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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 SEPTEMBER 30, 2004
Commission file number 0 - 12784
WESTBANK CORPORATION
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(Exact name of the registrant as specified in its charter)
MASSACHUSETTS 04-2830731
- ------------------------------- --------------------------
(State of other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
225 PARK AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0149
- ------------------------------------------------ ----------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Common stock, par value $2.00 per share: 4,703,612 shares outstanding as of
October 31, 2004.
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WESTBANK CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. Financial Statements
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 7-10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-25
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 26
ITEM 4. Controls and Procedures 26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
ITEM 3. Defaults Upon Senior Securities 26
ITEM 4. Submission of Matters to a Vote of Security Holders 27
ITEM 5. Other Information 27
ITEM 6. Exhibits 27
Signatures 28
2
ITEM 1. FINANCIAL STATEMENTS
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 December 31,
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (Unaudited) 2003
- ------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks:
Non-interest-bearing $ 15,753 $ 14,599
Interest-bearing 175 40
Federal funds sold 19,610 39
- ------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 35,538 14,678
- ------------------------------------------------------------------------------------------------------
Investment securities available for sale, at fair value 185,571 241,812
Investment securities held to maturity, at amortized cost
(approximate fair value of $62,825
in 2004 and $289 in 2003) 63,259 250
- ------------------------------------------------------------------------------------------------------
Total securities 248,830 242,062
- ------------------------------------------------------------------------------------------------------
Loans 435,167 439,911
Allowance for loan losses 4,349 4,428
- ------------------------------------------------------------------------------------------------------
Net loans 430,818 435,483
Premises and equipment, net 6,799 6,749
Accrued interest receivable 3,672 3,180
Other real estate owned, net 706
Goodwill 8,837 8,837
Bank-owned life insurance 9,165 8,703
Investment in unconsolidated investees 526 526
Other assets 4,635 4,368
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 749,526 $ 724,586
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 90,472 $ 76,015
Interest-bearing 503,620 460,439
- ------------------------------------------------------------------------------------------------------
Total deposits 594,092 536,454
Borrowed funds 86,292 122,204
Accrued interest payable 607 575
Payable to Westbank Capital Trust I 17,526
Payable to Westbank Capital Trust II 8,763
Payable to Westbank Capital Trust III 8,763
Other liabilities 4,387 2,552
- ------------------------------------------------------------------------------------------------------
Total liabilities 702,904 679,311
- ------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock - $5 par value
Authorized - 100,000 shares
Issued - None
Common stock - $2 par value
Authorized - 9,000,000 shares
Issued - 4,746,397 shares in 2004
and 4,523,480 shares in 2003 9,493 9,047
Unearned compensation - restricted stock award (1,708)
Additional paid in capital 20,426 14,524
Retained earnings 19,486 22,724
Treasury stock (50,164 shares in 2004
and 114,232 shares in 2003) (1,001) (1,692)
Accumulated other comprehensive (loss) income (74) 672
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 46,622 45,275
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 749,526 $ 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 September 30, Nine Months Ended September 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and Dividend Income:
Interest and fees on loans $ 6,140 $ 6,962 $18,448 $21,876
Interest and dividend income on securities 3,227 1,454 9,331 4,721
Interest on federal funds sold 8 48 17 164
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 9,375 8,464 27,796 26,761
Interest expense 3,693 3,293 10,850 10,725
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 5,682 5,171 16,946 16,036
Provision for (recovery of) loan losses 150 (354) 150 (354)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,532 5,525 16,796 16,390
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Gain (Loss) on sale of securities (303) 301 (76) 564
Gain on sale of loans 14 171 441 417
Other non-interest income 778 824 2,335 2,302
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 489 1,296 2,700 3,283
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Salaries and benefits 2,644 2,502 7,807 7,315
Other non-interest expense 2,426 1,663 5,506 4,431
Occupancy - net 387 379 1,233 1,189
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Total non-interest expense 5,457 4,544 14,546 12,935
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Income before income taxes 564 2,277 4,950 6,738
Income taxes 112 856 1,468 2,309
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NET INCOME $ 452 $ 1,421 $ 3,482 $ 4,429
====================================================================================================================================
Net income per share
- Basic $0.10 $0.31 $0.76 $0.97
- Diluted $0.09 $0.29 $0.72 $0.93
Weighted average shares outstanding
- Basic 4,694,391 4,604,265 (1) 4,572,912 4,588,988 (1)
- Dilutive Option Shares 263,611 (2) 244,341 (1) 261,444 (2) 188,582 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
- Diluted 4,958,002 4,848,606 (1) 4,834,356 4,777,570 (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 NINE MONTHS ENDED SEPTEMBER 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)
Income tax benefit for exercise of
non-qualified stock options 105 105
Stock option compensation(Note E) 95 95
Repurchase of common stock (55,687) (904) (904)
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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 3,482 3,482
Cash dividends declared
($0.14 per share) (1,904) (1,904)
Shares issued from treasury stock:
