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| WHI > SEC Filings for WHI > Form 10-K on 28-Oct-2009 | All Recent SEC Filings |
28-Oct-2009
Annual Report
• OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: Provides a brief summary of the most significant events and drivers affecting the Company's financial condition and results of operations.
• CRITICAL ACCOUNTING POLICIES: Provides a discussion of the Company's accounting policies that require critical judgment, assumptions and estimates.
• RESULTS OF OPERATIONS: Provides an analysis of the consolidated results of operations for 2008 compared to 2007, and 2007 compared to 2006.
• FINANCIAL CONDITION: Provides an analysis of the most significant balance sheet items that impact the Company's financial statements and business.
• BUSINESS SEGMENTS REVIEW: Provides a description of the Company's operating business segments and an analysis of the results of operations for each segment.
• QUARTERLY FINANCIAL INFORMATION: Provides an analysis of the consolidated results of operations and financial conditions for each of the quarters in 2008 compared to 2007, and 2007 compared to 2006.
• RISK MANAGEMENT: Provides disclosure and analysis about the Company's main risks, specifically credit risk, market risk and interest rate risk, liquidity risk, operation risk, legal risk, reputational risk, and concentration risk. This section also includes a discussion of the Company's off-balance sheet activities and contractual obligations.
• OFF-BALANCE SHEET ARRANGEMENTS - Provides disclosure of off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
• MANAGEMENT CERTIFICATIONS - Provides disclosure of certifications provided by management during the most recent fiscal year.
DEFINITIONS
• Loans receivable - net - represents extensions of credit (commercial or
personal) resulting from direct negotiations between Westernbank and a
borrower, and which management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off, net of any deferred fees
or costs the allowance for loan losses.
• Commercial real estate loans - extensions of credit secured by commercial real estate properties (excludes construction loans).
• Residential real estate loans - extensions of credit secured by 1 to 4 family residential properties.
• Construction loans - extensions of credit secured by real estate made to finance (a) land development (i.e., the process of improving land) preparatory to erecting new structures or (b) the on-site construction of industrial, commercial, residential, or farm buildings.
• Total commercial real estate loans - includes commercial real estate and construction loans.
• Commercial, industrial & agricultural ("C&I") - extensions of credit to sole proprietorships, partnerships, corporations, and other business enterprises, whether secured (other than those that meet the definition of a "loan secured by real estate") or unsecured, single-payment or installment.
• Total commercial loans - includes commercial real estate, construction and C&I loans.
• Consumer loans secured by real estate - extensions of credit secured by commercial real estate properties or residential real estate properties.
• Consumer other - unsecured extensions of credit, includes installment loans, lines of credit, overdraft, and credit cards.
• Total consumer loans - includes consumer loans secured by real estate and consumer other.
• Retail deposits - includes non-interest bearing accounts, passbook accounts, NOW accounts, money market accounts and individual certificate of deposits.
• Brokered Deposits - represents funds which Westernbank obtains, directly or indirectly, by or through any deposit broker for deposit into one or more deposit accounts.
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total assets at December 31, 2008, 2007 and 2006 were $15.3 billion,
$17.9 billion, and $17.1 billion, respectively. The decrease in total assets was
mainly driven by decreases in the Company's investment portfolio, excluding
short-term money market instruments, and in the Company's loans portfolio. The
investment portfolio, excluding short-term money market instruments, decreased
$2.4 billion, from $7.1 billion at December 31, 2007, to $4.7 billion at
December 31, 2008, due to the Company's decision to deleverage its balance sheet
to strengthen the Company's regulatory capital ratios. During 2008, the Company
changed and repositioned its balance sheet by shifting the composition of its
investment portfolio from callable agency securities with a risk-weight of 20%
to GNMA mortgage-backed securities and collateralized mortgage obligations with
a risk-weight of 0% and deleveraging the Company's balance sheet. In particular,
the Company made used of short-term money market instruments and proceeds from
called investment securities to pay down repurchase agreements as they matured.
The investment portfolio, excluding short-term money market instruments, was
$7.0 billion at December 31, 2006. Loans receivable-net decreased by $542.2
million, from $9.2 billion at December 31, 2007 to $8.7 billion at December 31,
2008, due primarily to the Company' decision to curtail major commercial lending
since the summer of 2007 in light of worsening economic conditions in Puerto
Rico and the application of stricter underwriting guidelines. Loans receivable -
net was $8.6 billion at December 31, 2006. As part of the Company's strategy to
strengthen its capital ratios, during 2008 the Company emphasized its loan
production toward the small business and residential mortgage loan sectors while
deemphasizing the large corporate and construction loan portfolios.
