Summary of W HOLDING CO INC

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations has been revised to reflect the restatement of the Company's consolidated financial statements. Please refer to Note 25 in the notes to the consolidated financial statements included in this Annual Report on Form 10-K under Part II, Item 8 for further financial information regarding the restatement of the Company's consolidated financial statements.
This section analyzes the major elements of the Company's consolidated financial statements and should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto and other detailed information appearing elsewhere in this Annual Report. Readers should also review carefully Item 1, "Business-Forward-Looking Statements" and Item 1A, "Risk Factors" for a description of the forward-looking statements in this report and a discussion of the factors that might cause our actual results to differ, perhaps materially, from those forward-looking statements.
ORGANIZATION OF MD&A
We intend for our MD&A to provide information that will assist in better understanding our consolidated financial statements. This section explains the changes in certain key items in our consolidated financial statements from year to year and with respect to certain quarterly periods, the primary factors driving those changes, our risk management processes and results, any known trends or uncertainties of which we are aware that we believe may have a material effect on our future performance, as well as how certain accounting principles affect our consolidated financial statements. Our MD&A also provides information about our business segments in order to explain how the activities of each segment impact our results of operations and financial condition.
This discussion should be read in conjunction with our consolidated financial statements and the notes accompanying those consolidated financial statements. Readers should also review carefully Item 1, "Business-Forward-Looking Statements" and Item 1A, "Risk Factors" for a description of the forward-looking statements in this report and a discussion of the risk factors that might cause our actual results to differ, perhaps materially, from these forward-looking statements.
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 OVERVIEW
Total assets at December 31, 2007, 2006 and 2005 were $17.93 billion, $17.07 billion, and $16.11 billion, respectively. The increase in total assets was mainly driven by increases in the Company's loan portfolio. Loans receivable-net grew by $655.7 million for the year ended December 31, 2007, when compared to the previous year, as a result of the Company's strategy of growing its 2007 variable rate loan portfolio mainly through increased originations in commercial real estate mortgage and construction mortgage loans. The investment portfolio, excluding short-term money market instruments, increased $49.1 million, from $7.03 billion at December 31, 2006, to $7.08 billion at December 31, 2007. The investment portfolio was $7.08 billion at December 31, 2005. Total deposits reached $10.50 billion, from $9.34 billion at December 31, 2006, and $8.38 billion at year end 2005. The increase is mainly attributable to increases in brokered deposits.
Net loss for the year ended December 31, 2007 was $68.3 million, compared to a net income of $59.6 million and $123.5 million for the years ended December 31, 2006 and 2005, respectively. Basic and diluted earnings (loss) per common share for the year ended December 31, 2007 amounted to $(31.92), compared to basic and diluted earnings per common share of $6.89 ($6.74 on a diluted basis) and $26.37 ($25.61 on a diluted basis), adjusted to reflect the one-for-fifty reverse stock split approved on November 7, 2008 and effective on December 1, 2008, for the comparable periods in 2006 and 2005, respectively. As more fully discussed in this Item 7, the net loss for the year ended December 31, 2007, when compared to a net income in 2006, was mainly attributed to an increase of $186.7 million in the provision for loan losses (principally attributed to increased provisions in the Company's commercial loan portfolios, including construction loans), an increase of $38.9 million in noninterest expenses (mainly attributed to additional professional fees, salaries and employees' benefits, deposit insurance premium and other expenses incurred during 2007) and a decrease of $23.3 million in net interest income (mainly as a result of an increase in non-performing loans), partially offset by an increase of $10.7 million in noninterest income and a decrease of $110.3 million in the provision for income taxes. The decrease in net income for the year ended December 31, 2006, when compared to year 2005, was attributed to an increase of $10.9 million in the provision for loan losses (principally attributed to an increase in the provision of the asset-based lending division loan portfolio), an increase of $16.3 million in noninterest expenses, an increase of $36.9 million in the provision for income taxes, and a decrease of $1.1 million in net interest income, partially offset by an increase of $1.3 million in noninterest income. In the year 2005, the Company recorded a charge of $6.7 million ($4.1 million, net of taxes), mainly as a result of the change in the fair value during the year of certain interest rate swaps on a portion of the Company's brokered deposits. The Company's returns on average assets for the years ended December 31, 2007, 2006, and 2005 were (0.39)%, 0.36% and 0.81%, respectively; while, the Company's returns on average common stockholders' equity for the years ended December 31, 2007, 2006, and 2005 were (19.46)%, 3.66%, and 14.55%, respectively.

