-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HT1uCT2I4LZwwK3NRwz3nueG/J963fUQC9dZO25n71jh6WFmEfunhzlPJbvyBKRr GJF4Gqp8qvxi66ceXkMv8Q== 0000950144-02-003161.txt : 20020415 0000950144-02-003161.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950144-02-003161 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: W HOLDING CO INC CENTRAL INDEX KEY: 0001084887 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 660573197 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-16799 FILM NUMBER: 02594984 BUSINESS ADDRESS: STREET 1: 19 WEST MCKINLEY STREET CITY: MAYAGUEZ STATE: PR ZIP: 00681-1180 BUSINESS PHONE: 7878348617 MAIL ADDRESS: STREET 1: PO BOX 1180 CITY: MAYAGUEZ STATE: PR ZIP: 00681-1180 10-K 1 g75063e10-k.txt W HOLDING COMPANY, INC. ================================================================================ 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 EX-10.3 3 g75063ex10-3.txt EMPLOYMENT AGREEMENT EXHIBIT 10.3 PAYMENT AGREEMENT IN THE EVENT OF A CHANGE OF CONTROL This PAYMENT AGREEMENT IN THE EVENT OF A CHANGE OF CONTROL (the "Agreement") is dated December 7, 2001, between WESTERNBANK PUERTO RICO (the "Bank") and Mr. Miguel Vazquez Seijo (the "Employee"). WHEREAS, the Employee is currently serving as the President of Westernbank Business Credit, a division of Westernbank Puerto Rico; and WHEREAS, the Board believes that it is in the best interests of the Bank to encourage the Employee's continued employment with dedication to the Bank in the face of potentially distracting circumstances arising from the remote possibility of a change in control of the Bank, although no such change is now thought of or contemplated; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions for the payment of special compensation to the Employee in the event of a termination of the Employee's employment in connection with or as a result of a change in control; NOW THEREFORE, IT IS AGREED AS FOLLOWS: 1. TERM. The initial term of this Agreement shall be for a two (2) year period commencing on the date hereof. This Agreement shall be automatically renewed for one (1) additional year on the first and each subsequent anniversary date of this Agreement, unless the Bank gives contrary written notice to the Employee sixty (60) days prior to such renewal date. References herein to the term of this Agreement shall include the initial term and any additional years for which this Agreement is renewed. 2. TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE IN CONTROL. (a) If during the term of this Agreement there is a change in control of the Bank, the Employee shall be entitled to receive as a special compensation a lump sum cash payment as provided for herein, in connection with or within one (1) year after a "Change in Control" (as defined below) in the event the Employee's employment is terminated voluntarily by the Employee or involuntarily by the Bank without cause in connection with or within one (1) year after a change in control has occurred. The amount of this payment shall be equal to three (3) times the annual base compensation, year-end Christmas bonus, and special bonuses, if any, paid to the Employee by the Bank during the calendar year preceding the year in which the Change in Control occurs. Payment under this Section 2(a) shall be in lieu of any amount that may be otherwise owed to the employee as damages for the loss of employment, in the event that such loss occurs. Payment under this Section 2(a) shall not be reduced by any compensation which the Employee may receive from other employment with another employer after termination of the Employee's employment with the Bank, if such termination occurs. No payment hereunder shall affect the Employee's entitlement to any vested benefits or other compensation payments. (b) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if: (i) Twenty-five (25) percent or more of ownership, control, power to vote, or beneficial ownership of any class of voting securities of the Bank is acquired by any person, either directly or indirectly or acting through one or more other persons; (ii) any person (other than any person named as a proxy in connection with any solicitation on behalf of the Board) holds revocable or irrevocable proxies, as to the election or removal of three (3) or more Directors of the Bank, for twenty-five (25) percent or more of the total number of voting shares of the Bank; (iii) any person has received all applicable regulatory approvals to acquire control of the Bank; (iv) any person has commenced a cash tender or exchange offer, or entered into an agreement or received an option, to acquire beneficial ownership of twenty-five (25) percent or more of the total