Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 000-27377
W HOLDING COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMONWEALTH OF PUERTO RICO 66-0573197
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
19 WEST MCKINLEY STREET, MAYAGUEZ, PUERTO RICO 00680
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (787) 834-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
COMMON STOCK ($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
7.125% NONCUMULATIVE, CONVERTIBLE MONTHLY INCOME PREFERRED STOCK, 1998 SERIES A
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)
7.25% NONCUMULATIVE, NON-CONVERTIBLE MONTHLY INCOME PREFERRED STOCK, 1999
SERIES B
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)
7.60% NONCUMULATIVE, NON-CONVERTIBLE MONTHLY INCOME PREFERRED STOCK,
2001 SERIES C
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)
7.40% NONCUMULATIVE, NON-CONVERTIBLE MONTHLY INCOME PREFERRED STOCK,
2001 SERIES D
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting and non-voting stock held by nonaffiliates
of the registrant: $455,280,884 based on the closing sales price of $16.55 at
February 28, 2002, for 27,509,419 shares.
Number of shares of Common Stock outstanding as of February 28, 2002: 41,500,000
================================================================================
PART I
ITEM 1. BUSINESS
GENERAL
W Holding Company, Inc. (the "Company") is a financial holding company
offering a full range of financial services through its wholly-owned
subsidiaries, Westernbank Puerto Rico ("Westernbank" or the "Bank") and
Westernbank Insurance, Corp. The Company was organized under the laws of the
Commonwealth of Puerto Rico in February 1999 to become the bank holding company
of Westernbank. The business of the Company is mainly conducted through
Westernbank. The Bank, which was founded as a savings institution in 1958, is a
Puerto Rico-chartered commercial bank, deposits in which are insured to
applicable limits by the United States Federal Deposit Insurance Corporation
("FDIC"). The Bank offers a full array of business and consumer financial
services, including banking, trust and brokerage services. Westernbank
Insurance, Corp. is a general insurance agent placing property casualty, life
and disability insurance.
In July 2000, the Company became a financial holding company under the
Bank Holding Company Act. As a financial holding company, the Company is
permitted to engage in financial related activities, including insurance and
securities activities, provided that the Company and its banking subsidiary meet
certain regulatory standards.
The Company is the third largest, locally controlled banking company
headquartered in Puerto Rico, based on total assets at December 31, 2001. The
Company had total assets of $5.89 billion, loans of $2.84 billion, deposits of
$3.23 billion and stockholders' equity of $387.9 million at year end 2001. The
Bank operates through 35 full service branch offices located throughout Puerto
Rico, primarily in the Southwestern portion of the island, and a fully
functional banking site on the Internet at www.westernetbank.com.
In recent years, Westernbank has emphasized expansion in the San Juan
metropolitan area, having opened four branches there since 1998. The Bank has
also focused on shifting its asset composition from primarily traditional
long-term fixed rate residential loans to assets with shorter maturities and
greater repricing flexibility, such as commercial real estate, business and
consumer loan products, as well as investment securities.
For segment information, please refer to Note 22 of the audited
consolidated financial statements. The Company's financial performance is
reported in two primary business segments, the operations of Westernbank in
Puerto Rico and those of the Bank's division known as Westernbank International.
The international division was established to offer commercial banking and
related services outside of Puerto Rico. At year-end 2001, the international
division reported total assets of $1.83 billion, substantially all of which were
investment securities and purchased loans. As of the date of this report, the
Company does not conduct significant banking business outside of Puerto Rico.
The Company's executive office is located at 19 West McKinley Street,
Mayaguez, Puerto Rico; its telephone number is (787) 834-8000.
LENDING ACTIVITIES
GENERAL. At December 31, 2001, the Bank's net loans, including mortgage
loans held for sale, amounted to $2.84 billion or 48.29% of total assets.
2
The following table sets forth the composition of the Bank's loan
portfolio, including mortgage loans held for sale, by type of loan at the dates
indicated.
December 31,
---------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- ------- -------- -------
(Dollars in Thousands)
Residential real estate:
Mortgage (1) $ 852,715 30.0% $ 785,853 35.5% $ 706,792 37.8% $ 407,245 29.9% $230,416 29.4%
Construction 117,957 4.2 80,905 3.7 101,979 5.5 69,215 5.1 24,192 3.1
Commercial, industrial
and agricultural:
Real estate 1,115,700 39.2 887,084 40.2 677,924 36.2 518,893 38.1 234,071 29.8
Business and others 378,696 13.3 99,483 4.5 79,343 4.3 72,235 5.3 40,001 5.1
Consumer and others 416,953 14.7 383,903 17.4 329,682 17.6 309,509 22.7 269,316 34.3
---------- ----- ---------- ----- ---------- ----- ---------- ----- -------- -----
Total loans 2,882,021 101.4% 2,237,228 101.3% 1,895,720 101.4% 1,377,097 101.1% 797,996 101.7%
Allowance for loan losses (38,364) (1.4) (28,928) (1.3) (23,978) (1.4) (15,800) (1.1) (13,201) (1.7)
---------- ----- ---------- ----- ---------- ----- ---------- ----- -------- -----
Loans, net $2,843,657 100.0% $2,208,300 100.0% $1,871,742 100.0% $1,361,297 100.0% $784,795 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ======== =====
(1) Includes mortgage loans held for sale. At December 31, 2001, mortgage
loans held for sale totaled $5.3 million.
Residential real estate mortgage loans at December 31, 2001 are mainly
comprised of loans secured by first mortgages on one-to-four family residential
properties. At year end 2001, residential mortgage loans included $16.9 million
of mortgages insured or guaranteed by government agencies of the United States
or Puerto Rico.
The Bank originated $542.8 million of commercial real estate loans
during 2001. At year-end, commercial real estate loans totaled $1.12 billion. In
general, commercial real estate loans are considered by management to be of
somewhat greater risk of uncollectibility than other loans due to the dependency
on income production and future development of real estate. Commercial real
estate loans are collateralized by various types of property, including
warehouse, retail and other business properties.
Consumer loans and others at December 31, 2001, includes consumer loans
totaling $318.8 million (of which $167.9 million are secured by real estate),
credit card loans of $63.1 million and loans secured by deposits in the Bank
totaling $35.1 million.
During 2001, the Bank securitized $11.2 million and $32.0 million of
residential mortgage loans into Government National Mortgage Association and
Fannie Mae participation certificates, respectively. The Bank continues to
service outstanding loans which are securitized.
3
The following table summarizes the contractual maturities of the Bank's
total loans, excluding mortgage loans held for sale, for the periods indicated
as of December 31, 2001. Contractual maturities do not necessarily reflect the
actual term of a loan, including prepayments.
MATURITIES
--------------------------------------------------------------------------
AFTER ONE YEAR TO FIVE YEARS AFTER FIVE YEARS
------------------------------- ------------------------------
BALANCE
OUTSTANDING AT ONE YEAR FIXED VARIABLE FIXED VARIABLE
DECEMBER 31, 2001 OR LESS INTEREST RATES INTEREST RATES INTEREST RATES INTEREST RATES
----------------- --------- -------------- -------------- -------------- --------------
(IN THOUSANDS)
Residential real estate:
Mortgage ................. $ 847,462 $ 4,016 $ 9,266 $ 94 $ 416,522 $ 417,564
Construction ............. 117,957 51,266 -- 66,691 -- --
Commercial, industrial and
agricultural:
Real estate (1) .......... 1,115,700 223,311 142,432 71,701 62,835 615,421
Business and other ....... 378,696 187,181 21,219 38,298 6,365 125,633
Consumer and other ........... 416,953 122,308 124,453 -- 170,192 --
----------- --------- --------- --------- --------- -----------
Total ................ $ 2,876,768 $ 588,082 $ 297,370 $ 176,784 $ 655,914 $ 1,158,618
=========== ========= ========= ========= ========= ===========
(1) Includes foreign loans amounting to $3.9 million, secured by real estate
collateral and unlimited guaranty of a Puerto Rico resident.
As of December 31, 2001, the maximum unsecured amount which Westernbank
could have loaned to one borrower and the borrower's related entities under
applicable banking laws was approximately $46.6 million. The maximum loan to one
borrower for secured debts at December 31, 2001 was $97.9 million. At such date,
Westernbank's largest loan outstanding balance of a group of loans to one
borrower aggregated $96.4 million, of which a loan amounting to $49.4 million is
secured by real estate. The second largest loan outstanding balance of loans to
one borrower aggregated $67.9 million, all of which are secured by real estate.
At December 31, 2001, such loans were current.
ORIGINATION, PURCHASE AND SALE OF LOANS. The Bank's loan originations
come from a number of sources. The primary sources for residential loan
originations are depositors and walk-in customers. Commercial loan originations
come from existing customers as well as through direct solicitation and
referrals.
The Bank originates loans in accordance with written,
non-discriminatory underwriting standards and loan origination procedures
prescribed in Board of Director approved loan policies. Detailed loan
applications are obtained to determine the borrower's repayment ability.
Applications are verified through the use of credit reports, financial
statements and other confirmations procedures. Property valuations by Board of
Director approved independent appraisers are required for mortgage loans. The
Bank's Credit Committee approval is required for all residential and commercial
real estate loans originated up to $1.0 million, and all other commercial loans
from $250,000 up to $3.0 million. Loans in excess of $1.0 million are also
reviewed by the full Board of Directors, including those loans approved by the
Credit Committee.
It is the Bank's policy to require borrowers to provide title insurance
policies certifying or ensuring that the Bank has a valid first lien on the
mortgaged real estate. Borrowers must also obtain hazard insurance policies
prior to closing and, when required by the Department of Housing and Urban
Development, flood insurance policies. Borrowers may be required to advance
funds on a monthly basis together with each payment of principal and interest to
a mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes, hazard insurance premiums and private mortgage insurance
premiums as they fall due.
Westernbank originates most of its residential real estate loans as
conforming loans, eligible for sale in the secondary market. The loan-to-value
ratio at the time of origination on residential mortgages is generally 75%,
except that the Bank may lend up to 90% of the lower of the purchase price or
appraised value of residential properties if private mortgage insurance is
obtained by the borrower for amounts in excess of 80%.
The Bank originates fixed and adjustable rate residential mortgage
loans secured by a first mortgage on the borrower's real property, payable in
monthly installments for terms ranging from ten to forty years. Adjustable rates
are indexed to specified prime or LIBOR rate. All 30 year conforming mortgages
are originated with the intent to sell.
4
In addition to its residential loan originations, the Bank also
purchases residential first mortgage loans from other mortgage originators in
Puerto Rico. In 2001 and 2000, Westernbank purchased $256.7 million and $261.8
million, of such loans, respectively.
The Bank originates primarily variable and adjustable rate commercial
business and real estate loans. The Bank also makes real estate construction
loans subject to firm permanent financing commitments. On June 15, 2001, the
Bank acquired the entire loan portfolio of the Puerto Rico branch of Congress
Credit Corporation, a subsidiary of First Union National Bank, N. A. for $163.8
million. This new line of business is managed by Westernbank Business Credit
Division, which specializes in commercial loans secured principally by accounts
receivables, inventory and equipment.
The Bank offers different types of consumer loans in order to provide a
full range of financial services to its customers. Within the different types of
consumer loans offered by the bank there are various types of secured and
unsecured consumer loans with varying amortization schedules. In addition, the
Bank makes fixed-rate residential second mortgage loans.
The Bank offers the service of VISA and Master Card. At December 31,
2001, there were approximately 28,080 outstanding accounts, with an aggregate
outstanding balance of $63.1 million and unused credit card lines available of
$53.5 million.
In connection with all consumer and second mortgage loans originated,
the Bank's underwriting standards include a determination of the applicants
payment history on other debts and an assessment of the ability to meet existing
obligations and payments on the proposed loan. As of December 31, 2001, only
$4.3 million or 1.03% of the consumer loan portfolio consisted of loans more
than 60 days delinquent in payment.
Commercial loans have increased from $986.6 million as of December 31,
2000, to $1.49 billion as of December 31, 2001. As of December 31, 2001, only
$10.4 million or .69% of the commercial loan portfolio consisted of loans more
than 60 days delinquent in payment.
The following table reflects the Bank's net portfolio loan origination,
purchase, and sale activities for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
Beginning balance of net loans, including
residential real estate mortgage loans
held for sale ........................... $ 2,208,300 $ 1,871,742 $ 1,361,297 $ 784,795 $ 623,621
Residential real estate mortgage loans
held for sale originated ................ 47,446 44,389 63,812 75,660 39,506
Residential real estate mortgage loans
held for sale securitized and transferred
to trading and available for sale
securities .............................. (44,176) (38,289) (68,350) (71,217) (53,963)
Sales of residential real estate mortgage
loans held for sale ..................... (2,148) (3,123) -- -- --
Residential real estate mortgage and
construction loans originated and
purchased ............................... 380,258 347,154 449,055 299,397 135,719
Residential real estate mortgage loans
sold .................................... -- -- (20,101) -- --
Residential real estate mortgage loans
foreclosed .............................. (1,017) (569) (291) (1,233) (176)
Residential real estate mortgage and
construction loans repayments(1) ........ (276,449) (291,575) (91,814) (80,755) (12,694)
Commercial loans purchased ................ 163,800 -- -- -- --
Commercial loans-other net increase(1) ... 344,029 229,300 166,139 317,056 45,777
Consumer and other-net increase(1) ........ 33,050 54,221 20,173 40,193 8,179
Decrease (increase) in allowance for loan
losses .................................. (9,436) (4,950) (8,178) (2,599) (1,174)
----------- ----------- ----------- ----------- ---------
End Balance ............................... $ 2,843,657 $ 2,208,300 $ 1,871,742 $ 1,361,297 $ 784,795
=========== =========== =========== =========== =========
Net increase in net loans, including
mortgage loans held for sale ............ $ 635,357 $ 336,558 $ 510,445 $ 576,502 $ 161,174
=========== =========== =========== =========== =========
- ---------
(1) Excludes effect of amounts charged off.
5
INCOME FROM LENDING ACTIVITIES. The Bank realizes interest income and
fee income from its lending activities. For the most part, interest rates
charged by the Bank on loans depend upon the general interest rate environment,
the demand for loans and the availability of funds. The Bank also receives fees
for originating and committing to originate or purchase loans and also charges
service fees for the assumption of loans, late payments, inspection of
properties, appraisals and other miscellaneous services.
Loan origination and commitment fees vary with the volume and type of
loans and commitments made and sold and with competitive conditions in the
residential and commercial mortgage markets. The Bank accounts for loan
origination and commitment fees based on the provisions of Financial Accounting
Standards Board Statement No. 91. Loan origination fees and related direct loan
origination costs are deferred and amortized over the life of the related loans
as a yield adjustment. Commitment fees are also deferred and amortized over the
life of the related loans as a yield adjustment. If the commitment expires
unexercised, the fee is taken into income.
In accordance with requirements of Financial Accounting Standards Board
Statement No. 140, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, AN AMENDMENT OF
FASB STATEMENT NO. 65 ("SFAS 140"), the Bank recognizes as separate assets the
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. SFAS 140 also requires that the entities assess the
capitalized mortgage servicing rights for impairment based on the fair value of
those rights.
NON-PERFORMING LOANS AND FORECLOSED REAL ESTATE. When a borrower fails
to make a required payment on a loan, the Bank attempts to cure the deficiency
by contacting the borrower. In most cases, deficiencies are cured promptly. If
the delinquency exceeds 90 days and is not cured through the Bank's normal
collection procedures, the Bank will generally institute measures to remedy the
default. If a foreclosure action is instituted and the loan is not cured, paid
in full or refinanced, the property is sold at a judicial sale at which the Bank
may acquire the property. Thereafter, if the Bank acquires the property, such
acquired property is appraised and included in the Bank's foreclosed real estate
held for sale account at the fair value at the date of acquisition. Then this
asset is carried at the lower of fair value less estimated costs to sell or cost
until the property is sold. In the event that the property is not sold in the
foreclosure sale or sold at a price insufficient to cover the payment of the
loan, the debtor remains liable for the deficiency of the judgment.
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due, but in
no event is it recognized after 90 days in arrears on payments of principal or
interest. When interest accrual is discontinued, all unpaid interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
The following table sets forth information regarding non-performing
loans and foreclosed real estate held for sale by the Bank at the dates
indicated:
AT DECEMBER 31,
------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- -------- --------- ---------
(IN THOUSANDS)
Residential real estate mortgage and
construction loans .................................. $ 2,735 $ 1,817 $ 1,719 $ 1,183 $ 1,651
Commercial, industrial and agricultural
loans ............................................... 7,947 6,140 4,366 5,427 4,988
Consumer loans ........................................ 3,431 1,733 870 1,172 967
--------- --------- -------- --------- ---------
Total non-performing loans ....................... 14,113 9,690 6,955 7,782 7,606
Foreclosed real estate held for sale .................. 3,013 2,454 2,232 3,271 2,396
--------- --------- -------- --------- ---------
Total non-performing loans and
foreclosed real estate held for sale ........... $ 17,126 $ 12,144 $ 9,187 $ 11,053 $ 10,002
========= ========= ======== ========= =========
Interest which could have been recorded if
the loans had not been classified as
non-performing ...................................... $ 1,123 $ 979 $ 514 $ 1,027 $ 713
========= ========= ======== ========= =========
Interest recorded in non-performing loans ............. $ 1,716 $ 780 $ 1,470 $ 242 $ 220
========= ========= ======== ========= =========
Total non-performing loans as a percentage
of total loans receivable, including
mortgage loans held for sale ................... 0.49% 0.43% 0.37% 0.57% 0.95%
========= ========= ======== ========= =========
Total non-performing loans and foreclosed
real estate held for sale as a percentage
of total assets ................................ 0.29% 0.28% 0.27% 0.45% 0.64%
========= ========= ======== ========= =========
As of December 31, 2001, there were only three non-accrual loans with a
principal balance in excess of $500,000.
6
ALLOWANCE FOR LOAN LOSSES. The Bank maintains an allowance for loan
losses to absorb losses inherent in the loan portfolio. The allowance is based
on ongoing, quarterly assessments of the probable estimated losses inherent in
the loan portfolio. The Company follows a systematic methodology to establish
and evaluate the adequacy of the allowance for loan losses. This methodology
consists of several key elements, which include:
The Formula Allowance. The formula allowance is calculated by
applying loss factors to outstanding loans not otherwise covered by
specific allowances. Loss factors are based on our historical loss
experience and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Loss factors are described as follows:
- Loan loss factors for commercial loans, including construction
and land acquisition loans, are based on historical loss trends for
three years, as adjusted for management's expected increase in the
loss factors given the significant increase in such loan portfolios
over the last few years.
- Pooled loan loss factors are also based on historical loss trends
for one to three years. Pooled loans are loans that are homogeneous
in nature, such as consumer installment and residential mortgage
loans.
Specific Allowances for Identified Problem Loans and Portfolio
Segments. Specific allowances are established and maintained where
management has identified significant conditions or circumstances related
to a credit or portfolio segment that management believes indicate the
probability that a loss has been incurred in excess of the amount
determined by the application of the formula allowance. Larger commercial
and construction loans that exhibit potential or observed credit weaknesses
are subject to individual review. Where appropriate, allowances are
allocated to individual loans based on management's estimate of the
borrower's ability to repay the loan given the availability of collateral,
other sources of cash flow and legal options available to the Bank.
In addition, the specific allowance incorporates the results of
measuring impaired loans as provided in Statement of Financial Accounting
Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN ("SFAS
114"). This accounting standard prescribe the measurement methods, income
recognition and disclosures concerning impaired loans.
The Unallocated Allowance. An unallocated allowance is established
recognizing the estimation risk associated with the formula and specific
allowances. It is based upon management's evaluation of various conditions,
the effects of which are not directly measured in determining the formula
and specific allowances. These conditions include then-existing general
economic and business conditions affecting our key lending areas; credit
quality trends, including trends in nonperforming loans expected to result
from existing conditions, collateral values, loan volumes and
concentrations, seasoning of the loan portfolio, recent loss experience in
particular segments of the portfolio, regulatory examination results, and
findings of our internal credit examiners. The evaluation of the inherent
loss regarding these conditions involves a higher degree of uncertainty
because they are not identified with specific problem credits or portfolio
segments.
Management assesses these conditions quarterly. If any of these
conditions is evidenced by a specifically identifiable problem credit or
portfolio segment as of the evaluation date, management's estimate of the effect
of this condition may be reflected as a specific allowance applicable to this
credit or portfolio segment. Where any of these conditions is not evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's evaluation of the probable loss concerning this
condition is reflected in the unallocated allowance.
The allowance for loan losses is based upon estimates of probable
losses inherent in the loan portfolio. The amount actually observed for these
losses can vary significantly from the estimated amounts. Our methodology
includes several features that are intended to reduce the differences between
estimated and actual losses. Historical loss factors for commercial and consumer
loans may be adjusted for significant factors that, in management's judgement,
reflect the impact of any current condition on loss recognition. Factors which
management considers in the analysis include the effect of the national and
local economies, trends in the nature and volume of loans (delinquencies,
charge-offs, non-accrual and problem loans), changes in the internal lending
policies and credit standards, collection practices, and examination results
from bank regulatory agencies and the Bank's internal credit examiners. Loan
loss factors are adjusted quarterly based upon the level of net charge offs
expected by management in the next twelve months, after taking into account
historical loss ratios adjusted for current trends. By assessing the probable
estimated losses inherent in the loan portfolio on a quarterly basis, we are
able to adjust specific and inherent loss estimates based upon any more recent
information that has become available.
7
At December 31, 2001, the Bank's allowance for loan losses was $38.4
million, consisting of $22.0 million formula allowance, $2.0 million of specific
allowances and $5.3 million of unallocated allowance. As of December 31, 2001,
the allowance for loan losses equals 1.33% of total loans, and 271.83% of total
non-performing loans, compared with an allowance for loan losses at December 31,
2000 of $28.9 million, or 1.29% of total loans, and 298.5% of total
non-performing loans.
During 2001, there were no significant changes in estimation methods or
assumptions that affected our methodology for assessing the appropriateness of
the allowance for loan losses.
The table below presents a reconciliation of changes in the allowance
for loan losses for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance, beginning of year ............................ $ 28,928 $ 23,978 $ 15,800 $ 13,201 $ 12,027
--------- --------- -------- --------- ---------
Loans charged off:
Consumer loans ...................................... 3,840 4,760 5,154 4,090 2,458
Commercial, industrial and agricultural
loans ............................................ 2,970 372 1,913 134 139
Real estate-mortgage and construction
loans ............................................ 228 231 291 4
--------- --------- -------- --------- ---------
Total loans charged off ........................ 7,038 5,363 7,358 4,224 2,601
--------- --------- -------- --------- ---------
Recoveries of loans previously charged off:
Consumer loans ...................................... 996 795 1,003 601 480
Commercial, industrial and agricultural
loans ............................................ 133 594 335 42 184
Real estate-mortgage and construction
loans ............................................ 175 224 198 180 411
--------- --------- -------- --------- ---------
Total recoveries of loans previously
charged off ................................. 1,304 1,613 1,536 823 1,075
--------- --------- -------- --------- ---------
Net loans charged off ................................. 5,734 3,750 5,822 3,401 1,526
Provision for loan losses ............................. 12,278 8,700 14,000 6,000 2,700
Allowance acquired on loans purchased.................. 2,892 -- -- -- --
--------- --------- -------- --------- ---------
Balance, end of year .................................. $ 38,364 $ 28,928 $ 23,978 $ 15,800 $ 13,201
========= ========= ======== ========= =========
Ratios:
Allowance for loan losses to total loans ............ 1.33% 1.29% 1.26% 1.15% 1.65%
Provision for loan losses to net loans
charged off ...................................... 214.09% 232.00% 240.47% 176.42% 176.93%
Recoveries of loans to loans charged off in
previous year .................................... 24.31% 21.92% 36.36% 31.64% 40.26%
Net loans charged off to average loans .............. 0.23% 0.19% 0.35% 0.32% 0.22%
Allowance for loans losses to
non-performing loans ............................. 271.83% 298.53% 344.76% 203.03% 173.56%
The following table presents the allocation of the allowance for credit
losses and the percentage of loans in each category to total loans, as set forth
in the "Loans" table on page 3.
