<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 March 31, 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 outstanding of each of the registrant's classes of common
stock, as of the latest practicable date is:
<TABLE>
<S> <C>
Common Stock $1.00 par value 41,562,500
7.125% Preferred Stock 1998 Series A 1,219,000
7.25% Preferred Stock 1999 Series B 2,001,000
</TABLE>
<PAGE> 2
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION:
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income for the three
months ended March 31, 2000 and 1999 4
Consolidated Statements of Changes in Stockholders'
Equity and of Comprehensive Income for the three
months ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 25
Item 2. Changes In Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</TABLE>
2
<PAGE> 3
Part I. Financial Information
Item I. Financial Statements
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 45,563,736 $ 55,671,999
Money market instruments:
Federal funds sold and securities purchased under agreements to resell 120,794,108 137,054,546
Interest bearing deposits with banks 9,765,408 9,271,389
Trading securities, at fair value (Note 4) 6,077,249 1,289,188
Investment securities available for sale, at fair value (Note 4) 21,875,070 22,185,441
Investment securities held to maturity, with a fair value of
$1,113,738,898 in 2000 and $1,074,346,260 in 1999 (Note 4) 1,208,821,068 1,174,532,295
Federal Home Loan Bank stock, at cost 13,047,200 12,800,000
Mortgage loans held for sale, at lower of cost or market 5,002,511 2,073,600
Loans, net of allowance for loan losses of $25,330,311 in 2000
and $23,978,449 in 1999 (Note 5) 1,912,799,008 1,869,668,173
Accrued interest receivable 29,804,113 33,311,340
Premises and equipment, net 38,837,645 38,431,276
Other assets (Note 7) 19,279,626 18,281,424
--------------- ---------------
Total $ 3,431,666,742 $ 3,374,570,671
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 6) $ 2,309,714,264 $ 2,247,864,807
Securities sold under agreements to repurchase 723,373,156 729,967,785
Term notes 79,000,000 79,000,000
Advances from Federal Home Loan Bank 70,000,000 70,000,000
Other liabilities 22,883,862 23,918,771
--------------- ---------------
Total liabilities 3,204,971,282 3,150,751,363
--------------- ---------------
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% non-cumulative, non-convertible monthly income preferred stock, 1999 Series B -
Issued 2,001,000 shares 2,001,000 2,001,000
7.125% non-cumulative, convertible monthly income preferred stock, 1998 Series A -
Issued 1,219,000 shares 1,219,000 1,219,000
Common stock - $1.00 par value per share; authorized 300,000,000
shares; issued 41,562,500 in 2000 and 42,000,000 in 1999 41,562,500 42,000,000
Paid in capital 95,859,691 99,595,597
Retained earnings:
Reserve fund 13,899,685 12,843,183
Undivided profits 73,177,321 67,218,342
Accumulated other comprehensive loss (1,023,737) (1,057,814)
--------------- ---------------
Total stockholders' equity 226,695,460 223,819,308
--------------- ---------------
TOTAL $ 3,431,666,742 $ 3,374,570,671
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
INTEREST INCOME:
Loans, including loan fees $ 42,078,482 $ 32,222,819
Investment securities 19,018,565 13,799,324
Mortgage and other asset-backed securities 2,372,144 2,033,773
Money market instruments 2,297,253 1,358,709
------------ ------------
Total interest income 65,766,444 49,414,625
============ ============
INTEREST EXPENSE:
Deposits 28,819,605 18,971,618
Securities sold under agreements to repurchase 10,252,015 6,790,976
Term notes 964,310 988,652
Advances from Federal Home Loan Bank 1,025,129 412,250
------------ ------------
Total interest expense 41,061,059 27,163,496
============ ============
NET INTEREST INCOME 24,705,385 22,251,129
PROVISION FOR LOAN LOSSES 2,000,000 1,500,000
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 22,705,385 20,751,129
------------ ------------
OTHER INCOME:
Service charges on deposit accounts and other fees 3,316,623 2,873,897
Net gain (loss) on sale and on valuation of loans,
securities and other (88,013) 301,405
------------ ------------
Total other income 3,228,610 3,175,302
============ ============
TOTAL NET INTEREST INCOME AND
OTHER INCOME 25,933,995 23,926,431
------------ ------------
OPERATING EXPENSES:
Salaries and employees' benefits 5,347,159 5,175,846
Equipment 1,940,357 1,436,125
Occupancy 1,214,599 1,227,574
Advertising 1,013,667 1,010,938
Printing, postage, stationery and supplies 645,167 690,655
Telephone 498,833 552,631
Other 2,662,976 2,462,126
------------ ------------
Total operating expenses 13,322,758 12,555,895
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 12,611,237 11,370,536
------------ ------------
PROVISION FOR INCOME TAXES:
Current 2,586,324 2,735,000
Deferred (540,107) (379,359)
------------ ------------
Total income taxes 2,046,217 2,355,641
------------ ------------
NET INCOME $ 10,565,020 $ 9,014,895
============ ============
NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 9,115,481 $ 8,472,059
============ ============
BASIC AND DILUTED EARNINGS PER
COMMON SHARE (Note 2) $ 0.22 $ 0.20
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
Changes in Stockholders' Equity:
Preferred stock:
Balance at beginning of period $ 3,220,000 $ 1,219,000
------------- -------------
Balance at end of period 3,220,000 1,219,000
------------- -------------
Common stock:
Balance at beginning of period 42,000,000 42,080,309
Purchase and retirement of common stock (437,500) (80,309)
------------- -------------
Balance at end of period 41,562,500 42,000,000
------------- -------------
Paid-in-capital:
Balance at beginning of period 99,595,597 54,465,556
Purchase and retirement of common stock (3,735,906) (1,141,791)
------------- -------------
Balance at end of period 95,859,691 53,323,765
------------- -------------
Reserve fund:
Balance at beginning of period 12,843,183 9,130,767
Transfer from undivided profits 1,056,502 901,490
------------- -------------
Balance at end of period 13,899,685 10,032,257
------------- -------------
Undivided profits:
Balance at beginning of period 67,218,342 47,358,549
Net income 10,565,020 9,014,895
Cash dividends on common stock (2,100,000) (2,524,819)
Cash dividends on preferred stock (1,449,539) (542,836)
Transfer to reserve fund (1,056,502) (901,490)
------------- -------------
Balance at end of period 73,177,321 52,404,299
------------- -------------
Accumulated other comprehensive income:
Balance at beginning of period (1,057,814) 28,226
Reclassification adjustment included in net income -- (28,226)
Net change in fair value of securities available for
sale, net of taxes 34,077 --
------------- -------------
Balance at end of period (1,023,737) --
------------- -------------
Total Stockholders' Equity $ 226,695,460 $ 158,979,321
============= =============
Comprehensive income:
Net income $ 10,565,020 $ 9,014,895
Other comprehensive income (loss), net of taxes:
Unrealized net losses on securities available
for sale arising during the period 34,077 --
Reclassification adjustment included in net income -- (28,226)
------------- -------------
Total Comprehensive Income $ 10,599,097 $ 8,986,669
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,565,020 $ 9,014,895
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision (credit) for:
Loan losses 2,000,000 1,500,000
Deferred income taxes (540,107) (379,359)
Depreciation and amortization on:
Premises and equipment 1,519,052 1,173,619
Foreclosed real estate held for sale 14,183 21,391
Mortgage servicing rights 81,612 67,447
Amortization of premium (discount) on:
Investment securities (3,331,680) (1,707,605)
Loans 179,602 101,433
Amortization of excess of cost over net assets acquired 15,749 155,858
Amortization of deferred loan origination fees and costs (794,108) (997,157)
Net loss (gain) on sale or on valuation of:
Investment securities available for sale (25,638) (35,987)
Mortgage loans held for sale 77,867 (83,930)
Foreclosed real estate held for sale (45,071) 37,297
Originations of mortgage loans held for sale (13,342,146) (10,546,681)
Decrease (increase) in:
Trading securities 5,547,303 15,332,339
Accrued interest receivable 3,507,227 989,048
Other assets (567,016) 1,468,954
Increase (decrease) in:
Accrued interest on deposits and borrowings (1,706,527) (71,465)
Other liabilities 3,513,105 3,346,050
------------- -------------
Net cash provided by operating activities 6,668,427 19,386,147
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest bearing deposits with banks (494,019) (835,803)
Net decrease in federal funds sold and securities purchased under
agreements to resell 16,260,438 11,351,793
Investment securities available for sale:
Purchases (10,128,125)
Proceeds from sales 25,355,254
Proceeds from principal repayment 333,678 40,080
Investment securities held to maturity:
Purchases (943,997,353) (899,676,076)
Proceeds from redemption and repayment 909,490,568 699,280,000
Proceeds from principal repayment of mortgage-backed securities
held to maturity 3,552,024 18,528,345
Loans:
Purchases (61,053,559) (139,249,716)
Other decrease (increase) 16,660,229 (55,458,374)
Proceeds from sales of foreclosed real estate held for sale 27,000 --
Additions to premises and equipment (2,429,690) (1,930,044)
Purchase of Federal Home Loan Bank stock (247,200) (3,612,300)
Purchase of SRG Net, Inc. -- (107,651)
------------- -------------
Net cash used in investing activities (61,897,884) (356,442,617)
------------- -------------
Forward $ (55,229,457) $(337,056,470)
------------- -------------
</TABLE>
(Continued)
6
<PAGE> 7
W HOLDING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
Forward $ (55,229,457) $(337,056,470)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 61,212,376 204,891,530
Net increase in securities sold under agreements to repurchase 112,685,131 77,420,258
Securities sold under agreements to repurchase with original maturities over
