<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of l934
For Quarter Ended September 30, 2000
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 A ($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 to be filed by Section 13 or 15(d) of the Securities Exchange Act of
l934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
The number of shares issued and outstanding of each of the registrant's classes
of stock, as of the latest practicable date (September 30, 2000), is:
Common Stock 41,515,200
7.125% Preferred Stock 1998 Series A 1,219,000
7.25% Preferred Stock 1999 Series B 2,001,000
<PAGE> 2
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2000 and December 31, 1999 1
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and 1999 2
Consolidated Statements of Changes in Stockholders' Equity
and of Comprehensive Income for the Nine Months Ended
September 30, 2000 and 1999 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 4-5
Notes to Consolidated Financial Statements 6-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26-27
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 28
Item 2. Changes In Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
EXHIBIT 27.1 30
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 43,444 $ 55,672
Money market instruments:
Federal funds sold and securities purchased under agreements to resell 153,918 137,055
Interest bearing deposits with banks 10,465 9,271
Trading securities, at fair value (Note 4) 1,190 1,289
Investment securities available for sale, at fair value (Note 4) 17,830 22,185
Investment securities held to maturity, with a fair value of
$1,514,900 in 2000 and $1,074,346 in 1999 (Note 4) 1,597,798 1,174,532
Federal Home Loan Bank stock, at cost 23,384 12,800
Mortgage loans held for sale, at lower of cost or market 1,007 2,074
Loans, net of allowance for loan losses of $27,640 in 2000
and $23,978 in 1999 (Note 5) 2,089,500 1,869,668
Accrued interest receivable 34,146 33,311
Premises and equipment, net 42,473 38,431
Other assets (Note 7) 23,950 18,283
----------- -----------
Total $ 4,039,105 $ 3,374,571
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 6) $ 2,564,636 $ 2,247,865
Securities sold under agreements to repurchase 1,010,333 729,968
Term notes 79,000 79,000
Advances from Federal Home Loan Bank 120,000 70,000
Other liabilities 22,396 23,919
----------- -----------
Total liabilities 3,796,365 3,150,752
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 2, 3, 4, 9):
Preferred stock $1.00 par value per share (liquidation preference $25 per
share); authorized 20,000,000 shares; 7.25% noncumulative, non-convertible
monthly income preferred stock, 1999 Series B -
Issued and outstanding 2,001,000 shares 2,001 2,001
7.125% noncumulative, convertible monthly income preferred stock, 1998 Series A -
Issued and outstanding 1,219,000 shares 1,219 1,219
Common stock - $1.00 par value per share; authorized 300,000,000
shares; issued and outstanding 41,515,200 in 2000 and 42,000,000 in 1999 41,515 42,000
Paid in capital 95,426 99,596
Retained earnings:
Reserve fund 16,195 12,843
Undivided profits 86,801 67,218
Accumulated other comprehensive loss (417) (1,058)
----------- -----------
Total stockholders' equity 242,740 223,819
----------- -----------
TOTAL $ 4,039,105 $ 3,374,571
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE> 4
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including loan fees $ 47,290 $ 39,483 $ 133,582 $ 108,082
Investment securities 21,457 18,090 59,399 48,322
Mortgage and other asset-backed securities 3,045 2,297 7,936 6,268
Money market instruments 2,815 1,368 7,261 3,735
-------- -------- --------- ---------
Total interest income 74,607 61,238 208,178 166,407
-------- -------- --------- ---------
INTEREST EXPENSE:
Deposits 33,642 23,540 91,405 63,641
Securities sold under agreements to repurchase 14,427 9,270 36,620 24,025
Term notes 975 992 2,870 2,967
Advances from Federal Home Loan Bank 2,019 900 4,959 1,815
-------- -------- --------- ---------
Total interest expense 51,063 34,702 135,854 92,448
-------- -------- --------- ---------
NET INTEREST INCOME 23,544 26,536 72,324 73,959
PROVISION FOR LOAN LOSSES 2,000 3,000 6,000 6,500
-------- -------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 21,544 23,536 66,324 67,459
-------- -------- --------- ---------
OTHER INCOME:
Service charges on deposit accounts and other fees 3,732 2,835 10,553 8,453
Net gain (loss) on sale and valuation of loans,
securities and other 21 (117) (559) 221
-------- -------- --------- ---------
Total other income 3,753 2,718 9,994 8,674
-------- -------- --------- ---------
TOTAL NET INTEREST INCOME AND
OTHER INCOME 25,297 26,254 76,318 76,133
-------- -------- --------- ---------
OPERATING EXPENSES:
Salaries and employees' benefits 4,589 5,500 14,668 16,213
Equipment 2,282 1,782 6,408 4,765
Occupancy 1,216 1,302 3,706 3,804
Advertising 759 1,223 2,340 3,457
Printing, postage, stationery and supplies 438 711 1,625 2,142
Telephone 336 677 1,199 1,907
Other 1,939 2,731 7,495 8,248
-------- -------- --------- ---------
Total operating expenses 11,559 13,926 37,441 40,536
-------- -------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 13,738 12,328 38,877 35,597
-------- -------- --------- ---------
PROVISION FOR INCOME TAXES:
Current 2,266 3,488 6,803 8,706
Deferred (280) (1,192) (1,440) (1,734)
-------- -------- --------- ---------
Total provision for income taxes 1,986 2,296 5,363 6,972
-------- -------- --------- ---------
NET INCOME $ 11,752 $ 10,032 $ 33,514 $ 28,625
======== ======== ========= =========
NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 10,303 $ 8,580 $ 29,166 $ 25,768
======== ======== ========= =========
BASIC AND DILUTED EARNINGS PER
COMMON SHARE (Note 2) $ 0.25 $ 0.20 $ 0.70 $ 0.61
======== ======== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 5
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
--------- ---------
<S> <C> <C>
Changes in Stockholders' Equity:
Preferred stock:
Balance at beginning of period $ 3,220 $ 1,219
Issuance of preferred stock -- 2,001
--------- ---------
Balance at end of period 3,220 3,220
--------- ---------
Common stock:
Balance at beginning of period 42,000 42,080
Purchase and retirement of common stock (485) (80)
--------- ---------
Balance at end of period 41,515 42,000
--------- ---------
Paid-in-capital:
Balance at beginning of period 99,596 54,466
Issuance of preferred stock -- 46,272
Purchase and retirement of common stock (4,170) (1,142)
--------- ---------
Balance at end of period 95,426 99,596
--------- ---------
Reserve fund:
Balance at beginning of period 12,843 9,131
Transfer from undivided profits 3,352 2,863
--------- ---------
Balance at end of period 16,195 11,994
--------- ---------
Undivided profits:
Balance at beginning of period 67,218 47,359
Net income 33,514 28,625
Cash dividends on common stock (6,231) (5,885)
Cash dividends on preferred stock (4,348) (2,858)
Transfer to reserve fund (3,352) (2,863)
--------- ---------
Balance at end of period 86,801 64,378
--------- ---------
