THE FINANCIAL HOLDING COMPANY OF
WESTERNBANK PUERTO RICO
REPORTS A RECORD INCREASE OF 56.65% IN NET INCOME
FOR THE 4th QUARTER ENDED DECEMBER 31, 2002
Mayagüez, Puerto Rico, January 15, 2003. W HOLDING COMPANY, INC. (NYSE: WHI), the financial holding company of WESTERNBANK PUERTO RICO, reported today record results for the fourth quarter and year ended December 31, 2002.
W HOLDING reported a net income of $25.3 million or $0.32 earnings per basic common share ($0.31 on a diluted basis) for the fourth quarter ended December 31, 2002, to a year-ago net income for the comparable quarter of $16.2 million or $0.21 (split adjusted) per basic and diluted common share, an increase of $9.2 million or 56.65%.
The return on common stock equity (ROCE) for the fourth quarter ended December 31, 2002, was very strong at 24.41%, compared to 25.46% for the same period in 2001, particularly in lieu of the recent offerings of the Company’s Common and Preferred Stock completed in August, October and November of 2002. The return on assets (ROA) for the fourth quarter ended December 31, 2002, was 1.26%, up from 1.17% for the same period in 2001. W HOLDING achieved this strong ROA notwithstanding the significant increase in total assets that the Company achieved during the year.
For the full year-ended December 31, 2002, W HOLDING reached a record net income of $86.0 million or $1.12 earnings per basic common share ($1.11 on a diluted basis), a very strong growth from the net income of $62.2 million or $0.83 (split adjusted) per basic and diluted common share reported in 2001, an increase of $23.8 million or 38.30%. The return on assets (ROA) for the years ended December 31, 2001 and 2002 remained stable at 1.22%, while the return on common stock equity (ROCE) was 25.39%, slightly lower but very strong still when compared to 27.49% for the prior year. These ratios are within management’s expectation considering the strong growth in assets, the additional capital infusion and the significant resources invested in the development stage of new areas of business during 2002, particularly the new Expresso Division launched in July 2002.
At December 31, 2002, driven by strong increases in W Holding loans and investments portfolios, total assets ended at $8.2 billion, breaking the $8 billion mark. Total assets grew $2.3 billion or 38.98%, up from $5.9 billion at December 31, 2001. The investments portfolio increased $1.3 billion, from $2.9 billion in 2001 to $4.2 billion in 2002. Loans receivable net, including mortgage loans held for sale, grew by $918.1 million, resulting from the Company continued strategy of growing its loan portfolio through commercial real estate, asset-based, unsecured business and construction lending, as well as its consumer loan portfolios.
Stockholders’ equity increased to $584.7 million as of December 31, 2002, compared to $388.0 million as of December 31, 2001. Such increase resulted from the combination of the issuances of 6,095,000 and 1,725,000 shares of the Company’s Common Stock and Series E Preferred Stock, respectively, providing a net capital infusion of $98.0 million and $41.8 million, respectively, plus the net income generated for the year, partially offset by dividends paid on common and preferred stock. The average number of common shares outstanding increased from 62,250,000 (split adjusted) in 2001 to 65,298,153 in 2002.
Net Interest Income
Net interest income for the fourth quarter ended December 31, 2002 was $47.6 million, an increase of $15.3 million, or 47.25%, from $32.3 million for the same period of last year. Average interest-earning assets for the fourth quarter of 2002 increased by $2.7 billion, compared with the same quarter the previous year, primarily driven by a rise in the average loan portfolio of $932.2 million, particularly a very diversified growth from all lines of loans and an increase of $1.8 billion in the average investment portfolio, mainly U.S. Government and agencies obligations and mortgage-backed securities. For the full year ended December 31, 2002, average interest-earnings assets also increased by $2.3 billion or 49.07%. Notwithstanding, average yields decreased from 6.37% to 5.20% and from 7.22% to 5.44%, for the fourth quarter and year-ended 2002, respectively. The fluctuation on average yields was primarily due to a drop in market interest rates during both periods affecting our loan repricing, primarily our commercial loans portfolio with floating rates and reinvestment rates on matured, called and purchased securities.