three months:
Proceeds 246,950,000 81,533,000
Payments (366,229,760) (30,531,000)
Net decrease in advances from borrowers for taxes
and insurance (513,607) (239,660)
Dividends paid (4,809,540) (3,067,655)
Repurchase of common stock for retirement (4,173,406) (1,222,100)
------------- -------------
Net cash provided by financing activities 45,121,194 328,784,373
------------- -------------
NET DECREASE IN CASH AND DUE FROM BANKS (10,108,263) (8,272,097)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 55,671,999 49,429,206
------------- -------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 45,563,736 $ 41,157,109
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and other borrowings $ 42,767,585 $ 27,234,961
Income taxes -- --
Noncash activities:
Accrued dividends payable 2,341,589 90,473
Mortgage loans securitized and transferred to trading securities 10,335,368 16,139,687
Transfer from loans to foreclosed real estate held for sale 186,522
Mortgage loans originated to finance the sale of foreclosed real estate
held for sale 123,000 598,000
Capitalized mortgage servicing rights 99,110 204,300
Transfer from undivided profits to reserve fund 1,056,502 901,490
Net increase (decrease) in fair value of securities available for sale 34,077 (28,226)
</TABLE>
(Concluded)
See Notes to Consolidated Financial Statements.
7
<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 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. 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 and retirement of common
stock. 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) necessary to present fairly, in all material respects, the
Company's financial condition as of March 31, 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 months ended March 31,
2000 and 1999. The results of operations for the three months ended March 31,
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 months ended March 31,
2000 and 1999, were computed by dividing the income available to common
stockholders for such periods by the weighted average number of shares of common
stock outstanding during the period (41,920,632 and 42,050,031 shares,
respectively).
During the three month period ended March 31, 2000, the Company acquired and
retired 437,500 shares of common stock for $4,173,406.
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
period ended March 31, 2000. Hereafter, dividends will be paid on the 15th day
of the next month for stockholders of record as of the last day of the previous
month.
8
<PAGE> 9
The Company's cash dividend per share declared for the three months of the first
quarter of 2000 was as follows:
<TABLE>
<CAPTION>
RECORD DATE PAYABLE DATE AMOUNT PER SHARE
----------- ------------ ----------------
<S> <C> <C>
March 31, 2000 April 17, 2000 $ 0.05
</TABLE>
4. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of
investment securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
MARCH 31, 2000 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
TRADING SECURITIES:
U.S. Government and agencies
obligations $ 4,828,249 $ -- $ -- $ 4,828,249
Mortgage-backed securities-
Government National Mortgage
Association (GNMA) certificates 1,225,714 23,286 -- 1,249,000
-------------- ----------- ----------- --------------
Total $ 6,053,963 $ 23,286 $ -- $ 6,077,249
============== =========== =========== ==============
AVAILABLE FOR SALE:
Mortgage-backed securities-GNMA
certificates $ 19,009,698 $ -- $ 707,227 $ 18,302,471
Federal National Mortgage
Association certificates 3,994,520 -- 421,921 3,572,599
-------------- ----------- ----------- --------------
Total $ 23,004,218 $ -- $ 1,129,148 $ 21,875,070
============== =========== =========== ==============
HELD TO MATURITY:
U.S. Government and agencies
obligations $1,037,863,235 $ 174 $93,169,424 $ 944,693,985
Puerto Rico Government and
agencies obligations 16,641,941 155,301 135,000 16,662,243
Other investments 46,605,738 -- 173,788 46,431,950
-------------- ----------- ----------- --------------
Total 1,101,110,914 155,475 93,478,212 1,007,788,178
-------------- ----------- ----------- --------------
MORTGAGE and other asset-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) certificates 19,883,405 59,468 750,310 19,192,563
GNMA certificates 26,649,942 334,555 137,124 26,847,373
FNMA certificates 14,078,071 40,501 434,795 13,683,777
Collateralized mortgage obligations
(CMO) certificates 26,986,458 2,877 592,740 26,396,595
Other 20,112,278 -- 281,866 19,830,412
-------------- ----------- ----------- --------------
Total 107,710,154 437,401 2,196,835 105,950,720
-------------- ----------- ----------- --------------
Total $1,208,821,068 $ 592,876 $95,675,047 $1,113,738,898
============== =========== =========== ==============
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
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 $ 1,250,732 $ 38,456 $ -- $ 1,289,188
-------------- ----------- ------------ --------------
AVAILABLE FOR SALE:
