WHI W Holding Company Incorporated New Common Stock ($1.00 Par Value)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2009

Commission File Number 001-16799

W HOLDING COMPANY, INC.

(Exact name of Registrant as Specified in its Charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 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 o       NO þ

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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
Condensed Consolidated Statements of Financial Condition as of September 30, 2009 and December 31, 2008			1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008			2
Condensed Consolidated Statements of Changes in Stockholders’ Equity and Condensed Consolidated Statements of Comprehensive Income (Loss) for the Nine Months Ended September 30, 2009 and 2008			3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008			4
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			61
Item 3. Quantitative and Qualitative Disclosures About Market Risk			111
Item 4T. Controls and Procedures			111
PART II OTHER INFORMATION:
Item 1. Legal Proceedings			113
Item 1A. Risk Factors			113
Item 6. Exhibits			114
SIGNATURES			115
EX-31.1
EX-31.2
EX-32.1
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)

		September 30,				December 31,
		2009				2008
ASSETS
Cash and due from banks		$	52,484			$	68,368
Money market instruments:
Federal funds sold			49,008				—
Interest-bearing deposits in banks			417,709				1,096,465
Investment securities available for sale, at fair value with an amortized cost of $2,504,839 in 2009 and $3,713,645 in 2008			2,533,849				3,670,241
Investment securities held to maturity, at amortized cost with a fair value of $563,710 in 2009 and $1,020,837 in 2008			575,251				1,037,970
Securities sold but not yet delivered			624,501				—
Federal Home Loan Bank stock, at cost			52,252				64,190
Residential mortgage loans held for sale, at lower of cost or fair value			46,681				18,871
Loans, net of allowance for loan losses of $225,502 in 2009 and $282,089 in 2008			8,482,884				8,667,717
Accrued interest receivable			42,344				56,224
Foreclosed real estate held for sale, net of allowance of $4,045 in 2009 and $3,104 in 2008			119,308				98,570
Other real estate held for sale, net			—				5,462
Premises and equipment, net			128,837				120,796
Deferred income taxes, net			144,724				155,661
Other assets			219,785				222,362
TOTAL		$	13,489,617			$	15,282,897
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing		$	295,989			$	250,380
Interest-bearing and related accrued interest payable, includes $14,482 in 2009 and $109,944 in 2008 of deposits measured at fair value			9,073,811				10,751,793
Total deposits			9,369,800				11,002,173
Repurchase agreements			2,657,725				3,204,142
Advances from Federal Home Loan Bank			392,000				42,000
Mortgage note payable			—				34,932
Advances from borrowers for taxes and insurance			10,096				11,759
Accrued expenses and other liabilities			77,871				72,524
Total liabilities			12,507,492				14,367,530
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
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; issued and outstanding 3,297,815 shares in 2009 and 3,298,138 shares in 2008			3,298				3,298
Paid-in capital			870,679				870,450
Retained earnings:
Reserve fund			79,070				78,389
Accumulated losses			(13,298	)			(13,939	)
Accumulated other comprehensive income (loss), net of income tax			24,219				(40,988	)
Total stockholders’ equity			982,125				915,367
TOTAL		$	13,489,617			$	15,282,897

See notes to condensed consolidated financial statements.