Total deposits reached $11.0 billion at December 31, 2008, from $10.5 billion
at December 31, 2007, and $9.3 billion at December 31, 2006. The increase is
mainly attributable to increases in brokered deposits. Brokered deposits at
December 31, 2008, 2007 and 2006 were $8.6 billion (78% of total deposits),
$7.9 billion (75% of total deposits), and $6.8 billion (73% of total deposits),
respectively. Retail deposits at December 31, 2008, 2007 and 2006 were
$2.4 billion, $2.6 billion, and $2.5 billion, respectively.
Net loss for the year ended December 31, 2008 was $5.5 million, compared to a
net loss of $68.3 million and a net income of $59.6 million for the years ended
December 31, 2007 and 2006, respectively. Basic and diluted earnings (loss) per
common share for the year ended December 31, 2008 amounted to $(12.84), compared
to basic and diluted earnings (loss) per common share of $(31.92) and to basic
and diluted earnings (loss) per common share of $6.89 ($6.74 on a diluted
basis), adjusted to reflect the one-for-fifty reverse stock split approved on
November 7, 2008 and effective on December 1, 2008, for the comparable periods
in 2007 and 2006, respectively. As more fully discussed in this Item 7, the
Company's financial performance for 2008, as compared to 2007, was principally
impacted by the following:
• A decrease of $210.1 million in the provision for loan losses, as a result
of steps taken by the Company since the middle of 2007 to mitigate the
credit risk underlying its total commercial loan portfolios under the
current economic environment, which included segregating origination,
underwriting and credit administration functions, setting portfolio limits
and applying stricter underwriting guidelines, among others. In addition,
in connection with the 2007 and 2008 consolidated financial statements,
the Company's internal loan review department examined the entire
construction and asset-based loan portfolios, and commercial loan
relationships in excess of $3.0 million using current appraisals, the
majority of which were done in 2007 or more recently, for substantially
all of the underlying collateral. The Company's determination of valuation
allowances was mainly based on a collateral dependent analysis, which
reflects the value of the property in its present condition after
appropriate deductions for selling costs. The loan loss provision for 2007
included the incorporation of such appraisals in the calculation of the
specific allowances.
• A decrease of $142.1 million in net interest income, mainly due to a decrease in net yield on interest-earning assets coupled with a decrease in the Company's average earning assets.
• An increase of $32.4 million in noninterest expenses, for the most part due to increases in deposit insurance premiums and supervisory examination, salaries and employees' benefits, municipal tax expenses and in the provision for claim receivable.
• An increase in the income tax benefit of $14.5 million mainly due to a positive variance in the current provision for income taxes, offset in part by a significant decrease in deferred tax benefits. For 2008, the Company's current provision for income taxes amounted to a benefit of $31.9 million, compared to an expense of $33.8 million in 2007. The positive variance in 2008, when compared to 2007, was mainly attributed to agreements reached with local and federal authorities that yielded a benefit of $33.3 million for 2008, coupled with a negative variance in taxable income.
• An increase of $12.9 million in noninterest income, principally as a result of an increase of $12.5 million in net gain (loss) on sales of loans, securities and other assets coupled with an increase of $1.5 million in other fees and commissions, offset in part by decreases in service and other charges on loans. During 2008, the Company sold certain land lots originally held for future branch development and recognized a gain on sale of $14.7 million. The increase in other fees and commissions was mainly driven by higher credit card fees as a result of higher merchant fees due to an increase in assessment rates and higher automatic teller machine fees as a result of the imposition of a usage fee to non-bank customers. The decrease in service and other charges on loans was mainly due to lower volume of business in commercial loans due to the Company's decision to curtail major commercial lending in light of worsening economic conditions in Puerto Rico.
Net loss for the year ended December 31, 2007, when compared to a net income
in 2006, was mainly attributed to an increase of $186.7 million in the provision
for loan losses (principally attributed to increased provisions in the Company's
total commercial loan portfolios), an increase of $38.9 million in noninterest
expenses (mainly attributed to additional professional fees, salaries and
employees' benefits, deposit insurance premium and other expenses incurred
during 2007) and a decrease of $23.3 million in net interest income (mainly as a
result of the effects of the flattening of the yield curve), partially offset by
an increase of $10.7 million in noninterest income and a decrease of
$110.3 million in the provision for income taxes.
