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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934 (No Fee Required)
Commission File No. 000-27377
W Holding Company, Inc.
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Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0573197
Principal Executive Offices:
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19 West Mckinley Street
Mayaguez, Puerto Rico 00680
Telephone number: (787) 834-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock ($1.00 par value)
7.125% Noncumulative, Convertible Monthly Income Preferred Stock,
1998 Series ($1.00 par value)
7.25% Noncumulative, Non-convertible Monthly Income Preferred Stock,
1999 Series B ($1.00 par value)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant: $215,079,465 based on the closing sales price of $7.75 at March
15, 2000, for 27,752,189 shares.
Number of shares of Common Stock outstanding as of March 15, 2000: 41,795,000
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the annual report to stockholders for the fiscal year ended
December 31, 1999 are incorporated by reference into Part II, Items 5-8
of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III, Items 10-13 of
this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
W Holding Company, Inc. (the "Company") is a bank holding company
offering a full range of financial services through its wholly owned subsidiary,
Westernbank Puerto Rico ("Westernbank"). The Company's primary business is the
business of Westernbank. The Company was organized under the laws of the
Commonwealth of Puerto Rico in February 1999. Effective November 30, 1999,
pursuant to a resolution approved by the stockholders and after receiving all
pertinent regulatory approvals, a reorganization was effected as a result of
which the Company became the sole shareholder of Westernbank Puerto Rico. In
connection with the reorganization, each outstanding share of Westernbank's
common stock and preferred stocks was converted into similar shares of the
Company in a one for one exchange. Until December 31, 1999, the Company had no
operations other than those resulting from its investment in Westernbank. The
Company's executive office is located at 19 West McKinley Street, Mayaguez,
Puerto Rico; its telephone number is (787) 834-8000; its internet email address
is [email protected]; and its web page is at URL:http: //www.wbpr.com.
Westernbank Puerto Rico was chartered as a federal mutual savings and
loan association in 1958 and operated as Western Federal Savings and Loan
Association of Puerto Rico. In January 1984, Western Federal was converted to a
federal mutual savings bank, under the name of "Western Federal Savings Bank of
Puerto Rico." Effective February 21, 1985, Westernbank was converted to a
federal stock savings bank in accordance with federal laws and regulations. As
of the close of business on November 30, 1994, the Savings Bank converted its
charter to that of a Puerto Rico commercial bank under the laws of the
Commonwealth of Puerto Rico and is presently known as Westernbank Puerto Rico.
Westernbank operates 36 branches, 26 of which are located in western Puerto
Rico, 4 in the Metropolitan area, 3 in northeastern Puerto Rico and 3 in
southern Puerto Rico. In 1996, Westernbank commenced operating a division known
as Westernbank International to offer commercial banking and related services
outside of Puerto Rico. In February 1998, Westernbank acquired 80% of the
voting shares of SRG Net, Inc. that operates a shared electronic funds transfer
network. In March 1999, Westernbank acquired the remaining 20% of the voting
shares of SRG Net, Inc. The assets, liabilities, revenues and expenses of the
subsidiary at December 31, 1999 and 1998 and for the years then ended are not
significant.
The principal business of the Company consists of attracting deposits
from the general public and utilizing such funds and proceeds from term notes
and reverse repurchase agreements to invest in residential mortgage loans and
consumer and commercial loans. Historically, the Company's assets have consisted
primarily of long-term, fixed-rate mortgages, while its liabilities consisted
primarily of short-term deposits and reverse repurchase agreements. More
recently, the Company has invested in US and Puerto Rico Governments and
agencies obligations, mortgage-backed securities, repurchase agreements, and
commercial and consumer loans. These investments have created a more flexible
asset structure and increased the Company's liquidity.
The Company is subject to examination, regulation and periodic
reporting under the Bank Holding Company Act of 1956, as amended, which is
administered by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). Westernbank is subject to examination and
comprehensive regulation by the Department of the Treasury, the Puerto Rico
Commissioner of Financial Institutions and the Federal Deposit Insurance
Corporation ("FDIC"). In addition, Westernbank is subject to the regulations of
the Puerto Rico Regulatory Financial Board with respect to rates and fees
charged on certain loans to individuals, and to the regulations of the Puerto
Rico Treasury Department and the Commissioner of Financial Institutions.
Westernbank is a member of the Federal Home Loan Bank ("FHLB") of New York,
which is one of the twelve regional banks comprising the Federal Home Loan Bank
System ("FHLB System"). Deposits with
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Westernbank are insured to the maximum extent provided by law through the
Savings Association Insurance Fund ("SAIF") and Bank Insurance Fund ("BIF")
which are administered by the FDIC.
For segment information, please refer to Note 21 of the audited
consolidated financial statements.
THE BANKING INDUSTRY
The operations of financial institutions are significantly influenced
by general economic conditions, by the related monetary and fiscal policies of
the federal government, and by the policies of regulatory authorities, including
the Federal Reserve Board, the FDIC and, in Puerto Rico, by the Commissioner and
the Puerto Rico Treasury Department. Asset and liability flows and the
respective yields thereon are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for mortgage financing and for consumer, commercial, and
other types of loans, which in turn are affected by the interest rates at which
such financing may be offered and other factors affecting the supply of housing
and the availability of funds.
LENDING ACTIVITIES
GENERAL
At December 31, 1999, the Company's net loans, including mortgage
loans held for sale, ("net loan portfolio") amounted to $1.87 billion or 55.47%
of total assets.
The following table sets forth the composition of the Company's loan
portfolio, including mortgage loans held for sale, by type of loan at the dates
indicated:
December 31,
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1999 1998 1997 1996 1995
---------------- ------------------ ------------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Real estate-mortgage (1) $ 706,792 37.8% $ 407,245 29.9% $ 230,416 29.4% $ 142,990 22.9% $ 137,052 27.3%
Real estate-construction 101,979 5.5 69,215 5.1 24,192 3.1 3,226 0.5 1,540 0.3
Commercial, industrial
and agricultural:
Real estate 677,924 36.2 518,893 38.1 234,071 29.8 187,944 30.1 113,319 22.6
Others 79,343 4.3 72,235 5.3 40,001 5.1 40,351 6.5 22,756 4.5
Consumer (2) 329,682 17.6 309,509 22.7 269,316 34.3 261,137 41.9 240,178 48.0
----------- ----- ---------- ----- --------- ----- --------- ----- --------- -----
Total loans 1,895,720 101.4 1,377,097 101.1 797,996 101.7 635,648 101.9 514,845 102.7
Allowance for loan
losses (23,978) (1.4) (15,800) (1.1) (13,201) (1.7) (12,027) (1.9) (13,644) (2.7)
----------- ----- ---------- ----- --------- ----- --------- ----- --------- -----
Loans, net $ 1,871,742 100% $1,361,297 100% $ 784,795 100% $ 623,621 100% $ 501,201 100%
=========== ===== ========== ===== ========= ===== ========= ===== ========= =====
(1) Includes mortgage loans held for sale.
(2) Includes consumer, loans on deposit, second mortgage, auto and credit card
loans.
Real estate mortgage loans at December 31, 1999, include $684.1
million or 36.55% of net loans portfolio, of fixed and adjustable rate
conventional loans and $22.7 million or 1.21% of mortgages insured or
guaranteed by government agencies of the United Stated or Puerto Rico.
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The Company originated commercial real estate loans during 1999
amounting to approximately $406,725,000 and totaling approximately $677,924,000
at December 31, 1999. In general, commercial real estate loans are considered by
management to be of somewhat greater risk of uncollectibility due to the
dependency on income production or future development of the real estate. The
commercial real estate loans are principally collateralized by property
dedicated to wholesale, retail and rental business activities.
Consumer loans at December 31, 1999, include $254.5 million or 13.60%
of installment loans (of which $173.5 million are collateralized by real
estate), $35.3 million or 1.89% of credit cards, and $35.3 million or 1.88% of
loans on deposits.
During 1999, the Company securitized $46.0 million, $13.8 million and
$9.4 million of conforming mortgage loans into Government National Mortgage
Association, Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation participation certificates, respectively. The Company will
continue the servicing of these loans for a fee.
The following table summarizes the contractual maturities for the
Company's total loan portfolios, excluding mortgage loans held for sale, due
for the periods indicated as of December 31, 1999.
Maturities
Balance ----------------------------------------------------------------------------------
Outstanding After One Year to Five Years After Five Years
at December One Year Fixed Interest Variable Interest Fixed Interest Variable Interest
31, 1999 or Less Rates Rates Rates Rates
-------- ------- ----- ----- ----- -----
(Dollars in Thousands)
Real estate-mortgage $ 704,719 $ 2,859 $ 2,978 $ 8,065 $666,459 $ 24,358
Real estate-construction 101,979 75,203 -- 26,776 -- --
Commercial, industrial and
agricultural:
Real estate (1) 677,924 104,940 133,977 240,782 72,185 126,040
Others 79,343 40,003 18,660 14,114 3,844 2,722
Consumer 329,682 81,974 130,163 68,227 41,060 8,258
---------- ---------- --------- --------- -------- ---------
Total $1,893,647 $ 304,979 $ 285,778 $ 357,964 $783,548 $ 161,378
========== ========== ========= ========= ======== =========
The average term of loans is affected by loan prepayments and enforcement of
due-on-sale clauses.
(1) Includes foreign loans amounting to $5.6 million.
The Company's lending activities are subject to the Federal Reserve
System, the FDIC and the Commissioner regulations which permit financial
institutions and borrowers to develop a broader variety of mortgage instruments
to meet home financing needs. Conventional mortgages originated by the Company
consist principally of fixed-rate loans.
Under the Financial Institution Reform, Recovery and Enforcement Act
("FIRREA"), the permissible amount of loans-to-one borrower follows the
national bank standard for all loans. The national bank standard generally does
not permit loans-to-one borrower to exceed 15% of unimpaired capital and
unimpaired surplus. Loans in an amount equal to an additional 10% of unimpaired
capital and unimpaired surplus also may be made to
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a borrower if the loans are fully secured by readily marketable securities.
