixed-rate residential second mortgage consumer loans. In July 2002~~any, ~~Westernbank~~are ~~launched~~accounted afor ~~new~~as ~~banking~~if ~~division~~the ~~focused~~sales onor ~~offering~~transfers ~~consumer~~were ~~loans through~~to 19third ~~full-service branches~~parties, ~~called~~that ~~“Expresso of Westernbank”~~is, ~~denoting~~at ~~the~~current ~~branches’~~market ~~emphasis on small, unsecured consumer loans up to $15,000 and collateralized consumer loans up to $150,000~~prices.

~~Westernbank~~Substantially ~~offers~~all ~~the service~~ of ~~VISA™~~the ~~and~~Company’s ~~MasterCard™~~business ~~credit~~activities ~~cards.~~are Atwith ~~June 30,~~customers ~~2005,~~located ~~there~~in ~~were~~the United ~~approximately~~States ~~23,694~~of ~~outstanding~~America ~~accounts,~~and ~~with~~its anterritories ~~aggregate~~(mainly ~~outstanding~~in ~~balance~~the Commonwealth of ~~$51~~Puerto Rico).~~6 million~~ In addition, all ~~and~~of ~~unused~~the ~~credit~~Company’s ~~card~~long-lived ~~lines~~assets ~~available~~are oflocated ~~$91~~in Puerto Rico.~~4 million.~~

InThe ~~connection~~financial ~~with~~information ~~all~~presented ~~consumer~~below ~~loans~~was ~~originated,~~derived ~~Westernbank’s~~from ~~underwriting standards include a determination of~~ the ~~applicants’~~internal ~~payment~~management ~~history on other debts and an assessment of the ability to~~accounting ~~meet~~system ~~existing obligations~~ and ~~payments~~does onnot ~~the~~necessarily ~~proposed~~represent ~~loan.~~each ~~As of June 30, 2005, Westernbank~~segment’s ~~consumer~~ ~~loan~~financial ~~portfolio,~~condition ~~including the Expresso of Westernbank loan portfolio, had a total delinquency ratio, including the categories of 60 days~~ and ~~over,~~results of ~~1.35%, an increase of 32 basis~~ ~~points~~operations ~~when~~as ~~compared~~if tothese ~~1.03%~~were atindependent ~~December 31, 2004~~entities. ~~The increase in the delinquency ratio from 2004~~ ~~to 2005 was mainly due to delinquencies in regular consumer loans past due over 90 days which are collateralized by real estate properties.~~

Westernbank has 84% of its loan portfolio as of June 30, 2005, secured by real estate. Our combined delinquency on all portfolios for the categories of 60 days and over continues to be below our benchmark of 1% for both periods, being 0.65% at June 30, 2005, and 0.57% at December 31, 2004.


	As of and for the six months ended
	June 30, 2009
	Westernbank			Westernbank		Asset-Based		Total major			Other
	Puerto Rico			International		Lending Unit		segments			Segments			Eliminations			Total
	(In thousands)

Interest income:
Consumer loans	$	34,074		$	—	$	—	$	34,074		$	—		$	—		$	34,074
Construction loans		19,902			—		—		19,902			—			—			19,902
Commercial loans		121,402			—		24,119		145,521			—			—			145,521
Mortgage loans		36,014			—		—		36,014			—			—			36,014
Treasury and investment activities		48,494			29,476		—		77,970			3,010			(4,410	)		76,570

Total interest income		259,886			29,476		24,119		313,481			3,010			(4,410	)		312,081
Interest expense		219,850			22,713		17,630		260,193			165			(4,410	)		255,948

Net interest income		40,036			6,763		6,489		53,288			2,845			—			56,133

Credit (provision) for loan losses		(20,291	)		—		312		(19,979	)		—			—			(19,979	)

Noninterest income, net:
Service and other charges on loans		3,702			—		832		4,534			—			—			4,534
Service charges on deposit accounts		4,532			—		—		4,532			—			—			4,532
Other fees and commisions		7,499			2		—		7,501			825			(133	)		8,193
Trust account fees		—			—		—		—			1,050			(58	)		992
Insurance commission fees		—			—		—		—			892			—			892
Net gain on derivative instruments and deposits measured at fair value		746			—		—		746			—			—			746
Net gain on sales and valuation of loans held for sale, securities and other assets		32,603			4,677		—		37,280			—			—			37,280

Total noninterest income		49,082			4,679		832		54,593			2,767			(191	)		57,169

Equity in earnings (loss) of subsidiaries		268			—		—		268			(4,188	)		3,920			—

Total net interest income and noninterest income	$	69,095		$	11,442	$	7,633	$	88,170		$	1,424		$	3,729		$	93,323


Total assets	$	13,596,097		$	1,689,067	$	741,773	$	16,026,937		$	1,677,291		$	(3,313,980	)	$	14,390,248

Non-performing loans and foreclosed real estate held for sale


	For the three months ended
	June 30, 2009
	Westernbank		Westernbank		Asset-Based		Total major		Other
	Puerto Rico		International		Lending Unit		segments		Segments		Eliminations		Total
	(In thousands)

Interest income:
Consumer loans	$	17,170	$	—	$	—	$	17,170	$	—	$	—	$	17,170
Construction loans		9,797		—		—		9,797		—		—		9,797
Commercial loans		58,262		—		12,458		70,720		—		—		70,720
Mortgage loans

Filing Compare · W HOLDING CO INC