Stock option plan 78,796 (455) 1,109 654
Dividend reinvestment and
stock purchase plan 25,481 107 400 507
Changes in unrealized gain/(loss)
on securities available for sale (746) (746)
Repurchase of common stock (40,095) (816) (816)
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) $(1,708) 1,785 77
Five percent common stock
dividend 222,803 446 4,360 (4,816) (2) (12)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 2004 4,696,233 $9,493 $(1,708) $ 20,426 $19,486 $(1,001) $ (74) $46,622
====================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 452 $1,421 $3,482 $4,429
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale,
net of income taxes (benefit) of $1,028 and $(110) for
the quarter and $(410) and $(288) for the nine-month
periods ended September 30, 2004 and 2003 respectively 1,996 (182) (796) (470)
Reclassification adjustment for gains (losses) included in
net income, net of income taxes (benefit) of $103 and
$(113) for the third quarter of 2004 and 2003 respectively,
and net of income taxes (benefit) of $26 and $(193) for
the nine months ended September 30, 2004 and 2003 respectively 200 (188) 50 (371)
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Other Comprehensive Income (Loss) 2,196 (370) (746) (841)
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $2,648 $1,051 $2,736 $3,588
====================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
5
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS)
Nine months ended September 30,
2004 2003
==================================================================================================================
Operating activities:
Net income $ 3,482 $ 4,429
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for (recovery of) loan losses 150 (354)
Accretion of investment discounts (108) (20)
Depreciation and amortization 641 509
Realized loss (gain) on sale of securities 76 (564)
Compensation expense, non-qualified 77
Tax benefit related to the exercise of
non-qualified stock options 102
Gain on sale of mortgages (441) (417)
Changes in assets and liabilities:
(Increase) Decrease in accrued interest receivable (492) 883
Increase in bank-owned life insurance (462) (295)
Increase in other assets 22 (3,203)
Increase (Decrease) in accrued interest payable on deposits 32 (189)
Increase (Decrease) in other liabilities 1,835 104
==================================================================================================================
Net cash provided by operating activities 4,914 883
==================================================================================================================
Investing activities:
Investments and mortgage-back securities:
Held to maturity:
Purchases (72,256)
Proceeds from maturities and principal payments 9,268 160
Available for sale:
Purchases (78,393) (89,565)
Proceeds from sales 42,220 16,848
Proceeds from maturities and principal payments 91,258 74,827
Purchases of premises and equipment (691) (630)
Net increase in loans 4,382 3,906
==================================================================================================================
Net cash provided by (used in) investing activities (4,212) 5,546
==================================================================================================================
Financing activities:
Net (decrease) in borrowings (35,912) (15,087)
Proceeds from Westbank Capital Trusts II and III 17,526
Repayment of Westbank Capital Trust I (17,526)
Net increase (decrease) in deposits 57,638 (18,094)
Treasury stock issued, net 348 87
Dividends paid (1,916) (1,583)
==================================================================================================================
Net cash provided by (used in) financial activities 20,158 (34,677)
==================================================================================================================
Increase (Decrease) in cash and cash equivalents 20,860 (28,248)
Cash and cash equivalents at beginning of period 14,678 47,250
==================================================================================================================
Cash and cash equivalents at end of period $35,538 $19,002
==================================================================================================================
Cash paid:
Interest on deposits and other borrowings $10,818 $10,914
Income taxes 1,643 3,043
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 (746)
Unearned compensation - restricted stock award 1,708
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
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
NOTE A - GENERAL INFORMATION
Westbank Corporation (the "Corporation") is a Massachusetts-chartered
corporation and a registered bank holding company. The Corporation has a
wholly-owned bank subsidiary: Westbank , a Massachusetts-chartered commercial
bank and trust company (the "Bank"). The Bank has two (2) subsidiaries: Park
West Securities Corporation and PWB&T, Inc. The Corporation is headquartered in
West Springfield, Massachusetts. As of September 30, 2004, the Bank had eighteen
(18) offices located in Massachusetts and Connecticut that provide a full range
of retail banking services to individuals, businesses and nonprofit
organizations. The accompanying unaudited consolidated financial statements
include the Corporation, the Bank and the Bank's two subsidiaries. Substantially
all operating income and net income of the Corporation are presently accounted
for by the Bank. All significant intercompany balances and transactions have
been eliminated in the accompanying unaudited consolidated financial statements.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for the
quarters ended September 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 nine-month period ended September 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 Westbank Corporation's 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 has been restated for
the period ended September 30, 2003 to reflect the May 18, 2004 stock dividend.
NOTE D - FINANCIAL STATEMENT RECLASSIFICATION
The Corporation reclassified certain amounts in the December 31, 2003 and
September 30, 2003 financial statements due to the Corporation's adoption of FIN
46(R), "Consolidation of Variable Interest Entities", as of March 31, 2004,
requiring the Corporation to record on its balance sheet 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 I."
