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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
Commission file number 0 - 12784
WESTBANK CORPORATION
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2830731
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(State of other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
225 PARK AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0149
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(Address of principal executive offices) (Zip Code)
(413) 747-1400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Common stock, par value $2.00 per share: 4,695,395 shares outstanding
as of July 31, 2004
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WESTBANK CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
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Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Stockholders' Equity 5
Condensed Consolidated Statements of Comprehensive Income 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7-9
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-21
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22
ITEM 4. Controls and Procedures 22
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 2. Changes in Rights of Securities Holders, Use of Proceeds
and Issuer Purchases of Equity Securities 23
ITEM 3. Defaults by Company on its Senior Securities 23
ITEM 4. Submission of Matters to a Vote of Security Holders 23
ITEM 5. Other Events 23
ITEM 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2
ITEM 1. FINANCIAL STATEMENTS
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (Unaudited) December 31, 2003
- --------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks:
Non-interest bearing $ 19,499 $ 14,599
Interest bearing 7 40
Federal funds sold 529 39
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Total cash and cash equivalents 20,035 14,678
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Investment securities available for sale, at fair value 214,181 241,812
Investment securities held to maturity, at amortized cost 71,974 250
(approximate fair value of $70,233 in 2004 and $262 in 2003)
- --------------------------------------------------------------------------------------------------------
Total securities 286,155 242,062
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Loans 427,899 439,911
Allowance for loan losses 4,227 4,428
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Net loans 423,672 435,483
Premises and equipment, net 6,636 6,749
Accrued interest receivable 3,983 3,180
Other real estate owned, net 706
Goodwill 8,837 8,837
Bank-owned life insurance 9,081 8,703
Investment in unconsolidated investee 526 526
Other assets 6,453 4,368
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 766,084 $ 724,586
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 82,443 $ 76,015
Interest bearing 501,505 460,439
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Total deposits 583,948 536,454
Borrowed funds 116,287 122,204
Accrued interest payable 585 575
Payable to Westbank Capital Trust 1 17,526 17,526
Other liabilities 3,252 2,552
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Total liabilities 721,598 679,311
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Stockholders' Equity:
Common stock - $2 par value
Authorized - 9,000,000 shares
Issued - 4,746,397 shares in 2004
and 4,523,480 in 2003 9,493 9,047
Unearned compensation -
restricted stock award (1,764)
Additional paid in capital 20,443 14,524
Retained earnings 19,692 22,724
Treasury stock (56,215 shares in 2004 and 114,232 shares in 2003) (1,108) (1,692)
Accumulated other comprehensive income (loss) (2,270) 672
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 44,486 45,275
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 766,084 $ 724,586
========================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarter Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Income:
Interest and fees on loans $ 5,997 $ 7,281 $ 12,186 $ 14,914
Interest and dividend income on securities 3,240 1,598 6,104 3,267
Interest on federal funds sold 2 54 9 116
- ---------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 9,239 8,933 18,299 18,297
Interest expense 3,628 3,584 7,157 7,432
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 5,611 5,349 11,142 10,865
Provision for loan losses 0 0 0 0
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Net interest income after
provision for loan losses 5,611 5,349 11,142 10,865
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Non-interest income:
Gain on sale of securities 165 4 227 263
Gain on sale of loans 47 246 427 246
Other non-interest income 805 744 1,679 1,478
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Total non-interest income 1,017 994 2,333 1,987
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Non-interest expenses:
Salaries and benefits 2,567 2,443 5,163 4,813
Other non-interest expense 1,551 1,421 3,080 2,768
Occupancy - net 385 365 846 810
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Total non-interest expense 4,503 4,229 9,089 8,391
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Income before income taxes 2,125 2,114 4,386 4,461
Income taxes 681 612 1,357 1,453
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NET INCOME $ 1,444 $ 1,502 $ 3,029 $ 3,008
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Net income per share
- Basic $0.32 $0.33(1) $0.67 $0.66(1)
- Diluted $0.30 $0.32(1) $0.63 $0.63(1)
Weighted average shares outstanding
- Basic 4,573,803 4,600,565(1) 4,511,505 4,581,224(1)
- Dilutive Option Shares 265,806(2) 163,344(1) 271,036(2) 159,090(1)
- ---------------------------------------------------------------------------------------------------------------------------
- Diluted 4,839,609 4,763,909(1) 4,782,541 4,740,314(1)
===========================================================================================================================
(1) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in May 2004.
(2) 8,400 options were excluded from diluted earnings per share because their
effect would be anti-dilutive.
See accompanying notes to condensed consolidated financial statements.
4
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2003 AND SIX MONTHS ENDED JUNE 30, 2004 (DOLLAR AMOUNTS
IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK UNEARNED ACCUMULATED
------------ COMPENSATION ADDITIONAL OTHER
NUMBER PAR RESTRICTED PAID-IN RETAINED TREASURY COMPREHENSIVE
OF SHARES VALUE STOCK AWARD CAPITAL EARNINGS STOCK INCOME/(LOSS) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE - JANUARY 1, 2003 4,367,780 $9,047 $14,497 $18,780 $(2,091) $2,379 $42,612
====================================================================================================================================
Net income 6,054 6,054
Cash dividends declared
($.48 per share) (2,110) (2,110)
Shares issued from treasury
stock:
Stock option plan 54,850 (278) 744 466
Dividend reinvestment and
stock purchase plan 42,305 105 559 664
Changes in unrealized
gain/(loss) on securities
available for sale (1,707) (1,707)
Repurchase of common stock (55,687) (904) (904)
Income tax benefit for exercise
of non-qualified stock options 105 105
Stock option compensation
(Note E) 95 95
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BALANCE - DECEMBER 31, 2003 4,409,248 9,047 14,524 22,724 (1,692) 672 45,275
====================================================================================================================================
(Unaudited)
Net income 3,029 3,029
Cash dividends declared
($.28 per share) (1,245) (1,245)
Shares issued from treasury
stock:
Stock option plan 76,801 (440) 1,072 632
Dividend reinvestment and
stock purchase plan 16,240 109 231 340
Changes in unrealized
gain/(loss) on securities
available for sale (2,942) (2,942)
Repurchase of common stock (35,024) (717) (717)
Income tax benefit for exercise
of non-qualified stock options 102 102
Stock option compensation
(Note E) 3 3
Issuance of restricted
stock award (Note E) (1,764) 1,785 21
Five percent common stock
dividend 222,917 446 4,360 (4,816) (2) (12)
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BALANCE - JUNE 30, 2004 4,690,182 $9,493 $(1,764) $20,443 $19,692 $(1,108) $(2,270) $44,486
====================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (DOLLARS IN THOUSANDS)
Quarter Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
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Net income $ 1,444 $ 1,502 $ 3,029 $ 3,008
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Unrealized gain (loss) on securities available for sale,
net of income taxes (benefit) of $(1,891) and $66 for
the quarter and $(1,438) and $(193) for the six-month
periods ended June 30, 2004 and 2003 respectively (3,670) 128 (2,792) (375)
Reclassification adjustment for gains included in net income,
net of income taxes of $(56) and $(1) for the
quarter and $(77) and $(89) for the six-month
periods ended June 30, 2004 and 2003 respectively (109) (3) (150) (174)
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Other Comprehensive Income (Loss) (3,779) 125 (2,942) (549)
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COMPREHENSIVE INCOME (LOSS) $(2,335) $ 1,627 $ 87 $ 2,459
===========================================================================================================================
See accompanying notes to condensed consolidated financial statements.