FIRREA permits financial institutions to make loans-to-one borrower for any
purpose, not to exceed $500,000. For development of single family homes having
prices not more than $500,000 each, if the bank is in capital compliance, the
limit is the lesser of $30 million or 30% of unimpaired capital (loans to all
borrowers under this exception is limited to 150% of capital). For the finance
of the sale of real property acquired by foreclosure the limit is 50% of
unimpaired capital.
Section 17 of the Puerto Rico Banking Act of 1933, as amended, (the
"Puerto Rico Banking Law") permits commercial banks to make loans to any one
person, firm, partnership or corporation, up to an aggregate amount of fifteen
percent (15%) of paid-in capital and reserve fund of the commercial bank. If
such loans are secured by collateral worth at least twenty-five percent (25%)
more than the amount of the loan, the aggregate maximum amount may reach one
third of the paid-in capital of the commercial bank, plus its reserve fund.
There are no restrictions under Section 17 of the Puerto Rico Banking Law on the
amount of loans, which are wholly secured by bonds, securities and other
evidences of indebtedness of the Government of the United States and the
Commonwealth of Puerto Rico. The Commissioner has issued a Circular Letter
interpreting the lending limits provision of the Puerto Rico Banking Law to
permit commercial banks to additionally take into consideration up to 50% of the
Company's retained earnings in the calculation of the institution's lending
limit if the institution is well capitalized.
As of December 31, 1999, the maximum unsecured amount which the
Company could have loaned to one borrower and the borrower's related entities
under FIRREA and the Puerto Rico Banking Law was approximately $36.0 million
and $28.7 million, respectively. At such date the Company's largest loan
outstanding balance or group of loans-to-one borrower aggregated $31.1 million,
which is substantially secured by collateral. The next largest loan outstanding
balance concentration to one borrower amounted to $20.7 million, which is also
substantially secured by collateral. At December 31, 1999, the loans referred
to above were current.
Federal regulations limit loans by financial institutions to specified
percentages of the value of the real property securing the loans, as determined
by an appraisal at the time the loan is originated (referred to as
"loan-to-value ratios"). Under current regulations, a real estate loan may not
exceed 100% of the appraised value of the secured property at the time of
origination. With respect to home loans originated or refinanced in excess of
90% of the appraised value of the security property, that part of the unpaid
balance that exceeds 80% of the property's value must be insured or guaranteed
by a mortgage insurance company qualified by the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Company's lending policies require private mortgage
insurance when the loan-to-value ratio of a particular loan exceeds 80%. The
Company's policies permit lending up to 90% of the appraised value of
single-family residential dwellings when required mortgage insurance is
obtained; however, in practice, loans rarely exceed 80% of appraised value.
Multi-family and commercial real estate loans are generally limited to 75% of
the lesser of cost or market value as determined by a qualified appraiser.
Under Regulation 26-A, interest rates on mortgage, except for those
guaranteed by the Federal Housing Administration (FHA) and Veterans
Administration (VA), consumer and commercial loans were de-regulated. Pursuant
to Regulation 26-A, the maximum rate which is permitted to be charged on FHA
and VA residential first mortgage loans is .375% over a specified FHLMC auction
rate with a 60-day delivery commitment, rounded to the nearest .125%, and the
maximum rate which may be charged on fixed-rate residential second mortgages is
.25% above the first mortgage rate. These FHLMC auction rates change weekly.
ORIGINATION, PURCHASE AND SALE OF LOANS
Loan originations come from a number of sources. The primary sources
for residential loan originations are depositors and walk-in customers.
Commercial loan originations are also from clients, depositors and by direct
solicitation and referrals.
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All of the Company's lending is subject to its written,
non-discriminatory underwriting standards and to loan origination procedures
prescribed in its policies approved by the Board of Directors. Detailed loan
applications are obtained to determine the borrower's ability to repay, and the
more significant items on these applications are verified through the use of
credit reports, financial statements and confirmations. Property valuations by
independent appraisers, approved by the Company's Board of Directors, are
required for mortgage loans. The Company's Credit Committee approves all
residential and commercial real estate loans originated by the Company up to
one million and all other commercial loans between $250,000 and one million.
All loans exceeding one million are reviewed by the full Board of Directors.
It is the Company's policy to require borrowers to provide title
insurance policies certifying or ensuring that the Company has a valid first
lien on the mortgaged real estate. Borrowers must also obtain hazard insurance
policies prior to closing and, when required by the Department of Housing and
Urban Development, flood insurance policies. Borrowers may be required to
advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which the Company makes
disbursements for items such as real estate taxes, hazard insurance premiums
and private mortgage insurance premiums as they fall due.
The Company's lending policies require that all such loans should
qualify for sale in the secondary market. The loan-to-value ratio on non
conforming conventional mortgages is generally 75%, except that on loans to
finance purchases of residences, the Company may lend up to 90% of the lower of
the purchase price or appraised value, if private mortgage insurance is
obtained by the borrower for amounts in excess of 80%.
The Company grants long-term mortgage loans secured by a first mortgage
over borrower's real property payable in monthly installments for a term up to
forty years. Interest rates are adjusted every ten years and the borrower is
granted the option to prepay the loan during the 90 days following the ten-year
anniversaries, without penalty. Interest on these loans is tied and adjusted as
permitted by law.
The Company originates fixed-rate commercial mortgage loans, for the
construction, acquisition or refinancing of commercial properties. The Company
also makes real estate construction loans subject to firm permanent financing
commitments.
The Company offers different types of consumer loans in order to
provide a full range of financial services to its customers. The Company offers
various types of secured and unsecured consumer loans with varying amortization
schedules. In addition, the Company makes fixed-rate, residential second
mortgage loans.
The Company offers the service of VISA and Master Card. At December
31, 1999, there were approximately 25,144 outstanding accounts, with an
aggregate outstanding balance of $35.3 million and unused credit card lines
available of $33.3 million.
In connection with all consumer and second mortgage loans originated,
the Company's underwriting standards include a determination of the applicants
payment history on other debts and an assessment of the ability to meet
existing obligations and payments on the proposed loan. As of December 31,
1999, $936,000 or 0.28% of the consumer loan portfolio consisted of loans more
than 60 days delinquent in payment.
Commercial loans have increased from $591.1 million as of December 31,
1998 to $757.3 million as of December 31, 1999, or 28.11%. Commercial loans may
be secured or unsecured, with the terms of such loans negotiable.
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The following table reflects the Company's net portfolio loan
origination, purchase, and sale activities for the periods indicated:
Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Beginning balance of net loan, including mortgage
loans held for sale $ 1,361,297 $ 784,795 $ 623,621 $ 501,201 $ 444,826
Mortgage loans held for sale originated 63,812 75,660 39,506 32,321 36,209
Mortgage loans held for sale securitized and
transferred to trading and available for sale securities (68,350) (71,217) (53,963) (30,056) (39,434)
Sales of mortgage loans held for sale -- (9,885)
Real estate mortgage and construction loans
originated and purchased 449,055 299,397 135,719 26,653 46,723
Real estate mortgage loans sold (20,101)
Real estate mortgage loans foreclosed (291) (1,233) (176) (613) (252)
Real estate mortgage and construction loans
repayments (1) (91,814) (80,755) (12,694) (20,681) (12,409)
Commercial loans-net increase (1) 166,139 317,056 45,777 92,220 26,045
Auto loans purchased 20,359 22,380
Auto loans repayments (5,716) (12,283) (26,150) (32,717) (39,142)
Auto loans sold (1,671)
Loans on savings-net increase (2,286) 631 5,962 6,140 220
Other consumer and credit card loans-net increase(1) 28,175 53,516 28,367 27,177 28,781
Decrease (increase) in allowance for loan losses (8,178) (2,599) (1,174) 1,617 (2,861)
----------- ----------- --------- --------- ---------
End Balance $ 1,871,742 $ 1,361,297 $ 784,795 $ 623,621 $ 501,201
=========== =========== ========= ========= =========
Net increase in net loan, including mortgage
loans held for sale $ 510,445 $ 576,502 $ 161,174 $ 122,420 $ 56,375
=========== =========== ========= ========= =========
(1) Excludes effect of amount charged off.
INCOME FROM LENDING ACTIVITIES
The Company realizes interest income and fee income from its lending
activities. For the most part, interest rates charged by the Company on loans
depend upon general interest rates, the demand for loans and the availability
of funds. The Company also receives fees for originating and committing to
originate or purchase loans and also charges service fees for the assumption of
loans, late payments, inspection of properties, appraisals and other
miscellaneous services.
Loan origination and commitment fees vary with the volume and type of
loans and commitments made and sold and with competitive conditions in the
residential and commercial mortgage markets. The Company accounts for loan
origination and commitment fees based on the Financial Accounting Standards
Board Statement No. 91. In accordance with the provisions of this statement,
loan origination fees and related direct loan origination costs are deferred
and amortized over the life of the related loans as a yield adjustment.
Commitment fees are also deferred and amortized over the life of the related
loans as a yield adjustment. If the commitment expires unexercised, the fee is
taken into income.
In accordance with requirements of Financial Accounting Standards
Board Statement No. 125, Accounting for Mortgage Servicing Rights, an amendment
of FASB Statement No. 65 ("SFAS 125"), the Company recognizes as separate
assets the rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. SFAS 125 also requires that the entities assess
the capitalized mortgage servicing rights for impairment
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based on the fair value of those rights. During 1999, the Company sold $69.2
million of conforming mortgage loans to the Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association, and Government National
Mortgage Association. The Company will continue the servicing of the loans sold
for a fee. The Company's accounting policy for these transactions is in
agreement with the provisions of SFAS 125.
NON PERFORMING LOANS AND FORECLOSED REAL ESTATE
When a borrower fails to make a required payment on a loan, the
Company attempts to cure the deficiency by contacting the borrower. In most
cases, deficiencies are cured promptly. If the delinquency exceeds 90 days and
is not cured through the Company's normal collection procedures, the Company
will generally institute measures to remedy the default. If a foreclosure
action is instituted and the loan is not cured, paid in full or refinanced, the
property is sold at a judicial sale at which the Company may acquire the
property. Thereafter, if the Company acquires the property, such acquired
property is appraised and included in the Company's foreclosed real estate held
for sale account at the fair value at the date of acquisition. Then this asset
is carried at the lower of fair value less estimated costs to sell or cost
until the property is sold. In the event that the property is not sold in the
foreclosure sale or sold at a price insufficient to cover the payment of the
loan, the debtor remains liable for the deficiency of the judgment.