Mortgage backed securities -
GNMA certificates $ 19,294,234 $ -- $ 766,689 $ 18,527,545
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 $97,335,316 $ 932,119,874
Puerto Rico Government and agencies
obligations 16,668,050 158,336 135,000 16,691,386
Other 17,165,787 -- 1,100,787 16,065,000
-------------- ----------- ------------ --------------
Total 1,063,283,545 163,818 98,571,103 964,876,260
-------------- ----------- ------------ --------------
MORTGAGE and other asset-backed securities:
FHLMC certificates 20,593,887 99,980 643,903 20,049,964
GNMA certificates 27,636,974 360,115 178,992 27,818,097
FNMA certificates 14,735,927 36,772 453,092 14,319,607
CMO certificates 28,106,621 5,554 721,539 27,390,636
Other 20,175,341 -- 283,645 19,891,696
-------------- ----------- ------------- --------------
Total 111,248,750 502,421 2,281,171 109,470,000
-------------- ----------- ------------- --------------
Total $1,174,532,295 $ 666,239 $ 100,852,274 $1,074,346,260
============== =========== ============= ==============
</TABLE>
The amortized cost and fair value of investment securities held to maturity at
March 31, 2000 by contractual maturity (excluding mortgage and asset-backed
securities), are shown below:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
-------------- --------------
<S> <C> <C>
Due within one year $ 42,551,183 $ 42,542,237
Due after one year through five years 603,514 609,000
Due after five years through ten years 42,931,803 42,368,647
Due after ten years 1,015,024,414 922,268,294
-------------- --------------
Total 1,101,110,914 1,007,788,178
Mortgage and other asset-backed securities 107,710,154 105,950,720
-------------- --------------
Total $1,208,821,068 $1,113,738,898
============== ==============
</TABLE>
10
<PAGE> 11
5. LOANS
The loan portfolio consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
REAL ESTATE LOANS SECURED BY
FIRST MORTGAGES:
Conventional:
One-to-four family residences $ 673,463,988 $ 680,675,250
Other properties 2,177,602 2,388,015
Construction and land acquisition 114,706,939 111,451,452
Loans to facilitate the sale of foreclosed
real estate held for sale 755,470 757,218
Insured or guaranteed:
Federal Housing Administration and
Veterans Administration 20,127,036 21,250,880
Puerto Rico Housing Bank and Finance Agency 451,345 466,758
Commercial - collateralized by real estate 710,047,389 677,923,910
-------------- --------------
Total 1,521,729,769 1,494,913,483
-------------- --------------
Plus (less):
Undisbursed portion of loans in process (7,621,898) (8,762,838)
Premium on loans purchased - net 3,097,997 3,277,599
Deferred loan fees - net (4,611,397) (4,806,862)
-------------- --------------
Total (9,135,298) (10,292,101)
-------------- --------------
Real estate loans - net 1,512,594,471 1,484,621,382
-------------- --------------
OTHER LOANS:
Commercial loans 85,247,006 80,483,612
Loans on deposits 35,959,416 35,264,574
Installment loans:
Credit cards 36,234,663 35,305,985
Other consumer loans 269,053,077 258,926,538
Less:
Unearned interest (50,227) (64,607)
Deferred loan fees - net (909,087) (890,862)
-------------- --------------
Other loans - net 425,534,848 409,025,240
-------------- --------------
TOTAL LOANS 1,938,129,319 1,893,646,622
ALLOWANCE FOR LOAN LOSSES (25,330,311) (23,978,449)
-------------- --------------
LOANS - NET $1,912,799,008 $1,869,668,173
============== ==============
</TABLE>
11
<PAGE> 12
The total investment on impaired commercial and constructions loans at March
31, 2000 and December 31, 1999, was $14,611,000 and $13,083,000, respectively.
All impaired commercial and constructions loans were measured based on the fair
value of collateral at March 31, 2000 and December 31, 1999. Impaired
commercial and construction loans amounting to $8,084,000 and $8,136,000 at
March 31, 2000 and December 31, 1999, respectively, were covered by a valuation
allowance of $1,268,000. Impaired commercial and construction loans amounting
to $6,527,000 at March 31, 2000 and $4,947,000 at December 31, 1999, did not
require a valuation allowance in accordance with SFAS 114. The average
investment on impaired commercial and construction loans at March 31, 2000 and
1999, amounted to $13,912,000 and $9,827,000, 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 March 31, 2000 and 1999, amounted to
$275,107 and $115,400, respectively.
6. DEPOSITS
A comparative summary of deposits as of March 31, 2000 and December 31, 1999
follows:
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
Noninterest bearing accounts $ 99,600,554 $ 103,681,889
Passbook 413,310,857 409,422,925
NOW, Super NOW and other money market accounts 110,363,336 105,400,121
Certificates of deposit 1,667,335,389 1,610,892,826
-------------- --------------
Total 2,290,610,136 2,229,397,761
Accrued interest payable 19,104,128 18,467,046
-------------- --------------
Total $2,309,714,264 $2,247,864,807
============== ==============
</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.