5
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited) (DOLLAR AMOUNTS IN THOUSANDS)
Six months ended June 30,
2004 2003
- ---------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 3,029 $ 3,008
Adjustments to reconcile net income to net
cash provided by operating activities:
Investment accretion income (104) (20)
Depreciation and amortization 436 339
Realized gain on sale of securities (227) (263)
Gain on sale of mortgages (427) (246)
Changes in assets and liabilities
(Increase) Decrease in accrued interest receivable (803) 403
Increase in bank-owned life insurance (378) (196)
(Increase) Decrease in other assets 179 (2,037)
Increase (Decrease) in accrued interest payable on deposits 10 (139)
Increase (Decrease) in other liabilities 248 (28)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,963 821
=========================================================================================================
Investing activities:
Investments:
Held to maturity:
Purchases (72,256)
Proceeds from maturities and principal payments 551 119
Available for sale:
Purchases (78,008) (21,392)
Proceeds from sales 24,433 7,459
Proceeds from maturities and principal payments 76,875 49,267
Purchases of premises and equipment (323) (104)
Net decrease (increase) in loans 11,544 (3,062)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (37,184) 32,287
=========================================================================================================
Financing activities:
Net increase (decrease) in deposits 47,494 (24,464)
Net decrease in borrowings (5,917) (9,989)
Treasury stock issued, net 246 193
Dividends paid (1,245) (1,057)
- ---------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 40,578 (35,317)
=========================================================================================================
Increase (Decrease) in cash and cash equivalents 5,357 (2,209)
Cash and cash equivalents at beginning of period 14,678 47,250
=========================================================================================================
Cash and cash equivalents at end of period $ 20,035 $ 45,041
=========================================================================================================
Cash paid:
Interest on deposits and other borrowings $ 7,147 $ 7,571
Income taxes 1,283 6,180
Supplemental disclosure of cash flow information:
Securitization of loans into mortgage-backed securities 26,079
Transfer of loans to other real estate owned 574
Unrealized loss on securities available for sale, net of taxes (2,942)
Unearned compensation - restricted stock award 1,785
Exercise of non-qualified stock options 102
See accompanying notes to condensed consolidated financial statements.
6
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
NOTE A - GENERAL INFORMATION
Westbank Corporation (hereinafter sometimes referred to as the "Corporation") is
a registered bank holding company organized to facilitate the expansion and
diversification of the business of its banking subsidiary, Westbank (hereinafter
sometimes referred to as "the Bank"), into additional financial services related
to banking. Substantially all operating income and net income of the Corporation
are presently accounted for by the Bank.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for the
quarters and six-month periods ended June 30, 2004 and 2003 have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("generally accepted accounting principles"). Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted,
pursuant to the rules and regulations of the Securities and Exchange Commission
for interim reports. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2004
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. In preparing such financial statements, management is
required to make estimates and assumptions that affect the reported amounts.
Actual results could differ significantly from these estimates.
For further information, please refer to the Consolidated Financial Statements
and footnotes thereto included in the Westbank Corporation Annual Report on Form
10-K for the year ended December 31, 2003.
NOTE C - STOCK DIVIDEND
On April 12, 2004, the Corporation announced a five percent (5%) stock dividend
payable to shareholders of record May 12, 2004 to be paid on May 18, 2004. As a
result of the stock dividend, all earnings-per-share data have been restated for
the period ended June 30, 2003 to reflect the May 18, 2004 stock dividend.
NOTE D - FINANCIAL STATEMENT RECLASSIFICATION
Certain amounts in the December 31, 2003 and June 30, 2003 financial statements
have been reclassified to conform to the June 30, 2004 presentation.
NOTE E - STOCK-BASED COMPENSATION
ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS: Effective January 1, 2003, the
Corporation adopted the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", prospectively to all employee awards granted, modified or settled
after January 1, 2003. In accordance with this Statement, the Corporation began
expensing the cost of the stock-based employee compensation for all new employee
awards granted.
RESTRICTED STOCK AWARD PLAN: On April 21, 2004, Westbank Corporation's
stockholders approved the Corporation's adoption of the 2004 Recognition and
Retention Plan ("RRP"), which allows the Corporation to grant restricted stock
awards ("Awards") to certain officers, employees and outside Directors. The RRP
is authorized to acquire not more than 92,505 shares of common stock on the open
market. Shares generally vest at a rate of 12.5% per year, with the first
vesting period ending May 25, 2005. The aggregate purchase price of all shares
acquired by the RRP is reflected as a reduction of stockholders' equity.
Compensation expense will be amortized annually over an eight(8)-year period as
the Corporation's employees and Directors become vested in their stock awards.
As of June 30, 2004, compensation expense amounted to $21,509 and is based on
the fair value of the common stock on the grant date.
7
NOTE F - FINANCIAL AND PERFORMANCE LETTERS OF CREDIT
The Corporation has financial and performance letters of credit. Financial
letters of credit require the Corporation to make payment if the customer's
financial condition deteriorates, as defined in the agreements. Performance
letters of credit require the Corporation to make payments if the customer fails
to perform certain non-financial contractual obligations. The Corporation
estimates the initial fair value of the letters of credit based on the fee
received from the customer. The fees collected as of June 30, 2004 were
immaterial; therefore, these guarantee obligations are not reflected in the
accompanying financial statements. The maximum potential undiscounted amount of
future payments of letters of credit as of June 30, 2004 are approximately
$652,856, of which $450,000 will expire on September 17, 2004, $10,000 will
expire on January 9, 2005 and $192,856 will expire on January 15, 2005. Amounts
due under these letters of credit would be reduced by any proceeds that the
Corporation would be able to obtain in liquidating the collateral for the loans,
which varies depending on the customer. The Corporation has not recorded any
contingent liabilities related to these letters of credit.