DECEMBER 31,
---------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ---------------- ----------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Commercial, industrial and
agricultural loans................. $24,397 51.8% $16,273 44.1% $11,772 39.9% $ 7,747 42.9% $ 5,143 34.4%
Consumer loans ..................... 8,203 14.5 7,194 17.2 5,718 17.4 5,044 22.5 3,629 33.7
Residential real estate-mortgage and
construction-loans ................ 494 33.7 526 38.7 1,743 42.7 1,043 34.6 551 31.9
Unallocated allowance............... 5,270 -- 4,935 -- 4,745 -- 1,966 -- 3,878 --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total allowance for loan losses .. $38,364 100.0% $28,928 100.0% $23,978 100.0% $15,800 100.0% $13,201 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Loans are classified as impaired or not impaired in accordance with
SFAS 114, which was implemented in 1995. A loan is impaired when, based on
current information and events, it is probable that the Bank will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the agreement.
8
The Bank measures the impairment of a loan based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
or as a practical expedient, at the observable market price of the loan or the
fair value of the collateral, if the loan is collateral dependent. Significant
loans (those exceeding $500,000) are individually evaluated for impairment.
Large groups of small balance, homogeneous loans are collectively evaluated for
impairment, loans that are recorded at fair value or at the lower of cost of
market are not evaluated for impairment. The portfolios of mortgage and consumer
loans are considered homogeneous and are evaluated collectively for impairment.
Impaired loans for which the discounted cash flows, collateral value or
market price exceeds its carrying value do not require an allowance. The
allowance for impaired loans is part of the Company's overall allowance for loan
losses.
The following table sets forth information regarding the investment on
impaired loans:
2001 2000 1999 1998 1997
--------- --------- -------- -------- --------
(IN THOUSANDS)
Investment in impaired loans:
Covered by a valuation allowance .................... $ 21,996 $ 8,040 $ 8,136 $ 5,499 $ 1,465
Do not require a valuation allowance ................ 20,482 4,834 4,947 4,309 4,234
--------- --------- -------- -------- --------
Total ....................................... $ 42,478 $ 12,874 $ 13,083 $ 9,808 $ 5,699
========= ========= ======== ======== ========
Valuation allowance on impaired loans ................. $ 4,181 $ 1,157 $ 1,268 $ 1,120 $ 248
========= ========= ======== ======== ========
Average investment on impaired loans .................. $ 20,293 $ 11,873 $ 14,919 $ 6,561 $ 5,646
========= ========= ======== ======== ========
Interest collected on impaired loans .................. $ 1,716 $ 780 $ 1,470 $ 242 $ 220
========= ========= ======== ======== ========
During 2001, the Bank's investment in impaired loans increased $29.6
million, from $12.9 million in 2000 to $42.5 as of December 31, 2001. This
increase is principally attributed to four newly classified loans with and
aggregate outstanding principal balance of $25.2 million as of December 31,
2001. The largest impaired loan with an outstanding principal balance of $9.3
million is collateralized by real estate and required no specific valuation
allowance. The second largest impaired loan with an outstanding principal
balance of $6.6 million was acquired as part of the purchase of the entire loan
portfolio of the Puerto Rico branch of Congress Credit Corporation, a subsidiary
of First Union Bank, N.A. This loan is collateralized by equipment, inventory
and accounts receivable and required a specific valuation allowance of $1.3
million at December 31, 2001, which was established in connection with the
acquisition of the loan. Two other loans with outstanding principal balances of
$4.7 and $4.6 million are collateralized by real estate. A specific valuation
allowance of $170,000 was established for the $4.7 million loan while no
specific allowance was necessary for the $4.6 million loan. As of December 31,
2001, all four loans were current in the payment of principal and interest.
INVESTMENT ACTIVITIES
The Bank's investments are managed by the Investment Department.
Purchases and sales are required to be reported monthly to both the Investment
Committee composed of members of the Board of Directors, as well as the
President and Chief Executive Officer and the Chief Financial Officer.
The Investment Department is authorized to purchase and sell federal
funds, interest bearing deposits in banks, banker's acceptances of commercial
banks insured by the FDIC, mortgage and other assets-backed securities, Puerto
Rico and U.S. Government and agency obligations, municipal securities rated A or
better by any of the nationally recognized rating agencies and commercial paper
rated P-1 by Moody's Investors Service, Inc or A-1 by Standard and Poor's, a
Division of the McGraw-Hill Companies, Inc. In addition, the Investment
Department is responsible for the pricing and sale of deposits and reverse
repurchase agreements. See "Sources of Funds-Deposits and Borrowings" and
"Equity Risk Investments."
The Bank's investment strategy is affected by both the rates and terms
available on competing investments and tax and other legal considerations.
9
The following table presents the carrying value of investments as of
year end for each of the years indicated:
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
Held to maturity:
US Government and agency obligations ...... $ 1,788,000 $ 1,367,417 $ 1,029,450
Puerto Rico Government and agency obligations 22,607 13,769 16,668
Commercial paper .......................... 59,992 34,994 --
Corporate notes ........................... 66,460 51,420 17,165
Mortgage and other asset-backed securities 432,716 189,087 111,249
----------- ----------- -----------
Total ............................. 2,369,775 1,656,687 1,174,532
----------- ----------- -----------
Available for sale:
US Government and agency obligations .... 196,446 -- --
Corporate notes ......................... 56,080 -- --
Mortgage-backed securities .............. 29,156 27,806 22,185
----------- ----------- -----------
Total ............................ 281,682 27,806 22,185
----------- ----------- -----------
Trading securities- mainly mortgage-backed
securities ................................ 4,609 2,161 1,289
----------- ----------- -----------
Total investments ........................... $ 2,656,066 $ 1,686,654 $ 1,198,006
=========== =========== ===========
At December 31, 2001, the only investment of an issuer which aggregate balance
exceeded 10% of the consolidated stockholders, equity follows:
NAME OF ISSUER INVESTMENT CATEGORY CARRYING VALUE FAIR VALUE
Constellation Energy Group, Inc. Commercial paper - matures next business day $ 39,993 $ 39,993
The carrying amount of investment securities at December 31, 2001, by
contractual maturity (excluding mortgage and others asset- backed securities),
are shown below:
CARRYING WEIGHTED
AMOUNT AVERAGE YIELD
----------- -------------
(IN THOUSANDS)
US Government and agency obligations:
Due within one year or less .................... $ 198,597 1.96%
Due after one year through five years .......... 1,419,035 4.59
Due after five years through ten years ......... 254,585 5.75
Due after ten years ............................ 112,229 7.03
----------- ------
1,984,446 4.62
----------- ------
Puerto Rico Government and agency obligations:
Due within one year ............................ 600 7.60
Due after one year through five years .......... 6,000 4.88
Due after five years through ten years ......... 14,012 7.11
Due after ten years ............................ 1,995 6.15
----------- ------
22,607 6.45
----------- ------
Other:
Due within one year ............................ 59,992 2.82
Due after one year through five years .......... 45,300 4.16
Due after ten years ............................ 77,240 4.99
----------- ------
182,532 4.07
----------- ------
Total .................................. 2,189,585 4.59
Mortgage and other asset-backed securities ....... 466,481 5.17
----------- ------
Total .................................. $ 2,656,066 4.69%
=========== ======
10
Mortgage and other asset-backed securities at December 31, 2001,
consists of:
(IN THOUSANDS)
Trading securities:
Government National Mortgage Association (GNMA)
certificates ....................................... $ 2,579
Fannie Mae (FNMA) certificates .......................... 2,030
---------
Total .............................................. 4,609
---------
Available for sale- Collaterized Mortgage Obligation
(CMO) certificates ................................. 29,156
---------
Held to maturity:
Federal Home Loan Mortgage Corporation Certificates ..... 13,475
GNMA certificates ....................................... 18,500
FNMA certificates ....................................... 10,011
CMO certificates ........................................ 319,386
Other ................................................... 71,344
---------
Total held to maturity ............................. 432,716
---------
Total mortgage and other asset-backed
securities ....................................... $ 466,481
=========
SOURCES OF FUNDS
GENERAL. Deposits, reverse repurchase agreements, Federal Home Loan
Bank ("FHLB") advances and term notes are the primary sources of the Bank's
funds for use in lending and for other general business purposes. In addition,
the Bank obtains funds in the form of loan repayments and income from operations
and the maturities and repayments of securities. Loan repayments are a
relatively stable source of funds, while net increases in deposits and reverse
repurchase agreements are significantly influenced by general interest rates and
money market conditions. Short-term borrowings from the FHLB of New York is used
to compensate for reductions in normal sources of funds such as savings inflows
at less than projected levels.
DEPOSITS. The Bank offers a diversified choice of deposit accounts. At
December 31, 2001, the Bank had total deposits of $3.2 billion (excluding
accrued interest payable), of which $465.3 million or 14.50% consisted of
savings deposits, $141.4 million or 4.41% consisted of interest bearing demand
deposits, $123.9 million or 3.86% consisted of noninterest bearing deposits, and
$2.5 billion or 77.23% consisted of time deposits. Time deposits include $1.6
billion of brokered deposits. These accounts have historically been a stable
source of funds. The Bank also offers negotiable order of withdrawal ("NOW")
accounts, Super Now Accounts, special checking accounts and commercial demand
accounts. At December 31, 2001, the scheduled maturities of time certificates of
deposit in amounts of $100,000 or more are as follows:
(IN THOUSANDS)
3 months or less .......................................... $ 227,255
over 3 months through 6 months ............................. 64,411
over 6 months through 12 months ............................ 52,944
over 12 months ............................................. 63,030
---------
Total ............................................ $ 407,640
=========
The following table sets forth the average amount and the average rate
paid on the following deposit categories for the years ended December 31:
2001 2000 1999
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ------- ----------- ------- ----------- -------
(DOLLARS IN THOUSANDS)
Time deposits ............ $ 2,177,399 5.21% $ 1,765,493 6.34% $ 1,377,977 5.44%
Savings deposits ......... 432,626 2.96 407,636 3.06 405,288 3.07
Interest bearing demand
deposits ............... 100,960 3.45 97,168 3.28 105,774 2.93
Noninterest bearing demand
deposits ............... 136,251 -- 118,632 -- 120,059 --
----------- ----- ----------- ----- ----------- -----
Total .......... $ 2,847,236 4.55% $ 2,388,929 5.34% $ 2,009,098 4.51%
=========== ===== =========== ===== =========== =====
The increase in deposits during the last three years is mainly the
result of the increase in the volume of business.
11
BORROWINGS. The following table sets forth the borrowings of the Bank
at the dates indicated:
DECEMBER 31,
---------------------------------------------
2001 2000 1999
----------- ----------- ---------
(IN THOUSANDS)
Reverse repurchase agreements ..... $ 2,059,646 $ 1,179,073 $ 729,968
Advances from FHLB ................ 120,000 120,000 70,000
Term notes ........................ 43,000 48,000 79,000
----------- ----------- ---------
Total ................... $ 2,222,646 $ 1,347,073 $ 878,968
=========== =========== =========
The Bank has made use of institutional reverse repurchase agreements in
order to obtain funding, primarily through investment banks and brokerage firms.
Such agreements are collateralized with investment securities. The Bank had $2.1
billion in total reverse repurchase agreements outstanding at December 31, 2001,
at a weighted average rate of 4.19%. Reverse repurchase agreements outstanding
as of December 31, 2001, mature as follows: $503.3 million within 30 days;
$303.2 million in 2001; $164.6 million in 2005; $47.5 million in 2006; and $1.04
billion thereafter.
Westernbank also obtains advances from FHLB of New York. As of December
31, 2001, Westernbank had $120.0 million in outstanding FHLB advances at a
weighted average rate of 5.10%. Advances from FHLB mature as follows: $14.0
million in 2003; $14.0 million in 2005; $50.0 million in 2006; and $42.0 million
in 2010.
At December 31, 2001, the Bank had outstanding $43.0 million of term
notes payable, consisting of variable rate notes (83% to 89% of three month
LIBID rate), at a weighted average rate of 1.66%. At such date, $43.0 million
mature in 2002.
The following table presents certain information regarding the Bank's
short-term borrowings for the periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Amount outstanding at year end ................... $ 806,548 $ 170,225 $ 174,266
Monthly average outstanding balance .............. 353,003 274,669 171,914
Maximum outstanding balance at any month-end ..... 806,548 472,916 276,956
Weighted average interest rate:
For the year ................................ 3.73% 6.29% 5.22%
At year end ................................. 2.18 6.65 5.86
FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS. As part of the Company's
asset/liability management, the Bank uses interest-rate contracts, which include
interest-rate exchange agreements (swaps and options agreements), to hedge
various exposures or to modify interest rate characteristics of various
statement of financial condition accounts.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES and Statement of Financial Accounting Standards No. 138
("SFAS 138"), ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES. These statements establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statements require that all
derivative instruments be recognized as assets and liabilities at fair value. If
certain conditions are met, the derivative may qualify for hedge accounting
treatment and be designated as one of the following types of hedges: (a) hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment ("fair value hedge"); (b) a hedge of the
exposure to variability of cash flows of a recognized asset, liability or
forecasted transaction ("cash flow hedge") or (c) a hedge of foreign currency
exposure ("foreign currency hedge").
In the case of a qualifying fair value hedge, changes in the value of
the derivative instruments that have been highly effective are recognized in
current period earnings along with the change in value of the designated hedged
item. In the case of a qualifying cash flow hedge, changes in the value of the
derivative instruments that have been highly effective are recognized in other
comprehensive income, until such time those earnings are affected by the
variability of the cash flows of the underlying hedged item. In either a fair
value hedge or a cash flow hedge, net earnings may be impacted to the extent the
changes in the value of the derivative instruments do not perfectly offset
changes in the value of the hedged items. If the derivative is not designated as
a hedging instrument, the changes in fair value of the derivative are recorded
in earnings. The Company does not currently have any foreign currency hedges.
12
Certain contracts contain embedded derivatives. When the embedded
derivative possesses economic characteristics that are not clearly and closely
related to the economic characteristics of the host contract, it should be
bifurcated and carried at fair value and designated as a trading or non-hedging
derivative instrument.
The effect of implementing these Statements on the Company's financial
condition was a decrease in deposits; an increase in other liabilities and an
increase in accumulated other comprehensive income (net of tax of $45,000) by
$2,607,000, $2,472,000 and $135,000, respectively. There was no effect on
results of operations from the implementation of these Statements.
In the case of interest-rate exchange agreements that qualify for
hedging accounting treatment, net interest income (expense) resulting from the
differential between exchanging floating and fixed-rate interest payment is
recorded on a current basis as an adjustment to interest income or expense on
the corresponding hedged assets and liabilities.
The Company utilizes various derivative instruments for hedging
purposes and other than hedging purposes such as asset/liability management.
These transactions involve both credit and market risk. The notional amounts are
amounts in which calculations and payments are based. Notional amounts do not
represent direct credit exposures. Direct credit exposure is limited to the net
difference between the calculated amounts to be received and paid, if any. The
actual risk of loss is the cost of replacing, at market, these contracts in the
event of default by the counterparties. The Company controls the credit risk of
its derivative financial instruments agreements through credit approvals, limits
and monitoring procedures.
The Company enters into interest-rate swap contracts in managing its
interest rate exposure. Interest-rate swap contracts generally involve the
exchange of fixed and floating-rate interest-payment obligations without the
exchange of the underlying principal amounts. Entering into interest-rate swap
contracts involves not only the risk of dealing with counterparties and their
ability to meet the terms of the contracts, but also the interest rate risk
associated with unmatched positions. Interest rate swaps are the most common
type of derivative contract that the Company utilizes. Situations in which the
Company utilizes interest rate swaps are: a) to convert its fixed-rate
certificates of deposit (liabilities) to a variable rate, and b) to convert its
variable rate - term notes and FHLB advances (liabilities) to a fixed rate. By
entering into the swap, the principal amount of the hedged item would remain
unchanged but the interest payment streams would change.
Interest-rate swap contracts used to convert its fixed-rate
certificates of deposit (liabilities) to a variable rate, mature between ten to
twenty years with a right by the counterparty to call after the first
anniversary. The Company has an identical right to call the certificates of
deposit.
In addition, the Company offers its customers certificates of deposit
which contain an embedded derivative tied to the performance of Standard &
Poor's 500 Composite Stock Index that must be bifurcated from the host deposit
and recognized in the statement of financial condition in accordance with SFAS
133. At the end of five years, the depositor will receive a specified percent of
the average increase of the month-end value of the stock index. If such index
decreases, the depositor receives the principal without any interest. The
Company uses interest rate swap and option agreements with major broker dealer
companies to manage its exposure to the stock market. Under the terms of the
swap agreements, the Company will receive the average increase in the month-end
value of the index in exchange for a quarterly fixed interest cost. Under the
option agreements, the Company also will receive the average increase in the
month-end value of the index but in exchange for the payment of a premium when
the contract is initiated. Since the embedded derivative instrument of the
certificates of deposit and the interest rate swap and option agreements do not
qualify for hedge accounting, these derivative instruments are marked to market
through 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.
Derivatives instruments are generally negotiated over-the-counter
("OTC") contracts. Negotiated OTC derivatives are generally entered into between
two counterparties that negotiate specific agreement terms, including the
underlying instrument, amount, exercise price and maturity.
See Note 19 to the consolidated financial statements for a detail of
derivative transactions.
13
OTHER OFF-BALANCE SHEET INSTRUMENTS. In the ordinary course of
business, the Bank enters into off-balance sheet instruments consisting of
commitments to extend credit, commitments under credit-card arrangements, and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received. The Bank periodically evaluates the credit risks inherent in these
commitments and letters of credit, and establishes loss allowances for such
risks if and when these are deemed necessary.
YIELDS EARNED AND RATES PAID
The net income of the Bank depends primarily upon the difference or
spread between the interest income received on its interest-earning assets and
the interest paid on its interest-bearing liabilities. Net interest income
increased $26.6 million or 27.04% for the year ended December 31, 2001, reaching
$125.1 million, compared to $98.5 million reported in 2000 and $102.2 million in
1999. The increase in 2001 was the result of increases in most of the components
of interest income, but principally from interest income from loans, investment
securities and mortgage and other asset-backed securities, which was partially
offset by increases in interest expense, principally on deposits and reverse
repurchase agreements. The decrease in 2000 was primarily the result of
increases in interest expense on deposit, reverse repurchase agreements and FHLB
advances associated with rising interest rates for most of year 1999. These
expenses offset the increases in interest in interest income from loans,
investment securities, and money market instruments.
The following table reflects the interest income and interest expense,
the average balance, the average yield and the average rate paid for each major
category of interest-earning assets and interest-bearing liabilities for the
periods indicated:
INTEREST AVERAGE BALANCE AVERAGE RATE
------------------------------ ------------------------------------ ------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
-------- -------- -------- ---------- ---------- ---------- ------ ------ ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (1) .................... $207,385 $183,497 $151,398 $2,534,486 $2,023,169 $1,686,477 8.18% 9.07% 8.98%
Mortgage and other asset-
backed securities (2) ...... 28,273 12,387 9,490 411,922 142,911 122,496 6.86 8.67 7.75
Investment securities (3) .... 98,946 84,532 65,926 1,606,744 1,253,011 1,009,945 6.16 6.75 6.53
Money market instruments ..... 8,731 10,171 6,173 203,081 160,224 119,851 4.30 6.35 5.15
-------- -------- -------- ---------- ---------- ---------- ------ ------ ------
Total interest-earning
assets ....................... 343,335 290,587 232,987 4,756,233 3,579,315 2,938,769 7.22 8.12 7.93
-------- -------- -------- ---------- ---------- ---------- ------ ------ ------
Interest-bearing
liabilities:
Deposits ..................... 129,676 127,640 90,554 2,847,236 2,388,929 2,009,098 4.55 5.34 4.51
Reverse repurchase
agreements ................. 79,882 53,968 33,511 1,484,639 847,028 672,657 5.38 6.37 4.98
Advances from FHLB ........... 6,597 6,920 2,809 120,000 106,715 51,476 5.50 6.48 5.46
Term notes ................... 2,114 3,609 3,932 47,798 74,863 83,785 4.42 4.82 4.69
-------- -------- -------- ---------- ---------- ---------- ------ ------ ------
Total interest-bearing
liabilities .................. 218,269 192,137 130,806 4,499,673 3,417,535 2,817,016 4.85 5.62 4.64
-------- -------- -------- ---------- ---------- ---------- ------ ------ ------
Net interest income ............ $125,066 $ 98,450 $102,181 2.37% 2.50% 3.29%
======== ======== ======== ====== ====== ======
Net interest-earning assets .... $256,560 $161,780 $121,753
========== ========== ==========
Net yield on interest-earning
assets (4) ................... 2.63% 2.75% 3.48%
====== ====== ======
Interest-earning assets to
interest-bearing liabilities
ratio ........................ 105.70% 104.73% 104.32%
========== ========== ==========
- ----------
(1) Includes loans held for sale. Average loans exclude non-performing loans.
Loans fees amounted to $4.6 million; $3.5 million; and $4.9 million in
2001, 2000 and 1999, respectively.
(2) Includes mortgage-backed securities available for sale and for trading
purposes.
(3) Includes trading account securities and investments available for sale.
(4) Net interest income divided by average interest-earning assets.
14
The following table sets forth information regarding changes in
interest income and interest expense for the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(changes in volume times old rate) and (2) changes in rates (changes in rate
times old volume). The changes that are not due solely to volume or rate are
allocated based on the proportion of the change in each category.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2001 VS. 2000 2000 VS. 1999
---------------------------------- ----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Interest income:
Loans (1) ......................... $ 38,974 $(15,086) $ 23,888 $ 30,522 $ 1,577 $ 32,099
Mortgage and other assets-backed
securities (2) ................. 17,861 (1,975) 15,886 1,691 1,206 2,897
Investment securities (3) ......... 20,854 (6,440) 14,414 16,333 2,273 18,606
Money market instruments .......... 2,323 (3,763) (1,440) 3,640 358 3,998
-------- -------- -------- -------- -------- --------
Total increase (decrease) in interest
income ............................ 80,012 (27,264) 52,748 52,186 5,414 57,600
-------- -------- -------- -------- -------- --------
Interest expense:
Deposits .......................... 8,824 (6,788) 2,036 18,722 18,364 37,086
Reverse repurchase agreements ..... 32,662 (6,748) 25,914 9,854 10,603 20,457
Advances from FHLB ................ 1,450 (1,773) (323) 3,497 614 4,111
Term notes ........................ (1,165) (330) (1,495) (427) 104 (323)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in interest
expense ........................ 41,771 (15,639) 26,132 31,646 29,685 61,331
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest
income ......................... $ 38,241 $(11,625) $ 26,616 $ 20,540 $(24,271) $ (3,731)
======== ======== ======== ======== ======== ========
- --------
(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale and trading
securities.
(3) Includes investments available for sale.
The following table sets forth, for the periods indicated, certain
ratios reflecting the productivity and profitability of the Company:
YEAR ENDED DECEMBER 31, (1)
-----------------------------------
2001 2000 1999
----- ----- -----
Return on total assets (2) ......................... 1.22% 1.17% 1.27%
Return on common stockholders' equity (3) .......... 27.49 24.75 24.57
Dividend payout ratio to common stockholders (4) ... 19.99 21.42 20.48(5)
Equity-to-asset ratio (6) .......................... 6.29 6.21 6.46
- -------
(1) Averages computed by using beginning and end of year balances.
(2) Net income divided by average total assets.
(3) Net income attributable to common stockholders divided by average
common stockholders' equity.
(4) Common stockholders' dividend declared divided by net income
attributable to common stockholders.
(5) The amount of $2,525,000 dividends corresponding to the second semester
of 1998, which were declared for stockholders of record on January 15,
1999, and paid on January 25, 1999, was excluded from the 1999 ratio
(included in the 1998 ratio).
(6) Average net worth divided by average total assets.
MARKET AREA AND COMPETITION
The Company operates through 35 full service branch offices throughout
Puerto Rico, primarily in the Southwestern portion of the island. In recent
years, the Company has expanded into the San Juan metropolitan area, where it
now has four branches. In addition, the Company has four branches in
northeastern Puerto Rico. As of December 31, 2001, the Company was the third
largest locally controlled banking company headquartered in Puerto Rico, based
on total assets.
The Company competes mainly with other commercial banks in attracting
and retaining deposits and in making real estate and commercial loans. At year
end 2001, there were approximately 13 other banks, including affiliates of banks
headquartered in the United States, Canada and Spain, operating branches in
Puerto Rico.
