<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934 (No Fee Required)
Commission File No. 000-27377
W Holding Company, Inc.
-----------------------
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0573197
Principal Executive Offices:
----------------------------
19 West Mckinley Street
Mayaguez, Puerto Rico 00680
Telephone number: (787) 834-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock ($1.00 par value)
7.125% Noncumulative, Convertible Monthly Income Preferred Stock,
1998 Series ($1.00 par value)
7.25% Noncumulative, Non-convertible Monthly Income Preferred Stock,
1999 Series B ($1.00 par value)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant: $215,079,465 based on the closing sales price of $7.75 at March
15, 2000, for 27,752,189 shares.
Number of shares of Common Stock outstanding as of March 15, 2000: 41,795,000
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the annual report to stockholders for the fiscal year ended
December 31, 1999 are incorporated by reference into Part II, Items 5-8
of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III, Items 10-13 of
this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
W Holding Company, Inc. (the "Company") is a bank holding company
offering a full range of financial services through its wholly owned subsidiary,
Westernbank Puerto Rico ("Westernbank"). The Company's primary business is the
business of Westernbank. The Company was organized under the laws of the
Commonwealth of Puerto Rico in February 1999. Effective November 30, 1999,
pursuant to a resolution approved by the stockholders and after receiving all
pertinent regulatory approvals, a reorganization was effected as a result of
which the Company became the sole shareholder of Westernbank Puerto Rico. In
connection with the reorganization, each outstanding share of Westernbank's
common stock and preferred stocks was converted into similar shares of the
Company in a one for one exchange. Until December 31, 1999, the Company had no
operations other than those resulting from its investment in Westernbank. The
Company's executive office is located at 19 West McKinley Street, Mayaguez,
Puerto Rico; its telephone number is (787) 834-8000; its internet email address
is [email protected]; and its web page is at URL:http: //www.wbpr.com.
Westernbank Puerto Rico was chartered as a federal mutual savings and
loan association in 1958 and operated as Western Federal Savings and Loan
Association of Puerto Rico. In January 1984, Western Federal was converted to a
federal mutual savings bank, under the name of "Western Federal Savings Bank of
Puerto Rico." Effective February 21, 1985, Westernbank was converted to a
federal stock savings bank in accordance with federal laws and regulations. As
of the close of business on November 30, 1994, the Savings Bank converted its
charter to that of a Puerto Rico commercial bank under the laws of the
Commonwealth of Puerto Rico and is presently known as Westernbank Puerto Rico.
Westernbank operates 36 branches, 26 of which are located in western Puerto
Rico, 4 in the Metropolitan area, 3 in northeastern Puerto Rico and 3 in
southern Puerto Rico. In 1996, Westernbank commenced operating a division known
as Westernbank International to offer commercial banking and related services
outside of Puerto Rico. In February 1998, Westernbank acquired 80% of the
voting shares of SRG Net, Inc. that operates a shared electronic funds transfer
network. In March 1999, Westernbank acquired the remaining 20% of the voting
shares of SRG Net, Inc. The assets, liabilities, revenues and expenses of the
subsidiary at December 31, 1999 and 1998 and for the years then ended are not
significant.
The principal business of the Company consists of attracting deposits
from the general public and utilizing such funds and proceeds from term notes
and reverse repurchase agreements to invest in residential mortgage loans and
consumer and commercial loans. Historically, the Company's assets have consisted
primarily of long-term, fixed-rate mortgages, while its liabilities consisted
primarily of short-term deposits and reverse repurchase agreements. More
recently, the Company has invested in US and Puerto Rico Governments and
agencies obligations, mortgage-backed securities, repurchase agreements, and
commercial and consumer loans. These investments have created a more flexible
asset structure and increased the Company's liquidity.
The Company is subject to examination, regulation and periodic
reporting under the Bank Holding Company Act of 1956, as amended, which is
administered by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). Westernbank is subject to examination and
comprehensive regulation by the Department of the Treasury, the Puerto Rico
Commissioner of Financial Institutions and the Federal Deposit Insurance
Corporation ("FDIC"). In addition, Westernbank is subject to the regulations of
the Puerto Rico Regulatory Financial Board with respect to rates and fees
charged on certain loans to individuals, and to the regulations of the Puerto
Rico Treasury Department and the Commissioner of Financial Institutions.
Westernbank is a member of the Federal Home Loan Bank ("FHLB") of New York,
which is one of the twelve regional banks comprising the Federal Home Loan Bank
System ("FHLB System"). Deposits with
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Westernbank are insured to the maximum extent provided by law through the
Savings Association Insurance Fund ("SAIF") and Bank Insurance Fund ("BIF")
which are administered by the FDIC.
For segment information, please refer to Note 21 of the audited
consolidated financial statements.
THE BANKING INDUSTRY
The operations of financial institutions are significantly influenced
by general economic conditions, by the related monetary and fiscal policies of
the federal government, and by the policies of regulatory authorities, including
the Federal Reserve Board, the FDIC and, in Puerto Rico, by the Commissioner and
the Puerto Rico Treasury Department. Asset and liability flows and the
respective yields thereon are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for mortgage financing and for consumer, commercial, and
other types of loans, which in turn are affected by the interest rates at which
such financing may be offered and other factors affecting the supply of housing
and the availability of funds.
LENDING ACTIVITIES
GENERAL
At December 31, 1999, the Company's net loans, including mortgage
loans held for sale, ("net loan portfolio") amounted to $1.87 billion or 55.47%
of total assets.
The following table sets forth the composition of the Company's loan
portfolio, including mortgage loans held for sale, by type of loan at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ------------------ ------------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-mortgage (1) $ 706,792 37.8% $ 407,245 29.9% $ 230,416 29.4% $ 142,990 22.9% $ 137,052 27.3%
Real estate-construction 101,979 5.5 69,215 5.1 24,192 3.1 3,226 0.5 1,540 0.3
Commercial, industrial
and agricultural:
Real estate 677,924 36.2 518,893 38.1 234,071 29.8 187,944 30.1 113,319 22.6
Others 79,343 4.3 72,235 5.3 40,001 5.1 40,351 6.5 22,756 4.5
Consumer (2) 329,682 17.6 309,509 22.7 269,316 34.3 261,137 41.9 240,178 48.0
----------- ----- ---------- ----- --------- ----- --------- ----- --------- -----
Total loans 1,895,720 101.4 1,377,097 101.1 797,996 101.7 635,648 101.9 514,845 102.7
Allowance for loan
losses (23,978) (1.4) (15,800) (1.1) (13,201) (1.7) (12,027) (1.9) (13,644) (2.7)
----------- ----- ---------- ----- --------- ----- --------- ----- --------- -----
Loans, net $ 1,871,742 100% $1,361,297 100% $ 784,795 100% $ 623,621 100% $ 501,201 100%
=========== ===== ========== ===== ========= ===== ========= ===== ========= =====
</TABLE>
(1) Includes mortgage loans held for sale.
(2) Includes consumer, loans on deposit, second mortgage, auto and credit card
loans.
Real estate mortgage loans at December 31, 1999, include $684.1
million or 36.55% of net loans portfolio, of fixed and adjustable rate
conventional loans and $22.7 million or 1.21% of mortgages insured or
guaranteed by government agencies of the United Stated or Puerto Rico.
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The Company originated commercial real estate loans during 1999
amounting to approximately $406,725,000 and totaling approximately $677,924,000
at December 31, 1999. In general, commercial real estate loans are considered by
management to be of somewhat greater risk of uncollectibility due to the
dependency on income production or future development of the real estate. The
commercial real estate loans are principally collateralized by property
dedicated to wholesale, retail and rental business activities.
Consumer loans at December 31, 1999, include $254.5 million or 13.60%
of installment loans (of which $173.5 million are collateralized by real
estate), $35.3 million or 1.89% of credit cards, and $35.3 million or 1.88% of
loans on deposits.
During 1999, the Company securitized $46.0 million, $13.8 million and
$9.4 million of conforming mortgage loans into Government National Mortgage
Association, Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation participation certificates, respectively. The Company will
continue the servicing of these loans for a fee.
The following table summarizes the contractual maturities for the
Company's total loan portfolios, excluding mortgage loans held for sale, due
for the periods indicated as of December 31, 1999.
<TABLE>
<CAPTION>
Maturities
Balance ----------------------------------------------------------------------------------
Outstanding After One Year to Five Years After Five Years
at December One Year Fixed Interest Variable Interest Fixed Interest Variable Interest
31, 1999 or Less Rates Rates Rates Rates
-------- ------- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate-mortgage $ 704,719 $ 2,859 $ 2,978 $ 8,065 $666,459 $ 24,358
Real estate-construction 101,979 75,203 -- 26,776 -- --
Commercial, industrial and
agricultural:
Real estate (1) 677,924 104,940 133,977 240,782 72,185 126,040
Others 79,343 40,003 18,660 14,114 3,844 2,722
Consumer 329,682 81,974 130,163 68,227 41,060 8,258
---------- ---------- --------- --------- -------- ---------
Total $1,893,647 $ 304,979 $ 285,778 $ 357,964 $783,548 $ 161,378
========== ========== ========= ========= ======== =========
</TABLE>
The average term of loans is affected by loan prepayments and enforcement of
due-on-sale clauses.
(1) Includes foreign loans amounting to $5.6 million.
The Company's lending activities are subject to the Federal Reserve
System, the FDIC and the Commissioner regulations which permit financial
institutions and borrowers to develop a broader variety of mortgage instruments
to meet home financing needs. Conventional mortgages originated by the Company
consist principally of fixed-rate loans.
Under the Financial Institution Reform, Recovery and Enforcement Act
("FIRREA"), the permissible amount of loans-to-one borrower follows the
national bank standard for all loans. The national bank standard generally does
not permit loans-to-one borrower to exceed 15% of unimpaired capital and
unimpaired surplus. Loans in an amount equal to an additional 10% of unimpaired
capital and unimpaired surplus also may be made to
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a borrower if the loans are fully secured by readily marketable securities.
FIRREA permits financial institutions to make loans-to-one borrower for any
purpose, not to exceed $500,000. For development of single family homes having
prices not more than $500,000 each, if the bank is in capital compliance, the
limit is the lesser of $30 million or 30% of unimpaired capital (loans to all
borrowers under this exception is limited to 150% of capital). For the finance
of the sale of real property acquired by foreclosure the limit is 50% of
unimpaired capital.
Section 17 of the Puerto Rico Banking Act of 1933, as amended, (the
"Puerto Rico Banking Law") permits commercial banks to make loans to any one
person, firm, partnership or corporation, up to an aggregate amount of fifteen
percent (15%) of paid-in capital and reserve fund of the commercial bank. If
such loans are secured by collateral worth at least twenty-five percent (25%)
more than the amount of the loan, the aggregate maximum amount may reach one
third of the paid-in capital of the commercial bank, plus its reserve fund.
There are no restrictions under Section 17 of the Puerto Rico Banking Law on the
amount of loans, which are wholly secured by bonds, securities and other
evidences of indebtedness of the Government of the United States and the
Commonwealth of Puerto Rico. The Commissioner has issued a Circular Letter
interpreting the lending limits provision of the Puerto Rico Banking Law to
permit commercial banks to additionally take into consideration up to 50% of the
Company's retained earnings in the calculation of the institution's lending
limit if the institution is well capitalized.
As of December 31, 1999, the maximum unsecured amount which the
Company could have loaned to one borrower and the borrower's related entities
under FIRREA and the Puerto Rico Banking Law was approximately $36.0 million
and $28.7 million, respectively. At such date the Company's largest loan
outstanding balance or group of loans-to-one borrower aggregated $31.1 million,
which is substantially secured by collateral. The next largest loan outstanding
balance concentration to one borrower amounted to $20.7 million, which is also
substantially secured by collateral. At December 31, 1999, the loans referred
to above were current.
Federal regulations limit loans by financial institutions to specified
percentages of the value of the real property securing the loans, as determined
by an appraisal at the time the loan is originated (referred to as
"loan-to-value ratios"). Under current regulations, a real estate loan may not
exceed 100% of the appraised value of the secured property at the time of
origination. With respect to home loans originated or refinanced in excess of
90% of the appraised value of the security property, that part of the unpaid
balance that exceeds 80% of the property's value must be insured or guaranteed
by a mortgage insurance company qualified by the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Company's lending policies require private mortgage
insurance when the loan-to-value ratio of a particular loan exceeds 80%. The
Company's policies permit lending up to 90% of the appraised value of
single-family residential dwellings when required mortgage insurance is
obtained; however, in practice, loans rarely exceed 80% of appraised value.
Multi-family and commercial real estate loans are generally limited to 75% of
the lesser of cost or market value as determined by a qualified appraiser.
Under Regulation 26-A, interest rates on mortgage, except for those
guaranteed by the Federal Housing Administration (FHA) and Veterans
Administration (VA), consumer and commercial loans were de-regulated. Pursuant
to Regulation 26-A, the maximum rate which is permitted to be charged on FHA
and VA residential first mortgage loans is .375% over a specified FHLMC auction
rate with a 60-day delivery commitment, rounded to the nearest .125%, and the
maximum rate which may be charged on fixed-rate residential second mortgages is
.25% above the first mortgage rate. These FHLMC auction rates change weekly.
ORIGINATION, PURCHASE AND SALE OF LOANS
Loan originations come from a number of sources. The primary sources
for residential loan originations are depositors and walk-in customers.
Commercial loan originations are also from clients, depositors and by direct
solicitation and referrals.
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All of the Company's lending is subject to its written,
non-discriminatory underwriting standards and to loan origination procedures
prescribed in its policies approved by the Board of Directors. Detailed loan
applications are obtained to determine the borrower's ability to repay, and the
more significant items on these applications are verified through the use of
credit reports, financial statements and confirmations. Property valuations by
independent appraisers, approved by the Company's Board of Directors, are
required for mortgage loans. The Company's Credit Committee approves all
residential and commercial real estate loans originated by the Company up to
one million and all other commercial loans between $250,000 and one million.
All loans exceeding one million are reviewed by the full Board of Directors.
It is the Company's policy to require borrowers to provide title
insurance policies certifying or ensuring that the Company 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 the Company makes
disbursements for items such as real estate taxes, hazard insurance premiums
and private mortgage insurance premiums as they fall due.
The Company's lending policies require that all such loans should
qualify for sale in the secondary market. The loan-to-value ratio on non
conforming conventional mortgages is generally 75%, except that on loans to
finance purchases of residences, the Company may lend up to 90% of the lower of
the purchase price or appraised value, if private mortgage insurance is
obtained by the borrower for amounts in excess of 80%.
The Company grants long-term mortgage loans secured by a first mortgage
over borrower's real property payable in monthly installments for a term up to
forty years. Interest rates are adjusted every ten years and the borrower is
granted the option to prepay the loan during the 90 days following the ten-year
anniversaries, without penalty. Interest on these loans is tied and adjusted as
permitted by law.
The Company originates fixed-rate commercial mortgage loans, for the
construction, acquisition or refinancing of commercial properties. The Company
also makes real estate construction loans subject to firm permanent financing
commitments.
The Company offers different types of consumer loans in order to
provide a full range of financial services to its customers. The Company offers
various types of secured and unsecured consumer loans with varying amortization
schedules. In addition, the Company makes fixed-rate, residential second
mortgage loans.
The Company offers the service of VISA and Master Card. At December
31, 1999, there were approximately 25,144 outstanding accounts, with an
aggregate outstanding balance of $35.3 million and unused credit card lines
available of $33.3 million.
In connection with all consumer and second mortgage loans originated,
the Company's underwriting standards include a determination of the applicants
payment history on other debts and an assessment of the ability to meet
existing obligations and payments on the proposed loan. As of December 31,
1999, $936,000 or 0.28% of the consumer loan portfolio consisted of loans more
than 60 days delinquent in payment.
Commercial loans have increased from $591.1 million as of December 31,
1998 to $757.3 million as of December 31, 1999, or 28.11%. Commercial loans may
be secured or unsecured, with the terms of such loans negotiable.
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The following table reflects the Company's net portfolio loan
origination, purchase, and sale activities for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance of net loan, including mortgage
loans held for sale $ 1,361,297 $ 784,795 $ 623,621 $ 501,201 $ 444,826
Mortgage loans held for sale originated 63,812 75,660 39,506 32,321 36,209
Mortgage loans held for sale securitized and
transferred to trading and available for sale securities (68,350) (71,217) (53,963) (30,056) (39,434)
Sales of mortgage loans held for sale -- (9,885)
Real estate mortgage and construction loans
originated and purchased 449,055 299,397 135,719 26,653 46,723
Real estate mortgage loans sold (20,101)
Real estate mortgage loans foreclosed (291) (1,233) (176) (613) (252)
Real estate mortgage and construction loans
repayments (1) (91,814) (80,755) (12,694) (20,681) (12,409)
Commercial loans-net increase (1) 166,139 317,056 45,777 92,220 26,045
Auto loans purchased 20,359 22,380
Auto loans repayments (5,716) (12,283) (26,150) (32,717) (39,142)
Auto loans sold (1,671)
Loans on savings-net increase (2,286) 631 5,962 6,140 220
Other consumer and credit card loans-net increase(1) 28,175 53,516 28,367 27,177 28,781
Decrease (increase) in allowance for loan losses (8,178) (2,599) (1,174) 1,617 (2,861)
----------- ----------- --------- --------- ---------
End Balance $ 1,871,742 $ 1,361,297 $ 784,795 $ 623,621 $ 501,201
=========== =========== ========= ========= =========
Net increase in net loan, including mortgage
loans held for sale $ 510,445 $ 576,502 $ 161,174 $ 122,420 $ 56,375
=========== =========== ========= ========= =========
</TABLE>
(1) Excludes effect of amount charged off.
INCOME FROM LENDING ACTIVITIES
The Company realizes interest income and fee income from its lending
activities. For the most part, interest rates charged by the Company on loans
depend upon general interest rates, the demand for loans and the availability
of funds. The Company also receives fees for originating and committing to
originate or purchase loans and also charges service fees for the assumption of
loans, late payments, inspection of properties, appraisals and other
miscellaneous services.
Loan origination and commitment fees vary with the volume and type of
loans and commitments made and sold and with competitive conditions in the
residential and commercial mortgage markets. The Company accounts for loan
origination and commitment fees based on the Financial Accounting Standards
Board Statement No. 91. In accordance with the provisions of this statement,
loan origination fees and related direct loan origination costs are deferred
and amortized over the life of the related loans as a yield adjustment.
Commitment fees are also deferred and amortized over the life of the related
loans as a yield adjustment. If the commitment expires unexercised, the fee is
taken into income.
In accordance with requirements of Financial Accounting Standards
Board Statement No. 125, Accounting for Mortgage Servicing Rights, an amendment
of FASB Statement No. 65 ("SFAS 125"), the Company recognizes as separate
assets the rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. SFAS 125 also requires that the entities assess
the capitalized mortgage servicing rights for impairment
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based on the fair value of those rights. During 1999, the Company sold $69.2
million of conforming mortgage loans to the Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association, and Government National
Mortgage Association. The Company will continue the servicing of the loans sold
for a fee. The Company's accounting policy for these transactions is in
agreement with the provisions of SFAS 125.
NON PERFORMING LOANS AND FORECLOSED REAL ESTATE
When a borrower fails to make a required payment on a loan, the
Company attempts to cure the deficiency by contacting the borrower. In most
cases, deficiencies are cured promptly. If the delinquency exceeds 90 days and
is not cured through the Company's normal collection procedures, the Company
will generally institute measures to remedy the default. If a foreclosure
action is instituted and the loan is not cured, paid in full or refinanced, the
property is sold at a judicial sale at which the Company may acquire the
property. Thereafter, if the Company acquires the property, such acquired
property is appraised and included in the Company's foreclosed real estate held
for sale account at the fair value at the date of acquisition. Then this asset
is carried at the lower of fair value less estimated costs to sell or cost
until the property is sold. In the event that the property is not sold in the
foreclosure sale or sold at a price insufficient to cover the payment of the
loan, the debtor remains liable for the deficiency of the judgment.
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due, but in
no event is it recognized after 90 days in arrears on payments of principal or
interest. When interest accrual is discontinued, all unpaid interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
The following table sets forth information regarding non-performing
loans and foreclosed real estate held for sale by the Company at the dates
indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Real estate-mortgage and construction-loans $ 1,719 $ 1,183 $ 1,651 $ 1,401 $ 1,862
Commercial, industrial and agricultural loans 4,366 5,427 4,988 4,360 2,039
Consumer loans 870 1,172 967 374 326
-------- -------- -------- -------- --------
Total non-performing loans 6,955 7,782 7,606 6,135 4,227
Foreclosed real estate held for sale 2,232 3,271 2,396 2,822 2,627
-------- -------- -------- -------- --------
Total non-performing loans
and foreclosed real estate held for sale $ 9,187 $ 11,053 $ 10,002 $ 8,957 $ 6,854
======== ======== ======== ======== ========
Interest which could have been recorded if the
loans had not been classified as non performing $ 514 $ 1,027 $ 713 $ 398 $ 472
======== ======== ======== ======== ========
Total non-performing loans as a percentage of total
loans receivable, including mortgage loans held
for sale 0.37% 0.56% 0.95% 0.97% 0.82%
======== ======== ======== ======== ========
Total non-performing loans and foreclosed real
estate held for sale as a percentage of total assets 0.27% 0.45% 0.64% 0.70% 0.66%
======== ======== ======== ======== ========
</TABLE>
As of December 31, 1999, there was one non-accrual loan with a
principal balance in excess of $500,000.
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ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. The allowance is based on ongoing, quarterly
assessments of the probable estimated losses inherent in the loan portfolio,
and to a lesser extent, unused commitments to provide financing. Our
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include:
- the formula allowance,
- specific allowances for identified problem loans and portfolio
segments, and
- the unallocated allowance.
In addition, the allowance incorporates the results of measuring
impaired loans as provided in:
- Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan", and
- SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures".
These accounting standards prescribe the measurement methods, income
recognition and disclosures concerning impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans not otherwise covered by specific allowances. Loss factors
are based on our historical loss experience and may be adjusted for significant
factors that, in management's judgment, affect the collectibility of the
portfolio as of the evaluation date. Loss factors are described as follows:
- Loan loss factors for commercial loans, including construction and
land acquisition loans, are based on the expected net charge offs for
one year.
- Pooled loan loss factors are also based on expected net charge offs
for one year. Pooled loans are loans that are homogeneous in nature,
such as consumer installment and residential mortgage loans.
Specific allowances are established where management has identified
significant conditions or circumstances related to a credit or portfolio
segment that management believes indicate the probability that a loss has been
incurred in excess of the amount determined by the application of the formula
allowance.
An unallocated allowance is established recognizing the estimation
risk associated with the formula and specific allowances. It is based upon
management's evaluation of various conditions, the effects of which are not
directly measured in determining the formula and specific allowances. These
conditions include then-existing general economic and business conditions
affecting our key lending areas; credit quality trends, including trends in
nonperforming loans expected to result from existing conditions; collateral
values; loan volumes and concentrations; seasoning of the loan portfolio;
recent loss experience in particular segments of the portfolio; and regulatory
examination results, and findings of our internal credit examiners. The
evaluation of the inherent loss regarding these conditions involves a higher
degree of uncertainty because they are not identified with specific problem
credits or portfolio segments.
Management assesses these conditions quarterly. If any of these
conditions is evidenced by a specifically identifiable problem credit or
portfolio segment as of the evaluation date, management's estimate of the
effect of this condition may be reflected as a specific allowance applicable to
this credit or portfolio segment. Where any of these conditions is not
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's evaluation of the probable loss concerning
this condition is reflected in the unallocated allowance.
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The allowance for loan losses is based upon estimates of probable
losses inherent in the loan portfolio. The amount actually observed for these
losses can vary significantly from the estimated amounts. Our methodology
includes several features that are intended to reduce the differences between
estimated and actual losses. Loan loss factors are adjusted quarterly based
upon the level of net charge offs expected by management in the next twelve
months, after taking into account historical loss ratios adjusted for current
trends. Furthermore, our methodology permits adjustments to any loss factor
used in the computation of the formula allowance in the event that, in
management's judgment, significant factors that affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the probable estimated losses inherent in the loan portfolio on a
quarterly basis, we are able to adjust specific and inherent loss estimates
based upon any more recent information that has become available.
At December 31, 1999, our allowance for loan losses was $24.0 million,
consisting of $17.2 million formula allowance, a $2.0 million specific
allowance and a $4.8 million unallocated allowance. As of December 31, 1999, it
represents 1.26% of total loans, and 344.8% of total non-performing loans,
compared with an allowance for loan losses at December 31, 1998 of $15.8
million, or 1.15% of total loans, and 203.0% of total non-performing loans.
During 1999, there were no significant changes in estimation methods
or assumptions that affected our methodology for assessing the appropriateness
of the allowance for loan losses, except that the expected net charge off rates
for commercial loans were slightly increased as compared to those used for 1998
based on continued higher than expected actual net charge offs.
The Company evaluates the loan portfolio for impairment as defined by
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended.
At December 31, 1999, total impaired loans were $13.1 million and the
associated impairment allowance was $1.3 million, compared with total impaired
loans of $9.8 million and an associated impairment allowance of $1.1 million at
December 31, 1998.