12
<PAGE> 13
Deferred income tax assets (liabilities) as of March 31, 2000 and December 31,
1999, consisted of the following:
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
Allowance for loan losses $ 9,879,000 $ 9,352,000
Loss carryforward relating to sale of securities 39,000 136,000
Allowance for foreclosed real estate held for sale 75,000 75,000
Mortgage servicing rights (779,000) (772,000)
Other temporary differences 27,237 (98,308)
-------------- --------------
Total 9,241,237 8,692,692
Less valuation allowance 39,000 39,000
-------------- --------------
Deferred income tax assets, net $ 9,202,237 $ 8,653,692
============== ==============
</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 March 31, 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; $596.0
million and $438.5 million fixed rate certificates of deposit liabilities,
respectively.
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 March 31, 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.
In June 1998, the Financial Accounting Standard Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVES 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
13
<PAGE> 14
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. SFAS 133
became effective for all fiscal years beginning after June 15, 2000, pursuant
to Statement of Financial Accounting Standards (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.
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 March 31, 2000 and December 31, 1999, the Company had
outstanding the following contract amount of financial instruments whose amount
represent credit risk:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Commitments to extend credit:
Fixed rates $ 11,083,000 $ 15,302,000
Variable rates 67,578,000 159,328,000
Unused lines of credit:
Commercial 36,472,000 36,998,000
Credit cards and other 49,590,000 45,856,000
Stand-by letters of credit 1,866,000 2,373,000
-------------- --------------
Total $ 166,589,000 $ 259,857,000
============== ==============
</TABLE>
Such commitments will be funded in the normal course of business from the
Company's principal sources of funds. At March 31, 2000, the Company had $1.01
billion of 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 options plan, 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. 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
14
<PAGE> 15
shares that can be purchased in the event of a stock split, reclassification of
stock and a merger or a reorganization. During the first quarter of 2000, the
Company granted to four executive officers 2,120,000 options under the 1999
Qualified Stock Option Plan, which will become fully exercisable after five
years following the grant date.
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 ended
March 31, 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 March 31, 2000 based on the Fair Value Method described in SFAS No. 123
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>
As of and for the three month period ended
March 31, 2000
(In Thousands)
---------------------------------------------------------------
In Puerto Rico International Total
<S> <C> <C> <C>
Operations data:
Interest income $ 57,404 $ 8,362 $ 65,766
Interest expense 34,392 6,669 41,061
----------- ----------- -----------
Net interest income 23,012 1,693 24,705
Provision for loan losses (2,000) -- (2,000)
Other income, net 3,224 5 3,229
Intersegment revenue 39 -- 39
Intersegment expense -- (39) (39)
Equity in loss of subsidiary (51) -- (51)
Operating expenses (13,222) (50) (13,272)
Provision for income taxes (2,046) -- (2,046)
----------- ----------- -----------
Net income $ 8,956 $ 1,609 $ 10,565
=========== =========== ===========
Total assets $ 2,959,087 $ 476,909 $ 3,435,996
=========== =========== ===========
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
As of December 31, 1999 and for the three months
period ended March 31, 1999
(In Thousands)
---------------------------------------------------------------
In Puerto Rico International Total
<S> <C> <C> <C>
Operations data:
Interest income $ 42,740 $ 6,675 $ 49,415
Interest expense 22,299 4,864 27,163
----------- ----------- -----------
Net interest income 20,441 1,811 22,252
Provision for loan losses (1,500) -- (1,500)
Other income, net 3,107 68 3,175
Intersegment revenue 10 10
Intersegment expense (10) -- (10)
Equity in loss of subsidiary (155) -- (155)
Operating expenses (12,344) (57) (12,401)
Provision for income taxes (2,356) -- (2,356)
----------- ----------- -----------
Net income $ 7,183 $ 1,832 $ 9,015
=========== =========== ===========
Total assets $ 2,903,174 $ 471,608 $ 3,374,782
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three month period ended
March 31,
2000 1999
-------------- --------------
(In Thousands)
<S> <C> <C>
Interest income:
Reportable segments $ 65,766 $ 49,415
Less eliminations -- --
-------------- --------------
Consolidated interest income $ 65,766 $ 49,415
============== ==============
Net income:
Reportable segments $ 10,565 $ 9,015
All other 10,514 (164)
-------------- --------------
Total 21,079 8,851
Plus eliminations (10,514) 164
-------------- --------------
Consolidated net income $ 10,565 $ 9,015
============== ==============
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Total assets:
Reportable segments $ 3,435,996 $ 3,374,782
All other 231,901 228,499
-------------- --------------
Total 3,667,897 3,603,281
Plus (less) eliminations (236,230) (228,710)
-------------- --------------
Consolidated total assets $ 3,431,667 $ 3,374,571
============== ==============
</TABLE>
16
<PAGE> 17
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 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. 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, 3 in
the Metropolitan Area, 4 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 business,
and installment loans. Westernbank operates a division known as Westernbank
International, which 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 March 31, 2000 and December 31, 1999 and for the three
month period ended March 31, 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.