The impact of the strong growth in average interest-earning assets in both periods was in part offset by an increase in the average interest-bearing liabilities of $2.4 billion or 49.88% and $2.1 billion or 47.60%, for the fourth quarter of 2002 and the full year 2002, respectively. In order to offset such increase, we managed our liability costs carefully, decreasing the overall cost of rates paid from 4.18% to 3.06%, and from 4.85% to 3.30% for the same periods, respectively, while continuing to offer competitive rates. Interest- bearing deposits grew in average by $973.0 million and $843.0 million during the fourth quarter and for the full year 2002, respectively, while other borrowings in average (mainly securities sold under agreements to repurchase) rose by $1.5 billion and $1.3 billion for the same periods.
Net Interest Margin
Our net interest margin during the fourth quarter of 2002 increased 9 basis points to 2.38% from 2.29% in the third quarter of 2002 in spite of industry wide interest margin compression pressures. Although our average yield on earning assets decreased during this quarter, we managed carefully our liability costs to more than offset the effect of such reduction.
Under a flat interest rate scenario for year 2003, we estimate our net interest margin will remain relatively stable within a range of 2.32% to 2.38% during said period. However, assuming an instantaneous 50 basis points decrease in the fed funds rate, we estimate our net interest margin will fall within a range of 2.15% to 2.32% for year 2003. On the contrary, assuming a 50 basis points increase in the fed funds rate, we estimate our net interest margin will rise within a range of 2.27% to 2.41% during the same period. The lower and higher values of such range meaning the lowest and highest net interest margin for any quarter within the year 2003.
Attached as Exhibits IIIa, IIIb and IIIc are supplemental unaudited data schedules providing additional information on the net interest margin including average balances and average rates for both interest-earning assets and interest-bearing liabilities, as well as changes in volumes and rates for the periods presented.
Other Operating Income
Other operating income, excluding derivative transactions and gain (losses) on sales and valuation of loan, securities and other assets, was also very strong growing $714,000 or 13.70% and $3.6 million or 19.33%, during the three-months and the year ended December 31, 2002, respectively, when compared to the similar periods in prior year. Such increases were primarily driven by higher activity associated with service charges on deposit accounts and other fees as a result of the Company’s continued strategy to diversify and increase its fee income. Other factors that contributed to such boost were increases in fees associated to our trust division, insurance commissions earned by Westernbank Insurance Corp., and fees generated by our asset-based lending operation as well as strong increases in other areas resulting from the Company’s overall growing volume of business.
Operating Expenses
Total operating expenses increased $3.6 million or 22.50% for the three months period ended December 31, 2002, and $13.6 million or 22.56% during the full year 2002, to the comparable corresponding periods in 2001. Salaries and employees' benefits accounted for the majority of such increase, rising $1.4 million or 21.71% for the fourth quarter of year 2002, and $5.1 million or 22.43% for the full year, as compared to the corresponding periods in 2001. Such increases are attributed to the continued expansion of the Company, including increases in personnel, normal salary increases and related employee benefits. At December 31, 2002, the Company had 1,031 full-time employees, including its executive officers, an increase of 179 employees or 21.01%, when compared to the same period in prior year. New personnel and additional infrastructure were added to support the continued expansion of the Company, largely with the inception of Westernbank’s new division, Expresso of Westernbank, which accounted for 130 new employees at December 31, 2002.
Other operating expenses, as a group, excluding salaries and employees’ benefits, increased $2.3 million or 23.00% for the fourth quarter of 2002 and $8.5 million or 22.64%, during the full year 2002, resulting mostly from increases in advertising, occupancy and equipment expenses, and other expenses, primarily associated to the new Expresso Division, launched in July 2002, as well as the inherent costs associated with the additional investment in technology and general infrastructure to sustain and coordinate the Bank’s expansion in all of its business areas.
The Company continued its strict cost control measures, maintaining operating expenses at adequate levels, further evidenced by its outstanding and world-class efficiency ratio of 37.03% achieved for the fourth quarter of year 2002 and 39.15% for the full year ended 2002, well below management’s long term target of 40% to 42%. W HOLDING is committed to constantly improve and maintain operating expenses at adequate levels, further improving its lean, effective and highly productive operation.
