THE FINANCIAL HOLDING COMPANY OF
WESTERNBANK PUERTO RICO
REPORTS AN INCREASE OF 37.66% IN NET INCOME
FOR THE FIRST QUARTER ENDED MARCH 31, 2003
Mayagüez, Puerto Rico, April 21, 2003. W HOLDING COMPANY, INC. (NYSE: "WHI"), the financial holding company of WESTERNBANK PUERTO RICO and WESTERNBANK INSURANCE CORP. reported today results for the first quarter ended March 31, 2003.
W HOLDING reported a net income of $24.6 million or $0.30 earnings per basic and diluted common share for the first quarter ended March 31, 2003, to a year-ago net income for the comparable quarter of $17.9 million or $0.23 (split adjusted) per basic and diluted common share, an increase of $6.7 million or 37.66%.
The return on common stockholders’ equity (ROCE) for the first quarter ended March 31, 2003, continue to be strong at 22.43%, compared to 27.67% for the same period in 2002. Such decrease is attributable to a stronger capital position as a result of the issuance of 6,095,000 shares of the Company’s common stock in August 2002, providing a net capital infusion of $97.9 million, when compared to the first quarter of 2002. The return on assets (ROA) for the quarter ended March 31, 2003, was 1.16%, up from 1.13% for the same quarter in 2002. W HOLDING achieved this strong ROA notwithstanding the continued increase in total assets that the Company attained during the first quarter.
As of March 31, 2003, driven by strong increases in the loan and investment portfolios, total assets ended at $8.9 billion. Total assets grew $645.5 million or 7.87%, up from $8.2 billion as of December 31, 2002. The investment portfolio increased $412.2 million or 9.85%, from $4.2 billion as of December 31, 2002, to $4.6 billion as of March 31, 2003. Loans receivable-net, grew by $218.0 million, resulting from the Company continued strategy of growing its loan portfolio through commercial real estate, asset-based and construction lending, as well as its consumer loan portfolio.
On a year to year basis, total assets grew $2.1 billion or 31.32% from $6.7 billion at March 31, 2002. The investment portfolio increased $1.1 billion or 29.00%, from $3.5 billion as of March 31, 2002, to $4.6 billion as of March 31, 2003, while loans receivable-net, grew by $1.0 billion or 34.55% for the same period.
Stockholders’ equity increased to $595.3 million as of March 31, 2003, compared to $584.7 million as of December 31, 2002. Such increase resulted from the net income of $24.6 million generated during the quarter ended March 31, 2003, partially offset by dividends paid during the quarter of $4.3 and $4.1 million on our common and preferred stock, respectively and an increase of $5.9 million in other comprehensive loss. The period-end number of common shares outstanding increased from 68,346,306 as of December 31, 2002 to 68,370,436 as of March 31, 2003, as a result of the conversion of certain non-cumulative convertible preferred stock, 1998 Series A.
Net Interest Income
Net interest income for the first quarter ended March 31, 2003 was $49.2 million, an increase of $12.3 million, or 33.31%, from $36.9 million for the same period of last year. Such increase was primarily due to an increase of $106.0 million or 26.43% in net interest-earning assets for the quarter ended March 31, 2003, when compared to same quarter in prior year.
Average interest-earning assets for the first quarter of 2003 increased by $1.8 billion, against the comparable quarter in the previous year, primarily driven by a rise in the average loan portfolio of $929.5 million, particularly a very diversified growth from all lines of loans and an increase of $856.0 million in the average investment portfolio, mainly U.S. Government and agencies obligations and mortgage-backed securities. Notwithstanding, average yields between both quarter decreased from 5.68% for the three months ended March 31, 2002 to 5.16% for the comparable period of 2003. The fluctuation on average yields was primarily due to a drop in market interest rates affecting our loan repricing, primarily our commercial loan portfolio with floating rates and reinvestment rates on matured, called and purchased securities.
The impact of the strong growth in average interest-earning assets for the first quarter ended March 31, 2003, was in part offset by an increase in the average interest-bearing liabilities of $1.7 billion or 28.31% from the year ago average. In order to offset such increase, we managed our liability costs carefully, decreasing the overall cost of rates paid from 3.54% to 2.88% between both periods, while continuing to offer competitive rates. Interest-bearing deposits grew in average by $1.0 billion, while other borrowings in average (mainly securities sold under agreements to repurchase) rose by $661.5 million.