15
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act ("CRA"), as implemented by federal
regulations, a financial institution has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires federal examiners, in connection with the examination of a financial
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Company has a Compliance Committee,
which oversees the planning of products, and services offered to the community,
especially those aimed to serve low and moderate income communities. The CRA
rated the Company as having a "satisfactory record of meeting community credit
needs."
EMPLOYEES
At December 31, 2001, the Company had 817 full-time employees,
including its executive officers; and 6 part time employees.
REGULATION
FEDERAL REGULATION. The Company is a financial holding company subject
to the regulation, supervision, and examination of the Federal Reserve Board
under the Bank Holding Company Act of 1956, as amended. The Company is required
to file periodic reports and other information with the Federal Reserve Board,
and the Federal Reserve Board may conduct examinations of the Company.
The Company is subject to capital adequacy guidelines of the Federal
Reserve Board. The guidelines apply on a consolidated basis and require bank
holding companies to maintain a ratio of Tier 1 capital to total average assets
of 4.0% to 5.0%. There is a minimum ratio of 3.0% established for the most
highly rated bank holding companies. The Federal Reserve Board's capital
adequacy guidelines also require bank holding companies to maintain a minimum
ratio of qualifying total capital to risk-weighted assets of 8.0%, and a minimum
ratio of Tier 1 capital to risk-weighted assets of 4.0%. As of December 31,
2001, the Company's ratio of Tier 1 capital to total average assets was 7.17%,
its ratio of Tier 1 capital to risk-weighted assets was 11.64%, and its ratio of
qualifying total capital to risk-weighted assets was 12.65%.
The Company's ability to pay dividends to its stockholders and expand
its line of business through the acquisition of new banking or nonbanking
subsidiaries can be restricted if its capital falls below levels established by
the Federal Reserve Board's guidelines. In addition, any bank holding company
whose capital falls below levels specified in the guidelines can be required to
implement a plan to increase capital.
The Federal Reserve Board is empowered to initiate cease and desist
proceedings and other supervisory actions for violations of the Bank Holding
Company Act, or the Federal Reserve Board's regulations, orders or notices
issued thereunder. Under applicable regulations, banks and bank holding
companies which do not meet minimum capital adequacy guidelines are considered
to be undercapitalized and are required to submit an acceptable plan for
achieving capital adequacy.
Federal Reserve Board approval is required if the Company seeks to
acquire direct or indirect ownership or control of any voting shares of a bank
if, after such acquisition, the Company would own or control directly or
indirectly more than 5% of the voting stock of the bank. Federal Reserve Board
approval also must be obtained if a financial holding company acquires all or
substantially all of the assets of a bank or merges or consolidates with another
bank holding company.
Under the Change in Bank Control Act, persons who intend to acquire
control of a financial holding company, either directly or indirectly or through
or in concert with one or more persons, must give 60 days' prior written notice
to the Federal Reserve Board. "Control" would exist when an acquiring party
directly or indirectly has voting control of at least 25% of the Company's
voting securities or the power to direct the management or policies of the
Company. Under Federal Reserve Board regulations, a rebuttable presumption of
control would arise with respect to an acquisition where, after the transaction,
the acquiring party has ownership, control or the power to vote at least 10%
(but less than 25%) of the Company's common stock.
Under Puerto Rico law, no person or company may acquire direct or
indirect control of a holding company without first obtaining the prior approval
of the Puerto Rico Commissioner of Financial Institutions (the "Puerto Rico
Commissioner"). Control is defined to mean the power to, directly or indirectly,
direct or decisively influence the management or the operations of the holding
company.
16
Control is presumed to exist if a person or entity, or group acting in concert,
would become the owner, directly or indirectly, of more than 5% of the voting
stock of the holding company as a result of the transfer of voting stock, and
such person, entity or group did not own more than 5% of the voting stock prior
to the transfer.
The Company is required to give the Federal Reserve Board prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, will be equal to 10% or more of the Company's consolidated net worth.
The Federal Reserve Board may disapprove any purchase or redemption if it
determines that the proposal would constitute an unsafe and unsound practice, or
would violate any law, regulation, order or directive of the Federal Reserve
Board, or any condition imposed by, or written agreement with, the Federal
Reserve Board. Such notice and approval is not required for a bank holding
company that would be treated as "well capitalized" under applicable regulations
of the Federal Reserve Board, that has received a composite "1" or "2" rating at
its most recent bank holding company inspection by the Federal Reserve Board,
and that is not the subject of any unresolved supervisory issues.
Notwithstanding the foregoing, any redemption of the Company's preferred stocks
will require the prior approval of the Federal Reserve Board.
On October 26, 2001, the President signed into law comprehensive
anti-terrorism legislation known as the USA Patriot Act. Title III of the USA
Patriot Act requires financial institutions to help prevent, detect and
prosecute international money laundering and the financing of terrorism. The
Company's bank has adapted its systems and procedures to accomplish this. The
Secretary of the Treasury has proposed additional regulations to further
implement Title III. Although the Company cannot predict when and in what form
these regulations will be adopted, the Company believes that the cost of
compliance with Title III of the USA Patriot Act is not likely to be material to
the Company.
PUERTO RICO BANKING LAW. Westernbank is a bank chartered under the
Puerto Rico Banking Law and its deposit accounts are insured up to applicable
limits by the FDIC under SAIF and BIF. Westernbank is subject to extensive
regulation by the Puerto Rico Commissioner as its chartering agency, and by the
FDIC as the deposit insurer. Westernbank must file reports with the Puerto Rico
Commissioner and the FDIC concerning its activities and financial condition, and
it must obtain regulatory approval prior to entering into certain transactions,
such as mergers with, or acquisitions of, other depository institutions and
opening or acquiring branch offices. The Puerto Rico Commissioner and the FDIC
conduct periodic examinations to assess Westernbank's compliance with various
regulatory requirements. This regulation and supervision is intended primarily
for the protection of the deposit insurance funds and depositors. The regulatory
authorities have extensive discretion in connection with the exercise of their
supervisory and enforcement activities, including the setting of policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.
Westernbank derives its lending, investment and other powers primarily
from the applicable provisions of the Puerto Rico Banking Law and the
regulations adopted thereunder. That law governs the responsibilities of
directors, officers and stockholders, and the corporate powers, savings,
lending, capital and investment requirements and other activities of
Westernbank. The Puerto Rico Commissioner has extensive rulemaking power and
administrative discretion under the Puerto Rico Banking Law, and generally
examines Westernbank on an annual basis.
The Puerto Rico Banking Law requires that at least 10% of the yearly
net income of Westernbank be credited annually to a reserve fund. This must be
done every year until the reserve fund is equal to the total paid-in capital for
common stock and preferred stock. At December 31, 2001, Westernbank had an
adequate reserve fund established. The Puerto Rico Banking Law also provides
that when the expenditures of a bank are greater than the receipts, the excess
is charged against the undistributed profits of the bank, and the balance, if
any, is charged against and reduces the reserve fund. If there is no reserve
fund sufficient to cover the entire amount, the excess amount is charged against
the capital account and no dividend can be declared until the capital has been
restored to its original amount and the reserve fund to 20% of the original
capital.
Under the Puerto Rico Banking Law, Westernbank must maintain a legal
reserve in an amount equal to at least 20% of Westernbank's demand liabilities,
except certain government deposits. At December 31, 2001, Westernbank had a
legal reserve of 186.68%.
The Puerto Rico Regulatory Financial Board (the "Financial Board")
which is part of the Office of the Commissioner, has the authority to regulate
the maximum interest rates and finance charges that may be charged on loans to
individuals and unincorporated businesses in the Commonwealth of Puerto Rico. In
February 1992 and again in November 1997, the Financial Board approved
regulations which provide that the applicable interest rate on loans to
individuals and unincorporated businesses is to be determined by free
competition. The Financial Board also has authority to regulate the maximum
finance charges on retail installment sales contracts, including credit card
purchases, which are currently set at 21%. There is no maximum rate set for
installment sales contracts involving motor vehicles, commercial, agricultural
and industrial equipment, commercial electric appliances, and insurance
premiums.
CAPITAL REQUIREMENTS. Westernbank is subject to minimum capital
requirements imposed by the FDIC that are substantially similar to the capital
requirements imposed on the Company. The FDIC regulations require that
Westernbank maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8.0%, and a minimum ratio of Tier 1 capital to
risk-weighted assets of 4.0%. In addition, under the minimum leverage-based
capital requirement adopted by the FDIC, Westernbank must maintain a ratio of
17
Tier 1 capital to average total assets (leverage ratio) of at least 3% to 5%,
depending on Westernbank's CAMELS rating. As of December 31, 2001, Westernbank's
ratio of total capital to risk--weighted assets was 12.15%, its ratio of Tier 1
capital to risk-weighted assets was 11.13%, and its ratio of Tier 1 capital to
average total assets was 6.86%. Capital requirements higher than the generally
applicable minimum requirements may be established for a particular bank if the
FDIC determines that a bank's capital is, or may become, inadequate in view of
its particular circumstances. Failure to meet capital guidelines could subject a
bank to a variety of enforcement actions, including actions under the FDIC's
prompt corrective action regulations.
ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. State banks are limited
in their investments and activities engaged in as principal to those permissible
under applicable state law and that are permissible for national banks and their
subsidiaries, unless such investments and activities are specifically permitted
by the Federal Deposit Insurance Act or the FDIC determines that such activity
or investment would pose no significant risk to the SAIF and BIF. The FDIC has
by regulation determined that certain real estate investment activities do not
present a significant risk to the SAIF and BIF, provided they are conducted in
accordance with the regulations. Provisions of the Gramm-Leach-Bliley Act,
passed in 1999, permit national banks to establish financial subsidiaries that
may engage in the activities permissible for financial holding companies, other
than insurance underwriting, merchant banking and real estate development and
investment activities. In order to exercise this authority, a bank and its
depository institution affiliates must be well- capitalized, well-managed and
have CRA ratings of at least "satisfactory." For a state bank, such activities
also must be permissible under relevant state law.
ENFORCEMENT. The FDIC, as well as the Puerto Rico Commissioner, has
extensive enforcement authority over insured banks, including Westernbank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and to unsafe or unsound practices.
DEPOSIT INSURANCE. Westernbank is subject to quarterly payments on
semiannual insurance premium assessments for its FDIC deposit insurance.
However, the FDIC has recently announced that it may have to impose premiums
commencing in 2002. Westernbank is subject to separate assessments to repay
bonds ("FICO bonds") issued in the late 1980's to recapitalize the former
Federal Savings and Loan Insurance Corporation. The assessment for the payments
on the FICO bonds for the quarter beginning on January 1, 2002 is 1.82 basis
points for BIF- assessable and SAIF-assessable deposits. Most of Westernbank's
deposits are presently insured by SAIF.
FDIC insurance on deposits may be terminated by the FDIC, after notice
and hearing, upon a finding by the FDIC that the insured bank has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound condition
to continue operations as an insured bank, or has violated any applicable law,
regulation, rule or order of or condition imposed by or written agreement
entered into with the FDIC.
TRANSACTIONS WITH AFFILIATES OF WESTERNBANK. Transactions between
Westernbank and any of its affiliates, including the Company, are governed by
sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any
company or entity that controls, is controlled by or is under common control
with the bank. Generally, sections 23A and 23B (1) limit the extent to which a
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of the bank's capital stock and surplus, and
limit such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (2) require that all such transactions be on
terms that are consistent with safe and sound banking practices. The term
"covered transactions" includes the making of loans, purchase of or investment
in securities issued by the affiliate, purchase of assets, issuance of
guarantees and other similar types of transactions. Most loans by a bank to any
of its affiliates must be secured by collateral in amounts ranging from 100 to
130 percent of the loan amount, depending on the nature of the collateral. In
addition, any covered transaction by a bank with an affiliate and any sale of
assets or provision of services to an affiliate must be on terms that are
substantially the same, or at least as favorable, to the bank as those
prevailing at the time for comparable transactions with nonaffiliated companies.
In addition, Sections 22 (h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors, and principal
stockholders. Under Section 22 (h), loans to a director, an executive officer
and to a greater than 10% stockholder of a financial institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the financial
institution's loans to one borrower limit (generally equal to 15% of the
18
institution's unimpaired capital and surplus). Section 22 (h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the financial
institution. Section 22 (h) also requires prior board approval for certain
loans, and the aggregate amount of extensions of credit by a financial
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22 (h) places additional restrictions on loans
to executive officers.
SAFETY AND SOUNDNESS STANDARDS. Westernbank is subject to certain FDIC
standards designed to maintain the safety and soundness of individual banks and
the banking system. The FDIC has prescribed safety and soundness guidelines
relating to (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
exposure; (v) asset growth and quality; (vi) earnings; and (vii) compensation
and benefit standards for officers, directors, employees and principal
stockholders. A state nonmember bank not meeting one or more of the safety and
soundness guidelines may be required to file a compliance plan with the FDIC.
PROMPT CORRECTIVE ACTION. Under the FDIC's prompt corrective action
regulations, insured institutions will be considered (i) "well capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater
(provided that the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive to meet and maintain a
specified capital level for any capital measure), (ii) "adequately capitalized"
if the institution has a total risk-based capital ratio of 8% or greater, a Tier
1 risk based capital ratio of 4% or greater and a leverage ratio of 4% or
greater (3% or greater if the institution is rated composite CAMELS 1 in its
most recent report of examination and is not experiencing or anticipating
significant growth), (iii) "undercapitalized" if the institution has a total
risk-based capital ratio that is less than 8%, or a Tier 1 risk-based ratio of
less than 4% and a leverage ratio that is less than 4% (3% if the institution is
rated composite CAMELS 1 in its most recent report of examination and is not
experiencing or anticipating significant growth), (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, Tier 1 risk-based capital ratio of less than 3% or a leverage
ratio that is less than 3%, and (v) "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%. Under certain circumstances, the FDIC can reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At December 31, 2001, Westernbank qualified as a
"well capitalized" institution.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency,
which would be the FDIC for Westernbank. An undercapitalized institution also is
generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches, or engaging in any new line of
business, except in accordance with an accepted capital restoration plan or with
the approval of the FDIC. In addition, the FDIC may take any other action that
it determines will better carry out the purpose of prompt corrective action
initiatives.
DIVIDEND RESTRICTIONS. Westernbank is not permitted to pay dividends
if, as the result of the payment, it would become undercapitalized, as defined
in the prompt corrective action regulations of the FDIC. In addition, if
Westernbank becomes "undercapitalized" under these regulations, payment of
dividends would be prohibited without the prior approval of the FDIC.
Westernbank also could be subject to these dividend restrictions if the FDIC
determines that Westernbank is in an unsafe or unsound condition or engaging in
an unsafe or unsound practice.
OTHER. The Gramm-Leach-Bliley Act imposes certain obligations on
financial institutions, including state-chartered banks like Westernbank, to
develop privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request, and establish procedures and
practices to protect and secure customer data.
FEDERAL HOME LOAN BANK SYSTEM
Westernbank is a member of the FHLB System. The System consists of 12
regional Federal Home Loan Banks, with each subject to supervision and
regulation by the Federal Housing Finance Board. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions.
Westernbank, as a member of the FHLB of New York, is required to acquire and
hold shares of capital stock in that FHLB in an amount equal to; the greater of
1.0% of the aggregate principal amount of its unpaid residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each year,
19
or 5% of its FHLB advances outstanding or one percent of thirty percent of total
assets. At December 31, 2001, the Bank had $38.5 million in FHLB's capital
stock.
Advances from the FHLB of New York are secured by a member's shares of
stock in the FHLB of New York, certain type of mortgages and other assets,
including investment securities. Interest rates charged for advances vary
depending upon maturity and the cost of funds to the FHLB of New York. As of
December 31, 2001, there were $120.0 million in outstanding advances and $649.0
million in securities sold under agreements to repurchase from the FHLB of New
York.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Company's ability to generate sufficient cash
to meet the funding needs of current loan demand, savings deposit withdrawals,
principal and interest payments with respect to outstanding borrowings and to
pay operating expenses. The Company monitors its liquidity in accordance with
guidelines established by the Investment Committee and applicable regulatory
requirements. The Company's need for liquidity is affected by loan demand, net
changes in deposit levels and the scheduled maturities of its borrowings.
Liquidity demand caused by net reductions in deposits is usually caused by
factors over which the Company has limited control.
The Company derives its liquidity from both its assets and liabilities.
Liquidity from assets is provided by receipt of interest and principal payments
and prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. At December 31, 2001, the Company
had approximately $727.8 million in securities and other short-term securities
maturing or repricing within one year or available for sale. Additional
asset-driven liquidity is provided by the remainder of the investment securities
portfolio and securitizable loans.
Liquidity is derived from liabilities by maintaining a variety of
funding sources, including deposits, and other short and long-term borrowing,
such as securities sold under agreements to repurchase ("reverse repurchase
agreements"). Other borrowings funding source limits are determined annually by
each counterparty and depend on the Bank's financial condition and delivery of
acceptable collateral securities. The Bank may be required to provide additional
collateral based on the fair value of the underlying securities. In addition,
the Bank utilizes the National Certificate of Deposit ("CD") Market as a source
of cost effective deposit funding in addition to local market deposit inflows.
Depositors in this market consist of credit unions, banking institutions, CD
brokers and some private corporations or non-profit organizations. The Bank's
ability to acquire brokered deposits can be restricted if it becomes in the
future less than well-capitalized. An adequately-capitalized bank, by
regulation, may not accept deposits from brokers unless it applies for and
receives a waiver from the FDIC. The Company also uses the Federal Home Loan
Bank (FHLB) as a funding source, issuing notes payable, such as advances, and
other borrowings, such as reverse repurchase agreements, through its FHLB member
subsidiary, Westernbank. This funding source requires the Bank to maintain a
minimum amount of qualifying collateral with a fair value of at least 110% and
105% of the outstanding advances and reverse repurchase agreements,
respectively.
As of December 31, 2001, the Bank had line of credit agreements with
three commercial banks permitting the Bank to borrow a maximum aggregate amount
of $75.0 million (no borrowings were made during the year ended December 31,
2001 under such lines of credit). The agreements provide for unsecured advances
to be used by the Company on an overnight basis. Interest rate is negotiated at
the time of the transaction. The credit agreements are renewable annually.
The Company's liquidity targets are reviewed monthly by the Investment
Committee and are based on the Company's commitment to make loans and
investments and its ability to generate funds.
The Bank's investment portfolio at December 31, 2001 had an average
maturity of 73 months. However, no assurance can be given that such levels will
be maintained in future periods.
CAPITAL, DIVIDENDS, STOCK SPLIT AND OPTION PLANS
Total shareholders' equity as a measure of capital increased by
approximately $137.3 million in 2001 and $26.8 million in 2000.
In June 1998, Westernbank issued 1,219,000 shares of 7.125%
Non-cumulative, Convertible Monthly Income Preferred Stock, Series A, with a
liquidation preference of $25.00 per share. Proceeds from the issuance of
preferred stock amounted to $29.1 million, net of $1.3 million of issuance
costs. Each share is convertible, at the holder's option, at any time on or
after the 90th date following the issue date, into .995 shares of the Company's
common stock, subject to adjustment upon certain events. The per share
conversion ratio equates to a price of $25.125 per share of common stock.
20
In April and June 1999, Westernbank issued 2,001,000 shares of 7.25%
Non-cumulative, Non-convertible Monthly Income Series B Preferred Stock, with a
liquidation preference of $25 per share. Proceeds from the issuance of preferred
stock amounted to $48.3 million, net of $1.8 million of issuance costs.
In March and April 2001, the Company issued 2,208,000 shares of its
7.60% Non-cumulative, Non-convertible Monthly Income Preferred Stock, Series C,
with a liquidation preference of $25 per share. Proceeds from issuance of
preferred stock amounted to $53.1 million, net of $2.1 million of issuance cost.
In August 2001, the Company issued 1,791,999 shares of its 7.40%
Non-cumulative, Non-convertible Monthly Income Preferred Stock Series D, with a
liquidation preference of $25 per share. Proceeds from issuance of preferred
stock amounted to $43.2 million, net of $1.6 million of issuance cost.
The Company may redeem, in whole or in part, at any time at the
following redemption prices, if redeemed during the twelve month period
beginning July 1 for 1998 Series A, May 28 for 1999 Series B, March 30 for the
2001 Series C and August 1 for the 2001 Series D of the years indicated below,
plus accrued and unpaid dividends, if any, for the current period to the date of
redemption:
REDEMPTION PRICE PER SHARE
--------------------------------------------------------
YEAR SERIES A SERIES B SERIES C SERIES D
------------------------------------------------------------------------------------
2002 $26.00 -- -- --
2003 25.75 -- -- --
2004 25.50 $26.00 -- --
2005 25.25 25.50 -- --
2006 25.00 25.00 $25.50 $25.50
2007 25.00 25.00 25.25 25.25
2008 and thereafter 25.00 25.00 25.00 25.00
Series A, B, C and D Preferred Stocks rank senior to the Company's
common stock as to dividends and liquidation rights. Dividends declared on
preferred stock for the years ended December 31, 2001 and 2000 amounted to $10.3
million and $5.8 million, respectively.
During 2001, 2000 and 1999 the Company acquired and retired shares of
common stock as follows: $28,000 (1,700 shares) in 2001; $4.8 million (498,300
shares) in 2000; and $1.2 million (80,309 shares) in 1999.
Total common stock dividends declared in 2001 amounted to $10.4 million
compared to $8.3 million in 2000.
On January 18, 2002, the Board of Directors approved an increase of its
annual dividend payments to shareholders in 2002 to $0.32 per share. This
represents an increase of 28% over the dividends paid the previous year of $0.25
per share.
On March 7, 2000, the Company's Board of Directors adopted the policy
of paying dividends on a monthly basis. Initial dividend payment under this
policy, were applied retroactively for dividends corresponding to the first
three-month period ending March 31, 2000. Thereafter, dividends on common stock
and preferred stock are being paid on the 15th day of each month for
stockholders of record as of the last day of the previous month.
In June 1999, the Board of Directors approved the 1999 Qualified Stock
Option Plan (the "1999 Qualified Option Plan") and the 1999 Nonqualified Stock
Option Plan (the "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 plans 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. At December 31, 2001, and 2000, the Company had outstanding
2,370,000 and 2,295,000 options, respectively, under the 1999 Qualified
21
Stock Option Plan. These options were granted to various executives' officers
and employees, which will become fully exercisable after five years following
the grant date. During 2001 and 2000, the Company granted 75,000 and 2,295,000
options, respectively, to various executive officers and employees. None of
these options were exercised or forfeited in 2001 and 2000.
On February 28, 1998 and on February 3, 1997, the Bank declared a
two-for-one stock split and a fifteen percentage stock dividend of its common
shares.
COMMONWEALTH TAXATION
GENERAL. Under the Puerto Rico Internal Revenue Code, all companies are
treated as separate taxable entities and are not entitled to file consolidated
tax returns. The Company, Westernbank and Westernbank Insurance, Corp. (the
"Companies") report their income and expenses based on the accrual basis of
accounting and file their Puerto Rico tax returns on a calendar year basis.
INCOME TAXES. The Companies are subject to Puerto Rico regular income
tax on income earned from all sources up to a maximum rate of 39%.
The Puerto Rico income tax act disallows any interest deduction which
is allocable to income earned from tax exempt obligations acquired after
December 31, 1987. For purposes of the above determination, each company is
required to allocate interest expense to exempt interest income based on the
ratio that the average exempt obligations bear to the total average assets of
each company.
The Companies are also subject to an alternative minimum tax ("AMT")
equal to 22% of the alternative minimum taxable income. The alternative minimum
taxable income is equal to each company's taxable income adjusted for certain
items. The principal adjustments for determining each company's alternative
minimum taxable income are the following: (i) no deduction may be claimed with
respect to the company's interest expense allocable to interest income derived
from tax exempt obligations acquired before January 1, 1988, other than
mortgages guaranteed by the government of Puerto Rico, its agencies,
instrumentalities and political subdivisions, issued before September 1, 1987;
and (ii) the alternative minimum taxable income is increased by 50% of the
amount by which the corporation's book income (adjusted for certain items)
exceeds its alternative minimum taxable income without regard to this
adjustment.
The AMT is payable if it exceeds regular income tax. The excess of AMT
over regular income tax paid in any one year may be used to offset regular
income tax in future years, subject to certain limitations. The Companies income
taxes were based on regular income tax rates.