NOTE G - PAYABLE TO WESTBANK CAPITAL TRUST 1
The Corporation's adoption of FIN 46(R), "Consolidation of Variable Interest
Entities," as of March 31, 2004 required the Corporation to remove Westbank
Capital Trust 1 from the Corporation's consolidated financial statements and to
record on its balance sheet the portion of ownership of the Preferred Stock
issue in the amount of $526,000 as an "Investment in Unconsolidated Investee"
and the total amount outstanding of $17,526,000 as "Note Payable to Westbank
Capital Trust 1." Interest income and expense were recognized in the financial
statements. The adoption of FIN 46(R) did not have a material impact on the
financial position or results of operations.
In response to FIN 46(R), the Federal Reserve Board has proposed to permit bank
holding companies to continue to treat trust preferred securities as Tier 1
capital up to the current 25% limit until March 31, 2007. After March 31, 2007,
the 25% limit will be calculated net of goodwill. The Federal Reserve Board also
proposed to subject trust preferred securities to new quantitative and
qualitative standards after the three-year transition period. The proposal also
provides that, beginning with the period commencing five years prior to maturity
(generally, twenty-five years after issuance), the entire amount of trust
preferred securities must be removed as an element of Tier 1 capital and may be
included in Tier 2 capital, subject to the same phase-out currently applicable
to limited life preferred stock (i.e., one-fifth each year and excluded totally
during the last year). If the proposal were adopted, there would be no material
change as of June 30, 2004 to the regulatory capital treatment of the trust
preferred securities issued by Westbank Capital Trust 1 based on the adoption of
FIN 46(R) prior to the first revision of March 31, 2007.
8
NOTE H - DIRECTORS AND EXECUTIVES SUPPLEMENTAL RETIREMENT PLAN
The Westbank Directors and Executives Supplemental Retirement Plan was
established in 2001. Under the Supplemental Retirement Plan, the Bank provides
post-retirement benefits for non-employee Directors who retire from the Board
after reaching age seventy-two (72) and certain executive officers who retire at
age sixty-five (65). The retirement benefit is in the amount of seventy-five
percent (75%) of the Director's or executive's final compensation at retirement
and is payable for the life of the retiree. For the executives, this amount is
reduced by fifty percent (50%) of the primary insurance amount from Social
Security and any employer-provided qualified retirement plans. The Corporation
uses a December 31 measurement date for the plan.
The combined cost of the defined benefit portion of the Directors and Executives
Supplemental Retirement Plan includes the following components:
Quarter Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Service cost $ 30,319 $ 26,347 $ 60,638 $ 52,694
Interest cost 43,032 38,991 86,064 77,982
Amortization of prior service cost 31,235 31,235 62,470 62,470
- --------------------------------------------------------------------------------------------------------------------
$ 104,586 $ 96,573 $ 209,172 $ 193,146
====================================================================================================================
The weighted average assumptions utilized to determine the benefit obligation
and net benefit cost are as follows:
Quarter Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Discount rate 6.30% 6.30% 6.30% 6.30%
Rate of increase in compensation levels 5.00% 5.00% 5.00% 5.00%
The Corporation does not expect to contribute to the Directors and Executives
Supplemental Retirement Plan in 2004.
NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission staff recently released Staff Accounting
Bulletin (SAB) 105, "Loan Commitments Accounted for as Derivative Instruments."
SAB 105 requires that a lender should not consider the expected future cash
flows related to loan servicing or include any internally developed intangible
assets, such as expected customer-related intangible assets, in determining the
fair value of loan commitments accounted for as derivatives. Corporations were
required to adopt SAB 105 effective for commitments entered into after March 31,
2004. The requirements of SAB 105 will apply to the Corporation's mortgage loan
interest rate lock commitments to the extent the Bank originates loans held for
sale. The Corporation adopted SAB 105 effective April 1, 2004 and the effect on
the Corporation's financial presentation was immaterial. At June 30, 2004, no
such commitments were outstanding.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
The following forward-looking statements are made in accordance with the Private
Securities Litigation Reform Act of 1995.
The Corporation has made and may make in the future forward-looking statements
concerning future performance, including, but not limited to, future earnings
and events or conditions that may affect such future performance. These
forward-looking statements are based upon management's expectations and belief
concerning possible future developments and the potential effect of such future
developments on the Corporation. There is no assurance that such future
developments will be in accordance with management's expectations and belief or
that the effect of any future developments on the Corporation will be those
anticipated by the Corporation's management.
All assumptions that form the basis of any forward-looking statements regarding
future performance, as well as events or conditions that may affect such future
performance, are based on factors that are beyond the Corporation's ability to
control or predict with precision, including future market conditions and the
behavior of other market participants. Among the factors that could cause actual
results to differ materially from such forward-looking statements are the
following:
1. The status of the economy in general, as well as in the Corporation's
primary market areas of western and central Massachusetts and northeastern
Connecticut;
2. The real estate market in western and central Massachusetts and
northeastern Connecticut;
3. Competition in the Corporation's primary market area from other banks,
especially in light of continued consolidation in the New England banking
industry;
4. Any changes in federal and state bank regulatory requirements,
5. Changes in interest rates;
6. The cost and other effects of unanticipated legal and administrative cases
and proceedings, settlements and investigations;
7. Unanticipated changes in laws and regulations, including federal and state
banking laws and regulations, to which the Corporation and its subsidiaries
are subject;
8. Changes in accounting policies and practices, as may be adopted by the
Financial Accounting Standards Board or any regulatory agency having
authority over the Corporation and/or its subsidiaries; and
9. Disruption in general economic conditions due to military or terrorist
activity.
Forward-looking statements speak only as of the date they were made. While the
Corporation periodically reassesses material trends and uncertainties affecting
the Corporation's performance in connection with its preparation of management's
discussion and analysis of results of operations and financial condition
contained in its quarterly and annual reports, the Corporation does not intend
to review or revise any particular forward-looking statement.
10
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of Westbank Corporation are in accordance
with generally accepted accounting policies in the United States of America and
conform to general practices within the banking industry. In reviewing and
understanding financial information for the Corporation, you are encouraged to
read and understand the significant accounting policies that are used in
preparing the Corporation's consolidated financial statements. These policies
are described in Note 1 to the consolidated financial statements in the
Corporation's Annual Report on Form 10-K. Of these policies, management believes
that the accounting for loans and the allowance for loan losses are the most
critical.