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
INTEREST INCOME:
Loans, including loan fees		$	111,785			$	141,897			$	347,296			$	440,485
Investment securities			1,680				19,596				6,892				88,624
Mortgage-backed securities			37,317				37,639				106,423				78,609
Money market instruments			1,175				4,513				3,427				17,420
Total interest income			151,957				203,645				464,038				625,138
INTEREST EXPENSE:
Deposits			83,611				112,536				281,238				342,363
Federal funds purchased and repurchase agreements			20,890				52,051				77,968				165,548
Advances from Federal Home Loan Bank			1,074				630				2,317				2,351
Total interest expense			105,575				165,217				361,523				510,262
NET INTEREST INCOME			46,382				38,428				102,515				114,876
PROVISION FOR LOAN LOSSES			12,366				15,382				32,345				44,685
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			34,016				23,046				70,170				70,191
NONINTEREST INCOME:
Service and other charges on loans			1,934				2,549				6,467				7,751
Service charges on deposit accounts			2,159				2,851				6,691				8,903
Other fees and commissions			4,506				5,504				14,583				16,993
Net gain on derivative instruments and deposits measured at fair value			664				1,622				1,410				2,844
Net gain (loss) on sales and valuation of loans held for sale, securities, and other assets			30,072				(2,655	)			67,353				11,674
Total noninterest income			39,335				9,871				96,504				48,165
NONINTEREST EXPENSES:
Salaries and employees’ benefits			14,157				17,064				42,801				49,926
Equipment			3,354				3,337				9,486				10,136
Deposits insurance premium and supervisory examination			12,218				3,957				40,785				10,578
Occupancy			2,431				2,601				6,736				7,903
Advertising			1,604				1,650				5,289				5,943
Printing, postage, stationery and supplies			971				976				2,727				3,168
Telephone			663				784				1,976				2,364
Net loss from operations of foreclosed real estate held for sale			974				107				1,508				216
Municipal taxes			2,862				2,726				8,386				7,510
Professional fees			4,443				5,848				11,892				13,943
Provision for claim receivable			—				485				—				485
Other			10,451				6,531				21,707				20,679
Total noninterest expenses			54,128				46,066				153,293				132,851
INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES			19,223				(13,149	)			13,381				(14,495	)
PROVISION (CREDIT) FOR INCOME TAXES			7,886				(2,070	)			6,758				(37,126	)
NET INCOME (LOSS)			11,337				(11,079	)			6,623				22,631
LESS DIVIDENDS TO PREFERRED STOCKHOLDERS			—				9,228				4,614				27,684
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	11,337			$	(20,307	)		$	2,009			$	(5,053	)
BASIC EARNINGS (LOSS) PER COMMON SHARE		$	3.44			$	(6.16	)		$	0.61			$	(1.53	)
DILUTED EARNINGS (LOSS) PER COMMON SHARE		$	3.40			$	(6.16	)		$	0.61			$	(1.53	)

See notes to condensed 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)

		Nine Months Ended
		September 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			229				231
Balance at end of period			870,679				870,359
Reserve fund:
Balance at beginning of year			78,389				78,389
Transfer from undivided profits			681				2,645
Balance at end of period			79,070				81,034
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			6,623				22,631
Cash dividends on common stock			(687	)			(6,182	)
Cash dividends on preferred stock			(4,614	)			(27,684	)
Transfer to reserve fund			(681	)			(2,645	)
Balance at end of period			(13,298	)			22,786
Accumulated other comprehensive income (loss), net of income tax:
Balance at beginning of year			(40,988	)			(5,119	)
Other comprehensive income (loss)			65,207				(113,382	)
Balance at end of period			24,219				(118,501	)
Total Stockholders’ Equity		$	982,125			$	877,133
Comprehensive Income (Loss):
Net income		$	6,623			$	22,631
Other comprehensive income (loss):
Unrealized net gains (losses) on securities available for sale:
Unrealized gains (losses) arising during the period			138,251				(124,361	)
Reclassification adjustment for losses (gains) included in net income (loss)			(65,837	)			53
			72,414				(124,308	)
Unrealized net gains on cash flow hedge derivatives — (fixed — price sale contracts):
Unrealized losses arising during the period			(1,760	)			—
Reclassification adjustment for losses (gains) included in net income (loss)			—				—
			(1,760	)			—
Sub-total			70,654				(124,308	)
Income tax effect			(5,447	)			10,926
Other comprehensive income (loss)			65,207				(113,382	)
Total Comprehensive Income (Loss)		$	71,830			$	(90,751	)

See notes to condensed consolidated financial statements.