The Puerto Rico Internal Revenue Code provides a dividend received
deduction of 100% on dividends received from wholly owned subsidiaries subject
to income taxation in Puerto Rico, like Westernbank and Westernbank Insurance
Corp.
For the year ended December 31, 2001, the Company had approximately
$26.4 million of regular taxable income, on which it was required to pay current
income tax of $11.7 million. The income on certain investments is exempt for
income tax purposes. Also, activities relating to the Westernbank International
division are exempt for income tax purposes. As a result of the above, the
Company's effective tax rate is substantially below the statutory rate.
ITEM 2. PROPERTIES
The Company owns the condominium offices space housing its main offices
at 19 West McKinley Street, Mayaguez, Puerto Rico.
The Company's investment in premises and equipment, exclusive of
leasehold improvements, at December 31, 2001, was $33.4 million. The combined
net book value of the Company's main offices as of December 31, 2001 was $1.5
million.
22
The Company's properties, owned (excluding its main offices) or leased,
at book value as of December 31, 2001 follow:
BOOK VALUE OF:
------------------------
LEASEHOLD PROPERTY LEASE
LOCATION IMPROVEMENTS OWNED EXPIRATION DATE(*)
- ---------------------------------------- ------------ -------- ------------------------
(IN THOUSANDS)
Mayaguez, Puerto Rico
Mayaguez Mall ........................ $ 236 $ -- March 20, 2006
Mayaguez Main ........................ 465 N/A
Mayaguez Plaza ....................... 497 N/A
Other location ....................... 180 N/A
Aguadilla-- Aguadilla Mall ............. 162 January 30, 2005
Aguada-- Aguada II ..................... 1,203 July 31, 2002
Camuy .................................. 117 May 3, 2002
Cabo Rojo-- La Hacienda ................ 1,498 N/A
Sabana Grande .......................... 215 N/A
Carolina
Campo Rico ........................... 461 April 31, 2004
Plaza Carolina ....................... 218 January 30, 2009
San German -- La Quinta Shopping
Center ............................... 374 N/A
Bayamon ................................ 483 N/A
Caguas ................................. 576 August 31, 2002
Guaynabo ............................... 4,333 March 31, 2039
Yauco .................................. 679
Land lots for future developments ...... 12,683 N/A
Other properties-- (individually ....... Various dates throughout
less than $100,000) .................. 345 134 November 12, 2006
-------- ---------
Total ................................ $ 8,330 $ 16,529
======== =========
(*) Excludes renewal options.
At December 31, 2001, the Company's future rental commitments under
non-cancelable operating leases aggregated $24.6 million, not considering
renewal options.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary
routine legal proceedings incidental to the business of the Company to which the
Company or any of its subsidiaries is the subject or of which any of their
property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
(NYSE) since December 5, 2001 under the symbol "WHI" (before that date it was
traded on the National Association of Securities Dealers Automated Quotation
(Nasdaq) under the symbol "WBPR"). The following table sets forth the closing
sale prices for the Common Stock for the periods indicated.
HIGH LOW
--------- ---------
2001
1st quarter ... $ 11.88 $ 11.00
2nd quarter ... 13.00 12.00
3rd quarter ... 14.49 13.50
4th quarter ... 16.40 15.96
2000
1st quarter ... $ 10.75 $ 9.13
2nd quarter ... 9.25 7.88
3rd quarter ... 10.19 9.25
4th quarter ... 12.06 11.56
The closing price of the Common Stock on December 31, 2001 was $16.20.
The approximate number of holders of record of the Company's Common Stock at
December 31, 2001 was 642.
The Company's cash dividends corresponding to 2001 and 2000 were as
follows:
RECORD DATE PAYABLE DATE AMOUNT PER SHARE
- ------------------ ------------------ ----------------
YEAR 2001
January 31, 2001 February 15, 2001 $ 0.0208
February 28, 2001 March 15, 2001 0.0208
March 31, 2001 April 15, 2001 0.0209
April 30, 2001 May 15, 2001 0.0208
May 31, 2001 June 15, 2001 0.0208
June 30, 2001 July 15, 2001 0.0209
July 31, 2001 August 15, 2001 0.0208
August 31, 2001 September 15, 2001 0.0208
September 30, 2001 October 15, 2001 0.0209
October 31, 2001 November 15, 2001 0.0208
November 30, 2001 December 15, 2001 0.0208
December 31, 2001 January 15, 2002 0.0209
---------
Total $ 0.2500
=========
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 0.0167
September 30, 2000 October 15, 2000 0.0167
October 31, 2000 November 15, 2000 0.0166
November 30, 2000 December 15, 2000 0.0166
December 31, 2000 January 15, 2001 0.0166
---------
Total $ 0.2000
=========
24
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
SELECTED FINANCIAL AND OTHER DATA
Year Ended December 31,
(Dollars in thousands, except per share data)
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Total Assets: $5,888,194 $4,260,857 $3,374,571 $2,481,176 $1,555,799
Securities purchased under agreements to resell 136,096 125,809 120,655 91,211 42,878
Interest-bearing deposits in other banks and federal
funds sold 46,251 54,805 25,671 7,787 5,442
Investment securities held to maturity, securities
available for sale and trading securities 2,656,066 1,686,654 1,198,006 892,169 631,121
Loans-net and mortgage loans held for sale 2,843,657 2,208,300 1,871,742 1,361,297 784,795
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities: $5,500,285 $4,010,239 $3,150,752 $2,326,894 $1,453,564
Savings deposits 465,267 416,684 409,423 403,753 362,317
Other deposits (excluding accrued interest payable) 2,743,166 2,188,538 1,819,975 1,276,320 676,088
Securities sold under agreement to repurchase 2,059,646 1,179,073 729,968 506,325 281,750
Term notes 43,000 48,000 79,000 84,000 112,000
Advances from Federal Home Loan Bank 120,000 120,000 70,000 31,000
Total Stockholders' Equity 387,909 250,618 223,819 154,282 102,235
- -----------------------------------------------------------------------------------------------------------------------------
Operations Data:
Interest income $ 343,335 $ 290,587 $ 232,987 $ 157,446 $ 113,528
Interest expense 218,269 192,137 130,806 84,308 57,198
---------- ---------- ---------- ---------- ----------
Net interest income 125,066 98,450 102,181 73,138 56,330
Provision for loan losses (12,278) (8,700) (14,000) (6,000) (2,700)
Other income, net 18,181 13,868 12,239 10,154 9,979
Operating expenses (60,310) (53,216) (53,816) (41,705) (35,012)
---------- ---------- ---------- ---------- ----------
Income before income taxes 70,659 50,402 46,604 35,587 28,597
Income taxes 8,504 5,814 9,480 6,892 5,693
---------- ---------- ---------- ---------- ----------
Net income $ 62,155 $ 44,588 $ 37,124 $ 28,695 $ 22,904
========== ========== ========== ========== ==========
Net income attributable to common stockholders $ 51,891 $ 38,789 $ 32,817 $ 27,604 $ 22,904
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------
Basic and Diluted Earnings per Common Share
(after effect of stock splits) $ 1.25 $ 0.93 $ 0.78 $ 0.66 $ 0.54
========== ========== ========== ========== ==========
Dividends per Common Share
(after effect of stock splits) $ 0.25 $ 0.20 $ 0.16 $ 0.12 $ 0.09
========== ========== ========== ========== ==========
25
Years Ended December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Other Selected Data:
Average yield earned on all interest-earning
assets 7.21% 8.12% 7.93% 8.28% 8.50%
Average rate paid on all interest-bearing
liabilities 4.85% 5.62% 4.64% 4.54% 4.41%
Average interest rate spread 2.37% 2.50% 3.29% 3.74% 4.09%
Branch offices 35 35 36 36 35
Ratios
The following table sets forth, for the indicated periods, certain
ratios reflecting the productivity and profitability of the Company:
Years Ended December 31, (1)
------------------------------------------------------
2001 2000 1999 1998 1997
----- ----- ----- ----- -----
Return on assets (2) 1.22% 1.17% 1.27% 1.42% 1.61%
Return on common stockholders' equity (3) 27.49% 24.75% 24.57% 24.42% 24.71%
Equity-to-assets ratio (4) 6.29% 6.21% 6.46% 6.35% 6.53%
Net yield on interest earning assets (5) 2.63% 2.75% 3.48% 3.84% 4.21%
(1) Averages computed by using beginning and end of year balances.
(2) Net income divided by average total assets.
(3) Net income attributable to common stockholders divided by average
common stockholders' equity.
(4) Average net worth divided by average total assets.
(5) Net interest income divided by average interest-earning assets.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This financial discussion contains an analysis of the consolidated
financial position and financial performance of W Holding Company, Inc. and its
wholly owned subsidiaries, Westernbank Puerto Rico ("Westernbank") and
Westernbank Insurance, Corp. The Company was organized under the laws of the
Commonwealth of Puerto Rico in February 1999 to become the bank holding company
of Westernbank. Westernbank offers a full array of business and consumer
financial services, including banking, trust services, and brokerage services.
Westernbank Insurance Corp. is a general insurance agent placing property,
casualty, life and disability insurance.
The Company's principal source of earnings is its net interest income.
This is the difference between interest income on loans, investments,
mortgage-backed securities and other assets and its interest expense on deposits
and borrowings, including securities sold under repurchase agreements, term
notes and advances from Federal Home Loan Bank. 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. In
addition, the Company's net income is 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-liability management program
is to invest funds judiciously and reduce interest rate risks while optimizing
net income and maintaining adequate liquidity levels. The Company uses several
tools to manage the risks associated with the composition and repricing of
assets and liabilities. Therefore, management has followed a conservative
practice inclined towards the preservation of capital with adequate returns. The
Company's Investment Committee, which includes the Board of Directors and senior
management, is responsible for the asset-liability management oversight. The
Investment Department is responsible for implementing the policies established
by the Investment Committee.
The Company's total assets increased by $1.63 billion from year-end
2000 to year-end 2001. This growth reflects a $635.4 million increase in net
loans and a $969.4 million increase in investment securities. Liabilities to
fund the growth increased by $1.49 billion.
The Company also has assets managed by its trust division. This
division offers a variety of IRA products and manages 401 (K) and Keogh
retirement plans, custodian and corporate accounts. At December 31, 2001, total
assets managed by Westernbank's trust amounted to $110.2 million, an increase of
$109.9 million or 521.05% when compared to $211,000 as of December 31, 2000.
Such increase was the result of effective aggressive marketing efforts
throughout the year.
Net income increased to $62.2 million in 2001, up 39.40% from $44.6
million in 2000, and net income available to common stockholders increased to
$51.9 million in 2001, up 33.78% from $38.8 million in 2000. The increase for
the year ended December 31, 2001 was the result of increases in all components
of interest income, but principally from interest income from loans, investment
securities and mortgage and other asset-backed securities, which was partially
offset by increases in interest expense, principally on deposits and reverse
repurchase agreements.
FINANCIAL CONDITION
The Company had total assets of $5.89 billion, $4.26 billion and $3.37
billion as of December 31, 2001, 2000 and 1999, respectively. As of December 31,
2001, total liabilities amounted to $5.50 billion, an increase of $1.49 billion
or 37.16% when compared to $4.01 billion as of December 31, 2000. In 2000, total
liabilities totaled $4.01 billion, an increase of $859.5 million or 27.28% from
December 31, 1999.
INTEREST-EARNING ASSETS
Interest-earning assets amounted to $5.74 billion at December 31, 2001,
an increase of $1.62 billion or 39.28% when compared to $4.12 billion as of
December 31, 2000, which represented an increase of $878.7 million or 27.07%
when compared to $3.25 billion as of December 31, 1999. The increase in
interest-earnings assets reflects the increases in loans and investment
securities.
During 2001 and 2000, the Bank continued its emphasis on the
origination of commercial real estate loans as well as origination and purchase
of residential mortgage loans. Residential mortgage and construction loans,
including mortgage loans held for sale, increased from $815.9 million as of
December 31, 1999, to $871.8 million as of December 31, 2000, and to $974.3
million as of December 31, 2001. Commercial real estate loans increased from
$677.9 million as of December 31, 1999, to $887.1 million as of December 31,
2000, and to $1.12 billion as of December 31, 2001. Total other loans, which
includes consumer loans (including credit cards), commercial loans (not
collateralized by real estate) increased from $409.0 million at December 31,
1999, to $483.4 million as of December 31, 2000, and to $795.6 million as of
December 31, 2001. This increase was mainly due to the continuous emphasis in
27
the credit granting activity and the acquisition of the entire loan portfolio of
the Puerto Rico branch of Congress Credit Corporation, a subsidiary of First
Union National Bank, N.A. for $163.8 million on June 15, 2001.
Trading, available for sale and held to maturity investment securities,
which principally include United States and Puerto Rico Government and agency
obligations and mortgage and other asset-backed securities increased from $1.20
billion as of December 31, 1999, to $1.69 billion as of December 31, 2000, and
to $2.66 billion as of December 31, 2001, an increase of $488.6 million or
40.79% in 2000, and $969.4 million or 57.48% in 2001.
Securities purchased under agreements to resell increased from $120.7
million as of December 31, 1999, to $125.8 million as of December 31, 2000, and
to $136.1 million as of December 31, 2001, an increase of $5.2 million or 4.27%
and $10.3 million or 8.18%, respectively.
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities amounted to $5.31 billion at December 31,
2001, an increase of $1.48 billion or 38.51% when compared to $3.83 billion as
of December 31, 2000. In 2000, interest-bearing liabilities increased by $827.1
million or 27.53% when compared to $3.00 billion at December 31, 1999.
The increase in interest-bearing liabilities from year-end 2000 to
year-end 2001 reflects an increase of $599.8 million in deposits (excluding
noninterest-bearing accounts and accrued interest payable), $880.6 million in
securities sold under agreements to repurchase, net of a decrease of $5.0
million in term notes. The increase in 2000 was mainly related to a $358.9
million increase in deposits, $449.1 million increase in securities sold under
agreements to repurchase and $50.0 million increase in advances from FHLB, net
of a decrease of $31.0 million in term notes.
The Bank offers a variety of deposit accounts and certificates of
deposit. Savings deposits increased from $409.4 million as of December 31, 1999,
to $416.7 million as of December 31, 2000, and to $465.3 million as of December
31, 2001, an increase of $7.3 million or 1.77% and $48.6 million or 11.66%,
respectively. In addition, other deposits, represented mainly by time deposits,
including brokered deposits and Individual Retirement Account Deposits (IRA's),
increased from $1.82 billion as of December 31, 1999, to $2.19 billion as of
December 31, 2000, and to $2.74 billion as of December 31, 2001, an increase of
$368.6 million or 20.25% in 2000, and $554.6 million or 25.34% in 2001. Other
deposits include brokered deposits amounting to $1.57 billion, $1.27 billion and
$894.8 million as of December 31, 2001, 2000 and 1999, respectively.
STOCKHOLDERS' EQUITY
As of December 31, 2001, total stockholders' equity amounted to $387.9
million, an increase of $137.3 million or 54.78% when compared to $250.6 million
as of December 31, 2000. In 2000, total stockholders' equity increased by $26.8
million or 11.97% when compared to $223.8 million at December 31, 1999. The
increase during 2001 was primarily due to a net income of $62.2 million, the
issuance of 2001 Series C and D preferred stock for $96.3 million (net of cost
of issuance of $3.7 million), offset by cash dividends declared on common and
preferred stock totaling $20.6 million. The increase during 2000 was primarily
due to a net income of $44.6 million, net of cash dividends declared on common
and preferred stocks totaling $14.1 million and of the repurchase of 498,300
shares of common stock for $4.8 million.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the main source of earnings of the
Company. As further discussed in "Quantitative and Qualitative Disclosure About
Market Risk", the Company uses several tools to manage the risks associated with
the composition and repricing of assets and liabilities.
Net interest income increased $26.6 million or 27.04% for the year
ended December 31, 2001, reaching $125.1 million, compared to $98.5 million
reported in 2000 and $102.2 million in 1999. The increase in 2001 was the result
of increases in most of the components of interest income, but principally from
interest income from loans, investment securities and mortgage and other
asset-backed securities, which was partially offset by increases in interest
expense, principally on deposits and reverse repurchase agreements. The decrease
in 2000 was primarily the result of increases in interest expense on deposits,
28
reverse repurchase agreements and FHLB advances associated with rising interest
rates for most of year 1999. These expenses offset the increases in interest
income from loans, investment securities, and money market instruments.
Average interest-earning assets increased $1.18 billion or 32.88% from
2000 to 2001, and $640.5 million or 21.80% from 1999 to 2000. The rise in
average interest-earning assets in both periods is mainly related to increases
in average loans, which is the higher yielding category of interest-earning
assets, followed by a significant increase in investment securities and mortgage
and other asset-backed securities.
The increase in average interest-earning assets was partially offset by
an increase in average interest-bearing liabilities of $1.08 billion or 31.66%
and $600.5 million or 21.32% experienced in 2001 and 2000, respectively. The
increase in average interest-bearing liabilities was mainly related to
significant increases in average deposits and in securities sold under
agreements to repurchase.
Interest income on loans amounted to $207.4 million for the year ended
December 31, 2001, compared to $183.5 million in 2000 and $151.4 million in
1999. Commercial loans - collateralized by real estate as well as other
commercial loans accounted for the majority of the increase in average loans
during 2001. The increase was primarily from a combination of business growth
experienced as a result of the Company continuous emphasis in the credit
granting activity and the purchases of mortgage and commercial loans, which
includes the purchase of the entire loan portfolio of the Puerto Rico branch of
Congress Credit Corporation for $163.8 million. Mortgage loans accounted for the
majority of the increase in average loans in 2000, mainly attributed to the
purchase of mortgage loans portfolios. In addition, commercial real estate loans
contributed to the increase as a result of a business growth experienced during
2000. The average balance on loans increased $511.3 million or 25.27% in 2001,
and $336.7 million or 19.96% in 2000. The average yield on loans increased from
8.98% in 1999, to 9.07% in 2000 and decreased to 8.18% in 2001, as a result of
fluctuation on market interest rates during both years.
Interest income on investment securities amounted to $98.9 million for
the year ended December 31, 2001 compared to $84.5 million in 2000 and $65.9
million in 1999. A rise in average balances of $353.7 million in 2001 and $243.1
million in 2000 caused these increases in income from investment securities for
2001 and 2000. The average yield on investments securities increased from 6.53%
in 1999, to 6.75% in 2000 and decreased to 6.16% in 2001.
Interest income on mortgage and other asset-backed securities and
trading securities amounted to $28.3 million for the year ended December 31,
2001, compared to $12.4 million in 2000 and $9.5 million in 1999. A rise in
average balance of $269.0 million or 188.24% in 2001, and $29.0 million or
25.48% in 2000 mainly caused these increases in income on mortgage and other
asset-backed securities and trading securities for both years. The average yield
on mortgage and other asset-backed securities and trading securities increased
from 7.65% in 1999, to 8.67% in 2000 and decreased to 6.86% in 2001.
Interest income on money market instruments decreased to $8.7 million
for the year ended December 31, 2001, compared to $10.2 million in 2000 and $6.2
million in 1999. The decrease in 2001 was mainly related to a decrease in the
average yield on money market instruments from 6.35% in 2000, to 4.30% in 2001.
The average yield during 1999 was 5.15%. The increase in 2000 was due to a
combination of an increase in the average balance and in the average yield. The
average balance on money market instruments increased by $40.4 million or 33.69%
in 2000 and $42.9 million or 26.75% in 2001.
Interest expense on deposits amounted to $129.7 million for the year
ended December 31, 2001, compared to $127.6 million in 2000 and $90.6 million in
1999. The increase in 2001 was mainly attributed to a rise in the average
balance on deposits. The increase in 2000 was due to a combination of an
increase in the average balance of deposits and in the average rate paid on
them. The average balance of deposits increased $458.3 million or 19.18% in
2001, and $379.8 million or 18.91% in 2000. The average rate paid on deposits
decreased from 5.34% in 2000, to 4.55% in 2001. The average rate paid during
1999 was 4.51%.
Interest expense on securities sold under agreements to repurchase
amounted to $80.0 million for the year ended December 31, 2001, compared to
$54.0 million in 2000, and $33.5 million in 1999. The increase in 2001 was
mainly caused by an increase in the average balance of securities sold under
agreements to repurchase. The increase in 2000 was due to a combination of an
increase in the average balance of securities sold under agreements to
repurchase and in the average rate paid on them. The average balance of
securities sold under agreements to repurchase increased $637.6 million or
75.28% in 2001, and $174.4 million or 25.92% in 2000. The average rate paid on
securities sold under agreements to repurchase decreased from 6.37% in 2000, to
5.38% in 2001. The average rate paid during 1999 was 4.98%.
Interest expense on advances from FHLB amounted to $6.6 million for the
year ended December 31, 2001, compared to $6.9 million in 2000 and $2.8 million
in 1999. The decrease in 2001 was primarily related to a decrease in the average
29
interest rates paid on them from 6.48% in 2000, to 5.50% in 2001. In 2001, the
average balance increased $13.3 million or 12.45%. The increase in 2000 was
mainly due to an increase in the average balance of advances from FHLB of $55.2
million or 107.31%.
Interest expense on term notes totaled $2.1 million for the year ended
December 31, 2001, compared to $3.6 million in 2000 and $3.9 million in 1999.
This decrease is mainly related to a decrease in the average balance of term
notes in 2001 and 2000.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 2001,
amounted to $12.3 million, with an allowance for loan losses at December 31,
2001 of $38.4 million. In 2000, the provision for loan losses amounted to $8.7
million, with an allowance for loan losses at December 31, 2000 of $28.9
million. While for the year ended December 31, 1999 the provision for loan
losses amounted to $14.0 million, with an allowance for loan losses of $24.0
million at December 31, 1999. The decrease in the provision for loan losses of
$5.3 million in 2000 was mainly due to a lower level of delinquencies in the
loan portfolio and a reduction in net loans charged off of $2.1 million.
The allowance for loan losses is a current estimate of the losses
inherent in the present portfolio based on management's ongoing quarterly
evaluations of the loan portfolio. Estimates of losses inherent in the loan
portfolio involve the exercise of judgment and the use of assumptions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The Company follows a systematic methodology to establish and evaluate
the adequacy of the allowance for loan losses. This methodology includes the
consideration of factors such as current economic conditions, trends in the
nature and volume (delinquencies, charge-off, non-accrual and problem loans),
prior loss experience results of periodic credit reviews of individuals loans,
changes in the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and the
Company's internal credit examiners. (see Note 1 to the consolidated financial
statements for a detailed description of methodology). Because of uncertainties
inherent in the estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may change in the near
term.
At December 31, 2001, the allowance for loan losses was $38.4 million,
or 1.33% of total loans, and 271.83% of total non-performing loans, compared
with an allowance for loan losses at December 31, 2000 of $28.9 million, or
1.30% of total loans, and 298.53% of total non-performing loans.
During 2001, accounts amounting to $7.0 million were written-off
against the allowance for loan losses, as compared to $5.4 million in 2000. The
accounts written-off are submitted to the Collections Department recovery unit
for continued collection efforts. Recoveries made from accounts previously
written-off amounted to $1.3 million in 2001 and $1.6 million in 2000.
OTHER INCOME
Service charges on deposit accounts and other fees amounted to $18.9
million for the year ended December 31, 2001, compared to $14.4 million in 2000
and $11.9 million in 1999. The increase of $4.4 million or 30.60% in 2001 as
compared to 2000, was primarily the result of an increase in fees charged to
checking accounts, credit cards and other loan fees and fees from other services
consistent with the Company strategy of increasing its fee base and other
income.
OPERATING EXPENSES
Total operating expenses amounted to $60.3 million for the year ended
December 31, 2001, as compared to $53.2 million in 2000 and $53.8 million in
1999.
Salaries and employee benefits, which are the largest components of
total operating expenses, amounted to $22.9 million for the year ended December
31, 2001, compared to $20.1 million in 2000, and $21.8 million in 1999, an
increase of $2.8 million or 13.74% in 2001, and a decrease of $1.7 million or
7.76% in 2000. The increase in 2001 was mainly due to an increase in personnel
to support the continued expansion of the Company, including the inception of
new lines of businesses, normal salary increases and related employees'
benefits. The decrease in 2000 was primary the result of a strict cost reduction
plan while at the same time, supporting the expansion of the Company.