Interest income on loans is recorded on an accrual basis. Loan origination fees,
net of certain direct loan origination costs, are deferred and recognized as
income over the life of the related loan as an adjustment to the loan's yield.
Non-accrual loans are loans on which the accrual of interest ceases when the
collection of principal or interest payments is determined to be doubtful by
management. It is the general policy of the Corporation to discontinue the
accrual of interest when principal or interest payments are delinquent ninety
(90) days, unless the loan principal and interest are determined by management
to be fully collectible. Any unpaid amounts previously accrued on these loans
are reversed from income. Interest received on a loan in non-accrual status is
applied to reduce principal or, if management determines that the principal is
collectible, applied to interest on a cash basis. A loan is returned to accrual
status after the borrower has brought the loan current and has demonstrated
compliance with the loan terms for a sufficient period, and management's doubts
concerning collectibility have been removed.
The Corporation measures impairment of loans in accordance with Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting for Impairment of a
Loan", as Amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures" (collectively "SFAS No. 14"). A loan
is recognized as impaired when it is probable that either principal or interest
is not collectible in accordance with the terms of the loan agreement.
Measurement of impairment for commercial loans is generally based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. Commercial real estate loans are generally measured based on the fair
value of the underlying collateral. If the estimated fair value of the impaired
loan is less than the related recorded amount, a specific valuation allowance is
established or a write-down is charged against the allowance for loan losses.
Smaller balance homogenous loans, including residential real estate and consumer
loans, are excluded from the provisions of SFAS No. 114. Generally, income is
recorded only on a cash basis for impaired loans.
The appropriateness of the allowance for loan losses is evaluated quarterly by
management. Factors considered in evaluating the appropriateness of the
allowance include the size and concentration of the portfolio, previous loss
experience, current economic conditions and their effect on borrowers, the
financial condition of individual borrowers and the related performance of
individual loans in relation to contract terms. The provision for loan losses
charged to operating expense is based upon management's judgment of the amount
necessary to maintain the allowance at an appropriate level to absorb losses.
Management also retains an independent loan review consultant to provide advice
on the appropriateness of the loan loss allowance. Loan losses are charged
against the allowance for loan losses when management believes the
collectibility of the principal is unlikely.
At June 30, 2004, the allowance for loan losses totaled $4,227,000, representing
..99% of total loans and 364.40% of non-performing loans. Please see "Provision
and Allowance for Loan Losses" for further discussion of the Corporation's
methodology in determining the allowance as of June 30, 2004.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or fair value in the aggregate. Net unrealized
losses are recognized through a valuation allowance charged to income.
BUSINESS SUMMARY
Westbank Corporation is a one-bank holding company with its headquarters located
in West Springfield, Massachusetts. Westbank operates eighteen (18) branch
offices and twenty-three (23) ATM's, serving communities in western and central
Massachusetts and northeastern Connecticut. Westbank's affiliates include
Westbank, a commercial bank and trust company, Park West Securities Corporation
and PWB&T, Inc.
Westbank Corporation has a growth-oriented strategy focused on (1) shareholder
value, (2) expanding its banking franchise, (3) unparalleled service and (4)
effective capital management.
The primary source of Westbank's revenue is net interest income from loans and
deposits, and fee income. Balance sheet growth was approximately 5.73% for the
six months ended June 30, 2004. The components of growth for the quarter were
federal funds sold, security purchases and deposits. The offset to the growth
was a decline in the loan portfolio and borrowed funds. The rise in interest
rates during the latter part of 2003 and continuing into 2004 resulted in lower
mortgage volume. Contributing to the decline in the loan portfolio, management
sold approximately $20,505,000 of fixed rate residential real estate loans as
part of its interest rate risk management strategy. Deposits grew approximately
8.85% for the six(6)-month period, providing management with the funds to pay
down approximately 4.84%, or $5,917,000 of its borrowings.
11
CHANGES IN FINANCIAL CONDITION
Total consolidated assets amounted to $766,084,000 on June 30, 2004 compared to
$724,586,000 on December 31, 2003. As of June 30, 2004 and December 31, 2003,
earning assets amounted to, respectively, $715,116,000 or 93.3% of total assets
and $682,578,000 or 94.2% of total assets. Earning assets increased during the
first six months of 2004 as a result of an increase in federal funds sold and
securities, which was offset by a decrease in loans. An increase in deposits and
a decrease in borrowed funds offset the increase in earning assets.
CHANGES IN RESULTS OF OPERATION
For the quarter ended June 30, 2004, net income totaled $1,444,000 compared to
$1,502,000 for the quarter ended June 30, 2003. During the second quarter of
2004, the Corporation sold approximately $1,805,000 of real estate loans in the
secondary mortgage market. For the six months ended June 30, 2004, net income
was $3,029,000, compared to $3,008,000 for the same period during 2003.
Non-interest income increased by $23,000 during the second quarter of 2004
compared to the second quarter of 2003. During the second quarter of 2004, the
Corporation recognized a gain on sale of securities available for sale and a
gain on sale of loans totaling $165,000 and $47,000 respectively, while other
non-interest income totaled $805,000. Included in other non-interest income is
$74,400 in amortizations of the Bank's mortgage servicing assets. Non-interest
expense totaled $4,503,000 for the quarter ended June 30, 2004, an increase of
$274,000 versus the second quarter of 2003. The increase is the result of the
overall growth of the corporation.
The overall increase in interest income reflects an increase in volume and a
decline in interest rates on earning assets, while the increase in interest
expense reflects an increase in interest-bearing liabilities and a decrease in
rates as compared to the second quarter of 2003. Further analysis is provided in
sections on net interest revenue and supporting schedules.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
A decrease of $67,000 has been reflected in the allowance for loan losses during
the most recent quarter. The Corporation recorded no provision for the quarters
ended June 30, 2004 and June 30, 2003. Loans written off against the allowance
for loan losses after recoveries amounted to net charge-offs of $67,000 and
$201,000 respectively for the quarter and six months ended June 30, 2004. During
the second quarter of 2003, the Corporation's net charge-offs totaled $60,000
and, for the six-month period ended June 30, 2003, the Corporation recorded net
recoveries of $11,000.
After giving effect to the activity described above, the allowance for loan
losses at June 30, 2004 totaled $4,227,000 or .99% of total loans, as compared
to $4,428,000 or 1.02% at December 31, 2003.