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RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's principal source of earnings is its net interest income, which is the difference between interest income on loans and invested assets ("interest-earning assets") and interest expense on deposits and borrowings, including federal funds purchased and repurchase agreements and advances from the FHLB ("interest-bearing liabilities"). Loan origination and commitments fees, net of related costs, are deferred and amortized over the life of the related loans as a yield adjustment. Gains or losses on the sale of loans and investments, service charges, fees and other income, also affect income. In addition, the Company's net income is affected by the level of its non-interest expenses, such as the provision for loan losses, compensation, employees' benefits, occupancy costs, other operating expenses and income taxes.
The Company's net interest income is subject to interest rate risk due to the re-pricing and maturity mismatch of the Company's assets and liabilities. The Company manages its exposure to interest rate risk through the Company's Asset and Liability Management Group. 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 under the header "- Market Risk and Interest Rate Risk", the Company uses several tools to manage the risks associated with the composition and repricing of assets and liabilities. Therefore, management has followed a conservative practice inclined towards the preservation of capital with adequate returns. The 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.
2007 VERSUS 2006. Net interest income for the year ended December 31, 2007 was $285.1 million, a decrease of $23.3 million or 7.56%, from $308.4 million for the prior year. The decrease in net interest income was mainly due to a reduction in the net yield and in the average balance on the net interest-earning assets, offset in part by an increase in average balance on the interest-earning assets. For the year ended December 31, 2007, the net yield on interest-earning assets decreased by 25 basis points when compared to the same period in 2006. The decrease in net yield on interest-earning assets during 2007 was mainly driven by the effects of the flattening of the yield curve experienced during most of 2007, coupled with the mismatch between the re-pricing profile of the Company's assets and liabilities. At December 31, 2006 and for most of 2007, the Company was liability sensitive since the Company's liabilities re-price earlier than its assets. As a consequence, in periods of rising short-term rates or flattening of the yield curve, the Company's average rate paid on its interest-bearing liabilities increases in higher proportion than the increase in the average yield earned on its interest-earning assets. For further details on the Company's interest rate risk profile, refer to "Risk Management - Market Risk & Interest Rate Risk" section of this discussion. For the year 2007, when compared to 2006, the overall cost of funds increased by 32 basis points, from 4.48% for year 2006, to 4.80% for year 2007. The average interest rate paid on deposits increased 49 basis points, from 4.17% in 2006, to 4.66% for 2007 and the average interest rates paid on federal funds purchased and repurchase agreements increased 12 basis points, from 4.89% in 2006, to 5.01% in 2007. The average interest rate paid on advances from the Federal Home Loan Bank also increased by 20 basis points, from 5.34% in 2006, to 5.54% in 2007. The average yield earned on interest-earning assets increased 10 basis points from 6.14% to 6.24%, for the year ended December 31, 2007, when compared to year 2006. The increase in the average yield for the year ended December 31, 2007, was mainly due to higher average yields earned in almost all the categories of interest-earning assets, and most significant in the Company's mortgage backed securities portfolio.
Average interest-earning assets for the year ended December 31, 2007 increased by $1.04 billion or 6.44%, compared to year 2006, primarily driven by a rise in the average loan portfolio of $781.7 million or 9.63%, particularly in the commercial real estate mortgage and construction loan portfolios coupled with an increase in the Company's mortgage-backed securities portfolio. The average investment portfolio, excluding mortgage-backed securities and money market instruments, decreased by $60.4 million, and the average mortgage-backed securities increased by $302.5 million or 47.80%. The decrease in the average investment portfolio, excluding mortgage-backed securities and money market instruments, was primarily in short-term tax exempt securities, such as U.S. Government Agencies discount notes, while the increase on the average mortgage-backed securities was specifically due to CMO's issued or guaranteed by FNMA and FHLMC available for sale bought during the quarter ended June 30, 2007. The average money market instruments increased by $14.7 million. The impact of the growth in average interest-earning assets was offset by an increase in the average interest-bearing liabilities of $1.14 billion or 7.49% for the year 2007, principally by brokered deposits, when compared to year 2006.
2006 VERSUS 2005. Net interest income for the year ended December 31, 2006 was $308.4 million, a decrease of $1.1 million, from $309.5 million for the prior year. The decrease in net interest income during 2006 was mainly due to a reduction in net yield and in the average balance on the net interest-earning assets offset in part by an increase in average balance on the interest-earning assets. For the year ended December 31, 2006, net yield on interest-earning assets decreased by 17 basis points when compared to the same period in 2005. The decrease in net yield on interest-earning assets was mainly due to the upward trend of short-term interest rates and