30
Equipment expenses amounted to $8.8 million in 2001, $8.7 million in
2000, and $6.8 million in 1999, an increase of $155,000 or 1.78% and $1.9
million or 27.25%, respectively. This increase was the result of continued
investment in technological resources to support the Company's expansion,
increases on furniture and fixtures and equipment expenses, including
depreciation and property taxes.
Occupancy expenses amounted to $5.0 million for years 2001, 2000 and in
1999. This is the result of a strict cost reduction plan while at the same time
supporting the expansion of the Company.
Advertising expense amounted to $4.4 million in 2001, $3.3 million in
2000, and $4.1 million in 1999. The increase in 2001 of $1.0 million or 31.18%,
was due to promotional efforts launched in connection to the individual
retirement's accounts campaign as well as for the consumer loans and credit
cards programs. The decrease in 2000 of $724,000 or 17.78%, was the result of
strict cost reduction measures.
All other operating expenses amounted to $19.1 million in 2001 compared
to $16.1 million in 2000 and $16.2 million in 1999. The increase in 2001 was
mainly due to increases in the volume of operations, new businesses and the
inception in new markets. The slight decrease in 2000 resulted from a general
increase in other operating expenses related to the expansion of the Company and
the increase in the volume of business, both of which were significantly offset
by strict cost reduction measures.
PROVISION FOR INCOME TAXES
Under Puerto Rico income tax laws, the Company and its subsidiaries are
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 for the year ended December 31, 2001 amounted to $11.7 million compared to
$7.7 million in 2000 and $13.8 million in 1999. 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. 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, the Company's effective tax rate is
substantially below the statutory rate.
NET INCOME
The Company's net income increased $17.6 million or 39.40% and $7.5 million or
20.11% in 2001 and 2000, respectively. The increase in 2001 resulted from an
increase in net interest income and other income, which was partially offset by
increases in total operating expenses and in the provisions for loan losses and
income taxes. The increase in 2000, is mainly due to a decrease in operating
expenses and in the provision for income taxes and loan losses.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As disclosed in the notes to the consolidated financial statements, the Company
has certain obligations and commitments to make future payments under contracts.
At December 31, 2001, the aggregate contractual obligations and commercial
commitments are:
Payments Due by Period
----------------------------------------------------
Less than 1
Total year 2-5 years After 5 years
---------- ----------- --------- -------------
(Dollars in Thousands)
CONTRACTUAL OBLIGATIONS:
Securities sold under agreements to
repurchase $2,059,646 $806,548 $212,150 $1,040,948
Advances from FHLB 120,000 -- 78,000 42,000
Term notes 43,000 43,000 -- --
Annual rental commitments under
noncancelable operating leases 24,593 1,726 6,109 16,758
Purchase obligation 50,500 12,645 1,606 36,249
---------- -------- -------- ----------
Total $2,297,739 $863,919 $297,865 $1,135,955
========== ======== ======== ==========
OTHER COMMERCIAL COMMITMENTS:
Lines of credit $ 129,406 $ 50,382 $ 79,024 $ --
Stand-by letters of credit 2,340 2,340 -- --
Commitments to extend credit 163,596 83,636 79,960 --
---------- -------- -------- ----------
Total $ 295,342 $136,358 $158,984 $ --
========== ======== ======== ==========
Such commitments will be funded in the normal course of business from
the Bank's principal sources of funds. At December 31, 2001, the Bank had $1.34
billion in certificate of deposit that mature during the following twelve
months. The Bank does not anticipate any difficulty in retaining such deposits.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or with the same magnitude as the
prices of goods and services since such prices are affected by inflation.
NEW ACCOUNTING DEVELOPMENTS
Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 140 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. 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. SFAS 140 supersedes SFAS 125,
although it retains most of SFAS 125's provisions without modification. SFAS 140
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. Adoption of SFAS 140 did not have
an effect on the Company's consolidated financial statements.
Effective April 1, 2001, the Company adopted, the Emerging Issues Task
Force of the Financial Accounting Standards Board ("EITF") No. 99-20. This
document, establishes guidance for (1) recognizing interest income (including
amortization of premiums or discounts) on (a) all credit-sensitive mortgage and
asset-backed securities and (b) certain prepayment-sensitive securities
including agency interest-only strips and (2) determining when these securities
must be written down to fair value because of impairment. Existing generally
accepted accounting principles did not provide interest recognition and
impairment guidance for securities on which cash flows change as a result of
both prepayments and credit losses and, in some cases, interest rate
adjustments. Implementation of EITF No. 99-20 did not have an effect on the
Company's consolidated financial results.
On July 20, 2001, the Financial Accounting Standards Board issued SFAS
No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). Those statements changed the accounting
for business combinations and goodwill in two significant ways. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interest
method is prohibited. SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of that statement, which for the Company, will be January 1, 2002.
The Company does not expect that SFAS 141 and SFAS 142 to have a material effect
on the Company's financial position or results of operations.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
cost. SFAS 143 becomes effective January 1, 2003, and is not expected to have a
material effect on the Company's consolidated financial condition.
In August 2001, the Financial Accounting Standards Board issued SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of", and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the Disposal of a Segment of a Business.
SFAS 144 becomes effective January 1, 2002, and is not expected to have a
material effect on the Company's consolidated financial statements.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
Management considers interest rate risk the Company's most significant
market risk. Interest rate risk is the exposure to adverse changes in net
interest income due to changes in interest rates. Consistency of the Company's
net interest income is largely dependent upon the effective management of
interest rate risk.
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.
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
securitization and sale of long-term, fixed-rate residential mortgage loans,
shortening the amortized maturity of fixed-rate loans and increasing the volume
of variable and adjustable rate loans to reduce the average maturity of the
Company's interest-earning assets. All long-term, fixed-rate single family
residential mortgage loans underwritten according to Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association and Government National
Mortgage Association guidelines are sold for cash upon origination. In addition,
the Company enters into interest rate exchange agreements (swaps) to hedge
variable term notes and fixed callable certificates of deposit.
32
The Company is exposed to changes in the level of Net Interest Income
("NII") in a changing 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 (minus 100 basis points for 2002), and (2) all
scheduled repricing, reinvestments and estimated prepayments, and reissuances
are at such constant, or increase or decrease accordingly; NII will fluctuate as
shown on the table below:
December 31, 2001:
CHANGE IN INTEREST EXPECTED NII AMOUNT
RATE (1) CHANGE % CHANGE
----------------------- ------------- --------- --------
(DOLLARS IN THOUSANDS)
+ 200 Basis Points..... $ 141,560 $ 20,471 16.91%
Base Scenario.......... 121,089 -- --
- 100 Basis Points..... 100,279 (20,810) (17.19)%
December 31, 2000:
CHANGE IN INTEREST EXPECTED NII AMOUNT
RATE (1) CHANGE % CHANGE
----------------------- ------------- --------- --------
(DOLLARS IN THOUSANDS)
+200 Basis Points...... $127,174 $ 3,596 2.91%
Base Scenario.......... 123,578 -- --
- 200 Basis Points..... 118,217 (5,361) (4.34)%
- ----------
Given the current fed fund rate of 1.75% at December 31, 2001, a linear 100
basis points decrease was modeled in the estimated change in interest rate in
place of the linear 200 basis points decrease. 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.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
W Holding Company, Inc.
Mayaguez, Puerto Rico
We have audited the accompanying consolidated statements of financial condition
of W Holding Company, Inc. and its subsidiaries (the "Company") as of December
31, 2001 and 2000, and the related consolidated statements of income, changes in
stockholders' equity and of comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of W Holding Company, Inc. and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments effective January 1,
2001.
Deloitte & Touche LLP
San Juan, Puerto Rico
February 22, 2002
Stamp No. 1775095
affixed to original.
34
W HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
ASSETS
Cash and due from banks $ 62,414 $ 45,936
Money market instruments:
Securities purchased under agreements to resell 136,096 125,809
Federal funds sold 20,037 43,500
Interest-bearing deposits in banks 26,214 11,305
Trading securities, with an amortized cost of $4,624 in 2001
and $2,146 in 2000 4,609 2,161
Investment securities available for sale, with an amortized cost
of $281,963 in 2001 and $27,735 in 2000 281,682 27,806
Investment securities held to maturity, with a fair value of
$2,362,836 in 2001 and $1,620,264 in 2000 2,369,775 1,656,687
Federal Home Loan Bank stock, at cost 38,450 29,800
Mortgage loans held for sale, at lower of cost or fair value 5,253 4,640
Loans, net of allowance for loan losses of $38,364 in 2001 and
$28,928 in 2000 2,838,404 2,203,660
Accrued interest receivable 32,820 46,951
Foreclosed real estate held for sale, net 3,013 2,454
Premises and equipment, net 40,673 41,738
Deferred income taxes, net 13,862 10,445
Other assets 14,892 7,965
------------- ------------
TOTAL $ 5,888,194 $ 4,260,857
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 3,233,912 $ 2,636,695
Securities sold under agreements to repurchase 2,059,646 1,179,073
Advances from Federal Home Loan Bank 120,000 120,000
Term notes 43,000 48,000
Advances from borrowers for taxes and insurance 2,435 1,776
Other liabilities 41,292 24,695
------------- ------------
Total liabilities 5,500,285 4,010,239
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $1.00 par value per share (liquidation preference $25 per
share); 20,000,000 shares authorized; issued and outstanding 7,219,999
shares in 2001 and 3,220,000 shares in 2000 7,220 3,220
Common stock - $1.00 par value per share; authorized 300,000,000 shares;
issued and outstanding 41,500,000 shares in 2001 and 41,501,700 shares in 2000 41,500 41,502
Paid-in capital 187,628 95,313
Retained earnings:
Reserve fund 23,476 17,302
Undivided profits 128,583 93,241
Accumulated other comprehensive income (loss) (498) 40
------------- ------------
Total stockholders' equity 387,909 250,618
------------- ------------
TOTAL $ 5,888,194 $ 4,260,857
============= ============
See notes to consolidated financial statements.
35
W HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
INTEREST INCOME:
Loans, including loan fees $ 207,385 $ 183,497 $ 151,398
Investment securities 98,946 84,532 65,926
Mortgage-backed securities 28,216 12,251 9,214
Money market instruments 8,731 10,171 6,173
Trading securities 57 136 276
----------- ----------- -----------
Total interest income 343,335 290,587 232,987
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 129,676 127,640 90,554
Securities sold under agreements to repurchase 79,882 53,968 33,511
Advances from Federal Home Loan Bank 6,597 6,920 2,809
Term notes 2,114 3,609 3,932
----------- ----------- -----------
Total interest expense 218,269 192,137 130,806
----------- ----------- -----------
NET INTEREST INCOME 125,066 98,450 102,181
PROVISION FOR LOAN LOSSES 12,278 8,700 14,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 112,788 89,750 88,181
----------- ----------- -----------
OTHER INCOME (LOSS):
Service charges on deposit accounts and other fees 18,859 14,440 11,872
Unrealized gain (loss) on derivative instruments (838) 11 (323)
Net gain (loss) on sales and valuation of loans, securities,
and other assets 160 (583) 690
----------- ----------- -----------
Total other income, net 18,181 13,868 12,239
----------- ----------- -----------
TOTAL NET INTEREST INCOME AND OTHER INCOME 130,969 103,618 100,420
----------- ----------- -----------
OPERATING EXPENSES:
Salaries and employees' benefits 22,884 20,120 21,812
Equipment 8,850 8,695 6,833
Occupancy 5,031 4,997 4,930
Advertising 4,392 3,348 4,072
Printing, postage, stationery, and supplies 2,262 2,029 2,393
Telephone 1,864 1,620 1,800
Net gain from operations of foreclosed real estate held for sale (173) (236) (40)
Other 15,200 12,643 12,016
----------- ----------- -----------
Total operating expenses 60,310 53,216 53,816
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 70,659 50,402 46,604
PROVISION FOR INCOME TAXES 8,504 5,814 9,480
----------- ----------- -----------
NET INCOME $ 62,155 $ 44,588 $ 37,124
=========== =========== ===========
NET INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ 51,891 $ 38,789 $ 32,817
=========== =========== ===========
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 1.25 $ 0.93 $ 0.78
=========== =========== ===========
See notes to consolidated financial statements.
36
W HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND OF COMPREHENSIVE INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
CHANGES IN STOCKHOLDERS' EQUITY:
Preferred stock:
Balance at beginning of year $ 3,220 $ 3,220 $ 1,219
Issuance of preferred stock 4,000 2,001
---------- ---------- ----------
Balance at end of year 7,220 3,220 3,220
---------- ---------- ----------
Common stock:
Balance at beginning of year 41,502 42,000 42,080
Purchase and retirement of common stock (2) (498) (80)
---------- ---------- ----------
Balance at end of year 41,500 41,502 42,000
---------- ---------- ----------
Paid-in capital:
Balance at beginning of year 95,313 99,596 54,466
Purchase and retirement of common stock (26) (4,283) (1,142)
Issuance of preferred stock 92,341 46,272
---------- ---------- ----------
Balance at end of year 187,628 95,313 99,596
---------- ---------- ----------
Reserve fund:
Balance at beginning of year 17,302 12,843 9,131
Transfer from undivided profits 6,174 4,459 3,712
---------- ---------- ----------
Balance at end of year 23,476 17,302 12,843
---------- ---------- ----------
Undivided profits:
Balance at beginning of year 93,241 67,218 47,359
Net income 62,155 44,588 37,124
Cash dividends on common stock (10,375) (8,307) (9,246)
Cash dividends on preferred stock (10,264) (5,799) (4,307)
Transfer to reserve fund (6,174) (4,459) (3,712)
---------- ---------- ----------
Balance at end of year 128,583 93,241 67,218
---------- ---------- ----------
Accumulated other comprehensive income (loss):
Balance at beginning of year 40 (1,058) 28
Cumulative effect of change in accounting
for derivative instruments 135
Other comprehensive income (loss) for the year (673) 1,098 (1,086)
---------- ---------- ----------
Balance at end of year (498) 40 (1,058)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY $ 387,909 $ 250,618 $ 223,819
========== ========== ==========
COMPREHENSIVE INCOME:
Net income $ 62,155 $ 44,588 $ 37,124
---------- ---------- ----------
Other comprehensive income (loss), net of income tax:
Unrealized net gains (losses) on securities available for sale:
Arising during the period (1) 804 (1,070)
Reclassification adjustment included in net income (351) 422 (113)
---------- ---------- ----------
(352) 1,226 (1,183)
---------- ---------- ----------
Cash flow hedges:
Adoption of SFAS 133, net of income tax 135
Unrealized net derivative loss arising during the period (536)
---------- ---------- ----------
(401)
---------- ---------- ----------
Income tax effect 215 (128) 97
---------- ---------- ----------
Net change in other comprehensive income (loss), net of income tax (538) 1,098 (1,086)
---------- ---------- ----------
TOTAL COMPREHENSIVE INCOME $ 61,617 $ 45,686 $ 36,038
========== ========== ==========
See notes to consolidated financial statements
37
W HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 62,155 $ 44,588 $ 37,124
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for:
Loan losses 12,278 8,700 14,000
Foreclosed real estate held for sale 20 20 15
Depreciation and amortization on:
Premises and equipment 5,797 6,377 5,341
Foreclosed real estate held for sale 61 57 85
Mortgage servicing rights 477 347 320
Deferred income tax credit (3,246) (1,920) (4,326)
Amortization of premium (discount) on:
Investment securities available for sale (160) 9 7
Investment securities held to maturity (14,068) (12,021) (8,423)
Mortgage-backed securities held to maturity (1,634) (63) 24
Loans 1,166 476 668
Deposits 780
Amortization of excess of cost over net assets acquired 134 63 355
Amortization of deferred loan origination fees, net (4,710) (3,905) (4,728)
Net loss (gain) on sale and valuation of:
Investment securities available for sale (351) 422 (113)
Mortgage loans held for sale 26 (43) (74)
Loans 50
Derivative instruments 838
Foreclosed real estate held for sale (89) (57) (20)
Originations of mortgage loans held for sale (47,446) (44,389) (63,812)
Proceeds from sales of mortgage loans held for sale 2,148 3,123
Decrease (increase) in:
Trading securities 41,728 37,417 67,970
Accrued interest receivable 14,131 (13,640) (9,858)
Other assets (5,793) (528) 2,284
Increase (decrease) in:
Accrued interest on deposits and borrowings (8,496) 20,425 9,838
Other liabilities 3,824 (490) 2,712
------------ ----------- -----------
Net cash provided by operating activities 59,570 44,968 49,439
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits in banks (14,909) (2,034) (1,484)
Net decrease (increase) in federal funds sold 23,463 (27,100) (16,400)
Net increase in securities purchased under agreements to resell (10,287) (5,154) (29,443)
Investment securities available for sale:
Purchases (449,227) (9,889) (60,391)
Proceeds from sales 162,556 3,552 55,297
Proceeds from principal repayment 32,954 1,511 1,244
Investment securities held to maturity:
Purchases (11,453,430) (2,426,084) (3,340,222)
Proceeds from redemption and repayment 10,998,040 2,033,788 3,027,764
Mortgage-backed securities held to maturity:
Purchases (420,790) (96,454) (17,502)
Proceeds from principal repayment 178,795 18,680 35,675
Loans receivable:
Purchases (420,459) (261,829) (375,475)
Proceeds from sales 20,051
Other increase (224,004) (77,817) (169,940)
Purchases of options (331)
Proceeds from sales of foreclosed real estate held for sale 434 142 587
Additions to premises and equipment (4,671) (10,342) (10,024)
Purchase of Federal Home Loan Bank stock (8,650) (17,000) (7,000)
Purchase of companies, net of cash acquired (1,070) (109)
------------ ----------- -----------
Net cash used in investing activities (1,611,586) (876,030) (887,372)
------------ ----------- -----------
Forward $ (1,552,016) $ (831,062) $ (837,933)
------------ ----------- -----------
(continued)
38
W HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
Forward $(1,552,016) $ (831,062) $ (837,933)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 616,097 374,693 549,325
Net increase in securities sold under agreements to repurchase 365,447 16,293 123,212
Securities sold under agreements to repurchase with original
maturities over three months:
Proceeds 792,500 1,508,886 418,339
Payments (277,374) (1,076,074) (317,908)
Term notes payments (5,000) (31,000) (5,000)
Advances from Federal Home Loan Bank:
Proceeds 64,000 50,000 39,000
Payments (64,000)
Net increase in advances from borrowers for taxes
and insurance 659 82 198
Repurchase of common stock for retirement (28) (4,781) (1,222)
Issuance of preferred stock 96,341 48,273
Dividends paid (20,148) (16,773) (10,041)
----------- ----------- -----------
Net cash provided by financing activities 1,568,494 821,326 844,176
----------- ----------- -----------
NET CHANGE IN CASH AND DUE FROM BANKS 16,478 (9,736) 6,243
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 45,936 55,672 49,429
----------- ----------- -----------
CASH AND DUE FROM BANKS, END OF YEAR $ 62,414 $ 45,936 $ 55,672
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest on deposits and other borrowings $ 226,765 $ 171,712 $ 120,968
Income taxes 8,200 11,104 11,424
Noncash activities:
Accrued dividends payable 1,419 935 3,602
Net decrease (increase) in other comprehensive loss (538) 1,098 (1,086)
Mortgage loans securitized and transferred to:
Trading securities 44,176 38,289 64,169
Investment securities available for sale 4,181
Transfers from loans to foreclosed real estate held for sale 1,017 569 291
Mortgage loans originated to finance the sale of foreclosed
real estate held for sale 32 185 663
Capitalized mortgage servicing rights 483 454 837
Unpaid additions to premises and equipment 19 80 739
Transfer from undivided profits to reserve fund 6,174 4,459 3,712
Effect in valuation of derivatives and their hedged items:
Decrease in other assets 8
Decrease in deposits 13,666
Increase in other liabilities 14,965
(concluded)
See notes to consolidated financial statements.
39
W HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
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
subsidiaries, Westernbank Puerto Rico ("Westernbank") and Westernbank
Insurance Corp. The Company was organized under the laws of the
Commonwealth of Puerto Rico in February 1999 to become the bank holding
company of Westernbank.
In July 2000, the Company became a financial holding company under the
Bank Holding Company Act. As a financial holding company, the Company
is permitted to engage in financial related activities, including
insurance and securities activities, provided that the Company and its
banking subsidiary meet certain regulatory standards.
Westernbank, which was founded as a savings institution in 1958, is a
Puerto Rico-chartered commercial bank. Westernbank offers a full array
of consumer and business financial services, including banking and
trust services. Westernbank operates through 35 full service branch
offices located throughout Puerto Rico, primarily in the Southwestern
part of the island, and a fully functional banking site on the
Internet. In addition, it operates three divisions: Westernbank
International Division, which offers, commercial banking and related
services outside of Puerto Rico; Westernbank Trust Division, which
offers a full array of trust services; and Westernbank Business Credit,
a new division specializing in commercial business loans secured
principally by accounts receivable, inventory and equipment, created on
June 15, 2001 when Westernbank acquired the entire loan portfolio of
the Puerto Rico branch of Congress Credit Corporation, a subsidiary of
First Union National Bank N.A. Westernbank owns 100% of the voting
shares of SRG Net, Inc., a Puerto Rico corporation that operates an
electronic funds transfer network. The assets, liabilities, revenues
and expenses of SRG Net, Inc. at December 31, 2001 and 2000 and for
each of the three years in the period ended December 31, 2001 are not
significant.
On July 1, 2001, the Company acquired 100% of the voting shares of a
general insurance agency headquartered in Mayaguez, Puerto Rico. The
new corporation is a wholly-owned subsidiary of the Company, and
operates as a general agent by placing property and casualty insurance,
as well as life and disability insurance. The assets, liabilities,
revenues and expenses of this subsidiary at December 31, 2001 and for
the year then ended are not significant.
The accounting and reporting policies of W Holding Company, Inc.
conform to accounting principles generally accepted in the United
States of America ("GAAP") and banking industry practices. Following is
a summary of the Company's most significant accounting policies:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Westernbank Puerto Rico and Westernbank Insurance Corp. All significant
intercompany transactions and balances have been eliminated in
consolidation.
40
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - Most of the Company's
business activities are with customers located within Puerto Rico.
Notes 2 and 3 discuss the types of securities that the Company invests
in. Note 4 discusses the types of lending that the Company engages in.
The Company does not have any significant concentration in any one
industry or customer.
CASH AND CASH EQUIVALENTS - For purpose of presentation in the
consolidated statements of cash flows, cash and cash equivalents are
those amounts included in the statements of financial condition as
"cash and due from banks".
INTEREST-BEARING DEPOSITS IN BANKS AND FEDERAL FUNDS SOLD -
Interest-bearing deposits in banks and federal funds sold are recorded
at cost and mature as follows: $44,751,000 the next business day and
$1,500,000 in April 2002.
TRADING SECURITIES - Securities held principally for resale in the near
term are classified as trading securities and recorded at fair value.
Gains and losses on sales and changes in fair value of these securities
are included in current operating results.
INVESTMENT SECURITIES HELD TO MATURITY - Investment securities for
which the Company has the positive intent and ability to hold to
maturity are carried at cost, adjusted for premium amortization and
discount accretion under the interest method over the period to
maturity.
INVESTMENT SECURITIES AVAILABLE FOR SALE - Investment securities
available for sale consist of securities not classified as trading
securities nor as held to maturity securities. These securities are
reported at fair value with unrealized holding gains and losses, net of
tax, reported as a net amount in other comprehensive income. Realized
gains and losses on these securities are determined using the specific
identification method. Premium amortization and discount accretion are
recognized in interest income using the interest method over the period
to maturity.
MORTGAGE LOANS HELD FOR SALE - Mortgage loans originated and intended
for sale in the secondary market are carried at the lower of cost or
estimated fair value in the aggregate. Net unrealized losses are
recognized through a valuation allowance by charges to income. Realized
gains or losses on these loans are determined using the specific
identification method.
LOANS - Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at
their outstanding unpaid principal balances adjusted for charge-offs,
the allowance for loan losses, and any deferred fees or costs on
originated loans. Interest income is accrued on the unpaid principal
balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan
yield using the interest method. Discounts and premiums on purchased
loans are amortized to income over the expected lives of the loans
using methods that approximate the interest method.