Non-performing past due loans at June 30, 2004 aggregated $1,160,000 or .27% of
total loans compared to $3,308,000 or .75% at December 31, 2003. The percentage
of non-performing and past due loans compared to total assets on those same
dates, respectively, amounted to .15% and .46%.
Management has made every effort to evaluate all circumstances known at this
time that could affect the collectibility of loans and has reflected these in
determining the provision for loan losses, the writing down of other real estate
owned and impaired loans to fair value and other loans (watch list) monitored by
management, the charge-off of loans and the balance in the allowance for loan
losses. Management believes that the balance in the allowance for loan losses,
are adequate based on the results of management's loan reserve evaluation
process and circumstances known at this time.
12
NET INTEREST INCOME
The Corporation's earning assets include a diverse portfolio of earning
instruments ranging from the Corporation's core business of loan extensions to
interest-bearing securities issued by federal, state and municipal authorities.
These earning assets are financed through a combination of interest-bearing and
interest-free sources.
Net interest income, the most significant component of earnings, is the amount
by which the interest generated by assets exceeds the interest expense on
liabilities. For analytical purposes, the interest earned on tax exempt assets
is adjusted to a "tax equivalent" basis to recognize the income tax savings that
facilitates comparison between taxable and tax exempt assets.
The Corporation analyzes its performance by utilizing the concepts of interest
rate spread and net yield on earning assets. The interest rate spread represents
the difference between the yield on earning assets and interest paid on
interest-bearing liabilities. The net yield on earning assets is the difference
between the rate of interest on earning assets and the effective rate paid on
all funds - interest-bearing liabilities, as well as interest-free sources
(primarily demand deposits and stockholders' equity).
The balances and rates derived for the analysis of net interest income presented
on the following pages reflect the consolidated assets and liabilities of the
Corporation's principal earning subsidiary, Westbank.
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
- --------------------------------------------------------------------------------
Interest and dividend income $ 9,239 $ 8,933 $18,299 $ 18,297
Interest expense 3,628 3,584 7,157 7,432
- --------------------------------------------------------------------------------
Net interest income 5,611 5,349 11,142 10,865
Tax equivalent adjustment 33 27 65 50
- --------------------------------------------------------------------------------
NET INTEREST INCOME
(TAXABLE EQUIVALENT) $ 5,644 $ 5,376 $11,207 $ 10,915
================================================================================
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter Ended June 30, Six Months Ended June 30,
- -------------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
- -------------------------------------------------------------------------------------------------------------------------
Earning assets $701,238 5.29% $604,565 5.93% $689,265 5.33% $ 613,847 5.98%
- -------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 613,798 2.36 521,869 2.75 603,752 2.37 532,166 2.79
- -------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.93 3.18 2.96 3.19
- -------------------------------------------------------------------------------------------------------------------------
Interest-free resources used
to fund earning assets 87,440 82,696 85,513 81,681
- -------------------------------------------------------------------------------------------------------------------------
Total Sources of Funds $701,238 $604,565 $689,265 $ 613,847
=========================================================================================================================
NET YIELD ON EARNING ASSETS 3.22% 3.56% 3.25% 3.56%
=========================================================================================================================
13
QUARTER-TO-DATE AVERAGE BALANCES
INTEREST EARNED - INTEREST EXPENSE
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter ended June 30,
2004 2003
- -------------------------------------------------------------------------------------------------------------------------
Balance Interest(1) Rate Balance Interest(1) Rate
- -------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
temporary investments $ 1,157 $ 2 .69% $ 21,797 $ 54 0.99%
Securities 277,746 3,244 4.67 125,311 1,602 5.11
Loans 422,335 6,026 5.71 457,457 7,304 6.39
- -------------------------------------------------------------------------------------------------------------------------
Total earning assets 701,238 $9,272 5.29% 604,565 $ 8,960 5.93%
- -------------------------------------------------------------------------------------------------------------------------
Loan loss allowance (4,334) (5,200)
All other assets 45,558 42,082
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 742,462 $ 641,447
=========================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits $ 498,394 $2,655 2.13% $ 457,923 $ 2,772 2.42%
Borrowed funds 115,404 973 3.37 63,946 812 5.08
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 613,798 $3,628 2.36 521,869 $ 3,584 2.75
- -------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.93% 3.18%
Demand deposits 81,309 72,275
Other liabilities 2,106 4,077
Shareholders' equity 45,249 43,226
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 742,462 $ 641,447
=========================================================================================================================
Net Interest Income (tax equivalent basis) $5,644 $ 5,376
Interest Earned/Earning Assets 5.29% 5.93%
Interest Expense/Earning Assets 2.07 2.37
- -------------------------------------------------------------------------------------------------------------------------
Net Yield on Earning Assets 3.22% 3.56%
Deduct tax equivalent adjustment 33 27
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $5,611 $ 5,349
=========================================================================================================================
(1) Amounts shown are adjusted to a "tax equivalent" basis.
14
YEAR-TO-DATE AVERAGE BALANCES
INTEREST EARNED - INTEREST EXPENSE
(DOLLAR AMOUNTS IN THOUSANDS)
Six months ended June 30,
2004 2003
- -------------------------------------------------------------------------------------------------------------------------
Balance Interest(1) Rate Balance Interest(1) Rate
- -------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
temporary investments $ 2,474 $ 9 .73% $ 23,294 $ 116 1.00%
Securities 257,115 6,112 4.75 122,953 3,274 5.33
Loans 429,676 12,243 5.70 467,600 14,957 6.40
- -------------------------------------------------------------------------------------------------------------------------
Total earning assets 689,265 $18,364 5.33% 613,847 $18,347 5.98%
- -------------------------------------------------------------------------------------------------------------------------
Loan loss allowance (4,397) (5,178)
All other assets 44,633 42,475
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 729,501 $ 651,144
=========================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits $ 485,480 $ 5,183 2.14% $ 464,621 $ 5,737 2.47%
Borrowed funds 118,272 1,974 3.34 67,545 1,695 5.02
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 603,752 $ 7,157 2.37 532,166 $ 7,432 2.79
- -------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.96% 3.19%
Demand deposits 78,239 71,752
Other liabilities 2,020 4,342
Shareholders' equity 45,490 42,884
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 729,501 $ 651,144
=========================================================================================================================
Net Interest Income (tax equivalent basis) $11,207 $10,915
Interest Earned/Earning Assets 5.33% 5.98%
Interest Expense/Earning Assets 2.08 2.42
- -------------------------------------------------------------------------------------------------------------------------
Net Yield on Earning Assets 3.25% 3.56%
Deduct tax equivalent adjustment 65 50
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $11,142 $ 10,865
=========================================================================================================================
(1) Amounts shown are adjusted to a "tax equivalent" basis.