The Company's returns on average assets for the years ended December 31,
2008, 2007, and 2006 were (0.03)%, (0.39)% and 0.36%, respectively, while the
Company's returns on average common stockholders' equity for the years ended
December 31, 2008, 2007, and 2006 were (9.97)%, (19.46)%, and 3.66%,
respectively.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of the Company's financial statements. The
significant accounting policies of the Company are described in the footnotes to
the consolidated financial statements. Certain accounting policies involve
significant judgments and assumptions by management which have a material impact
on the carrying value of certain assets and liabilities; management considers
such accounting policies to be critical accounting policies. The judgments and
assumptions used by management are based on historical experience and other
factors, which management believes to be reasonable under the circumstances.
Because of the nature of the judgments and assumptions made by management,
actual results could differ from these judgments and estimates which could have
a material impact on the carrying values of assets and liabilities and the
results of operations of the Company. The Company believes that of its
significant accounting policies, the following may involve a higher degree of
judgment and complexity:
• Allowance for loan losses - The allowance for loan losses is a critical
accounting policy that requires the most significant judgments and estimates
used in the preparation of the Company's consolidated financial statements.
The Company maintains an allowance to absorb probable loan losses inherent in the portfolio. The allowance is maintained at a level the Company considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectibility and historical loss experience of loans. Credit losses are charged and recoveries are credited to the allowance. Provisions for loan losses are based on the Company's review of the historical credit loss experience and such factors that, in management's judgment, deserve consideration under existing economic conditions in estimating probable credit losses.
Estimates of losses inherent in the loan portfolio involve the exercise of judgment and the use of assumptions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company's control. Because of uncertainties inherent in the estimation process, management's estimate of credit losses in the loan portfolio and the related allowance may change.
The allowance consists of two components: the specific allowance and the general allowance. The Company follows a systematic methodology in determining the appropriate level of these two allowance components.
Larger commercial and construction loans that exhibit probable or observed credit weaknesses are subject to individual review and thus subject to specific allowance allocations. Where appropriate, allowances are allocated to individual loans based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow, as well as evaluation of legal options available to the Company. The review of individual loans includes those loans that are impaired as provided in Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, as amended. Any allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loans' effective interest rate or the fair value of the underlying collateral. The Company evaluates the collectibility of both principal and interest when assessing the need for loss accrual.
General allowances based on loss rates are applied to commercial and construction loans which are not impaired and thus not subject to specific allowance allocations. The loss rates are generally derived from two or three year historical net charge-offs by loan category adjusted for significant qualitative factors that, in management's judgment, are necessary to reflect losses inherent in the portfolio. These qualitative factors include: the effect of the national and local economies; trends in loans growth; trends in the impaired and delinquent loans; risk management and loan administration; changes in concentration of loans to one obligor; changes in the internal lending policies and credit standards; and examination results from bank examiners and the Company's internal credit examiners. During 2007, the Company segregated the commercial and construction loan portfolios for purposes of determining loss rates into additional loan categories based on collateral type.
Homogeneous loans, such as consumer installments, residential mortgage loans, and credit cards are not individually risk graded. General allowances are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are generally based on the higher of current year or the average of the last two to three year historical net charge-offs by loan category, adjusted for significant qualitative factors that, in management's judgment, are necessary to reflect losses inherent in the portfolio. These qualitative factors include: the effect of the national and local economies; trends in the delinquent loans; risk management; collection practices; and changes in the internal lending policies and credit standards.
• Other-than-temporary impairments - The Company reviews its investment securities for impairment on a quarterly basis or earlier if other factors indicative of potential impairment exist. An impairment charge in the consolidated statements of income is recognized when the decline in the fair value of the securities below their cost basis is judged to be other-than-temporary.
Available-for-sale and held-to-maturity securities are reviewed at least quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the length of time and the extent to which the fair
value has been below cost, the expectation for that security's performance, the credit worthiness of the issuer and the Company's intent and ability to hold the security to allow for any anticipated recovery in fair value if classified as available for sale, or to maturity. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the consolidated statements of operations.
The equity securities and corporate notes impairment analyses are performed based on the latest financial information and any supporting research report made by major brokerage houses. These analyses are subjective and based, among other things, on relevant financial data such as capitalization, cash flows, liquidity, systematic risk, and debt outstanding. Management also considers the industry trends, the historical performance of the stock, as well as the Company's intent to hold the security. If management believes that there is a low probability of achieving book value in a reasonable time frame, then an impairment is recorded by writing down the security to fair value.