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due, but in
no event is it recognized after 90 days in arrears on payments of principal or
interest. When interest accrual is discontinued, all unpaid interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
The following table sets forth information regarding non-performing
loans and foreclosed real estate held for sale by the Company at the dates
indicated:
At December 31,
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1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Real estate-mortgage and construction-loans $ 1,719 $ 1,183 $ 1,651 $ 1,401 $ 1,862
Commercial, industrial and agricultural loans 4,366 5,427 4,988 4,360 2,039
Consumer loans 870 1,172 967 374 326
-------- -------- -------- -------- --------
Total non-performing loans 6,955 7,782 7,606 6,135 4,227
Foreclosed real estate held for sale 2,232 3,271 2,396 2,822 2,627
-------- -------- -------- -------- --------
Total non-performing loans
and foreclosed real estate held for sale $ 9,187 $ 11,053 $ 10,002 $ 8,957 $ 6,854
======== ======== ======== ======== ========
Interest which could have been recorded if the
loans had not been classified as non performing $ 514 $ 1,027 $ 713 $ 398 $ 472
======== ======== ======== ======== ========
Total non-performing loans as a percentage of total
loans receivable, including mortgage loans held
for sale 0.37% 0.56% 0.95% 0.97% 0.82%
======== ======== ======== ======== ========
Total non-performing loans and foreclosed real
estate held for sale as a percentage of total assets 0.27% 0.45% 0.64% 0.70% 0.66%
======== ======== ======== ======== ========
As of December 31, 1999, there was one non-accrual loan with a
principal balance in excess of $500,000.
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ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. The allowance is based on ongoing, quarterly
assessments of the probable estimated losses inherent in the loan portfolio,
and to a lesser extent, unused commitments to provide financing. Our
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include:
- the formula allowance,
- specific allowances for identified problem loans and portfolio
segments, and
- the unallocated allowance.
In addition, the allowance incorporates the results of measuring
impaired loans as provided in:
- Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan", and
- SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures".
These accounting standards prescribe the measurement methods, income
recognition and disclosures concerning impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans not otherwise covered by specific allowances. Loss factors
are based on our historical loss experience and may be adjusted for significant
factors that, in management's judgment, affect the collectibility of the
portfolio as of the evaluation date. Loss factors are described as follows:
- Loan loss factors for commercial loans, including construction and
land acquisition loans, are based on the expected net charge offs for
one year.
- Pooled loan loss factors are also based on expected net charge offs
for one year. Pooled loans are loans that are homogeneous in nature,
such as consumer installment and residential mortgage loans.
Specific allowances are established where management has identified
significant conditions or circumstances related to a credit or portfolio
segment that management believes indicate the probability that a loss has been
incurred in excess of the amount determined by the application of the formula
allowance.
An unallocated allowance is established recognizing the estimation
risk associated with the formula and specific allowances. It is based upon
management's evaluation of various conditions, the effects of which are not
directly measured in determining the formula and specific allowances. These
conditions include then-existing general economic and business conditions
affecting our key lending areas; credit quality trends, including trends in
nonperforming loans expected to result from existing conditions; collateral
values; loan volumes and concentrations; seasoning of the loan portfolio;
recent loss experience in particular segments of the portfolio; and regulatory
examination results, and findings of our internal credit examiners. The
evaluation of the inherent loss regarding these conditions involves a higher
degree of uncertainty because they are not identified with specific problem
credits or portfolio segments.
Management assesses these conditions quarterly. If any of these
conditions is evidenced by a specifically identifiable problem credit or
portfolio segment as of the evaluation date, management's estimate of the
effect of this condition may be reflected as a specific allowance applicable to
this credit or portfolio segment. Where any of these conditions is not
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's evaluation of the probable loss concerning
this condition is reflected in the unallocated allowance.
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The allowance for loan losses is based upon estimates of probable
losses inherent in the loan portfolio. The amount actually observed for these
losses can vary significantly from the estimated amounts. Our methodology
includes several features that are intended to reduce the differences between
estimated and actual losses. Loan loss factors are adjusted quarterly based
upon the level of net charge offs expected by management in the next twelve
months, after taking into account historical loss ratios adjusted for current
trends. Furthermore, our methodology permits adjustments to any loss factor
used in the computation of the formula allowance in the event that, in
management's judgment, significant factors that affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the probable estimated losses inherent in the loan portfolio on a
quarterly basis, we are able to adjust specific and inherent loss estimates
based upon any more recent information that has become available.
At December 31, 1999, our allowance for loan losses was $24.0 million,
consisting of $17.2 million formula allowance, a $2.0 million specific
allowance and a $4.8 million unallocated allowance. As of December 31, 1999, it
represents 1.26% of total loans, and 344.8% of total non-performing loans,
compared with an allowance for loan losses at December 31, 1998 of $15.8
million, or 1.15% of total loans, and 203.0% of total non-performing loans.
During 1999, there were no significant changes in estimation methods
or assumptions that affected our methodology for assessing the appropriateness
of the allowance for loan losses, except that the expected net charge off rates
for commercial loans were slightly increased as compared to those used for 1998
based on continued higher than expected actual net charge offs.
The Company evaluates the loan portfolio for impairment as defined by
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended.
At December 31, 1999, total impaired loans were $13.1 million and the
associated impairment allowance was $1.3 million, compared with total impaired
loans of $9.8 million and an associated impairment allowance of $1.1 million at
December 31, 1998.
9
11
The table below presents a reconciliation of changes in the allowance for loan
losses for the periods indicated:
Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance, beginning of year $ 15,800 $ 13,201 $ 12,027 $ 13,644 $ 10,783
-------- -------- -------- -------- --------
Loans charged off:
Consumer loans 5,154 4,090 2,458 1,525 873
Commercial, industrial and agricultural loans 1,913 134 139 444 85
Real estate-mortgage and construction loans 291 4 701
-------- -------- -------- -------- --------
Total loans charged off 7,358 4,224 2,601 2,670 958
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Consumer loans 1,003 601 480 451 428
Commercial, industrial and agricultural loans 335 42 184 577 307
Real estate-mortgage and construction loans 198 180 411 25 84
-------- -------- -------- -------- --------
Total recoveries of loans previously
charged off 1,536 823 1,075 1,053 819
-------- -------- -------- -------- --------
Net loans charged off 5,822 3,401 1,526 1,617 139
Provision for loan losses 14,000 6,000 2,700 3,000
-------- -------- -------- -------- --------
Balance, end of year $ 23,978 $ 15,800 $ 13,201 $ 12,027 $ 13,644
======== ======== ======== ======== ========
Ratios:
Allowance for loan losses to total loans 1.26% 1.15% 1.65% 1.89% 2.65%
Provision for loan losses to net loans
charged off 240.47% 176.42% 176.93% -- 2158.27%
Recoveries of loans to loans charged off
in previous year 36.36% 31.64% 40.26% 109.92% 44.25%
Net loans charged off to average loans 0.35% 0.32% 0.22% 0.29% 0.03%
Allowance for loans losses to non-
performing loans 344.76% 203.03% 173.56% 196.04% 322.78%
10
12
The following table presents the allocation of the allowance for
credit losses. The percentages reflect the allowance allocated to each
respective loan category at period end, as a percentage of the total period end
balance of that loan category, as set forth in the "Loans" table on page 3.
December 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Commercial, industrial
and agricultural loans $11,772 1.55% $ 7,747 1.31% $ 5,143 1.88% $ 6,884 3.02% $ 5,711 4.20%
Consumer loans 5,718 1.73 5,044 1.63 3,629 1.35 3,480 1.33 2,624 1.09
Real estate-mortgage and
construction-loans 1,743 0.22 1,043 0.22 551 0.22 430 0.29 450 0.32
Unallocated 4,745 -- 1,966 -- 3,878 -- 1,233 -- 4,859 --
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total allowance for
loan losses $23,978 1.26% $15,800 1.15% $13,201 1.65% $12,027 1.89% $13,644 2.65%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Loans are classified as impaired or not impaired in accordance with
Statement of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan, which was implemented in 1995. A loan is impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement.
The Company measures the impairment of a loan based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or as a practical expedient, at the observable market price of the loan
or the fair value of the collateral, if the loan is collateral dependent.
Significant loans (those exceeding $250,000) are individually evaluated for
impairment. Large groups of small balance, homogeneous loans are collectively
evaluated for impairment, loans that are recorded at fair value or at the lower
of cost of market are not evaluated for impairment. The portfolio of mortgage,
consumer and auto loans are considered homogeneous and are evaluated
collectively for impairment.
Impaired loans for which the discounted cash flows, collateral value
or market price exceeds its carrying value do not require an allowance. The
allowance for impaired loans is part of the Company's overall allowance for
loan losses.
The following table sets forth information regarding the investment on
impaired loans:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Investment on impaired loans:
Covered by a valuation allowance $ 8,136 $ 5,499 $ 1,465 $ 1,536 $ 2,500
Do not require a valuation allowance 4,947 4,309 4,234 4,800 1,233
-------- ------- ------- ------- --------
Total $ 13,083 $ 9,808 $ 5,699 $ 6,336 $ 3,733
======== ======= ======= ======= ========
Valuation allowance on impaired loans $ 1,268 $ 1,120 $ 248 $ 140 $ 788
======== ======= ======= ======= ========
Average investment on impaired loans $ 14,919 $ 6,561 $ 5,646 $ 6,292 $ 3,916
======== ======= ======= ======= ========
Interest collected on impaired loans $ 1,470 $ 242 $ 220 $ 192 $ 56
======== ======= ======= ======= ========
11
13
INVESTMENT ACTIVITIES
The Company's investments are managed by the Investment Department.
Purchases and sales are required to be reported monthly to both the Investment
Committee composed of members of the Board of Directors, the President and
Chief Executive Officer and the Chief Financial Officer.
The Investment Department is authorized to purchase and sell federal
funds, interest bearing deposits in banks, banker's acceptances of commercial
banks insured by the FDIC, mortgage-backed securities, Puerto Rico and U.S.
Government and agency obligations, municipal securities rated A or better by
Moody's Investors Service, Inc. ("Moody's") and commercial paper rated P-1 by
Moody's or A-1 by Standard and Poor's Corporation. In addition, the Investment
Department is responsible for the pricing and sale of reverse repurchase
agreements. See "Sources of Funds -- Borrowings" and "Equity Risk Investments."