7
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
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 September 30, 2004, compensation expense amounted to $77,300 and is based
on the fair value of the common stock on the grant date.
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 September 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 September 30, 2004 are approximately
$460,000, of which $450,000 expired on September 30, 2004 and $10,000 will
expire on January 9, 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 - NOTES PAYABLE TO WESTBANK CAPITAL TRUST I, II AND III
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 I from the Corporation's consolidated financial statements and to
record on its balance sheet the common stock of the Corporation 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 I."
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. The two (2) new trust preferred placements effectuated
by the Corporation to finance the redemption of Trust I appear on the balance
sheet as "Note Payable to Westbank Capital Trust II" and "Note Payable to
Westbank Capital Trust III." The note payable to Westbank Capital Trust I was
redeemed on September 30, 2004.
In response to FIN 46(R), the Federal Reserve Board has proposed to permit bank
holding companies to continue to treat the 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 September 30, 2004 to the regulatory capital treatment of the trust
preferred securities issued by Westbank Capital Trust I, II or III based on the
adoption of FIN 46(R) prior to the first revision of March 31, 2007.
8
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
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 September 30, Nine Months Ended September 30,
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------
Service cost $ 30,319 $ 26,347 $ 90,957 $ 52,694
Interest cost 43,032 38,991 129,096 77,982
Amortization of prior service cost 31,235 31,235 93,705 62,470
- --------------------------------------------------------------------------------------------------------------
$104,586 $ 96,573 $313,758 $193,146
==============================================================================================================
The weighted average assumptions utilized to determine the benefit obligation
and net benefit cost are as follows:
Quarter Ended September 30, Nine Months Ended September 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%
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 September 30, 2004, such commitments were not significant.
At its March 2004 meeting, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 03-1, "Meaning of Other-than-Temporary Impairment
and Its Application to Certain Investments" ("EITF 03-1"), that prescribes
guidance to be used to determine when an investment in debt and equity
securities is considered impaired, whether the impairment is other than
temporary, and the measurement of an impaired loss. The guidance also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment.
9
The effective date for the impairment measurement and recognition guidance of
EITF 03-1 has been delayed until the issuance of an FASB Staff Position expected
to provide additional implementation guidance.
In compliance with its current policies in reference to impairment of
investments, the Corporation did take a write-down in the current quarter as a
result of the impairment of certain investments as described in Note J.
NOTE J - INVESTMENT IMPAIRMENT
In the quarter ended September 30, 2004, the Bank recognized an impairment loss
of $583,000 related to investments in certain preferred stock securities. The
impairment charge was recorded as part of the gain (loss) on sale of securities
in the Condensed Consolidated Statement of Income. Although the credit ratings
of the issuers remain strong, the market values of these securities have not
recovered despite recent increases in short-term interest rates. The Bank
considered the severity and duration of these impairments, and determined that
they were other than temporary.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 include, but
are not limited to, the following:
1. the status of the economy in general, as well as in the Corporation's
primary market areas of western central Massachusetts and northeastern
Connecticut;
2. the real estate markets 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.
11
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. Certain accounting policies require
significant estimates and assumptions that have a material impact on the
carrying value of certain assets and liabilities, and these are considered to be
critical accounting policies. The estimates and assumptions used are based on
historical experience and other factors that we believe are reasonable under the
circumstances. Actual results could differ significantly from these estimates
and assumptions, and could have a material impact on the carrying values of
assets and liabilities at the balance sheet dates and on the results of
operations for the reporting periods. Management believes that accounting for
loans and the allowance for loan losses are the critical accounting policies
that require the most significant estimates and assumptions that are
particularly susceptible to significant change in the preparation of the
consolidated financial statements.
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 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-based 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 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. 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.
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 September 30, 2004, the allowance for loan losses totaled $4,349,000,
representing 1.00% of total loans and 368.13% 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 September 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.
12
OVERVIEW
Westbank Corporation (the "Corporation" or "Westbank") is a
Massachusetts-chartered corporation and a registered bank holding company. The
Corporation has a wholly-owned bank subsidiary: Westbank ("the Bank"), a
Massachusetts-chartered commercial bank and trust company formed in 1962. The
Bank has two (2) subsidiaries: Park West Securities Corporation and PWB&T, Inc.
The Corporation is headquartered in West Springfield, Massachusetts. As of
September 30, 2004, the Bank had eighteen (18) offices located in Massachusetts
and Connecticut that provide a full range of retail banking services to
individuals, businesses and nonprofit organizations.
The Bank was chartered as a commercial bank and trust company; as such, much of
its product focus is designed to facilitate the commercial lending and deposit
business. To assist in development of this business line, the Corporation
employs a significant staff of seasoned lenders and introduced a marketing
campaign during 2003 geared towards its commercial customers. As a result of
these efforts, commercial loans, leasing and mortgages have grown by
approximately 11% since year-end 2003.
As a result of increases in interest rates, residential lending volume has
slowed significantly this past year. The Corporation has supplemented some of
its residential real estate growth with growth in its investment portfolio.