15
CHANGES IN NET INTEREST INCOME
(DOLLAR AMOUNTS IN THOUSANDS)
QUARTER ENDED JUNE 30, 2004
OVER
QUARTER ENDED JUNE 30, 2003
- --------------------------------------------------------------------------------
CHANGE DUE TO
VOLUME RATE TOTAL
- --------------------------------------------------------------------------------
Interest Income:
Loans $ (536) $ (742) $ (1,278)
Securities 1,792 (150) 1,642
Federal funds (40) (12) (52)
- --------------------------------------------------------------------------------
Total Interest Earned 1,216 (904) 312
Interest Expense:
Interest-bearing deposits 241 (358) (117)
Other borrowed funds 503 (342) 161
- --------------------------------------------------------------------------------
Total Interest Expense 744 (700) 44
- --------------------------------------------------------------------------------
NET INTEREST INCOME $ 472 $ (204) $ 268
================================================================================
For the quarter June 30, 2004, an increase in average earning assets of
$96,673,000 or 15.99% and a 64-basis-point decrease in average rate of return
resulted in an increase in volume of $1,216,000 and a decrease in rate of
$904,000. An increase in average interest-bearing liabilities of $91,929,000 or
17.62% and a 39-basis-point decrease in average rate of interest paid
contributed to an increase in volume of $744,000 and a decrease in rate of
$700,000. Net interest earned on a tax equivalent basis increased to $5,644,000
for the second quarter of 2004, up $268,000 as compared with the quarter ended
June 30, 2003.
(DOLLAR AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2004
OVER
SIX MONTHS ENDED JUNE 30, 2003
- --------------------------------------------------------------------------------
CHANGE DUE TO
VOLUME RATE TOTAL
- --------------------------------------------------------------------------------
Interest Income:
Loans $ (1,155) $ (1,559) $ (2,714)
Securities 3,222 (384) 2,838
Federal funds (82) (25) (107)
- --------------------------------------------------------------------------------
Total Interest Earned 1,985 (1,968) 17
Interest Expense:
Interest-bearing deposits 249 (803) (554)
Other borrowed funds 978 (699) 279
- --------------------------------------------------------------------------------
Total Interest Expense 1,227 (1,502) (275)
- --------------------------------------------------------------------------------
NET INTEREST INCOME $ 758 $ (466) $ 292
================================================================================
For the six-month period ended June 30, 2004, an increase in average earning
assets of $75,418,000 or 12.29% and a 65-basis-point decrease in average rate of
return resulted in an increase in volume of $1,985,000 and a decrease in rate of
$1,968,000. An increase in average interest-bearing liabilities of $71,586,000
or 13.45% and a 42-basis-point decrease in average rate of interest paid
contributed to an increase in volume of $1,227,000 and a decrease in rate of
$1,502,000. Net interest earned on a tax equivalent basis increased to
$11,207,000 for the six-month period ended June 30, 2004, up $292,000 as
compared with the six months ended June 30, 2003.
16
OPERATING EXPENSES
The components of total operating expenses for the periods and their percentage
of interest income and non-interest income are as follows:
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
Salaries and benefits $ 2,567 25.03% $ 2,443 24.61% $5,163 25.02% $4,813 23.73%
Other non-interest expense 1,551 15.12 1,421 14.31 3,080 14.93 2,768 13.65
Occupancy - net 385 3.76 365 3.68 846 4.10 810 3.99
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $ 4,503 43.91% $ 4,229 42.60% $9,089 44.05% $8,391 41.37%
==============================================================================================================================
For the three-month period ended June 30, 2004, operating expenses increased by
approximately $274,000 versus the 2003 period. Salaries and benefits increased
by $124,000, other non-interest expense and occupancy increased by $130,000 and
$20,000 respectively.
For the six-month period ended June 30, 2004, operating expenses increased by
approximately $698,000 versus the 2003 period. Salaries and benefits increased
by $350,000, other non-interest expense and occupancy increased by $312,000 and
$36,000 respectively. The increase is the direct result of general additions to
staff, the overall growth of the Corporation, and additions to staff and general
operating costs related to the opening of the Corporation's newest office in
Webster, Massachusetts.
17
INTEREST RATE SENSITIVITY
The following table sets forth the distribution of the repricing of the
Corporation's earning assets and interest-bearing liabilities as of June 30,
2004, the interest rate sensitivity gar (i.e. interest rate sensitive assets
less interest rate sensitive liabilities), the cumulative interest rate
sensitivity gap, the interest rate sensitivity gap ratio and the cumulative
interest rate sensitivity gap ratio. The table also sets forth the time periods
in which earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. However, the table does not
necessarily indicate the impact of general interest rate movements on the net
interest margin since the repricing of various categories of assets and
liabilities is subject to competitive pressures and the needs of the Bank's
customers. In addition, various assets and liabilities indicated as repricing
within the same period may, in fact, reprice at different times within such
period and at different rates.
(DOLLAR AMOUNTS IN THOUSANDS)
Three Over Three Over One
Months Months to Year to Over Five
or Less One Year Five Years Years Total
- -----------------------------------------------------------------------------------------------------------------------
Earning Assets $ 98,669 $ 48,725 $ 178,963 $ 388,759 $ 715,116
Interest-Bearing
Liabilities 165,048 179,320 270,775 20,175 635,318
- -----------------------------------------------------------------------------------------------------------------------
Interest Rate
Sensitivity Gap $(66,379) $ (130,595) $ (91,812) $ 368,584 $ 79,798
=======================================================================================================================
Cumulative Interest
Rate Sensitivity Gap $(66,379) $ (196,974) $(288,786) $ 79,798
Interest Rate
Sensitivity Gap Ratio (9.28)% (18.26)% (12.84)% 51.54%
Cumulative Interest
Rate Sensitivity Gap Ratio (9.28)% (27.54)% (40.38)% 11.16%
The presentation of a run-off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $9,805,000 and
$3,307,000 respectively, included in the three-month to one-year category and
the remainder placed in the one- to five-year category of the interest-bearing
liabilities.
Westbank seeks to manage the mix of asset and liabilities maturities to control
the effect of changed in the general level of interest rates on net interest
income. Except for its effect on the general level of interest rates, inflation
does not have a material impact on Westbank's earnings due to the rate of
variability and short-term maturities of its earning assets.