• Securities classification and related values - Securities are classified as held-to-maturity, available-for-sale or trading on the date of purchase. Only those securities classified as held-to-maturity, and which management has the intent and ability to hold to maturity, are reported at amortized cost. Available-for-sale and trading securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in accumulated other comprehensive income (loss) and noninterest income, respectively. The fair value of a security is determined based on quotations received from pricing service firms and/or securities dealers. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Realized securities gains or losses are reported within noninterest income in the consolidated statements of operations. The cost of securities sold is based on the specific identification method. The assessment of fair value applies to certain of the Corporation's assets and liabilities, including the investment portfolio. Fair values are volatile and are affected by factors such as market interest rates, prepayment speeds and discount rates.
• Valuation of financial instruments - The measurement of fair value is fundamental to the Company's presentation of financial condition and results of operations. The Company holds derivatives, investments and other financial instruments at fair value. The Company holds its investments and liabilities on the statement of financial condition mainly to manage liquidity needs and interest rate risks. A substantial part of these assets and liabilities is reflected at fair value on the Company's financial statement of condition.
Effective January 1, 2008, the Company adopted SFAS No. 157, which provides a
framework for measuring fair value under accounting principles generally
accepted in the United States of America. SFAS No. 157 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. SFAS
No. 157 also establishes a fair value hierarchy, which prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. The
fair value hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). A financial instrument's categorization within
the fair value hierarchy is based upon the lowest level of input that is
significant to the instrument's fair value measurement. The three levels within
the fair value hierarchy are described as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date.
Level 1 assets and liabilities include equity securities that are traded in an
active exchange market, as well as certain U.S. Treasury and other U.S.
government and agency securities and corporate debt securities that are traded
by dealers or brokers in active markets.
Level 2 - Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly. Level 2
inputs include: quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in markets
that are not active; inputs other than quoted prices that are observable for the
asset or liability; and inputs that are derived principally from or corroborated
by observable market data by correlation or other means. Level 2 assets and
liabilities
include (i) mortgage-backed securities for which the fair value is estimated
based on the value of identical or comparable assets, (ii) debt securities with
quoted prices that are traded less frequently than exchange-traded instruments
and (iii) derivative contracts and financial liabilities (e.g., brokered
deposits elected for fair value option under SFAS 159) whose value is determined
using a pricing model with inputs that are observable in the market or can be
derived principally from or corroborated by observable market data.
Level 3 - Unobservable inputs for the asset or liability for which there is
little, if any, market activity at the measurement date. Unobservable inputs
reflect the Company's own assumptions about what market participants would use
to price the asset or liability. The inputs are developed based on the best
information available in the circumstances, which might include the Company's
own financial data such as internally developed pricing models, discounted cash
flow methodologies, as well as instruments for which the fair value
determination requires significant management judgment.
For a detail of fair value of financial instruments please refer to Note 20
in the notes to the consolidated financial statements included in this Annual
Report on Form 10-K under Part II, Item 8.
• Certain liabilities and contingencies - In the ordinary course of business,
the Company's management is required to make certain estimates and assumptions
that affect the reported amounts of liabilities and disclosures of contingent
liabilities at the date of the consolidated financial statements and therefore
the reported amounts of revenues and expenses during the reporting period.
Such estimates are subjective in nature and involve uncertainties and matters
of significant judgment regarding past and expected gains or losses, current
economic conditions, and risk characteristics, among other factors. The
following is a description of the most significant methods and assumptions
used by the Company in estimating the amounts reported in connection with
certain liabilities and contingencies as disclosed in the financial
statements:
• Income taxes - The Company is required to compute income taxes in connection with its preparation of the consolidated financial statements. This computation involves estimates and assumptions made by the Company's management based on its interpretation of current and enacted tax laws and regulations that affect the reported amounts of current and deferred income tax provisions. The carrying value of the Company's net deferred tax asset assumes that the Company will be able to generate sufficient taxable income in the future to realize most of the tax benefit. If expectations about future taxable income are not materialized, the Company may be required to record a valuation allowance to reduce the recorded amount of its deferred tax asset resulting in an increase of income tax expense in the consolidated statements of operations.
The Company evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintains tax accruals consistent with its evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. These changes, when they occur, can affect the income tax accruals as well as the current period's income tax expense and can be significant to the operating results of the Company.
• Other Contingencies - The Company is a defendant in legal actions arising in the normal course of business. Evaluation of these contingencies requires management of the Company, after consultation with its legal counsel, to assume certain positions based on its interpretation of current laws and regulations. Such interpretations are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, actual results could differ from management position and estimates.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's principal source of earnings is its net interest income, which
is the difference between interest income on loans and invested assets
. . .
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