Net Interest Margin
Our net interest margin during the first quarter of 2003 increased 10 basis points to 2.46% from 2.36% in the first quarter of 2002. Further, on a linked quarter comparison to the three months ended December 31, 2002, our net interest margin also increased 8 basis points from 2.38% in the fourth quarter of 2002 to 2.46% in the first quarter in 2003. We were able to achieve both increases 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 the remaining three quarters of year 2003, based on our asset and liability composition as of March 31, 2003, we estimate our net interest margin will increase slightly to within a range of 2.49% to 2.56% during said period. However, assuming an instantaneous 50 basis points decrease in the fed funds rate, we estimate our net interest margin will fall slightly to within a range of 2.33% to 2.46% during said period. On the contrary, assuming a 50 basis points increase in the fed funds rate, we estimate our net interest margin will rise slightly to within a range of 2.44% to 2.59% during such period. The lower and higher values of such ranges meaning the lowest and highest net interest margin for any remaining quarter within the year 2003.
Attached as Exhibits IIIa and IIIb 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 sales and valuation of loans, securities and other assets, was also very strong growing $815,000 or 15.43% during the three-months ended March 31, 2003, when compared to the similar period in prior year. Such increase was 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, increases in insurance commissions earned by Westernbank Insurance Corp., 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. This increase in other operating income was however offset by a net loss on sales and valuation of loans, securities and other assets of $1.4 million during the three months ended March 31, 2003, when compared to the year ago quarter. This increase resulted from a write-down of certain investments held to maturity (collateralized bond obligations), which management believes are other than temporarily impaired, in accordance with applicable accounting pronouncements. In connection with such write-down, management also, as permitted by such accounting pronouncements, reassessed its intent to hold such investments to maturity with an adjusted carrying value of $13.6 million and reclassified them as available for sale as of March 31, 2003. The net effect of the above-mentioned factors, in addition to an increase of $150,000 in unrealized gain on derivative instruments, resulted in a net decrease in total other operating income of $449,000 or 8.01% for the quarter ended March 31, 2003, when compared to same quarter in year 2002.
Operating Expenses
Total operating expenses increased $2.4 million or 14.60% for the three months ended March 31, 2003, when compared to same quarter in 2002. Salaries and employees' benefits accounted for the majority of such increase, rising $2.0 million or 32.06% for the first quarter of year 2003, when compared to the corresponding period in 2002. Such increase is attributed to the continued expansion of the Company, including increases in personnel, normal salary increases and related employees’ benefits. At March 31, 2003, the Company had 1,068 full-time employees, including its executive officers, an increase of 187 employees or 21.22%, 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 in July 2002, which accounted for 126 new employees between both periods. In addition, effective January 1, 2003, the Company changed the method of accounting for employee stock options from the intrinsic value method to the fair value method in accordance with Statement of Financial Accounting Standard No. 148. The effect of implementing this Statement on W Holding results of operations was an increase in salary expense in the amount of $265,000 for the quarter ended March 31, 2003.
Other operating expenses, as a group, excluding salaries and employees’ benefits, increased $417,000 or 4.00% for the first quarter of 2003 against the comparable quarter of 2002, resulting mostly from increases in occupancy, printing, postage, stationery and supplies, 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 Company’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 34.73% achieved for the first quarter of year 2003, when compared to 39.72% for the same period in prior year, 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 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 with 83.00% of W Holding loan portfolio as of March 31, 2002 secured by real estate. The consumer loan portfolio had a total delinquency ratio, including the categories of 60 days and over, of 1.06% at March 31, 2003, when compared to 1.49% for the comparable prior year. The commercial loan portfolio had a total delinquency ratio, including the categories of 60 days and over of 0.72% (less than 1%); when compared to 0.61% reported for the year ago period, already very strong ratios by any standard.
The provision for possible loan losses amounted to $6.2 million during the quarter ended March 31, 2003, up from $3.6 million for the same period in the previous year, an increase of $2.6 million or 71.85%. The allowance for possible loan losses amounted to $51.4 million as of March 31, 2003. 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 Company’s loan portfolio and particularly those of Westernbank’s newest Divisions; Westernbank Business Credit, a division specializing in asset-based lending; 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 grew to $555.5 million as of March 31, 2003, an increase of $122.9 million or 28.41%, when compared to December 31, 2002 or an increase of $296.5 million or 114.48% when compared to March 31, 2002. The Expresso of Westernbank loan portfolio grew by $21.8 million from $116.4 million at December 31, 2002 or 18.73% to $138.2 million at March 31, 2003, net of repayments. This division began operations in July 2002. As a result of such increase in both portfolios and the overall growth in general in the loan portfolio, the provision for loan losses for Westernbank Business Credit and Expresso of Westernbank divisions amounted to $692,000 and $1.5 million, respectively, for the first quarter ended March 31, 2003, contributing to the increase of $2.6 million in the provision for loan losses between both periods. The average yields of Westernbank Business Credit and the Expresso of Westernbank loan portfolios were 5.03% and 19.02%, respectively, for the first quarter ended March 31, 2003.