LIQUIDITY
Liquidity refers to the Corporation's ability to generate adequate amounts of
cash to fund loan originations, security purchases, deposit withdrawals, and
fund dividends on the Corporation's common stock and the amount payable to
Westbank Capital Trust 1.
The Corporation's liquidity position is monitored by the Asset/Liability
Committee, based on policies approved by the Board of Directors. The Committee
meets regularly to review and direct the Bank's investment, lending and
deposit-gathering activities.
At June 30, 2004, the Corporation maintained cash balances, short-term
investments and investments available for sale totaling $234,216,000,
representing 30.6% of total quarter-end assets, versus $256,490,000 or 35.4% of
total assets at December 31, 2003.
18
The following table summarizes the Corporation's contractual obligations as well
as commitments to fund loans:
Due in Due in
Due in One to Three to Due After
(DOLLAR AMOUNTS IN THOUSANDS) One Year Three Years Five Years Five Years Total
- -----------------------------------------------------------------------------------------------------------------------------
Contractual Obligations:
Investment security purchases
Total borrowings $ 5,434 $ 28,320 $ 31,000 $ 8,000 $ 72,754
Payable to Westbank Capital Trust 1 17,526 17,526
Annual rental commitments under non-
cancelable operating leases 326 448 191 6 971
- -----------------------------------------------------------------------------------------------------------------------------
$ 5,760 $ 28,768 $ 31,191 $ 25,532 $ 91,251
=============================================================================================================================
Expires in Expires in
Expires in One to Three to Expires in
(DOLLAR AMOUNTS IN THOUSANDS) One Year Three Years Five Years Five Years Total
- -----------------------------------------------------------------------------------------------------------------------------
Commitments:
Commitments to extend credit $ 30,929 $ 4,859 $ 35,788
Undisbursed portion of loans in process
and unused portions of lines of credit $ 33,668 1,368 1,242 22,848 59,126
- -----------------------------------------------------------------------------------------------------------------------------
$ 64,597 $ 1,368 $ 1,242 $ 27,707 $ 94,914
=============================================================================================================================
At June 30, 2004, the Corporation had certificates of deposit maturing within
the next 12 months amounting to $218,333,000. Based on historical experience,
the Corporation anticipates that a significant portion of the maturing
certificates of deposit will be renewed with the Corporation.
In addition to cash flow from loan and securities payments and prepayments, as
well as from sales of available for sale securities and mortgage loans, the
Corporation has significant borrowing capacity available to fund liquidity
needs. During the second quarter of 2004, the Corporation increased its
utilization of borrowings and deposits as a source of funds. The average balance
of borrowings for the quarter ended June 30, 2004 and June 30, 2003 were
$115,404,000 and $63,946,000 respectively, and $118,272,000 and $67,545,000
respectively for the six months ended June 30, 2004 and 2003. The Bank's
borrowings to date have consisted primarily of advances from the Federal Home
Loan Bank of Boston, of which the Bank is a member. Under the terms of the
collateral agreement with the Federal Home Loan Bank, the Bank pledges
residential mortgage loans and mortgage-backed securities, as well as the Bank's
stock in the Federal Home Loan Bank, as collateral for such transactions. The
note payable to Westbank Capital Trust 1 is callable in whole or in part on or
after September 30, 2004.
The Corporation has not used any off-balance sheet financing arrangements for
liquidity purposes. Its primary financial instruments with off-balance sheet
risk are limited to loan servicing for others, obligations to fund loans to
customers pursuant to existing commitments and commitments to sell mortgage
loans. Liquidity management requires close scrutiny of the mix and maturity of
deposits, borrowings and short-term investments. Cash and due from banks,
federal funds sold, investment securities and mortgage-backed securities
available for sale, as compared to deposits and borrowings, are used by the
Corporation to compute its liquidity on a daily basis.
The primary source of funds for the payment of dividends by the Corporation is
dividends paid to the Corporation by the Bank. Bank regulatory authorities
generally restrict the amounts available for payment of dividends, if the effect
thereof would cause the capital of the Bank to be reduced below applicable
capital requirements. These restrictions indirectly affect the Corporation's
ability to pay dividends.
Management of the Corporation believes that its current liquidity is sufficient
to meet current and anticipated funding needs.
19
PROVISION AND ALLOWANCE FOR LOAN LOSSES
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning of period $4,294 $ 5,182 $ 4,428 $ 5,111
Provision for loan losses
- ---------------------------------------------------------------------------------------------------------------
4,294 5,182 4,428 5,111
Less charge-offs:
Loans secured by real estate 2 82 6
Commercial and industrial loans 49 32 100 32
Consumer loans 19 27 33 67
- ---------------------------------------------------------------------------------------------------------------
68 61 215 105
- ---------------------------------------------------------------------------------------------------------------
Add recoveries:
Loans secured by real estate 1 1 100
Commercial and industrial loans 1 13
Consumer loans 1 12 3
- ---------------------------------------------------------------------------------------------------------------
1 1 14 116
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 67 60 201 (11)
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $4,227 $ 5,122 $ 4,227 $ 5,122
===============================================================================================================
Net charge-offs (recoveries) to:
Average loans .02% .01% .05% Nil
Loans at end of period .02% .01% .05% Nil
Allowance for loan losses at January 1 1.51% 1.17% 4.54% (.22)%
Allowance for loan losses at June 30
as a percentage of
Average loans 1.00% 1.12% .98% 1.10%
Loans at end of period .99% 1.12% .99% 1.12%
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is an exposure method based on the Corporation's loan loss
history, among other factors. Quarterly, based on an internal review of the loan
portfolio, the Corporation identifies required reserve allocations targeted to
recognized problem loans that, in the opinion of management, have potential loss
exposure or uncertainties relative to the depth of the collateral on these same
loans. In addition, the Corporation maintains a formula-based reserve against
the remainder of the loan portfolio, based on the overall mix of the loan
portfolio and the loss history of each loan category. The formula reserve
allocation is calculated by applying loss factors to outstanding loans by
category. Loss factors are based on historical loss experience combined with a
comparison to a group of peer banks. The amount of the recorded reserve above
the minimum of the formula range is based on management's evaluation of relevant
factors (e.g. local area economic statistics, credit quality trends, loan
concentrations, industry conditions and delinquency levels) and the percentage
of loan loss reserves to aggregate loans.