The Company's investment strategy is affected by both the rates and
terms available on competing investments and tax and other legal
considerations.
The following table presents the carrying value of investments as of
December 31:
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Held to maturity:
US Government and agency obligations $ 1,029,450 $ 727,584 $ 452,508
Puerto Rico Government and agency obligations 16,668 14,818 26,211
Other investments 17,165 -- --
Mortgage and other asset-backed securities 111,249 129,446 147,054
----------- --------- ---------
Total $ 1,174,532 $ 871,848 $ 625,773
=========== ========= =========
Available for sale-mortgage-backed securities $ 22,185 $ 15,231 $ --
=========== ========= =========
Trading securities-mainly mortgage-backed securities $ 1,289 $ 5,090 $ 5,348
=========== ========= =========
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14
The carrying amount of investment securities at December 31, 1999, by
contractual maturity (excluding mortgage and others asset-backed securities),
are shown below:
Weighted
Carrying Amount Average Yield
(Dollars in Thousands)
US Government and agency obligations:
Due within one year or less $ 18,055 5.70%
Due after five years through ten years 33,801 6.12
Due after ten years 977,594 6.77
------------ ----
1,029,450 6.73
------------ ----
Puerto Rico Government and agency obligations:
Due within one year or less 1,680 6.10
Due after one year through five years 604 7.60
Due after five years through ten years 11,384 7.39
Due after ten years 3,000 6.15
------------ ----
16,668 7.05
------------ ----
Other-due after ten years 17,165 8.25
------------ ----
Total 1,063,283 6.74
Mortgage and other assets-backed securities 134,723 7.19
------------ ----
Total $ 1,198,006 6.74%
============ ====
Mortgage and other asset-backed securities at December 31, 1999,
consists of:
(Dollars in Thousands)
Trading securities - Government National Association (GNMA) certificates $ 1,289
-------
Available for sale:
Federal National Mortgage Association (FNMA) certificates 3,658
GNMA certificates 18,527
--------
Total available for sale 22,185
--------
Held to maturity:
Federal Home Loan Mortgage Corporation (FHLMC) certificates 20,594
GNMA certificates 27,637
FNMA certificates 14,736
Collateralized mortgage obligations (CMO) certificates 28,106
Other 20,176
--------
Total held to maturity 111,249
--------
Total mortgage and other asset-backed securities $134,723
========
SOURCES OF FUNDS
GENERAL
Deposits, reverse repurchase agreements and term notes are the primary
sources of the Company's funds for use in lending and for other general
business purposes. In addition, the Company obtains funds in the form of
13
15
loan repayments and income from operations and the maturities and repayments of
securities. Loan repayments are a relatively stable source of funds, while net
increases in deposits and reverse repurchase agreements are significantly
influenced by general interest rates and money market conditions. Short-term
borrowings from the FHLB of New York may also be used to compensate for
reductions in normal sources of funds such as savings inflows at less than
projected levels.
DEPOSITS
The Company offers a limited number of fixed rate accounts. At
December 31, 1999, the Company had total deposits of $2.23 billion (excluding
accrued interest payable), of which $409.4 million or 18.36% consisted of
savings deposits, $105.4 million or 4.73% consisted of interest bearing demand
deposits, $103.7 million or 4.65% consisted of noninterest bearing deposits,
and $1,610.9 million or 72.26% consisted of time deposits. Time deposits
include $894.8 million of brokered deposits. These accounts have historically
been a stable source of funds. The Company also offers negotiable order of
withdrawal ("NOW") accounts, Super Now Accounts, special checking accounts and
commercial demand accounts. At December 31, 1999, the scheduled maturities of
time certificates of deposit and other time deposits in amounts of $100,000 or
more are as follows:
(Dollars in Thousands)
3 months or less $ 503,839
3 to 6 months 141,962
6 to 12 months 88,947
over 12 months 527,534
-----------
Total $ 1,262,282
===========
The following table sets forth the average amount and the average rate
paid on the following deposit categories for the years ended December 31:
1999 1998 1997
---- ---- ----
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Time deposits $ 1,377,977 5.44% $ 800,139 5.49% $ 470,429 5.50%
Savings deposits 405,288 3.07 372,696 3.04 353,977 3.03
Interest bearing demand deposits 105,774 2.93 91,308 3.00 73,337 2.64
Noninterest bearing demand deposits 120,059 -- 75,302 -- 54,004 --
----------- ---- ----------- ---- --------- ----
Total $ 2,009,098 4.51% $ 1,339,445 4.31% $ 951,747 4.05%
=========== ==== =========== ==== ========= ====
The increase in deposits during the last three years is mainly the
result of the increase in the volume of business.
14
16
BORROWINGS
The following table sets forth the borrowings of the Company at the
dates indicated:
December 31,
------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Reverse repurchase agreements $729,968 $506,325 $281,750
Term notes 79,000 84,000 112,000
Advances from FHLB 70,000 31,000
-------- -------- --------
Total $878,968 $621,325 $393,750
======== ======== ========
The Company has made use of institutional reverse repurchase agreements
in order to obtain conventional Funds, primarily through investment banks and
brokerage firms. Such agreements are collateralized with investment securities.
The Company had $730.0 million in total reverse repurchase agreements
outstanding at December 31, 1999, at a weighted average rate of 5.26%. Reverse
repurchase agreements outstanding as of December 31, 1999, mature as follows:
within 30 days $149.3 million; in 2001 $45.0 million; in 2004 $19.0 million; in
2008 $195.6 million; and in 2009 $321.1 million.
At December 31, 1999, the Company had outstanding $79.0 million of term
notes payable, consisting of variable rate notes (85% to 89% of three month
LIBID rate), at a weighted average rate of 5.11%. The amount of $31.0 million
mature in 2000; $5.0 million mature in 2001; and $43.0 million mature in 2002.
The Company may obtain advances from the FHLB of New York upon the
security of the capital stock of the FHLB of New York it owns and certain
investments and home mortgages, provided that certain standards related to
creditworthiness are met. See "Regulation - Federal Home Loan Bank System". Such
advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. As of December 31,
1999, the Company had $70.0 million in outstanding advances from the FHLB, at a
weighted average rate of 5.70%. Advances from FHLB mature as follows: $25.0
million in 2000; $14.0 million in 2001; $10.0 million in 2008; and $21.0 million
in 2009.
The following table presents certain information regarding the
Company's short-term borrowings for the periods indicated.
Year Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Reverse repurchase agreements:
Amount outstanding at year end $149,266 $ 47,345 $ 236,725
Monthly average outstanding balance 159,221 113,574 197,917
Maximum outstanding balance at any month-end 251,956 338,169 241,837
Weighted average interest rate during the year:
For the year 5.24% 5.51% 5.58%
At year end 5.99% 5.25% 5.71%
15
17
The Company enters into interest-rate swap agreements in managing its
interest rate exposure. Interest rate swap transactions generally involve the
exchange of fixed-and floating-rate interest payment obligations without the
exchange of the underlying principal amounts. Entering into interest-rate swap
agreements involves not only the risk of dealing with counterparties and their
ability to meet the terms of the contracts, but also the interest rate risk
associated with unmatched positions. The notional amounts are amounts in which
calculations and payments are based. Notional amounts do not represent direct
credit exposures. Direct credit exposure is limited to the net difference
between the calculated amounts to be received and paid, if any.
At December 31, 1999 and 1998, the Company had outstanding interest
swap agreements with other financial institutions, used to hedge the interest
rate risk on $71.0 million term notes bearing variable rates, and $438.5 million
and $218.3 million fixed rate certificates of deposit liabilities, respectively.
YIELDS EARNED AND RATES PAID
The net income of the Company depends primarily upon the difference or
spread between the interest income received on its interest-earning assets and
the interest paid on its interest-bearing liabilities. Net interest income
amounted to $56.3 million in 1997, $73.1 million in 1998 and $102.2 million in
1999. The increases in 1998 and 1999 were mainly the result of increases in
interest income from loans, investment securities and money market instruments
which were partially offset by a decrease on interest from mortgage-backed
securities and increases on interest expense on deposits and reverse repurchase
agreements.
16
18
The following table reflects the interest income and interest expense, the
average balance, the average yield and the average rate paid for each major
category of interest-earning assets and interest-bearing liabilities for the
periods indicated:
Interest Average Balance
-------------------------------- --------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans (1) $151,398 $102,913 $ 69,393 $1,686,477 $1,084,430 $ 686,057
Mortgage and other asset-
backed securities (2) 9,490 9,946 11,691 122,496 144,984 148,196
Investment securities (3) 65,926 40,519 29,590 1,009,945 596,255 452,392
Money market instruments 6,173 4,068 2,854 119,851 77,751 51,258
-------- -------- -------- ---------- ---------- ----------
Total interest-earning assets 232,987 157,446 113,528 2,938,769 1,903,420 1,337,903
-------- -------- -------- ---------- ---------- ----------
Interest-bearing liabilities:
Deposits 90,554 57,733 38,552 2,009,098 1,339,445 951,747
Reverse repurchase
agreements 33,511 20,467 13,810 672,657 392,868 247,214
Term notes 3,932 4,870 4,836 83,785 101,341 100,721
Advances from FHLB 2,809 1,238 -- 51,476 23,059 --
-------- -------- -------- ---------- ---------- ----------
Total interest-bearing liabilities 130,806 84,308 57,198 2,817,016 1,856,713 1,299,682
-------- -------- -------- ---------- ---------- ----------
Net interest income $102,181 $ 73,138 $ 56,330
======== ======== ========
Net interest-earning assets $ 121,753 $ 46,707 $ 38,221
========== ========== ==========
Net yield on interest-earning
assets (4)
Interest-earning assets to 104.32% 102.52% 102.94%
interest-bearing liabilities ratio ========== ========== ==========
Average Rate
-------------------------------
1999 1998 1997
-------- ------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans (1) 8.98% 9.49% 10.11%
Mortgage and other asset-
backed securities (2) 7.75 6.86 7.89
Investment securities (3) 6.53 6.80 6.54
Money market instruments 5.15 5.23 5.57
------- ------- -------
Total interest-earning assets 7.93% 8.28 8.50
------- ------- -------
Interest-bearing liabilities:
Deposits 4.51 4.31 4.05
Reverse repurchase
agreements 4.98 5.21 5.59
Term notes 4.69 4.81 4.80
Advances from FHLB 5.46 5.37 --
------- ------- -------
Total interest-bearing liabilities 4.64 4.54 4.41
------- ------- -------
Net interest income 3.29% 3.74% 4.09%
======= ======= =======
Net interest-earning assets
Net yield on interest-earning
assets (4) 3.48% 3.84% 4.21%
======= ======= =======
Interest-earning assets to
interest-bearing liabilities ratio
- ---------------------
(1) Includes loans held for sale. Average loans exclude non-performing loans.