Asset Quality
W Holding asset quality continues to be among the strongest within its peer group, as measured by our reserves to total loans, non-performing loans as a percentage of total loans and net-charge-offs to average loans. Also, credit quality overall continues to be very strong in spite of the present economic environment reflecting the Company’s aggressive market penetration but conservative underwriting, being essentially a secured lender. The provision for possible loan losses amounted to $4.2 million during the quarter ended December 31, 2002, up from $3.1 million for the same period in the previous year, an increase of $1.1 million or 36.52%. The allowance for possible loan losses amounted to $47.1 million as of December 31, 2002. The increase in the provision for loan losses is attributed to management’s policy of establishing adequate and conservative reserves, principally taking into consideration the overall strong growth in the loan portfolio and particularly of Westernbank’s newest Divisions, Westernbank Business Credit, a division specializing in commercial business loans secured principally by accounts receivable, inventory and equipment, and the Expresso of Westernbank, which specializes in small, unsecured consumer loans up to $15,000 and collateralized consumer loans up to $75,000. Westernbank Business Credit loan portfolio stands at $427.7 million at December 31, 2002, an increase of $176.1 million or 69.96%, for the full year 2002. The Expresso of Westernbank loan portfolio grew to $117.4 million, net of repayments, since its inception in July 2002. The average yields of Westernbank Business Credit and the Expresso of Westernbank loan portfolios were 5.56% and 19.40%, respectively, for the year ended December 31, 2002.
Non-performing loans stand at $19.4 million or .51% (less than 1%) of the Bank’s loans portfolio at December 31, 2002, slightly up from .49% or an increase of $5.3 million, from $14.1 million as of December 31, 2001. This increase is mostly attributed to four commercial loans with principal balances of $2.4 million, $1.6 million, $1.3 million and $589,000, all of which are collateralized by real estate properties. At December 31, 2002, two of these loans with outstanding balances of $2.4 million and $1.6 million, required a specific valuation allowance of $355,000 and $770,000, respectively. At December 31, 2002, the allowance for possible loan losses was 242.80% of total non-performing loans (reserve coverage).
Net charge-offs in the fourth quarter of 2002 were $3.1 million or .34% to average loans, compared to $3.0 million or .42% to average loans for the same period in 2001, an improvement of 8 basis points when compared to the prior period. Loans charged-off associated to the Expresso of Westernbank Division amounted to $62,000 or .11% of average Expresso loans, representing seven loans. Delinquencies on our newest Expresso of Westernbank division portfolio at December 31, 2002, were .23% (less than one quarter of 1%) including the categories of 60 days and over, well below our estimate. This ratio may increase prospectively, as this portfolio matures, to a rate within our estimate and current loan loss reserves. Moreover, the total consumer loan portfolio had a total delinquency ratio, including the categories of 60 days and over, of 0.59% (less than 1%) at December 31, 2002 when compared to 1.15% for the prior year. The commercial loan portfolio had a total delinquency ratio, including the categories of 60 days and over of 0.33% (less than 1%); an improvement from .67% reported for the prior period, already very strong ratios by any standard.
Total Investments, Loans and Deposits
In line with the Company’s long-standing policy of spreading risk, W Holding has continuously maintained a diversified asset base almost 50/50 between investments and lending. The investment portfolio stands at $4.2 billion at December 31, 2002, growing $1.3 billion or 45.36% in comparison to year 2001. Such growth was primarily focused on securities guaranteed by the United States Government and mortgage backed securities, both accounting for 63.88% and 19.09%, respectively, of our investment portfolio as of December 31, 2002. The investment portfolio at December 31, 2002 had an average contractual maturity of 50 months, when compared to an average contractual maturity of 76 months at December 31, 2001, as we shortened our maturities to reduce market risk under the present interest rate scenario. The Company’s interest rate risk model, takes into consideration the callable feature of certain investment securities. Given the present interest rate scenario, and taking into consideration the callable features of these securities, the investment portfolio as of December 31, 2002, had a remaining average maturity of 30 months. However, no assurance can be given that such levels will be maintained in future periods.
W Holding loans, which include mortgage loans held for sale, grew 32.29% on a year to year basis, emphasizing the Company’s main target of continued growth in its loan portfolio through commercial real estate, asset-based, unsecured business and construction lending, as well as its consumer loan portfolios. As a result, the portfolio of real estate loans secured by first mortgages, including mortgage loans held for sale, increased from $2.1 billion as of December 31, 2001, to $2.5 billion as of December 31, 2002, an increase of $408.3 million or 19.49%. Commercial real estate loans secured by first mortgages increased from $1.1 billion as of December 31, 2001, to $1.5 billion as of December 31, 2002, an increase of $344.2 million or 30.80%. The consumer loans portfolio (including credit cards and Expresso loans), commercial loans (not collateralized by real estate) and other loans increased from $795.6 million as of December 31, 2001, to $1.3 billion as of December 31, 2002, an increase of $518.1 million or 65.12%.