The Corporation continues to look for ways to increase its deposit base and
recently introduced two (2) new deposit products: an eighteen(18)-month "Flex
CD" and a Capital Access NOW Account. Each of these new products is designed to
give the depositor increased flexibility in accessing their funds and a premium
interest rate.
September marks the one-year anniversary of the opening of the Corporation's
newest full-service office. The Webster, Massachusetts, office has been an
excellent source of deposits and commercial loan business, and the Corporation
will seek to further develop this new market.
13
NINE MONTHS ENDED SEPTEMBER 30, 2004
RECENT DEVELOPMENTS
On September 30, 2004, the Corporation redeemed the outstanding principal
balance of the $17,526,000 of 9.60% junior subordinated deferrable interest
debentures it issued on September 30, 1999 to Westbank Capital Trust I ("Trust
I"), a Delaware statutory business trust formed by the Corporation to facilitate
the Trust's capital securities offering. Concurrently with the Corporation's
redemption of the debentures, Trust I redeemed all of its issued and outstanding
capital and common securities.
The Corporation raised capital to redeem the 9.60% debentures issued to Trust I
by engaging in two (2) new pooled private placement of trust preferred
securities at a more advantageous interest rate.
On September 20, 2004, Westbank Capital Trust II ("Trust II"), a Delaware
statutory trust formed by the Corporation, completed the sale of $8,763,000 of
4.06% floating rate capital securities, adjustable every three (3) months at
LIBOR plus 219 basis points ("Capital Securities II"). Trust II also issued
common securities to the Corporation and used the net proceeds from the offering
to purchase a like amount of 4.06% floating rate junior subordinated deferrable
interest debentures ("Debentures II") of the Corporation. Debentures II are the
sole assets of Trust II. The Corporation used the proceeds to redeem the
securities issued by Trust I, which were callable on September 30, 2004.
Capital Securities II accrue and pay distributions quarterly at a floating
annual rate initially set at 4.06% of the stated liquidation amount of
$8,763,000 per capital security. The Corporation has fully and unconditionally
guaranteed all of the obligations of Trust II. The guarantee covers the
quarterly distributions and payments on liquidation or redemption of Capital
Securities II, but only to the extent that Trust II has funds necessary to make
these payments.
Capital Securities II are mandatorily redeemable upon the maturing of Debentures
II on September 20, 2029 or upon earlier redemption, as provided in the
Indenture. The Corporation has the right to redeem Debentures II, in whole or in
part, on or after September 20, 2009 at the liquidation amount plus any accrued
but unpaid interest to the redemption date.
On September 20, 2004, Westbank Capital Trust III ("Trust III"), a Delaware
statutory trust formed by the Corporation, completed the sale of $8,763,000 of
5.98% fixed-floating rate capital securities ("Capital Securities III"). Trust
III also issued common securities to the Corporation and deferrable interest
debentures ("Debentures III") of the Corporation. Debentures III are the sole
assets of Trust III. The Corporation used the proceeds to redeem the securities
issued by Trust I, which were callable on September 30, 2004.
Capital Securities III accrue and pay distributions quarterly at an annual rate
of 5.98% of the stated liquidation amount of $8,763,000 per capital security
through September 20, 2009, at which time the interest rate will become the
three(3)-month LIBOR plus 219 basis points. The Corporation has fully and
unconditionally guaranteed all of the obligations of Trust III. The guarantee
covers the quarterly distributions and payments on liquidation or redemption of
Capital Securities III, but only to the extent that Trust III has funds
necessary to make these payments.
Capital Securities III are mandatorily redeemable upon the maturing of
Debentures III on September 20, 2029 or upon earlier redemption, as provided in
the Indenture. The Corporation has the right to redeem Debentures III, in whole
or in part, on or after September 20, 2009 at the liquidation amount plus any
accrued but unpaid interest to the redemption date.
The Corporation has reduced its interest expense associated with the trust
preferred securities by $787,000 annually as a result of the redemption and the
new placements of securities. As a result of the redemption, the Corporation
will experience a $807,000 charge to its earnings in the third quarter of 2004.
The expenses of the Trust I financing were amortized over the life of the
debentures and since they were redeemed after five (5) years, the Corporation
must take a charge for the rest of the amortized expenses in this quarter.
14
CHANGES IN FINANCIAL CONDITION
Total consolidated assets amounted to $749,526,000 on September 30, 2004
compared to $724,586,000 on December 31, 2003. As of September 30, 2004 and
December 31, 2003, earning assets amounted to, respectively, $704,308,000 or 94%
of total assets, and $682,578,000 or 94.2% of total assets. The net increase in
earning assets totaled $21,730,000 during the first nine (9) months of 2004 as a
result of an increase in interest-bearing deposits, federal funds sold and
securities totaling $26,474,000. Loans showed a slight decline for the same
period totaling $4,744,000. The net increase in interest-bearing liabilities
during the first nine (9) months of 2004 totaled $7,269,000 as a result of an
increase in interest-bearing deposits of $43,181,000 and a decrease in
short-term borrowings totaling $21,789,000 and a decrease in long-term
borrowings totaling $14,123,000.