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.
17
<PAGE> 18
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. 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
depositor's 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 was mainly related to increase in commercial real
estate portfolio, continued effective management of interest rate risk and a
tight control of operating expenses. Total net income for the three month
period ended March 31, 2000 increased to $10.6 million, up 17.20% when compared
to $9.0 million for the three month period ended March 31, 1999, while net
income available to common stockholders increased to $9.1 million, up 7.59%
when compared to $8.5 million for the same period in 1999. The Company's
profitability ratios for the first quarter of 2000 represented returns of 1.24%
on assets (ROA) and 25.19% on common stockholders' equity (ROE), compared with
an ROA and ROE of 1.35% and 26.86%, respectively, in the first quarter of 1999.
Different components that impacted the Company's performance are discussed in
detail in the following pages.
FINANCIAL CONDITION
The Company had total assets of $3.43 billion and $3.37 billion as of March 31,
2000 and December 31, 1999, respectively; an increase of $57.1 million or
1.69%. As of March 31, 2000, total liabilities amounted to $3.20 billion, an
increase of $54.2 million or 1.72% when compared to $3.15 billion as of
December 31, 1999.
INTEREST-EARNING ASSETS
Interest-earning assets amounted to $3.30 billion at March 31, 2000, an
increase of $69.1 million or 2.15% when compared to $3.23 billion as of
December 31, 1999.
During this quarter, the Company's 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 $710.0 million as of
March 31, 2000, an increase of $32.1 million or 4.74% in the first quarter of
2000. The
18
<PAGE> 19
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 $409.0 million as of December 31, 1999, to
$425.5 million as of March 31, 2000, an increase of $16.5 million or 4.04%.
Federal funds sold and securities purchased under agreements to resell
("repurchase agreements") decreased from $137.1 million as of December 31,
1999, to $120.8 million as of March 31, 2000, a decrease of $16.3 million or
11.86%. Investment securities held to maturity, which principally include
United States and Puerto Rico Governments and agency obligations and mortgage
and other asset-backed securities increased from $1.17 billion as of December
31, 1999, to $1.21 billion as of March 31, 2000, an increase of $34.3 million
or 2.92%. Investments available for sale decreased from $22.2 million as of
December 31, 1999, to $21.9 million as of March 31, 2000, a decrease of
$310,000 or 1.40%. Trading securities increased from $1.3 million as of
December 31, 1999, to $6.1 million as of March 31, 2000, an increase of $4.8
million.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities amounted to $3.16 billion at March 31, 2000, an
increase of $54.1 million or 1.74% when compared to $3.11 billion as of
December 31, 1999.
The increase during the first quarter of 2000 was mainly due to an increase of
$61.2 million in deposits (excluding accrued interest payable), which was
partially offset by a decrease of $6.6 million in securities sold under
agreements to repurchase ("reverse repurchase agreements").
The Company offers a variety of specialized types of deposit accounts and
certificates of deposit. Savings deposits increased from $409.4 million as of
December 31, 1999, to $413.3 million as of March 31, 2000, an increase of $3.9
million or 1.0%. Also, other deposits (excluding accrued interest payable),
represented mainly by time deposits, increased from $1.82 billion as of
December 31, 1999, to $1.88 billion as of March 31, 2000, an increase of $57.3
million or 3.15%. Other deposits include brokered deposits amounting to $917.7
million and $894.8 as of March 31, 2000 and December 31, 1999, respectively.
STOCKHOLDERS' EQUITY
As of March 31, 2000, total stockholders' equity amounted to $226.7 million, an
increase of $2.9 million or 1.29% when compared to $223.8 million as of
December 31, 1999. The increase during the first quarter of 2000 was mainly due
to a net income of $10.6 million, net of dividends paid on common and preferred
stock of $3.5 million and the repurchase and retirement of 437,500 shares of
common stock for $4.2 million.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the main source of earnings of the Company. As
further discussed in the "Quantitative and Qualitative Disclosures of Market
Risk" section, the Company uses several tools to manage the risks associated
with the composition and repricing of assets and liabilities.
Net interest income increased $2.5 million or 11.03% for the three month period
ended March 31, 2000, reaching $24.7 million, compared to $22.3 million
reported in the first quarter of 1999. The increase in 2000, when compared to
the corresponding prior year period was 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.