Accumulated other comprehensive income:
Balance at beginning of period (1,058) 28
Reclassification adjustment included in net income 422 (28)
Net decrease in fair value of securities available for
sale, net of taxes 219 (725)
--------- ---------
Balance at end of period (417) (725)
--------- ---------
Total Stockholders' Equity $ 242,740 $ 220,463
========= =========
Comprehensive income:
Net income $ 33,514 $ 28,625
========= =========
Other comprehensive income (loss), net of taxes:
Unrealized net income (losses) on securities available
for sale arising during the period 219 (725)
Reclassification adjustment included in net income 422 (28)
--------- ---------
Net change in fair value of securities available for sale,
net of taxes 641 (753)
--------- ---------
Total Comprehensive Income $ 34,155 $ 27,872
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 6
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,514 $ 28,625
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision (credit) for:
Loan losses 6,000 6,500
Deferred income taxes (1,440) (1,734)
Foreclosed real estate held for sale -- 15
Depreciation and amortization on:
Premises and equipment 4,660 3,852
Foreclosed real estate held for sale 43 64
Mortgage servicing rights 253 224
Amortization of premium (discount) on:
Investment securities available for sale 8 1
Investment securities held to maturity (9,202) (5,730)
Mortgage-backed securities held to maturity (43) 28
Loans 387 489
Amortization of excess of cost over net assets acquired 47 339
Amortization of deferred loan origination fees and costs (2,995) (3,392)
Net loss (gain) on sale and in valuation of:
Investment securities available for sale 422 106
Mortgage loans held for sale (36) 119
Foreclosed real estate held for sale (57) (18)
Originations of mortgage loans held for sale (32,491) (47,105)
Decrease (increase) in:
Trading securities 33,304 46,511
Accrued interest receivable (835) (4,806)
Other assets (4,070) 658
Increase in:
Accrued interest on deposits and borrowings 4,372 4,715
Other liabilities 897 4,053
----------- -----------
Net cash provided by operating activities 32,738 33,514
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest bearing deposits with banks (1,194) (2,921)
Net increase in federal funds sold and securities purchased
under agreements to resell (16,863) (13,672)
Investment securities available for sale:
Purchases -- (60,391)
Proceeds from sales 3,552 45,738
Proceeds from principal repayment 1,111 940
Investment securities held to maturity:
Purchases (1,875,772) (2,586,428)
Proceeds from redemption and repayment 1,522,135 2,274,657
Mortgage-backed securities held to maturity:
Purchases (73,687) (4,895)
Proceeds from principal repayment 13,303 32,274
Loans:
Purchases (186,585) (281,620)
Other increase (36,932) (185,249)
Proceeds from sales of foreclosed real estate held for sale 142 106
Additions to premises and equipment (9,014) (7,511)
Purchase of Federal Home Loan Bank stock (10,584) (3,612)
Business acquisition -- (108)
----------- -----------
Net cash used in investing activities (670,388) (792,692)
----------- -----------
Forward $ (637,650) $ (759,178)
----------- -----------
(Continued)
</TABLE>
4
<PAGE> 7
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
----------- ---------
<S> <C> <C>
Forward $ (637,650) $(759,178)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 313,355 481,981
Net increase in securities sold under agreements to repurchase 29,273 174,252
Securities sold under agreements to repurchase with original maturities
over three months:
Proceeds 1,109,488 211,347
Payments (858,396) (159,064)
Proceeds from Federal Home Loan Bank advances 50,000 39,000
Net decrease in advances from borrowers for taxes
and insurance (395) (156)
Repurchase of common stock for retirement (4,654) (1,222)
Dividends paid (13,249) (8,742)
Issuance of preferred stock -- 48,273
----------- ---------
Net cash provided by financing activities 625,422 785,669
----------- ---------
NET CHANGE IN CASH AND DUE FROM BANKS (12,228) 26,491
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 55,672 49,429
----------- ---------
CASH AND DUE FROM BANKS, END OF PERIOD $ 43,444 $ 75,920
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and other borrowings $ 81,381 $ 54,774
Income taxes 9,752 7,424
Noncash activities:
Accrued dividends payable 934 242
Net increase (decrease) in unrealized loss on investment securities
available for sale (641) 753
Mortgage loans securitized and transferred to trading securities 33,204 43,356
Transfer from:
Trading securities to investment securities available for sale -- 4,181
Loans to foreclosed real estate held for sale 479 291
Mortgage loans originated to finance the sale of foreclosed real estate
held for sale 185 598
Capitalized mortgage servicing rights 389 574
</TABLE>
See Notes to Consolidated Financial Statements.
(Concluded)
5
<PAGE> 8
W HOLDING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
W Holding Company, Inc. (the "Company") is a financial holding company offering
a full range of financial services 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. On July 14, 2000, the
Company's election to become a financial holding company under the Bank Holding
Company Act was approved by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). As a financial holding company, the
Company may engage in the expanded activities permitted under the
Gramm-Leach-Bliley Act passed in 1999, including expanded insurance and
securities activities, provided that all depository institutions the Company
controls remain well-capitalized, well-managed and has a satisfactory Community
Reinvestment Act (CRA) rating. Also, no prior notice to the Federal Reserve
Board is required from a financial holding company to acquire a company
engaging in permissible nonbanking activities or to commence these activities
directly or indirectly through a subsidiary.
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. Westernbank is a commercial bank chartered under
the laws of the Commonwealth of Puerto Rico. Since its inception, the Company
had no operations other than those resulting from its investment in Westernbank
and the repurchase, retirement and payment of dividends on its common and
preferred stocks. 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.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions for Form 10-Q. Complete information regarding
the financial statements can be found in the notes to the financial statements
for the year ended December 31, 1999, contained in the Company's 1999 Annual
Report.
In management's opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting mainly of normal recurring
adjustments and elimination of intercompany transactions and balances)
necessary to present fairly, in all material respects, the Company's financial
condition as of September 30, 2000 and December 31, 1999, and the results of
its operations, changes in stockholders' equity and of comprehensive income and
its cash flows for the three and nine months ended September 30, 2000 and 1999.