9
<PAGE> 11
The table below presents a reconciliation of changes in the allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 15,800 $ 13,201 $ 12,027 $ 13,644 $ 10,783
-------- -------- -------- -------- --------
Loans charged off:
Consumer loans 5,154 4,090 2,458 1,525 873
Commercial, industrial and agricultural loans 1,913 134 139 444 85
Real estate-mortgage and construction loans 291 4 701
-------- -------- -------- -------- --------
Total loans charged off 7,358 4,224 2,601 2,670 958
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Consumer loans 1,003 601 480 451 428
Commercial, industrial and agricultural loans 335 42 184 577 307
Real estate-mortgage and construction loans 198 180 411 25 84
-------- -------- -------- -------- --------
Total recoveries of loans previously
charged off 1,536 823 1,075 1,053 819
-------- -------- -------- -------- --------
Net loans charged off 5,822 3,401 1,526 1,617 139
Provision for loan losses 14,000 6,000 2,700 3,000
-------- -------- -------- -------- --------
Balance, end of year $ 23,978 $ 15,800 $ 13,201 $ 12,027 $ 13,644
======== ======== ======== ======== ========
Ratios:
Allowance for loan losses to total loans 1.26% 1.15% 1.65% 1.89% 2.65%
Provision for loan losses to net loans
charged off 240.47% 176.42% 176.93% -- 2158.27%
Recoveries of loans to loans charged off
in previous year 36.36% 31.64% 40.26% 109.92% 44.25%
Net loans charged off to average loans 0.35% 0.32% 0.22% 0.29% 0.03%
Allowance for loans losses to non-
performing loans 344.76% 203.03% 173.56% 196.04% 322.78%
</TABLE>
10
<PAGE> 12
The following table presents the allocation of the allowance for
credit losses. The percentages reflect the allowance allocated to each
respective loan category at period end, as a percentage of the total period end
balance of that loan category, as set forth in the "Loans" table on page 3.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, industrial
and agricultural loans $11,772 1.55% $ 7,747 1.31% $ 5,143 1.88% $ 6,884 3.02% $ 5,711 4.20%
Consumer loans 5,718 1.73 5,044 1.63 3,629 1.35 3,480 1.33 2,624 1.09
Real estate-mortgage and
construction-loans 1,743 0.22 1,043 0.22 551 0.22 430 0.29 450 0.32
Unallocated 4,745 -- 1,966 -- 3,878 -- 1,233 -- 4,859 --
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total allowance for
loan losses $23,978 1.26% $15,800 1.15% $13,201 1.65% $12,027 1.89% $13,644 2.65%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
Loans are classified as impaired or not impaired in accordance with
Statement of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan, which was implemented in 1995. A loan is impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement.
The Company measures the impairment of a loan based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or as a practical expedient, at the observable market price of the loan
or the fair value of the collateral, if the loan is collateral dependent.
Significant loans (those exceeding $250,000) are individually evaluated for
impairment. Large groups of small balance, homogeneous loans are collectively
evaluated for impairment, loans that are recorded at fair value or at the lower
of cost of market are not evaluated for impairment. The portfolio of mortgage,
consumer and auto loans are considered homogeneous and are evaluated
collectively for impairment.
Impaired loans for which the discounted cash flows, collateral value
or market price exceeds its carrying value do not require an allowance. The
allowance for impaired loans is part of the Company's overall allowance for
loan losses.
The following table sets forth information regarding the investment on
impaired loans:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Investment on impaired loans:
Covered by a valuation allowance $ 8,136 $ 5,499 $ 1,465 $ 1,536 $ 2,500
Do not require a valuation allowance 4,947 4,309 4,234 4,800 1,233
-------- ------- ------- ------- --------
Total $ 13,083 $ 9,808 $ 5,699 $ 6,336 $ 3,733
======== ======= ======= ======= ========
Valuation allowance on impaired loans $ 1,268 $ 1,120 $ 248 $ 140 $ 788
======== ======= ======= ======= ========
Average investment on impaired loans $ 14,919 $ 6,561 $ 5,646 $ 6,292 $ 3,916
======== ======= ======= ======= ========
Interest collected on impaired loans $ 1,470 $ 242 $ 220 $ 192 $ 56
======== ======= ======= ======= ========
</TABLE>
11
<PAGE> 13
INVESTMENT ACTIVITIES
The Company's investments are managed by the Investment Department.
Purchases and sales are required to be reported monthly to both the Investment
Committee composed of members of the Board of Directors, the President and
Chief Executive Officer and the Chief Financial Officer.
The Investment Department is authorized to purchase and sell federal
funds, interest bearing deposits in banks, banker's acceptances of commercial
banks insured by the FDIC, mortgage-backed securities, Puerto Rico and U.S.
Government and agency obligations, municipal securities rated A or better by
Moody's Investors Service, Inc. ("Moody's") and commercial paper rated P-1 by
Moody's or A-1 by Standard and Poor's Corporation. In addition, the Investment
Department is responsible for the pricing and sale of reverse repurchase
agreements. See "Sources of Funds -- Borrowings" and "Equity Risk Investments."
The Company's investment strategy is affected by both the rates and
terms available on competing investments and tax and other legal
considerations.
The following table presents the carrying value of investments as of
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Held to maturity:
US Government and agency obligations $ 1,029,450 $ 727,584 $ 452,508
Puerto Rico Government and agency obligations 16,668 14,818 26,211
Other investments 17,165 -- --
Mortgage and other asset-backed securities 111,249 129,446 147,054
----------- --------- ---------
Total $ 1,174,532 $ 871,848 $ 625,773
=========== ========= =========
Available for sale-mortgage-backed securities $ 22,185 $ 15,231 $ --
=========== ========= =========
Trading securities-mainly mortgage-backed securities $ 1,289 $ 5,090 $ 5,348
=========== ========= =========
</TABLE>
12
<PAGE> 14
The carrying amount of investment securities at December 31, 1999, by
contractual maturity (excluding mortgage and others asset-backed securities),
are shown below:
<TABLE>
<CAPTION>
Weighted
Carrying Amount Average Yield
(Dollars in Thousands)
<S> <C> <C>
US Government and agency obligations:
Due within one year or less $ 18,055 5.70%
Due after five years through ten years 33,801 6.12
Due after ten years 977,594 6.77
------------ ----
1,029,450 6.73
------------ ----
Puerto Rico Government and agency obligations:
Due within one year or less 1,680 6.10
Due after one year through five years 604 7.60
Due after five years through ten years 11,384 7.39
Due after ten years 3,000 6.15
------------ ----
16,668 7.05
------------ ----
Other-due after ten years 17,165 8.25
------------ ----
Total 1,063,283 6.74
Mortgage and other assets-backed securities 134,723 7.19
------------ ----
Total $ 1,198,006 6.74%
============ ====
</TABLE>
Mortgage and other asset-backed securities at December 31, 1999,
consists of:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Trading securities - Government National Association (GNMA) certificates $ 1,289
-------
Available for sale:
Federal National Mortgage Association (FNMA) certificates 3,658
GNMA certificates 18,527
--------
Total available for sale 22,185
--------
Held to maturity:
Federal Home Loan Mortgage Corporation (FHLMC) certificates 20,594
GNMA certificates 27,637
FNMA certificates 14,736
Collateralized mortgage obligations (CMO) certificates 28,106
Other 20,176
--------
Total held to maturity 111,249
--------
Total mortgage and other asset-backed securities $134,723
========
</TABLE>
SOURCES OF FUNDS
GENERAL
Deposits, reverse repurchase agreements and term notes are the primary
sources of the Company's funds for use in lending and for other general
business purposes. In addition, the Company obtains funds in the form of
13
<PAGE> 15
loan repayments and income from operations and the maturities and repayments of
securities. Loan repayments are a relatively stable source of funds, while net
increases in deposits and reverse repurchase agreements are significantly
influenced by general interest rates and money market conditions. Short-term
borrowings from the FHLB of New York may also be used to compensate for
reductions in normal sources of funds such as savings inflows at less than
projected levels.
DEPOSITS
The Company offers a limited number of fixed rate accounts. At
December 31, 1999, the Company had total deposits of $2.23 billion (excluding
accrued interest payable), of which $409.4 million or 18.36% consisted of
savings deposits, $105.4 million or 4.73% consisted of interest bearing demand
deposits, $103.7 million or 4.65% consisted of noninterest bearing deposits,
and $1,610.9 million or 72.26% consisted of time deposits. Time deposits
include $894.8 million of brokered deposits. These accounts have historically
been a stable source of funds. The Company also offers negotiable order of
withdrawal ("NOW") accounts, Super Now Accounts, special checking accounts and
commercial demand accounts. At December 31, 1999, the scheduled maturities of
time certificates of deposit and other time deposits in amounts of $100,000 or
more are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
3 months or less $ 503,839
3 to 6 months 141,962
6 to 12 months 88,947
over 12 months 527,534
-----------
Total $ 1,262,282
===========
</TABLE>
The following table sets forth the average amount and the average rate
paid on the following deposit categories for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Time deposits $ 1,377,977 5.44% $ 800,139 5.49% $ 470,429 5.50%
Savings deposits 405,288 3.07 372,696 3.04 353,977 3.03
Interest bearing demand deposits 105,774 2.93 91,308 3.00 73,337 2.64
Noninterest bearing demand deposits 120,059 -- 75,302 -- 54,004 --
----------- ---- ----------- ---- --------- ----
Total $ 2,009,098 4.51% $ 1,339,445 4.31% $ 951,747 4.05%
=========== ==== =========== ==== ========= ====
</TABLE>
The increase in deposits during the last three years is mainly the
result of the increase in the volume of business.
14
<PAGE> 16
BORROWINGS
The following table sets forth the borrowings of the Company at the
dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Reverse repurchase agreements $729,968 $506,325 $281,750
Term notes 79,000 84,000 112,000
Advances from FHLB 70,000 31,000
-------- -------- --------
Total $878,968 $621,325 $393,750
======== ======== ========
</TABLE>
The Company has made use of institutional reverse repurchase agreements
in order to obtain conventional Funds, primarily through investment banks and
brokerage firms. Such agreements are collateralized with investment securities.
The Company had $730.0 million in total reverse repurchase agreements
outstanding at December 31, 1999, at a weighted average rate of 5.26%. Reverse
repurchase agreements outstanding as of December 31, 1999, mature as follows:
within 30 days $149.3 million; in 2001 $45.0 million; in 2004 $19.0 million; in
2008 $195.6 million; and in 2009 $321.1 million.
At December 31, 1999, the Company had outstanding $79.0 million of term
notes payable, consisting of variable rate notes (85% to 89% of three month
LIBID rate), at a weighted average rate of 5.11%. The amount of $31.0 million
mature in 2000; $5.0 million mature in 2001; and $43.0 million mature in 2002.
The Company may obtain advances from the FHLB of New York upon the
security of the capital stock of the FHLB of New York it owns and certain
investments and home mortgages, provided that certain standards related to
creditworthiness are met. See "Regulation - Federal Home Loan Bank System". Such
advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. As of December 31,
1999, the Company had $70.0 million in outstanding advances from the FHLB, at a
weighted average rate of 5.70%. Advances from FHLB mature as follows: $25.0
million in 2000; $14.0 million in 2001; $10.0 million in 2008; and $21.0 million
in 2009.
The following table presents certain information regarding the
Company's short-term borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Reverse repurchase agreements:
Amount outstanding at year end $149,266 $ 47,345 $ 236,725
Monthly average outstanding balance 159,221 113,574 197,917
Maximum outstanding balance at any month-end 251,956 338,169 241,837
Weighted average interest rate during the year:
For the year 5.24% 5.51% 5.58%
At year end 5.99% 5.25% 5.71%
</TABLE>
15
<PAGE> 17
The Company enters into interest-rate swap agreements in managing its
interest rate exposure. Interest rate swap transactions generally involve the
exchange of fixed-and floating-rate interest payment obligations without the
exchange of the underlying principal amounts. Entering into interest-rate swap
agreements involves not only the risk of dealing with counterparties and their
ability to meet the terms of the contracts, but also the interest rate risk
associated with unmatched positions. The notional amounts are amounts in which
calculations and payments 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.
At December 31, 1999 and 1998, the Company had outstanding interest
swap agreements with other financial institutions, used to hedge the interest
rate risk on $71.0 million term notes bearing variable rates, and $438.5 million
and $218.3 million fixed rate certificates of deposit liabilities, respectively.
YIELDS EARNED AND RATES PAID
The net income of the Company depends primarily upon the difference or
spread between the interest income received on its interest-earning assets and
the interest paid on its interest-bearing liabilities. Net interest income
amounted to $56.3 million in 1997, $73.1 million in 1998 and $102.2 million in
1999. The increases in 1998 and 1999 were mainly the result of increases in
interest income from loans, investment securities and money market instruments
which were partially offset by a decrease on interest from mortgage-backed
securities and increases on interest expense on deposits and reverse repurchase
agreements.
16
<PAGE> 18
The following table reflects the interest income and interest expense, the
average balance, the average yield and the average rate paid for each major
category of interest-earning assets and interest-bearing liabilities for the
periods indicated:
<TABLE>
<CAPTION>
Interest Average Balance
-------------------------------- --------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans (1) $151,398 $102,913 $ 69,393 $1,686,477 $1,084,430 $ 686,057
Mortgage and other asset-
backed securities (2) 9,490 9,946 11,691 122,496 144,984 148,196
Investment securities (3) 65,926 40,519 29,590 1,009,945 596,255 452,392
Money market instruments 6,173 4,068 2,854 119,851 77,751 51,258
-------- -------- -------- ---------- ---------- ----------
Total interest-earning assets 232,987 157,446 113,528 2,938,769 1,903,420 1,337,903
-------- -------- -------- ---------- ---------- ----------
Interest-bearing liabilities:
Deposits 90,554 57,733 38,552 2,009,098 1,339,445 951,747
Reverse repurchase
agreements 33,511 20,467 13,810 672,657 392,868 247,214
Term notes 3,932 4,870 4,836 83,785 101,341 100,721
Advances from FHLB 2,809 1,238 -- 51,476 23,059 --
-------- -------- -------- ---------- ---------- ----------
Total interest-bearing liabilities 130,806 84,308 57,198 2,817,016 1,856,713 1,299,682
-------- -------- -------- ---------- ---------- ----------
Net interest income $102,181 $ 73,138 $ 56,330
======== ======== ========
Net interest-earning assets $ 121,753 $ 46,707 $ 38,221
========== ========== ==========
Net yield on interest-earning
assets (4)
Interest-earning assets to 104.32% 102.52% 102.94%
interest-bearing liabilities ratio ========== ========== ==========
<CAPTION>
Average Rate
-------------------------------
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans (1) 8.98% 9.49% 10.11%
Mortgage and other asset-
backed securities (2) 7.75 6.86 7.89
Investment securities (3) 6.53 6.80 6.54
Money market instruments 5.15 5.23 5.57
------- ------- -------
Total interest-earning assets 7.93% 8.28 8.50
------- ------- -------
Interest-bearing liabilities:
Deposits 4.51 4.31 4.05
Reverse repurchase
agreements 4.98 5.21 5.59
Term notes 4.69 4.81 4.80
Advances from FHLB 5.46 5.37 --
------- ------- -------
Total interest-bearing liabilities 4.64 4.54 4.41
------- ------- -------
Net interest income 3.29% 3.74% 4.09%
======= ======= =======
Net interest-earning assets
Net yield on interest-earning
assets (4) 3.48% 3.84% 4.21%
======= ======= =======
Interest-earning assets to
interest-bearing liabilities ratio
</TABLE>
- ---------------------
(1) Includes loans held for sale. Average loans exclude non-performing loans.
(2) Includes mortgage-backed securities available for sale.
(3) Includes trading account securities and investments available for sale.
(4) Net interest income divided by average interest-earning assets.
17
<PAGE> 19
The following table sets forth information regarding changes in
interest income and interest expense for the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(changes in volume times old rate) and (2) changes in rates (changes in rate
times old volume). The changes that are not due solely to volume or rate are
allocated based on the proportion of the change in each category.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------ ------------------------------------
Volume Rate Total Volume Rate Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (1) $ 54,321 $(5,836) $ 48,485 $ 38,045 $(4,525) $ 33,520
Mortgage and other assets-
backed securities (2) (2,743) 2,287 (456) (249) (1,496) (1,745)
Investment securities (3) 26,938 (1,531) 25,407 9,736 1,193 10,929
Money market instruments 2,169 (64) 2,105 1,395 (181) 1,214
-------- ------- -------- -------- ------- --------
Total increase (decrease) in interest
income 80,685 (5,144) 75,541 48,927 (5,009) 43,918
-------- ------- -------- -------- ------- --------
Interest expense:
Deposits 30,072 2,749 32,821 16,574 2,607 19,181
Reverse repurchase agreements 13,976 (932) 13,044 7,644 (987) 6,657
Term notes (826) (112) (938) 30 4 34
Advances from FHLB 1,550 21 1,571 1,238 -- 1,238
-------- ------- -------- -------- ------- --------
Total increase in interest expense 44,772 1,726 46,498 25,486 1,624 27,110
-------- ------- -------- -------- ------- --------
Increase (decrease) in net
interest income $ 35,913 $(6,870) $ 29,043 $ 23,441 $(6,633) $ 16,808
======== ======= ======== ======== ======= ========
</TABLE>
- ----------------------------
(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale and trading
securities.
(3) Includes investments available for sale.
The following table sets forth, for the periods indicated, certain
ratios reflecting the productivity and profitability of the Company:
<TABLE>
<CAPTION>
Year Ended December 31, (1)
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on total assets (2) 1.27% 1.42% 1.61%
Return on common stockholders' equity (3) 24.57 24.42 24.71
Dividend payout ratio to common stockholders (4) 20.48(5) 18.30(5) 16.61
Equity-to-asset ratio (6) 6.46 6.35 6.53
</TABLE>
- ----------------
(1) Averages computed by using beginning and end of year balances.
(2) Net income divided by average total assets.
(3) Net income attributable to common stockholders divided by average common
stockholders' equity.
(4) Common stockholders' dividend declared divided by net income attributable to
common stockholders.
(5) Includes, on a pro-forma basis, $2,524,819 dividends corresponding to the
second semester of 1998, which were declared for stockholders of record on
January 15, 1999, and paid on January 25, 1999. Amount was excluded from
1999 ratio.
(6) Average net worth divided by average total assets.
18
<PAGE> 20
MARKET AREA AND COMPETITION
The Company's primary market area is the western, southwestern and
southern areas of Puerto Rico. The Company has 26 branch offices in its primary
market area, 4 in the Metropolitan Area, 3 in northeastern Puerto Rico and 3 in
the southern area. The Company is looked at as the strongest and most
conservative bank of the Island, and as of December 31, 1999, it was the third
largest native commercial bank.
As of December 31, 1999, according to the Puerto Rico Department of
Labor, the average unemployment rate for the year was 11.7%. Puerto Rico has
experienced slow but steady growth in population and average income in recent
years. The principal businesses in the Company's primary market area are
farming, clothing manufacturing, pharmaceutical manufacturing, light industries
(including electronic equipment) and tuna and rum processing. Tuna industries in
the area have experienced a significant decrease in operations since 1990 as a
result of competitive market conditions from foreign countries. Management does
not expect this situation to have an adverse effect on the Company's results of
operations.
The Company competes mainly with other commercial banks in attracting
and retaining savings deposits and in making real estate and commercial loans.
There are 13 other banks, including affiliates of banks headquartered in the
United States, Canada and Spain operating in Puerto Rico. The Company is in
direct competition in loan origination in its primary market area, where its
most direct competitors are other Puerto Rico commercial banks.
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act ("CRA"), as implemented by federal
regulations, a financial institution has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires federal examiners, in connection with the examination of a financial
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Company has a Compliance Committee,
which oversees the planning of products, and services offered to the community,
especially those aimed to serve low and moderate income communities. The CRA
rated the Company as having a "satisfactory record of meeting community credit
needs".
FINANCIAL MANAGEMENT REQUIREMENTS
FDICIA imposed financial reporting requirements on all depository
institutions with assets of more than $500 million and their management and
independent auditors, and established new rules for the composition, duties, and
authority of such institutions' audit committees and boards of directors. Among
other things, all such depository institutions are required to prepare and make
available to the public annual reports on their financial condition, including
statements of management's responsibility for financial statements, internal
controls and compliance with certain Federal banking laws and regulations
relating to safety and soundness, and an assessment of the institution's
compliance with such internal controls, laws and regulations. The institution's
independent public accountants are required to attest to certain of these
management assessments.
19
<PAGE> 21
EMPLOYEES
At December 31, 1999, the Company had 814 full-time employees,
including its executive officers, and 6 part time employees.
REGULATIONS
Federal Regulation. The Company, as a bank holding company, is subject
to regulation, supervision, and examination by the Federal Reserve Board.
Westernbank, as a bank chartered under the laws of the Commonwealth of Puerto
Rico, is subject to regulation, supervision, and examination by the FDIC as its
primary federal regulator and by the Puerto Rico Commissioner of Financial
Institutions ("the Puerto Rico Commissioner").
THE COMPANY
FEDERAL REGULATION. The Company is a bank holding company subject to
the regulation, supervision, and examination of the Federal Reserve Board under
the Bank Holding Company Act of 1956, as amended. The Company is required to
file periodic reports and other information with the Federal Reserve Board, and
the Federal Reserve Board may conduct examinations of the Company.
The Company is subject to capital adequacy guidelines of the Federal
Reserve Board. The guidelines apply on a consolidated basis and require bank
holding companies to maintain a ratio of Tier 1 capital to total average assets
of 4.0% to 5.0%. There is a minimum ratio of 3.0% established for the most
highly rated bank holding companies. The Federal Reserve Board's capital
adequacy guidelines also require bank holding companies to maintain a minimum
ratio of qualifying total capital to risk-weighted assets of 8.0%, and a minimum
ratio of Tier 1 capital to risk-weighted assets of 4.0%. As of December 31,
1999, the Company's ratio of Tier 1 capital to total average assets was 6.68%,
its ratio of Tier 1 capital to risk-weighted assets was 12.12%, and its ratio of
qualifying total capital to risk-weighted assets was 13.22%.
The Company's ability to pay dividends to its stockholders and expand
its line of business through the acquisition of new banking or nonbanking
subsidiaries can be restricted if its capital falls below levels established by
the Federal Reserve Board's guidelines. In addition, any bank holding company
whose capital falls below levels specified in the guidelines can be required to
implement a plan to increase capital.
The Federal Reserve Board is empowered to initiate cease and desist
proceedings and other supervisory actions for violations of the Bank Holding
Company Act, or the Federal Reserve Board's regulations, orders or notices
issued thereunder. Under the Federal Reserve Board's regulations, banks and bank
holding companies which do not meet minimum capital adequacy guidelines are
considered to be undercapitalized and are required to submit an acceptable plan
for achieving capital adequacy.
Federal Reserve Board approval is required if the Company seeks to
acquire direct or indirect ownership or control of any voting shares of a bank
if, after such acquisition, the Company would own or control directly or
indirectly more than 5% of the voting stock of the bank. Federal Reserve Board
approval also must be obtained if a bank holding company acquires all or
substantially all of the assets of a bank or merges or consolidates with another
bank holding company.
Bank holding companies, like the Company, are prohibited from engaging
in activities other than banking and activities so closely related to banking or
managing or controlling banks as to be a proper incident thereto. The Federal
Reserve Board's regulations contain a list of permissible nonbanking activities
that are closely related to banking or managing or controlling banks. These
activities include lending activities, certain data
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processing activities, securities brokerage and investment advisory services,
trust activities and leasing activities. A bank holding company must file an
application or notice with the Federal Reserve Board prior to acquiring more
than 5% of the voting shares of a company engaged in such activities.
On November 12, 1999, President Clinton signed legislation to reform
the U.S. banking laws, including the Bank Holding Company Act. The changes made
to the Bank Holding Company Act by this legislation, referred to as the
Gramm-Leach-Bliley Act, became effective on March 11, 2000, and expanded the
permissible activities of the bank holding companies like the Company. In order
to engage in the expanded activities, the Company would have to file a notice to
become a financial holding company. As a financial holding company, the Company
would be permitted to own and control depository institutions and to engage in
activities that are financial in nature or incidental to the financial
activities, or activities that are complementary to a financial activity and do
not pose a substantial risk to the safety and soundness of the depository
institutions or the financial system generally. The legislation identifies
certain activities that are deemed to be financial in nature, including
nonbanking activities currently permissible for the bank holding companies to
engage in both within and outside the United States, as well as insurance and
securities underwriting and merchant banking activities. The Federal Reserve
Board is authorized under the legislation to identify additional activities that
are permissible financial activities.
In order to become a financial holding company and take advantage of
this new authority, the Company's depository institution subsidiaries, currently
Westernbank, must be well-capitalized and well-managed and have at least a
satisfactory record of performance under the Community Reinvestment Act. No
prior notice to the Federal Reserve Board would be required from a financial
holding company to acquire a company engaging in nonbanking activities or to
commence these activities directly or indirectly through a subsidiary. Although
the Company could qualify to become a financial holding company, it has no
present plan to change its status under the Bank Holding Company Act since it
has no plans to acquire a nonbanking company or engage in any new nonbanking
activities.