CHANGES IN RESULTS OF OPERATIONS
For the quarter ended September 30, 2004, net income totaled $452,000 or $0.09
per diluted share compared to $1,421,000 or $0.29 per diluted share for the
three-month period ended September 30, 2003. For the nine months ended September
30, 2004, net income was $3,482,000 or $0.72 per diluted share, compared to
$4,429,000 or $0.93 per diluted share for the same period during 2003. The
decrease in net income for the current quarter and nine-month period is
primarily attributable to a write-down of $807,000 related to the redemption of
the Corporation's prior trust preferred securities and a write-down of preferred
stock deemed impaired in the amount of $583,000.
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 third quarter of 2003. Further analysis is provided in
sections on net interest revenue and supporting schedules.
Non-interest income decreased by $807,000 during the third quarter of 2004
compared to the third quarter of 2003. During the third quarter of 2004, the
Corporation recognized losses on the sale of securities available for sale and
gains on loan sales totaling $303,000 and $14,000 respectively, while other
non-interest income totaled $778,000. As part of the Corporation's loss of
$303,000 on the sale of securities available for sale, the Corporation recorded
a write-down of $583,000 against the Corporation's equity investments as an
impairment charge as described in Note J.
Operating expenses for the quarter ended September 30, 2004 totaled $5,457,000
versus $4,544,000 for the quarter ended September 30, 2003. The increase in
operating expenses is a direct result of the overall growth of the corporation
and the write-down of the origination costs from the Corporation's initial trust
preferred financing in 1999 totaling $807,000, which was required when these
trust preferred securities were redeemed in this quarter and replaced with trust
preferred securities bearing a lower interest rate, as described more fully in
this report under the section titled Recent Developments.
Income taxes for the current quarter totaled $112,000, representing an effective
tax rate of 20% versus an effective rate of 29% for the nine-month period ended
September 30, 2004. The decline in the effective tax rate is the result of the
level of pre-tax income and non-taxable income for the current quarter.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
A decrease of $79,000 has been reflected in the allowance for loan losses at
September 30, 2004 as compared to December 31, 2003. The Corporation recorded a
provision of $150,000 for the quarter ended September 30, 2004 as compared to
the recovery of a provision of $354,000 in 2003. Loans written off against the
allowance for loan losses after recoveries amounted to net charge-offs of
$28,000 for the quarter ended September 30, 2004 versus net charge-offs of
$54,000 for the same period of 2003.
After giving effect to the activity described above, the allowance for loan
losses at September 30, 2004 totaled $4,349,000 or 1.00% of total loans, as
compared to $4,428,000 or 1.01% at December 31, 2003.
Non-performing past due loans at September 30, 2004 aggregated $1,602,000 or
0.37% of total loans compared to $3,308,000 or 0.75% at December 31, 2003. The
percentage of non-performing and past due loans compared to total assets on
those same dates, respectively, amounted to 0.31% and 0.46%.
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 provision for the quarter, and 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.
15
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,
which 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.
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Earning Assets $714,313 5.27% $603,490 5.63% $697,651 5.33% $610,429 5.86%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 623,868 2.37 520,807 2.53 610,480 2.37 528,424 2.71
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.90 3.10 2.96 3.15
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-free resources used
to fund earning assets 90,445 82,683 87,171 82,005
- ------------------------------------------------------------------------------------------------------------------------------------
Total Sources of Funds $714,313 $603,490 $697,651 $610,429
====================================================================================================================================
NET YIELD ON EARNING ASSETS 3.20% 3.45% 3.26% 3.52%
====================================================================================================================================
16
QUARTER-TO-DATE AVERAGE BALANCES
INTEREST EARNED - INTEREST EXPENSE
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter Ended September 30,
2004 2003
- -------------------------------------------------------------------------------------------------------------------------
Balance Interest(1) Rate Balance Interest(1) Rate
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Federal funds sold and
temporary investments $ 1,971 $ 8 1.62% $ 24,640 $ 48 .78%
Securities 278,800 3,231 4.64 119,515 1,458 4.88
Loans 433,542 6,169 5.69 459,335 6,992 6.08
- -------------------------------------------------------------------------------------------------------------------------
Total earning assets 714,313 $9,408 5.27% 603,490 $8,498 5.63%
- -------------------------------------------------------------------------------------------------------------------------
Loan loss allowance (4,250) (5,111)
All other assets 46,515 43,050
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 756,578 $ 641,429
=========================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits $ 495,705 $2,645 2.13% $ 461,924 $2,569 2.22%
Borrowed funds 128,163 1,048 3.27 58,883 724 4.92
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 623,868 3,693 2.37 520,807 3,293 2.53
- -------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.90% 3.10%
Demand deposits 85,652 74,770
Other liabilities 1,434 2,629
Shareholders' equity 45,624 43,223
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 756,578 $ 641,429
=========================================================================================================================
Net interest income (tax equivalent basis) $5,715 $5,205
Interest earned/earning assets 5.27% 5.63%
Interest expense/earning assets 2.07 2.18
- -------------------------------------------------------------------------------------------------------------------------
Net yield on earning assets 3.20% 3.45%
Deduct tax equivalent adjustment 33 34
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $5,682 $5,171
=========================================================================================================================
(1) Amounts shown are adjusted to a "tax equivalent" basis.