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the re-pricing mismatch of the Company's assets and liabilities, in particular the Company's investment portfolio. Prior to 2005, the Company's investment portfolio, mostly long term mortgage-backed and callable U.S. Government agency securities, was funded with short-term repurchase agreements. The maturity and re-pricing mismatch of the Company's investment portfolio and its funding caused net interest income to decrease as short term rates increased. For further details on the Company's interest rate risk profile, refer to "Risk Management - Market Risk & Interest Rate Risk" section of this discussion. The average interest rates paid on federal funds purchased and repurchase agreements increased 122 basis points, from 3.67% in 2005, to 4.89% in 2006. Additionally, as a result of increases in short-term rates, the average interest rate paid on deposits also increased by 90 basis points, from 3.27% in 2005, to 4.17% for 2006.
The average yield earned on interest-earning assets increased 81 basis points from 5.33% to 6.14%, for the year ended December 31, 2006, when compared to year 2005. The increase in the average yield for the year ended December 31, 2006, was mainly due to higher average yields earned on the loan portfolio, higher reinvestment rates on matured and called securities and higher yields earned on mortgage-backed securities and money market instruments. The increase in the average yield earned on the loan portfolio was due to new higher yielding loans and the repricing of existing floating and adjustable rate in the commercial real estate loans and in construction loans ("Commercial") and in commercial, industrial and agricultural loans ("C&I") portfolios. During the year ended December 31, 2006, the Federal Reserve increased the discount rate by 100 basis points, which is reflected equally on the Prime Rate, the index used by the Bank to reprice most of its floating and adjustable rate commercial loans. Average interest-earning assets for the year ended December 31, 2006 increased by $1.23 billion or 8.24%, compared to year 2005, primarily driven by a rise in the average loan portfolio of $1.20 billion or 17.36%, particularly in the Commercial and C&I loans portfolios, and an increase of $252.2 million or 4.02% in the average investment portfolio, excluding short-term money market instruments and mortgage-backed securities. The average mortgage-backed securities and the average money market instruments decreased by $120.0 million or 15.95% and $105.6 million or 11.10%, respectively. Changes in the investment portfolio are attributable to the reinvestment in short-term tax-exempt securities, specifically U.S. Government Agencies discount notes, as part of management's strategy of growing the Company's tax exempt interest income.
The impact of the growth in average interest-earning assets was offset by an increase in the average interest-bearing liabilities of $1.25 billion or 8.96% for the year 2006, when compared to year 2005.
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, as well as in a normal and tax equivalent basis. Average balances are daily monthly average balances. The yield on the securities portfolio is based on average amortized cost balances and does not give effect to changes in fair value that are reflected as a component of consolidated stockholders' equity for investment securities available for sale.