Under the Change in Bank Control Act, persons who intend to acquire
control of a bank holding company, either directly or indirectly or through or
in concert with one or more persons, must give 60 days' prior written notice to
the Federal Reserve Board. "Control" would exist when an acquiring party
directly or indirectly has voting control of at least 25% of the Company's
voting securities or the power to direct the management or policies of the
Company. Under Federal Reserve Board's regulations, a rebuttable presumption of
control would arise with respect to an acquisition where, after the transaction,
the acquiring party has ownership, control or the power to vote at least 10%
(but less than 25%) of the Company's common stock.
Under Puerto Rico law, no person or company may acquire direct or
indirect control of a holding company without first obtaining the prior approval
of the Puerto Rico Commissioner. Control is defined to mean the power to,
directly or indirectly, direct or decisively influence the management or the
operations of the holding company. Control is presumed to exist if a person or
entity, or group acting in concert, would become the owner, directly or
indirectly, of more than 5% of the voting stock of the holding company as a
result of the transfer of voting stock, and such person, entity or group did not
own more than 5% of the voting stock prior to the transfer.
The Company is required to give the Federal Reserve Board prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, will be equal to 10% or more of the Company's consolidated net worth.
The Federal Reserve Board may disapprove any purchase or redemption if it
determines that the proposal would constitute an unsafe and unsound practice, or
would violate any law, regulation, order or directive of the Federal Reserve
Board, or any
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<PAGE> 23
condition imposed by, or written agreement with, the Federal Reserve Board. Such
notice and approval is not required for a bank holding company that would be
treated as "well capitalized" under applicable regulations of the Federal
Reserve Board, that has received a composite "1" or "2" rating at its most
recent bank holding company inspection by the Federal Reserve Board, and that is
not the subject of any unresolved supervisory issues. Notwithstanding the
foregoing, any redemption of the Company's Series A or Series B preferred stocks
will require the prior approval of the Federal Reserve Board.
WESTERNBANK
PUERTO RICO BANKING LAW
Westernbank is a bank chartered under the Puerto Rico Banking Law and
its deposit accounts are insured up to applicable limits by the FDIC under SAIF
and BIF. Westernbank is subject to extensive regulation by the Puerto Rico
Commissioner as its chartering agency, and by the FDIC as the deposit insurer.
Westernbank must file reports with the Puerto Rico Commissioner and the FDIC
concerning its activities and financial condition, and it must obtain regulatory
approval prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions and opening or acquiring branch
offices. The Puerto Rico Commissioner and the FDIC conduct periodic examinations
to assess Westernbank's compliance with various regulatory requirements. This
regulation and supervision is intended primarily for the protection of the
deposit insurance funds and depositors. The regulatory authorities have
extensive discretion in connection with the exercise of their supervisory and
enforcement activities, including the setting of policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes.
Westernbank derives its lending, investment and other powers primarily
from the applicable provisions of the Puerto Rico Banking Law and the
regulations adopted thereunder. That law governs the responsibilities of
directors, officers and stockholders, and the corporate powers, savings,
lending, capital and investment requirements and other activities of
Westernbank. The Puerto Rico Commissioner has extensive rulemaking power and
administrative discretion under the Puerto Rico Banking Law, and generally
examines Westernbank on an annual basis.
The Puerto Rico Banking Law requires that at least 10% of the yearly
net income of Westernbank be credited annually to a reserve fund. This must be
done every year until the reserve fund is equal to the total paid-in capital for
common stock and preferred stock. At December 31, 1999, Westernbank had an
adequate reserve fund established. The Puerto Rico Banking Law also provides
that when the expenditures of a bank are greater than the receipts, the excess
is charged against the undistributed profits of the bank, and the balance, if
any, is charged against and reduces the reserve fund. If there is no reserve
fund sufficient to cover the entire amount, the excess amount is charged against
the capital account and no dividend can be declared until the capital has been
restored to its original amount and the reserve fund to 20% of the original
capital.
Under the Puerto Rico Banking Law, Westernbank must maintain a legal
reserve in an amount equal to at least 20% of Westernbank's demand liabilities,
except certain government deposits. At December 31, 1999, Westernbank had a
legal reserve of 103.72%.
The Puerto Rico Regulatory Financial Board (the "Financial Board")
which is part of the Office of the Commissioner, has the authority to regulate
the maximum interest rates and finance charges that may be charged on loans to
individuals and unincorporated businesses in the Commonwealth of Puerto Rico. In
February 1992 and again in November 1997, the Financial Board approved
regulations which provide that the applicable interest rate on loans to
individuals and unincorporated businesses is to be determined by free
competition. The Financial Board also has authority to regulate the maximum
finance charges on retail installment sales contracts, including credit card
purchases, which are currently set a 21%. There is no
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<PAGE> 24
maximum rate set for installment sales contracts involving motor vehicles,
commercial, agricultural and industrial equipment, commercial electric
appliances, and insurance premiums.
FEDERAL REGULATION OF WESTERNBANK
CAPITAL REQUIREMENTS. Westernbank is subject to minimum capital
requirements imposed by the FDIC that are substantially similar to the capital
requirements imposed on the Company. The FDIC regulations require that
Westernbank maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8.0%, and a minimum ratio of Tier 1 capital to
risk-weighted assets of 4.0%. In addition, under the minimum leverage-based
capital requirement adopted by the FDIC, Westernbank must maintain a ratio of
Tier 1 capital to average total assets (leverage ratio) of at least 3% to 5%,
depending on Westernbank's CAMELS rating. As of December 31, 1999, Westernbank's
ratio of total capital to risk-weighted assets was 13.22%, its ratio of Tier 1
capital to risk-weighted assets was 12.12%, and Westernbank's ratio of Tier 1
capital to average total assets was 6.68%. Capital requirements higher than the
generally applicable minimum requirements may be established for a particular
bank if the FDIC determines that a bank's capital is, or may become, inadequate
in view of its particular circumstances. Failure to meet capital guidelines
could subject a bank to a variety of enforcement actions, including actions
under the FDIC's prompt corrective action regulations.
ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. State banks are limited
in their investments and activities engaged in as principal to those permissible
under applicable state law and that are permissible for national banks and their
subsidiaries, unless such investments and activities are specifically permitted
by the Federal Deposit Insurance Act or the FDIC determines that such activity
or investment would pose no significant risk to the SAIF and BIF. The FDIC has
by regulation determined that certain real estate investment and securities
underwriting activities do not present a significant risk to the SAIF and BIF,
provided they are conducted in accordance with the regulations. Provisions of
the Gramm-Leach-Bliley Act permit national banks to establish financial
subsidiaries that may engage in the activities noted above that will be
permissible for financial holding companies, other than insurance underwriting,
merchant banking and real estate development and investment activities. In order
to exercise this authority, a bank and its depository institution affiliates
must be well-capitalized, well-managed and have CRA ratings of at least
"satisfactory." For a state bank, such activities also must be permissible under
relevant state law.
ENFORCEMENT. The FDIC, as well as the Puerto Rico Commissioner, has
extensive enforcement authority over insured banks, including Westernbank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and to unsafe or unsound practices.
DEPOSIT INSURANCE. Westernbank is subject to quarterly payments on
semiannual insurance premium assessments for its FDIC deposit insurance. The
FDIC implements a risk-based deposit insurance assessment system. Deposit
insurance assessment rates currently are within a range of $0.00 to $0.27 per
$100 of insured deposits, depending on the assessment risk classification
assigned to each institution. Under current FDIC assessment guidelines,
Westernbank expects that it will not incur any FDIC deposit insurance
assessments during the next fiscal year, although the current system for
assigning assessment risk classifications to insured depository institutions is
being reviewed by the FDIC and the deposit insurance assessments are subject to
change. Westernbank is subject to separate assessments to repay bonds ("FICO
bonds") issued in the late 1980's to recapitalize the former Federal Savings and
Loan Insurance Corporation. The assessment for the payments on the FICO bonds
for the quarter beginning on January 1, 2000 is 2.120 basis points for BIF-
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assessable deposits and 2.120 basis points for SAIF-assessable deposits. Most of
Westernbank's deposits are presently insured by SAIF.
FDIC insurance on deposits may be terminated by the FDIC, after notice
and hearing, upon a finding by the FDIC that the insured bank has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound condition
to continue operations as an insured bank, or has violated any applicable law,
regulation, rule or order of or condition imposed by or written agreement
entered into with the FDIC.
TRANSACTIONS WITH AFFILIATES OF WESTERNBANK. Transactions between
Westernbank and any of its affiliates, including the Company, are governed by
sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any
company or entity that controls, is controlled by or is under common control
with the bank. Generally, sections 23A and 23B (1) limit the extent to which a
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of the bank's capital stock and surplus, and
limit such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (2) require that all such transactions be on
terms that are consistent with safe and sound banking practices. The term
"covered transactions" includes the making of loans, purchase of or investment
in securities issued by the affiliate, purchase of assets, issuance of
guarantees and other similar types of transactions. Most loans by a bank to any
of its affiliates must be secured by collateral in amounts ranging from 100 to
130 percent of the loan amount, depending on the nature of the collateral. In
addition, any covered transaction by a bank with an affiliate and any sale of
assets or provision of services to an affiliate must be on terms that are
substantially the same, or at least as favorable, to the bank as those
prevailing at the time for comparable transactions with nonaffiliated companies.
In addition, Sections 22 (h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors, and principal
stockholders. Under Section 22 (h), loans to a director, an executive officer
and to a greater than 10% stockholder of a financial institution, and certain
affiliated interests of either, may or not exceed, together with all other
outstanding loans to such person and affiliated interests, the financial
institution's loans to one borrower limit (generally equal to 15% of the
institution's impaired capital and surplus). Section 22 (h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (I) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the financial
institutions. Section 22 (h) also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a financial
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22 (h) places additional restrictions on loans
to executive officers.
SAFETY AND SOUNDNESS STANDARDS. Westernbank is subject to certain FDIC
standards designed to maintain the safety and soundness of individual banks and
the banking system. The FDIC has prescribed safety and soundness guidelines
relating to (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
exposure; (v) asset growth and quality; (vi) earnings; and (vii) compensation
and benefit standards for officers, directors, employees and principal
stockholders. A state nonmember bank not meeting one or more of the safety and
soundness guidelines may be required to file a compliance plan with the FDIC.
PROMPT CORRECTIVE ACTION. Under the FDIC's prompt corrective action
regulations, insured institutions will be considered (i) "well capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater
(provided that the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive to meet and maintain a
specified capital level for any capital measure), (ii) "adequately capitalized"
if the
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<PAGE> 26
institution has a total risk-based capital ratio of 8% or greater, a Tier 1 risk
based capital ratio of 4% or greater and a leverage ratio of 4% or greater (3%
or greater if the institution is rated composite CAMELS 1 in its most recent
report of examination and is not experiencing or anticipating significant
growth), (iii) "undercapitalized" if the institution has a total risk-based
capital ratio that is less than 8%, or a Tier 1 risk-based ratio of less than 4%
and a leverage ratio that is less than 4% (3% if the institution is rated
composite CAMELS 1 in its most recent report of examination and is not
experiencing or anticipating significant growth), (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, Tier 1 risk-based capital ratio of less than 3% or a leverage
ratio that is less than 3%, and (v) "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%. Under certain circumstances, the FDIC can reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At December 31, 1999, the most recent notification
from the FDIC categorized Westernbank as a "well capitalized" institution.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency,
which would be the FDIC for Westernbank. An undercapitalized institution also is
generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches, or engaging in any new line of
business, except in accordance with an accepted capital restoration plan or with
the approval of the FDIC. In addition, the FDIC may take any other action that
it determines will better carry out the purpose of prompt corrective action
initiatives.
DIVIDEND RESTRICTIONS. Westernbank is not permitted to pay dividends
if, as the result of the payment, it would become undercapitalized, as defined
in the prompt corrective action regulations of the FDIC. In addition, if
Westernbank becomes "undercapitalized" under these regulations, payment of
dividends would be prohibited without the prior approval of the FDIC.
Westernbank also could be subject to these dividend restrictions if the FDIC
determines that Westernbank is in an unsafe or unsound condition or engaging in
an unsafe or unsound practice.
OTHER. The Gramm-Leach-Bliley Act imposes certain obligations on
financial institutions, including state-chartered banks like Westernbank, to
develop privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request, and establish procedures and
practices to protect and secure customer data. These privacy provisions will be
implemented by regulations that will take effect on or after November 12, 2000.
FEDERAL HOME LOAN BANK SYSTEM
The Company, through its subsidiary, is a member of the FHLB System.
The System consists of 12 regional Federal Home Loan Banks, with each subject to
supervision and regulation by the Federal Housing Finance Board. The Federal
Home Loan Bank provides a central credit facility primarily for member
institutions. The Company, as a member of the FHLB of New York, is required to
acquire and hold shares of capital stock in that FHLB in an amount equal to the
greater of 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or 5% of its FHLB advances outstanding or one percent of thirty
percent of total assets. At December 31, 1999, the Company had $12.8 million in
FHLB's capital stock.
Advances from the FHLB of New York are secured by a member's shares of
stock in the FHLB of New York, certain type of mortgages and other assets.
Interest rates charged for advances vary depending upon
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<PAGE> 27
maturity and the cost of funds to the FHLB of New York. As of December 31, 1999,
there were $70.0 million in outstanding advances from the FHLB of New York.
LIQUIDITY
Liquidity refers to the Company's ability to generate sufficient cash
to meet the funding needs of current loan demand, savings deposit withdrawals,
principal and interest payments with respect to outstanding borrowings and to
pay operating expenses. The Company monitors its liquidity in accordance with
guidelines established by the Investment Committee and applicable regulatory
requirements. The Company's need for liquidity is affected by loan demand, net
changes in deposit levels and the scheduled maturities of its borrowings.
Liquidity demand caused by net reductions in deposits are usually caused by
factors over which the Company has limited control. The Company derives its
liquidity from both its assets and liabilities. Liquidity from assets by receipt
of interest and principal payments and prepayments, by the ability to sell
assets at market prices and by utilizing unpledged assets as collateral for
borrowings. Liquidity is derived from liabilities by maintaining a variety of
funding sources, including deposits, advances from the FHLB of New York and
other short and long-term borrowings.
The Company's liquidity targets are reviewed monthly by the Investment
Committee and are based on the Company's commitment to make loans and
investments and its ability to generate funds. The Committee's targets are also
affected by yields on available investments and upon the Committee's judgment as
to the attractiveness of such yields and its expectations as to future yields.
The Company's investment portfolio at December 31, 1999 had an average
maturity of 167 months. However, no assurance can be given that such levels will
be maintained in future periods.
As of December 31, 1999, the Company had line of credit agreements with
two commercial banks permitting the Company to borrow a maximum aggregate amount
of $30.0 million (no borrowings were made during the year ended December 31,
1999 under such lines of credit). The agreements provide for unsecured advances
to be used by the Company on an overnight basis. Interest rate is negotiated at
the time of the transaction. The credit agreements are renewable annually.
CAPITAL, DIVIDENDS, STOCK SPLIT AND OPTION PLANS
Total shareholders' equity as a measure of capital increased by
approximately $69.5 million in 1999 and $52.0 million in 1998.
In June 1998, Westernbank issued 1,219,000 shares of 7.125%
Non-cumulative, Convertible Monthly Income Preferred Stock, Series A, with a
liquidation preference of $25.00 per share. Proceeds from the issuance of
preferred stock amounted to $29.1 million, net of $1.3 million of issuance
costs. Dividends on Series A Preferred Stock, when and if declared by the Board
of Directors, shall be payable monthly in arrears on the 15th day of each month
of each year, at the annual rate per share of 7.125% of the $25 liquidation
preference (equivalent to $1.78 per share per annum). The amount of dividends
paid for any monthly dividend period will be computed on the basis of twelve
30-day months and a 360-day year. The amount of dividends payable for any period
shorter than a full month dividend period will be computed on the basis of the
actual number of days elapsed in such period. Each share is convertible, at the
holder's option, at any time on or after the 90th date following the issue date,
into .995 shares of the Company's common stock, subject to adjustment upon
certain events. The per share conversion ratio equates to a price of $25.125 per
share of common stock. The Company may redeem the preferred stock at any time at
the following redemption prices, if redeemed during the 12-month period
beginning July 1 of the years indicated below, plus the accrued and unpaid
dividends, if any, for the then current
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dividend period to the date of redemption: in 2002 - $26.00; in 2003 - $25.75;
in 2004 - $25.50; in 2005 - $25.25; and in 2006 and thereafter - $25.00.
In April and June 1999, Westernbank issued 2,001,000 shares of 7.25%
Non-cumulative, Non-convertible Monthly Income Series B Preferred Stock, with a
liquidation preference of $25 per share. Proceeds from the issuance of preferred
stock amounted to $48.3 million, net of $1.8 million of issuance costs.
Dividends on Series B Preferred Stock, when and if declared by the Board of
Directors, shall be payable monthly in arrears on the 15th day of each month of
each year, at the annual rate per share of 7.25% of the $25 liquidation
preference (equivalent to $1.81 per share per annum). The amount of dividends
paid for any monthly dividend period will be computed on the basis of twelve
30-day months and a 360-day year. The Company may redeem the preferred stock at
any time at the following redemption prices, if redeemed during the 12-month
period beginning May 28 of the years indicated below, plus the accrued and
unpaid dividends, if any, for the then current dividend period to the date of
the redemption: in 2004 - $26.00; in 2005 - $25.50; and in 2006 and thereafter -
$25.00.
Series A and B Preferred Stocks rank senior to the Company's common
stock as to dividends and liquidation rights. Dividends declared on preferred
stock for the years ended December 31, 1999 and 1998 amounted to $4.3 million
and $1.1 million, respectively.
In 1998, Westernbank acquired and retired 165,674 shares of common
stock for $2,427,441, and exchanged 12,163 shares in treasury for land amounting
$225,014. The remaining 6,346,901 shares in treasury were retired in December
1998. During 1999, Westernbank acquired and retired 80,309 shares of common
stock for $1,222,100.
Total common stock dividends declared in 1999 amounted to $9.2 million
compared to $2.5 million in 1998.
On February 3, 2000, the Board of Directors approved an increase on its
annual dividend payments to shareholders in 2000 to $0.20 per share. This
represents an increase of 25% over the dividends paid the previous year of $0.16
per share.
In June 1999, the Board of Directors approved the 1999 Qualified Stock
Option Plan (the "1999 Qualified Option Plan") and the 1999 Nonqualified Stock
Option Plan (the "Nonqualified Option Plan"), for the benefit of employees of
the Company and its subsidiaries. Under the 1999 Qualified Option Plan, options
for up to 4,200,000 shares of common stock can be granted. Also, options for up
to 4,200,000 shares 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 the both is $13.00. Both plans will remain in effect for a
term of 10 years. At December 31, 1999 no options had been granted to employees.
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COMMONWEALTH TAXATION
GENERAL
Under the Puerto Rico Internal Revenue Code, all companies are treated
as separate taxable entities and are not entitled to file consolidated tax
returns. The Company and Westernbank (the "Companies") report their income and
expenses based on the accrual basis of accounting and file their Puerto Rico
tax returns on a calendar year basis.
INCOME TAXES
The Companies are subject to Puerto Rico regular income tax on income
earned from all sources up to a maximum rate of 39%.
The Puerto Rico income tax act disallows any interest deduction which
is allocable to income earned from tax exempt obligations acquired after
December 31, 1987. For purposes of the above determination, each company is
required to allocate interest expense to exempt interest income based on the
ratio that the average exempt obligations bear to the total average assets of
each company.
The Companies are also subject to an alternative minimum tax ("AMT")
equal to 22% of the alternative minimum taxable income. The alternative minimum
taxable income is equal to each company's taxable income adjusted for certain
items. The principal adjustments for determining each company's alternative
minimum taxable income are the following: (i) no deduction may be claimed with
respect to the company's interest expense allocable to interest income derived
from tax exempt obligations acquired before January 1, 1988, other than
mortgages guaranteed by the government of Puerto Rico, its agencies,
instrumentalities and political subdivisions, issued before September 1, 1987;
and (ii) the alternative minimum taxable income is increased by 50% of the
amount by which the corporation's book income (adjusted for certain items)
exceeds its alternative minimum taxable income without regard to this
adjustment.
The AMT is payable if it exceeds regular income tax. The excess of AMT
over regular income tax paid in any one year may be used to offset regular
income tax in future years, subject to certain limitations. Westernbank income
tax was based on regular income tax rates since 1994.
The Puerto Rico Internal Revenue Code provides a dividend received
deduction of 100% on dividends received from "controlled subsidiaries" subject
to taxation in Puerto Rico, like Westernbank. Until December 31, 1999, the
Company had no operations other than those resulting from dividends received
from its investment in Westernbank.
For the year ended December 31, 1999, the Company had approximately
$33.6 million of regular taxable income, on which it was required to pay current
income tax of $13.8 million. The income on certain investments is exempt for
income tax purposes. Also, activities relating to the Westernbank International
division are exempt for income tax purposes. As a result of the above, the
Company's effective tax rate is substantially below the statutory rate.
Effective August 1, 1997, interest earned on FHA and VA loans and
securities backed by such loans originated after July 31, 1997, which were
previously tax exempt (after disallowance of related expenses), began to pay
income taxes except for FHA and VA mortgages for new construction projects. This
change does not alter the tax-exempt status of FHA and VA loans and securities
backed by such loans originated prior to July 31, 1997. This change did not have
a significant effect on the Company's financial condition or results of
operation.
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ITEM 2. PROPERTIES
The Company owns the condominium office space housing its main office
at 19 West McKinley Street, Mayaguez, Puerto Rico.
The Company's investment in premises and equipment, exclusive of
leasehold improvements, at December 31, 1999, was $34.8 million. The combined
net book value of the Company's condominium office space and main office
building as of December 31, 1999 was $1.5 million.
The Company leases most of its branch offices. The net book value of
leasehold improvements was $3.6 million as of December 31, 1999. Leases on 24 of
the branches expire or have option periods expiring after 2000.
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The following table presents information about the Company's leased branch
offices at December 31, 1999:
<TABLE>
<CAPTION>
Book Value of Leasehold Lease
Location Improvements Expiration Date (*)
-------- ------------ -------------------
<S> <C> <C>
Mayaguez, Puerto Rico
Mayaguez Mall $ 313,292 March 31, 2001
Mayaguez Town Center 206,062 March 30, 2002
Aguadilla
Town 6,749 September 14, 2002
Marbella 12,625 August 30, 2001
Aguadilla Mall 337,041 September 30, 2004
San Sebastian
San Sebastian I 8,438 March 30, 2002
San Sebastian II 4,197 January 31, 2001
Aguada 2,179 September 7, 2002
Anasco
Anasco I 1,206 Month to Month
Anasco II 9,659 Month to Month
Quebradillas 8,714 July 31, 2002
Camuy 310,880 May 30, 2002
Cabo Rojo I 24,442 October 1, 2001
Sabana Grande
Sabana Grande II 2,190 April 30, 2003
Lares 2,096 August 30, 2001
Rincon 7,944 December 31, 2000
Lajas
Lajas I 55,555 January 14, 2005
Lajas II 1,467 March 31, 2001
Carolina
Campo Rico 678,006 March 31, 2004
Plaza Carolina 439,270 January 31, 2002
Ponce
Ponce I 97,557 June 30, 2003
Ponce El Tuque 3,123 April 30, 2004
Canovanas 4,107 May 30, 2004
Rio Grande 9,734 October 31, 2000
San German - Plaza del Oeste 1,935 November 12, 2001
Yauco 52,082 October 31, 2001
Hato Rey 164,839 October 31, 2002
Caguas 697,040 August 27, 2002
Other leased facilities 94,728 June 30, 2002
----------
Total $3,557,157
==========
</TABLE>
(*) Excludes renewal options.
At December 31, 1999, the Company's future rental commitments under
non-cancelable operating leases aggregated $5.5 million, not considering
renewal options.
30
<PAGE> 32
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business,
which in the aggregate are not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from pages
12 through 14 of the Company's 1999 Annual Report to Stockholders, which is
filed herein as Exhibit 13.1 ("1999 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from pages
15 and 16 of the Company's 1999 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required herein is incorporated by reference from page
3 through 12 of the Company's 1999 Annual Report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability
management function is to evaluate the interest rate risk included in certain
balance sheet accounts and in off-balance sheet commitments, determine the
appropriate level of risk given the Company's business focus, operating
environment, capital and liquidity requirements and performance objectives,
establish prudent asset concentration guidelines and manage the risk consistent
with Board of Directors approved guidelines. Through such management, the
Company seeks to reduce the vulnerability of its operations to changes in
interest rates and to manage the ratio of interest rate sensitive assets to
interest rate sensitive liabilities within specified maturities or repricing
dates.
The Company's profitability is dependent to a large extent upon its
net interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and borrowings. The
Company is subject to interest rate risk to the degree that its
interest-earning assets reprice differently than its interest-bearing
liabilities.
Interest rate risk can be defined as the exposure of the Company's
operating results or financial position to adverse movements in market interest
rates which mainly occur when assets and liabilities reprice at different
times and at different rates. The Company manages its mix of assets and
liabilities with the goals of limiting its exposure to interest rate risk,
ensuring adequate liquidity, and coordinating its sources and uses of funds.
Specific strategies have included shortening the amortized maturity of
fixed-rate loans and increasing the
31
<PAGE> 33
volume of variable rate loans to reduce the average maturity of the Company's
interest-earning assets and entering into interest rate exchange agreements
(swaps) to hedge variable term notes and fixed callable certificates of
deposit.