The Corporation measures impairment of loans in accordance with SFAS No. 114,
"Accounting for Impairment of a Loan as Amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(collectively SFAS No. 114). A loan is recognized as impaired when it is
probable that either principal or interest is not collectible in accordance with
the terms of the loan agreement. Measurement of impairment for commercial loans
is generally based on the present value of expected future cash flows discounted
at the loan's effective interest rate. Commercial real estate loans are
generally measured based on the fair value of the underlying collateral. If the
estimated fair value of the impaired loan is less than the related recorded
amount, a specific valuation allowance is established or a write-down is charged
against the allowance for loan losses. Smaller balance homogenous loans,
including residential real estate and consumer loans, are excluded from the
provisions of SFAS No. 114. Generally, income is recorded only on a cash basis
for impaired loans.
20
The allowance for loan losses is increased by provisions charged against current
earnings. Loan losses are charged against the allowance when management believes
that the collectibility of the loan principal is unlikely. Recoveries on loans
previously charged off are credited to the allowance. Management believes that
the allowance for loan losses is appropriate. While management uses available
information to assess possible losses on loans, future adjustments to the
allowance may be necessary based on changes in non-performing loans, changes in
economic conditions or for other reasons. Any future adjustments to the
allowance would be recognized in the period in which they were determined to be
necessary. In addition, various regulatory agencies periodically review the
Corporation's allowance for loan losses as an integral part of their examination
process. Such agencies may require the Corporation to recognize adjustments to
the allowance, based on judgements different from those of management.
Management also retains an independent loan review consultant to provide advice
on the appropriateness of the loan loss allowance.
For the quarters ended June 30, 2004 and 2003, the Bank did not make any
additions to the allowance for loan losses. For the quarters ended June 30, 2004
and 2003, recoveries totaled $1,000 and $1,000, and charge-offs totaled $68,000
and $61,000 respectively.
NON-ACCRUAL, PAST DUE AND NON-PERFORMING LOANS
(DOLLAR AMOUNTS IN THOUSANDS)
6-30-04 3-31-04 12-31-03 9-30-03 6-30-03
- --------------------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 987 $ 997 $ 3,111 $2,182 $ 1,116
- --------------------------------------------------------------------------------------------------------------------------
Loans contractually past
due 90 days or more
still accruing 173 195 197 1,335 346
- --------------------------------------------------------------------------------------------------------------------------
Total non-accrual, past due
and restructured loans $ 1,160 1,192 3,308 3,517 1,462
- --------------------------------------------------------------------------------------------------------------------------
Non-accrual, past due and
restructured loans as a
percentage of total loans 0.27% 0.28% 0.75% 0.78% 0.32%
- --------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a
percentage of non-accrual,
past due and restructured loans 364.40% 360.23% 133.86% 134.03% 350.34%
- --------------------------------------------------------------------------------------------------------------------------
Other real estate owned - net 706 705
- --------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 1,866 $1,897 $ 3,308 $3,517 $ 1,462
Non-performing assets as a
percentage of total assets 0.24% 0.26% 0.46% 0.54% 0.23%
==========================================================================================================================
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Corporation's assessment of its
sensitivity to market risk since its presentation in the 2003 Annual Report
filed with the Securities and Exchange Commission.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Corporation carried
out an evaluation, under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Corporation's disclosure controls and procedures. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Corporation in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There were no significant changes in the Corporation's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their evaluations.
22
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Certain litigation is pending against the Corporation and its
subsidiaries. Management, after consultation with legal counsel,
does not anticipate that any liability arising out of such
litigation will have a material affect on the Corporation's
Financial Statements.
ITEM 2. Changes in Rights of Securities Holders, Use of Proceeds and Issuer
Purchases of Equity Securities
Share Repurchase Plan - During the fourth quarter of 2003, the Board
of Directors approved a new stock repurchase program of up to 5% of
the Corporation's stock. The value of the 5% stock of the
Corporation at the time of the announcement was approximately
$3,800,000. The following table summarizes repurchases of Westbank
Corporation's stock for the six months ended June 30, 2004.
Total Number of Shares Maximum Number of
Purchased as Part of Shares the May Yet Be
Total Number of Average Price Paid Publicly Announced Purchased Under the
Period Shares Purchased Per Share Plans or Programs Plans or Programs
------ ---------------- --------- ----------------- -----------------
January 2004 15,315 $18.98 4,370 213,534
February 2004 5,975 22.54 5,975 207,559
March 2004 4,525 23.07 4,525 203,034
April 2004 1,900 22.84 1,900 201,134
May 2004 3,300 21.86 3,300 197,834
June 2004 3,895 18.43 3,895 193,939
----------------------------------------------------------------------------------------------------
Total 34,910 $20.54 23,965
====================================================================================================
On January 12, 2004, under the terms of the 1996 Stock Option Plan,
the Corporation purchased from officers 10,945 shares of its common
stock at an average stock option price of $18.56 per share in
exchange for 26,250 shares at an average stock option price of $7.74
per share.
ITEM 3. Defaults by Company on its Senior Securities - NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
The Corporation held its Annual Meeting of Shareholders on April 21,
2004. At the Annual Meeting, the shareholders of the Corporation
took the following actions:
a. Elected Roland O. Archambault, Donald R. Chase and George R.
Sullivan to serve until the 2007 Annual Meeting of
Shareholders. The voting results for the election of
Directors were as follows:
Name For Withheld
---- --- --------
Roland O. Archambault 3,558,615 74,019
Donald R. Chase 3,587,847 43,737
George R. Sullivan 3,572,828 58,756
b. Approved the 2004 Recognition and Retention Plan. The vote
was 2,595,307 in favor of the proposal and 201,890 against
the proposal, with 40,195 abstentions and 962,655 broker
nonvotes.
c. Approved the ratification of the appointment of Grant
Thornton LLP as the Corporation's independent public auditor
for the fiscal year ending December 31, 2004. The vote was
3,590,444 in favor of the proposal and 19,830 against the
proposal, with 21,610 abstentions and 102,481 broker
nonvotes.
ITEM 5. Other Information - NONE
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ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
3. Articles of Organization and By-Laws, as amended *
(a) Articles of Organization, as amended *
(b) By-Laws, as amended *
31.1 Certification of Chief Executive Officer, pursuant to Rule 13a-14a, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer, pursuant to Rule 13a-14a, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Sec.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Sec.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
b. Reports on Form 8-K - NONE
* Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1988.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned thereunto duly authorized.
WESTBANK CORPORATION
Date: August 6, 2004 /s/ Donald R. Chase
-------------------------------------
Donald R. Chase
President and Chief Executive Officer
Date: August 6, 2004 /s/ John M. Lilly
-------------------------------------
John M. Lilly
Treasurer and Chief Financial Officer
25