17
QUARTER-TO-DATE AVERAGE BALANCES
INTEREST EARNED - INTEREST EXPENSE
(DOLLAR AMOUNTS IN THOUSANDS)
Nine Months Ended September 30,
2004 2003
- -------------------------------------------------------------------------------------------------------------------------
Balance Interest (1) Rate Balance Interest (1) Rate
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Federal funds sold and
temporary investments $ 2,281 $ 17 0.99% $ 23,740 $ 164 .92%
Securities 264,396 9,342 4.71 121,812 4,731 5.18
Loans 430,974 18,534 5.73 464,877 21,949 6.30
- -------------------------------------------------------------------------------------------------------------------------
Total earning assets 697,651 $ 27,893 5.33% 610,429 $ 26,844 5.86%
- -------------------------------------------------------------------------------------------------------------------------
Loan loss allowance (4,348) (5,155)
All other assets 45,263 42,656
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 738,566 $ 647,930
=========================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits $ 488,913 $ 7,828 2.13% $ 463,738 $ 8,306 2.39%
Borrowed funds 121,567 3,022 3.31 64,685 2,419 4.99
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 610,480 10,850 2.37 528,423 10,725 2.71
- -------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.96% 3.15%
Demand deposits 80,728 72,740
Other liabilities 1,823 3,772
Shareholders' equity 45,535 42,995
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 738,566 $ 647,930
=========================================================================================================================
Net interest income (tax equivalent basis) $ 17,043 $ 16,119
Interest earned/earning assets 5.33% 5.86%
Interest expense/earning assets 2.07 2.34
- -------------------------------------------------------------------------------------------------------------------------
Net yield on earning assets 3.26% 3.52%
Deduct tax equivalent adjustment 97 83
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 16,946 $ 16,036
=========================================================================================================================
(1) Amounts shown are adjusted to a "tax equivalent" basis.
18
CHANGES IN NET INTEREST INCOME
(DOLLAR AMOUNTS IN THOUSANDS)
QUARTER ENDED SEPTEMBER 30, 2004
OVER
QUARTER ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
CHANGE DUE TO
VOLUME RATE TOTAL
- --------------------------------------------------------------------------------
Interest Income:
Loans $ (378) $ (445) $ (823)
Securities 1,851 (78) 1,773
Federal funds (76) 36 (40)
- --------------------------------------------------------------------------------
Total Interest Earned 1,397 (487) 910
Interest Expense:
Interest-bearing deposits 186 (110) 76
Other borrowed funds 633 (309) 324
- --------------------------------------------------------------------------------
Total Interest Expense 819 (419) 400
- --------------------------------------------------------------------------------
NET INTEREST INCOME $ 578 $ (68) $ 510
================================================================================
For the quarter ended September 30, 2004, an increase in average earning assets
of $110,823,000 or 18.36% and a 36-basis point decrease in average rate of
return resulted in an increase in volume of $1,397,000 and a decrease in rate of
$487,000. An increase in average interest-bearing liabilities of $103,061,000 or
19.79% and a 16-basis point decrease in average rate of interest paid
contributed to an increase in volume of $819,000 and a decrease in rate of
$419,000. Net interest earned on a tax equivalent basis increased to $5,715,000
for the third quarter of 2004, up $510,000 as compared with the quarter ended
September 30, 2003.
19
CHANGES IN NET INTEREST INCOME
(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2004
OVER
NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
CHANGE DUE TO
VOLUME RATE TOTAL
- --------------------------------------------------------------------------------
Interest Income:
Loans $(1,537) $ (1,878) $(3,415)
Securities 5,073 (462) 4,611
Federal funds (158) 11 (147)
- --------------------------------------------------------------------------------
Total Interest Earned 3,378 (2,329) 1,049
Interest Expense:
Interest-bearing deposits 435 (913) (478)
Other borrowed funds 1,611 (1,008) 603
- --------------------------------------------------------------------------------
Total Interest Expense 2,046 (1,921) 125
- --------------------------------------------------------------------------------
NET INTEREST INCOME $ 1,332 $ (408) $ 924
================================================================================
For the nine-month period ended September 30, 2004, an increase in average
earning assets of $87,222,000 or 14.29% and a 53-basis point decrease in average
rate of return resulted in an increase in volume of $3,378,000 and a decrease in
rate of $2,329,000. An increase in average interest-bearing liabilities of
$82,057,000 or 15.53% and a 34-basis point decrease in average rate of interest
paid contributed to an increase in volume of $2,046,000 and a decrease in rate
of $1,921,000. Net interest earned on a tax equivalent basis increased to
$17,043,000 for the nine-month period ended September 30, 2004, up $924,000 as
compared with the nine-month period ended September 30, 2003.