As of December 31, 2002, total deposits reached $4.3 billion, from $3.2 billion at December 31, 2001, representing a growth of 32.93%, while securities sold under agreements to repurchase increased to $3.1 billion from $2.1 billion in 2001, a growth of 50.38%, in order to fund W Holding strong loans growth of 32.29% and investments growth of 45.36% or total asset growth of 39.35%.
Commenting on the results of the Company, Frank C. Stipes, Chairman of the Board, President and Chief Executive Officer, stated: “This has been the Company’s best year in its history to the present date and we expect 2003 to be again an excellent year. At the beginning of 2002, we informed that we were expecting to break and surpass the $7.0 billion barrier in total assets and that net income was expected to be the highest in the Bank’s history to date, ranging between $81.0 million and $85.0 million. Actual results indeed not only met those projections but we were even able to surpass our estimates”.
Mr. Stipes took the opportunity to inform how pleased he was with the performance of the Company during year 2002, which is the result of consecutive achievements, including: dominating the asset-based lending field through its division known as Westernbank Business Credit; turning the small personal loans world upside down with the simultaneous launching of 17 new Westernbank Expresso division branches in July 2002, (now 19 branches), growing its loan portfolio from zero to $117.0 million in less than six months; capturing the equivalent of the entire annual market growth of the island’s individual retirement account (IRA) again in 2002; consolidating islandwide leadership in commercial real-estate lending; and issuing what quickly turned out to be a stellar oversubscribed $104.0 million common stock issue in August 2002, just when Wall Street was in the middle of one of the most grueling periods of the bear market.
Mr. Stipes further stated: “In a year, where the rest of the industry was concerned with the compression in net interest margin and facing sluggish loan volumes, we were able to manage both and produce very impressive growth in volumes and more importantly, our bottom line. Net interest margin for the year ended December 31, 2002, decreased only slightly by 28 basis points, while loan originations in all business lines; commercial real estate, commercial businesses and consumer loan portfolios, were very strong. Moreover, our asset quality continues to be among the strongest within our peer group, as we discussed throughout the content of this press release.”
“During year 2003 we intend to continue the expansion of our operations, opening new branches at highly densed areas. We recently acquired a property consisting of an entire block in Old San Juan, just across the Covandonga bus station. This site will be home to Westernbank’s Old San Juan branch by the third quarter of 2003, making Westernbank the only financial institution offering the convenience of auto banking lanes and ample customer parking in that area. We also just purchased a one-acre lot in Cupey, to be the site of another branch during the latter part of year 2003 and we are also negotiating for additional branch sites in the Condado and Isla Verde sectors. Together with the metroplex San Juan region expansion, the Bank will be opening branches in the east coast of Puerto Rico where Westernbank has no presence, specifically in the Fajardo and Humacao areas and likewise expanding our presence in Caguas, therefore creating an east coast network to provide this market our full array of financial products and convenient services. We expect to break the $9 billion barrier before year end 2003 and net income to be even stronger and to range between $107.0 to $115.0 million, an increase between 25% and 35%, as economic and market conditions may permit, and as the Company’s plans and forecasts are able to be materialized depending on said market and economic conditions.
Mr. Stipes warned however that “forward-looking statements with respect to future financial conditions, results of operations and businesses of the Company are always subject to various risk and market factors out of management’s control which could cause future results to differ materially from current management expectations or estimates and as such should be understood, and not taken as carved in stone. Such factors include particularly, but are not limited, to the possibility of prolonged adverse economic conditions or that an adverse interest rate environment could develop.”
Westernbank Puerto Rico, the wholly-owned subsidiary of W HOLDING COMPANY, INC., is the third largest locally controlled banking entity headquartered in Puerto Rico, in term of total assets operating throughout Puerto Rico through 50 full fledged branches, including 32 in the Southwestern region of Puerto Rico, 7 in the Northeastern region, and 11 at the San Juan Metropolitan area of Puerto Rico. W HOLDING COMPANY, INC. also owns Westernbank Insurance Corp., a general insurance agent placing property, casualty, life and disability insurance, whose results of operations and financial condition are reported on a consolidated basis.
FINANCIAL HIGHLIGHT
AND ADDITIONAL EXHIBITS
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