number of voting shares of the Bank, whether or not any requisite regulatory approval for such acquisition has been received, provided that a Change in Control will not be deemed to have occurred under this clause (iv) unless the Board has made a determination that such action constitutes or will constitute a Change in control; or (v) as the result of, or in connection with, any cash tender or Exchange offer, merger, or other business combination, sale of assets or contested election, or any combination of the foregoing transaction, (A) the persons who were directors of the Bank before such transaction shall cease to constitute at least a majority of the Board or its successor, or (B) the persons who were stockholders of the Bank immediately before such transaction do not own more than fifty (50) percent of the outstanding voting stock of the Bank or its successor immediately after such transaction. For purposes of this Section, a "person" includes an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, unincorporated organization, joint-stock company or similar organization or entity or group acting in concert. A person for these purposes shall be deemed to be a "beneficial owner" as that term is used in Rule 13d-3 under the Securities Exchange Act of 1934. 3. NO ASSIGNMENTS. This Agreement is personal to each of the parties hereto. No party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other party hereto. However, in the event of the death of the Employee, all rights to receive payments hereunder shall become rights of the Employee's estate claimable within a twelve (12) month period following the date of death of the Employee. 4. AMENDMENTS OR ADDITIONS: ACTION BY BOARD OF DIRECTORS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties hereto. The prior approval by a majority affirmative vote of the full Board shall be required in order for the Bank to authorize any amendments or additions to this Agreement. 5. SECTION HEADINGS. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 6. COMPENSATION. The special compensation to be received as agreed to herein shall not exceed in any event $1.5 million. 7. GOVERNING LAW. This Agreement shall be governed by the laws of the United States to the extent applicable because of the Bank's status as a federally insured financial institution and otherwise by the laws of the Commonwealth of Puerto Rico. WESTERNBANK PUERTO RICO ATTEST: /s/ Cesar Ruiz BY: /s/ Frank C. Stipes (Secretary) (President) EMPLOYEE: /s/ Miguel Vazquez Seijo EX-10.4 4 g75063ex10-4.txt EMPLOYMENT AGREEMENT EXHIBIT 10.4 PAYMENT AGREEMENT IN THE EVENT OF A CHANGE OF CONTROL This PAYMENT AGREEMENT IN THE EVENT OF A CHANGE OF CONTROL (the "Agreement") is dated December 7, 2001, between WESTERNBANK PUERTO RICO (the "Bank") and Mr. Alfredo Archilla Quinones (the "Employee"). WHEREAS, the Employee is currently serving as the Vice-president of Administration, Supervision, and Human Resources of the Bank; and WHEREAS, the Board believes that it is in the best interests of the Bank to encourage the Employee's continued employment with dedication to the Bank in the face of potentially distracting circumstances arising from the remote possibility of a change in control of the Bank, although no such change is now thought of or contemplated; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions for the payment of special compensation to the Employee in the event of a termination of the Employee's employment in connection with or as a result of a change in control; NOW THEREFORE, IT IS AGREED AS FOLLOWS: 1. TERM. The initial term of this Agreement shall be for a two (2) year period commencing on the date hereof. This Agreement shall be automatically renewed for one (1) additional year on the first and each subsequent anniversary date of this Agreement, unless the Bank gives contrary written notice to the Employee sixty (60) days prior to such renewal date. References herein to the term of this Agreement shall include the initial term and any additional years for which this Agreement is renewed. 2. TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE IN CONTROL. (a) If during the term of this Agreement there is a change in control of the Bank, the Employee shall be entitled to receive as a special compensation a lump sum cash payment as provided for herein, in connection with or within one (1) year after a "Change in Control" (as defined below) in the event the Employee's employment is terminated voluntarily by the Employee or involuntarily by the Bank without cause in connection with or within one (1) year after a change in control has occurred. The amount of this payment shall be equal to three (3) times the annual base compensation, year-end Christmas bonus, and special bonuses, if any, paid to the Employee by the Bank during the calendar year preceding the year in which the Change in Control occurs. Payment under this Section 2(a) shall be in lieu of any amount that may be otherwise owed to the employee as damages for the loss of employment, in the event that such loss occurs. Payment under this Section 2(a) shall not be reduced by any compensation which the Employee may receive from other employment with another employer after termination of the Employee's employment with the Bank, if such termination occurs. No payment hereunder shall affect the Employee's entitlement to any vested benefits or other compensation payments. (b) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if: (i) Twenty-five (25) percent or more of ownership, control, power to vote, or beneficial ownership of any class of voting securities of the Bank is acquired by any person, either directly or indirectly or acting through one or more other persons; (ii) any person (other than any person named as a proxy in connection with any solicitation on behalf of the Board) holds revocable or irrevocable proxies, as to the election or removal of three (3) or more Directors of the Bank, for twenty-five (25) percent or more of the total number of voting shares of the Bank; (iii) any person has received all applicable regulatory approvals to acquire control of the Bank; (iv) any person has commenced a cash tender or exchange offer, or entered into an agreement or received an option, to acquire beneficial ownership of twenty-five (25) percent or more of the total number of voting shares of the Bank, whether or not any requisite regulatory approval for such acquisition has been received, provided that a Change in Control will not be deemed to have occurred under this clause (iv) unless the Board has made a determination that such action constitutes or will constitute a Change in control; or (v) as the result of, or in connection with, any cash tender or Exchange offer, merger, or other business combination, sale of assets or contested election, or any combination of the foregoing transaction, (A) the persons who were directors of the Bank before such transaction shall cease to constitute at least a majority of the Board or its successor, or (B) the persons who were stockholders of the Bank immediately before such transaction do not own more than fifty (50) percent of the outstanding voting stock of the Bank or its successor immediately after such transaction. For purposes of this Section, a "person" includes an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, unincorporated organization, joint-stock company or similar organization or entity or group acting in concert. A person for these purposes shall be deemed to be a "beneficial owner" as that term is used in Rule 13d-3 under the Securities Exchange Act of 1934. 3. NO ASSIGNMENTS. This Agreement is personal to each of the parties hereto. No party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other party hereto. However, in the event of the death of the Employee, all rights to receive payments hereunder shall become rights of the Employee's estate claimable within a twelve (12) month period following the date of death of the Employee. 4. AMENDMENTS OR ADDITIONS: ACTION BY BOARD OF DIRECTORS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties hereto. The prior approval by a majority affirmative vote of the full Board shall be required in order for the Bank to authorize any amendments or additions to this Agreement. 5. SECTION HEADINGS. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 6. COMPENSATION. The special compensation to be received as agreed to herein shall not exceed in any event $1.5 million. 7. GOVERNING LAW. This Agreement shall be governed by the laws of the United States to the extent applicable because of the Bank's status as a federally insured financial institution, and otherwise by the laws of the Commonwealth of Puerto Rico. WESTERNBANK PUERTO RICO ATTEST: /s/ Cesar Ruiz BY: /s/ Frank C. Stipes (Secretary) (President) EMPLOYEE: /s/ Alfredo Archilla Quinones EX-23.1 5 g75063ex23-1.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors of W Holding Company, Inc. Mayaguez, Puerto Rico We consent to the incorporation by reference in the Registration Statement No. 333-60126 of W Holding Company, Inc. on Form S-8 of our reports dated February 22, 2002, appearing in and incorporated by reference in the Annual Report on Form 10-K of W Holding Company, Inc. for the year ended December 31, 2001. DELOITTE & TOUCHE LLP San Juan, Puerto Rico March 28, 2002 Stamp No.1789526 affixed to original. -----END PRIVACY-ENHANCED MESSAGE-----