(2) Includes mortgage-backed securities available for sale.
(3) Includes trading account securities and investments available for sale.
(4) Net interest income divided by average interest-earning assets.
17
19
The following table sets forth information regarding changes in
interest income and interest expense for the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(changes in volume times old rate) and (2) changes in rates (changes in rate
times old volume). The changes that are not due solely to volume or rate are
allocated based on the proportion of the change in each category.
Year Ended December 31,
-----------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------ ------------------------------------
Volume Rate Total Volume Rate Total
(Dollars in Thousands)
Interest income:
Loans (1) $ 54,321 $(5,836) $ 48,485 $ 38,045 $(4,525) $ 33,520
Mortgage and other assets-
backed securities (2) (2,743) 2,287 (456) (249) (1,496) (1,745)
Investment securities (3) 26,938 (1,531) 25,407 9,736 1,193 10,929
Money market instruments 2,169 (64) 2,105 1,395 (181) 1,214
-------- ------- -------- -------- ------- --------
Total increase (decrease) in interest
income 80,685 (5,144) 75,541 48,927 (5,009) 43,918
-------- ------- -------- -------- ------- --------
Interest expense:
Deposits 30,072 2,749 32,821 16,574 2,607 19,181
Reverse repurchase agreements 13,976 (932) 13,044 7,644 (987) 6,657
Term notes (826) (112) (938) 30 4 34
Advances from FHLB 1,550 21 1,571 1,238 -- 1,238
-------- ------- -------- -------- ------- --------
Total increase in interest expense 44,772 1,726 46,498 25,486 1,624 27,110
-------- ------- -------- -------- ------- --------
Increase (decrease) in net
interest income $ 35,913 $(6,870) $ 29,043 $ 23,441 $(6,633) $ 16,808
======== ======= ======== ======== ======= ========
- ----------------------------
(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)
--------------------------------------
1999 1998 1997
---- ---- ----
Return on total assets (2) 1.27% 1.42% 1.61%
Return on common stockholders' equity (3) 24.57 24.42 24.71
Dividend payout ratio to common stockholders (4) 20.48(5) 18.30(5) 16.61
Equity-to-asset ratio (6) 6.46 6.35 6.53
- ----------------
(1) Averages computed by using beginning and end of year balances.
(2) Net income divided by average total assets.
(3) Net income attributable to common stockholders divided by average common
stockholders' equity.
(4) Common stockholders' dividend declared divided by net income attributable to
common stockholders.
(5) Includes, on a pro-forma basis, $2,524,819 dividends corresponding to the
second semester of 1998, which were declared for stockholders of record on
January 15, 1999, and paid on January 25, 1999. Amount was excluded from
1999 ratio.
(6) Average net worth divided by average total assets.
18
20
MARKET AREA AND COMPETITION
The Company's primary market area is the western, southwestern and
southern areas of Puerto Rico. The Company has 26 branch offices in its primary
market area, 4 in the Metropolitan Area, 3 in northeastern Puerto Rico and 3 in
the southern area. The Company is looked at as the strongest and most
conservative bank of the Island, and as of December 31, 1999, it was the third
largest native commercial bank.
As of December 31, 1999, according to the Puerto Rico Department of
Labor, the average unemployment rate for the year was 11.7%. Puerto Rico has
experienced slow but steady growth in population and average income in recent
years. The principal businesses in the Company's primary market area are
farming, clothing manufacturing, pharmaceutical manufacturing, light industries
(including electronic equipment) and tuna and rum processing. Tuna industries in
the area have experienced a significant decrease in operations since 1990 as a
result of competitive market conditions from foreign countries. Management does
not expect this situation to have an adverse effect on the Company's results of
operations.
The Company competes mainly with other commercial banks in attracting
and retaining savings deposits and in making real estate and commercial loans.
There are 13 other banks, including affiliates of banks headquartered in the
United States, Canada and Spain operating in Puerto Rico. The Company is in
direct competition in loan origination in its primary market area, where its
most direct competitors are other Puerto Rico commercial banks.
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act ("CRA"), as implemented by federal
regulations, a financial institution has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires federal examiners, in connection with the examination of a financial
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Company has a Compliance Committee,
which oversees the planning of products, and services offered to the community,
especially those aimed to serve low and moderate income communities. The CRA
rated the Company as having a "satisfactory record of meeting community credit
needs".
FINANCIAL MANAGEMENT REQUIREMENTS
FDICIA imposed financial reporting requirements on all depository
institutions with assets of more than $500 million and their management and
independent auditors, and established new rules for the composition, duties, and
authority of such institutions' audit committees and boards of directors. Among
other things, all such depository institutions are required to prepare and make
available to the public annual reports on their financial condition, including
statements of management's responsibility for financial statements, internal
controls and compliance with certain Federal banking laws and regulations
relating to safety and soundness, and an assessment of the institution's
compliance with such internal controls, laws and regulations. The institution's
independent public accountants are required to attest to certain of these
management assessments.
19
21
EMPLOYEES
At December 31, 1999, the Company had 814 full-time employees,
including its executive officers, and 6 part time employees.
REGULATIONS
Federal Regulation. The Company, as a bank holding company, is subject
to regulation, supervision, and examination by the Federal Reserve Board.
Westernbank, as a bank chartered under the laws of the Commonwealth of Puerto
Rico, is subject to regulation, supervision, and examination by the FDIC as its
primary federal regulator and by the Puerto Rico Commissioner of Financial
Institutions ("the Puerto Rico Commissioner").
THE COMPANY
FEDERAL REGULATION. The Company is a bank holding company subject to
the regulation, supervision, and examination of the Federal Reserve Board under
the Bank Holding Company Act of 1956, as amended. The Company is required to
file periodic reports and other information with the Federal Reserve Board, and
the Federal Reserve Board may conduct examinations of the Company.
The Company is subject to capital adequacy guidelines of the Federal
Reserve Board. The guidelines apply on a consolidated basis and require bank
holding companies to maintain a ratio of Tier 1 capital to total average assets
of 4.0% to 5.0%. There is a minimum ratio of 3.0% established for the most
highly rated bank holding companies. The Federal Reserve Board's capital
adequacy guidelines also require bank holding companies to maintain a minimum
ratio of qualifying total capital to risk-weighted assets of 8.0%, and a minimum
ratio of Tier 1 capital to risk-weighted assets of 4.0%. As of December 31,
1999, the Company's ratio of Tier 1 capital to total average assets was 6.68%,
its ratio of Tier 1 capital to risk-weighted assets was 12.12%, and its ratio of
qualifying total capital to risk-weighted assets was 13.22%.
The Company's ability to pay dividends to its stockholders and expand
its line of business through the acquisition of new banking or nonbanking
subsidiaries can be restricted if its capital falls below levels established by
the Federal Reserve Board's guidelines. In addition, any bank holding company
whose capital falls below levels specified in the guidelines can be required to
implement a plan to increase capital.
The Federal Reserve Board is empowered to initiate cease and desist
proceedings and other supervisory actions for violations of the Bank Holding
Company Act, or the Federal Reserve Board's regulations, orders or notices
issued thereunder. Under the Federal Reserve Board's regulations, banks and bank
holding companies which do not meet minimum capital adequacy guidelines are
considered to be undercapitalized and are required to submit an acceptable plan
for achieving capital adequacy.
Federal Reserve Board approval is required if the Company seeks to
acquire direct or indirect ownership or control of any voting shares of a bank
if, after such acquisition, the Company would own or control directly or
indirectly more than 5% of the voting stock of the bank. Federal Reserve Board
approval also must be obtained if a bank holding company acquires all or
substantially all of the assets of a bank or merges or consolidates with another
bank holding company.
Bank holding companies, like the Company, are prohibited from engaging
in activities other than banking and activities so closely related to banking or
managing or controlling banks as to be a proper incident thereto. The Federal
Reserve Board's regulations contain a list of permissible nonbanking activities
that are closely related to banking or managing or controlling banks. These
activities include lending activities, certain data
20
22
processing activities, securities brokerage and investment advisory services,
trust activities and leasing activities. A bank holding company must file an
application or notice with the Federal Reserve Board prior to acquiring more
than 5% of the voting shares of a company engaged in such activities.
On November 12, 1999, President Clinton signed legislation to reform
the U.S. banking laws, including the Bank Holding Company Act. The changes made
to the Bank Holding Company Act by this legislation, referred to as the
Gramm-Leach-Bliley Act, became effective on March 11, 2000, and expanded the
permissible activities of the bank holding companies like the Company. In order
to engage in the expanded activities, the Company would have to file a notice to
become a financial holding company. As a financial holding company, the Company
would be permitted to own and control depository institutions and to engage in
activities that are financial in nature or incidental to the financial
activities, or activities that are complementary to a financial activity and do
not pose a substantial risk to the safety and soundness of the depository
institutions or the financial system generally. The legislation identifies
certain activities that are deemed to be financial in nature, including
nonbanking activities currently permissible for the bank holding companies to
engage in both within and outside the United States, as well as insurance and
securities underwriting and merchant banking activities. The Federal Reserve
Board is authorized under the legislation to identify additional activities that
are permissible financial activities.
In order to become a financial holding company and take advantage of
this new authority, the Company's depository institution subsidiaries, currently
Westernbank, must be well-capitalized and well-managed and have at least a
satisfactory record of performance under the Community Reinvestment Act. No
prior notice to the Federal Reserve Board would be required from a financial
holding company to acquire a company engaging in nonbanking activities or to
commence these activities directly or indirectly through a subsidiary. Although
the Company could qualify to become a financial holding company, it has no
present plan to change its status under the Bank Holding Company Act since it
has no plans to acquire a nonbanking company or engage in any new nonbanking
activities.