The results of operations for the nine months ended September 30, 2000, are not
necessarily indicative of the results to be expected for the entire year.
2. EARNINGS PER SHARE AND CAPITAL TRANSACTIONS
Basic and diluted earnings per common share for the three and nine months ended
September 30, 2000, were computed by dividing the income attributable to common
stockholders for such periods by the weighted average number of shares of
common stock outstanding during such periods (41,531,124 and 41,670,074 shares,
respectively).
Basic and diluted earnings per common share for the three and nine months ended
September 30, 1999, were computed by dividing the income attributable to common
stockholders for such periods by the weighted average number of shares of
common stock outstanding during such periods (42,000,000 and 42,007,765 shares,
respectively).
6
<PAGE> 9
During the nine months ended September 30, 2000, the Company acquired and
retired 484,800 shares of common stock for $4,653,931.
3. DIVIDENDS DECLARED PER SHARE
On February 3, 2000, the Board of Directors approved an increase on its annual
dividend payments to common shareholders in 2000 to $0.20 per share. This
represents an increase of 25% over the dividends paid the previous year. 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 Board of Directors adopted the policy of paying dividends
on a monthly basis. The first dividend payment under this new policy was paid
on April 17, 2000, and covered retroactive dividends for the first three months
ended March 31, 2000. Thereafter, dividends are being paid on the 15th day of
the next month for stockholders of record as of the last day of the previous
month.
The Company's cash dividends per share declared for the nine months ended
September 30, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
RECORD DATE PAYABLE DATE AMOUNT PER SHARE
----------- ------------ ----------------
<S> <C> <C>
YEAR 2000
March 31, 2000 April 17, 2000 $ 0.0500
April 30, 2000 May 15, 2000 0.0167
May 31, 2000 June 15, 2000 0.0167
June 30, 2000 July 15, 2000 0.0167
July 31, 2000 August 14, 2000 0.0167
August 31, 2000 September 15, 2000 0.0166
September 30, 2000 October 15, 2000 0.0166
--------
Total $ 0.1500
========
YEAR 1999
June 30, 1999 July 15, 1999 $ 0.0800
========
</TABLE>
7
<PAGE> 10
4. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of
investment securities were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
SEPTEMBER 30, 2000
TRADING SECURITIES:
Mortgage-backed securities-
Government National Mortgage
Association (GNMA) certificates $ 1,176 $ 14 $ -- $ 1,190
========== ====== ======= ==========
AVAILABLE FOR SALE:
Mortgage-backed securities-GNMA
certificates $ 18,247 $ -- $ 417 $ 17,830
========== ====== ======= ==========
HELD TO MATURITY:
U.S. Government and agencies
obligations $1,327,045 $ 187 $81,069 $1,246,163
Puerto Rico Government and
agencies obligations 14,788 150 56 14,882
Other investments 84,290 618 1,704 83,204
---------- ------ ------- ----------
Total 1,426,123 955 82,829 1,344,249
---------- ------ ------- ----------
Mortgage and other asset-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) certificates 18,000 135 281 17,854
GNMA certificates 24,106 102 614 23,594
Federal National Mortgage Association
(FNMA) certificates 13,048 67 154 12,961
Collateralized mortgage obligations
(CMO) certificates 69,031 327 279 69,079
Other 47,490 -- 327 47,163
---------- ------ ------- ----------
Total 171,675 631 1,655 170,651
---------- ------ ------- ----------
Total $1,597,798 $1,586 $84,484 $1,514,900
========== ====== ======= ==========
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
TRADING SECURITIES:
Mortgage backed securities -
GNMA certificates $ 1,251 $ 38 $ -- $ 1,289
========== ==== ======== ==========
AVAILABLE FOR SALE:
Mortgage backed securities -
GNMA certificates $ 19,294 $ -- $ 767 $ 18,527
FNMA certificates 4,046 -- 388 3,658
---------- ---- -------- ----------
Total $ 23,340 $ -- $ 1,155 $ 22,185
========== ==== ======== ==========
HELD TO MATURITY:
U.S. Government and agencies obligations $1,029,450 $ 5 $ 97,335 $ 932,120
Puerto Rico Government and agencies
obligations 16,668 158 135 16,691
Other 17,166 -- 1,101 16,065
---------- ---- -------- ----------
Total 1,063,284 163 98,571 964,876
---------- ---- -------- ----------
Mortgage and other asset-backed securities:
FHLMC certificates 20,594 100 644 20,050
GNMA certificates 27,637 360 179 27,818
FNMA certificates 14,735 38 453 14,320
CMO certificates 28,107 6 723 27,390
Other 20,175 -- 283 19,892
---------- ---- -------- ----------
Total 111,248 504 2,282 109,470
---------- ---- -------- ----------
Total $1,174,532 $667 $100,853 $1,074,346
========== ==== ======== ==========
</TABLE>
The amortized cost and fair value of investment securities held to maturity at
September 30, 2000, by contractual maturity (excluding mortgage and
asset-backed securities) are shown below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due within one year $ 54,149 $ 54,150
Due after one year through five years 290,845 291,196
Due after five years through ten years 57,761 57,506
Due after ten years 1,023,368 941,397
---------- ----------
Total 1,426,123 1,344,249
Mortgage and other asset-backed securities 171,675 170,651
---------- ----------
Total $1,597,798 $1,514,900
========== ==========
</TABLE>
9
<PAGE> 12
5. LOANS
The loan portfolio consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
REAL ESTATE LOANS SECURED BY
FIRST MORTGAGES:
<S> <C> <C>
Conventional:
One-to-four family residences $ 724,529 $ 680,675
Other properties 1,955 2,388
Construction and land acquisition 109,747 111,451
Loans to facilitate the sale of foreclosed
real estate held for sale 750 757
Insured or guaranteed:
Federal Housing Administration and
Veterans Administration 18,613 21,251
Puerto Rico Housing Bank and Finance Agency 371 467
Commercial - collateralized by real estate 804,884 677,924
----------- -----------
Total 1,660,849 1,494,913
----------- -----------
Plus (less):
Undisbursed portion of loans in process (6,126) (8,763)
Premium on loans purchased - net 2,825 3,278
Deferred loan fees - net (4,567) (4,807)
----------- -----------
Total (7,868) (10,292)
----------- -----------
Real estate loans - net 1,652,981 1,484,621
----------- -----------
OTHER LOANS:
Commercial loans 94,222 80,484
Loans on deposits 36,876 35,265
Installment loans:
Credit cards 36,296 35,306
Other consumer loans 297,752 258,926
Less:
Unearned interest (29) (65)
Deferred loan fees - net (958) (891)
----------- -----------
Other loans - net 464,159 409,025
----------- -----------
TOTAL LOANS 2,117,140 1,893,646
ALLOWANCE FOR LOAN LOSSES (27,640) (23,978)
----------- -----------
LOANS - NET $ 2,089,500 $ 1,869,668
=========== ===========
</TABLE>
10
<PAGE> 13
The total investment on impaired commercial and constructions loans at
September 30, 2000 and December 31, 1999, was $8,903,000 and $13,083,000,
respectively. All impaired commercial and constructions loans were measured
based on the fair value of collateral at September 30, 2000 and December 31,
1999. Impaired commercial and construction loans amounting to $3,719,000 and
$8,136,000 at September 30, 2000 and December 31, 1999, respectively, were
covered by a valuation allowance of $624,000 and $1,268,000, respectively.