The Company is exposed to a reduction in the level of Net Interest
Income ("NII") in a rising interest rate environment. NII will fluctuate
pursuant to changes in the levels of interest rates and of interest-sensitive
assets and liabilities. If (1) the weighted average rates in effect at year end
remain constant, or increase or decrease on an instantaneous and sustained
change of plus or minus 200 basis points, and (2) all scheduled repricing,
reinvestments and estimated prepayments, and reissuances are at such constant,
or increase or decrease accordingly; NII will fluctuate as shown on the table
below:
December 31, 1999:
<TABLE>
<CAPTION>
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollar in thousands)
<S> <C> <C> <C>
+200 Basis Points $ 84,334 $(16,330) (16.22)%
Base Scenario 100,664 -- --
-200 Basis Points 115,736 15,072 14.97%
December 31, 1998:
<CAPTION>
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollar in thousands)
<S> <C> <C> <C>
+200 Basis Points $80,318 $(3,916) (4.65)%
Base Scenario 84,234 -- --
-200 Basis Points 88,376 4,142 4.92%
</TABLE>
- -------------------------------------
(1) The NII figures exclude the effect of the amortization of loan fees.
The model utilized to create the information presented above makes
various estimates at each level of interest rate change regarding cash flows
from principal repayments on loans and mortgage-backed securities and/or call
activity on investment securities. Actual results could differ significantly
from these estimates which would result in significant differences in the
calculated projected change. In addition, the limits stated above do not
necessarily represent the level of change under which management would
undertake specific measures to realign its portfolio in order to reduce the
projected level of change.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required herein are
incorporated by reference from page 19 through 56 of the Company's 1999 Annual
Report.
32
<PAGE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein with respect to directors is
incorporated herein by reference from the definitive proxy statement of the
Company to be filed supplementary.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
definitive proxy statement to be filed supplementary.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
definitive proxy statement to be filed supplementary.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
definitive proxy statement to be filed supplementary.
33
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) The following financial statements are incorporated
by reference from Item 8 hereof (see Exhibit 13):
Report of Independent Accountants
Consolidated Statements of Financial Condition as of December 31, 1999
and 1998
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1999
Consolidated Statements of Changes in Stockholders' Equity and of
Comprehensive Income for each of the three years in the period ended
December 31, 1999
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1999
Notes to Consolidated Financial Statements
(2) Index to financial statement schedules. Not
applicable.
(3) The following exhibits are filed as part of this
Form 10-K, and this list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Exhibit
- --- -------
<S> <C>
3.1 Articles of Incorporation (incorporated by reference herein to Exhibit
3.1 to the Company's Registration Statement on Form S-4, File No.
333-76975)
3.2 Bylaws (incorporated by reference herein to Exhibit 3.2 to the
Company's Registration Statement on Form S-4, File No. 333-76975)
10.1 Form of 1999 Qualified Stock Option Plan (incorporated by reference
herein to Exhibit 10.1 to the Company's Registration Statement on Form
S-4, File No. 333-76975)
10.2 Form of 1999 Nonqualified Stock Option Plan (incorporated by reference
herein to Exhibit 10.2 to the Company's Registration Statement on Form
S-4, File No. 333-76975)
13.1 Annual Report to Stockholders
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
(b) No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
(c) See (a)(3) above for all exhibits filed herewith and the
Exhibit Index.
(d) Separate financial statements are not applicable.
- -----------------------------
* Incorporated herein by reference from the Company's Form S-4, as
amended, filed with Securities and Exchange Commission on April 23,
1999 (Registration No. 333).
34
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
W Holding Company, Inc.
BY: /s/ Frank C. Stipes
--------------------------------------- Date: March 30, 2000
Frank C. Stipes, Chairman of the
Board, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Frank C. Stipes
--------------------------------------- Date: March 30, 2000
Frank C. Stipes, Chairman of the
Board, Chief Executive Officer and
President
/s/ Angel L. Rosas
--------------------------------------- Date: March 30, 2000
Angel L. Rosas, Director
/s/ Cesar A. Ruiz
--------------------------------------- Date: March 30, 2000
Cesar A. Ruiz, Director
/s/ Pedro R. Dominguez
--------------------------------------- Date: March 30, 2000
Pedro R. Dominguez, Director
/s/ Cornelius Tamboer
--------------------------------------- Date: March 30, 2000
Cornelius Tamboer, Director
/s/ Fredeswinda G. Frontera
--------------------------------------- Date: March 30, 2000
Fredeswinda G. Frontera, Directress
/s/ Freddy Maldonado
--------------------------------------- Date: March 30, 2000
Freddy Maldonado
Chief Financial Officer and
Vice President of Finance and Investment
35
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
- -------- -------
<S> <C>
3.1 Articles of Incorporation (incorporated by reference
herein to Exhibit 3.1 to the Company's Registration
Statement on Form S-4, File No. 333-76975)
3.2 Bylaws (incorporated by reference herein to Exhibit 3.2 to the
Company's Registration Statement on Form S-4, File No. 333-76975)
10.1 Form of 1999 Qualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.1 to
the Company's Registration Statement on Form S-4,
File No. 333-76975)
10.2 Form of 1999 Nonqualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.2 to
the Company's Registration Statement on Form S-4,
File No. 333-76975)
13.1 Annual Report to Stockholders
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
36
<PAGE> 1
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands)
1999 1998
---- ----
FINANCIAL CONDITION
<S> <C> <C>
Total assets $ 3,374,571 $ 2,481,176
Loans, net and mortgage loans held for sale 1,871,742 1,361,297
Trading, available for sale and held to maturity
investment securities 1,198,007 892,169
Total liabilities 3,150,751 2,326,894
Deposits 2,247,865 1,690,529
Securities sold under agreements to repurchase 729,968 506,325
Total Stockholders' equity 223,819 154,282
EARNINGS
Total interest income $ 232,987 $ 157,446
Total interest expense (130,806) (84,308)
------------ ------------
Net interest income 102,181 73,138
Provision for loan losses (14,000) (6,000)
Other income 12,239 10,154
Operating expenses (53,816) (41,705)
Provision for income taxes (9,480) (6,892)
------------ ------------
Net income $ 37,124 $ 28,695
============ ============
Net income attributable to common stockholders $ 32,817 $ 27,604
============ ============
RATIOS
Return on assets 1.27% 1.42%
Return on common stockholders' equity 24.57% 24.42%
Equity to asset ratio 6.46% 6.35%
Efficiency ratio 47.18% 49.31%
Operating expenses to total assets 1.59% 1.68%
Basic and diluted earnings per share of common stock $ 0.78 $ 0.66
Book value per share of common stock $ 3.41 $ 2.94
Total capital to risk-weighted assets 13.22% 11.74%
Tier I capital to risk-weighted assets 12.12% 10.61%
Tier I capital to total average assets 6.68% 6.37%
Net yield on interest-earning assets 3.48% 3.84%
Branches 36 36
</TABLE>
1
<PAGE> 2
DESCRIPTION OF THE BUSINESS
W Holding Company, Inc. ("Company") is a bank holding company offering
a full range of financial services through its wholly owned subsidiary,
Westernbank Puerto Rico ("Westernbank"). The Company was organized under the
laws of the Commonwealth of Puerto Rico in February 1999. Effective November
30, 1999, pursuant to a resolution approved by the stockholders and after
receiving all pertinent regulatory approvals, a reorganization was effected as
a result of which the Company became the sole shareholder of Westernbank Puerto
Rico. In connection with the reorganization, each outstanding share of
Westernbank's common stock and preferred stock were converted into similar
shares of the Company on a one for one exchange. Up to December 31, 1999, the
Company had no operations other than those resulting from its investment in
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 it became a federal mutual savings
bank. In February 1985, the savings bank was converted to the stock form of
ownership. Westernbank, headquartered in Mayaguez, which is on Puerto Rico's
West coast, conducts business through 36 service branches, 26 in the West of
Puerto Rico, 4 in the Metropolitan Area, 3 in the Northeastern region, and 3 in
the Southern region of Puerto Rico, including one regional office. During 1996,
Westernbank commenced operating a division known as Westernbank International
to offer commercial banking and related services outside of Puerto Rico. In
February 1998, Westernbank acquired 80% of the voting shares of SRG, Inc., a
Puerto Rico corporation that operates a shared electronic funds transfer
network. In March 1999, Westernbank acquired the remaining 20% of the voting
shares of SRG Net, Inc. The assets, liabilities, revenues and expenses of the
subsidiary at December 31, 1999 and 1998 and for the years then ended are not
significant.
The principal business of the Company consists of attracting deposits
from the general public and utilizing such funds and proceeds from reverse
repurchase agreements and other borrowings, to invest in residential mortgage
loans, commercial loans collateralized with real estate, consumer loans and
other loans.
The Company is subject to examination, regulation and periodic
reporting under the Bank Holding Company Act of 1956, as amended, which is
administered by the Board of Governors of the Federal Reserve System.
Westernbank is subject to examination and comprehensive regulation by the
Department of the Treasury, the Puerto Rico Commissioner of Financial
Institutions and the Federal Deposit Insurance Corporation ("FDIC"). In
addition, Westernbank is subject to the regulations of the Puerto Rico
Regulatory Financial Board with respect to rates and fees charged on certain
loans to individuals, and to the regulations of the Puerto Rico Treasury
Department and the Commissioner of Financial Institutions. Westernbank is a
member of the Federal Home Loan Bank ("FHLB") of New York, which is one of the
twelve regional banks comprising the Federal Home Loan Bank System ("FHLB
System"). Deposits with Westernbank are insured to the maximum extent provided
by law through the Savings Association Insurance Fund ("SAIF") and Bank
Insurance Fund ("BIF") which are administered by the FDIC.
The Company and Westernbank are subject to Puerto Rico regular income
tax or alternative minimum tax ("AMT") on income earned from all sources.
2
<PAGE> 3
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial discussion contains an analysis of the consolidated
financial position and financial performance of W Holding Company, Inc. and its
wholly owned subsidiary, Westernbank Puerto Rico.
The Company's principal source of earnings is its net interest income.
This is the difference between interest income on loans and mortgage-backed
securities, investments, and other assets ("interest-earning assets") and its
interest expense on deposits and borrowings, including reverse repurchase
agreements, term notes and advances from the Federal Home Loan Bank
("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 and
service charges, fees and other income, also affect income. The Company's net
income is also affected by the level of its non-interest expenses, such as
compensation, employees' benefits, occupancy costs and other operating
expenses.
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. Therefore,
management has followed a conservative practice inclined towards the
preservation of capital with adequate returns. The Company's Investment
Committee, which includes the Board of Directors and senior management, is
responsible for the asset-liability oversight. The Investment Department is
responsible for implementing the policies established by the Investment
Committee.
The policies generated and practices followed are intended to retain
depositor's confidence, obtain a favorable match between the maturity of its
interest-earning assets and interest-bearing liabilities, and enhance the
stockholders' investment in the Company.
The Company's 1999 growth was mainly related to high volume of
mortgage origination, increase in commercial real estate portfolio, continued
effective management of interest rate risk and a tight control of operating
expenses. Net income available to common stockholders increased to $32.8
million, up 18.9% from $27.6 million in 1998. The Company's profitability
ratios for 1999 represented returns of 1.27% on assets (ROA) and 24.57% on
common stockholder's equity (ROE), compared with an ROA and ROE of 1.42% and
24.42%, respectively in 1998.
Different components that impacted the Company's performance are discussed in
detail in the following pages. In addition, the selected financial data table
provides relevant operational ratios and information for the last five years.
3
<PAGE> 4
FINANCIAL CONDITION
The Company had total assets of $3.37 billion, and $2.48 billion and
$1.56 billion as of December 31, 1999, 1998 and 1997, respectively; an increase
of $893.4 million or 36.01% in 1999 and $925.4 million or 59.48% in 1998. As of
December 31, 1999, total liabilities amounted to $3.15 billion, an increase of
$823.9 million or 35.41% when compared to $2.33 billion as of December 31, 1998.
In 1998, an increase of $873.3 million or 60.10% was experienced when compared
to total liabilities amounting to $1.45 billion, at December 31, 1997.
INTEREST-EARNING ASSETS
Interest-earning assets amounted to $3.23 billion at December 31, 1999,
an increase of $870.6 million or 36.92% when compared to $2.36 billion as of
December 31, 1998. In 1998, an increase of $888.2 million or 60.66% was
experienced when compared to 1998 interest-earnings assets amounting to $1.46
billion at December 31, 1997.
During 1999 and 1998, the Company's continued its emphasis in the
credit granting activity. As a result, the real estate-mortgage and construction
loans portfolio (other than commercial) including mortgage loans held for sale
increased from $254.6 million as of December 31, 1997, to $476.5 million as of
December 31, 1998, to $808.8 million as of December 31, 1999, an increase of
$221.9 million or 87.16% in 1998 and an increase of $332.3 million or 69.74% in
1999. The Company also maintained its marketing efforts on commercial loans
collateralized by real estate. Such loans increased from $234.1 million as of
December 31, 1997, to $518.9 million as of December 31, 1998, and to $677.9
million as of December 31, 1999, an increase of $284.8 million or 121.66% in
1998 and $159.0 million or 30.64% in 1999. The consumer loan portfolio
(including auto loans purchased with recourse and credit cards portfolio),
commercial loans (not collateralized by real estate) and other loans increased
from $381.7 million as of December 31, 1998, to $409.0 million as of December
31, 1999, an increase of $27.3 million or 7.15%. In 1998, an increase of $72.4
million or 23.41% was experienced when compared to the consumer loan portfolio
amounting to $309.3 million, at December 31, 1997.
Securities purchased under agreements to resell ("repurchase
agreements") increased from $42.9 million as of December 31, 1997, to $91.2
million as of December 31, 1998, to $120.7 million as of December 31, 1999,
an increase of $48.3 million or 112.59% in 1998 and $29.5 million or 32.35% in
1999. Investment securities held to maturity, which principally include United
States and Puerto Rico Governments and agency obligations and mortgage-backed
securities increased from $625.8 million as of December 31, 1997, to $871.8
million as of December 31, 1998, to $1,174.5 million as of December 31, 1999,
an increase of $246.0 million or 39.31% in 1998 and $302.7 million or 34.72% in
1999. Investments available for sale increased from $15.2 million as of
December 31, 1998, to $22.2 million as of December 31, 1999, an increase of
$7.0 million or 46.05%. There were no investments available for sale at
December 31, 1997. Trading securities amounted to $1.3 million as of
December 31, 1999, $5.1 million as of December 31, 1998 and $5.3 million as of
December 31, 1997.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities amounted to $3.11 billion at December 31,
1999, an increase of $807.0 million or 35.06% when compared to $2.30 billion as
of December 31, 1998. In 1998, an increase of
4
<PAGE> 5
$874.7 million or 60.86% was experienced when compared to interest-bearing
liabilities amounting to $1.44 billion, at December 31, 1997.
The increase during 1999 was mainly due to an increase of $557.3
million in deposits, $223.6 million in securities sold under agreements to
repurchase ("reverse repurchase agreements"), $39.0 million in advances from
FHLB, net of a decrease of $5.0 million in term notes. The increase in 1998 was
mainly related to a rise of $647.1 million in deposits, $224.6 million in
reverse repurchase agreements, $31.0 million in advances from Federal Home Loan
Bank, net of a decrease of $28.0 million in term notes.
The Company offers a variety of specialized types of deposit accounts
and certificates of deposit. Savings deposits increased from $362.3 million as
of December 31, 1997, to $403.8 million as of December 31, 1998, to $409.4
million as of December 31, 1999, an increase of $41.5 million or 11.45% in 1998
and $5.6 million or 1.39% in 1999. Also, other deposits, represented mainly by
time deposits, increased from $681.1 million as of December 31, 1997, to $1.29
billion as of December 31, 1998, to $1.84 billion as of December 31, 1999, an
increase of $605.7 million or 88.93% in 1998 and $551.7 million or 42.87% in
1999. Other deposits include brokered deposits amounting to $894.8 million,
$416.2 million and $92.3 million, as of December 31, 1999, 1998 and 1997,
respectively.
STOCKHOLDERS' EQUITY
As of December 31, 1999, total stockholders' equity amounted to $223.8
million, an increase of $69.5 million or 45.04% when compared to $154.3 million
as of December 31, 1998. In 1998, and increase of $52.1 million or 50.98% was
experienced when compared to total stockholders' equity amounting to $102.2
million at December 31, 1997. The increase during 1999 was mainly due to a net
income of $37.1 million and the issuance of Series B preferred stock for $48.3
million, net of dividends paid on common and preferred stock of $13.6 million
and the repurchase of 80,309 shares of common stock for $1.2 million. The
increase in 1998 was mainly due to a net income of $28.7 million and the
issuance of Series A preferred stock for $29.1 million, net of dividends paid on
common and preferred stock of $3.6 million and the repurchase of 165,674 shares
of common stock for $2.4 million.
In 1999, the Company issued 2,001,000 shares of 7.25% Non-cumulative,
Non-convertible Monthly Income Preferred Stock, 1999 Series B, with a
liquidation preference of $25.00 per share. In 1998, the Company issued
1,219,000 shares of 7.125% Non-cumulative, Convertible Preferred Stock, 1998
Series A with a liquidation preference of $25.00 per share. Both preferred stock
rank senior to the Company's common stock as to dividends and liquidation
rights.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the main source of earnings of the
Company. As further discussed in the Asset/Liability Management section, the
Company uses several tools to manage the risks associated with the composition
and repricing of assets and liabilities.
Net interest income increased $29.0 million or 39.71% for the year
ended December 31, 1999, reaching $102.2 million, compared to $73.1 million
reported in 1998. In 1997, net interest income totaled $56.3 million. In 1998,
net interest income increased $16.8 million or 29.84%. The increases in 1999 and
1998 when compared to the corresponding prior year were primarily the result of
increases in interest income from loans and investment securities, which were
partially offset by increases in interest expense on deposits and reverse
repurchase agreements.
Average interest-earning assets increased $1.0 billion or 54.39% from
1998 to 1999 and $565.5 million or 42.27% from 1997 to 1998, being the principal
reason for the increase in net interest income. The rise in average
interest-earning assets in both periods is mainly related to increases in
average loans, which is the higher yielding category of interest-earning assets,
followed by a significant increase in investment securities.
Interest income on loans amounted to $151.4 million for the year ended
December 31, 1999, compared to $102.9 million in 1998 and $69.4 million in 1997.
Mortgage loans accounted for the majority of the increase in average loans in
1999 and 1998. The increase was mainly attributed to the purchase of mortgage
loans. In addition, commercial real estate loans contributed to the increase as
a result of business growth experienced during 1999 and 1998. The average yield
on loans decreased from 10.11% for the year ended December 31, 1997 to 9.49% for
the year ended December 31, 1998 and to 8.98% for the year ended December 31,
1999.
5
<PAGE> 6
Interest income on investment securities amounted to $65.9 million for
the year ended December 31, 1999 compared to $40.5 million in 1998 and $29.6
million in 1997. Increase in income from investment securities for 1999 and
1998 is mainly related to a rise in average balances of $413.7 million in 1999
and $143.9 million in 1998. Increase in average balance of investment
securities is partially offset by a decrease in the investment portfolio
average yield from 6.80% in 1998 to 6.53% in 1999. Increase in 1998 is also
attributed to a rise in the yield of investment securities from 6.54% in 1997
to 6.80% in 1998.
Interest income on mortgage and other asset-backed securities and
trading securities amounted to $9.5 million for the year ended December 31,
1999, compared to $9.9 million in 1998 and $11.7 million in 1997. The decrease
in interest income in 1999 was mainly the result of a decrease in the average
balance of those securities which was partially offset by the rise in the yield
of those securities. In 1998, the decrease was mainly attributed to a decrease
in the yield of those securities.
Interest income on money market instruments increased to $6.2 million
for the year ended December 31, 1999, compared to $4.1 million in 1998 and $2.9
million in 1997. Increase is mainly related to a rise in the average balance of
money market instruments in 1999 and 1998.
The increase in average interest-earning assets is partially offset by
an increase in average interest-bearing liabilities of $960.3 million or 51.72%
and $557.0 million or 42.86% experienced in 1999 and 1998, respectively. The
increase in average interest-bearing liabilities is mainly related to increase
in average deposits, followed by a significant increase in reverse repurchase
agreements.
Interest expense on deposits amounted to $90.6 million for the year
ended December 31, 1999, compared to $57.7 million in 1998 and $38.6 million in
1997. The increases in 1999 and 1998 are mainly attributed to a rise in average
balance of deposits. The average balance of deposits increased $669.7 million
or 50.0% in 1999 and $387.7 million or 40.74% in 1998.
Interest expense on reverse repurchase agreements amounted to $33.5
million for the year ended December 31, 1999, compared to $20.5 million in 1998
and $13.8 million in 1997. The increases are mainly related to an increase in
the average balance of reverse repurchase agreements. The average balance of
reverse repurchase agreements increased $279.8 million or 71.22% in 1999 and
$145.7 million or 58.92% in 1998.
Interest expense on term notes totaled $3.9 million for the year ended
December 31, 1999, compared to $4.9 million in 1998 and $4.8 million in 1997.
Decrease is mainly related to a decrease in the average balance of term notes
in 1999.
Increase in interest expense on advances from FHLB is mainly due to
the rises in average balance of advances in 1999 and 1998. During 1997, there
were no advances from FHLB outstanding.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 1999,
amounted to $14.0 million, with an allowance for loan losses at December 31,
1999 of $24.0 million. In 1998, the provision for loan losses amounted to $6
million, with an allowance for loan losses at December 31,
6
<PAGE> 7
1998 of $15.8 million. The provision for loan losses for the year ended
December 31, 1997 amounted to $2.7 million, with an allowance for loan losses
of $13.2 million at December 31, 1997. The allowance for loan losses is
maintained at a level which, in management's judgment, is adequate to absorb
credit losses inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and current economic
conditions. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. Because of
uncertainties inherent in the estimation process, management's estimate of
credit losses inherent in the loan portfolio and the related allowance may
change in the near term.
At December 31, 1999, the allowance for loan losses was $24.0 million,
or 1.26% of total loans, and 344.76% of total non-performing loans, compared
with an allowance for loan losses at December 31, 1998 of $15.8 million, or
1.15% of total loans, and 203.03% of total non-performing loans.
During 1999, accounts amounting to $7.4 million were written-off
against the allowance for loan losses, as compared to $4.2 million in 1998. The
accounts written-off are submitted to the Collections Department recovery unit
for continued collection efforts. Recoveries made from accounts previously
written-off amounted to $1.5 million in 1999 and $823,000 in 1998.
OTHER INCOME
Service charges on deposit accounts and other fees amounted to $11.9
million for the year ended December 31, 1999, compared to $11.4 million in 1998
and $8.7 million in 1997. The increase of $2.7 million or 31.03% in 1998 as
compared to 1997, was primarily the result of an increase in the volume of
checking accounts and fees from other services.
During 1998, the Company recorded a loss on settlement of pension plan
amounting to $1.7 million as a result of the termination of the pension plan on
December 18, 1998.
OPERATING EXPENSES
Total operating expenses amounted to $53.8 million for the year ended
December 31, 1999, as compared to $41.7 million in 1998 and $35.0 million in
1997.
Salaries and employee benefits, which is the largest component of
total operating expenses, amounted to $23.6 million for the year ended December
31, 1999, compared to $17.5 million in 1998, and $13.7 million in 1997, an
increase of $6.1 million or 34.86% in 1999 and $3.8 million or 27.74% in 1998.
The increase in 1999 and in 1998 over the corresponding prior year is mainly
the result of an increase in personnel to support expansion of the Company,
normal salary increases and related employees' benefits.
Equipment expenses amounted to $6.8 million in 1999, $5.4 million in
1998, and $4.2 million in 1997. Increase of equipment expenses totaled $1.4
million or 25.93% in 1999 and $1.2 million or 28.57% in 1998, mainly resulted
from the Company's expansion and growth in business activity.
7
<PAGE> 8
Occupancy expenses amounted to $4.9 million in 1999, $4.4 million in
1998, and $3.0 million in 1997. The increase in 1999 and in 1998, mainly
resulted from the Company's expansion and growth in business activity.
Advertising expense amounted to $4.1 million in 1999, $2.8 million in
1998, and $2.7 million in 1997. Increase in advertising expense of $1.3 million
or 45.62% in 1999, is mainly related to an institutional campaign launched in
the island to emphasize the Company's image as the "People's Bank" and
promotional efforts for the credit card and consumer loans.
All other operating expenses amounted to $14.4 million in 1999
compared to $11.7 million in 1998 and $11.5 million in 1997. The increase in
1999 and in 1998 was mainly the result of a general increase in other operating
expenses related to the expansion of the Company and the increase in the volume
of business.
PROVISION FOR INCOME TAXES
Under Puerto Rico income tax laws, all companies are treated as
separate entities and are not entitled to file consolidated tax returns. The
Company and Westernbank are required to pay the higher of an alternative
minimum tax of 22% or a regular statutory rate up to 39%. The provision for
income taxes for the year ended December 31, 1999, amounted to $9.5 million
compared to $6.9 million in 1998 and $5.7 million in 1997. The rise in income
tax expense results from higher pre-tax earnings. The income on certain
investments is exempt for income tax purposes. Also, qualified activities
relating to the Westernbank International division are exempt for income tax
purposes. As a result of the above, the Company's effective tax rate is
substantially below the statutory rate.