Non-performing loans stand at $25.7 million or .64% (less than 1%) of the Company’s loan portfolio as of March 31, 2003, slightly up from .51% or an increase of $6.3 million, from $19.4 million as of December 31, 2002. Excluding real estate loans, these ratios were 0.05% and 0.02% respectively as of the same periods. The increase primarily comes from the Company’s commercial and regular consumer loan portfolios. Non-performing loans in the commercial loan portfolio increased by $4.0 million, when compared to December 31, 2002. This increase is mostly attributed to three loans with principal balances of $1.6 million, $589,000 and $525,000, all of which are collateralized by real estate. At March 31, 2003, one loan with an outstanding balance of $1.6 million required a specific valuation allowance of $770,000. Total non-performing loans in the regular consumer loan portfolio (excluding the Expresso of Westernbank loan portfolio) grew by $1.6 million, when compared to December 31, 2002. Such increase was specifically due to consumer loans past due (over 90 days) which are fully collateralized by real estate properties. As of March 31, 2003, the allowance for possible loan losses was 200.49% (excluding real estate loans 2,849.19%) of total non-performing loans (reserve coverage).
Net charge-offs in the first quarter of 2003 were $1.9 million or 0.19% of average loans, compared to $657,000 or .09% of average loans for the same period in 2002 or .19% for the year ended December 31, 2002, all ratios significantly lower than industry averages. Such increase was primarily due to loans charged-off on our consumer loan portfolio in the amount of $1.2 million. Loans charged-off associated to the Expresso of Westernbank Division amounted to $804,000 or 2.58% on an annualized basis to average Expresso loans as of March 31, 2003. Delinquencies on the Expresso of Westernbank division loan portfolio at March 31, 2003, were 0.87% (less than 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. For the quarter ended March 31, 2003, there were no charge-offs related to Westernbank Business Credit loan portfolio.
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 $4.6 billion as of March 31, 2003, growing $412.2 million or 9.85% in comparison to December 31, 2002. Such growth was primarily focused on securities guaranteed by the United States Government and mortgage backed securities, both accounting for 69.64% and 17.77%, respectively, of our investment portfolio as of March 31, 2003. The investment portfolio as of March 31, 2003, had an average contractual maturity of 66 months. 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 March 31, 2003, had a remaining average maturity of six (6) months. However, no assurance can be given that such levels will be maintained in future periods.
W Holding loans-net, grew 5.81% when compared to December 31, 2002, and 34.55% 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, increased from $2.2 billion as of March 31, 2002, to $2.7 billion as of December 31, 2002, further increasing to $2.8 billion as of March 31, 2003, an increase of $437.6 million or 19.57% and $149.6 million or 5.60%, respectively. Commercial real estate loans secured by first mortgages increased from $1.6 billion as of December 31, 2002, to $1.8 billion as of March 31, 2003, an increase of $171 million or 10.36%. On a year to year basis commercial real estate loans grew by $551.2 million or 43.45%. Commercial real estate loan secured by first mortgage stood at $1.3 billion at March 31, 2002. Other loans portfolio, including commercial loans not collateralized by real estate, consumer loans (including the Expresso of Westernbank loans portfolio), loans on deposits and credit cards, increased from $758.0 million as of March 31, 2002, to $1.1 billion as of December 31, 2002, further increasing to $1.2 billion as of March 31, 2003, an increase of $370.1 million or 48.84% and $73.0 million or 6.45%, respectively. Such increases were primarily driven by increases in Westernbank Business Credit loan portfolio, in addition to loans originated by the Expresso of Westernbank division since its inception in July 2002, both in line with 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. Attached as Exhibit IV is a supplemental unaudited data schedule providing additional information in regards to W Holding loan portfolio.
As of March 31, 2003, total deposits reached $4.5 billion, from possibility of prolonged adverse economic conditions or that an adverse interest rate environment could develop.”
Westernbank Puerto Rico, a 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 51 full fledged branches, including 33 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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