19
<PAGE> 20
Average interest-earning assets increased from $2.54 billion for the three
months period ended March 31, 1999 to $3.32 billion for the first quarter of
2000, an increase of $785.3 million or 30.95%, being the principal reason for
the increase in net interest income. The rise in average interest-earning
assets is mainly related to increases in the average loans, which is the higher
yielding category of interest-earning assets, followed by a significant
increase in the average investment securities.
Interest income on loans amounted to $42.1 million for the three month period
ended March 31, 2000, compared to $32.2 million for the corresponding quarter
in 1999. Average loans increased from $1.46 billion for the three month period
ended March 31, 1999 to $1.91 billion for the three months period ended March
31, 2000, an increase of $447.5 million or 30.62%. Mortgage loans accounted for
the majority of the increase in the average loans. 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 the early stages of the current year. The average
yield on loans decreased from 9.06% for the quarter ended March 31, 1999, to
8.87% for the quarter ended March 31, 2000.
Interest income on investment securities amounted to $19.0 million for the
three month period ended March 31, 2000 compared to $13.8 million for the same
period of prior year, an increase of $5.2 million or 37.82%. Increase in income
from investment securities is mainly related to a rise in the average balance
of investment securities from $846.4 million for the three month period ended
March 31, 1999 to $1.14 billion for the first quarter of 2000, an increase of
$295.9 million or 34.96%. In addition, the investment portfolio average yield
increased from 6.57% in 1999, to 6.68% in 2000.
Interest income on mortgage and other asset-backed securities amounted to $2.4
million for the three month period ended March 31, 2000, compared to $2.0
million for the same period of prior year. The increase in interest income was
mainly the result of an increase in the average yield of those securities. The
average yield on mortgage and other asset-backed securities increased from
6.84% in 1999 to 8.73% in 2000.
Interest income on money market instruments increased to $2.3 million for the
three month period ended March 31, 2000, compared to $1.4 million for the same
period of prior year. Increase is mainly related to a rise in the average
balance of money market instruments in 2000, as well as for an increase in the
average yield of such instruments.
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 $2.47 billion for the three month period ended March
31, 1999 to $3.18 billion for the three month period ended March 31, 2000, an
increase of $714.5 million or 28.97%. In addition, the interest paid on these
liabilities during the corresponding periods increased from 4.47% in 1999, to
5.19% in 2000. The increase in the average interest-bearing liabilities was
mainly related to an increase in the average deposits, followed by a
significant increase in the average reverse repurchase agreements.
Interest expense on deposits amounted to $28.8 million for the three month
period ended March 31, 2000, compared to $19.0 million in the same period for
prior year. The increase was mainly attributed to a rise in the average balance
of deposits, as well as an increase in the average rate paid on them. The
average balance of deposits increased from $1.78 billion for the first quarter
of 1999 to $2.31 billion or the first quarter of 2000, an increase of $531.8
million or 29.89%. The average rate paid on deposits increased from 4.32% for
the three month period ended March 31, 1999, to 5.02% for the three month
period ended March 31, 2000.
Interest expense on reverse repurchase agreements amounted to $10.3 million for
the three month period ended March 31, 2000, compared to $6.8 million in the
same period in 1999. The increase is mainly related to an increase in the
average balance of
20
<PAGE> 21
reverse repurchase agreements. The average balance of reverse repurchase
agreements increased from $571.8 million for the first quarter of 1999 to
$720.3 million for the first quarter of 2000, an increase of $148.5 million or
25.98%.
Interest expense on term notes totaled $964,000 for the three month period
ended March 31, 2000, compared to $989,000 in the same period in 1999. Decrease
is mainly related to a decrease in the average balance of term notes in 2000.
Increase in interest expense on advances from FHLB is mainly due to a rise in
average balance of advances in 2000. The average balance of advances from FHLB
increased from $31.0 million for the three month period ended March 31, 1999,
to $70.2 million for the three month period ended March 31, 2000, an increase
of $39.2 million or 126.45%.
PROVISION FOR LOAN LOSSES
Provision for loan losses amounted to $2.0 million for the three month period
ended March 31, 2000, compared to $1.5 million for the same period in 1999, an
increase of $500,000 million or 33.33%. The allowance for loan losses amounted
to $25.3 million as of March 31, 2000, compared to $24.0 million as of December
31, 1999, an increase of $1.3 million or 5.64%. 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.
OTHER INCOME
Total other income increased $53,000 or 1.68% during the three months ended
March 31, 2000, as compared to the corresponding period in 1999.
Service charges on deposit accounts and other fees increased from $2.9 million
in 1999 to $3.3 million in 2000, an increase of $443,000 or 15.41%. Sales of
loans, securities and other assets produced a net loss of $88,000 for the three
months ended March 31, 2000, as compared to a net gain of $301,000 for the
corresponding period in 1999.