NET INCOME
The Company's net income increased $8.4 million or 29.37% and $5.8
million or 25.28% in 1999 and 1998, respectively. The increase in both periods
was mainly the result of an increase in net interest income and other income,
which was partially offset by increases in the provision for loan losses, in
total operating expenses and in the provision for income taxes.
ASSET/LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability
management function is to evaluate the interest rate risk included in certain
balance sheet accounts and in off-balance sheet commitments, determine the
appropriate level of risk given the Company's business focus, operating
environment, capital and liquidity requirements and performance objectives,
establish prudent asset concentration guidelines and manage the risk consistent
with Board of Directors approved guidelines. Through such management, the
Company seeks to reduce the vulnerability of its operations to changes in
interest rates and to manage the ratio of interest rate sensitive assets to
interest rate sensitive liabilities within specified maturities or repricing
dates.
The Company's profitability is dependent to a large extent upon its
net interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and borrowings. The
Company
8
<PAGE> 9
is subject to interest rate risk to the degree that its interest-earning assets
reprice differently than its interest-bearing liabilities.
Interest rate risk can be defined as the exposure of the Company's
operating results or financial position to adverse movements in market interest
rates which mainly occurs when assets and liabilities reprice at different
times and at different rates. The Company manages its mix of assets and
liabilities with the goals of limiting its exposure to interest rate risk,
ensuring adequate liquidity, and coordinating its sources and uses of funds.
Specific strategies have included shortening the amortized maturity of
fixed-rate loans and increasing the volume of variable rate loans to reduce the
average maturity of the Company's interest-earning assets and entering into
interest rate exchange agreements (swaps) to hedge variable term notes and
fixed callable certificates of deposit.
The Company is exposed to a reduction in the level of Net Interest
Income ("NII") in a rising interest rate environment. NII will fluctuate
pursuant to changes in the levels of interest rates and of interest-sensitive
assets and liabilities. If (1) the weighted average rates in effect at year end
remained constant, or increase or decrease on an instantaneous and sustained
change of plus or minus 200 basis points, and (2) all scheduled repricing,
reinvestments and estimated prepayments, and reissuances are at such constant,
or increase or decrease accordingly; NII will fluctuate as shown on the table
below:
December 31, 1999:
<TABLE>
<CAPTION>
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
+200 Basis Points $ 84,334 $(16,330) (16.22)%
Base Scenario 100,664 -- --
-200 Basis Points 115,736 15,072 14.97%
December 31, 1998:
<CAPTION>
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
+200 Basis Points $80,318 $(3,916) (4.65)%
Base Scenario 84,234 -- --
-200 Basis Points 88,376 4,142 4.92%
</TABLE>
- ---------------------------------------
(1) The NII figures exclude the effect of the amortization of loan fees.
The model utilized to create the information presented above makes
various estimates at each level of interest rate change regarding cash flows
from principal repayments on loans and mortgage-backed securities and/or call
activity on investment securities. Actual results could differ significantly
from these estimates which would result in significant differences in the
calculated projected change. In addition, the limits stated above do not
necessarily represent the level of change under which management would
undertake specific measures to realign its portfolio in order to reduce the
projected level of change.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to Company's ability to generate sufficient cash to
meet the funding needs of current loan demand, savings deposit withdrawals,
principal and interest payments with respect to outstanding borrowings and to
pay operating expenses. The Company monitors its liquidity in accordance with
guidelines established by the Investment Committee and applicable regulatory
requirements. The Company's need for liquidity is affected by loan demand, net
changes in deposit levels, and the scheduled maturities of its borrowings.
Liquidity demand caused by net reductions in deposits are usually caused by
factors over which the Company has limited control. The Company derives its
liquidity from both its assets and liabilities. Liquidity from assets
originates by receipt of interest and principal payments and prepayments, by
the ability to sell assets at market prices and by utilizing unpledged assets
as collateral for borrowings. Liquidity is derived from liabilities by
maintaining a variety of funding sources, including deposits, advances from the
FHLB of New York and other short and long-term borrowings.
As of December 31, 1999, the Company had line of credit agreements
with two commercial banks permitting the Company to borrow a maximum aggregate
amount of $30.0 million (no borrowings were made during the year ended December
31, 1999, under such lines of credit). The agreements provide for unsecured
advances to be used by the Company on an overnight basis. Interest rate is
negotiated at the time of the transaction. The credit agreements are renewable
annually.
The Company's liquidity targets are reviewed monthly by the Investment
Committee and are based on the Company's commitment to make loans and
investments and its ability to generate funds. The Committee's targets are also
affected by the yields on available investments and by the Committee's judgment
as to the attractiveness of such yields and its expectations as to future
yields.
FINANCIAL INSTRUMENTS
All derivative financial instruments held or issued by the Company are
held or issued for purposes other than trading.
Interest-rate exchange agreements. Interest-rate exchange agreements
(swaps) used in asset/liability management activities are accounted for using
the accrual method. As of December 31, 1999, the Company had outstanding
interest swap agreements with other financial institutions, used to hedge the
interest rate risk on $71.0 million in term notes with variable rates and $438.5
million in fixed rate certificate of deposit liabilities.
Other off-balance-sheet instruments. In the ordinary course of
business, the Bank has entered into off-balance-sheet financial instruments
consisting of commitments to extend credit, commitments under credit-card
arrangements, commercial letters of credit, and standby letters of credit. Such
financial instruments are recorded in the financial statements when they are
funded or related fees are incurred or received. The Company periodically
evaluates the credit risks inherent in these commitments, and letters of credit,
and establishes loss allowances for such risks if and when these are deemed
necessary.
Committed Resources. At December 31, 1999, the Company had outstanding
unused credit lines to customers of $82.9 million at variable rates. Commitments
to originate loans at December 31, 1999, amounted to approximately $15.3 million
and $159.3 million at fixed and floating rates, respectively, which will be
outstanding for approximately one month. Stand-by letters of credit amounted to
$2.4
10
<PAGE> 11
million at December 31, 1999. Such commitments will be funded in the normal
course of business from the Company's principal sources of funds. At December
31, 1999, the Company had $1.03 billion in certificates of deposit that mature
during the following twelve months. The Company does not anticipate any
difficulty in retaining such deposits. The Company also has on-going
commitments to repay borrowings, fund maturing certificates of deposit and meet
obligations under long-term operating leases for certain branches. No material
changes are anticipated in regard to such commitments.
CAPITAL REQUIREMENTS
The Company maintains a strong capital base to take advantage of
business opportunities while ensuring that it has resources to absorb the risks
inherent in the business. The Federal Reserve Board has established guidelines
regarding the capital adequacy of bank holding companies, such as the Company.
These requirements are substantially similar to those adopted by the FDIC for
depository institutions, such as Westernbank, as set forth below.
The Company (on a consolidated basis) and Westernbank (the
"Companies") are subject to risk-based capital guidelines issued by the federal
banking agencies. These guidelines are used to evaluate capital adequacy based
primarily on the perceived credit risk associated with balance sheet assets as
well as certain off-balance sheet exposures such as unused loan commitments,
letters of credit and derivatives.
Under the risk-based capital guidelines, qualifying total capital
consists of two types of capital components. Tier 1 capital includes common
shareholders' equity, qualifying perpetual preferred stock (subject to
limitations) and minority interest in consolidated subsidiaries less goodwill
and certain other deductions. Tier 2 capital includes Tier 1 capital plus
perpetual preferred stock not included in Tier 1 capital (subject to
limitations), the general allowance for credit losses, qualifying senior and
subordinated debt, and limited-life preferred stock less certain deductions.
The risk-based capital guidelines require a minimum ratio of Tier 1
capital to risk-weighted assets of 4.0% and a minimum ratio of combined Tier 1
and Tier 2 capital ("total risk-based capital") to risk-weighted assets of
8.0%.
The risk-based capital guidelines are supplemented by a leverage ratio
requirement. This requirement establishes a minimum leverage ratio of 3.0% for
the highest rated banking organizations. Other banking organizations are
expected to have ratios of at least 4.0 to 5.0% depending on their particular
growth plans and condition (including diversification of risk, asset quality,
earnings, and liquidity). The ratio is defined as Tier 1 capital divided by
total average assets, less certain deductions, including goodwill.
As of December 31, 1999, the most recent notification from the FDIC
categorized Westernbank as well capitalized, the highest of five tiers, under
the regulatory framework for prompt corrective action. There are no conditions
or events since the FDIC notification that management believes would change
Westernbank's category.
11
<PAGE> 12
The following table reflects the Companies' actual capital amounts and
ratios, and applicable regulatory requirements at December 31, 1999:
<TABLE>
<CAPTION>
Minimum
To Be Well
Capitalized Under
Minimum Prompt Corrective
Actual Capital Requirement Action Provisions
----------------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $248,007 13.22% $150,064 8% $187,578 10%
======== ======== ======== = ======== ==
Tier I Capital
(to Risk Weighted Assets) $224,553 12.12% $ 74,093 4% $111,140 6%
======== ======== ======== = ======== ==
Tier I Capital
(to Average Assets) $224,553 6.68% $100,887 3% $168,145 5%
======== ======== ======== = ======== ==
</TABLE>
Since the Company had no operations other than those resulting from
its investment in Westernbank, the consolidated actual capital amounts and
ratios equal those of Westernbank.
The Company's ability to pay dividends to its stockholders and other
activities can be restricted if its capital falls below levels established by
the Federal Reserve guidelines. In addition, any bank holding company whose
capital falls below levels specified in the guidelines can be required to
implement a plan to increase capital.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or with the same magnitude as the
prices of goods and services since such prices are affected by inflation.
MARKET PRICES AND STOCK DATA
The Company's common stock and preferred stocks are traded in the over
the counter market known as the National Association of Securities Dealer
Automated Quotation System (NASDAQ). The symbol for the Company's common stock
is "WBPR", for the 1998 Series A preferred stock is "WBPRP" and for the 1999
Series B preferred stock is "WBPRO". As of December 31, 1999, there were 619
stockholders of record in addition to stockholders who hold their stock in
"street name" through brokerage firms or nominees.
12
<PAGE> 13
On February 2, 1998, February 3, 1997 and May 24, 1996, Westernbank
declared a two-for-one stock split, a fifteen percent (15%) stock dividend and
a two-for-one stock split, and a two-for-one stock split, of its common shares,
respectively. The two-for-one stock dividend declared on February 2, 1998, and
the stock split and stock dividend declared on February 3, 1997, was given
retroactive effect as of December 31, 1997 and 1996, respectively.
DIVIDENDS DECLARED PER SHARE
On February 3, 2000, the Company's Board of Directors approved an
increase in its annual dividend payments to shareholders in 2000 to $0.20 per
share. This represents an increase of 25% over the dividends paid in 1999. The
increase is the result of the guidelines established by the Board of Directors,
which provides for distribution of dividends to stockholders on the basis of
25% of the average earnings for the last two years.
On March 7, 2000, the Company's Board of Directors adopted the policy
of paying dividends on a monthly basis. Initial dividend payment under this new
policy, will be applied retroactively for dividends corresponding to the first
three-month period ending March 31, 2000. Thereafter, dividends will be paid on
the 15th day of each month for stockholders of record as of the last day of
each month.
The Company's cash dividends corresponding to 1999 and 1998 were as
follows:
RECORD DATE PAYABLE DATE AMOUNT PER SHARE
1999: June 30, 1999 July 15, 1999 $0.08
December 31, 1999 January 17, 2000 $0.08
1998: July 13, 1998 July 21, 1998 $0.06
January 15, 1999 January 25,1999 $0.06
The following table sets forth the range of high and low closing sale
prices of the Company's common stock, as quoted in the NASDAQ system, at the end
of each quarter for 1999 and 1998. The prices reflect interdealer quotations,
without retail mark-up, mark-down or commissions and do not necessarily
represent actual transactions:
13
<PAGE> 14
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
<S> <C> <C>
December 1999 $14.69 $10.13
September 1999 13.63 11.63
June 1999 16.00 12.50
March 1999 13.44 16.13
December 1998 16.13 15.50
September 1998 14.88 14.25
June 1998 17.00 16.53
March 1998 15.38 15.00
</TABLE>
NEW ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, ACCOUNTING FOR DERIVATIVE AND SIMILAR FINANCIAL INSTRUMENTS
AND FOR HEDGING ACTIVITIES ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and for hedging
activities and requires all derivatives to be measured at fair value and to be
recognized as either assets or liabilities in the statement of financial
condition. Under SFAS 133, derivatives used in hedging activities are to be
designated into one of the following categories: (a) fair value hedge; (b) cash
flow hedge; and (c) foreign currency exposure hedge. The changes in fair value
(that is, gains and losses) will be either recognized as part of earnings in
the period when the change occurs or as a component of other comprehensive
income (outside earnings) depending on their intended use and resulting
designation. This new standard becomes effective for all fiscal quarters
beginning after June 15, 2000, pursuant to SFAS No. 137 "Deferral of the
Effective Date of SFAS 133." The effect of implementing this statement on the
Company's financial condition and results of operations has not been
determined.
YEAR 2000
The Company's computer systems and applications successfully completed
the transition to the Year 2000 without operational problems or business
disruptions in accordance with management's plan and regulatory guidelines.
The Company initiated the process of preparing its computer system and
applications for the Year 2000 since 1992, when the new in-house computerized
system and software were acquired. The new software was designed under the
Julian Calendar, thus resolving the Year 2000 issue. The remaining process
involved modifying or replacing certain hardware and software maintained by the
Company as well as communicating with external service providers to ensure
that they took the appropriate action to remedy their Year 2000 issues. The
Company obtained certification of Year 2000 compliance from vendors related to
the new investment system, the credit cards system, the payroll systems and the
disbursement system. Following the arrival of the Year 2000, the Company has
not experienced any problems with systems provided by external service
providers.
Total cumulative costs of the Year 2000 project were approximately
$148,000.
14
<PAGE> 15
SELECTED FINANCIAL AND OTHER DATA
Year Ended December 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total Assets: $ 3,374,571 $ 2,481,176 $ 1,555,799 $ 1,284,697 $ 1,039,449
Securities purchased under agreements to resell 120,655 91,211 42,878 59,928 45,457
Interest-bearing deposits in other banks and federal 25,671 7,787 5,442 5,102 39,017
funds sold
Investment securities held to maturity, securities
available for sale and trading securities 1,198,007 892,169 631,121 534,060 395,710
Loans-net and mortgage loans held for sale 1,871,742 1,361,297 784,795 623,621 501,201
Total Liabilities: 3,150,751 2,326,894 1,453,564 1,201,561 971,792
Savings deposits 409,423 403,753 362,317 350,939 321,062
Other deposits 1,838,442 1,286,776 681,088 557,597 414,566
Securities sold under agreement to repurchase 729,968 506,325 281,750 188,192 74,900
Term notes 79,000 84,000 112,000 94,000 151,425
Advances from Federal Home Loan Bank 70,000 31,000
Total Stockholders' Equity 223,819 154,282 102,235 83,136 67,658
Operations Data:
Interest income $ 232,987 $ 157,446 $ 113,528 $ 93,416 $ 74,243
Interest expense 130,806 84,308 57,198 45,805 35,528
----------- ----------- ----------- ----------- -----------
Net interest income 102,181 73,138 56,330 47,611 38,715
Provision for loan losses (14,000) (6,000) (2,700) -- (3,000)
Other income, net 12,239 10,154 9,979 6,747 5,277
Operating expenses (53,816) (41,705) (35,012) (32,460)(1) (25,744)
----------- ----------- ----------- ----------- -----------
Income before income taxes 46,604 35,587 28,597 21,898 15,248
Income taxes 9,480 6,892 5,693 4,850 3,219
----------- ----------- ----------- ----------- -----------
Net income $ 37,124 $ 28,695 $ 22,904 $ 17,048 12,029
=========== =========== =========== =========== ===========
Net income attributable to common stockholders $ 32,817 $ 27,604 $ 22,904 $ 17,048 $ 12,029
=========== =========== =========== =========== ===========
Earnings per Common Share (After effect of stock splits):
Basic $ 0.78 $ 0.66 $ 0.54 $ 0.42 $ 0.29
=========== =========== =========== =========== ===========
Diluted $ 0.78 $ 0.66 $ 0.54 $ 0.41 $ 0.28
=========== =========== =========== =========== ===========
Dividends per Common Share
(After effect of stock splits) $ 0.16 $ 0.12 $ 0.09 $ 0.07 $ 0.03
=========== =========== =========== =========== ===========
</TABLE>
- ---------
(1) Includes a $3.3 million one time deposit insurance premium special
assessment paid to the Savings Association Insurance Fund.
15
<PAGE> 16
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Other Selected Data:
Average yield earned on all interest earning
assets 7.93% 8.28% 8.50% 8.19% 8.27%
Average rate paid on all interest-bearing
liabilities 4.64% 4.54% 4.41% 4.18% 4.09%
Average interest rate spread 3.29% 3.74% 4.09% 4.01% 4.18%
Branch offices 36 36 35 33 31
Ratios
</TABLE>
The following table sets forth, for the indicated periods, certain
ratios reflecting the productivity and profitability of the Bank:
<TABLE>
<CAPTION>
Years Ended December 31,(1)
------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on assets(2) 1.27% 1.42% 1.61% 1.47% 1.27%
Return on common stockholders' equity(3) 24.57% 24.42% 24.71% 22.61% 19.38%
Equity-to-assets ratio(4) 6.46% 6.35% 6.53% 6.49% 6.53%
Net yield on interest earning assets(5) 3.48% 3.84% 4.21% 4.18% 4.31%
</TABLE>
- ---------
(1) Averages computed by using beginning and end of year balances.
(2) Net income divided by average total assets.
(3) Net income attributable to common stockholders divided by average
common stockholders' equity.
(4) Average net worth divided by average total assets.
(5) Net interest income divided by average interest-earning assets.
16
<PAGE> 17
February 14, 2000
To the Board of Directors and Stockholders of
W Holding Company, Inc.
Financial Statements
The management of W Holding Company, Inc. (the "Company") is responsible for
the preparation, integrity, and fair presentation of its published consolidated
financial statements and all other information presented in this annual report.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based on
informed judgments and estimates made by management.
Internal Control
Management is responsible for establishing and maintaining an effective
internal control over financial reporting for financial presentations in
conformity with both generally accepted accounting principles and the Federal
Reserve Board instructions for Y-Report ("Y-Report Instructions"). The internal
control contains monitoring mechanisms, and actions are taken to correct
deficiencies identified.
There are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal control can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control may
vary over time.
Management assessed the Company's internal control over financial reporting for
financial presentations in conformity with both generally accepted accounting
principles and Y-Report Instructions as of December 31, 1999. This assessment
was based on criteria for effective internal control over financial reporting
described in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes that the Company maintained effective internal control over
financial reporting for financial presentations in conformity with both
generally accepted accounting principles and Y-Report Instructions as of
December 31, 1999.
<TABLE>
<S> <C>
/s/ Frank C. Stipes /s/ Freddy Maldonado
- --------------------------------------------- --------------------------------------------
Frank C. Stipes, Esq., Chairman of the Board, Freddy Maldonado, Chief Financial Officer
Chief Executive Officer and President and Vice President of Finance and Investment
</TABLE>
17
<PAGE> 18
-------------------------------------------------------------
W HOLDING COMPANY, INC.
AND SUBSIDIARY
Consolidated Financial Statements as of December 31, 1999 and
1998 and for Each of the Three Years in the Period Ended
December 31, 1999 and Independent Auditors' Report
18
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
W Holding Company, Inc.
Mayaguez, Puerto Rico
We have audited the accompanying consolidated statements of financial condition
of W Holding Company, Inc. and its subsidiary (formerly Westernbank Puerto Rico)
(the "Company") as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and of comprehensive
income, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of W Holding Company, Inc. and its
subsidiary at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Juan, Puerto Rico
February 28, 2000
Stamp No. 1634926
affixed to original.