W HOLDING COMPANY, INC. AND SUBISIDIARIES

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

		Nine Months Ended
		September 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	6,623			$	22,631
Adjustments to reconcile net income to net cash used in operating activities:
Provision (credit) for:
Loan losses			32,345				44,685
Unfunded loan commitments			89				—
Claim receivable			—				485
Deferred income tax			5,490				(4,762	)
Foreclosed real estate held for sale			941				63
Depreciation and amortization of:
Premises and equipment			7,043				7,437
Mortgage servicing rights			276				208
Stock-based compensation expense			229				231
Amortization of premium (discount)-net, on:
Investment securities available for sale			6,559				(1,072	)
Investment securities held to maturity			195				(15,875	)
Mortgage-backed securities held to maturity			528				33
Loans			14				18
Amortization of discount on deposits			1,771				2,039
Amortization of net deferred loan origination fees			(6,684	)			(6,281	)
Net loss (gain) on sale and in valuation of:
Investment securities available for sale			(65,837	)			53
Called investment securities held to maturity			—				2,814
Mortgage loans held for sale			(836	)			(627	)
Derivative instruments			(253	)			(2,801	)
Deposits measured at fair value			(694	)			3,266
Foreclosed real estate held for sale			229				(238	)
Other real estate held for sale			(671	)			(13,746	)
Loans			—				261
Premises and equipment			(8	)			(31	)
Other assets			—				(2,299	)
Capitalization of servicing rights			(443	)			(461	)
Originations of mortgage loans held for sale			(62,130	)			(41,175	)
Proceeds from sales of mortgage loans held for sale			35,156				32,363
Decrease (increase) in:
Trading securities			—				4,184
Accrued interest receivable			13,880				32,476
Other assets			(3,245	)			(11,258	)
Increase (decrease) in:
Accrued interest on deposits and borrowings			(72,685	)			(41,788	)
Other liabilities			10,532				(35,607	)
Net cash used in operating activities			(91,586	)			(24,774	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits in banks			678,756				(111,586	)
Net increase in federal funds sold and resell agreements			(49,008	)			(287,200	)
Cancellation of resell agreements over three months			—				547,800
Investment securities available for sale:
Maturities, prepayments and calls			472,494				1,157,864
Proceeds from sales			2,522,338				98,343
Purchases			(2,351,249	)			(4,670,210	)
Investment securities held to maturity:
Maturities, prepayments and calls			372,595				37,175,008
Purchases			—				(33,282,682	)
Mortgage-backed securities held to maturity:
Maturities, prepayments and calls			89,402				6,786
Loans:
Sales			—				12,783
Loan principal collections, net of originations			133,118				209,958
Purchases of derivative options			(2,204	)			(507	)
Proceeds from derivative instruments			4,822				9,124
Cash received on terminated swaps			404				—
Proceeds from sales of foreclosed real estate held for sale			4,128				906
Proceeds from sales of other real estate held for sale			1,875				19,675
Additions to premises and equipment			(10,142	)			(10,262	)
Proceeds from sales of premises and equipment			8				31
Proceeds from sales of other assets			—				2,299
Purchases of Federal Home Loan Bank stock			(44,146	)			(50,740	)
Redemptions of Federal Home Loan Bank stock			56,084				30,604
Net cash provided by investing activities			1,879,275				857,994
Forward		$	1,787,689			$	833,220

See notes to condensed consolidated financial statements.

(Continued)

W HOLDING COMPANY, INC. AND SUBSIDIARIES

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

		Nine Months Ended
		September 30,
		2009				2008
Forward		$	1,787,689			$	833,220
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits			(1,558,506	)			582,383
Net increase in federal funds purchased and repurchase agreements			9,583				413,250
Repurchase agreements with original maturities over three months:
Payments			—				(1,803,575	)
Cancellations			(556,000	)			—
Net increase (decrease) in advances from Federal Home Loan Bank			350,000				(60,000	)
Repayments of mortgage note payable			(34,932	)			(392	)
Cash paid on matured embedded derivatives			(4,529	)			(8,578	)
Net decrease in advances from borrowers for taxes and insurance			(1,663	)			(2,423	)
Dividends paid			(7,526	)			(35,791	)
Net cash used in financing activities			(1,803,573	)			(915,126	)
NET DECREASE IN CASH AND DUE FROM BANKS			(15,884	)			(81,906	)
CASH AND DUE FROM BANKS, BEGINNING OF YEAR			68,368				153,473
CASH AND DUE FROM BANKS, END OF PERIOD		$	52,484			$	71,567
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and other borrowings		$	420,426			$	536,991
Income taxes			864				12,300
Noncash activities (see Note 9):
Accrued dividends payable			—				2,225
Net change in other comprehensive income (loss)			65,207				(113,382	)
Securities sold but not yet delivered			624,501				—
Mortgage loans securitized and transferred to:
Trading securities			—				4,184
Transfer from :
Loans to foreclosed real estate held for sale			27,307				89,632
Premises and equipment to other real estate held for sale			—				12,181
Other real estate held for sale to premises and equipment			4,258				—
Undivided profits to reserve fund			681				2,645
Mortgage loans originated to finance the sale of foreclosed real estate held for sale			1,267				1,245
Unpaid additions to premises and equipment			821				226
Effect of derivative transactions:
Decrease in other assets			2,459				9,894
Decrease in deposits			(161	)			(3,891	)
Decrease in other liabilties			(3,245	)			(5,538	)