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                                                                                                 Year ended December 31,
                                                    2007                                                    2006                                                   2005
                                                 Average             Average                            Average             Average                            Average             Average
                              Interest         balance (1)        yield / rate        Interest        balance (1)        yield / rate        Interest        balance (1)        yield / rate
                                                                                                  (Dollars in thousands)
Normal Spread:
Interest-earning assets:
Loans, including loan
fees (2)                     $   723,765       $  8,898,688                8.13 %     $ 661,095       $  8,116,951                8.14 %     $ 476,918       $  6,916,243                6.90 %
Investment securities
(3)                              260,300          6,458,955                4.03         261,971          6,519,398                4.02         247,533          6,267,159                3.95
Mortgage-backed
securities (4)                    45,291            935,269                4.84          28,489            632,792                4.50          32,321            752,839                4.29
Money market instruments          40,833            860,093                4.75          38,235            845,375                4.52          36,433            950,980                3.83

Total                          1,070,189         17,153,005                6.24         989,790         16,114,516                6.14         793,205         14,887,221                5.33


Interest-bearing
liabilities:
Deposits                         463,298          9,938,968                4.66         366,063          8,771,531                4.17         241,268          7,376,605                3.27
Federal funds purchased
and repurchase
agreements                       315,030          6,289,605                5.01         307,463          6,290,818                4.89         234,791          6,398,451                3.67
Advances from FHLB                 5,691            102,684                5.54           7,893            147,780                5.34           7,688            184,153                4.17
Borrowings under line of
credit                             1,107             18,220                6.08               -                  -                   -               -                  -                   -

Total                            785,126         16,349,477                4.80         681,419         15,210,129                4.48         483,747         13,959,209                3.47


Net interest income          $   285,063                                              $ 308,371                                              $ 309,458

Interest rate spread                                                       1.44 %                                                 1.66 %                                                 1.86 %

Net interest-earning
assets                                         $    803,528                                           $    904,387                                           $    928,012

Net yield on
interest-earning assets
(5)                                                                        1.66 %                                                 1.91 %                                                 2.08 %

Ratio of
interest-earning assets
to interest-bearing
liabilities                                          104.91 %                                               105.95 %                                               106.65 %


Tax Equivalent Spread:
Interest-earnings assets     $ 1,070,189       $ 17,153,005                6.24 %     $ 989,790       $ 16,114,516                6.14 %     $ 793,205       $ 14,887,221                5.33 %
Tax equivalent
adjustment                             -                  -                   -               -                  -                   -          31,626                  -                0.21

Interest-earning assets
- tax equivalent               1,070,189         17,153,005                6.24         989,790         16,114,516                6.14         824,831         14,887,221                5.54

Interest-bearing
liabilities                      785,126       $ 16,349,477                4.80         681,419       $ 15,210,129                4.48         483,747       $ 13,959,209                3.47

Net interest income          $   285,063                                              $ 308,371                                              $ 341,084

Interest rate spread                                                       1.44 %                                                 1.66 %                                                 2.07 %

Net yield on interest-
earning assets (5)                                                         1.66 %                                                 1.91 %                                                 2.29 %

(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 the average balance of non-performing loans amounting to $367.9 million, $209.4 million and $40.9 million for the years ended December 31, 2007, 2006 and 2005, respectively. Loans fees, net amounted to $17.1 million, $15.8 million and $16.3 million for the years ended December 31, 2007, 2006 and 2005, respectively.

(3) Includes available for sale securities.

(4) Includes trading and available for sale securities.

(5) Net interest income divided by average interest-earning assets.

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The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase (decrease) related to changes in outstanding balances and the changes in interest rates.