Impaired commercial and construction loans amounting to $5,184,000 at September
30, 2000, and $4,947,000 at December 31, 1999, did not require a valuation
allowance in accordance with Statement of Financial Accounting Standards No.
114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. The average investment
on impaired commercial and construction loans at September 30, 2000 and 1999
amounted to $11,909,000 and $8,141,000, 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 for the periods ended September 30, 2000 and 1999, amounted to
$271,000 and $177,000, respectively.
6. DEPOSITS
A comparative summary of deposits as of September 30, 2000 and December 31,
1999, follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------------------------
2000 1999
<S> <C> <C>
Noninterest bearing accounts $ 93,217 $ 103,682
Passbook 408,274 409,423
NOW, Super NOW and other money market accounts 109,204 105,400
Certificates of deposit 1,928,739 1,610,893
---------- ----------
Total 2,539,434 2,229,398
Accrued interest payable 25,202 18,467
---------- ----------
Total $2,564,636 $2,247,865
========== ==========
</TABLE>
7. 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.
11
<PAGE> 14
Deferred income tax assets (liabilities) as of September 30, 2000 and December
31, 1999, consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------
2000 1999
<S> <C> <C>
Allowance for loan losses $ 10,779 $ 9,352
Loss carryforward relating to sale of securities 39 136
Allowance for foreclosed real estate held for sale 70 75
Mortgage servicing rights (825) (772)
Other temporary differences (27) (98)
-------- -------
Total 10,036 8,693
Less valuation allowance 39 39
-------- -------
Deferred income tax assets, net $ 9,997 $ 8,654
======== =======
</TABLE>
Realization of deferred tax assets is dependent on generating sufficient future
taxable income. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable
income are not met.
8. FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS DESIGNATED AS HEDGES - As part of the
Company's asset/liability management, the Company uses interest-rate contracts,
which include interest-rate exchange agreements (swaps), to hedge various
exposures or to modify interest rate characteristics of various statement of
financial condition accounts. Derivatives that are used as part of the
asset/liability management process are linked to specific assets or liabilities
and have high correlation between the contract and the underlying item being
hedged, both at the inception and throughout the hedge period. The derivative
instruments, such as interest-rate swaps, that meet the preceding
qualifications 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 a current basis. Gains or losses on
the sale of swaps used in asset/liability management activities are deferred
and amortized into interest income or expense over the maturity period of the
swap. As of September 30, 2000 and 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 term notes bearing variable
rates; $690.0 million and $438.5 million, respectively, fixed rate certificates
of deposit liabilities, and $50.0 million variable rate advances from Federal
Home Loan Bank in 2000. Also, at September 30, 2000, the Company had
outstanding option agreements on $250.0 million variable reverse repurchase
agreements to cap its interest rate risk. No such agreements were outstanding
at December 31, 1999.
OTHER DERIVATIVE FINANCIAL INSTRUMENTS - Those contracts, such as interest rate
options, that do not meet the hedging criteria above are classified as trading
activities and are recorded at fair value with changes in fair value recorded
as earnings.
Interest rate options, which include caps, are contracts that transfer, modify,
or reduce interest rate risk in exchange for the payment of a premium when the
contract is initiated. The Company pays a premium for the right, but not the
obligation, to buy or sell a financial instrument at predetermined terms in the
future. The credit risk inherent in options is the risk that the exchange party
may default. At September 30, 2000, the Company had outstanding cap agreements
with other financial institution amounting to $100.0 million. No such
agreements were outstanding at December 31, 1999.
12
<PAGE> 15
Other off-balance-sheet instruments. In the ordinary course of business the
Company 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.
Committed Resources. At September 30, 2000 and December 31, 1999, the Company
had outstanding the following contract amount of financial instruments whose
amount represent credit risk:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------
2000 1999
<S> <C> <C>
Commitments to extend credit:
Fixed rates $ 13,238 $ 15,302
Variable rates 133,044 159,328
Unused lines of credit:
Commercial 37,298 36,998
Credit cards and other 53,377 45,856
Stand-by letters of credit 1,118 2,373
-------- --------
Total $238,075 $259,857
======== ========
</TABLE>
Such commitments will be funded in the normal course of business from the
Company's principal sources of funds. At September 30, 2000, the Company had
$1.3 billion in deposits 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.
9. STOCK OPTION PLANS
The Company has two stock option plans, the 1999 Qualified Stock Option Plan
(the "1999 Qualified Option Plan") and the 1999 Nonqualified Stock Option Plan
(the " 1999 Nonqualified Option Plan") for the benefit of employees of the
Company and its subsidiaries. These plans offer to key officers, directors and
employees an opportunity to purchase shares of the Company's common stock.
Under the 1999 Qualified Option Plan, options for up to 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
determined at the grant date. Both plans will remain in effect for a term of 10
years. The Board of Directors has sole authority and absolute discretion as to
the number of stock options to be granted, their vesting rights, and the
options' exercise price. The Plans provide for a proportionate adjustment in
the exercise price and the number of shares that can be purchased in the event
of a stock split, reclassification of stock and a merger or a reorganization.
During the first nine months of 2000, the Company granted 2,250,000 options
under the 1999 Qualified Stock Option Plan to six executive officers, which
will become fully exercisable after five years following the grant date.