19
<PAGE> 20
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 55,671,999 $ 49,429,206
Money market instruments:
Securities purchased under agreements to resell (Note 2) 120,654,546 91,211,496
Federal funds sold 16,400,000
Interest-bearing deposits in banks 9,271,389 7,787,104
Trading securities, with an amortized cost of $1,250,732 in 1999
and $5,073,833 in 1998 (Note 3) 1,289,188 5,089,771
Investment securities available for sale, with an amortized cost
of $23,340,296 in 1999 and $15,202,996 in 1998 (Notes 3, 8) 22,185,441 15,231,222
Investment securities held to maturity, with a fair value of
$1,074,346,000 in 1999 and $868,683,000 in 1998 (Notes 3, 7, 8, 10, 17) 1,174,532,295 871,848,139
Federal Home Loan Bank stock, at cost 12,800,000 5,800,000
Mortgage loans held for sale, at lower of cost or market (Note 4) 2,073,600 7,374,047
Loans, net of allowance for loan losses of $23,978,449 in 1999 and
$15,800,241 in 1998 (Notes 4, 10, 17) 1,869,668,173 1,353,922,932
Accrued interest receivable (Note 2) 33,311,340 23,453,462
Foreclosed real estate held for sale, net (Note 5) 2,232,376 3,270,945
Premises and equipment, net (Note 6) 38,431,276 33,009,714
Deferred income taxes, net (Note 11) 8,653,692 4,230,785
Other assets (Note 4) 7,395,356 9,517,489
--------------- --------------
TOTAL $ 3,374,570,671 $2,481,176,312
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Notes 7, 17) $ 2,247,864,807 $1,690,528,897
Securities sold under agreements to repurchase (Note 8) 729,967,785 506,325,175
Term notes (Notes 10, 17) 79,000,000 84,000,000
Advances from Federal Home Loan Bank (Note 10) 70,000,000 31,000,000
Advances from borrowers for taxes and insurance 1,693,926 1,495,529
Other liabilities (Note 14) 22,224,845 13,544,304
--------------- --------------
Total liabilities 3,150,751,363 2,326,893,905
--------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 13, 17)
STOCKHOLDERS' EQUITY (Notes 1, 15, 16, 19, 22):
Preferred stock $1.00 par value per share (liquidation preference $25 per
share); authorized 20,000,000 and 5,000,000 shares in 1999 and 1998,
respectively; 7.25% non-cumulative, non-convertible monthly income preferred
stock, 1999 Series B - Issued 2,001,000 shares in 1999 2,001,000
7.125% non-cumulative, convertible monthly income preferred stock, 1998
Series A - Issued 1,219,000 shares in 1999 and 1998 1,219,000 1,219,000
Common stock - $1.00 par value per share; authorized 300,000,000 and
75,000,000 shares in 1999 and 1998, respectively;
issued 42,000,000 shares in 1999 and 42,080,309 shares in 1998 42,000,000 42,080,309
Paid-in capital 99,595,597 54,465,556
Retained earnings:
Reserve fund 12,843,183 9,130,767
Undivided profits 67,218,342 47,358,549
Accumulated other comprehensive income (loss) (1,057,814) 28,226
--------------- --------------
Total stockholders' equity 223,819,308 154,282,407
--------------- --------------
TOTAL $ 3,374,570,671 $2,481,176,312
=============== ==============
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
INTEREST INCOME (Note 3):
Loans, including loan fees $ 151,398,167 $ 102,913,336 $ 69,392,666
Mortgage-backed securities 9,214,346 9,658,374 11,479,479
Investment securities 65,926,322 40,519,245 29,589,840
Money market instruments 6,172,599 4,068,069 2,853,674
Trading securities 275,404 286,567 212,775
------------- ------------- -------------
Total interest income 232,986,838 157,445,591 113,528,434
------------- ------------- -------------
INTEREST EXPENSE:
Deposits (Note 7) 90,554,001 57,732,924 38,552,139
Securities sold under agreements to repurchase 33,510,626 20,466,364 13,810,566
Term notes 3,932,223 4,870,059 4,835,899
Advances from Federal Home Loan Bank 2,808,964 1,238,333
------------- ------------- -------------
Total interest expense 130,805,814 84,307,680 57,198,604
------------- ------------- -------------
NET INTEREST INCOME 102,181,024 73,137,911 56,329,830
PROVISION FOR LOAN LOSSES (Note 4) 14,000,000 6,000,000 2,700,000
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 88,181,024 67,137,911 53,629,830
------------- ------------- -------------
OTHER INCOME (LOSS):
Service charges on deposit accounts and other fees 11,872,421 11,438,770 8,723,551
Net gain on sales and valuation of loans, securities,
and other assets (Note 12) 366,545 405,055 1,255,298
Loss on settlement of pension plan (Note 14) (1,689,938)
------------- ------------- -------------
Total other income, net 12,238,966 10,153,887 9,978,849
------------- ------------- -------------
TOTAL NET INTEREST INCOME
AND OTHER INCOME 100,419,990 77,291,798 63,608,679
------------- ------------- -------------
OPERATING EXPENSES:
Salaries and employees' benefits (Note 14) 23,556,261 17,452,721 13,667,630
Equipment 6,833,091 5,400,553 4,245,391
Occupancy (Note 13) 4,929,873 4,353,763 2,966,710
Advertising 4,071,979 2,796,287 2,671,640
Printing, postage, stationery, and supplies 2,393,498 1,988,488 1,941,899
Telephone 1,799,900 1,538,489 1,456,792
Net gain from operations of foreclosed
real estate held for sale (40,348) (90,456) (185,688)
Other 10,271,707 8,265,188 8,247,016
------------- ------------- -------------
Total operating expenses 53,815,961 41,705,033 35,011,390
------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES 46,604,029 35,586,765 28,597,289
PROVISION FOR INCOME TAXES (Note 11) 9,479,869 6,891,557 5,692,849
------------- ------------- -------------
NET INCOME $ 37,124,160 $ 28,695,208 $ 22,904,440
============= ============= =============
NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS (Note 1) $ 32,817,027 $ 27,603,505 $ 22,904,440
============= ============= =============
BASIC AND DILUTED EARNINGS PER COMMON SHARE (Notes 1, 16): $ 0.78 $ 0.66 $ 0.54
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CHANGES IN STOCKHOLDERS' EQUITY (Note 16):
Preferred stock:
Balance at beginning of year $ 1,219,000 $ -- $ --
Issuance of preferred stock 2,001,000 1,219,000 --
------------- ------------- -------------
Balance at end of year 3,220,000 1,219,000 --
------------- ------------- -------------
Common stock:
Balance at beginning of year 42,080,309 48,592,884 24,296,568
Stock splits 24,296,316
Purchase and retirement of common stock (80,309) (165,674)
Retirement of treasury stock (6,346,901)
------------- ------------- -------------
Balance at end of year 42,000,000 42,080,309 48,592,884
------------- ------------- -------------
Paid-in capital:
Balance at beginning of year 54,465,556 27,810,269 52,106,585
Stock split (24,296,316)
Treasury stock exchanged for land 214,311
Purchase and retirement of common stock (1,141,791) (2,261,767)
Retirement of treasury stock 779,039
Issuance of preferred stock 46,271,832 27,923,704
------------- ------------- -------------
Balance at end of year 99,595,597 54,465,556 27,810,269
------------- ------------- -------------
Reserve fund:
Balance at beginning of year 9,130,767 6,261,246 3,970,802
Transfer from undivided profits 3,712,416 2,869,521 2,290,444
------------- ------------- -------------
Balance at end of year 12,843,183 9,130,767 6,261,246
------------- ------------- -------------
Undivided profits:
Balance at beginning of year 47,358,549 25,149,384 8,340,172
Net income 37,124,160 28,695,208 22,904,440
Cash dividends on common stock (9,244,818) (2,524,819) (3,804,784)
Cash dividends on preferred stock (4,307,133) (1,091,703)
Transfer to reserve fund (3,712,416) (2,869,521) (2,290,444)
------------- ------------- -------------
Balance at end of year 67,218,342 47,358,549 25,149,384
------------- ------------- -------------
Accumulated other comprehensive income:
Balance at beginning of year 28,226
Other comprehensive income (loss) for the year (1,086,040) 28,226
------------- ------------- -------------
Balance at end of year (1,057,814) 28,226 --
------------- ------------- -------------
Common stock in treasury:
Balance at beginning of year (5,578,565) (5,578,565)
Treasury stock exchanged for land 10,703
Retirement of treasury stock 5,567,862
------------- ------------- -------------
Balance at end of year -- -- (5,578,565)
------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY $ 223,819,308 $ 154,282,407 $ 102,235,218
============= ============= =============
COMPREHENSIVE INCOME:
Net income $ 37,124,160 $ 28,695,208 $ 22,904,440
------------- ------------- -------------
Other comprehensive income (loss), net of taxes:
Unrealized net loss on securities available for sale
arising during the year (972,705) (55,704)
Reclassification adjustment included in net income (113,335) 83,930
------------- ------------- -------------
Net change in fair value of securities available
for sale, net of taxes (1,086,040) 28,226 --
------------- ------------- -------------
TOTAL COMPREHENSIVE INCOME $ 36,038,120 $ 28,723,434 $ 22,904,440
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,124,160 $ 28,695,208 $ 22,904,440
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for:
Loan losses 14,000,000 6,000,000 2,700,000
Foreclosed real estate held for sale 14,689 22,005
Depreciation and amortization on:
Premises and equipment 5,341,375 3,920,118 2,737,129
Foreclosed real estate held for sale 85,565 85,774 86,399
Mortgage servicing rights 320,381 146,166 155,631
Deferred income tax credit (4,325,865) (2,175,938) (1,334,956)
Amortization of premium (discount) on:
Investment securities available for sale 6,547 67,033 27,219
Investment securities held to maturity (8,422,918) (4,777,934) (1,498,196)
Mortgage-backed securities held to maturity 24,097 252,834 24,333
Loans 667,825 472,501 42,441
Amortization of excess of cost over net assets acquired 354,913 656,267 563,423
Amortization of deferred loan origination fees and costs (4,727,686) (4,236,669) (2,773,005)
Net loss (gain) on sale and in valuation of:
Investment securities available for sale (113,335) (6,018) (431,528)
Investment securities held to maturity 8,984
Mortgage loans held for sale (74,317) 83,930 (20,899)
Loans 50,253 (15,232)
Foreclosed real estate held for sale (19,985) (15,712) (74,554)
Loss on settlement of pension plan 1,689,938
Loss on impairment of assets 477,446
Originations of mortgage loans held for sale (63,812,380) (75,659,943) (39,506,445)
Decrease (increase) in:
Trading securities 67,969,890 71,474,691 41,593,102
Accrued interest receivable (9,857,878) (7,311,533) (5,900,795)
Other assets 2,284,172 (4,774,595) (451,401)
Increase (decrease) in:
Accrued interest on deposits and borrowings 9,837,601 6,359,319 1,547,165
Other liabilities 2,712,026 (1,556,944) 4,231,042
--------------- --------------- ---------------
Net cash provided by operating activities 49,439,130 19,850,707 24,651,534
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits in banks (1,484,285) (2,436,633) (340,776)
Net increase in federal funds sold (16,400,000)
Net decrease (increase) in securities purchased under
agreements to resell (29,443,050) (48,229,956) 17,050,723
Investment securities available for sale:
Purchases (60,390,654) (40,566,125) (195,845,785)
Proceeds from sales 55,296,718 25,265,625 195,955,549
Proceeds from principal repayment 1,243,928 36,489 294,545
Investment securities held to maturity:
Purchases (3,340,222,066) (3,139,896,662) (2,324,481,737)
Proceeds from redemption and repayment 3,027,763,943 2,880,991,000 2,206,009,686
Mortgage-backed securities held to maturity:
Purchases (17,501,983) (23,266,376) (18,718,942)
Proceeds from principal repayment 35,674,771 41,625,984 53,964,430
Loans receivable:
Purchases (375,475,235) (260,417,668) (97,764,221)
Proceeds from sales 20,051,130 6,580,336
Other increase (169,939,979) (323,603,538) (78,364,543)
Proceeds from sales of foreclosed real estate held for sale 586,751 166,750 139,500
Additions to premises and equipment (10,024,275) (9,849,441) (16,667,365)
Purchase of Federal Home Loan Bank stock (7,000,000) (1,499,500) (1,176,100)
Purchase of SRG Net Inc., net of cash acquired (107,651) (709,181)
--------------- --------------- ---------------
Net cash used in investing activities (887,371,937) (895,808,896) (259,945,036)
--------------- --------------- ---------------
Forward $ (837,932,807) $ (875,958,189) $ (235,293,502)
--------------- --------------- ---------------
</TABLE>
(Continued)
23
<PAGE> 24
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Forward $(837,932,807) $(875,958,189) $(235,293,502)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 549,324,695 641,663,722 134,542,803
Net increase (decrease) in securities sold
under agreements to repurchase 123,212,025 (124,589,320) 31,767,320
Securities sold under agreements to repurchase
with original maturities over three months:
Proceeds 418,338,760 425,955,175 115,490,750
Payments (317,908,175) (76,790,750) (53,700,000)
Term notes:
Proceeds 43,000,000
Payments (5,000,000) (28,000,000) (25,000,000)
Advances from Federal Home Loan Bank:
Proceeds 39,000,000 51,000,000
Payments (20,000,000)
Net increase (decrease) in advances
from borrowers for taxes and insurance 198,397 450,790 (216,401)
Repurchase of common stock for retirement (1,222,100) (2,427,441)
Issuance of preferred stock 48,272,832 29,142,704
Dividends paid (10,040,834) (5,426,571) (3,465,086)
------------- ------------- -------------
Net cash provided by financing activities 844,175,600 890,978,309 242,419,386
------------- ------------- -------------
NET INCREASE IN CASH AND DUE FROM BANKS 6,242,793 15,020,120 7,125,884
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 49,429,206 34,409,086 27,283,202
------------- ------------- -------------
CASH AND DUE FROM BANKS, END OF YEAR $ 55,671,999 $ 49,429,206 $ 34,409,086
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits and other borrowings $ 120,968,213 $ 77,948,361 $ 55,651,439
Income taxes 11,423,887 9,850,006 5,069,476
Noncash activities (Note 17):
Accrued dividends payable 3,601,950 90,473 1,900,522
Mortgage loans securitized and transferred to:
Trading securities 64,169,307 71,216,508 53,962,900
Investment securities available for sale 4,180,504
Transfers from:
Trading securities to mortgage-backed securities
held to maturity 1,003,694 9,468,022
Loans to foreclosed real estate held for sale 291,451 1,233,103 175,628
Mortgage loans originated to finance the sale of
foreclosed real estate held for sale 663,000 121,250 428,000
Capitalized mortgage servicing rights 837,333 962,058 801,889
Unpaid additions to premises and equipment 738,662
Increase (decrease) in unrealized net gain (loss)
on investment securities available for sale,
net of taxes (1,086,040) 28,226
Treasury stock exchanged for land 225,014
Retirement of treasury stock 5,567,862
</TABLE>
See notes to consolidated financial statements. (Concluded)
24
<PAGE> 25
W HOLDING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
W Holding Company, Inc. (formerly Westernbank Puerto Rico) (the
"Company") was incorporated on February 3, 1999 under the laws of the
Commonwealth of Puerto Rico as a bank holding company.
Effective November 30, 1999, pursuant to a resolution approved by the
stockholders and after receiving all pertinent regulatory approvals, a
reorganization was effected as a result of which the Company became the
sole shareholder of Westernbank Puerto Rico ("Westernbank"). In
connection with the reorganization, the common and preferred shares of
Westernbank were converted into shares of the Company on a one for one
basis. Up to December 31, 1999, the Company had no operations other
than those resulting from its investment in 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 provides a variety of banking
services to individuals and businesses through its 36 branches, 26 of
which are located in the Western region, four in the Northeastern
region, three in the metropolitan area and three in the Southern region
of Puerto Rico. Its primary deposit products are passbook accounts,
certificates of deposit, and demand deposits, and its primary lending
products are real estate mortgage, commercial business, and installment
loans. Westernbank operates a division known as Westernbank
International, which offers commercial banking and related services
outside of Puerto Rico. In February 1998, Westernbank acquired 80% of
the voting shares of SRG Net, Inc., a Puerto Rico corporation that
operates a shared electronic funds transfer network. In March 1999,
Westernbank acquired the remaining 20% of the voting shares of SRG Net,
Inc. The assets, liabilities, revenues and expenses of the subsidiary
at December 31, 1999 and 1998 and for the years then ended are not
significant.
The accounting and reporting policies of W Holding Company, Inc.
conform to generally accepted accounting principles (GAAP) and banking
industry practices. Following is a summary of the Company's most
significant accounting policies:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary,
Westernbank Puerto Rico. All significant intercompany transactions and
balances have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS - For purpose of presentation in the consolidated
statements of cash flows, cash and cash equivalents are those amounts
included in the statement of financial condition caption "cash and due
from banks".
25
<PAGE> 26
INTEREST-BEARING DEPOSITS IN BANKS AND FEDERAL FUNDS SOLD
Interest-bearing deposits in banks and federal funds sold are recorded
at cost and mature within twelve days.
TRADING SECURITIES - Securities held principally for resale in the near
term are classified as trading securities and recorded at fair value.
Gains and losses on sales and changes in fair value of these securities
are included in current operating results.
INVESTMENT SECURITIES HELD TO MATURITY - Investment securities for
which the Company has the positive intent and ability to hold to
maturity are carried at cost, adjusted for premium amortization and
discount accretion under the interest method over the period to
maturity.
INVESTMENT SECURITIES AVAILABLE FOR SALE - Investment securities
available for sale consist of securities not classified as trading
securities nor as held to maturity securities. These securities are
reported at fair value with unrealized holding gains and losses, net of
tax, reported as a net amount in other comprehensive income. Realized
gains and losses on these securities are determined using the specific
identification method. Premium amortization and discount accretion are
recognized in interest income using the interest method over the period
to maturity.
MORTGAGE LOANS HELD FOR SALE - Mortgage loans originated and intended
for sale in the secondary market are carried at the lower of cost or
estimated fair value in the aggregate. Net unrealized losses are
included in current operating results. Realized gains or losses on
these loans are determined using the specific identification method.
LOANS - Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at
their outstanding unpaid principal balances adjusted for charge-offs,
the allowance for loan losses, and any deferred fees or costs on
originated loans. Interest income is accrued on the unpaid principal
balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan
yield using the interest method. Discounts and premiums on purchased
loans are amortized to income over the expected lives of the loans
using methods that approximate the interest method.
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become
due, but in no event is it recognized after 90 days in arrears on
payments of principal or interest. When interest accrual is
discontinued, all unpaid interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is maintained
at a level which, in management's judgment, is adequate to absorb
credit losses inherent in the loan portfolio. The amount of the
allowance is based on management's evaluation of the collectibility of
the loan portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific impaired
loans, and current economic conditions. Allowances for impaired loans
are generally determined based on collateral values or the present
value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan
losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses in the loan portfolio and the
related allowance may change in the near term.
The Company measures the impairment of a loan based on the present
value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the observable market
price of the loan or the fair value of the collateral, if the loan is
collateral dependent. Significant loans (those exceeding $250,000) are
individually evaluated for impairment. Large groups of small balance,
homogeneous loans are collectively evaluated for impairment, loans that
are recorded at fair
26
<PAGE> 27
value or at the lower of cost or market are not evaluated for
impairment. The portfolios of mortgage, consumer and auto loans are
considered homogeneous and are evaluated collectively for impairment.
Impaired loans for which the discounted cash flows, collateral value or
market price exceeds its carrying value do not require an allowance.
The allowance for impaired loans is part of the Company's overall
allowance for loan losses.
FORECLOSED REAL ESTATE HELD FOR SALE - Foreclosed real estate held for
sale are carried at the lower of fair value minus estimated costs to
sell or cost.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation is
computed under the straight-line method over the estimated useful lives
of the assets, which range from two to 30 years.
Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is
shorter. Costs of maintenance and repairs that do not improve or extend
the lives of the respective assets are charged to expense as incurred.
EXCESS OF COST OVER NET ASSETS ACQUIRED - The excess of cost over fair
value of net assets acquired is amortized to expense using the
straight-line method over a period of 60 months.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically reviews
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. As a result of such reviews, the Company recognized a loss
of $477,446 on impairment of assets during the year ended December 31,
1998.
LOAN SERVICING - Fees earned for servicing loans owned by investors are
reported as income when the related mortgage loan payments are
collected. Loans servicing costs are charged to expense as incurred.
MORTGAGE SERVICING RIGHTS - The Company recognizes as separate assets
the rights to service mortgage loans for others, regardless of how
those servicing rights are acquired and assesses the capitalized
mortgage servicing rights for impairment based on the fair value of
those rights. In evaluating individual pools for impairment, the
Company uses current market assumptions for prepayment speeds.
The total cost of mortgage loans to be sold with servicing rights
retained is allocated to the mortgage servicing rights and the loans
(without the mortgage servicing rights), based on their relative fair
values. Mortgage servicing rights are amortized in proportion to, and
over the period of, estimated servicing income.
STOCK OPTION PLAN - As further discussed in Note 16 to the consolidated
financial statements, the Company has two stock option plans. These
plans offer key officers, directors and employees an opportunity to
purchase shares of the Company's common stock. The Company follows the
intrinsic value-based method of accounting for measuring compensation
expense, if any. Compensation expense is generally recognized for any
excess of the quoted market price of the Company's stock at the
measurement date over the amount an employee must pay to acquire the
stock.
27
<PAGE> 28
INCOME TAXES - Deferred income taxes are accounted for using the asset
and liability method of accounting for income taxes. Under the asset
and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and the respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
FINANCIAL INSTRUMENTS - All derivative financial instruments held or
issued by the Company are held or issued for purposes other than
trading.
- INTEREST-RATE EXCHANGE AGREEMENTS - Interest-rate exchange
agreements (swaps) used in asset/liability management
activities are accounted for using the accrual method. Net
interest income (expense) resulting from the differential
between exchanging floating and fixed-rate interest payments
is recorded on the current basis as an adjustment to interest
income or expense on the corresponding hedged assets or
liabilities. Any gains or losses on the sales or early
termination of swaps used in asset/liability management
activities are deferred and amortized into income or expense
over the shorter of the maturity period of the hedged item or
the swap.
- OTHER OFF-BALANCE SHEET INSTRUMENTS - In the ordinary course
of business, the Company enters into off-balance sheet
instruments consisting of commitments to extend credit,
commitments under credit card arrangements and stand-by
letters of credit. Such financial instruments are recorded in
the financial statements when they are funded or related fees
are incurred or received. The Company periodically evaluates
the credit risks inherent in these commitments and letters of
credit, and establishes loss allowances for such risks if and
when these are deemed necessary.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and
assumptions were used by the Company in estimating fair values of
financial instruments as disclosed in these financial statements:
- CASH AND DUE FROM BANKS - The carrying amounts of cash and due
from banks approximate their fair value.
- MONEY MARKET INSTRUMENTS - Money market instruments have been
valued at their carrying amount given the relatively short
period of time between origination of the instruments and
their expected realization.
- TRADING SECURITIES - For securities held for trading purposes,
fair values are based on quoted market prices.
- INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
- The fair values of investment securities available for sale
and held to maturity are estimated based on bid prices
published in financial newspapers or bid quotations received
from securities dealers. If a quoted market price is not
available, fair value is estimated using quoted market prices
for similar securities.
28
<PAGE> 29
- FEDERAL HOME LOAN BANK (FHLB) STOCK - FHLB stock is valued at
its redemption value.
- LOANS - Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by
type such as residential mortgage, commercial, consumer,
credit cards and other loans. Each loan category is further
segmented into fixed and adjustable interest rate terms and by
performing, nonperforming and loans with payments in arrears.
The fair value of performing loans, except residential
mortgages and credit card loans, is calculated by discounting
scheduled cash flows through the estimated maturity dates
using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. For performing
residential mortgage loans, fair value is computed using an
estimated market rate based on secondary market sources
adjusted to reflect differences in servicing and credit costs.
For credit card loans, cash flows and maturities are estimated
based on contractual interest rates and historical experience
and are discounted using estimated market rates.
Fair value for significant nonperforming loans and certain
loans with payments in arrears is based on recent external
appraisals. If appraisals are not available, estimated cash
flows are discounted using a rate that is commensurate with
the risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and
specific borrower information.
- MORTGAGE SERVICING RIGHTs - The carrying amount of mortgage
servicing rights, which is evaluated periodically for
impairment, approximates the fair value (fair value is
estimated considering prices for similar assets).
- DEPOSITS - The fair value of deposits with no stated maturity,
such as passbook accounts, money market and checking accounts
is equal to the amount payable on demand. The fair value of
fixed maturity certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate
is estimated using the rates currently offered for deposits of
similar remaining maturities.
- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, TERM NOTES AND
ADVANCES FROM FHLB - The fair value of securities sold under
agreements to repurchase, term notes and advances from FHLB is
based on the discounted value using rates currently available
to the Company for debt with similar terms and remaining
maturities.
- ACCRUED INTEREST - The carrying amounts of accrued interest
approximate their fair values.
- INTEREST RATE SWAP AGREEMENTs - The fair value of interest
rate swap agreements was obtained from dealer quotes. This
value represents the estimated amount the Company would
receive or pay to terminate the swap agreements, at the
reporting date, taking into account current interest rates and
the current creditworthiness of the swap counterparties.
- COMMITMENTS TO EXTEND CREDIT AND STANDBy LETTERS OF CREDIt -
The fair value of commitments to extend credit and standby
letters of credit are based on fees currently charged to enter
into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit
standings.
The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial
instruments. Because no market exists for a portion of the Company's
financial instruments (loans and financial liabilities), fair value
estimates are based on judgments
29
<PAGE> 30
regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision.
In addition, the fair value estimates are based on existing on and
off-balance sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments such as
premises and equipment and goodwill. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have
a significant effect on fair value estimates and have not been
considered in the estimates.
EARNINGS PER SHARE - Basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per
share reflects 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. Potential common shares that may be issued by the Company
relate solely to outstanding convertible preferred stock, and are
determined using the if-converted method. The effect of convertible
preferred stock was antidilutive thus basic equals diluted earnings per
common share in both 1999 and 1998. There were no potential common
shares in 1997.
Basic and diluted earnings per share were computed as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Basic and diluted earnings per share:
Net income $ 37,124,160 $ 28,695,208 $22,904,440
Less preferred stock dividends (4,307,133) (1,091,703)
------------ ------------ -----------
Income available to common stockholders $ 32,817,027 $ 27,603,505 $22,904,440
============ ============ ===========
Weighted average number of common
shares outstanding for the year 42,012,116 42,096,038 42,233,820
============ ============ ===========
Basic and diluted earnings per share $ 0.78 $ 0.66 $ 0.54
============ ============ ===========
</TABLE>
RECENT ACCOUNTING DEVELOPMENTS - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement No. 133, ACCOUNTING FOR
DERIVATIVE AND SIMILAR FINANCIAL INSTRUMENTS AND FOR HEDGING ACTIVITIES
("SFAS 133"). SFAS 133 establishes accounting and reporting standards
for derivative financial instruments and for hedging activities and
requires all derivatives to be measured at fair value and to be
recognized as either assets or liabilities in the statement of
financial condition. Under SFAS 133, derivatives used in hedging
activities are to be designated into one of the following categories:
(a) fair value hedge; (b) cash flow hedge; and (c) foreign currency
exposure hedge. The changes in fair value (that is, gains and losses)
will be either recognized as part of earnings in the period when the
change occurs or as a component of other comprehensive income (outside
earnings) depending on their intended use and resulting designation.
This new standard becomes effective for all fiscal quarters beginning
after June 15, 2000, pursuant to SFAS No. 137, DEFERRAL OF THE
EFFECTIVE DATE OF SFAS 133. The effect of implementing this statement
on the Company's financial condition and results of operations has not
been determined.
RECLASSIFICATIONS - Certain reclassifications have been made to prior
years financial statements to conform with the current year
presentation.
30
<PAGE> 31
2. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
The Company enters into purchases of securities under agreements to
resell the same securities ("repurchase agreements"). The amounts
advanced under these agreements represent generally secured short-term
loans and are reflected as assets in the consolidated statements of
financial condition.
At December 31, 1999 and 1998, securities purchased under agreements to
resell (classified by counterparty) were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Doral Securities, Inc. $ 60,058,546 $32,550,496
PaineWebber, Incorporated of Puerto Rico 31,000,000 34,130,000
Merill Lynch Financial Services of Puerto Rico, Inc. 19,800,000
Popular Securities, Inc. 9,796,000
Lehman Brothers Inc. 24,531,000
------------ -----------
Total $120,654,546 $91,211,496
============ ===========
</TABLE>
A comparative summary of securities purchased under agreements to
resell follows:
<TABLE>
<CAPTION>
December 31, December 31,
----------------------------------------------------------------------------
1999 1998
--------------------------------- -------------------------------
FAIR FAIR
VALUE OF VALUE OF
RECEIVABLE UNDERLYING RECEIVABLE UNDERLYING
UNDERLYING COLLATERAL BALANCE COLLATERAL BALANCE COLLATERAL
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and
agencies obligations $ 25,100,000 $ 25,535,000 $ 54,571,000 $ 56,150,000
Mortgage-backed securities -
Guaranteed by Government
agencies 95,554,546 98,428,000 36,640,496 37,697,000
------------ ------------ ------------ ------------
Total - excluding accrued
interest receivable $120,654,546 $123,963,000 $ 91,211,496 $ 93,847,000
============ ============ ============ ============
Accrued interest receivable
on securities purchased
under agreements to resell $ 564,809 $ 367,119
============ ============
</TABLE>
The Company monitors the market value of the underlying securities as
compared to the related receivable, including accrued interest, and
requests additional collateral where deemed necessary. At December 31,
1999, repurchase agreements mature as follows: due the next business
day $40,858,546; due within 30 days $79,796,000. Securities purchased
under agreements to resell are held in safekeeping, in the name of the
Company, by Citibank N.A., the Company's custodian, or are held by the
counterparty if the agreement is due the next business day.