Under the Change in Bank Control Act, persons who intend to acquire
control of a bank holding company, either directly or indirectly or through or
in concert with one or more persons, must give 60 days' prior written notice to
the Federal Reserve Board. "Control" would exist when an acquiring party
directly or indirectly has voting control of at least 25% of the Company's
voting securities or the power to direct the management or policies of the
Company. Under Federal Reserve Board's regulations, a rebuttable presumption of
control would arise with respect to an acquisition where, after the transaction,
the acquiring party has ownership, control or the power to vote at least 10%
(but less than 25%) of the Company's common stock.
Under Puerto Rico law, no person or company may acquire direct or
indirect control of a holding company without first obtaining the prior approval
of the Puerto Rico Commissioner. Control is defined to mean the power to,
directly or indirectly, direct or decisively influence the management or the
operations of the holding company. Control is presumed to exist if a person or
entity, or group acting in concert, would become the owner, directly or
indirectly, of more than 5% of the voting stock of the holding company as a
result of the transfer of voting stock, and such person, entity or group did not
own more than 5% of the voting stock prior to the transfer.
The Company is required to give the Federal Reserve Board prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, will be equal to 10% or more of the Company's consolidated net worth.
The Federal Reserve Board may disapprove any purchase or redemption if it
determines that the proposal would constitute an unsafe and unsound practice, or
would violate any law, regulation, order or directive of the Federal Reserve
Board, or any
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condition imposed by, or written agreement with, the Federal Reserve Board. Such
notice and approval is not required for a bank holding company that would be
treated as "well capitalized" under applicable regulations of the Federal
Reserve Board, that has received a composite "1" or "2" rating at its most
recent bank holding company inspection by the Federal Reserve Board, and that is
not the subject of any unresolved supervisory issues. Notwithstanding the
foregoing, any redemption of the Company's Series A or Series B preferred stocks
will require the prior approval of the Federal Reserve Board.
WESTERNBANK
PUERTO RICO BANKING LAW
Westernbank is a bank chartered under the Puerto Rico Banking Law and
its deposit accounts are insured up to applicable limits by the FDIC under SAIF
and BIF. Westernbank is subject to extensive regulation by the Puerto Rico
Commissioner as its chartering agency, and by the FDIC as the deposit insurer.
Westernbank must file reports with the Puerto Rico Commissioner and the FDIC
concerning its activities and financial condition, and it must obtain regulatory
approval prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions and opening or acquiring branch
offices. The Puerto Rico Commissioner and the FDIC conduct periodic examinations
to assess Westernbank's compliance with various regulatory requirements. This
regulation and supervision is intended primarily for the protection of the
deposit insurance funds and depositors. The regulatory authorities have
extensive discretion in connection with the exercise of their supervisory and
enforcement activities, including the setting of policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes.
Westernbank derives its lending, investment and other powers primarily
from the applicable provisions of the Puerto Rico Banking Law and the
regulations adopted thereunder. That law governs the responsibilities of
directors, officers and stockholders, and the corporate powers, savings,
lending, capital and investment requirements and other activities of
Westernbank. The Puerto Rico Commissioner has extensive rulemaking power and
administrative discretion under the Puerto Rico Banking Law, and generally
examines Westernbank on an annual basis.
The Puerto Rico Banking Law requires that at least 10% of the yearly
net income of Westernbank be credited annually to a reserve fund. This must be
done every year until the reserve fund is equal to the total paid-in capital for
common stock and preferred stock. At December 31, 1999, Westernbank had an
adequate reserve fund established. The Puerto Rico Banking Law also provides
that when the expenditures of a bank are greater than the receipts, the excess
is charged against the undistributed profits of the bank, and the balance, if
any, is charged against and reduces the reserve fund. If there is no reserve
fund sufficient to cover the entire amount, the excess amount is charged against
the capital account and no dividend can be declared until the capital has been
restored to its original amount and the reserve fund to 20% of the original
capital.
Under the Puerto Rico Banking Law, Westernbank must maintain a legal
reserve in an amount equal to at least 20% of Westernbank's demand liabilities,
except certain government deposits. At December 31, 1999, Westernbank had a
legal reserve of 103.72%.
The Puerto Rico Regulatory Financial Board (the "Financial Board")
which is part of the Office of the Commissioner, has the authority to regulate
the maximum interest rates and finance charges that may be charged on loans to
individuals and unincorporated businesses in the Commonwealth of Puerto Rico. In
February 1992 and again in November 1997, the Financial Board approved
regulations which provide that the applicable interest rate on loans to
individuals and unincorporated businesses is to be determined by free
competition. The Financial Board also has authority to regulate the maximum
finance charges on retail installment sales contracts, including credit card
purchases, which are currently set a 21%. There is no
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maximum rate set for installment sales contracts involving motor vehicles,
commercial, agricultural and industrial equipment, commercial electric
appliances, and insurance premiums.
FEDERAL REGULATION OF WESTERNBANK
CAPITAL REQUIREMENTS. Westernbank is subject to minimum capital
requirements imposed by the FDIC that are substantially similar to the capital
requirements imposed on the Company. The FDIC regulations require that
Westernbank maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8.0%, and a minimum ratio of Tier 1 capital to
risk-weighted assets of 4.0%. In addition, under the minimum leverage-based
capital requirement adopted by the FDIC, Westernbank must maintain a ratio of
Tier 1 capital to average total assets (leverage ratio) of at least 3% to 5%,
depending on Westernbank's CAMELS rating. As of December 31, 1999, Westernbank's
ratio of total capital to risk-weighted assets was 13.22%, its ratio of Tier 1
capital to risk-weighted assets was 12.12%, and Westernbank's ratio of Tier 1
capital to average total assets was 6.68%. Capital requirements higher than the
generally applicable minimum requirements may be established for a particular
bank if the FDIC determines that a bank's capital is, or may become, inadequate
in view of its particular circumstances. Failure to meet capital guidelines
could subject a bank to a variety of enforcement actions, including actions
under the FDIC's prompt corrective action regulations.
ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. State banks are limited
in their investments and activities engaged in as principal to those permissible
under applicable state law and that are permissible for national banks and their
subsidiaries, unless such investments and activities are specifically permitted
by the Federal Deposit Insurance Act or the FDIC determines that such activity
or investment would pose no significant risk to the SAIF and BIF. The FDIC has
by regulation determined that certain real estate investment and securities
underwriting activities do not present a significant risk to the SAIF and BIF,
provided they are conducted in accordance with the regulations. Provisions of
the Gramm-Leach-Bliley Act permit national banks to establish financial
subsidiaries that may engage in the activities noted above that will be
permissible for financial holding companies, other than insurance underwriting,
merchant banking and real estate development and investment activities. In order
to exercise this authority, a bank and its depository institution affiliates
must be well-capitalized, well-managed and have CRA ratings of at least
"satisfactory." For a state bank, such activities also must be permissible under
relevant state law.
ENFORCEMENT. The FDIC, as well as the Puerto Rico Commissioner, has
extensive enforcement authority over insured banks, including Westernbank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and to unsafe or unsound practices.
DEPOSIT INSURANCE. Westernbank is subject to quarterly payments on
semiannual insurance premium assessments for its FDIC deposit insurance. The
FDIC implements a risk-based deposit insurance assessment system. Deposit
insurance assessment rates currently are within a range of $0.00 to $0.27 per
$100 of insured deposits, depending on the assessment risk classification
assigned to each institution. Under current FDIC assessment guidelines,
Westernbank expects that it will not incur any FDIC deposit insurance
assessments during the next fiscal year, although the current system for
assigning assessment risk classifications to insured depository institutions is
being reviewed by the FDIC and the deposit insurance assessments are subject to
change. Westernbank is subject to separate assessments to repay bonds ("FICO
bonds") issued in the late 1980's to recapitalize the former Federal Savings and
Loan Insurance Corporation. The assessment for the payments on the FICO bonds
for the quarter beginning on January 1, 2000 is 2.120 basis points for BIF-
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assessable deposits and 2.120 basis points for SAIF-assessable deposits. Most of
Westernbank's deposits are presently insured by SAIF.
FDIC insurance on deposits may be terminated by the FDIC, after notice
and hearing, upon a finding by the FDIC that the insured bank has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound condition
to continue operations as an insured bank, or has violated any applicable law,
regulation, rule or order of or condition imposed by or written agreement
entered into with the FDIC.
TRANSACTIONS WITH AFFILIATES OF WESTERNBANK. Transactions between
Westernbank and any of its affiliates, including the Company, are governed by
sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any
company or entity that controls, is controlled by or is under common control
with the bank. Generally, sections 23A and 23B (1) limit the extent to which a
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of the bank's capital stock and surplus, and
limit such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (2) require that all such transactions be on
terms that are consistent with safe and sound banking practices. The term
"covered transactions" includes the making of loans, purchase of or investment
in securities issued by the affiliate, purchase of assets, issuance of
guarantees and other similar types of transactions. Most loans by a bank to any
of its affiliates must be secured by collateral in amounts ranging from 100 to
130 percent of the loan amount, depending on the nature of the collateral. In
addition, any covered transaction by a bank with an affiliate and any sale of
assets or provision of services to an affiliate must be on terms that are
substantially the same, or at least as favorable, to the bank as those
prevailing at the time for comparable transactions with nonaffiliated companies.
In addition, Sections 22 (h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors, and principal
stockholders. Under Section 22 (h), loans to a director, an executive officer
and to a greater than 10% stockholder of a financial institution, and certain
affiliated interests of either, may or not exceed, together with all other
outstanding loans to such person and affiliated interests, the financial
institution's loans to one borrower limit (generally equal to 15% of the
institution's impaired capital and surplus). Section 22 (h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (I) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the financial
institutions. Section 22 (h) also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a financial
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22 (h) places additional restrictions on loans
to executive officers.
SAFETY AND SOUNDNESS STANDARDS. Westernbank is subject to certain FDIC
standards designed to maintain the safety and soundness of individual banks and
the banking system. The FDIC has prescribed safety and soundness guidelines
relating to (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
exposure; (v) asset growth and quality; (vi) earnings; and (vii) compensation
and benefit standards for officers, directors, employees and principal
stockholders. A state nonmember bank not meeting one or more of the safety and
soundness guidelines may be required to file a compliance plan with the FDIC.