13
<PAGE> 16
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 (the grant date) over the amount an employee must pay to
acquire the stock. No compensation expense was recognized in the quarter nor
the nine months ended September 30, 2000, because the price of the stock at the
grant date was lower than the exercise price of the options. The compensation
expense for the period ended September 30, 2000, based on the Fair Value Method
described in SFAS No. 123 and its effect on earnings per share was not
significant.
10. SEGMENT INFORMATION
The Company's management monitors and manages the financial performance of two
primary business segments, the operations of Westernbank 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 included in the Company's 1999 Annual Report. The Company
evaluates performance based on net income or loss. Inter-segment 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 is 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>
(IN THOUSANDS)
----------------------------------------------------------
AS OF DECEMBER 31, 1999 AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------------
IN PUERTO RICO INTERNATIONAL TOTAL
<S> <C> <C> <C>
Operations data:
Interest income $ 179,586 $ 28,592 $ 208,178
Interest expense 118,601 17,253 135,854
----------- --------- -----------
Net interest income 60,985 11,339 72,324
Provision for loan losses (6,000) -- (6,000)
Other income, net 9,980 14 9,994
Intersegment revenue -- 266 266
Intersegment expense (266) -- (266)
Equity in loss of subsidiary (162) -- (162)
Operating expenses (37,032) (143) (37,175)
Provision for income taxes (5,363) -- (5,363)
----------- --------- -----------
Net income $ 22,142 $ 11,476 $ 33,618
=========== ========= ===========
Total assets $ 3,181,542 $ 857,805 $ 4,039,347
=========== ========= ===========
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------------------------------
AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
----------------------------------------------------------
IN PUERTO RICO INTERNATIONAL TOTAL
<S> <C> <C> <C>
Operations data:
Interest income $ 143,933 $ 22,474 $ 166,407
Interest expense 76,051 16,397 92,448
----------- --------- -----------
Net interest income 67,882 6,077 73,959
Provision for loan losses (6,500) -- (6,500)
Other income, net 8,592 82 8,674
Intersegment revenue -- 7 7
Intersegment expense (7) -- (7)
Equity in loss of subsidiary (344) -- (344)
Operating expenses (40,038) (154) (40,192)
Provision for income taxes (6,972) -- (6,972)
----------- --------- -----------
Net income $ 22,613 $ 6,012 $ 28,625
=========== ========= ===========
Total assets $ 2,903,174 $ 471,608 $ 3,374,782
=========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
<S> <C> <C>
Consolidated interest income $ 208,178 $ 166,407
========= =========
Net income:
Reportable segments $ 33,618 $ 28,625
All other 33,249 (353)
--------- ---------
Total 66,867 28,272
Plus eliminations (33,353) 353
--------- ---------
Consolidated net income $ 33,514 $ 28,625
========= =========
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Total assets:
Reportable segments $ 4,039,347 $ 3,374,782
All other 245,085 228,499
----------- -----------
Total 4,284,432 3,603,281
Less eliminations (245,327) (228,710)
----------- -----------
Consolidated total assets $ 4,039,105 $ 3,374,571
=========== ===========
</TABLE>
15
<PAGE> 18
11. RECENT ACCOUNTING DEVELOPMENTS
In September 2000, the Financial Accounting Standards Board issued Statement
No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES ("SFAS 140"). SFAS 140 replaces FASB Statement
No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES ("SFAS 125"). SFAS 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
125's provisions without reconsideration.
SFAS 140 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial-components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. This
Statement is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Disclosures about securitization
and collateral accepted need not be reported for periods ending on or before
December 15, 2000, for which financial statements are presented for comparative
purposes. This Statement is to be applied prospectively with certain
exceptions. Other than those exceptions, earlier or retroactive application of
its accounting provisions is not permitted. Implementation of SFAS 140 is not
expected to have a significant effect in the Company's financial position and
results of operations.
In December 1999, the Securities and Exchange Commission (the "Commission")
released Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS ("SAB 101"). SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
Commission. It does not change any of the accounting profession's existing
rules on revenue recognition. Instead, it draws upon existing rules and
explains how the staff applies those rules, by analogy, to other transactions
that existing rules do not specifically address. The recurring revenue
recognition themes found throughout the existing accounting rules are used in
SAB 101 to provide the criteria registrants must meet before revenue may be
recognized.
SAB 101 provides a number of examples of how the staff applies these criteria
to specific fact patterns such as bill-and-hold transactions, up-front fees
when the seller has significant continuing involvement, long-term service
transactions, refundable membership fees, and contingent rental income. It also
addresses whether revenue should be presented on a fee or contingent basis or
at the full transaction amount when the seller is acting as a sales agent or
similar capacity. SAB 101 provides guidance on the disclosure registrants
should make about their revenue recognition policies and the impact of events
and trends on revenue. The adoption of SAB 101 did not have a significant
effect on the Company's financial position or results of operations.
16
<PAGE> 19
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, ACCOUNTING FOR DERIVATIVES AND SIMILAR FINANCIAL INSTRUMENTS AND FOR
HEDGING ACTIVITIES ("SFAS 133"). SFAS 133 was amended by SFAS 138, ACCOUNTING
FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES ("SFAS 138")
issued in June 2000. SFAS 133 and SFAS 138 establish accounting and reporting
standards for derivative financial instruments and for hedging activities and
require all derivatives to be measured at fair value and to be recognized as
either assets or liabilities in the statement of financial condition. The
Statements also require that derivatives used in hedging activities 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. SFAS 133 and SFAS 138 become effective for all fiscal years
beginning after June 15, 2000. The effect of implementing these statements on
the Company's financial condition and results of operations has not been
determined.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part I - Item 2
GENERAL
W Holding Company, Inc. (the "Company") is a financial holding company offering
a full range of financial services through its wholly owned subsidiary,
Westernbank Puerto Rico ("Westernbank"). As a financial holding company, the
Company may engage in the expanded activities permitted under the
Gramm-Leach-Bliley Act passed in 1999, including expanded insurance and
securities activities, provided that all depository institutions the Company
controls remain well-capitalized, well-managed and has a satisfactory Community
Reinvestment Act (CRA) rating. Also, no prior notice to the Federal Reserve
Board is required from a financial holding company to acquire a company
engaging in permissible nonbanking activities or to commence these activities
directly or indirectly through a subsidiary.