OPERATING EXPENSES
The components of total operating expenses for the period and their percentage
of gross income are as follows:
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------------
Salaries and benefits $2,644 26.80% $2,502 25.64% $ 7,807 25.60% $ 7,315 24.35%
Other non-interest expense 2,426 24.59 1,663 17.04 5,506 18.05 4,431 14.75
Occupancy - net 387 3.93 379 3.88 1,233 4.05 1,189 3.95
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $5,457 55.32% $4,544 46.56% $ 14,546 47.70% $ 12,935 43.05%
====================================================================================================================================
On September 30, 2004, the Corporation redeemed the outstanding principal of
$17,526,000 of 9.60% junior subordinated deferrable interest debentures it
issued on September 30, 1999 to Westbank Capital Trust I ("Trust I") and, in the
process, wrote off the balance of $807,000 of unamortized legal and accounting
fees associated with the issuance of the Trust's capital offering as other
non-interest expense. Salaries and benefits, along with occupancy (net),
increased as a direct result of general additions to staff, and additions to
staff and general operating costs related to the opening of the Corporation's
newest branch office in Webster, Massachusetts, in 2003.
20
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 September
30, 2004, the interest rate sensitivity gap (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 with 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 $ 116,531 $ 48,226 $ 191,807 $ 347,744 $ 704,308
Interest-Bearing
Liabilities 128,577 191,925 269,198 17,738 607,438
- --------------------------------------------------------------------------------------------------------------------
Interest Rate
Sensitivity Gap $ (12,046) $(143,699) $ (77,391) $ 330,006 $ 96,870
====================================================================================================================
Cumulative Interest
Rate Sensitivity Gap $ (12,046) $(155,745) $(233,136) $ 96,870
Interest Rate
Sensitivity Gap Ratio (1.71%) (20.40%) (10.99%) 46.86%
Cumulative Interest
Rate Sensitivity Gap Ratio (1.71%) (22.11%) (33.10%) 13.76%
The presentation of a run-off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $9,740,000 and
$3,218,000 respectively included in the three-month to one-year category and the
remainder placed in the one- to five-year category of interest bearing
liabilities.
Westbank seeks to manage the mix of assets and liabilities maturities to control
the effect of changes 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 amounts payable to
Westbank Capital Trust II and III.
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 September 30, 2004, the Corporation maintained cash balances, short-term
investments and investments available for sale totaling $221,109,000,
representing 29.50% of total quarter-end assets, versus $256,490,000 or 35.4% of
total assets at December 31, 2003.
21
At September 30, 2004, the Corporation had certificates of deposit maturing
within the next 12 months amounting to $227,095,000. 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 third quarter of 2004, the Corporation decreased its use of
borrowings totaling $35,912,000 and increased its use of deposits totaling
$57,638,000 as a source of funds. The average balance of borrowings for the
quarters ended September 30, 2004 and September 30, 2003 were $128,163,000 and
$58,883,000 respectively, and $121,567,000 and $64,685,000 for the nine months
ended September 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 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 the current liquidity of the Bank is
sufficient to meet present and anticipated funding needs.
22
PROVISION AND ALLOWANCE FOR LOAN LOSSES
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter Ended September 30, Nine Months Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 4,227 $ 5,122 $ 4,428 $5,111
Provision for (Recovery of) loan losses 150 (354) 150 (354)
- ------------------------------------------------------------------------------------------------------------------------------------
4,377 4,768 4,578 4,757
Less charge-off's:
Loans secured by real estate 2 82 8
Commercial and industrial loans 5 100 37
Consumer loans 30 48 63 115
- ------------------------------------------------------------------------------------------------------------------------------------
30 55 245 160
- ------------------------------------------------------------------------------------------------------------------------------------
Add-recoveries:
Loans secured by real estate 1 1 101
Commercial and industrial loans 1 13
Consumer loans 2 14 3
- ------------------------------------------------------------------------------------------------------------------------------------
2 1 16 117
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-off's (recoveries) 28 54 229 43
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 4,349 $ 4,714 $ 4,349 $4,714
====================================================================================================================================
Net charge-off's (recoveries) to:
Average loans nil .01% .01% .01%
Loans at end of period nil .01% .01% .01%
Allowance for loan losses at January 1 .63% 1.06% 5.17% .84%
Allowance for loan losses at September 30 as
a percentage of:
Average loans 1.00% 1.03% 1.01% 1.01%
Loans at end of period 1.00% 1.05% 1.00% 1.05%
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-based 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. 18, "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.
