W Holding Company WHI
February 04, 2002 - 6:28pm EST by
2002 2003
Price: 15.55 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 645 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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W Holding Company is a financial services company based in Puerto Rico. The company owns Westernbank Puerto Rico, as well as the recently formed Westernbank Insurance Corp. The company, formerly known as Westernbank Puerto Rico, became a holding company in July of 2000. This legal structure change was done in order for the company to engage in other non-bank activities including insurance and securities activities. In July of 2001, W Holding Company acquired an insurance company, which it renamed Westernbank Insurance Corp, that competes in such general lines as property, casualty, life, and disability insurance.

Westernbank Puerto Rico is an FDIC-insured commercial bank that has been in operation since 1958, when it opened its first branch, then called Western Federal Savings and Loan Association of Puerto Rico (try fitting that on a business card!) Today, Westernbank has 35 branches, making it the third largest bank on the island of PR, and the best capitalized. Westernbank also has two other divisions, those being Westernbank International, which does commercial banking outside of Puerto Rico, Westernbank Trust, which provides trust services, and Westernbank Business Credit, a new division which is involved in receivables financing and business loans. This division was created to manage a portfolio of business loans acquired in June of 2001. According to an August 2001 article in the Puerto Rico Herald, the company is also making impressive strides in its first year of entrée into asset management. Westernbank is quickly winning marketshare in the IRA investment market, growing its IRA portfolio from $17 million in the first quarter to over $86 million by the end of Q2, a 405% increase in three months.

Westernbank has been profitable every year since 1958, an unbroken string of 43 years.
This is an amazing feat when you consider the hyperinflation of the late ‘70’s and the savings and loan crisis of the late ‘80’s. According to the company’s website, every bank in Puerto Rico posted losses in 1989/90, with the exception of one: Westernbank. Westernbank also has one of the lowest delinquency ratios, at less than half of 1%, of any bank in the U.S., and has one of the highest ratios of reserves to non-performing loans as well, with $2.72 in reserves for every non-performing dollar.

Westernbank has a reputation as a technology leader in the banking industry. They were the first bank in Puerto Rico, and one of the first 75 banks in the world, to offer internet banking. In 1998, the company rolled out biometric sensors, which allows customers the option to access their accounts at all teller windows with a fingerprint scanner if they prefer that to the standard offering of bank cards and PIN numbers.

During the period of 1996 through 2001, the bank has shown some tremendous growth, with total assets ballooning from $861.3 million in 1996 to almost $6 billion at the end of 2001. For the fiscal year 2001, W Holding grew assets by 38.2% over the previous year, and operating income increased 39.4%.

WHI pays a monthly dividend, with payments coming on the 15th to all shareholders of record as of the last day of the previous month. The company follows a dividend payment guideline whereby 25% of the average net earnings of the previous two years are declared in the current year (as long as the bank is profitable), and the remaining 75% are retained by the bank. On January 18, 2002, the company declared 2002 dividends to be $0.32, for a dividend yield of just over 2%. This is an increase of 28% over the previous year’s dividend.

This dividend increase is the eighth year in a row that the company has raised the dividend, and they haven’t been insignificant increases. Check out the yearly percentage dividend increases since 1995:

1995 12.5%
1996 127.0%
1997 21.8%
1998 33.3%
1999 33.3%
2000 25.0%
2001 25.0%
2002 28.0%

For those of you counting at home, that’s a cumulative 1004% increase in eight years. For stockholders who’ve been holding since the company’s IPO in 1985, those impressive dividend hikes have been just the cherry on the dessert – the cake has been the stock price appreciation of a cumulative 6047% -- over 60 times the original investment.

The impressive 40% growth in earnings in 2001 was accomplished with ROA of 1.22% and an ROE of 27.49%, figures that are about as impressive as one will find in the regional bank universe.

Let’s move on to valuation. At a recent $15.48 per share, WHI trades at 1.7 times book value and 12.3 times 2001 earnings. Why so cheap? I can only guess. The company has no institutional following that I can see. I tried to find a research report for the company on Multex – the most recent was from 1996, put out by a company I didn’t recognize. There are only 716 message posts on Yahoo!, which seems a trifling number for a company with a market cap of $638 million. There are some institutional owners, but according to Yahoo! Finance, institutions own only 14% of the float. Insiders own 34%, and insiders have been consistent buyers.


There is no particular event-driven catalyst, only an exceptional operating history, continued rapid growth, a high level of insider buying, and a reasonable price.
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