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. Since its inception, the Company had no
operations other than those resulting from its investment in Westernbank and
the repurchase of common stock for retirement. 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 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,
provides a variety of banking services to individuals and businesses through
its 34 service branches, 24 of which are located in the Western region, 4 in
the Metropolitan Area, 3 in the Northeastern region, and 3 in the Southern
region of Puerto Rico, including one regional office. Its primary deposit
products are passbook accounts, certificates of deposit, and demand deposits,
and its primary lending products are real estate mortgage, commercial and
installment loans. Westernbank operates two divisions; Westernbank
International, which offers commercial banking and related services outside of
Puerto Rico and Westernbank Trust Division, which effective September 2000
began offering a full array of trust services principally geared to retirement
planning. 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 September 30, 2000 and December 31, 1999, and for the
three and nine months ended September 30, 2000 and 1999, 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.
18
<PAGE> 21
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
Puerto Rico 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. 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 the Bank Insurance Fund ("BIF") which are
administered by the FDIC.
OVERVIEW
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 FHLB ("interest-bearing liabilities"). Loan
origination and commitments fees, net of related costs, are deferred and
amortized over the life of the related loans as a yield adjustment. Gains or
losses on the sale of loans and investments 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. As further discussed in
Section Item 3; the "Quantitative and Qualitative Disclosures About Market
Risk", the Company uses several tools to manage the risks associated with the
composition and repricing of assets and liabilities. Therefore, management has
followed a conservative practice inclined towards the preservation of capital
with adequate returns. The 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
depositors' confidence, obtain a favorable match between the maturity of its
interest-earning assets and its interest-bearing liabilities, and enhance the
stockholders' investment in the Company.
The Company's 2000 growth is mainly related to an increase in its commercial
real estate loans and the portfolio of investment securities held to maturity,
continued effective management of interest rate risk and a tight control of
operating expenses. Total net income for the three and nine months ended
September 30, 2000, increased to $11.8 million and to $33.5 million,
respectively, up 17.15% and 17.08% when compared to $10.0 million and $28.6
million for the three and nine months ended September 30, 1999, respectively.
Net income attributable to common stockholders for the three and nine months
ended September 30, 2000, increased to $10.3 million and $29.2 million,
respectively, up 20.08% and 13.19% when compared to $8.6 million and $25.8
million, respectively, for the same periods in 1999. The Company's
profitability ratios for the nine months ended September 30, 2000, represented
returns of 1.21% on assets (ROA) and 25.45% on common stockholders' equity
(ROE), compared with a ROA and a ROE of 1.32% and 26.05%, respectively, for the
same period in 1999.
19
<PAGE> 22
Different components that impacted the Company's performance are discussed in
detail in the following pages.
FINANCIAL CONDITION
The Company had total assets of $4.04 billion compared to $3.37 billion as of
September 30, 2000 and December 31, 1999, respectively; an increase of $664.5
million or 19.69%. As of September 30, 2000, total liabilities amounted to
$3.80 billion, an increase of $645.6 million or 20.49% when compared to $3.15
billion as of December 31, 1999.
INTEREST-EARNING ASSETS
Interest-earning assets amounted to $3.90 billion at September 30, 2000, an
increase of $666.2 million or 20.63% when compared to $3.23 billion as of
December 31, 1999.
The Company has continued its emphasis in the credit granting activity. As a
result, the commercial real-estate loan portfolio increased from $677.9 million
as of December 31, 1999, to $804.9 million as of September 30, 2000, an
increase of $127.0 million or 18.73% during the first nine months ended
September 30, 2000. The consumer loan portfolio (including credit cards),
commercial loans (not collateralized by real estate) and other loans increased
from $409.0 million as of December 31, 1999, to $464.2 million as of September
30, 2000, an increase of $55.1 million or 13.48%.
Federal funds sold and securities purchased under agreements to resell
("repurchase agreements") increased from $137.1 million as of December 31,
1999, to $153.9 million as of September 30, 2000, an increase of $16.9 million
or 12.30%. Investment securities held to maturity, which principally include
United States and Puerto Rico Government and agencies obligations and mortgage
and other asset-backed securities increased from $1.17 billion as of December
31, 1999, to $1.60 billion as of September 30, 2000, an increase of $423.3
million or 36.04%. Investments available for sale decreased from $22.2 million
as of December 31, 1999, to $17.8 million as of September 30, 2000, a decrease
of $4.4 million or 19.63%.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities amounted to $3.75 billion at September 30, 2000,
an increase of $640.4 million or 20.60% when compared to $3.11 billion as of
December 31, 1999.
The increase during the nine months ended September 30, 2000, was mainly due to
an increase of $310.0 million in deposits (excluding accrued interest payable),
$280.4 million in securities sold under agreements to repurchase ("reverse
repurchase agreements"), and $50.0 million in advances from Federal Home Loan
Bank.
The Company offers a variety of specialized types of deposit accounts and
certificates of deposit. Savings deposits decreased from $409.4 million as of
December 31, 1999, to $408.3 million as of September 30, 2000, a decrease of
$1.1 million. Also, other deposits (excluding accrued interest payable)
represented mainly by time deposits, increased from $1.82 billion as of
December 31, 1999, to $2.13 billion as of September 30, 2000, an increase of
$311.2 million or 17.10%. Other deposits include brokered deposits amounting to
$1.21 billion and $894.8 million as of September 30, 2000 and December 31,
1999, respectively.
20
<PAGE> 23
STOCKHOLDERS' EQUITY
As of September 30, 2000, total stockholders' equity amounted to $242.7
million, an increase of $18.9 million or 8.45% when compared to $223.8 million
as of December 31, 1999. The increase during the first nine months ended
September 30, 2000, was mainly due to a net income of $33.5 million that was
partially offset by cash dividends declared on common and preferred stock of
$10.6 million and the repurchase and retirement of 484,800 shares of common
stock for $4.7 million.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income decreased $3.0 million or 11.28% for the three months ended
September 30, 2000, and decreased $1.6 million or 2.21% for the nine months
ended September 30, 2000, when compared to the corresponding 1999 periods. The
decrease for the three and nine months ended September 30, 2000, was primarily
the result of increases in interest expense on deposits, reverse repurchase
agreements and advances from Federal Home Loan Bank that offset the increases
in interest income from loans, investment securities and money market
instruments.
Average interest-earning assets increased from $3.08 billion for the three
months ended September 30, 1999, to $3.55 billion for the three months ended
September 30, 2000, an increase of $474.0 million or 15.40%. For the nine-month
period, average interest-earning assets increased from $2.83 billion in 1999 to
$3.43 billion in 2000, an increase of $602.4 million or 21.31%. The rise in
average interest-earning assets is mainly related to increases in average
loans, which is the higher yielding category of interest-earning assets, and a
significant increase in average investment securities.