                                                             Year ended December 31,

                                         2007 vs. 2006                                     2006 vs. 2005
                            Volume           Rate             Total           Volume           Rate             Total
                                                                  (In thousands)
Interest income:
Loans                      $ 63,580        $    (910 )      $  62,670        $ 90,136        $  94,041        $ 184,177
Investment securities
(1)                          (2,439 )            768           (1,671 )        10,084            4,354           14,438
Mortgage-backed
securities (2)               14,507            2,295           16,802          (5,515 )          1,683           (3,832 )
Money market
instruments                     648            1,950            2,598          (4,324 )          6,126            1,802

Total increase in
interest income              76,296            4,103           80,399          90,381          106,204          196,585

Interest expense:
Deposits                     51,754           45,481           97,235          50,744           74,051          124,795
Federal funds
purchased and
repurchase agreements           (59 )          7,626            7,567          (3,880 )         76,552           72,672
Advances from FHLB           (2,512 )            310           (2,202 )          (495 )            700              205
Borrowings under line
of credit                     1,107                -            1,107               -                -                -

Total increase in
interest expense             50,290           53,417          103,707          46,369          151,303          197,672

Increase
(decrease) in net
interest income            $ 26,006        $ (49,314 )      $ (23,308 )      $ 44,012        $ (45,099 )      $  (1,087 )

(1) Includes available for sale securities.

(2) Includes trading and available for sale securities.

PROVISION FOR LOAN LOSSES The provision for loan losses is charged to earnings to maintain the allowance for loan losses at a level that the Company considers adequate to absorb probable losses inherent in the loan portfolio. The adequacy of the allowance for loan losses is based on ongoing, quarterly assessments and evaluations of the collectibility and historical loss experience of loans. The Company follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses. Although the Company believes that the allowance for loan losses is adequate, factors beyond the Company's control, including factors affecting the Puerto Rico economy may contribute to delinquencies and defaults, thus necessitating additional reserves.
During 2007, the Company provided $277.6 million for loan losses, as compared to $90.9 million in 2006 and $80.0 million in 2005.
2007 VERSUS 2006. The Company's provision for loan losses increased by $186.7 million or 205.42% during 2007, compared to 2006. Net charge-offs during 2007 amounted to $141.0 million, which when subtracted from the provision for loan losses of $277.6 million resulted in a net increase in the allowance for loan losses of $136.5 million or 67.53%.
The increase in the provision for loan losses for 2007 is mainly attributable to higher non-performing and impaired loans and higher net loans charged-off and specific reserves during the period in the Company's commercial, construction and asset-based lending loan portfolios coupled with the growth of the Company's loan portfolios. The increase is principally due to the effects of the continuing downturn in the economy of Puerto Rico, which has been in recession since 2006. The slowdown in activity is the result of, among other things, higher utilities prices, higher taxes, government budgetary imbalances, the upward trend in short-term interest rates, and higher levels of oil prices. The slowdown in activity has impacted the commercial real estate mortgage loan portfolio, including the construction loan portfolio, of the Company. Westernbank has historically provided land acquisition, development, and construction financing to developers for residential housing projects. In connection with the preparation of the 2007 consolidated financial statements, the Company reviewed and obtained recent appraisals for substantially all properties underlying construction and asset-based lending loans and other impaired commercial loans. The loan loss provision for 2007 includes the incorporation of such appraisals in the calculation of the specific allowances. Since the middle of 2007, the Company has taken several steps to mitigate the credit risk underlying its commercial, construction and asset-based loan portfolios, including segregating origination, underwriting and credit administration functions, setting portfolio limits and applying stricter underwriting guidelines.

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The provision for loan losses for Commercial and C&I loans, excluding construction and asset-based loan portfolios, accounted for $122.9 million or 44.25% of the total provision for loan losses for the year ended December 31, 2007. The increase in the provision for loan losses when compared to 2006 is mainly attributable to higher Commercial and C&I non-performing and impaired loans due to worsening economic conditions in Puerto Rico. Total non-performing and impaired loans in this portfolio amounted to $726.5 million at December 31, 2007. As of December 31, 2007, the Company classified as non-performing and impaired loans twelve loan relationships with outstanding principal balances of $104.2 million, $88.1 million, $64.2 million, $47.0 million, $44.2 million, $38.7 million, $35.8 million, $34.0 million, $28.9 million, $25.7 million, . . .