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 bank holding company offering a full range of financial services. The business of the Company is conducted through its wholly-owned commercial bank subsidiary, Westernbank Puerto Rico (“Westernbank” or the “Bank”). The Company was organized under the laws of the Commonwealth of Puerto Rico in February 1999 to become the bank holding company of Westernbank. Westernbank is a commercial bank chartered under the laws of the Commonwealth of Puerto Rico effective November 30, 1994. Originally, Westernbank was organized as a federally chartered mutual savings and loan association in 1958, and in January 1984 became a federal mutual savings bank. In February 1985, the savings bank was converted to the stock form of ownership. Westernbank offers a full range of business and consumer financial services, including banking, trust and brokerage services and placing insurances. On May 19, 2008, the Company contributed 100% of its ownership in Westernbank Insurance Corp. (“WIC”) to Westernbank. WIC is a general insurance agent placing property, casualty, life and disability insurances.

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

Westernbank operates through a network of 48 bank branches (including 10 Expresso of Westernbank branches) located throughout Puerto Rico, including 25 in the Western and Southwestern regions, 14 in the San Juan metropolitan area, 7 in the Northeastern region, and 2 in the Eastern region, and a website on the Internet. On October 3, 2008, the Congress of the United States of America approved the Emergency Economic Stabilization Act of 2008, pursuant to which among other things, the amount of deposit insurance provided by the Federal Deposit Insurance Corporation (the “FDIC”) was temporarily increased from $100,000 to $250,000 per depositor until December 31, 2009. On May 20, 2009, President Barack Obama signed legislation that extended this temporary increase to $250,000 through December 31, 2013. Westernbank’s deposits, including Individual Retirement Accounts (“IRAs”), are insured by the Deposit Insurance Fund (“DIF”), which is administered by the FDIC, up to $250,000 per depositor.

Westernbank’s traditional banking operations include retail operations, such as its branches, including the branches of the Expresso division, together with consumer loans, mortgage loans, commercial loans (excluding the Asset-Based Lending Unit operations), investments (treasury) and deposit products. Besides the traditional banking operations, at September 30, 2009, 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, known as the International Banking Center Regulatory Act, which offers commercial banking and related services, and treasury and investment activities outside of Puerto Rico;
	•		Westernbank Trust Division, which offers a full array of trust services;
	•		Expresso of Westernbank, a division which specializes in small, unsecured consumer loans up to $15,000 and real estate collateralized consumer loans up to $150,000;
	•		and Westernbank International Trade Services, established during the first quarter of year 2006, a division which specializes in international trade products and services.

In addition, Westernbank operates the Asset-Based Lending Unit, which specializes in commercial business loans secured principally by commercial real estate, accounts receivable, inventories and machinery and equipment.

Westernbank owns 100% of the voting shares of:

	•		Westernbank World Plaza, Inc. (“WWPI”), which owns and operates Westernbank World Plaza, a 23-story office building, including its related parking facility, located in Hato Rey, Puerto Rico, the main Puerto Rican business district.
	•		SRG Net, Inc., a Puerto Rico corporation that operates an electronic funds transfer network. The assets, liabilities, revenues and expenses of SRG Net, Inc. at September 30, 2009 and December 31, 2008, and for each of the three and nine months ended September 30, 2009 and 2008, were not significant.
	•		Westernbank Financial Center Corp (“WFCC”), which was incorporated under the laws of the State of Florida to conduct commercial lending and other related activities in the United States of America. WFCC commenced operations in February 2007, was largely inactive, and was closed during the third quarter of 2008. The assets, liabilities, revenues and expenses of WFCC as of and for the three and nine months ended September 30, 2008, were not significant.
	•		Westernbank Insurance Corp., a general insurance agent placing property, casualty, life and disability insurances. On May 19, 2008, the Company contributed 100% of its ownership in WIC to Westernbank. The assets, liabilities, revenues and expenses of WIC at September 30, 2009 and December 31, 2008, and for the three and nine months ended September 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) 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 September 30, 2009 and December 31, 2008, the consolidated results of operations for the three and nine months ended September 30, 2009 and 2008, and the consolidated changes in stockholders’ equity, comprehensive income (loss), and cash flows for the nine months ended September 30, 2009 and 2008. All significant

intercompany balances and transactions have been eliminated in the accompanying unaudited condensed 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 31, 2008, has been derived from the audited Consolidated Financial Statements of the Company. The results of operations for the three and nine months ended September 30, 2009 and 2008, and cash flows for the nine months ended September 30, 2009 and 2008, are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

FASB Accounting Standards Codification

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 — Generally Accepted Accounting Principles Amendments Based on Statement of Financial Accounting Standards No. 168 — The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”. This Update amends the FASB Accounting Standards Codification (“ASC”) for the issuance of Statement No. 168, which establishes 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. ASU No. 2009-01 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has incorporated the disclosure requirements of ASU No. 2009-01 by reference to the ASC in these Notes to the Company’s Condensed Consolidated Financial Statements.