31
<PAGE> 32
Average outstanding balances and maximum month-end outstanding balances
during the years ended December 31, 1999 and 1998, and weighted average
interest rates for the year and at year end are indicated below:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Monthly average outstanding balance $ 96,770,000 $60,433,000
Maximum outstanding balance at any month-end 163,759,000 98,531,000
Weighted average interest rate:
For the year 5.25% 5.72%
At year end 5.61% 5.48%
</TABLE>
3. INVESTMENT SECURITIES:
The amortized cost, gross unrealized gains and losses, and fair value
of investment securities at December 31, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
TRADING SECURITIES -
Mortgage-backed securities -
Government National Mortgage
Association (GNMA) certificates $ 1,250,732 $ 38,456 $ -- $ 1,289,188
============== ============== ============== ==============
AVAILABLE FOR SALE -
Mortgage-backed securities -
GNMA certificates $ 19,294,234 $ -- $ 766,689 $ 18,527,545
Federal National Mortgage
Association (FNMA) certificates 4,046,062 -- 388,166 3,657,896
-------------- -------------- -------------- --------------
Total $ 23,340,296 $ -- $ 1,154,855 $ 22,185,441
============== ============== ============== ==============
HELD TO MATURITY:
U.S. Government and agencies obligations $1,029,449,708 $ 5,482 $ 97,335,190 $ 932,120,000
Puerto Rico Government and
agencies obligations 16,668,050 158,336 135,386 16,691,000
Other 17,165,787 1,100,787 16,065,000
-------------- -------------- --------------
Total 1,063,283,545 163,818 98,571,363 964,876,000
-------------- -------------- -------------- --------------
Mortgage and other asset-backed
securities:
Federal Home Loan Mortgage
Corporation (FHLMC) certificates 20,593,887 99,980 643,867 20,050,000
GNMA certificates 27,636,974 360,115 179,089 27,818,000
FNMA certificates 14,735,927 36,772 452,699 14,320,000
Collateralized mortgage obligations
(CMO) certificates 28,106,621 5,554 722,175 27,390,000
Other 20,175,341 283,341 19,892,000
-------------- -------------- --------------
Total 111,248,750 502,421 2,281,171 109,470,000
-------------- -------------- -------------- --------------
Total $1,174,532,295 $ 666,239 $ 100,852,534 $1,074,346,000
============== ============== ============== ==============
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
TRADING SECURITIES -
Mortgage-backed securities -
GNMA certificates $ 5,073,833 $ 15,938 $ -- $ 5,089,771
============== ============== ============== ==============
AVAILABLE FOR SALE -
Mortgage-backed securities -
FNMA certificates $ 15,202,996 $ 28,226 $ -- $ 15,231,222
============== ============== ============== ==============
HELD TO MATURITY:
U.S. Government and agencies obligations $ 727,584,526 $ 1,429,955 $ 6,077,481 $ 722,937,000
Puerto Rico Government and
agencies obligations 14,817,978 42,278 18,256 14,842,000
-------------- -------------- -------------- --------------
Total 742,402,504 1,472,233 6,095,737 737,779,000
-------------- -------------- -------------- --------------
Mortgage and other asset-backed securities:
FHLMC certificates 25,068,166 509,980 28,146 25,550,000
GNMA certificates 35,045,233 759,350 22,583 35,782,000
FNMA certificates 18,468,776 380,615 11,391 18,838,000
CMO certificates 41,920,793 56,200 187,993 41,789,000
Other 8,942,667 2,333 8,945,000
-------------- -------------- --------------
Total 129,445,635 1,708,478 250,113 130,904,000
-------------- -------------- -------------- --------------
Total $ 871,848,139 $ 3,180,711 $ 6,345,850 $ 868,683,000
============== ============== ============== ==============
</TABLE>
The amortized cost and fair value of investment securities held to
maturity at December 31, 1999, by contractual maturity (excluding
mortgage-backed securities), are shown below.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due within one year $ 19,734,920 $ 19,737,000
Due after one year through five years 604,054 612,000
Due after five years through ten years 45,185,231 44,253,000
Due after ten years 997,759,340 900,274,000
-------------- --------------
Total 1,063,283,545 964,876,000
Mortgage and other asset-backed securities 111,248,750 109,470,000
-------------- --------------
Total $1,174,532,295 $1,074,346,000
============== ==============
</TABLE>
Proceeds from sales of investment securities available for sale and the
respective gross realized gains and losses for the years ended December
31, 1999, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Available for sale:
Proceeds from sales $55,296,718 $25,265,625 $195,955,549
Gross realized gains 137,372 6,018 438,628
Gross realized losses 24,037 7,100
</TABLE>
Unencumbered investment securities held to maturity at December 31,
1999, amounted to $97,824,817 after taking into account the investment
securities pledged (Notes 7, 10 and 17), those sold under agreements to
repurchase (Note 8), and those pledged to the Puerto Rico Treasury
Department (for the Westernbank International Division) of $352,365.
33
<PAGE> 34
The fair values of investment securities available for sale and held to
maturity are estimated based on published bid prices or bid quotations
received from securities dealers. The Company derives significant tax
benefits by generating nontaxable interest income on a substantial
portion of these investments, thereby reducing its effective income tax
rate and, consequently, obtaining a higher effective investment yield.
The fair values determined as described above do not reflect this tax
advantage.
Nontaxable interest income on investments for the years ended December
31, 1999, 1998 and 1997, amounted to approximately $72,012,000,
$46,605,000, and $33,444,000, respectively. Nontaxable interest income
relates mostly to interest earned on government obligations of the
United States and Puerto Rico, certain mortgage-backed securities, and
investments of the Westernbank International division.
4. LOANS:
The loan portfolio at December 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
REAL ESTATE LOANS SECURED BY FIRST MORTGAGES:
Conventional:
One-to-four-family residences $ 680,675,250 $ 379,019,331
Other properties 2,388,015 3,007,491
Construction and land acquisition 111,451,452 78,718,789
Loans to facilitate the sale of foreclosed real estate
held for sale 757,218 767,454
Insured or guaranteed:
Federal Housing Administration, Farmers Home
Administration and Veterans Administration 21,250,880 17,876,435
Puerto Rico Housing Bank and Finance Agency 466,758 516,010
Commercial - collateralized by real estate 677,923,910 518,893,422
--------------- ---------------
Total 1,494,913,483 998,798,932
--------------- ---------------
Plus (less):
Undisbursed portion of loans in process (8,762,838) (8,518,196)
Premium on loans purchased 3,277,599 1,806,333
Deferred loan fees - net (4,806,862) (4,107,856)
--------------- ---------------
Total (10,292,101) (10,819,719)
--------------- ---------------
Real estate loans - net 1,484,621,382 987,979,213
--------------- ---------------
OTHER LOANS:
Commercial loans 80,483,612 73,077,192
Loans on deposits 35,264,574 37,550,963
Installment loans:
Auto loans 4,385,930 10,102,293
Credit cards 35,305,985 23,317,944
Other consumer loans 254,540,608 238,425,440
Less:
Unearned interest (64,607) (210,019)
Deferred loan fees - net (890,862) (519,853)
--------------- ---------------
Other loans - net 409,025,240 381,743,960
--------------- ---------------
TOTAL LOANS 1,893,646,622 1,369,723,173
ALLOWANCE FOR LOAN LOSSES (23,978,449) (15,800,241)
--------------- ---------------
LOANS - NET $ 1,869,668,173 $ 1,353,922,932
=============== ===============
</TABLE>
34
<PAGE> 35
The Company originated commercial real estate loans during 1999
amounting to approximately $406,725,000, totalling approximately
$677,924,000 at December 31, 1999. In general, commercial real estate
loans are considered by management to be of somewhat greater risk of
uncollectibility due to the dependency on income production or future
development of the real estate. The commercial real estate loans are
principally collateralized by property dedicated to wholesale, retail
and rental business activities.
The Company originates mortgage loans for portfolio investment or sale
in the secondary market. During the period of origination, mortgage
loans are designated as held for either sale or investment purposes.
Mortgage loans held for sale are carried at the lower of cost or market
value, determined on a net aggregate basis. At December 31, 1999 and
1998, mortgage loans with a cost of $2,083,213 and $7,457,977,
respectively, were designated as held for sale.
The following table reflects the approximate outstanding principal
balance of nonaccrual loans and the corresponding effect on earnings:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Outstanding principal balance
at end of year $6,955,000 $7,782,000 $7,606,000
========== ========== ==========
Interest which could have been recorded
if the loans had not been classified
as nonaccrual $ 514,000 $1,027,000 $ 713,000
========== ========== ==========
</TABLE>
Loans serviced for others are not included in the consolidated
statements of financial condition. At December 31, 1999 and 1998, the
unpaid principal balance of these loans amounted to $281,655,267 and
$239,926,751, respectively. Servicing loans for others generally
consists of collecting payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan
servicing income includes servicing fees from investors and certain
charges collected from borrowers, such as late payment fees. In
connection with the loans serviced for others, the Company held
borrowers' escrow balances of $885,880 and $952,728 at December 31,
1999 and 1998, respectively.
Mortgage servicing rights, included as other assets, amounted to
$1,979,103 and $1,462,151 at December 31, 1999 and 1998, respectively.
In 1999 and 1998, the Company capitalized mortgage servicing rights
amounting to $837,333 and $962,058, respectively. Amortization of
mortgage servicing rights was $320,381 and $146,166 in 1999 and 1998,
respectively. At December 31, 1999 and 1998, the carrying value of
mortgage servicing rights approximates fair value.
In the normal course of business, the Company engages in business
transactions with its directors, executive officers, principal
shareholders and organizations associated with them. Loans to related
parties, mainly mortgage loans for purchase of the principal residence,
are substantially on the same terms as loans to nonrelated parties. The
aggregate amount of loans outstanding to related parties at December
31, 1999 and 1998 totalled approximately $354,000 and $550,000,
respectively.
Changes in the allowance for loan losses are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance - at January 1 $ 15,800,241 $ 13,200,563 $ 12,027,123
Provision charged to income 14,000,000 6,000,000 2,700,000
Recoveries credited to the allowance 1,535,936 823,400 1,074,981
Write-off of uncollectible accounts (7,357,728) (4,223,722) (2,601,541)
------------ ------------ ------------
Balance - at December 31 $ 23,978,449 $ 15,800,241 $ 13,200,563
============ ============ ============
</TABLE>
35
<PAGE> 36
The total investment in impaired commercial and construction loans at
December 31, 1999 and 1998 was $13,083,000 and $9,808,000,
respectively. All impaired commercial and construction loans were
measured based on the fair value of collateral at December 31, 1999 and
1998. Impaired commercial and construction loans amounting to
$8,136,000 and $5,499,000 at December 31, 1999 and 1998, respectively,
were covered by a valuation allowance of $1,268,000 and $1,120,000,
respectively. Impaired commercial and construction loans amounting to
$4,947,000 and $4,309,000 at December 31, 1999 and 1998, respectively,
did not require a valuation allowance in accordance with SFAS 114. The
average investment in impaired commercial and construction loans during
the years ended December 31, 1999, 1998 and 1997, amounted to
approximately $14,919,000, $6,561,000 and $5,646,000, respectively. The
Company's policy is to recognize interest income related to impaired
loans on a cash basis. Interest on impaired commercial and construction
loans collected and recognized as income during the years ended
December 31, 1999, 1998 and 1997, amounted to approximately $1,470,000,
$242,000 and $220,000, respectively.
5. FORECLOSED REAL ESTATE HELD FOR SALE:
Foreclosed real estate held for sale at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Balance, foreclosed real estate held for sale:
Residential (1 - 4 units) $ 158,887 $ 597,804
Commercial 2,371,530 2,956,493
---------- ----------
Total 2,530,417 3,554,297
Less valuation allowance 298,041 283,352
---------- ----------
Foreclosed real estate held for sale - net $2,232,376 $3,270,945
========== ==========
</TABLE>
Changes in the valuation allowance for losses on foreclosed real estate
held for sale were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance - at January 1 $ 283,352 $ 301,197 $292,697
Provision charged to income 14,689 22,005
Write-offs (17,845) (13,505)
--------- --------- --------
Balance - at December 31 $ 298,041 $ 283,352 $301,197
========= ========= ========
</TABLE>
6. PREMISES AND EQUIPMENT:
Premises and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $10,850,415 $10,326,737
Buildings and improvements 8,109,083 7,678,086
Furniture and equipment 25,750,571 21,903,551
Leasehold improvements 6,929,865 6,137,758
Construction in progress 3,455,407 644,218
----------- -----------
Total 55,095,341 46,690,350
Less accumulated depreciation and amortization 16,664,065 13,680,636
----------- -----------
Total $38,431,276 $33,009,714
=========== ===========
</TABLE>
36
<PAGE> 37
7. DEPOSITS AND INTEREST EXPENSE:
A comparative summary of deposits follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
<S> <C> <C>
Noninterest bearings accounts $ 103,681,889 $ 98,339,310
Passbook 409,422,925 403,753,378
NOW accounts 78,844,100 77,887,644
Super NOW accounts 18,830,069 17,860,980
Money market 7,725,952 8,099,986
Certificates of deposit 1,610,892,826 1,074,131,768
-------------- -------------
Total 2,229,397,761 1,680,073,066
Accrued interest payable 18,467,046 10,455,831
-------------- -------------
Total $2,247,864,807 $1,690,528,897
============== ==============
</TABLE>
The weighted average interest rate of all deposits at December 31, 1999 and
1998, was approximately 4.93% and 4.42%, respectively. At December 31, 1999, the
aggregate amount of deposits in denominations of $100,000 or more was
approximately $1,385,071,000 ($830,991,000 at December 31, 1998) including
brokered deposits ($894,847,000 and $416,198,000 at December 31, 1999 and 1998,
respectively). Deposits from related parties amounted to approximately
$2,009,000 and $2,547,000 at December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
<S> <C>
2000 $ 1,027,870,617
2001 92,280,336
2002 27,800,728
2003 51,135,500
2004 38,501,156
Thereafter 373,304,489
---------------
Total $ 1,610,892,826
===============
</TABLE>
At December 31, 1999, the Company had pledged the following assets:
(1) Investment securities with a carrying value of $112,324,814 and
mortgage-backed securities with a carrying value of $23,004,431 to
secure public funds.
(2) Mortgage-backed securities with a carrying value of $112,695 to
secure individual retirement accounts.
A summary of interest expense on deposits for the years ended December 31,
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Passbook $12,461,975 $11,335,548 $10,730,006
NOW, Super NOW and Money
Market accounts 3,102,889 2,461,786 1,935,433
Certificates of deposit 74,989,137 43,935,590 25,886,700
----------- ----------- -----------
Total $90,554,001 $57,732,924 $38,552,139
=========== =========== ===========
</TABLE>
37
<PAGE> 38
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The Company enters into sales of securities under agreements to repurchase
("reverse repurchase agreements"). Reverse repurchase agreements are
treated as financings and the obligations to repurchase securities sold
are reflected as a liability in the consolidated statements of financial
condition. During the period of such agreements, the securities were
delivered to the counterparties. The dealers may have sold, loaned, or
otherwise disposed of such securities to other parties in the normal
course of their operations, and have agreed to resell to the Company the
same securities at the maturities of the agreements.
Reverse repurchase agreements at December 31, 1999 mature as follows:
within 30 days $149,266,025; in 2001 $45,025,000; in 2004 $19,000,000; in
2008 $195,580,000; and in 2009 $321,096,760. At December 31, 1999, with
respect to reverse repurchase agreements amounting to $394,701,760,
excluding FHLB reverse repurchase agreements (Note 10), the counterparties
have the option to terminate the agreements at the first anniversary date
and each interest payment date thereafter.
Reverse repurchase agreements at December 31, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Fixed rate $684,942,785 $461,300,175
Variable rate 45,025,000 45,025,000
------------ ------------
Total $729,967,785 $506,325,175
============ ============
</TABLE>
At December 31, 1999 and 1998, securities sold under agreements to
repurchase (classified by counterparty) were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
FAIR VALUE FAIR VALUE
BORROWING OF UNDERLYING BORROWING OF UNDERLYING
BALANCE COLLATERAL BALANCE COLLATERAL
<S> <C> <C> <C> <C>
Lehman Brothers Inc. $361,941,760 $370,843,000 $285,277,675 $295,385,000
Federal Home Loan Bank of New York 186,000,000 205,706,000 85,000,000 99,426,000
Merrill Lynch Government
Securities, Inc. and affiliates 62,243,000 63,534,000 78,577,500 80,538,000
Salomon Smith Barney Inc. 60,623,000 58,702,000
PaineWebber, Inc. 22,400,025 22,804,000 14,604,000 14,900,000
Morgan Stanley Dean Witter 17,865,000 18,046,000 14,793,000 15,231,000
The Conservation Trust Fund
of Puerto Rico 15,000,000 14,493,000 21,000,000 21,744,000
Prudential Securities, Incorporated 3,895,000 3,760,000 4,060,000 3,998,000
Bear Stearns & Co., Inc. 3,013,000 3,171,000
------------ ------------ ------------ ------------
Total $729,967,785 $757,888,000 $506,325,175 $534,393,000
============ ============ ============ ============
</TABLE>
38
<PAGE> 39
Borrowings under repurchase agreements at December 31 were collateralized
as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Securities Underlying Value of Value of Value of Value of
Reverse Repurchase Underlying Underlying Underlying Underlying
Agreements Collateral Collateral Collateral Collateral
<S> <C> <C> <C> <C>
U.S. Government and
agencies obligations $773,035,427 $699,933,000 $457,580,199 $463,568,000
U.S. Government and
agencies obligations
purchased under
agreements to resell 24,531,000 25,496,000
Mortgage-backed securities 23,928,585 23,362,000 29,776,134 30,098,000
Mortgage-backed securities
available for sale 19,294,234 18,528,000 15,231,222 15,231,000
Other investments 17,165,788 16,065,000
---------- ---------- ---------- ----------
Total 833,424,034 $757,888,000 527,118,555 $534,393,000
============ ============
Accrued interest receivable
of underlying securities 6,595,961 7,264,412
--------- ---------
Total $840,019,995 $534,382,967
============ ============
</TABLE>
Average outstanding balances and maximum month-end outstanding balances
during the years ended December 31, 1999 and 1998, and weighted average
interest rates for the year and at year-end are indicated below:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Monthly average outstanding balance $669,005,000 $394,052,000
Maximum outstanding balance at any month-end 744,155,000 506,325,000
Weighted average interest rate:
For the year 4.90 % 5.23 %
At year end 5.26 % 4.86 %
</TABLE>
9. LINES OF CREDIT:
As of December 31, 1999 and 1998, Westernbank had line of credit
agreements with two commercial banks permitting Westernbank to borrow a
maximum aggregate amount of $30,000,000 and $15,000,000, respectively,
(there were no borrowings during the years ended December 31, 1999 and
1998, under such lines of credit). The agreements provide for unsecured
advances to be used by Westernbank on an overnight basis. Interest rate is
negotiated at the time of the transaction. The credit agreements are
renewable annually.
39
<PAGE> 40
10. TERM NOTES AND ADVANCES FROM FEDERAL HOME LOAN BANK:
Term notes and advances from Federal Home Loan Bank (FHLB) at December 31
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------------------------- ------------------------
WEIGHTED WEIGHTED
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
TERM NOTES -
Variable rate notes
(83% to 89% of three
month LIBID rate) $79,000,000 5.11% $84,000,000 4.53%
=========== ==== =========== ====
ADVANCES FROM FHLB:
Variable rate convertible advances $39,000,000
(88 % to 94 % of three month LIBID rate)
Fixed rate convertible advances
(5.25 % to 5.40 %) 31,000,000 $31,000,000
---------- -----------
Total advances from FHLB $70,000,000 5.70% $31,000,000 5.32%
=========== ==== =========== ====
</TABLE>
Term notes amounting to $40,000,000 are secured by irrevocable stand-by
letters of credit issued by a commercial bank (the "issuer") with credit
values amounting to $40,899,583. Under the letters of credit securities
pledge agreements, the Company has delivered to the issuer specific
investment securities having a fair value, determined monthly, of at least
105% of the face amount of the letters of credit. At December 31, 1999,
the carrying value of the specific collateral held by the issuer consisted
of investments of $43,892,698.
Term notes amounting to $39,000,000 are secured by a pledge of certain
collateral pursuant to pledge agreements. Under the pledge agreements, the
Company has delivered to the note holders investments and mortgage-backed
securities having a market value determined every two weeks of at least
105% of the aggregate principal amount of the current notes outstanding.
At December 31, 1999, the carrying value of the specific collateral held
by the note holders consisted of investments of $38,227,325 and
mortgage-backed securities of $3,121,667.
Advances and reverse repurchase agreements (Note 8) are received from the
FHLB under an agreement whereby the Company is required to maintain a
minimum amount of qualifying collateral with a market value of at least
110% of the outstanding advances and reverse repurchase agreements. At
December 31, 1999, convertible advances were secured by mortgage notes
amounting to $101,577,622. At the advance's and reverse repurchase
agreement's first anniversary date and each quarter thereafter, the FHLB
has the option to convert the advances and reverse repurchase agreements
into replacement funding for the same or a lesser principal amount based
on any funding then offered by FHLB at 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 advance and reverse repurchase agreement, including any
accrued interest, on such optional conversion date.
40
<PAGE> 41
Term notes and advances from FHLB by contractual maturities at December
31, 1999, were as follows:
<TABLE>
<CAPTION>
YEAR ENDING TERM ADVANCES
DECEMBER 31, NOTES FROM FHLB
<S> <C> <C>
2000 $31,000,000 $25,000,000
2001 5,000,000 14,000,000
2002 43,000,000
2008 10,000,000
2009 21,000,000
----------- -----------
Total $79,000,000 $70,000,000
=========== ===========
</TABLE>
11. INCOME TAXES:
Under the Puerto Rico Internal Revenue Code, all companies are treated as
separate taxable entities and are not entitled to file consolidated tax
returns. The Company and Westernbank 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.
The income on certain investments is exempt for income tax purposes. Also,
activities relating to the Westernbank International division are exempt
for income tax purposes. As a result of the above, the Company's effective
tax rate is substantially below the statutory rate.
The provision for income taxes for the years ended December 31, consisted
of the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current $ 13,805,734 $ 9,067,495 $ 7,027,805
Deferred (4,325,865) (2,175,938) (1,334,956)
---------- ---------- ----------
Total $ 9,479,869 $ 6,891,557 $ 5,692,849
============ =========== ===========
</TABLE>
A reconciliation of the provision for income taxes computed by applying
the Puerto Rico income tax statutory rate to the tax provision as reported
for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(In Thousands)
<S> <C> <C> <C>
Computed at Puerto Rico statutory rate $ 18,176 $ 13,879 $ 11,153
Effect on provision of:
Exempt interest income, net (9,794) (6,930) (4,619)
Net nondeductible expenses (nontaxable income) 413 123 (872)
Other 685 (180) 31
-------- -------- --------
Provision for income taxes as reported $ 9,480 $ 6,892 $ 5,693
======== ======== ========
</TABLE>
41
<PAGE> 42
Deferred income tax assets (liabilities) as of December 31, 1999 and 1998,
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Allowance for loan losses $ 9,352,000 $ 4,832,000
Loss carryforward relating to sale of securities 136,000 635,000
Allowance for foreclosed real estate held for sale 75,000 71,000
Mortgage servicing rights (772,000) (570,000)
Other temporary differences (98,308) (102,215)
----------- -----------
Total 8,692,692 4,865,785
Less valuation allowance 39,000 635,000
----------- -----------
Deferred income taxes, net $ 8,653,692 $ 4,230,785
=========== ===========
</TABLE>
Changes in the valuation allowance for deferred income tax assets were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance - at January 1 $ 635,000 $400,000 $400,000
Increase (decrease) in valuation allowance (596,000) 235,000
--------- -------- --------
Balance - at December 31 $ 39,000 $635,000 $400,000
========= ======== ========
</TABLE>
Realization of deferred tax assets is dependent on generating sufficient
future taxable income. The amount of the deferred tax asset considered
realizable could be reduced in the near term if estimates of future
taxable income are not met.
12. NET GAIN ON SALES AND VALUATION OF LOANS, SECURITIES AND OTHER ASSETS:
Net gain on sales and valuation of loans, securities and other assets for
the years ended December 31, 1999, 1998 and 1997, consisted of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Trading account securities, mainly relating
to loans securitized $ 226,992 $ 931,264 $ 811,855
Investment securities available for sale 113,335 6,018 431,528
Mortgage loans held for sale 74,317 (83,930) 20,899
Loss on impairment of assets (Note 1) (477,446)
Other (48,099) 29,149 (8,984)
--------- --------- -----------
Total $ 366,545 $ 405,055 $ 1,255,298
========= ========= ===========
</TABLE>
42
<PAGE> 43
13. COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. In addition, the Company is a defendant
in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have
a material adverse effect on the Company's financial condition.
At December 31, 1999, the Company is obligated under noncancelable
operating leases for branch offices. Certain leases contain escalation
clauses providing for increased rental. Rent expense amounted to
$1,651,841, $1,507,357, and $1,085,112 for the years ended December 31,
1999, 1998 and 1997, respectively.
The projected minimum rental payments under the leases with initial or
remaining terms of more than one year and expiring through 2009 are
approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING MINIMUM
DECEMBER 31, RENT
<S> <C>
2000 $1,587,000
2001 1,419,000
2002 1,049,000
2003 643,000
2004 313,000
Thereafter 447,000
----------
Total $5,458,000
==========
</TABLE>
14. RETIREMENT BENEFIT PLANS:
PENSION PLAN
The Company had a non-contributory defined benefit pension plan which
covered substantially all of its employees. The Plan generally provided
pension benefits that were based on the employee's years of service and
average earnings during the last five years of employment. An employee
became vested at a variable percentage upon completion of three to seven
years of qualifying service. The Company's funding policy was to
contribute an amount not less than the ERISA minimum funding requirement
nor more than the maximum that would have been deductible for tax
purposes.