PROMPT CORRECTIVE ACTION. Under the FDIC's prompt corrective action
regulations, insured institutions will be considered (i) "well capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater
(provided that the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive to meet and maintain a
specified capital level for any capital measure), (ii) "adequately capitalized"
if the
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institution has a total risk-based capital ratio of 8% or greater, a Tier 1 risk
based capital ratio of 4% or greater and a leverage ratio of 4% or greater (3%
or greater if the institution is rated composite CAMELS 1 in its most recent
report of examination and is not experiencing or anticipating significant
growth), (iii) "undercapitalized" if the institution has a total risk-based
capital ratio that is less than 8%, or a Tier 1 risk-based ratio of less than 4%
and a leverage ratio that is less than 4% (3% if the institution is rated
composite CAMELS 1 in its most recent report of examination and is not
experiencing or anticipating significant growth), (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, Tier 1 risk-based capital ratio of less than 3% or a leverage
ratio that is less than 3%, and (v) "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%. Under certain circumstances, the FDIC can reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At December 31, 1999, the most recent notification
from the FDIC categorized Westernbank as a "well capitalized" institution.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency,
which would be the FDIC for Westernbank. An undercapitalized institution also is
generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches, or engaging in any new line of
business, except in accordance with an accepted capital restoration plan or with
the approval of the FDIC. In addition, the FDIC may take any other action that
it determines will better carry out the purpose of prompt corrective action
initiatives.
DIVIDEND RESTRICTIONS. Westernbank is not permitted to pay dividends
if, as the result of the payment, it would become undercapitalized, as defined
in the prompt corrective action regulations of the FDIC. In addition, if
Westernbank becomes "undercapitalized" under these regulations, payment of
dividends would be prohibited without the prior approval of the FDIC.
Westernbank also could be subject to these dividend restrictions if the FDIC
determines that Westernbank is in an unsafe or unsound condition or engaging in
an unsafe or unsound practice.
OTHER. The Gramm-Leach-Bliley Act imposes certain obligations on
financial institutions, including state-chartered banks like Westernbank, to
develop privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request, and establish procedures and
practices to protect and secure customer data. These privacy provisions will be
implemented by regulations that will take effect on or after November 12, 2000.
FEDERAL HOME LOAN BANK SYSTEM
The Company, through its subsidiary, is a member of the FHLB System.
The System consists of 12 regional Federal Home Loan Banks, with each subject to
supervision and regulation by the Federal Housing Finance Board. The Federal
Home Loan Bank provides a central credit facility primarily for member
institutions. The Company, as a member of the FHLB of New York, is required to
acquire and hold shares of capital stock in that FHLB in an amount equal to the
greater of 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or 5% of its FHLB advances outstanding or one percent of thirty
percent of total assets. At December 31, 1999, the Company had $12.8 million in
FHLB's capital stock.
Advances from the FHLB of New York are secured by a member's shares of
stock in the FHLB of New York, certain type of mortgages and other assets.
Interest rates charged for advances vary depending upon
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maturity and the cost of funds to the FHLB of New York. As of December 31, 1999,
there were $70.0 million in outstanding advances from the FHLB of New York.
LIQUIDITY
Liquidity refers to the Company's ability to generate sufficient cash
to meet the funding needs of current loan demand, savings deposit withdrawals,
principal and interest payments with respect to outstanding borrowings and to
pay operating expenses. The Company monitors its liquidity in accordance with
guidelines established by the Investment Committee and applicable regulatory
requirements. The Company's need for liquidity is affected by loan demand, net
changes in deposit levels and the scheduled maturities of its borrowings.
Liquidity demand caused by net reductions in deposits are usually caused by
factors over which the Company has limited control. The Company derives its
liquidity from both its assets and liabilities. Liquidity from assets by receipt
of interest and principal payments and prepayments, by the ability to sell
assets at market prices and by utilizing unpledged assets as collateral for
borrowings. Liquidity is derived from liabilities by maintaining a variety of
funding sources, including deposits, advances from the FHLB of New York and
other short and long-term borrowings.
The Company's liquidity targets are reviewed monthly by the Investment
Committee and are based on the Company's commitment to make loans and
investments and its ability to generate funds. The Committee's targets are also
affected by yields on available investments and upon the Committee's judgment as
to the attractiveness of such yields and its expectations as to future yields.
The Company's investment portfolio at December 31, 1999 had an average
maturity of 167 months. However, no assurance can be given that such levels will
be maintained in future periods.
As of December 31, 1999, the Company had line of credit agreements with
two commercial banks permitting the Company to borrow a maximum aggregate amount
of $30.0 million (no borrowings were made during the year ended December 31,
1999 under such lines of credit). The agreements provide for unsecured advances
to be used by the Company on an overnight basis. Interest rate is negotiated at
the time of the transaction. The credit agreements are renewable annually.
CAPITAL, DIVIDENDS, STOCK SPLIT AND OPTION PLANS
Total shareholders' equity as a measure of capital increased by
approximately $69.5 million in 1999 and $52.0 million in 1998.
In June 1998, Westernbank issued 1,219,000 shares of 7.125%
Non-cumulative, Convertible Monthly Income Preferred Stock, Series A, with a
liquidation preference of $25.00 per share. Proceeds from the issuance of
preferred stock amounted to $29.1 million, net of $1.3 million of issuance
costs. Dividends on Series A Preferred Stock, when and if declared by the Board
of Directors, shall be payable monthly in arrears on the 15th day of each month
of each year, at the annual rate per share of 7.125% of the $25 liquidation
preference (equivalent to $1.78 per share per annum). The amount of dividends
paid for any monthly dividend period will be computed on the basis of twelve
30-day months and a 360-day year. The amount of dividends payable for any period
shorter than a full month dividend period will be computed on the basis of the
actual number of days elapsed in such period. Each share is convertible, at the
holder's option, at any time on or after the 90th date following the issue date,
into .995 shares of the Company's common stock, subject to adjustment upon
certain events. The per share conversion ratio equates to a price of $25.125 per
share of common stock. The Company may redeem the preferred stock at any time at
the following redemption prices, if redeemed during the 12-month period
beginning July 1 of the years indicated below, plus the accrued and unpaid
dividends, if any, for the then current
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dividend period to the date of redemption: in 2002 - $26.00; in 2003 - $25.75;
in 2004 - $25.50; in 2005 - $25.25; and in 2006 and thereafter - $25.00.
In April and June 1999, Westernbank issued 2,001,000 shares of 7.25%
Non-cumulative, Non-convertible Monthly Income Series B Preferred Stock, with a
liquidation preference of $25 per share. Proceeds from the issuance of preferred
stock amounted to $48.3 million, net of $1.8 million of issuance costs.
Dividends on Series B Preferred Stock, when and if declared by the Board of
Directors, shall be payable monthly in arrears on the 15th day of each month of
each year, at the annual rate per share of 7.25% of the $25 liquidation
preference (equivalent to $1.81 per share per annum). The amount of dividends
paid for any monthly dividend period will be computed on the basis of twelve
30-day months and a 360-day year. The Company may redeem the preferred stock at
any time at the following redemption prices, if redeemed during the 12-month
period beginning May 28 of the years indicated below, plus the accrued and
unpaid dividends, if any, for the then current dividend period to the date of
the redemption: in 2004 - $26.00; in 2005 - $25.50; and in 2006 and thereafter -
$25.00.
Series A and B Preferred Stocks rank senior to the Company's common
stock as to dividends and liquidation rights. Dividends declared on preferred
stock for the years ended December 31, 1999 and 1998 amounted to $4.3 million
and $1.1 million, respectively.
In 1998, Westernbank acquired and retired 165,674 shares of common
stock for $2,427,441, and exchanged 12,163 shares in treasury for land amounting
$225,014. The remaining 6,346,901 shares in treasury were retired in December
1998. During 1999, Westernbank acquired and retired 80,309 shares of common
stock for $1,222,100.
Total common stock dividends declared in 1999 amounted to $9.2 million
compared to $2.5 million in 1998.
On February 3, 2000, the Board of Directors approved an increase on its
annual dividend payments to shareholders in 2000 to $0.20 per share. This
represents an increase of 25% over the dividends paid the previous year of $0.16
per share.
In June 1999, the Board of Directors approved the 1999 Qualified Stock
Option Plan (the "1999 Qualified Option Plan") and the 1999 Nonqualified Stock
Option Plan (the "Nonqualified Option Plan"), for the benefit of employees of
the Company and its subsidiaries. Under the 1999 Qualified Option Plan, options
for up to 4,200,000 shares of common stock can be granted. Also, options for up
to 4,200,000 shares of common stock, reduced by any share issued under the 1999
Qualified Option Plan, can be granted under the 1999 Nonqualified Option Plan.
The option price for the both is $13.00. Both plans will remain in effect for a
term of 10 years. At December 31, 1999 no options had been granted to employees.
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COMMONWEALTH TAXATION
GENERAL
Under the Puerto Rico Internal Revenue Code, all companies are treated
as separate taxable entities and are not entitled to file consolidated tax
returns. The Company and Westernbank (the "Companies") report their income and
expenses based on the accrual basis of accounting and file their Puerto Rico
tax returns on a calendar year basis.
INCOME TAXES
The Companies are subject to Puerto Rico regular income tax on income
earned from all sources up to a maximum rate of 39%.
The Puerto Rico income tax act disallows any interest deduction which
is allocable to income earned from tax exempt obligations acquired after
December 31, 1987. For purposes of the above determination, each company is
required to allocate interest expense to exempt interest income based on the
ratio that the average exempt obligations bear to the total average assets of
each company.
The Companies are also subject to an alternative minimum tax ("AMT")
equal to 22% of the alternative minimum taxable income. The alternative minimum
taxable income is equal to each company's taxable income adjusted for certain
items. The principal adjustments for determining each company's alternative
minimum taxable income are the following: (i) no deduction may be claimed with
respect to the company's interest expense allocable to interest income derived
from tax exempt obligations acquired before January 1, 1988, other than
mortgages guaranteed by the government of Puerto Rico, its agencies,
instrumentalities and political subdivisions, issued before September 1, 1987;
and (ii) the alternative minimum taxable income is increased by 50% of the
amount by which the corporation's book income (adjusted for certain items)
exceeds its alternative minimum taxable income without regard to this
adjustment.