OPERATING EXPENSES
Total operating expenses increased $767,000 or 6.11% during the three months
ended March 31, 2000, as compared to the corresponding period in 1999.
Salaries and employees' benefits, which is the largest component of total
operating expenses, increased $171,000 or only by 3.31% for the three month
period ended March 31, 2000, as compared to the corresponding 1999 period. Such
small increase was primarily the result of a strict cost reduction plan while
at the same time supporting the expansion of the Company.
Equipment expenses increased $504,000 or 35.11% for the three month period
ended March 31, 2000, as compared to the same period in 1999. The increase was
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.
21
<PAGE> 22
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 $2.05
million for the three month period ended March 31, 2000. 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.
NET INCOME
Net income increased $1.6 million or 17.20% for the three month period ended
March 31, 2000, as compared to the corresponding period in 1999. The increase
was mainly the result of the increase in net interest income, which was
partially offset by increases in the provision for loan losses and total
operating expenses.
MINIMUM REGULATORY CAPITAL REQUIREMENTS
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 (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 March 31, 2000 that the
Companies met all capital adequacy requirements to which they are subject.
As of March 31, 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.
22
<PAGE> 23
The Companies' actual capital amounts and ratios as of March 31, 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
(Dollar in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
Consolidated $251,729 12.95% 155,568 8.0% N/A N/A
Westernbank 255,903 13.16 155,717 8.0 $194,646 10.0%
Tier I Capital to Risk Weighted Assets:
Consolidated 227,409 11.84 76,811 4.0 N/A N/A
Westernbank 231,583 12.06 76,815 4.0 115,327 6.0
Tier I Capital to Average Assets:
Consolidated 227,409 6.60 103,351 3.0 N/A N/A
Westernbank 231,583 6.72 103,351 3.0 172,252 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 bank 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.
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 and entering into interest rate exchange
agreements (swaps) to hedge variable term notes and fixed callable certificates
of deposit.
23
<PAGE> 24
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:
<TABLE>
<CAPTION>
March 31, 2000:
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollar in thousands)
<S> <C> <C> <C>
+200 Basis Points $ 79,465 $(16,121) (16.87)%
Base Scenario 95,586 -- --
-200 Basis Points 110,289 14,703 15.38
December 31, 1999:
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollar in thousands)
+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.
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending and threatened legal
proceeding 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 March 31, 2000.
C - Exhibits
Exhibits filed as part of this Form 10-Q
27-1 Financial Data Schedule (for SEC use only)
25
<PAGE> 26
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: May 12, 2000 By /s/ Frank C. Stipes, Esq.
----------------------------------------
Frank C. Stipes, Esq.
Chairman of the Board,
Chief Executive Officer and
President
Date: May 12, 2000 By /s/ Freddy Maldonado
----------------------------------------
Freddy Maldonado,
Chief Financial Officer and Vice
Vice President of Finance and Investment
26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF W HOLDING COMPANY, INC. FOR THE THREE MONTH PERIOD ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 45,564
<INT-BEARING-DEPOSITS> 9,765
<FED-FUNDS-SOLD> 7,000
<TRADING-ASSETS> 6,077
<INVESTMENTS-HELD-FOR-SALE> 21,875
<INVESTMENTS-CARRYING> 1,208,821
<INVESTMENTS-MARKET> 1,113,730
<LOANS> 1,943,132
<ALLOWANCE> 25,330
<TOTAL-ASSETS> 3,431,667
<DEPOSITS> 2,309,714
<SHORT-TERM> 321,742
<LIABILITIES-OTHER> 22,884
<LONG-TERM> 550,631
0
3,220
<COMMON> 41,563
<OTHER-SE> 181,913
<TOTAL-LIABILITIES-AND-EQUITY> 3,431,667
<INTEREST-LOAN> 42,078
<INTEREST-INVEST> 19,019
<INTEREST-OTHER> 4,669
<INTEREST-TOTAL> 65,766
<INTEREST-DEPOSIT> 28,820
<INTEREST-EXPENSE> 41,061
<INTEREST-INCOME-NET> 24,705
<LOAN-LOSSES> 2,000
<SECURITIES-GAINS> (88)
<EXPENSE-OTHER> 2,249
<INCOME-PRETAX> 12,611
<INCOME-PRE-EXTRAORDINARY> 10,565
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,565
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 2.77
<LOANS-NON> 9,793
<LOANS-PAST> 339
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,279
<ALLOWANCE-OPEN> 23,978
<CHARGE-OFFS> 803
<RECOVERIES> 155
<ALLOWANCE-CLOSE> 25,330
<ALLOWANCE-DOMESTIC> 25,330
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,616
</TABLE>