Effective June 30, 1993, the Plan was amended to freeze any further
accrual of benefits for its participants. The effect of this curtailment
on the consolidated financial statements of the Company was not
significant. The June 30, 1993 accrued benefit will be guaranteed and
payable with at least 120 monthly payments guaranteed, as of the normal
retirement date of each participant as a minimum pension.
The Plan was terminated on December 18, 1998, to this effect the Plan
settled the projected benefit obligation ($5,788,278) through the purchase
of nonparticipating annuity contracts and lump sum payments. As a result,
the Company recognized a loss on settlement of pension plan of $1,689,938
($931,864 increase in benefit obligation plus $758,074 unrecognized loss).
43
<PAGE> 44
The following table sets forth the change in benefit obligation, change in
plan assets, the funded status of the Plan, and the amounts recognized in
the Company's consolidated statements of financial condition as of and for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,545,263 $ 5,227,789
Interest cost 387,075 357,788
Actuarial gain 122,300 174,594
Benefits paid (266,360) (214,908)
----------- -----------
Benefit obligation before settlement of Plan 5,788,278 5,545,263
Cost of settlement 931,864
Settlement payments (6,720,142)
----------- -----------
Benefit obligation at year end -- 5,545,263
----------- -----------
Change in Plan assets:
Fair value of Plan assets at beginning of year 5,982,355 5,763,291
Actual return on plan assets 328,195 433,972
Employer contribution 1,124,330
Benefits paid (266,360) (214,908)
----------- -----------
Fair value of plan assets before
settlement of Plan 7,168,520 5,982,355
Settlement payments (6,720,142)
Employer reversion (448,378)
----------- -----------
Fair value of Plan assets at year end; primarily
cash and short-term investments, including
$4,346,284 in interest bearing deposits with
Westernbank in 1997 -- 5,982,355
----------- -----------
Funded status (Plan assets in excess of
benefit obligation) 437,092
Unrecognized net actuarial gain 526,722
----------- -----------
Prepaid benefit cost included as other asset $ -- $ 963,814
=========== ===========
</TABLE>
The components of net periodic benefit credit for the years ended
December 31, 1998 and 1997 (none for 1999) are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Interest cost 387,075 $ 357,788
Actual return on plan assets (328,195) (433,972)
Net amortization and deferral (109,052) 10,465
--------- ---------
Net periodic benefit credit $ (50,172) $ (65,719)
========= =========
</TABLE>
44
<PAGE> 45
Assumptions used to develop the net periodic benefit for 1998 and 1997
were:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Discount rate 7.0 % 7.0 %
Expected return on plan assets 7.5 % 7.5 %
Rate of compensation increase NIL NIL
</TABLE>
The Company established a retirement plan for directors who were not also
executive officers and who elected to retire after January 1, 1988. The
Plan generally provided pension benefits ranging from 80% to 100% of the
Director's average remuneration based on consecutive years of service
(vesting started after six years) and average earnings during the last
five years (three years if the Director has served longer than 25 years).
On February 24, 1989, the plan was substantially amended to limit the
pension benefits to only those directors who were founders of the Company,
had attained the age of 50 years and had served for 25 consecutive years
on the Board. The amended plan provides for pension benefits equal to the
Director's average remuneration during the last three years of service.
The other Directors (non-founders) by approving this amendment waived and
renounced their pension benefits under the plan. The plan was unfunded as
of December 31, 1999 and 1998. The accumulated benefit obligation under
this plan is approximately $249,000 and $292,000 as of December 31, 1999
and 1998, respectively.
PROFIT-SHARING AND DEFINED CONTRIBUTIONS PLANS
The Company has a non-contributory deferred profit-sharing plan, covering
substantially all of its employees, which provides for retirement and
disability benefits. The Company's contributions to the profit-sharing
plan, which are discretionary, are based on a formula related to net
income. The Company's contributions for the years ended December 31 were
as follows: 1999 - $753,000; 1998 - $570,004; 1997 - $461,884.
Effective January 1, 1995, the Company established a defined contribution
plan under Section 1165(e) of the Puerto Rico Treasury Department Internal
Revenue Code, covering all full-time employees of the Company who have one
year of service and are twenty-one or older. Under the provisions of this
Plan, participants may contribute each year from 2% to 10% of their
compensation after deducting social security, up to a specified maximum.
The Company contributes 50 percent of the first 6 percent of base
compensation that a participant contributes to the Plan. Participants are
immediately vested in their contributions plus actual earnings thereon.
The Company's contributions plus actual earnings thereon are 100 percent
vested after five years of credited service. In case of death and
disability, a participant will be 100 percent vested regardless of the
number of years of credited service. The Company's contributions for the
years ended December 31, 1999, 1998 and 1997, amounted to $217,484,
$133,147 and $126,686, respectively.
15. MINIMUM REGULATORY CAPITAL REQUIREMENTS:
The Company is subject to examination, regulation and periodic reporting
under the Bank Holding Company Act of 1956, as amended, which is
administered by the Board of Governors of the Federal Reserve System.
Westernbank is regulated by the Federal Deposit Insurance Corporation
("FDIC") and by the Office of the Commissioner of Financial Institutions
of Puerto Rico. Westernbank's deposits are insured by the Savings
Association Insurance Fund and by the Bank Insurance Fund, which are
administered by the FDIC, up to $100,000 per depositor.
45
<PAGE> 46
The Company (on a consolidated basis) and Westernbank (the "Companies")
are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on
the Companies' financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Companies must
meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Companies to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1999 and 1998, that the Companies met all capital adequacy
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized Westernbank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, an
institution must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the following tables. There are no
conditions or events since the FDIC notification that management believes
have changed Westernbank's category.
The Companies' actual capital amounts and ratios as of December 31, 1999
and 1998 are also presented in the table below:
<TABLE>
<CAPTION>
MINIMUM TO BE
MINIMUM WELL CAPITALIZED UNDER
CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
---------------------- ---------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Total Capital
(to Risk Weighted Assets) $248,007 13.22% $150,063 8% $187,578 10%
======== ===== ======== = ======== ==
Tier I Capital
(to Risk Weighted Assets) $224,553 12.12% $ 74,093 4% $111,140 6%
======== ===== ======== = ======== ==
Tier I Capital
(to Average Assets) $224,553 6.68% $100,887 3% $168,145 5%
======== ===== ======== = ======== ==
AS OF DECEMBER 31, 1998:
Total Capital
(to Risk Weighted Assets) $167,588 11.74% $114,331 8% $142,914 10%
======== ===== ======== = ======== ==
Tier I Capital
(to Risk Weighted Assets) $149,921 10.61% $ 56,533 4% $ 84,800 6%
======== ===== ======== = ======== ==
Tier I Capital
(to Average Assets) $149,921 6.37% $ 70,643 3% $117,739 5%
======== ===== ======== = ======== ==
</TABLE>
46
<PAGE> 47
Since the Company had no operations other than those resulting from its
investment in Westernbank, the consolidated actual capital amounts and
ratios equal those of Westernbank.
The Company's ability to pay dividends to its stockholders and other
activities can be restricted if its capital falls below levels established
by the Federal Reserve guidelines. In addition, any bank holding company
whose capital falls below levels specified in the guidelines can be
required to implement a plan to increase capital.
16. COMMON AND PREFERRED STOCK TRANSACTIONS:
On February 2, 1998, Westernbank declared a two-for-one stock split of its
common shares. The stock split was given retroactive effect as of December
31, 1997. The effect of the stock split was to charge paid-in capital and
credit common stock by $24,296,316.
In 1998, Westernbank acquired and retired 165,674 shares of common stock
for $2,427,441, and exchanged 12,163 shares in treasury for land amounting
$225,014. The remaining 6,346,901 shares in treasury were retired in
December 1998.
During 1999, Westernbank acquired and retired 80,309 shares of common
stock for $1,222,100.
On June 19, 1998, Westernbank's Board of Directors approved the issuance
of 1,219,000 shares of 7.125% Non-cumulative, Convertible Monthly Income
Preferred Stock, 1998 Series A, with a liquidation preference of $25. The
preferred shares were issued on June 29, 1998, at a price of $25 per
share. Proceeds from issuance of preferred stock amounted to $29,142,704,
net of $1,332,296 of issuance costs. The preferred stock rank senior to
Westernbank's common stock as to dividends and liquidation rights. Each
share is convertible, at the holder's option, at any time on or after the
90th day following the issue date, into .995 shares of Westernbank's
common stock, subject to adjustment upon certain events. The per share
conversion ratio equates to a price of $25.125 per share of common stock.
Westernbank may redeem the preferred stock at any time at the following
redemption prices, if redeemed during the 12-month period beginning July 1
of the years indicated below, plus the accrued and unpaid dividends, if
any, for the then current dividend period to the date of redemption: in
2002 - $26.00; in 2003 - $25.75; in 2004 - $25.50; in 2005 - $25.25; and
in 2006 and thereafter - $25.00.
On April 29, 1999, Westernbank's Board of Directors approved the issuance
of 1,740,000 shares of 7.25% Non-cumulative, Non-convertible Monthly
Income Preferred Stock, 1999 Series B, with a liquidation preference of
$25 per share. The preferred shares were issued on May 29, 1999, at a
price of $25 per share. On June 2, 1999, Westernbank issued an additional
261,000 shares of this Series B preferred stock. Proceeds from issuance of
preferred stock amounted to $48,272,832, net of $1,752,168 of issuance
costs. The preferred stock rank senior to the Company's common stock as to
dividends and liquidation rights. The Company may redeem the 1999 Series B
preferred stock at any time at the following redemption prices, if
redeemed during the 12-month period beginning May 28 of the years
indicated below, plus the accrued and unpaid dividends, if any, for the
then current dividend period to the date of redemption: 2004 - $26.00; in
2005 - $25.50; and in 2006 and thereafter - $25.00.
In June 1999, the Board of Directors approved the 1999 Qualified Stock
Option Plan (the "1999 Qualified Option Plan") and the 1999 Nonqualified
Stock Option Plan (the "Nonqualified Option Plan"), for the benefit of
employees of the Company and its subsidiaries.
47
<PAGE> 48
Under the 1999 Qualified Option Plan, options for up to 4,200,000 shares
of common stock can be granted. Also, options for up to 4,200,000 shares
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 is $13.00. Both plans will remain in effect for a
term of 10 years. At December 31, 1999, no options have been granted to
employees (see Note 22).
17. FINANCIAL INSTRUMENTS:
In the normal course of business, the Company becomes a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit,
standby letters of credit and interest rate swaps. These instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the 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 Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
notional amount of those instruments, which do not necessarily represent
the amounts potentially subject to risk. In addition, the measurement of
the risks associated with these instruments is meaningful only when all
related and offsetting transactions are identified. The Company uses the
same credit policies in making commitments and conditional obligations as
it does for on-balance sheet instruments. For interest rate swap
transactions, the contract or notional amounts do not represent exposure
to credit loss. The actual risk of loss is the cost of replacing, at
market rate, those contracts in the event of default by the
counterparties. The Company controls the credit risk of its interest rate
swap agreements through credit approvals, limits and monitoring
procedures.
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with credit risk.
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.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
48
<PAGE> 49
The contract amount of financial instruments whose amounts represent
credit risk at December 31, 1999 and 1998, was as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Commitments to extend credit:
Fixed rates $ 15,302,000 $14,913,000
Variable rates 159,328,000 97,366,000
Unused lines of credit:
Commercial 36,998,000 34,901,000
Credit cards and other 45,856,000 30,892,000
Stand-by letters of credit 2,373,000 965,000
</TABLE>
The Company enters into interest-rate swap agreements in managing its
interest rate exposure. Interest-rate swap transactions generally involve
the exchange of fixed-and floating-rate interest-payment obligations
without the exchange of the underlying principal amounts. Entering into
interest-rate swap agreements involves not only the risk of dealing with
counterparties and their ability to meet the terms of the contracts, but
also the interest rate risk associated with unmatched positions. The
notional amounts are amounts in which calculations and payments 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.
At December 31, 1999 and 1998, the Company had outstanding interest swap
agreements with other financial institutions, used to hedge the interest
rate risk on $71,000,000 term notes bearing variable rates, and
$438,478,613 and $218,292,759 fixed rate certificates of deposit
liabilities, respectively.
A summary of the types of swaps used and their terms at December 31, 1999
and 1998, follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Pay floating/received fixed:
Notional amount $ 438,478,613 $ 218,292,759
Weighted average receive rate at year end 6.38% 6.26%
Weighted average pay rate at year end 5.33% 5.20%
Floating rate in percentage of three month LIBOR,
plus a spread ranging from minus .10% to plus .25% 100% 100%
<CAPTION>
1999 1998
<S> <C> <C>
Pay fixed/receive floating:
Notional amount $ 71,000,000 $ 71,000,000
Weighted average receive rate at year end 4.47% 4.51%
Weighted average pay rate at year end 4.62% 4.62%
Floating rate in percentage of
three month LIBOR, minus 1/8% 85% to 86.5% 85% to 86.5%
</TABLE>
49
<PAGE> 50
The changes in notional amount of swaps outstanding during the years ended
December 31, 1999 and 1998, follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Beginning balance $ 289,292,759 $105,937,116
New swaps 220,185,854 253,292,758
Cancelled swaps (69,937,115)
------------- ------------
Ending balance $ 509,478,613 $289,292,759
============= ============
</TABLE>
During 1998, various counterparties of swap agreements exercised their
option to cancel their swaps and the Company simultaneously exercised its
option to call the hedged certificates of deposit. No gains or losses
resulted from these cancellations.
At December 31, 1999, the interest rate swap maturities by year were as
follows:
<TABLE>
<CAPTION>
HEDGE INTEREST RATE RISK
------------------------------
VARIABLE FIXED
YEAR ENDING TERM CERTIFICATES
DECEMBER 31, NOTES OF DEPOSIT
<S> <C> <C>
2000 $ 31,000,000 $ --
2001 20,000,000
2002 40,000,000 10,000,000
2003 35,000,000
2005 and thereafter 373,478,613
------------ ------------
Total $ 71,000,000 $438,478,613
============ ============
</TABLE>
Swap agreements amounting to $26,000,000 have option features that match
those of the hedged term notes. In swap agreements amounting to
$418,478,613, the counterparties have the option to cancel the swap
agreement on any interest payment date (matching the call options that the
Company has on the hedged certificates of deposit).
At December 31, 1999, the carrying value of the specific collateral held
by the counterparties consisted of investments of $41,541,683.
50
<PAGE> 51
The estimated fair values of the Company's financial instruments at
December 31, were as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 55,672 $ 55,672 $ 49,429 $ 49,429
Securities purchased under
agreements to resell 120,655 120,655 91,211 91,211
Federal funds sold 16,400 16,400
Interest-bearing deposits in banks 9,271 9,271 7,787 7,787
Trading securities 1,289 1,289 5,090 5,090
Investment securities available for sale 22,185 22,185 15,231 15,231
Investment securities held to maturity 1,174,532 1,074,346 871,848 868,683
Mortgage loans held for sale 2,074 2,074 7,374 7,374
Loans (excluding allowance for loan losses) 1,893,647 1,888,216 1,369,723 1,373,876
Accrued interest receivable 33,311 33,311 23,453 23,453
Federal Home Loan Bank stock 12,800 12,800 5,800 5,800
Mortgage servicing rights 1,979 1,979 1,462 1,462
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing 103,682 103,682 98,339 98,339
Interest bearing 2,125,716 2,110,424 1,581,734 1,574,255
Securities sold under
agreements to repurchase 729,968 729,281 506,325 506,443
Term notes 79,000 77,801 84,000 84,195
Advances from FHLB 70,000 69,561 31,000 31,010
Accrued interest payable 24,371 24,371 14,556 14,556
Other 1,694 1,694 1,496 1,496
<CAPTION>
1999 1998
------------------------------- ------------------------------
CONTRACT OR CONTRACT OR
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OFF-BALANCE SHEET ITEMS
ASSETS:
Interest rate swaps in a
net receivable position $ 71,000 $ 1,136 $ 133,609 $ 1,433
(LIABILITIES):
Commitments to extend credit 174,630 (856) 112,279 (1,144)
Unused lines of credit:
Commercial 36,998 (28) 34,901 (3)
Credit cards and other 45,856 (157) 30,892 (108)
Stand-by letters of credit 2,373 (24) 965 (10)
Interest rate swaps in a
net payable position 438,479 (25,026) 155,684 (1,827)
</TABLE>
51
<PAGE> 52
18. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Most of the Company's business activities are with customers located
within Puerto Rico. The Company has a diversified loan portfolio with no
significant concentration in any economic sector or industry.
19. RESERVE FUND:
The Banking Law of Puerto Rico requires that a reserve fund be established
and that annual transfers of at least 10% of net income be made, until
such reserve fund equals 10% of total deposits or total paid-in capital,
whichever is greater. Such transfers restrict the retained earnings, which
would otherwise be available for dividends.
20. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of the unaudited quarterly results of
operations (in thousands except for per share data):
<TABLE>
<CAPTION>
1999 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
<S> <C> <C> <C> <C>
Total interest income $49,415 $55,754 $61,238 $66,580
Total interest expense 27,163 30,582 34,702 38,359
------ ------ ------ ------
Net interest income 22,252 25,172 26,536 28,221
Provision for loan losses 1,500 2,000 3,000 7,500
------ ------ ------ ------
Net interest income after
provision for loan losses 20,752 23,172 23,536 20,721
Total other income, net 3,175 2,781 2,718 3,565
Total operating expenses 12,556 14,054 13,926 13,280
------ ------ ------ ------
Income before income taxes 11,371 11,899 12,328 11,006
Provision for income taxes 2,356 2,320 2,296 2,508
------ ------ ------ ------
Net income $ 9,015 $ 9,579 $10,032 $ 8,498
======= ======= ======= =======
Basic and diluted earnings per
common share $ 0.20 $ 0.21 $ 0.20 $ 0.17
======= ======= ======= =======
<CAPTION>
1998 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
<S> <C> <C> <C> <C>
Total interest income $32,712 $36,743 $41,903 $46,088
Total interest expense 17,179 19,960 22,350 24,819
------ ------ ------ ------
Net interest income 15,533 16,783 19,553 21,269
Provision for loan losses 1,100 1,000 1,900 2,000
------ ------ ------ ------
Net interest income after
provision for loan losses 14,433 15,783 17,653 19,269
Total other income, net 3,415 2,606 3,128 1,005
Total operating expenses 9,966 10,214 11,491 10,034
------ ------ ------ ------
Income before income taxes 7,882 8,175 9,290 10,240
Provision for income taxes 1,414 1,200 2,025 2,253
------ ------ ------ ------
Net income $ 6,468 $ 6,975 $ 7,265 $ 7,987
======= ======= ======= =======
Basic and diluted earnings per
common share $ 0.15 $ 0.17 $ 0.16 $ 0.18
======= ======= ======= =======
</TABLE>
52
<PAGE> 53
21. SEGMENT INFORMATION:
In June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS 131"). SFAS 131
establishes standards for the way an enterprise reports information about
operating segments in annual financial statements and requires that
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
SFAS 131 requires a reconciliation of total segment revenue and expense
items and segment assets to the amounts in the enterprise's financial
statements. SFAS 131 also requires a descriptive report on how the
operating segments were determined, the products and services provided by
the operating segments, and any measurement differences used for segment
reporting and financial statement reporting.
The Company's management monitors and manages the financial performance
of two primary business segments, the operations of Westernbank in Puerto
Rico and those of the division known as Westernbank International. The
accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on net income or loss. 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 financial information presented below was derived from the internal
management accounting system and are based on internal management
accounting policies. The information presented does not necessarily
represent each segment's financial condition and results of operations as
if they were independent entities.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1999
(IN THOUSANDS)
------------------------------------------------------
IN PUERTO RICO INTERNATIONAL TOTAL
<S> <C> <C> <C>
Interest income $ 202,290 $ 30,697 $ 232,987
Interest expense 108,274 22,532 130,806
----------- --------- -----------
Net interest income 94,016 8,165 102,181
Provision for loan losses (14,000) (14,000)
Other income, net 12,154 84 12,238
Intersegment revenue 116 116
Intersegment expense (116) (116)
Equity in loss of subsidiary (395) (395)
Operating expenses (53,217) (203) (53,420)
Provision for income taxes (9,480) (9,480)
----------- --------- -----------
Net income $ 29,194 $ 7,930 $ 37,124
=========== ========= ===========
Total assets $ 2,903,174 $ 471,608 $ 3,374,782
=========== ========= ===========
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1998
(IN THOUSANDS)
----------------------------------------------------
IN PUERTO RICO INTERNATIONAL TOTAL
<S> <C> <C> <C>
Interest income $ 141,210 $ 16,265 $ 157,475
Interest expense 71,929 12,379 84,308
----------- --------- -----------
Net interest income 69,281 3,886 73,167
Provision for loan losses (6,000) (6,000)
Other income, net 10,134 23 10,157
Intersegment revenue 58 58
Intersegment expense (58) (58)
Equity in loss of subsidiary (470) (470)
Operating expenses (40,979) (196) (41,175)
Provision for income taxes (6,891) (6,891)
----------- --------- -----------
Net income $ 25,017 $ 3,771 $ 28,788
=========== ========= ===========
Total assets $ 2,121,911 $ 359,074 $ 2,480,985
=========== ========= ===========
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997
(IN THOUSANDS)
----------------------------------------------------
IN PUERTO RICO INTERNATIONAL TOTAL
<S> <C> <C> <C>
Interest income $ 103,255 $ 10,273 $ 113,528
Interest expense 49,191 8,008 57,199
----------- --------- -----------
Net interest income 54,064 2,265 56,329
Provision for loan losses (2,700) (2,700)
Other income 9,602 377 9,979
Intersegment revenue 26 26
Intersegment expense (26) (26)
Operating expenses (34,863) (148) (35,011)
Provision for income taxes (5,693) (5,693)
----------- --------- -----------
Net income $ 20,384 $ 2,520 $ 22,904
=========== ========= ===========
Total assets $ 1,373,450 $ 182,527 $ 1,555,977
=========== ========= ===========
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
1999 1998 1997
(IN THOUSANDS)
---------------------------------------------------
<S> <C> <C> <C>
Interest income:
Reportable segments $ 232,987 $ 157,475 $ 113,528
Less eliminations (29)
----------- ----------- -----------
Consolidated interest income $ 232,987 $ 157,446 $ 113,528
=========== =========== ===========
Net income:
Reportable segments $ 37,124 $ 28,788 $ 22,904
All other 1,173 (588)
----------- ----------- -----------
Total 38,297 28,200 22,904
Plus (less) eliminations (1,173) 495
----------- ----------- -----------
Consolidated net income $ 37,124 $ 28,695 $ 22,904
=========== =========== ===========
Total assets:
Reportable segments $ 3,374,782 $ 2,480,985 $ 1,555,977
All other 228,499 1,533
----------- ----------- -----------
Total 3,603,281 2,482,518 1,555,977
Less eliminations (228,710) (1,342) (178)
----------- ----------- -----------
Consolidated total assets $ 3,374,571 $ 2,481,176 $ 1,555,799
=========== =========== ===========
</TABLE>
22. SUBSEQUENT EVENTS:
In January 2000, the Board of Directors granted to three executive
officers 2,100,000 options under the 1999 Qualified Stock Option Plan.
Options will become fully exercisable after five years following the date
of the grant at an option price of $13.00.
In addition, the Company acquired and retired 75,000 shares of common
stock for $667,509 during February 2000.
******
55
<PAGE> 1
EXHIBIT 21.1
Westernbank Puerto Rico
Organized under the laws of the Commonwealth of Puerto Rico
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF W HOLDING COMPANY, INC. FOR THE YEAR ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 55,672
<INT-BEARING-DEPOSITS> 9,271
<FED-FUNDS-SOLD> 16,400
<TRADING-ASSETS> 1,289
<INVESTMENTS-HELD-FOR-SALE> 22,185
<INVESTMENTS-CARRYING> 1,174,532
<INVESTMENTS-MARKET> 1,074,346
<LOANS> 1,895,720
<ALLOWANCE> 23,978
<TOTAL-ASSETS> 3,374,571
<DEPOSITS> 2,247,865
<SHORT-TERM> 205,266
<LIABILITIES-OTHER> 23,918
<LONG-TERM> 673,702
0
3,220
<COMMON> 42,000
<OTHER-SE> 178,600
<TOTAL-LIABILITIES-AND-EQUITY> 3,374,571
<INTEREST-LOAN> 151,398
<INTEREST-INVEST> 65,926
<INTEREST-OTHER> 15,663
<INTEREST-TOTAL> 232,987
<INTEREST-DEPOSIT> 90,554
<INTEREST-EXPENSE> 130,806
<INTEREST-INCOME-NET> 102,181
<LOAN-LOSSES> 14,000
<SECURITIES-GAINS> 367
<EXPENSE-OTHER> 53,816
<INCOME-PRETAX> 46,604
<INCOME-PRE-EXTRAORDINARY> 37,124
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,124
<EPS-BASIC> 0.78
<EPS-DILUTED> 0.78
<YIELD-ACTUAL> 3.48
<LOANS-NON> 6,955
<LOANS-PAST> 66
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,456
<ALLOWANCE-OPEN> 15,800
<CHARGE-OFFS> 7,358
<RECOVERIES> 1,536
<ALLOWANCE-CLOSE> 23,978
<ALLOWANCE-DOMESTIC> 23,978
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,745
</TABLE>