Interest income on loans increased $7.8 million or 19.77% for the three months
ended September 30, 2000, as compared with the three months ended September 30,
1999. For the nine months ended September 30, 2000, interest income on loans
increased $25.5 million or 23.59% as compared to the same period in 1999.
Average loans increased from $1.78 billion for the three months ended September
30, 1999, to $2.02 billion for the three months ended September 30, 2000, an
increase of $246.6 million or 13.87%. For the nine-month period the average
loans increased from $1.63 billion in 1999 to $1.97 billion in 2000, an
increase of $336.2 million or 20.59%. The increase was mainly attributed to an
increase in commercial real estate loans as a result of business growth
experienced during 1999, and the nine months of the current year. In addition,
purchases of mortgage loans contributed to such increase. The average yield on
loans increased from 8.81% for the three months ended September 30, 1999, to
9.30% for the three months ended September 30, 2000. For the nine-month period
the average yield on loans increased from 8.85% in 1999, to 9.06% in 2000.
Interest income on investment securities increased $3.4 million or 18.61% for
the three months ended September 30, 2000, and $11.1 million or 22.92% for the
nine months ended September 30, 2000, as compared to the corresponding periods
in 1999. Increase in income from investment securities is mainly related to a
rise in the average balance of investment securities from $1.08 billion for the
three months ended September 30, 1999, to $1.23 billion for the three months
ended September 30, 2000, an increase of $148.2 million or 13.66%. For the
nine-month period the average balance of investment securities increased from
$980.5 million in 1999 to $1.18 billion in 2000, an increase of $202.6 million
or 20.67%. The investment portfolio average yield increased from 6.62% for the
three months ended September 30, 1999, to 6.92% for the three months ended
September 30, 2000. For the nine-month period the average yield of investment
securities increased from 6.59% in 1999 to 6.71% in 2000.
21
<PAGE> 24
Interest income on mortgage and other asset-backed securities increased
$748,000 or 32.57% for the three months ended September 30, 2000, as compared
to the corresponding period in 1999. For the nine months ended September 30,
2000, interest income on mortgage-backed securities increased $1.7 million or
26.61% as compared to the same period in 1999. The average balance on mortgage
and other asset-backed securities increased from $103.7 million for the three
months ended September 30, 1999, to $138.8 million for the three months ended
September 30, 2000, an increase of $35.1 million or 33.83%. For the nine-month
period, the average balance on mortgage and other asset-backed securities
increased from $110.4 million in 1999 to $123.5 million in 2000, an increase of
$13.0 million or 11.81%. For the nine-month period the average yield of
mortgage and other asset-backed securities increased from 7.59% in 1999 to
8.58% in 2000.
Interest income on money market instruments increased $1.4 million or 105.82%
for the three months ended September 30, 2000, as compared to the corresponding
period in 1999. For the nine months ended September 30, 2000, interest income
on money market instruments increased $3.5 million or 94.40% as compared to the
same period in 1999. The average balance of money market instruments increased
from $112.5 million for the three months ended September 30, 1999, to $156.6
million for the three months ended September 30, 2000, an increase of $44.1
million or 39.20%. For the nine-month period the average balance of money
market instruments increased from $102.9 million in 1999 to $153.5 million in
2000, an increase of $50.6 million or 49.10%. The money market instruments
average yield increased from 4.82% for the three months ended September 30,
1999, to 6.71% for the three months ended September 30, 2000. For the
nine-month period the average yield of money market instruments increased from
4.85% in 1999 to 6.32% in 2000.
The increase in the average interest-earning assets was partially offset by the
increase in the average interest-bearing liabilities. Average interest bearing
liabilities increased from $2.94 billion for the three months ended September
30, 1999, to $3.40 billion for the three months ended September 30, 2000, an
increase of $453.8 million or 15.43%. For the nine-month period average
interest bearing liabilities increased from $2.72 billion in 1999 to $3.28
billion in 2000, an increase of $554.4 million or 20.36%. In addition, average
interest rates paid on these liabilities during the three-month period
increased from 4.68% in 1999 to 5.98% in 2000. For the nine-month period
average interest rates paid on these liabilities increased from 4.54% in 1999
to 5.54% in 2000. The increase in average interest-bearing liabilities was
mainly related to an increase in average deposits, followed by a significant
increase in average reverse repurchase agreements.
Interest expense on deposits increased $10.1 million or 42.92% for the three
months ended September 30, 2000, and $27.8 million or 43.63% for the nine
months ended September 30, 2000, as compared to the corresponding periods in
1999. The increase was a combination of a rise in the average balance of
deposits and an increase in the average rate paid on them. The average balance
of deposits increased from $2.08 billion for the three months ended September
30, 1999, to $2.38 billion for the same period in 2000, an increase of $306.5
million or 14.78%. For the nine-month period the average balance of deposits
increased from $1.94 billion in 1999 to $2.33 billion in 2000, an increase of
$393.0 million or 20.27%. The average rate paid on deposits increased from
4.50% for the three months ended September 30, 1999, to 5.62% for the three
months ended September 30, 2000. For the nine-month period the average rate
paid on deposits increased from 4.39% in 1999 to 5.24% in 2000.
22
<PAGE> 25
Interest expense on reverse repurchase agreements increased $5.2 million or
55.63% for the three months ended September 30, 2000, and $12.6 million or
52.43% for the nine months ended September 30, 2000, as compared to the
corresponding periods in 1999. The increase is mainly related to a rise in the
average rate paid on reverse repurchase agreements. The average rate paid on
reverse repurchase agreements increased from 5.10% for the three months ended
September 30, 1999, to 6.88% for the three months ended September 30, 2000. For
the nine months the average rate paid on reverse repurchase agreements
increased from 4.91% in 1999 to 6.40% in 2000. The average balance of reverse
repurchase agreements increased from $721.5 million for the three months ended
September 30, 1999, to $815.5 million for the same period in 2000, an increase
of $94.1 million or 13.04%. For the nine-month period the average balance of
reverse repurchase agreements increased from $654.7 million in 1999 to $764.1
million in 2000, an increase of $109.4 million or 16.70%.
Interest expense on term notes decreased $17,000 for the three months ended
September 30, 2000, and $97,000 for the nine months ended September 30, 2000,
as compared to the corresponding periods in 1999. The decrease was mainly
related to a decrease in the average balance of term notes. The average balance
of term notes for the three and nine months ended September 30, 2000, decreased
from $84.0 million in 1999 to $79.0 million in 2000, a decrease of $5.0 million
or 5.95%.