Accounting Pronouncements Recently Adopted

In September 2006, the FASB issued authoritative guidance which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements (the “Fair Value Guidance”). The Fair Value Guidance emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability. This guidance clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset. Additionally, the Fair Value Guidance establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The adoption of this guidance on January 1, 2008 did not have a material impact on the Company’s consolidated financial position or results of operations. In February 2008, the FASB issued additional authoritative guidance which delayed the effective date of the Fair Value Guidance for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008. The adoption of this guidance for non-financial assets and non-financial liabilities at January 1, 2008, did not have a material impact on the Company’s condensed consolidated financial position or results of operations.

In October 2008, the FASB issued authoritative guidance which clarifies the application of the Fair Value Guidance in a market that is not active and illustrates key considerations in determining the fair value. The guidance was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of this guidance did not have any impact on the Company’s condensed consolidated financial statements.

In February 2007, the FASB issued authoritative guidance which 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. The guidance establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Eligible items that are measured at fair value must be displayed on the face of the statements of financial condition. The Company adopted this guidance on January 1, 2008 and recorded a cumulative effect adjustment of $5.3 million that was credited to retained earnings and decreased deposits, other assets and deferred income tax asset by $12.9 million, $4.2 million and $3.4 million, respectively. See Note 17.

In March 2008, the FASB issued authoritative guidance which enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under the existing guidance and its related interpretations, and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company early adopted the disclosure framework dictated by this guidance during 2008.

In April 2009, the FASB amended the existing guidance on the disclosure about fair values of financial instruments, which requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements, as well as annual financial statements. This FSB guidance reiterates that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional direction and utilizes a two-step process to determine whether there has been a significant decrease in the volume and level of activity for an asset or liability when compared with normal market activity for the asset or liability, and whether a transaction is not orderly. If it is determined that there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability, transactions or quoted prices may not be determinative of fair value. Accordingly, further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair. This guidance 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 this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued authoritative guidance amending the recognition and measurement guidance related to other-than-temporary impairment (“OTTI”) for debt securities. This guidance 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 guidance 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 guidance is effective for interim and annual reporting periods ending after June 15, 2009 and should be applied to existing and new investments held by an entity as of the beginning of the interim period in which it is adopted. The guidance also requires increased and more timely disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. This guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued authoritative guidance which requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. This guidance does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this guidance requires comparative disclosures only for periods ending subsequent to initial adoption. The Company adopted this guidance in the second quarter of 2009. See Note 17.

In May 2009, the FASB issued authoritative guidance which establishes the general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued. This guidance 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 this guidance should not result in significant changes in the subsequent events that the Company’s reports either through recognition or disclosure in the consolidated financial statements. This guidance 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 guidance became effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have any impact on the Company’s condensed consolidated financial statements.

In September 2009, the FASB updated the Codification to reflect SEC staff pronouncements on earnings-per-share calculations. According to the update, the SEC staff believes that when a public company redeems preferred shares, the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount on the balance sheet after issuance costs of the preferred stock should be added to or subtracted from net income before doing an earnings-per-share calculation. The SEC’s staff also 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 did not have a material impact on the Company’s condensed consolidated financial statements.

Accounting Pronouncements To Be Adopted

In June 2009, the FASB amended the existing guidance on the accounting for transfer of financial assets, which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This guidance 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 this guidance is not expected to have any effect on the Company’s condensed consolidated financial statements.

In June 2009, the FASB amended 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 this new guidance, the primary beneficiary of a VIE is defined as the enterprise that has both (1) the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. These amendments affect all entities currently within the scope of ASC Topic 810 Consolidation Variable Interest Entities (previously FIN No. 46(R)), as well as qualifying special-purpose entities (“QSPEs”) that are currently excluded from the scope of previous existing guidance. This guidance will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. This guidance will be effective as of the beginning of the first fiscal year that begins after November 15, 2009. The adoption of this guidance is not expected to have any effect on the Company’s condensed consolidated financial statements.