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become
due, but in no event is it recognized after 90 days in arrears on
payments of principal or interest. When interest accrual is
discontinued, all unpaid interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received.
41
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is a current
estimate of the losses inherent in the present portfolio based on
management's ongoing quarterly evaluations of the loan portfolio.
Estimates of losses inherent in the loan portfolio involve the exercise
of judgement and the use of assumptions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available. The allowance is
increased by a provision for loan losses, which is charged to expense
and reduced by charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the provision for
loan losses. Because of uncertainties inherent in the estimation
process, management's estimate of credit losses in the loan portfolio
and the related allowance may change in the near term.
The Company follows a systematic methodology to establish and evaluate
the adequacy of the allowance for loan losses. This methodology
consists of several key elements.
Larger commercial and construction loans that exhibit potential or
observed credit weaknesses are subject to individual review. Where
appropriate, allowances are allocated to individual loans based on
management's estimate of the borrower's ability to repay the loan given
the availability of collateral, other sources of cash flow and legal
options available to the Company.
Included in the review of individual loans are those that are impaired
as provided in Statement of Financial Accounting Standards No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. Any allowances for
impaired loans are measured based on the present value of expected
future cash flows discounted at the loans' effective interest rate or
fair value of the underlying collateral. Commercial business,
commercial real estate and construction loans exceeding $500,000 are
individually evaluated for impairment. Other loans are evaluated in
homogeneous groups and collectively evaluated for impairment. Loans
that are recorded at fair value or at the lower of cost or fair value
are not evaluated for impairment. Impaired loans for which the
discounted cash flows, collateral value or market price exceeds its
carrying value do not require an allowance. The Company evaluates the
collectibility of both principal and interest when assessing the need
for loss accrual.
Historical loss rates are applied to other commercial loans not subject
to specific allowance. The loss rates are derived from historical loss
trends for three years.
Homogeneous loans, such as consumer installments, residential mortgage
loans, and credit cards are not individually risk graded. Allowances
are established for each pool of loans based on the expected net
charge-offs for one year. Loss rates are based on the average net
charge-off history for one to three years by loan category.
An unallocated allowance is maintained to recognize the imprecision in
estimating and measuring loss when evaluating allowances for individual
loans or pools of loans.
Historical loss rates for commercial and consumer loans may be adjusted
for significant factors that, in management's judgement, reflect the
impact of any current condition on loss recognition. Factors which
management considers in the analysis include the effect of the national
and local economies, trends in the nature and volume of loans
(delinquencies, charge-offs, non-accrual and problem loans), changes in
the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and
the Company's internal credit examiners.
Allowances on individual loans and historical loss rates are reviewed
quarterly and adjusted as necessary based on changing borrower and/or
collateral conditions and actual collection and charge-off experience.
42
FORECLOSED REAL ESTATE HELD FOR SALE - Foreclosed real estate held for
sale are carried at the lower of fair value minus estimated costs to
sell or cost.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation is
computed under the straight-line method over the estimated useful lives
of the assets, which range from two to 40 years.
Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is
shorter. Costs of maintenance and repairs that do not improve or extend
the lives of the respective assets are charged to expense as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically reviews
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. No indications of impairment are evident as a result of
such review.
TRANSFER OF FINANCIAL ASSETS - Transfer of financial assets are
accounted for as a sale, when control over the assets has been
surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company,
(2) the transferee obtains the right (free of conditions that constrain
it from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase
them before maturity.
MORTGAGE SERVICING RIGHTS - The Company recognizes as separate assets
the rights to service mortgage loans for others, regardless of how
those servicing rights are acquired and assesses the capitalized
mortgage servicing rights for impairment based on the fair value of
those rights. Servicing assets are evaluated for impairment based upon
the fair value of the rights as compared to amortized cost. Fair value
is determined using prices for similar assets with similar
characteristics. Impairment is recognized through a valuation allowance
for an individual servicing right, to the extent that fair value is
less than the capitalized amount for that right.
The total cost of mortgage loans to be sold with servicing rights
retained is allocated to the mortgage servicing rights and the loans
(without the mortgage servicing rights), based on their relative fair
values. Mortgage servicing rights are amortized in proportion to, and
over the period of, estimated servicing income.
STOCK OPTION PLANS - As further discussed in Note 18 to the
consolidated financial statements, the Company has two stock option
plans. The Company follows the intrinsic value-based method of
accounting for measuring compensation expense, if any. Compensation
expense is generally recognized for any excess of the quoted market
price of the Company's stock at the measurement date over the amount an
employee must pay to acquire the stock.
INCOME TAXES - Deferred income taxes are accounted for using the asset
and liability method of accounting for income taxes. Under the asset
and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and the respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
43
FINANCIAL INSTRUMENTS:
- - DERIVATIVE FINANCIAL INSTRUMENTS - As part of the Company's
asset/liability management, the Company uses interest-rate contracts,
which include interest-rate exchange agreements (swaps and options
agreements), to hedge various exposures or to modify interest rate
characteristics of various statement of financial condition accounts.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES and Statement of Financial Accounting
Standards No. 138 ("SFAS 138"), ACCOUNTING FOR CERTAIN DERIVATIVE
INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES. These Statements establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. The statements require that all derivative instruments
be recognized as assets and liabilities at fair value. If certain
conditions are met, the derivative may qualify for hedge accounting
treatment and be designated as one of the following types of hedges: (a)
hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment ("fair value hedge"); (b)
a hedge of the exposure to variability of cash flows of a recognized
asset, liability or forecasted transaction ("cash flow hedge") or (c) a
hedge of foreign currency exposure ("foreign currency hedge").
In the case of a qualifying fair value hedge, changes in the value of the
derivative instruments that have been highly effective are recognized in
current period earnings along with the change in value of the designated
hedged item. In the case of a qualifying cash flow hedge, changes in the
value of the derivative instruments that have been highly effective are
recognized in other comprehensive income, until such time those earnings
are affected by the variability of the cash flows of the underlying hedged
item. In either a fair value hedge or a cash flow hedge, net earnings may
be impacted to the extent the changes in the value of the derivative
instruments do not perfectly offset changes in the value of the hedged
items. If the derivative is not designated as a hedging instrument, the
changes in fair value of the derivative are recorded in earnings. The
Company does not currently have any foreign currency hedges.
Certain contracts contain embedded derivatives. When the embedded
derivative possesses economic characteristics that are not clearly and
closely related to the economic characteristics of the host contract, it
should be bifurcated and carried at fair value and designated as a trading
or non-hedging derivative instrument.
The effect of implementing these statements on the Company's financial
condition was a decrease in deposits, an increase in other liabilities and
an increase in accumulated other comprehensive income (net of tax of
$45,000) by $2,607,000, $2,472,000 and $135,000, respectively. There was
no effect on results of operations from the implementation of these
Statements.
In the case of interest-rate exchange agreements that qualify for hedging
accounting treatment, net interest income (expense) resulting from the
differential between exchanging floating and fixed-rate interest payments
is recorded on a current basis as an adjustment to interest income or
expense on the corresponding hedged assets and liabilities.
44
OTHER OFF-BALANCE SHEET INSTRUMENTS - In the ordinary course of business,
the Company enters into off-balance sheet instruments consisting of
commitments to extend credit, commitments under credit card arrangements
and stand-by letters of credit. Such financial instruments are recorded in
the financial statements when they are funded or related fees are incurred
or received. The Company periodically evaluates the credit risks inherent
in these commitments and letters of credit, and establishes loss
allowances for such risks if and when these are deemed necessary.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and
assumptions were used by the Company in estimating fair values of
financial instruments as disclosed in these financial statements:
- CASH AND DUE FROM BANKS - The carrying amounts of cash and due from
banks approximate their fair value.
- MONEY MARKET INSTRUMENTS - Money market instruments have been valued
at their carrying amount given the relatively short period of time
between origination of the instruments and their expected
realization.
- TRADING SECURITIES - For securities held for trading purposes, fair
values are based on quoted market prices.
- INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY - The
fair values of investment securities available for sale and held to
maturity are estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. If a
quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
- FEDERAL HOME LOAN BANK (FHLB) STOCK - FHLB stock is valued at its
redemption value.
- LOANS - Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type such
as residential mortgage, commercial, consumer, credit cards and
other loans. Each loan category is further segmented into fixed and
adjustable interest rate terms and by performing, nonperforming and
loans with payments in arrears.
The fair value of performing loans, except residential mortgages and
credit card loans is calculated by discounting scheduled cash flows
through the estimated maturity dates using estimated market discount
rates that reflect the credit and interest rate risk inherent in the
loan. For performing residential mortgage loans, fair value is
computed using an estimated market rate based on secondary market
sources adjusted to reflect differences in servicing and credit
costs. For credit card loans, cash flows and maturities are
estimated based on contractual interest rates and historical
experience and are discounted using estimated market rates.
Fair value for significant nonperforming loans and certain loans
with payments in arrears is based on recent external appraisals of
collateral. If appraisals are not available, estimated cash flows
are discounted using a rate that is commensurate with the risk
associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower
information.
- MORTGAGE SERVICING RIGHTS - The carrying amount of mortgage
servicing rights, which is evaluated periodically for impairment,
approximates the fair value (fair value is estimated considering
prices for similar assets).
45
- DEPOSITS - The fair value of deposits with no stated maturity, such
as passbook accounts, money market and checking accounts is equal to
the amount payable on demand. The fair value of fixed maturity
certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining maturities.
- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, TERM NOTES AND
ADVANCES FROM FHLB - The fair value of securities sold under
agreements to repurchase, term notes and advances from FHLB is based
on the discounted value using rates currently available to the
Company for debt with similar terms and remaining maturities.
- ACCRUED INTEREST - The carrying amounts of accrued interest
approximate their fair values.
- INTEREST RATE SWAP AND INTEREST RATE OPTION CONTRACTS - The fair
value of interest rate swap and interest rate option contracts was
obtained from dealer quotes. This value represents the estimated
amount the Company would receive or pay to terminate the contracts,
at the reporting date, taking into account current interest rates and
the current creditworthiness of the contracts counterparties.
- COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - The fair
value of commitments to extend credit and standby letters of credit
are based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standings.
The fair value estimates are made at a discrete point in time based
on relevant market information and information about the financial
instruments. Because no market exists for a portion of the Company's
financial instruments (loans and financial liabilities), fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision.
In addition, the fair value estimates are based on existing on and
off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments
such as premises and equipment and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
EARNINGS PER SHARE - Basic earnings per share represents income
attributable to common stockholders divided by the weighted average
number of common shares outstanding during the period. Diluted earnings
per share reflect additional common shares that would have been
outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company
relate to the outstanding convertible preferred stock, which are
determined using the if-converted method, and the outstanding stock
options, which are determined using the treasury stock method. The
effect of convertible preferred stock (1,212,905 shares) was
antidilutive thus basic equals diluted earnings per common share in
2001, 2000 and 1999. In 2000, the options were not included in the
computation of diluted earnings per share because the common stock
average market price did not exceed the option exercise price.
46
Basic and diluted earnings per share were computed as follows:
2001 2000 1999
(Dollars in thousands, except share data)
Basic and diluted earnings per share:
Net income $ 62,155 $ 44,588 $ 37,124
Less preferred stock dividends (10,264) (5,799) (4,307)
------------ ------------ ------------
Income attributable to common stockholders $ 51,891 $ 38,789 $ 32,817
============ ============ ============
Weighted average number of common
shares outstanding for the year 41,501,695 41,630,259 42,012,116
Effect of dilutive stock options 117,202
------------ ------------ ------------
Total 41,618,897 41,630,259 42,012,116
============ ============ ============
Basic and diluted earnings per share $ 1.25 $ 0.93 $ 0.78
============ ============ ============
COMPREHENSIVE INCOME - Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and
other events and circumstances, except those resulting from investments
by owners and distributions to owners. Accounting principles generally
accepted in the United States of America require that recognized
revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and
losses on available for sale securities, are reported as a separate
component of the stockholders' equity section of the statement of
financial condition, such items, along with net income, are components
of comprehensive income.
RECENT ACCOUNTING DEVELOPMENTS -
Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 140 ("SFAS 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. SFAS
140 supersedes SFAS 125, although it retains most of SFAS 125's
provisions without modification. Adoption of SFAS 140 did not have an
effect on the Company's consolidated financial statements.
Effective April 1, 2001, the Company adopted, Emerging Issues Task
Force of the Financial Accounting Standards Board No. 99-20. This
document, establishes guidance for (1) recognizing interest income
(including amortization of premiums or discounts) on (a) all
credit-sensitive mortgage and asset-backed securities and (b) certain
prepayment-sensitive securities including agency interest-only strips
and (2) determining when these securities must be written down to fair
value because of impairment. Existing accounting principles generally
accepted in the United States of America did not provide interest
recognition and impairment guidance for securities on which cash flows
change as a result of both prepayments and credit losses and, in some
cases, interest rate adjustments. Implementation of EITF No. 99-20 did
not have a significant effect on the Company's consolidated financial
results.
47
On July 20, 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, BUSINESS COMBINATIONS ("SFAS 141") and SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142"). Those
statements will change the accounting for business combinations and
goodwill in two significant ways. SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method will be
prohibited. SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization
of goodwill, including goodwill recorded in past business combinations,
will cease upon adoption of that statement, which for the Company, will
be January 1, 2002. Implementation of SFAS 142 is not expected to have
a material effect on the Company's financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS ("SFAS 143"). SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement cost.
SFAS 143 becomes effective January 1, 2003, and is not expected to have
a significant effect on the Company's consolidated financial condition
or results of operations.
In August 2001, the FASB issued SFAS 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes SFAS No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF, and the accounting and reporting provisions of APB Opinion
No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, FOR THE DISPOSAL OF A
SEGMENT OF A BUSINESS. SFAS 144 becomes effective January 1, 2002, and
is not expected to have a significant effect on the Company's
consolidated financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made to prior
year's financial statements to conform with the current year
presentation.
2. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
The Company enters into purchases of securities under agreements to
resell the same securities. These agreements are classified as secured
loans and are reflected as assets in the consolidated statements of
financial condition.
At December 31, 2001 and 2000, securities purchased under agreements to
resell (classified by counterparty) were as follows:
2001 2000
(In thousands)
Doral Securities, Inc. $ 65,059 $ 60,341
UBS PaineWebber Incorporated of Puerto Rico 45,034 55,070
Popular Securities, Inc. 26,003 10,398
---------- ----------
Total $ 136,096 $ 125,809
========== ==========
48
A comparative summary of securities purchased under agreements to
resell as of December 31, were as follows:
2001 2000
------------------------------ -------------------------------
(In thousands)
Fair Fair
Value of Value of
Receivable Underlying Receivable Underlying
Underlying Collateral Balance Collateral Balance Collateral
Investment securities:
U.S. Government and
agencies obligations $ 48,114 $ 48,838 $ 48,076 $ 48,984
Puerto Rico Government and
agencies obligations 18,059 18,390
Mortgage-backed securities -
Guaranteed by Government
agencies 69,923 71,877 77,733 79,837
---------- ---------- ---------- ----------
Total - excluding accrued
interest receivable $ 136,096 $ 139,105 $ 125,809 $ 128,821
========== ========== ========== ==========
Accrued interest receivable
on securities purchased
under agreements to resell $ 11 $ 82
========== ==========
The Company monitors the fair value of the underlying securities as
compared to the related receivable, including accrued interest, and
requests additional collateral when the fair value of the underlying
collateral falls to less than the collateral requirement. The
collateral requirement is equal to 102 percent of the related
receivable, including interest. At December 31, 2001, all repurchase
agreements mature the next business day. Securities purchased under
agreements to resell are held in safekeeping, in the name of the
Company, by Citibank N.A., the Company's custodian, or are held by the
counterparty if the agreement is due the next business day.
Average outstanding balances and maximum month-end outstanding balances
during the years ended December 31, 2001 and 2000, and weighted average
interest rates for the year and at year end are indicated below:
2001 2000
(Dollars in thousands)
Monthly average outstanding balance $ 126,355 $ 123,240
Maximum outstanding balance at any month-end 145,747 143,121
Weighted average interest rate:
For the year 4.36% 6.20%
At year end 1.78 6.75
49
3. INVESTMENT SECURITIES:
The amortized cost, gross unrealized gains and losses, and fair value
of investment securities at December 31, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
(In thousands)
Trading securities:
Mortgage-backed securities:
Government National Mortgage
Association (GNMA) certificates $ 2,554 $ 25 $ $ 2,579
Fannie Mae (FNMA) certificates 2,070 40 2,030
------------ --------- --------- ------------
Total $ 4,624 $ 25 $ 40 $ 4,609
============ ========= ========= ============
Available for sale:
U.S. Government and agencies obligations $ 196,600 $ $ 154 $ 196,446
Corporate notes 56,301 22 243 56,080
Mortgage-backed securities -
Collateralized mortgage obligations (CMO) 29,062 94 29,156
------------ --------- --------- ------------
Total $ 281,963 $ 116 $ 397 $ 281,682
============ ========= ========= ============
Held to maturity:
U.S. Government and agencies obligations $ 1,788,000 $ 2,721 $ 6,360 $ 1,784,361
Puerto Rico Government and
agencies obligations 22,607 249 15 22,841
Commercial paper 59,992 59,992
Corporate notes 66,460 1,064 1,269 66,255
------------ --------- --------- ------------
Total 1,937,059 4,034 7,644 1,933,449
------------ --------- --------- ------------
Mortgage and other asset-backed
securities:
Federal Home Loan Mortgage
Corporation (FHLMC) certificates 13,475 455 13,930
GNMA certificates 18,500 594 19,094
FNMA certificates 10,011 332 10,343
CMO certificates 319,386 369 1,799 317,956
Other 71,344 3,280 68,064
------------ --------- --------- ------------
Total 432,716 1,750 5,079 429,387
------------ --------- --------- ------------
Total $ 2,369,775 $ 5,784 $ 12,723 $ 2,362,836
============ ========= ========= ============
50
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
(In thousands)
Trading securities:
Mortgage-backed securities:
FNMA certificates $ 2,095 $ 16 $ $ 2,111
GNMA certificates 51 1 50
------------ --------- --------- ------------
Total $ 2,146 $ 16 $ 1 $ 2,161
============ ========= ========= ============
Available for sale:
Mortgage-backed securities -
GNMA certificates $ 27,735 $ 194 $ 123 $ 27,806
============ ========= ========= ============
Held to maturity:
U.S. Government and agencies obligations $ 1,367,417 $ 707 $ 35,546 $ 1,332,578
Puerto Rico Government and
agencies obligations 13,769 281 14,050
Commercial paper 34,994 34,994
Corporate notes 51,420 688 2,557 49,551
------------ --------- --------- ------------
Total 1,467,600 1,676 38,103 1,431,173
------------ --------- --------- ------------
Mortgage and other asset-backed
securities:
FHLMC certificates 16,986 225 61 17,150
GNMA certificates 23,113 162 10 23,265
FNMA certificates 12,705 154 11 12,848
CMO certificates 66,184 423 124 66,483
Other 70,099 754 69,345
------------ --------- --------- ------------
Total 189,087 964 960 189,091
------------ --------- --------- ------------
Total $ 1,656,687 $ 2,640 $ 39,063 $ 1,620,264
============ ========= ========= ============
51
The amortized cost and fair value of investment securities available
for sale and held to maturity at December 31, 2001, by contractual
maturity (excluding mortgage-backed securities), are shown below.
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)
Due within one year $ 259,189 $ 259,217
Due after one year through five years $ 196,600 $ 196,446 1,273,889 1,273,529
Due after five years through ten years 268,597 267,992
Due after ten years 56,301 56,080 135,384 132,711
---------- ---------- ------------ ------------
Total 252,901 252,526 1,937,059 1,933,449
Mortgage and other asset-backed securities 29,062 29,156 432,716 429,387
---------- ---------- ------------ ------------
Total $ 281,963 $ 281,682 $ 2,369,775 $ 2,362,836
========== ========== ============ ============
Proceeds from sales of investment securities available for sale and the
respective gross realized gains and losses for the years ended December
31, 2001, 2000 and 1999, were as follows:
2001 2000 1999
(In thousands)
Proceeds from sales $ 162,556 $ 3,552 $ 55,297
Gross realized gains 426 137
Gross realized losses 75 422 24
Unencumbered investment securities held to maturity at December 31,
2001, amounted to $320,269,000 after taking into account the investment
securities pledged (Notes 7, 10 and 19), those sold under agreements to
repurchase (Note 8), those pledged to the Federal Reserve Bank of
$4,989,000, and those pledged to the Puerto Rico Treasury Department
(for the Westernbank International Division) of $350,000.
Nontaxable interest income on investments for the years ended December
31, 2001, 2000 and 1999, amounted to $131,112,000, $93,122,000, and
$72,012,000, respectively. Nontaxable interest income relates mostly to
interest earned on government obligations of the United States and
Puerto Rico, certain mortgage-backed securities, and investments of the
Westernbank International division.
52
4. LOANS:
The loan portfolio at December 31, consisted of the following:
2001 2000
(In thousands)
REAL ESTATE LOANS SECURED BY FIRST MORTGAGES:
Commercial real estate $ 1,117,451 $ 887,084
Conventional:
One-to-four-family residences 827,110 762,655
Other properties 2,734 2,592
Construction and land acquisition 125,047 87,834
Insured or guaranteed - Federal Housing Administration,
Veterans Administration and others 16,896 16,701
------------- -------------
Total 2,089,238 1,756,866
------------- -------------
Plus (less):
Undisbursed portion of loans in process (5,624) (5,963)
Premium on loans purchased 2,036 2,712
Deferred loan fees - net (4,531) (4,412)
------------- -------------
Total (8,119) (7,663)
------------- -------------
Real estate loans - net 2,081,119 1,749,203
------------- -------------
OTHER LOANS:
Commercial loans 376,408 100,487
Loans on deposits 35,140 37,108
Credit cards 63,108 35,556
Consumer loans 318,509 311,062
Plus (less):
Premium on loans purchased 4,169
Deferred loan fees - net and unearned interest (1,685) (828)
------------- -------------
Other loans - net 795,649 483,385
------------- -------------
TOTAL LOANS 2,876,768 2,232,588
ALLOWANCE FOR LOAN LOSSES (38,364) (28,928)
------------- -------------
LOANS - NET $ 2,838,404 $ 2,203,660
============= =============
The Company originated commercial real estate loans during 2001
amounting to $542,814,000, totalling $1,117,451,000 at December 31,
2001. In general, commercial real estate loans are considered by
management to be of somewhat greater risk of uncollectibility due to
the dependency on income production or future development of the real
estate. The commercial real estate loans are principally collateralized
by property dedicated to wholesale, retail and rental business
activities. Foreign loans amounted to $3,850,000 and $5,490,000 at
December 31, 2001 and 2000, respectively.
The Company originates mortgage loans for portfolio investment or sale
in the secondary market. During the period of origination, mortgage
loans are designated as held for either sale or investment purposes.
Mortgage loans held for sale are carried at the lower of cost or fair
value, determined on a net aggregate basis. At December 31, 2001 and
2000, mortgage loans with a cost of $5,352,000 and $4,640,000,
respectively, were designated as held for sale.
53
The following table reflects the outstanding principal balance of
nonaccrual loans and the corresponding effect on earnings:
2001 2000 1999
(In thousands)
Outstanding principal balance
at end of year $14,113 $9,690 $6,955
======= ====== ======
Interest which would have been recorded
if the loans had been performing and not been
classified as nonaccrual $ 1,123 $ 979 $ 514
======= ====== ======
Loans serviced for others are not included in the consolidated
statements of financial condition. At December 31, 2001 and 2000, the
unpaid principal balance of these loans amounted to $307,867,000 and
$297,143,000, respectively. Servicing loans for others generally
consists of collecting payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan
servicing income includes servicing fees from investors and certain
charges collected from borrowers, such as late payment fees. In
connection with the loans serviced for others, the Company held
borrowers' escrow balances of $852,000 and $786,000 at December 31,
2001 and 2000, respectively.
Mortgage servicing rights, included as other assets, amounted to
$2,091,000, $2,085,000 and $1,979,000 at December 31, 2001, 2000 and
1999, respectively. In 2001, 2000 and 1999, the Company capitalized
mortgage servicing rights amounting to $483,000, $454,000 and $837,000,
respectively. Amortization of mortgage servicing rights was $477,000,
$347,000, and $320,000 in 2001, 2000, and 1999, respectively. At
December 31, 2001, 2000 and 1999, the carrying value of mortgage
servicing rights approximates fair value.