For the quarter ended September 30, 2004, the Bank made additions to the
allowance for loan losses totaling $150,000. For the quarter ended September 30,
2003, the Bank had a recovery in the amount of $354,000 from the allowance for
loan losses. For the quarters ended September 30, 2004 and 2003, recoveries
totaled $2,000 and $1,000, while charge-offs totaled $30,000 and $55,000
respectively.
23
NON-ACCRUAL, PAST DUE AND NON-PERFORMING LOANS
(DOLLAR AMOUNTS IN THOUSANDS)
09-30-04 06-30-04 03-31-04 12-31-03 09-30-03
====================================================================================================================================
Non accrual-loans $1,245 $ 987 $ 997 $3,111 $2,182
Loans contractually past
due 90 days or more
still accruing 357 173 195 197 1,335
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-accrual, past due
and restructured loans $1,602 $1,160 $1,192 $3,308 3,517
- ------------------------------------------------------------------------------------------------------------------------------------
Non-accrual, past due and
restructured loans as a
percentage of total loans 0.37% 0.27% 0.28% 0.75% 0.78%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a
percentage of non-accrual,
past due and restructured loans 368.36% 364.40% 360.23% 133.86% 134.03%
- ------------------------------------------------------------------------------------------------------------------------------------
Other real estate owned - net 706 706 706
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $2,308 $1,866 $1,898 $ 3,308 $3,517
Non-performing assets as a
percentage of total assets 0.31% 0.24% 0.26% 0.46% 0.54%
- ------------------------------------------------------------------------------------------------------------------------------------
24
REGULATORY CAPITAL
At September 30, 2004, the Corporation exceeded each of the applicable
regulatory capital requirements. As of September 30, 2004, the most recent
notification from the Federal Deposit Insurance Corporation (the "FDIC")
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized", the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth below. There are no conditions or events since that notification
the management believes have changed the Bank's category. The Corporation's and
the Bank's capital ratios as of September 30, 2004 are also presented in the
following table:
Minimum for Capital
Actual Adequacy Purposes
------ -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
September 30, 2004
Total Capital (to Risk-Weighted Assets)
Consolidated $58,811 13.23% $35,556 8.00%
Bank 56,674 12.79 35,452 8.00
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated 52,477 11.81 17,778 4.00
Bank 52,325 11.81 17,726 4.00
Tier 1 Capital (to Average Assets)
Consolidated 52,414 7.01 29,926 4.00
Bank 52,325 7.01 29,856 4.00
The primary source of funds for payments of dividends by the Corporation is
dividends paid to the Corporation by the Bank. Bank regulatory authorities
generally restrict the amounts available for payments of dividends if the effect
thereof would cause the capital of the Bank to be reduced below applicable
capital requirements. These restrictions, thus, indirectly affect the
Corporation's ability to pay dividends.
OFF-BALANCE-SHEET ARRANGEMENTS
The Corporation does not have any off-balance-sheet arrangements that have, or
are reasonably likely to have, a current or future effect on the Corporation's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to investors. The Corporation's 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.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Westbank seeks to manage the mix of assets and liabilities maturities to control
the effect of changes 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.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the
Corporation carried out an evaluation, under the supervision, and with the
participation, of the Corporation's principal executive officer and principal
financial officer, of the effectiveness of the Corporation's disclosure controls
and procedures. Based on this evaluation, the Corporation's principal executive
officer and principal financial officer concluded that the Corporation's
disclosure controls and procedures are effective in ensuring that information
required to be disclosed by the Corporation in reports that it files or submits
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. It should be noted that the design of the
Corporation's disclosure controls and procedures is based in part upon certain
reasonable assumptions about the likelihood of future events and there can be no
reasonable assurance that any design of disclosure controls and procedures will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote. The Corporation's principal executive and financial
officers have concluded that the Corporation's disclosure controls and
procedures are, in fact, effective at a reasonable assurance level.
There have been no changes in the Corporation's internal control over financial
reporting (to the extend that elements of internal control over financial
reporting are subsumed within disclosure controls and procedures) identified in
connection with the evaluation described in the above paragraph that occurred
during the Corporation's last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
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 effect on the Corporation's
financial statements.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 three months ended September 30, 2004.
Total Number of Shares Maximum Number of
Purchased as Part of Shares that 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
------ ---------------- --------- ----------------- -----------------
July 2004 3,300 $18.00 27,265 190,639
August 2004 1,570 20.98 28,835 189,069
September 2004 315 21.40 29,150 188,754
- ----------------------------------------------------------------------------------------------------
Total 5,185 $19.11
====================================================================================================
ITEM 3. Defaults on Senior Securities - NONE
26
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders - NONE
ITEM 5. Other Information - NONE
ITEM 6. Exhibits
EXHIBIT INDEX
3. Articles of Organization, 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 Certifications pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1988.
27
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: November 9, 2004 /s/ Donald R. Chase
--------------------------------------
Donald R. Chase
President and Chief Executive Officer
Date: November 9, 2004 /s/ John M. Lilly
--------------------------------------
John M. Lilly
Treasurer and Chief Financial Officer
28