In August 2009, the FASB updated the Codification in connection with the fair value measurement of liabilities to clarify that in circumstances in which a quoted price in an active market for the identical 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 similar liabilities or 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 present value technique, or a market approach, such as a technique that is based on the amount at 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 this update also clarifies 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 clarifies that both a quoted price in 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, 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.

2. EARNINGS (LOSS) PER SHARE

In accordance with existing guidance, basic earnings per share is computed by dividing income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing income (loss) attributable to common stockholders as adjusted to add back dividends on convertible preferred stock, by the weighted-average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares represent assumed conversion of outstanding convertible preferred stock, which are determined using the if-converted method, and outstanding stock options, which are determined using the treasury stock method. The effect of convertible preferred stock (33,674 shares in the three and nine months ended September 30, 2009 and 2008, as adjusted to reflect the reverse stock split approved on November 7, 2008 and effective on December 1, 2008) was dilutive for the three months ended September 30, 2009 and antidilutive for the nine months ended September 30, 2009. Stock options outstanding at September 30, 2009 and 2008 were 113,335 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 the common stock.

Basic and diluted earnings (loss) per common share were computed as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Amounts in thousands, except per share data)
Basic and diluted earnings (loss) per common share:
Net income (loss)		$	11,337			$	(11,079	)		$	6,623			$	22,631
Less preferred stock dividends			—				9,228				4,614				27,684
Income (loss) attributable to common stockholders - basic			11,337				(20,307	)			2,009				(5,053	)
Plus convertible preferred stock dividends			34				—				—				—
Income (loss) attributable to common stockholders - diluted		$	11,371			$	(20,307	)		$	2,009			$	(5,053	)
Weighted average number of common shares outstanding during the period			3,298				3,298				3,298				3,298
Assumed conversion of preferred shares			34				—				—				—
Total			3,332				3,298				3,298				3,298
Basic earnings (loss) per common share		$	3.44			$	(6.16	)		$	0.61			$	(1.53	)
Diluted earnings (loss) per common share		$	3.40			$	(6.16	)		$	0.61			$	(1.53	)

3. DIVIDENDS DECLARED PER COMMON SHARE

The Company’s cash dividends per share declared for the nine months ended September 30, 2009 and 2008 were as follows:

RECORD DATE		PAYABLE DATE		AMOUNT PER SHARE (1)
2009
January 30, 2009		February 16, 2009			$0.2083
2008 (2)
January 31, 2008		February 15, 2008			$0.2083
February 28, 2008		March 15, 2008			0.2083
March 30, 2008		April 17, 2008			0.2083
April 30, 2008		May 15, 2008			0.2083
May 31, 2008		June 15, 2008			0.2083
June 29, 2008		July 17, 2008			0.2083
July 31, 2008		August 15, 2008			0.2083
August 31, 2008		September 17, 2008			0.2083
September 30, 2008		October 17, 2008			0.2083
Total					$1.8747

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 (“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.

4. ACCUMULATED OTHER COMPRENSIVE INCOME (LOSS), NET

Accumulated other comprehensive income (loss), net of income tax, consisted of the following:

		September 30,				December 31,
		2009				2008
		(In thousands)
Unrealized net gains (losses) on investment securities available for sale, net of income tax of $3,295,000 in 2009 and $2,415,000 in 2008		$	25,715			$	(40,988	)
Unrealized net losses on cash flow hedge derivatives (fixed-price sale contracts), net of income tax of $264,000 in 2009			(1,496	)			—
Total		$	24,219			$	(40,988	)

5. MONEY MARKET INSTRUMENTS

At September 30, 2009 and December 31, 2008, money market instruments included $417.7 million and $1.1 billion, respectively, in interest bearing deposits with other banks. At September 30, 2009 and December 31, 2008, the Company maintained $408.5 million and $1.1 billion, respectively, as interest-bearing deposit with the Federal Reserve Bank of New York. Restricted interest bearing deposits with other banks amounted to $3.6 million at September 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 September 30, 2009 and December 31, 2008.

The Company sells federal funds and enters into purchases of securities under agreements to resell the same securities (“resell agreements”). These agreements are classified as secured loans and are reflected as assets in the condensed consolidated statements of financial condition. At September 30, 2009, the Company had $49.0 million of federal funds sold outstanding. There were no such agreements outstanding at December 31, 2008.