In the normal course of business, the Company engages in business
transactions with its directors, executive officers, principal
shareholders and organizations associated with them. Loans to related
parties, mainly mortgage loans for purchase of the principal residence,
are substantially on the same terms as loans to nonrelated parties. The
aggregate amount of loans outstanding to related parties at December
31, 2001 and 2000 totalled $708,000 and $614,000, respectively.
Changes in the allowance for loan losses are summarized below:
2001 2000 1999
(In thousands)
Balance - at January 1 $ 28,928 $ 23,978 $ 15,800
Provision charged to income 12,278 8,700 14,000
Allowance acquired 2,892
Recoveries 1,304 1,613 1,536
Write-off of uncollectible accounts (7,038) (5,363) (7,358)
-------- -------- --------
Balance - at December 31 $ 38,364 $ 28,928 $ 23,978
======== ======== ========
54
The total investment in impaired commercial and construction loans at
December 31, 2001 and 2000 was $42,478,000 and $12,874,000,
respectively. All impaired commercial and construction loans were
measured based on the fair value of collateral at December 31, 2001 and
2000. Impaired commercial and construction loans amounting to
$21,996,000 and $8,040,000 at December 31, 2001 and 2000, respectively,
were covered by a valuation allowance of $4,181,000 and $1,157,000,
respectively. Impaired commercial and construction loans amounting to
$20,482,000 and $4,834,000 at December 31, 2001 and 2000, respectively,
did not require a valuation allowance in accordance with SFAS 114. The
average investment in impaired commercial and construction loans during
the years ended December 31, 2001, 2000 and 1999, amounted to
$20,293,000, $11,873,000 and $14,919,000, respectively. The Company's
policy is to recognize interest income related to impaired loans on a
cash basis when they are over 90 days in arrears on payments of
principal or interest. Interest on impaired commercial and construction
loans collected and recognized as income during the years ended
December 31, 2001, 2000 and 1999, amounted to $1,716,000, $780,000 and
$1,470,000, respectively.
5. FORECLOSED REAL ESTATE HELD FOR SALE:
Foreclosed real estate held for sale at December 31, consisted of the
following:
2001 2000 1999
(In thousands)
Balance, foreclosed real estate held for sale:
Residential (1 - 4 units) $ 934 $ 90 $ 159
Commercial 2,397 2,662 2,371
-------- -------- --------
Total 3,331 2,752 2,530
Less valuation allowance 318 298 298
-------- -------- --------
Foreclosed real estate held for sale - net $ 3,013 $ 2,454 $ 2,232
======== ======== ========
6. PREMISES AND EQUIPMENT:
Premises and equipment at December 31, consisted of the following:
2001 2000
(In thousands)
Land $ 13,153 $ 12,802
Buildings and improvements 7,747 7,788
Furniture and equipment 23,190 23,761
Leasehold improvements 11,542 10,776
Construction in progress 2,951 2,196
--------- ---------
Total 58,583 57,323
Less accumulated depreciation and amortization 17,910 15,585
--------- ---------
Total $ 40,673 $ 41,738
========= =========
55
7. DEPOSITS AND INTEREST EXPENSE:
Deposits at December 31, consisted of the following:
2001 2000
(In thousands)
Noninterest bearings accounts $ 123,932 $ 120,559
Passbook accounts 465,267 416,684
NOW accounts 115,977 92,737
Super NOW accounts 18,609 18,284
Money market accounts 6,806 6,360
Certificates of deposit 2,477,842 1,950,598
------------ ------------
Total 3,208,433 2,605,222
Accrued interest payable 25,479 31,473
------------ ------------
Total $ 3,233,912 $ 2,636,695
============ ============
The weighted average interest rate of all deposits at December 31, 2001
and 2000, was approximately 4.02% and 5.52%, respectively. At December
31, 2001, the aggregate amount of deposits in denominations of $100,000
or more was $583,979,000 ($432,653,000 at December 31, 2000). Deposits
include brokered deposits of $1,572,000,000 and $1,271,305,000 at
December 31, 2001 and 2000, respectively. Deposits of directors,
executive officers, principal shareholders and organizations associated
with them amounted to $7,273,000 and $5,796,000 at December 31, 2001
and 2000, respectively.
At December 31, 2001, the scheduled maturities of certificates of
deposit are as follows:
Year Ending Amount
December 31, (In thousands)
2002 $1,339,955
2003 330,842
2004 224,586
2005 24,462
2006 50,604
Thereafter 507,393
----------
Total $2,477,842
==========
At December 31, 2001, the Company had pledged the following assets:
(1) Investment securities held to maturity with a carrying value
of $16,007,000 and mortgage-backed securities held to maturity
with a carrying value of $16,888,000 to secure public funds.
(2) Mortgage-backed securities held to maturity with a carrying
value of $295,000 as bond requirement for individual
retirement accounts.
56
A summary of interest expense on deposits for the years ended December
31, follows:
2001 2000 1999
(In thousands)
Passbook $ 12,800 $ 12,491 $ 12,462
NOW, Super NOW and Money
Market accounts 3,479 3,185 3,103
Certificates of deposit 113,397 111,964 74,989
---------- ---------- ---------
Total $ 129,676 $ 127,640 $ 90,554
========== ========== =========
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The Company enters into sales of securities under agreements to
repurchase ("reverse repurchase agreements"). Reverse repurchase
agreements are classified as secured borrowings and are reflected as a
liability in the consolidated statements of financial condition. During
the period of such agreements, the securities were delivered to the
counterparties. The dealers may have sold, loaned, or otherwise
disposed of such securities to other parties in the normal course of
their operations, and have agreed to resell to the Company the same
securities at the maturities of the agreements. The Company may be
required to provide additional collateral based on the fair value of
the underlying securities.
Reverse repurchase agreements at December 31, 2001 mature as follows:
within 30 days $503,298,000; in 2002 $303,250,000; in 2005
$164,650,000; in 2006 $47,500,000 and $1,040,948,000 thereafter. At
December 31, 2001, with respect to reverse repurchase agreements
amounting to $775,098,000, excluding FHLB reverse repurchase agreements
(Note 10), the counterparties have the option to terminate the
agreements at the first anniversary date and each interest payment date
thereafter.
Reverse repurchase agreements at December 31, consisted of the
following:
2001 2000
(In thousands)
Fixed rate $ 2,059,646 $ 1,134,048
Variable rate 45,025
------------ ------------
Total $ 2,059,646 $ 1,179,073
============ ============
Reverse repurchase agreements include $200,000,000 of long-term
agreements with fixed rate step-up schedule.
57
At December 31, 2001 and 2000, securities sold under agreements to
repurchase (classified by counterparty) were as follows:
2001 2000
----------------------------------- -----------------------------------
Fair Value Fair Value
Borrowing of Underlying Borrowing of Underlying
Balance Collateral Balance Collateral
(In thousands)
Lehman Brothers Inc. and affiliates $ 733,950 $ 754,046 $ 475,144 $ 511,086
Federal Home Loan Bank of New York 649,000 702,801 476,000 507,886
UBS PaineWebber Incorporated
of Puerto Rico 255,730 262,177 69,214 74,908
Morgan Stanley Dean Witter 148,500 150,812 4,335 4,545
Keefe, Bruyette and Woods, Inc. 113,700 118,346
Merrill Lynch Government
Securities Inc. and affiliates 95,483 101,175 89,380 96,576
Salomon Smith Barney Inc. and affiliates 50,000 55,575 50,000 54,378
Bear, Stearns and Company, Inc. 13,283 14,230
The Conservation Trust Fund
of Puerto Rico 15,000 15,467
------------ ------------ ------------ ------------
Total $ 2,059,646 $ 2,159,162 $ 1,179,073 $ 1,264,846
============ ============ ============ ============
Borrowings under reverse repurchase agreements at December 31, were
collateralized as follows:
2001 2000
----------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Securities Underlying Value of Value of Value of Value of
Reverse Repurchase Underlying Underlying Underlying Underlying
Agreements Collateral Collateral Collateral Collateral
(In thousands)
U.S. Government and agencies
obligations - held to maturity $ 1,657,001 $ 1,654,518 $ 1,195,157 $ 1,164,678
U.S. Government and agencies
obligations - available for sale 196,600 195,447
Mortgage-backed securities - held
to maturity 280,443 280,042 61,573 61,908
Mortgage-backed securities -
available for sale 29,062 29,155 23,402 23,534
Other investments 17,170 14,726
------------ ------------ ------------ ------------
Total 2,163,106 $ 2,159,162 1,297,302 $ 1,264,846
============ ============
Accrued interest receivable
of underlying securities 10,211 19,424
------------ ------------
Total $ 2,173,317 $ 1,316,726
============ ============
58
Average outstanding balances and maximum month-end outstanding balances
during the years ended December 31, 2001 and 2000, and weighted average
interest rates for the year and at year-end are indicated below:
2001 2000
(Dollars in thousands)
Monthly average outstanding balance $ 1,521,005 $ 862,994
Maximum outstanding balance at any month-end 2,059,646 1,179,073
Weighted average interest rate:
For the year 5.38 % 6.37%
At year end 4.19 6.10
9. LINES OF CREDIT:
As of December 31, 2001 and 2000, Westernbank had line of credit
agreements with three commercial banks permitting Westernbank to borrow
a maximum aggregate amount of $75,000,000 and $35,000,000,
respectively, (there were no borrowings during the years ended December
31, 2001 and 2000, under such lines of credit). The agreements provide
for unsecured advances to be used by Westernbank on an overnight basis.
Interest rate is negotiated at the time of the transaction. The credit
agreements are renewable annually.
10. TERM NOTES AND ADVANCES FROM FEDERAL HOME LOAN BANK:
Term notes and advances from Federal Home Loan Bank ("FHLB") at
December 31, consisted of the following:
2001 2000
----------------- -----------------
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
(Dollars in thousands)
TERM NOTES -
Variable rate notes
(83% to 89% of three
month LIBID rate) $ 43,000 1.66% $ 48,000 5.59%
======== ==== ======== ====
ADVANCES FROM FHLB:
Variable rate convertible advances
(88 % to 94 % of three month LIBID rate) $ 64,000
Fixed rate convertible advances
(4.10 % to 6.66 %) $120,000 56,000
-------- ------
Total advances from FHLB $120,000 5.10% $120,000 6.41%
======== ==== ======== ====
59
Term notes amounting to $40,000,000 are secured by irrevocable stand-by
letters of credit issued by a commercial bank (the "issuer") with
credit values amounting to $40,900,000. Under the letters of credit
securities pledge agreements, the Company has delivered to the issuer
specific investment securities having a fair value, determined monthly,
of at least 105% of the face amount of the letters of credit. At
December 31, 2001, the carrying value of the specific collateral held
by the issuer consisted of investment securities held to maturity of
$44,500,000.
Term notes amounting to $3,000,000 are secured by a pledge of certain
collateral pursuant to pledge agreements. Under the pledge agreements,
the Company has delivered to the note holders investments and
mortgage-backed securities having a fair value determined every two
weeks of at least 105% of the aggregate principal amount of the current
notes outstanding. At December 31, 2001, the carrying value of the
specific collateral held by the note holders consisted of investment
securities held to maturity of $3,600,000.
Advances and reverse repurchase agreements (Note 8) are received from
the FHLB under an agreement whereby the Company is required to maintain
a minimum amount of qualifying collateral with a fair value of at least
110% and 105% of the outstanding advances and reverse repurchase
agreements, respectively. At December 31, 2001, convertible advances
were secured by investment securities held to maturity amounting to
$8,690,000 and mortgage notes amounting to $145,516,000. At the
advance's and reverse repurchase agreement's first anniversary date and
each quarter thereafter, the FHLB has the option to convert them into
replacement funding for the same or a lesser principal amount based on
any funding then offered by FHLB at then current market rates, unless
the interest rate has been predetermined between FHLB and the Company.
If the Company chooses not to replace the funding, it will repay the
convertible advance and reverse repurchase agreement, including any
accrued interest, on such optional conversion date.
Term notes and advances from FHLB by contractual maturities at December
31, 2001, were as follows:
Year Ending Term Advances
December 31, Notes from FHLB
(In thousands)
2002 $ 43,000
2003 $ 14,000
2005 14,000
2006 50,000
2010 42,000
--------- ----------
Total $ 43,000 $ 120,000
========= ==========
11. INCOME TAXES:
Under the Puerto Rico Internal Revenue Code (the "Code"), all companies
are treated as separate taxable entities and are not entitled to file
consolidated tax returns. The Company, Westernbank and Westernbank
Insurance Corp. 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.
60
The Code provides a dividend received deduction of 100%, on dividends
received from wholly-owned subsidiaries subject to income taxation in
Puerto Rico. The income on certain investments is exempt for income tax
purposes. Also, activities relating to the Westernbank International
division are exempt for income tax purposes. As a result of the above, the
Company's effective tax rate is substantially below the statutory rate.
The provision for income taxes for the years ended December 31, consisted
of the following:
2001 2000 1999
(In thousands)
Current $ 11,750 $ 7,734 $ 13,806
Deferred (3,246) (1,920) (4,326)
-------- -------- --------
Total $ 8,504 $ 5,814 $ 9,480
======== ======== ========
A reconciliation of the provision for income taxes computed by applying
the Puerto Rico income tax statutory rate to the tax provision as reported
for the years ended December 31, is as follows:
2001 2000 1999
(IN THOUSANDS)
Computed at Puerto Rico statutory rate $27,557 $19,657 $ 18,176
Effect on provision of:
Exempt interest income, net (20,791) (13,864) (9,794)
Net nondeductible expenses 26 105 413
Other 1,712 (84) 685
------- ------- --------
Provision for income taxes as reported $ 8,504 $ 5,814 $ 9,480
======= ======== ========
Statutory tax rates 39% 39% 39%
== == ==
Deferred income tax assets (liabilities) as of December 31, 2001 and 2000,
consisted of the following:
2001 2000
(IN THOUSANDS)
Allowance for loan losses $ 13,834 $ 11,282
Unrealized losses in derivatives instruments 891
Mortgage servicing rights (816) (813)
Allowance for foreclosed real estate held for sale 39 75
Other temporary differences (47) (60)
-------- --------
Total 13,901 10,484
Less valuation allowance 39 39
-------- --------
Deferred income taxes, net $ 13,862 $ 10,445
======== ========
61
Changes in the valuation allowance for deferred income tax assets were
as follows:
2001 2000 1999
(IN THOUSANDS)
Balance - at January 1 $ 39 $ 635 $ 400
Increase (decrease) in valuation allowance (596) 235
----- ----- -----
Balance - at December 31 $ 39 $ 39 $ 635
===== ===== =====
Realization of deferred tax assets is dependent on generating
sufficient future taxable income. The amount of the deferred tax asset
considered realizable could be reduced in the near term if estimates of
future taxable income are not met.
12. NET GAIN (LOSS) ON SALES AND VALUATION OF LOANS, SECURITIES AND OTHER
ASSETS:
Net gain (loss) on sales and valuation of loans, securities and other
assets for the years ended December 31, 2001, 2000 and 1999, consisted
of the following:
2001 2000 1999
(IN THOUSANDS)
Trading account securities, mainly related
to loans securitized $ (192) $ (204) $ 550
Investment securities available for sale 351 (422) 113
Mortgage loans held for sale (26) 43 74
Other 27 (47)
------ ------ ------
Total $ 160 $ (583) $ 690
====== ====== ======
13. COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the
Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material adverse effect on the
Company's financial condition. The principal commitments of the Company
are as follows:
a. LEASE COMMITMENTS:
At December 31, 2001, the Company is obligated under
noncancelable operating leases for banking premises. Certain
leases contain escalation clauses providing for increased
rental. Rent expense amounted to $1,938,000, $1,834,000, and
$1,652,000 for the years ended December 31, 2001, 2000 and
1999, respectively.
62
The projected minimum rental payments under the leases with
initial or remaining terms of more than one year, without
considering renewal options, and expiring through 2025 are as
follows:
YEAR ENDING MINIMUM
DECEMBER 31, RENT
(IN THOUSANDS)
2002 $ 1,726
2003 1,511
2004 1,545
2005 1,571
2006 1,482
Thereafter 16,758
---------
Total $ 24,593
=========
b. PURCHASE COMMITMENT:
In December 2001, the Company entered into a commitment to
purchase for $50.5 million a 23-story office building,
including a related parking facility, located in Hato Rey, San
Juan, Puerto Rico's central business district.
See Note 19 for standby letters of credit.
14. RETIREMENT BENEFIT PLANS:
PENSION PLAN
The Company established a retirement plan for directors who were not
also executive officers and who elected to retire after January 1,
1988. The Plan generally provided pension benefits ranging from 80% to
100% of the Director's average remuneration based on consecutive years
of service (vesting started after six years) and average earnings
during the last five years (three years if the Director has served
longer than 25 years). On February 24, 1989, the Plan was substantially
amended to limit the pension benefits to only those directors who were
founders of the Company, had attained the age of 50 years and had
served for 25 consecutive years on the Board. The amended plan provides
for pension benefits equal to the Director's average remuneration
during the last three years of service. The other Directors
(non-founders) by approving this amendment waived and renounced their
pension benefits under the Plan. The Plan was unfunded as of December
31, 2001 and 2000. The accumulated benefit obligation under this Plan
is $186,000 and $218,000 as of December 31, 2001 and 2000,
respectively.
PROFIT-SHARING AND DEFINED CONTRIBUTIONS PLANS
The Company has a non-contributory deferred profit-sharing plan,
covering substantially all of its employees, which provides for
retirement and disability benefits. The Company's contribution to the
profit-sharing plan is discretionary and is generally based on a
formula related to net income. The Company's contributions for the
years ended December 31 were as follows: 2001 - $250,000; 2000 -
$250,000; 1999 - $753,000.
63
The Company has a defined contribution plan under Section 1165(e) of
the Puerto Rico Treasury Department Internal Revenue Code, covering all
full-time employees of the Company who have one year of service and are
age twenty-one or older. Under the provisions of this Plan,
participants may contribute each year from 2% to 10% of their
compensation after deducting social security, up to a specified
maximum. The Company contributes 50 percent of the first 6 percent of
base compensation that a participant contributes to the Plan.
Participants are immediately vested in their contributions plus actual
earnings thereon. The Company's contributions plus actual earnings
thereon are 100 percent vested after five years of credited service. In
case of death or disability, a participant will be 100 percent vested
regardless of the number of years of credited service. The Company's
contributions for the years ended December 31, 2001, 2000 and 1999,
amounted to $286,000, $236,000 and $217,000, respectively.
15. ACQUISITION
On July 1, 2001, the Company acquired for $1.1 million the 100% of the
voting shares of a general insurance agency headquartered in Mayaguez,
Puerto Rico (the "Agency") from a related party. The net assets
acquired were not significant. The new corporation is a wholly-owned
subsidiary of the Company, and operates as a general agent by placing
property and casualty insurance, as well as life and disability
insurance. This transaction was approved by the regulatory authorities.
16. MINIMUM REGULATORY CAPITAL REQUIREMENTS:
The Company is subject to examination, regulation and periodic
reporting under the Bank Holding Company Act of 1956, as amended, which
is administered by the Board of Governors of the Federal Reserve
System. Westernbank is regulated by the Federal Deposit Insurance
Corporation ("FDIC") and by the Office of the Commissioner of Financial
Institutions of Puerto Rico. Westernbank's deposits are insured by the
Savings Association Insurance Fund and by the Bank Insurance Fund,
which are administered by the FDIC, up to $100,000 per depositor.
The Company (on a consolidated basis) and Westernbank (the "Companies")
are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Companies' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Companies must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions
are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Companies to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2001 and 2000, that the Companies met all
capital adequacy requirements to which they are subject.
As of December 31, 2001, Westernbank qualified as a well capitalized
institution 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 table. At December 31,
2001, there are no conditions or events that management believes have
changed Westernbank's category.
64
The Companies' actual capital amounts and ratios as of December 31,
2001 and 2000 are also presented in the table below:
MINIMUM TO BE
MINIMUM WELL CAPITALIZED UNDER
CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
------------------ ------------------------ ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
AS OF DECEMBER 31, 2001:
Total Capital to Risk Weighted Assets:
Consolidated $ 424,680 12.65% $ 268,657 8 % N/A N/A
Westernbank 407,793 12.15 268,594 8 $ 335,743 10 %
Tier I Capital to Risk Weighted Assets:
Consolidated $ 386,316 11.64% $ 132,794 4 % N/A N/A
Westernbank 369,429 11.13 132,763 4 $ 199,144 6 %
Tier I Capital to Average Assets:
Consolidated $ 386,316 7.17% $ 161,675 3 % N/A N/A
Westernbank 369,429 6.86 161,626 3 $ 269,377 5 %
AS OF DECEMBER 31, 2000:
Total Capital to Risk Weighted Assets:
Consolidated $ 279,275 11.73% $ 190,409 8 % N/A N/A
Westernbank 279,275 11.73 190,409 8 $ 238,012 10 %
Tier I Capital to Risk Weighted Assets:
Consolidated $ 250,347 10.65% $ 94,048 4 % N/A N/A
Westernbank 250,347 10.65 94,048 4 $ 141,071 6 %
Tier I Capital to Average Assets:
Consolidated $ 250,347 6.02% $ 124,698 3 % N/A N/A
Westernbank 250,347 6.02 124,698 3 $ 207,830 5 %
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.
65
17. COMMON AND PREFERRED STOCK TRANSACTIONS:
During 2001, 2000 and 1999, the Company acquired and retired shares of
common stock as follows: $28,000 (1,700 shares) in 2001; $4,781,000
(498,300 shares) in 2000; and $1,222,000 (80,309 shares) in 1999.
The Company's Board of Directors approved the issuance of the following
non-cumulative, monthly income preferred stock (liquidation preference
$25 per share):
Issuance Proceeds From
Issuance Dividend Price Per Shares Issuance, Net of Issuance
Year Type of Preferred Stock Rate Share Issued Issuance Costs Costs
-------------------------------------------------------------------------------------------------------------------
1998 Convertible, 1998 Series A 7.125 % $25 1,219,000 $29,143,000 $ 1,332,000
1999 Non-convertible, 1999 Series B 7.25 25 2,001,000 48,273,000 1,752,000
2001 Non-convertible, 2001 Series C 7.60 25 2,208,000 53,103,000 2,097,000
2001 Non-convertible, 2001 Series D 7.40 25 1,791,999 43,238,000 1,562,000
- --------- ------------ -----------
Total 7,219,999 $173,757,000 $ 6,743,000
========= ============ ===========
The preferred stock rank senior to the Company's common stock as to
dividends and liquidation rights. Each share of the, 1998 Series A
preferred stock is convertible, at the holder's option, at any time on
or after the 90th day following the issue date, into .995 shares of the
Company's common stock, subject to adjustment upon certain events. The
per share conversion ratio equates to a price of $25.125 per share of
common stock.
The Company may redeem, in whole or in part, at any time at the
following redemption prices, if redeemed during the twelve month period
beginning July 1 for 1998 Series A, May 28 for 1999 Series B, March 30
for the 2001 Series C and August 1 for the 2001 Series D of the years
indicated below, plus accrued and unpaid dividends, if any, for the
current period to the date of redemption:
REDEMPTION
PRICE PER SHARE
YEAR SERIES A SERIES B SERIES C SERIES D
-------------------------------------------------------------------------------------------------------
2002 $26.00 - - -
2003 25.75 - - -
2004 25.50 $ 26.00 - -
2005 25.25 25.50 - -
2006 25.00 25.00 $ 25.50 $ 25.50
2007 25.00 25.00 25.25 25.25
2008 and thereafter 25.00 25.00 25.00 25.00
66
18. STOCK COMPENSATION PLANS:
In June 1999, the Board of Directors approved the 1999 Qualified Stock
Option Plan (the "1999 Qualified Option Plan") and the 1999
Nonqualified Stock Option Plan (the "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 plans 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 reorganization. At
December 31, 2001 and 2000, the Company had outstanding 2,370,000 and
2,295,000 options, respectively, under the 1999 Qualified Stock Option
Plan. These options were granted to various executives' officers and
employees, which will become fully exercisable after five years
following the grant date. During 2001 and 2000, the Company granted
75,000 and 2,295,000 options, respectively, to various executive
officers and employees. None of these options were exercised or
forfeited in 2001 and 2000.