The AMT is payable if it exceeds regular income tax. The excess of AMT
over regular income tax paid in any one year may be used to offset regular
income tax in future years, subject to certain limitations. Westernbank income
tax was based on regular income tax rates since 1994.
The Puerto Rico Internal Revenue Code provides a dividend received
deduction of 100% on dividends received from "controlled subsidiaries" subject
to taxation in Puerto Rico, like Westernbank. Until December 31, 1999, the
Company had no operations other than those resulting from dividends received
from its investment in Westernbank.
For the year ended December 31, 1999, the Company had approximately
$33.6 million of regular taxable income, on which it was required to pay current
income tax of $13.8 million. The income on certain investments is exempt for
income tax purposes. Also, activities relating to the Westernbank International
division are exempt for income tax purposes. As a result of the above, the
Company's effective tax rate is substantially below the statutory rate.
Effective August 1, 1997, interest earned on FHA and VA loans and
securities backed by such loans originated after July 31, 1997, which were
previously tax exempt (after disallowance of related expenses), began to pay
income taxes except for FHA and VA mortgages for new construction projects. This
change does not alter the tax-exempt status of FHA and VA loans and securities
backed by such loans originated prior to July 31, 1997. This change did not have
a significant effect on the Company's financial condition or results of
operation.
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ITEM 2. PROPERTIES
The Company owns the condominium office space housing its main office
at 19 West McKinley Street, Mayaguez, Puerto Rico.
The Company's investment in premises and equipment, exclusive of
leasehold improvements, at December 31, 1999, was $34.8 million. The combined
net book value of the Company's condominium office space and main office
building as of December 31, 1999 was $1.5 million.
The Company leases most of its branch offices. The net book value of
leasehold improvements was $3.6 million as of December 31, 1999. Leases on 24 of
the branches expire or have option periods expiring after 2000.
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The following table presents information about the Company's leased branch
offices at December 31, 1999:
Book Value of Leasehold Lease
Location Improvements Expiration Date (*)
-------- ------------ -------------------
Mayaguez, Puerto Rico
Mayaguez Mall $ 313,292 March 31, 2001
Mayaguez Town Center 206,062 March 30, 2002
Aguadilla
Town 6,749 September 14, 2002
Marbella 12,625 August 30, 2001
Aguadilla Mall 337,041 September 30, 2004
San Sebastian
San Sebastian I 8,438 March 30, 2002
San Sebastian II 4,197 January 31, 2001
Aguada 2,179 September 7, 2002
Anasco
Anasco I 1,206 Month to Month
Anasco II 9,659 Month to Month
Quebradillas 8,714 July 31, 2002
Camuy 310,880 May 30, 2002
Cabo Rojo I 24,442 October 1, 2001
Sabana Grande
Sabana Grande II 2,190 April 30, 2003
Lares 2,096 August 30, 2001
Rincon 7,944 December 31, 2000
Lajas
Lajas I 55,555 January 14, 2005
Lajas II 1,467 March 31, 2001
Carolina
Campo Rico 678,006 March 31, 2004
Plaza Carolina 439,270 January 31, 2002
Ponce
Ponce I 97,557 June 30, 2003
Ponce El Tuque 3,123 April 30, 2004
Canovanas 4,107 May 30, 2004
Rio Grande 9,734 October 31, 2000
San German - Plaza del Oeste 1,935 November 12, 2001
Yauco 52,082 October 31, 2001
Hato Rey 164,839 October 31, 2002
Caguas 697,040 August 27, 2002
Other leased facilities 94,728 June 30, 2002
----------
Total $3,557,157
==========
(*) Excludes renewal options.
At December 31, 1999, the Company's future rental commitments under
non-cancelable operating leases aggregated $5.5 million, not considering
renewal options.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business,
which in the aggregate are not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from pages
12 through 14 of the Company's 1999 Annual Report to Stockholders, which is
filed herein as Exhibit 13.1 ("1999 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from pages
15 and 16 of the Company's 1999 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required herein is incorporated by reference from page
3 through 12 of the Company's 1999 Annual Report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability
management function is to evaluate the interest rate risk included in certain
balance sheet accounts and in off-balance sheet commitments, determine the
appropriate level of risk given the Company's business focus, operating
environment, capital and liquidity requirements and performance objectives,
establish prudent asset concentration guidelines and manage the risk consistent
with Board of Directors approved guidelines. Through such management, the
Company seeks to reduce the vulnerability of its operations to changes in
interest rates and to manage the ratio of interest rate sensitive assets to
interest rate sensitive liabilities within specified maturities or repricing
dates.
The Company's profitability is dependent to a large extent upon its
net interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and borrowings. The
Company is subject to interest rate risk to the degree that its
interest-earning assets reprice differently than its interest-bearing
liabilities.
Interest rate risk can be defined as the exposure of the Company's
operating results or financial position to adverse movements in market interest
rates which mainly occur when assets and liabilities reprice at different
times and at different rates. The Company manages its mix of assets and
liabilities with the goals of limiting its exposure to interest rate risk,
ensuring adequate liquidity, and coordinating its sources and uses of funds.
Specific strategies have included shortening the amortized maturity of
fixed-rate loans and increasing the
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volume of variable rate loans to reduce the average maturity of the Company's
interest-earning assets and entering into interest rate exchange agreements
(swaps) to hedge variable term notes and fixed callable certificates of
deposit.
The Company is exposed to a reduction in the level of Net Interest
Income ("NII") in a rising interest rate environment. NII will fluctuate
pursuant to changes in the levels of interest rates and of interest-sensitive
assets and liabilities. If (1) the weighted average rates in effect at year end
remain constant, or increase or decrease on an instantaneous and sustained
change of plus or minus 200 basis points, and (2) all scheduled repricing,
reinvestments and estimated prepayments, and reissuances are at such constant,
or increase or decrease accordingly; NII will fluctuate as shown on the table
below:
December 31, 1999:
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollar in thousands)
+200 Basis Points $ 84,334 $(16,330) (16.22)%
Base Scenario 100,664 -- --
-200 Basis Points 115,736 15,072 14.97%
December 31, 1998:
Change in Interest Rate Expected NII (1) Amount Change % Change
----------------------- ---------------- ------------- --------
(Dollar in thousands)
+200 Basis Points $80,318 $(3,916) (4.65)%
Base Scenario 84,234 -- --
-200 Basis Points 88,376 4,142 4.92%
- -------------------------------------
(1) The NII figures exclude the effect of the amortization of loan fees.
The model utilized to create the information presented above makes
various estimates at each level of interest rate change regarding cash flows
from principal repayments on loans and mortgage-backed securities and/or call
activity on investment securities. Actual results could differ significantly
from these estimates which would result in significant differences in the
calculated projected change. In addition, the limits stated above do not
necessarily represent the level of change under which management would
undertake specific measures to realign its portfolio in order to reduce the
projected level of change.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required herein are
incorporated by reference from page 19 through 56 of the Company's 1999 Annual
Report.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein with respect to directors is
incorporated herein by reference from the definitive proxy statement of the
Company to be filed supplementary.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
definitive proxy statement to be filed supplementary.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
definitive proxy statement to be filed supplementary.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
definitive proxy statement to be filed supplementary.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) The following financial statements are incorporated
by reference from Item 8 hereof (see Exhibit 13):
Report of Independent Accountants
Consolidated Statements of Financial Condition as of December 31, 1999
and 1998
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1999
Consolidated Statements of Changes in Stockholders' Equity and of
Comprehensive Income for each of the three years in the period ended
December 31, 1999
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1999
Notes to Consolidated Financial Statements
(2) Index to financial statement schedules. Not
applicable.
(3) The following exhibits are filed as part of this
Form 10-K, and this list includes the Exhibit Index.
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 3.2 to the
Company's Registration Statement on Form S-4, File No. 333-76975)
10.1 Form of 1999 Qualified Stock Option Plan (incorporated by reference
herein to Exhibit 10.1 to the Company's Registration Statement on Form
S-4, File No. 333-76975)
10.2 Form of 1999 Nonqualified Stock Option Plan (incorporated by reference
herein to Exhibit 10.2 to the Company's Registration Statement on Form
S-4, File No. 333-76975)
13.1 Annual Report to Stockholders
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
(c) See (a)(3) above for all exhibits filed herewith and the
Exhibit Index.
(d) Separate financial statements are not applicable.
- -----------------------------
* Incorporated herein by reference from the Company's Form S-4, as
amended, filed with Securities and Exchange Commission on April 23,
1999 (Registration No. 333).
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
W Holding Company, Inc.
BY: /s/ Frank C. Stipes
--------------------------------------- Date: March 30, 2000
Frank C. Stipes, Chairman of the
Board, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Frank C. Stipes
--------------------------------------- Date: March 30, 2000
Frank C. Stipes, Chairman of the
Board, Chief Executive Officer and
President
/s/ Angel L. Rosas
--------------------------------------- Date: March 30, 2000
Angel L. Rosas, Director
/s/ Cesar A. Ruiz
--------------------------------------- Date: March 30, 2000
Cesar A. Ruiz, Director
/s/ Pedro R. Dominguez
--------------------------------------- Date: March 30, 2000
Pedro R. Dominguez, Director
/s/ Cornelius Tamboer
--------------------------------------- Date: March 30, 2000
Cornelius Tamboer, Director
/s/ Fredeswinda G. Frontera
--------------------------------------- Date: March 30, 2000
Fredeswinda G. Frontera, Directress
/s/ Freddy Maldonado
--------------------------------------- Date: March 30, 2000
Freddy Maldonado
Chief Financial Officer and
Vice President of Finance and Investment
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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 3.2 to the
Company's Registration Statement on Form S-4, File No. 333-76975)
10.1 Form of 1999 Qualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.1 to
the Company's Registration Statement on Form S-4,
File No. 333-76975)
10.2 Form of 1999 Nonqualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.2 to
the Company's Registration Statement on Form S-4,
File No. 333-76975)
13.1 Annual Report to Stockholders
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (for SEC use only)
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