The Company monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral when the fair value of the underlying collateral falls to less than the collateral requirement. The collateral requirement was equal to 102 percent of the related receivable, including interest. Securities purchased under resell agreements may be held in safekeeping, in the name of the Company, by Citibank N.A., the Company’s custodian, or held by the counterparty.

6. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses and fair value of investment securities were as follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
September 30, 2009		Cost				Gains				Losses				Value
		(In thousands)
Available for sale:
U.S. Government and agencies obligations (USGO’s)		$	48,965			$	197			$	701			$	48,461
Puerto Rico Government and agencies obligations (PRGO’s)			11,258				294				—				11,552
Subtotal			60,223				491				701				60,013
Mortgage-backed securities:
Government National Mortgage Association (GNMA) certificates			1,329,101				18,946				111				1,347,936
Collateralized mortgage obligations (CMO’s) issued and guaranteed by GNMA			757,537				19,520				—				777,057
CMO’s issued and guaranteed by Federal National Mortgage Association (FNMA)			343,291				—				7,734				335,556
CMO’s issued and guaranteed by Federal Home Loan Mortgage Corporation (FHLMC)			12,781				—				292				12,489
Subtotal			2,442,710				38,466				8,137				2,473,038
Equity securities — common stock			1,906				—				1,108				798
Total		$	2,504,839			$	38,957			$	9,946			$	2,533,849
Held to maturity:
PRGO’s		$	12,833			$	9			$	102			$	12,740
Corporate notes			21,436				—				7,461				13,975
Subtotal			34,269				9				7,563				26,715
Mortgage-backed securities:
GNMA certificates			5,010				273				—				5,283
FHLMC certificates			1,647				131				—				1,778
FNMA certificates			2,392				165				—				2,557
CMO’s issued and guaranteed by FHLMC			478,817				2,278				8,063				473,032
CMO’s issued and guaranteed by FNMA			53,116				1,291				62				54,345
Subtotal			540,982				4,138				8,125				536,995
Total		$	575,251			$	4,147			$	15,688			$	563,710

						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 amortized cost and fair value of investment securities available for sale and held to maturity at September 30, 2009, by contractual maturity (excluding mortgage-backed securities), are shown below.

		Available For Sale								Held to Maturity
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
		(In thousands)
Due within one year		$	6,505			$	6,656			$	3,820			$	3,820
Due after one year through five years			4,753				4,896				8,528				8,439
Due after five years through ten years			48,965				48,461				485				481
Due after ten years			—				—				21,436				13,975
Subtotal			60,223				60,013				34,269				26,715
Mortgage-backed securities			2,442,710				2,473,038				540,982				536,995
Equity securities			1,906				798				—				—
Total		$	2,504,839			$	2,533,849			$	575,251			$	563,710

The following 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 September 30, 2009 and December 31, 2008:

		Less than 12 Months								12 Months or More								Total
						Gross								Gross								Gross				Number of
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized				Investment
September 30, 2009		Value				Losses				Value				Losses				Value				Losses				Positions
		(In thousands)
Available for sale:
USGO’s		$	23,860			$	701			$	—			$	—			$	23,860			$	701				1
Mortgage-backed securities:
GNMA certificates			97,053				111				—				—				97,053				111				2
CMO’s issued and guaranteed by FNMA			335,556				7,734				—				—				335,556				7,734				11
CMO’s issued and guaranteed by FHLMC			12,488				292				—				—				12,488				292				1
Subtotal			445,097				8,137				—				—				445,097				8,137				14
Equity securities — common stock			798				1,108				—				—				798				1,108				1
Total		$	469,755			$	9,946			$	—			$	—			$	469,755			$	9,946				16
Held to maturity:
PRGO’s		$	6,353			$	75			$	4,993			$	27			$	11,346			$	102				11
Corporate notes			—				—				13,975				7,461				13,975				7,461				3
Subtotal			6,353				75				18,968				7,488				25,321				7,563				14
Mortgage-backed securities:
CMO’s issued and guaranteed by FHLMC			12,847				45				368,355				8,018				381,202				8,063				4
CMO’s issued and guaranteed by FNMA			—				—				10,887				62				10,887				62				1
Subtotal			12,847				45				379,242				8,080				392,089				8,125				5
Total		$	19,200			$	120			$	398,210			$	15,568			$	417,410			$	15,688				19