As describe in Note 1, the Company follows the intrinsic value-based
method. Accordingly, no compensation expense was recognized at the
measurement date. Had compensation cost for the Company's stock option
plans been determined based on the fair value at the grant dates for
awards under the plans consistent with the method prescribed by FASB
Statement No. 123, the Company's net income and earnings per share
would have been adjusted to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31,
2001 2000
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Net income $ 62,155 $ 61,373 $ 44,588 $43,837
======== ======== ========= =======
Basic and diluted
earnings per share $ 1.25 $ 1.23 $ 0.93 $ 0.91
======== ======== ========= =======
The fair value of the options granted in years 2001 and 2000 were $4.87
and $2.68 per option, respectively. They were estimated on the grant
date using the Black-Scholes option pricing model with the following
weighted average assumptions: (1) the dividend yield was 2.14% (2.42%
in 2000); (2) the expected life was 7 years; (3) the expected
volatility was 41.95% (37.00% in 2000); and, (4) the risk-free interest
rate was 5.40% (6.15% in 2000). The weighted market price of the stock
at the grant date was $11.68 ($ 8.25 in 2000).
67
19. FINANCIAL INSTRUMENTS:
In the normal course of business, the Company becomes a party to
financial instruments with off-balance sheet risk to meet the financing
needs of its customers and to reduce its own exposure to fluctuations
in interest rates. These financial instruments include commitments to
extend credit, standby letters of credit and derivative financial
instruments. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition. The contract or
notional amounts of those instruments reflect the extent of involvement
the Company has in particular classes of financial instruments.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
notional amount of those instruments, which do not necessarily
represent the amounts potentially subject to risk. In addition, the
measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are
identified. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Unless noted otherwise, the Company does not require collateral or
other security to support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income producing commercial properties.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
The contract amount of financial instruments, whose amounts represent
credit risk at December 31, 2001 and 2000, was as follows:
2001 2000
(IN THOUSANDS)
Commitments to extend credit:
Fixed rates $ 11,839 $ 10,195
Variable rates 151,757 133,141
Unused lines of credit:
Commercial 53,723 39,074
Credit cards and other 75,683 57,191
Stand-by letters of credit 2,340 1,180
68
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes various derivative instruments for hedging
purposes and other than hedging purposes such as asset/liability
management. These transactions involve both credit and market risk. The
notional amounts are amounts on which calculations and payments are
based. Notional amounts do not represent direct credit exposures.
Direct credit exposure is limited to the net difference between the
calculated amounts to be received and paid, if any. The actual risk of
loss is the cost of replacing, at market, these contracts in the event
of default by the counterparties. The Company controls the credit risk
of its derivative financial instrument agreements through credit
approvals, limits and monitoring procedures.
The Company enters into interest-rate swap contracts in managing its
interest rate exposure. Interest-rate swap contracts generally involve
the exchange of fixed and floating-rate interest-payment obligations
without the exchange of the underlying principal amounts. Entering into
interest-rate swap contracts involves not only the risk of dealing with
counterparties and their ability to meet the terms of the contracts,
but also the interest rate risk associated with unmatched positions.
Interest rate swaps are the most common type of derivative contract
that the Company utilizes. Situations in which the Company utilizes
interest rate swaps are: a) to convert its fixed-rate certificates of
deposit (liabilities) to a variable rate, and b) to convert its
variable rate - term notes and FHLB advances (liabilities) to a fixed
rate. By entering into the swap, the principal amount of the hedged
item would remain unchanged but the interest payment streams would
change.
Interest-rate swap contracts used to convert its fixed-rate
certificates of deposit (liabilities) to a variable rate, mature
between ten to twenty years with a right by the counterparty to call
after the first anniversary. The Company has an identical right to call
the certificates of deposit.
In addition, the Company offers its customers certificates of deposit
which contain an embedded derivative tied to the performance of
Standard & Poor's 500 Composite Stock Index that must be bifurcated
from the host deposit and recognized in the statement of financial
condition in accordance with SFAS 133. At the end of five years, the
depositor will receive a specified percent of the average increase of
the month-end value of the stock index. If such index decreases, the
depositor receives the principal without any interest. The Company uses
interest rate swap and option agreements with major broker dealer
companies to manage its exposure to the stock market. Under the terms
of the swap agreements, the Company will receive the average increase
in the month-end value of the index in exchange for a quarterly fixed
interest cost. Under the option agreements, the Company also will
receive the average increase in the month-end value of the index but in
exchange for the payment of a premium when the contract is initiated.
Since the embedded derivative instrument of the certificates of deposit
and the interest rate swap and option agreements do not qualify for
hedge accounting, these derivative instruments are marked to market
through 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.
Derivatives instruments are generally negotiated over-the-counter
("OTC") contracts. Negotiated OTC derivatives are generally entered
into between two counterparties that negotiate specific agreement
terms, including the underlying instrument, amount, exercise price and
maturity.
69
Information pertaining to the notional amounts of the Company's
derivative financial instruments as of December 31, was as follows:
NOTIONAL AMOUNT
2001 2000
Type of Contract (In thousands)
HEDGING ACTIVITIES:
FAIR VALUE HEDGE:
Interest rate swaps used to hedge
fixed rate certificates of deposit $ 548,347 $ 730,739
CASH FLOW HEDGE:
Interest rate swaps used to hedge variable rate:
Term notes 40,000 40,000
FHLB advances 50,000
----------- ----------
TOTAL $ 588,347 $ 820,739
=========== ==========
DERIVATIVES NOT DESIGNATED AS HEDGE:
Interest rate swaps (unmatched portion) $ 11,653 $ 14,240
Interest rate swaps used to manage exposure
to the stock market 36,329
Embedded options on stock indexed deposits 37,952
Purchased options used to manage exposure
to the stock market on stock indexed deposits 1,623
Caps 100,000 100,000
----------- ----------
TOTAL $ 187,557 $ 114,240
=========== ==========
At December 31, 2001, the fair value of the hedging instruments and the
hedged deposits represented an unrealized net loss and gain,
respectively of $10.8 million, and were recorded as "Other Liabilities"
and as a decrease to "Deposits", respectively, in the accompanying
December 31, 2001 statement of financial condition. For the year ended
December 31, 2001, the net loss on fair value hedge derivative
activities and the net gain on hedged deposits amounted to $8,165,000.
At December 31, 2001, the fair value of the cash flow hedge derivatives
activities represented an unrealized loss of $356,000 and was recorded
as "Other Liabilities" in the accompanying December 31, 2001 statement
of financial condition. Their effect on "Other Comprehensive Income" at
December 31, 2001 was a decrease of $217,000, net of taxes of $139,000.
At December 31, 2001 and 2000, the fair value of the derivatives not
designated as hedge represented an unrealized net loss of $7,865,000
and $326,000, respectively, and were recorded as a decrease in "Other
Assets" ($8,000 in 2001), as an increase in "Deposits" ($3,821,000 in
2001) and as an increase in "Other Liabilities" ($4,036,000 in 2001 and
$326,000 in 2000) in the accompanying statements of financial
condition. For the years ended December 31, 2001, 2000 and 1999 net
gain (loss) on derivatives not designated as hedge amounted to
($838,000), $11,000, and ($323,000), respectively.
70
A summary of the types of swaps used, excluding those used to manage
exposure to the stock market, and their terms at December 31, follows:
2001 2000
(DOLLARS IN THOUSANDS)
Pay floating/received fixed:
Notional amount $ 560,000 $ 744,979
Weighted average receive rate at year end 6.13% 6.76%
Weighted average pay rate at year end 2.21% 6.44%
Floating rate in percentage of three month LIBOR,
plus a spread ranging from minus .22% to plus .25% 100% 100%
2001 2000
(DOLLARS IN THOUSANDS)
Pay fixed/receive floating:
Notional amount $ 40,000 $ 90,000
Weighted average receive rate at year end 1.60% 5.65%
Weighted average pay rate at year end 4.49% 5.32%
Floating rate in percentage of
three month LIBOR, minus .10% 85% to 100% 85% to 100%
The changes in notional amount of swaps outstanding during the years ended
December 31, follows:
2001 2000
(IN THOUSANDS)
Beginning balance $ 834,979 $ 509,479
New swaps 456,329 356,500
Matured swaps (654,979) (31,000)
--------- ---------
Ending balance $ 636,329 $ 834,979
========= =========
71
At December 31, 2001, the maturities of interest rate swaps, cap
agreement, embedded options and purchased options by year were as
follows:
YEAR ENDING EMBEDDED PURCHASED
DECEMBER 31, SWAPS CAP OPTIONS OPTIONS
(IN THOUSANDS)
2002 $ 40,000 $ 100,000
2003 35,000
2007 and thereafter 561,329 $ 37,952 $ 1,623
--------- --------- -------- -------
Total $ 636,329 $ 100,000 $ 37,952 $ 1,623
========== ========= ========= ========
Swap agreements amounting to $525,000,000 at December 31, 2001; provide
the counterparties the option to cancel the swap agreement on any
interest payment date after the first anniversary (matching the call
option that the Company has on the hedged certificates of deposit).
During the years ended December 31, 2001 and 2000, various
counterparties of swap agreements exercised their option to cancel
their swaps and immediately, the Company exercised its option to call
the hedged certificates of deposit. No gains or losses resulted from
above cancellations.
At December 31, 2001, the carrying value of the specific collateral
held by the counterparties consisted of investments securities held to
maturity of $16,743,000.
72
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, were as follows:
2001 2000
------------------------------ ---------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(IN THOUSANDS)
FINANCIAL ASSETS:
Cash and due from banks $ 62,414 $ 62,414 $ 45,936 $ 45,936
Securities purchased under
agreements to resell 136,096 136,096 125,809 125,809
Federal funds sold 20,037 20,037 43,500 43,500
Interest-bearing deposits in banks 26,214 26,214 11,305 11,305
Trading securities 4,609 4,609 2,161 2,161
Investment securities available for sale 281,682 281,682 27,806 27,806
Investment securities held to maturity 2,369,775 2,362,836 1,656,687 1,620,264
Federal Home Loan Bank stock 38,450 38,450 29,800 29,800
Mortgage loans held for sale 5,253 5,253 4,640 4,695
Loans (excluding allowance for loan losses) 2,876,768 2,924,974 2,232,588 2,236,855
Accrued interest receivable 32,820 32,820 46,951 46,951
Mortgage servicing rights 2,091 2,091 2,085 2,085
Derivative options purchased 323 323
FINANCIAL LIABILITIES:
Deposits:
Non-interest bearing 123,931 123,931 120,559 120,559
Interest bearing 3,084,502 3,081,878 2,484,663 2,491,001
Securities sold under
agreements to repurchase 2,059,646 2,164,736 1,179,073 1,183,400
Advances from FHLB 120,000 133,227 120,000 120,020
Term notes 43,000 43,438 48,000 47,495
Accrued interest payable 35,976 35,976 44,473 44,473
Interest rate swaps in a net payable position 15,164 15,164
Other 2,435 2,435 1,776 1,776
2001 2000
------------------------ ------------------------
CONTRACT OR CONTRACT OR
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
(IN THOUSANDS)
OFF-BALANCE SHEET ITEMS
Assets:
Interest rate swaps in a
net receivable position $ - $ - $ 419,000 $ 5,622
LIABILITIES:
Commitments to extend credit 163,596 (1,622) 143,336 (1,071)
Unused lines of credit:
Commercial 53,723 (55) 39,074 (154)
Credit cards and other 75,683 (171) 57,191 (205)
Stand-by letters of credit 2,340 (23) 1,180 (12)
Interest rate swaps in a
net payable position 636,329 (a) 415,979 (8,375)
(a) Effective January 1, 2001, derivatives instruments are recognized in
the statement of financial condition at fair value.
73
20. RESERVE FUND:
The Banking Law of Puerto Rico requires that a reserve fund be
established by banking institutions and that annual transfers of at
least 10% of net income be made, until such reserve fund equals 10% of
total deposits or total paid-in capital, whichever is greater. Such
transfers restrict the retained earnings, which would otherwise be
available for dividends.
21. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a summary of the unaudited quarterly results of
operations (in thousands except for per share data):
2001 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
Total interest income $ 84,432 $ 87,416 $ 87,521 $ 83,966
Total interest expense 55,816 55,525 55,301 51,627
-------- -------- -------- --------
Net interest income 28,616 31,891 32,220 32,339
Provision for loan losses 3,000 3,000 3,228 3,050
-------- -------- -------- --------
Net interest income after
provision for loan losses 25,616 28,891 28,992 29,289
Total other income, net 4,907 3,275 5,066 4,933
Total operating expenses (14,214) (14,825) (15,085) (16,186)
-------- -------- -------- --------
Income before income taxes 16,309 17,341 18,973 18,036
Provision for income taxes 2,569 1,987 2,079 1,869
-------- -------- -------- --------
Net income $ 13,740 $ 15,354 $ 16,894 $ 16,167
======== ======== ======== ========
Basic and diluted earnings per
common share $ 0.30 $ 0.31 $ 0.33 $ 0.31
======== ======== ======== ========
2000 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
Total interest income $ 65,766 $ 67,804 $ 74,607 $ 82,410
Total interest expense 41,061 43,728 51,063 56,285
-------- -------- -------- --------
Net interest income 24,705 24,076 23,544 26,125
Provision for loan losses 2,000 2,000 2,000 2,700
-------- -------- -------- --------
Net interest income after
provision for loan losses 22,705 22,076 21,544 23,425
Total other income, net 3,229 3,011 3,753 3,875
Total operating expenses (13,323) (12,559) (11,559) (15,775)
-------- -------- -------- --------
Income before income taxes 12,611 12,528 13,738 11,525
Provision for income taxes 2,046 1,331 1,986 451
-------- -------- -------- --------
Net income $ 10,565 $ 11,197 $ 11,752 $ 11,074
======== ======== ======== ========
Basic and diluted earnings per
common share $ 0.22 $ 0.23 $ 0.25 $ 0.23
======== ======== ======== ========
74
22. SEGMENT INFORMATION:
The Company's management monitors and manages the financial performance
of two primary business segments, the operations of Westernbank in
Puerto Rico and those of the division known as Westernbank
International. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. The
Company evaluates performance based on net interest income and other
income. Intersegment sales and transfers, if any, are accounted for as
if the sales or transfers were to third parties, that is, at current
market prices. Operating expenses and provision for income taxes are
analyzed on a combined basis. All other segments mainly include the
transactions of the parent company only which mainly consists of the
equity in subsidiaries.
The financial information presented below was derived from the internal
management accounting system and are based on internal management
accounting policies. The information presented does not necessarily
represent each segment's financial condition and results of operations
as if they were independent entities.
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2001
--------------------------------------------------
IN PUERTO RICO INTERNATIONAL TOTAL
(IN THOUSANDS)
Interest income $ 255,456 $ 79,840 $ 335,296
Interest expense 174,888 40,243 215,131
----------- ----------- -----------
Net interest income 80,568 39,597 120,165
Provision for loan losses (12,070) (12,070)
Other income, net 15,942 763 16,705
Equity in loss of subsidiary (192) (192)
----------- ----------- -----------
Total net interest income and other income $ 84,248 $ 40,360 $ 124,608
=========== =========== ===========
Total assets $ 4,514,001 $ 1,825,915 $ 6,339,916
=========== =========== ===========
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 2000
--------------------------------------------------
IN PUERTO RICO INTERNATIONAL TOTAL
(IN THOUSANDS)
Interest income $ 245,608 $ 44,979 $ 290,587
Interest expense 167,040 25,097 192,137
----------- ----------- -----------
Net interest income 78,568 19,882 98,450
Provision for loan losses (8,700) (8,700)
Other income, net 13,839 19 13,858
Intersegment revenue 266 266
Intersegment expense (266) (266)
Equity in loss of subsidiary (219) (219)
----------- ----------- -----------
Total net interest income and other income $ 83,222 $ 20,167 $ 103,389
=========== =========== ===========
Total assets $ 3,344,581 $ 916,815 $ 4,261,396
=========== =========== ===========
75
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1999
--------------------------------------------------
IN PUERTO RICO INTERNATIONAL TOTAL
(IN THOUSANDS)
Interest income $ 202,290 $ 30,697 $ 232,987
Interest expense 108,274 22,532 130,806
----------- ----------- -----------
Net interest income 94,016 8,165 102,181
Provision for loan losses (14,000) (14,000)
Other income, net 12,154 84 12,238
Intersegment revenue 116 116
Intersegment expense (116) (116)
Equity in loss of subsidiary (395) (395)
----------- ----------- -----------
Total net interest income and other income $ 91,891 $ 8,133 $ 100,024
=========== =========== ===========
Total assets $ 2,903,174 $ 471,608 $ 3,374,782
=========== =========== ===========
2001 2000 1999
(IN THOUSANDS)
Interest income:
Reportable segments $ 335,296 $ 290,587 $ 232,987
All other 8,039
----------- ----------- -----------
Consolidated interest income $ 343,335 $ 290,587 $ 232,987
=========== =========== ===========
Total net interest income and other income:
Reportable segments $ 124,608 $ 103,389 $ 100,024
All other 68,381 44,789 967
----------- ----------- -----------
Total 192,989 148,178 100,991
Less eliminations (62,020) (44,560) (571)
----------- ----------- -----------
Consolidated total net interest income and
other income $ 130,969 $ 103,618 $ 100,420
=========== =========== ===========
Total assets:
Reportable segments $ 6,339,916 $ 4,261,396 $ 3,374,782
All other 642,398 253,312 228,499
----------- ----------- -----------
Total 6,982,314 4,514,708 3,603,281
Less eliminations (1,094,120) (253,851) (228,710)
----------- ----------- -----------
Consolidated total assets $ 5,888,194 $ 4,260,857 $ 3,374,571
=========== =========== ===========
76
23. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Condensed financial information pertaining only to W Holding Company,
Inc. is as follows:
CONDENSED STATEMENT OF FINANCIAL CONDITION
(PARENT COMPANY ONLY)
DECEMBER 31, 2001
(IN THOUSANDS)
ASSETS
Cash $ 1
Dividends and other accounts receivable
from bank subsidiary 1,599
Investment in bank subsidiary 371,022
Investment in nonbank subsidiary 1,773
Advances to bank subsidiary 15,000
---------
TOTAL ASSETS $ 389,395
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Dividends payable $ 1,419
Income tax payable 67
---------
TOTAL LIABILITIES 1,486
STOCKHOLDERS' EQUITY 387,909
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 389,395
=========
CONDENSED STATEMENT OF INCOME
(PARENT COMPANY ONLY)
YEAR ENDED
DECEMBER 31, 2001
(IN THOUSANDS)
Dividends from bank subsidiary $ 22,138
Interest on advances to bank subsidiary 720
---------
Total income 22,858
Operating expenses 512
---------
Income before income taxes and change
in undistributed earnings of subsidiaries 22,346
Provision for income taxes - current 67
---------
Income before change in undistributed
earnings of subsidiaries 22,279
Increase in undistributed earnings from:
Bank subsidiary 39,603
Nonbank subsidiary 273
---------
Net income $ 62,155
=========
77
CONDENSED STATEMENT OF CASH FLOW
(PARENT COMPANY ONLY)
YEAR ENDED
DECEMBER 31, 2001
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 62,155
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in undistributed earnings of subsidiaries (39,876)
Increase in dividends and other accounts
receivable from bank subsidiary (700)
Increase in income tax payable 67
---------
Net cash provided by operating activities 21,646
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in advances to bank subsidiary (15,000)
Capital contributions in subsidiaries (81,740)
Purchase of nonbank subsidiary, net of cash acquired (1,070)
---------
Net cash used in investing activities (97,810)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock 96,341
Repurchase of common stock for retirement (28)
Dividends paid (20,148)
---------
Net cash provided by financing activities 76,165
---------
NET INCREASE IN CASH 1
CASH AT JANUARY 1, 2001
---------
CASH AT DECEMBER 31, 2001 $ 1
=========
78
The principal source of income for the Company consists of dividends
from its bank subsidiary, Westernbank. As a member subject to the
regulations of the Federal Reserve Board, the Company must obtain
approval from the Federal Reserve Board for any dividend if the total
of all dividends by it in any calendar year would exceed the total of
its consolidated net profits for the year, as defined by the Federal
Reserve Board, combined with its retained net profits for the two
preceding years. The payment of dividends by Westernbank to the Company
may also be affected by other regulatory requirements and policies,
such as the maintenance of certain regulatory capital levels. Up to
December 31, 2000, the Company had no other operations other than those
from its investment in Westernbank Puerto Rico and the stockholders'
equity transactions. Cash dividend paid by Westernbank to the Company
amounted to $18,886,184 and $4,085,000 for the years ended December 31,
2000 and 1999, respectively.
******
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein with respect to directors is
incorporated herein by reference from the definitive proxy statement of the
Company to be filed supplementary.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
definitive proxy statement to be filed supplementary.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
definitive proxy statement to be filed supplementary.
80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
definition proxy statement to be filed supplementary.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) The following financial statements are incorporated
by reference from Item 8 hereof:
- Report of Independent Accountants
- Consolidated Statements of Financial Condition as of December
31, 2001 and 2000
- Consolidated Statements of Income for each of the three years
in the period ended December 31, 2001
- Consolidated Statements of Changes in Stockholders' Equity and
of Comprehensive Income for each of the three years in the
period ended December 31, 2001
- Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2001
- Notes to Consolidated Financial Statements
(2) Not applicable.
90
(3) The following exhibits are filed as part of this Form 10-K,
and this list includes the Exhibit Index.
NO. EXHIBIT
--- -----------------------------------------------------
3.1 Articles of Incorporation (incorporated by reference
herein to Exhibit 3.1 to the Company's Registration
Statement on Form S-4, File No. 333-76975)
3.2 Bylaws (incorporated by reference herein to Exhibit
4 to the Company's Registration Statement on Form
8-A, Filed on November 29, 2001
10.1 Form of 1999 Qualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.1 to
the Company's Registration Statement on Form S-4 No.
333-76975)
10.2 Form of 1999 Nonqualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.2 to
the Company's Registration Statement on Form S-4
333-76975)
10.3 Employment agreement between Westernbank Puerto Rico
and Mr. Miguel Vazquez.
10.4 Employment agreement between Westernbank Puerto Rico
and Mr. Alfredo Archilla
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) See (a) (3) above for all exhibits filed herewith and the Exhibit
Index.
(d) Not applicable.
91
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
W Holding Company, Inc.
By: /s/ FRANK C. STIPES
----------------------------------------
Date: March 28, 2002
Frank C. Stipes, Chairman of the
Board, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ FRANK C. STIPES
-------------------------------------------
Frank C. Stipes, Chairman of the Board, Date: March 28, 2002
Chief Executive Officer and President
/s/ ANGEL L. ROSAS
-------------------------------------------
Angel L. Rosas, Director Date: March 28, 2002
/s/ CESAR A. RUIZ
-------------------------------------------
Cesar A. Ruiz, Director Date: March 28, 2002
/s/ PEDRO R. DOMiNGUEZ
-------------------------------------------
Pedro R. Dominguez, Director Date: March 28, 2002
/s/ CORNELIUS TAMBOER
-------------------------------------------
Cornelius Tamboer, Director Date: March 28, 2002
/s/ FREDESWINDA G. FRONTERA
-------------------------------------------
Fredeswinda G. Frontera, Directress Date: March 28, 2002
/s/ FREDDY MALDONADO
-------------------------------------------
Freddy Maldonado Date: March 28, 2002
Chief Financial Officer and Vice
President of Finance and Investment
92
EXHIBIT INDEX
EXHIBIT
NO. EXHIBIT
------- ----------------------------------------------------
3.1 Articles of Incorporation (incorporated by reference
herein to Exhibit 3.1 to the Company's Registration
Statement on Form S-4, File No. 333-76975)
3.2 Bylaws (incorporated by reference herein to Exhibit
4 to the Company's Registration Statement on Form
8-A, Filed on November 29, 2001
10.1 Form of 1999 Qualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.1 to
the Company's Registration Statement on Form S-4,
File No. 333-76975)
10.2 Form of 1999 Nonqualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.2 to
the Company's Registration Statement on Form S-4,
File No. 333-76975)
10.3 Employment agreement between Westernbank Puerto Rico
and Mr. Miguel Vazquez
10.4 Employment agreement between Westernbank Puerto Rico
and Mr. Alfredo Archilla
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
92