Interest expense on advances from FHLB increased $1.1 million and $3.1 million
for the three and nine months ended September 30, 2000, respectively, as
compared to the corresponding periods in 1999. For the three months ended
September 30, the average balance of advances from FHLB increased from $61.8
million in 1999 to $120.0 million in 2000, an increase of $58.2 million or
94.10%. For the nine-month period the average balance of advances from FHLB
increased from $45.3 million in 1999 to $102.3 million in 2000, an increase of
$57.0 million or 125.79%. The average rate paid on advances from FHLB increased
from 5.78% for the three months ended September 30, 1999, to 6.69% for the
three months ended September 30, 2000. For the nine-month period, the average
rate paid on advances from FHLB increased from 5.36% in 1999 to 6.48% in 2000.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased from $3.0 million for the three months
ended September 30, 1999, to $2.0 million for the three months ended September
30, 2000, a decrease of $1.0 million or 33.33%. For the nine months ended
September 30, 2000, the provision was $6.0 million, compared to $6.5 million
for the same period in 1999, a decrease of $500,000 or 7.69%. The allowance for
loan losses amounted to $27.6 million as of September 30, 2000, compared to
$24.0 million as of December 31, 1999, an increase of $3.7 million or 15.27%.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb possible 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 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.
23
<PAGE> 26
OTHER INCOME
Total other income increased $1.0 million or 38.08% during the three months
ended September 30, 2000, and increased $1.3 million or 15.22% during the nine
months ended September 30, 2000, as compared to the corresponding periods in
1999.
Service charges on deposit accounts and other fees increased $897,000 or 31.64%
and $2.1 million or 24.84% for the three and nine months ended September 30,
2000, respectively, as compared to the corresponding periods in 1999.
OPERATING EXPENSES
Total operating expenses decreased $2.4 million or 17.00% during the three
months ended September 30, 2000, and $3.1 million or 7.64% for the nine months
ended September 30, 2000, as compared to the corresponding periods in 1999.
Salaries and employees' benefits, which is the largest component of total
operating expenses, decreased $911,000 or 16.56% during the three months ended
September 30, 2000, and $1.5 million or 9.53% for the nine months ended
September 30, 2000, as compared to the corresponding 1999 periods. Such
decreases were primarily the result of a strict cost reduction plan while at
the same time supporting the expansion of the Company.
Equipment expenses increased $500,000 or 28.06% and $1.6 million or 34.48% for
the three and nine months ended September 30, 2000, as compared to the same
periods in 1999. The increases were the result of continued investment in
technological resources to support expansion of the Company, increases on
furniture and fixtures and equipment expenses, including depreciation, as well
as on property taxes.
Advertising expense decreased $464,000 or 37.94% and $1.1 million or 32.31% for
the three and nine months ended September 30, 2000, respectively, as compared
to the corresponding periods in 1999.
Other expenses decreased $1.5 million or 27.52% and $2.1 million or 12.89% for
the three and nine months ended September 30, 2000, respectively, as compared
to the corresponding periods in 1999, again a decrease as a result of the
strict cost control measures implemented.
PROVISION FOR INCOME TAXES
Under Puerto Rico income tax laws, the Company is required to pay the higher of
an alternative minimum tax of 22% or a regular statutory rate up to 39%. The
current provision for estimated Puerto Rico income taxes amounted to $2.3
million and $6.8 million for the three and the nine months ended September 30,
2000, respectively. Deferred income taxes reflect the impact of credit
carryforwards and "temporary differences" between amounts of assets and
liabilities for financial reporting purposes and their respective tax bases.
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.
24
<PAGE> 27
NET INCOME
Net income increased $1.7 million or 17.15% and $4.9 million or 17.08% for the
three and nine months ended September 30, 2000, as compared to the
corresponding periods in 1999. The increase for the three and nine months ended
September 30, 2000, is mainly due to a decrease in operating expenses and in
the provisions for income taxes and loan losses.
MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company, as a financial 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 (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
financial 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 September 30, 2000,
that the Companies met all capital adequacy requirements to which they are
subjects.
As of September 30, 2000, 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.
25
<PAGE> 28
The Companies' actual capital amounts and ratios as of September 30, 2000, 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>
Total Capital to Risk Weighted Assets:
Consolidated $ 270,506 12.03% $ 179,957 8.0% N/A N/A
Westernbank 270,506 12.03 179,957 8.0 $ 224,946 10%
Tier I Capital to Risk Weighted Assets:
Consolidated 242,867 10.93 88,873 4.0 N/A N/A
Westernbank 242,867 10.93 88,873 4.0 133,309 6.0
Tier I Capital to Average Assets:
Consolidated 242,867 6.51 111,868 3.0 N/A N/A
Westernbank 242,867 6.51 111,868 3.0 186,447 5.0
</TABLE>
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 financial holding company whose capital
falls below levels specified in the guidelines can be required to implement a
plan to increase capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK AND 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.
26
<PAGE> 29
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 volume of variable rate loans to reduce the average maturity of
the Company's interest-earning assets, entering into interest rate exchange
agreements (swaps) to hedge variable term notes and fixed callable certificates
of deposit as well as entering into interest rate options (caps) contracts on
its variable rate reverse repurchase agreements.
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 following table:
September 30, 2000:
<TABLE>
<CAPTION>
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
+200 Basis Points $94,299 $(11,067) (10.50)%
Base Scenario 105,366 - -
-200 Basis Points 117,112 11,746 11.15%
</TABLE>
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%
</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.
27
<PAGE> 30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending and threatened legal
proceedings of which management is aware will not have a material adverse
effect on the financial condition and results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A - Financial Statements Schedules
No schedules are presented because the information is not applicable or is
included in the Consolidated Financial Statements or in the notes thereto
described in 6(c) below.
B - Reports on Form 8-K
No current reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30, 2000.
C - Exhibits
Exhibits filed as part of this Form 10-Q:
27-1 Financial Data Schedule
28
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Registrant:
W HOLDING COMPANY, INC.
Date: November 14, 2000 By: /s/ Frank C. Stipes
---------------------------------
Frank C. Stipes, Esq.
Chairman of the Board,
Chief Executive Officer and
President
Date: November 14, 2000 By: /s/ Freddy Maldonado
---------------------------------
Freddy Maldonado,
Chief Financial Officer and Vice
President of Finance and Investment
29
