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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
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0 - 12784
WESTBANK CORPORATION
(Exact name of 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
(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: 4,763,102 shares outstanding as of
July 31, 2005
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WESTBANK CORPORATION AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
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 (Loss) 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 26
ITEM 4. Controls and Procedures 26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 27
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
ITEM 3. Defaults Upon Senior Securities 27
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
(Unaudited)
(Dollar amounts in thousands, except per share data) June 30, 2005 December 31, 2004
- ------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks:
Non-interest bearing $ 13,463 $ 12,451
Interest bearing 34 34
Federal funds sold 7 669
- ------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 13,504 13,154
- ------------------------------------------------------------------------------------------------------
Investment securities available for sale, at fair value 150,524 155,405
Investment securities held to maturity, at amortized cost
(fair value of $115,096 at June 30, 2005
and $112,158 at December 31, 2004) 115,457 112,424
- ------------------------------------------------------------------------------------------------------
Total investment securities 265,981 267,829
- ------------------------------------------------------------------------------------------------------
Investment in Federal Home Loan Bank stock 6,450 6,450
Loans, held for sale 21,954 0
Loans, net of allowance for loan losses ($4,462 at
June 30, 2005 and $4,356 at December 31, 2004) 426,087 434,119
Property and equipment, net 7,038 6,885
Accrued interest receivable 3,794 3,655
Other real estate owned, net 630 630
Goodwill 8,837 8,837
Bank-owned life insurance 8,995 9,204
Investment in unconsolidated investee 526 526
Deferred income taxes 967 1,477
Other assets 3,573 2,781
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 768,336 $ 755,547
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 83,341 $ 83,864
Interest bearing 512,530 505,274
- ------------------------------------------------------------------------------------------------------
Total deposits 595,871 589,138
Borrowed funds 102,137 97,354
Interest payable on deposits and borrowings 632 550
Payable to Westbank Capital Trust II 8,763 8,763
Payable to Westbank Capital Trust III 8,763 8,763
Other liabilities 3,668 3,517
- ------------------------------------------------------------------------------------------------------
Total liabilities 719,834 708,085
- ------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, par value $5 per share,
authorized 100,000 shares, none issued
Common stock, par value $2 per share,
authorized 9,000,000 shares, issued
4,758,993 in 2005 and 4,746,397 in 2004 9,518 9,493
Unearned compensation restricted stock (1,535) (1,652)
Additional paid in capital 19,519 20,377
Retained earnings 21,293 19,958
Treasury stock at cost
(7,493 shares at June 30, 2005 and
28,818 shares at December 31, 2004) (141) (606)
Accumulated other comprehensive loss (152) (108)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 48,502 47,462
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 768,336 $ 755,547
======================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, Six Months Ended June 30,
(Unaudited) --------------------------- ---------------------------
(Dollar amounts in thousands, except per share data) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------
Income:
Interest and fees on loans $ 6,541 $ 6,048 $ 12,787 $ 12,308
Interest and dividend income on securities 3,083 3,240 6,230 6,104
Interest on federal funds sold 2 2 5 9
- ----------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 9,626 9,290 19,022 18,421
- ----------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 2,904 2,655 5,655 5,183
Interest on borrowed funds 959 973 1,907 1,974
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 3,863 3,628 7,562 7,157
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Net interest income 5,763 5,662 11,460 11,264
Provision for loan losses 0 0 140 0
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,763 5,662 11,320 11,264
- ----------------------------------------------------------------------------------------------------------------------
Non-interest income:
Gain on sale of securities available for sale 0 165 96 227
Gain on sale of loans 149 47 165 427
Other non-interest income 753 754 1,858 1,557
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest income 902 966 2,119 2,211
- ----------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and benefits 2,820 2,567 5,517 5,163
Other non-interest expense 1,595 1,551 3,321 3,080
Occupancy - net 405 385 904 846
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest expense 4,820 4,503 9,742 9,089
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Income before income taxes 1,845 2,125 3,697 4,386
Provision for income taxes 597 681 1,038 1,357
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 1,248 $ 1,444 $ 2,659 $ 3,029
======================================================================================================================
Earnings per share:
Basic $ 0.26 $ 0.32 $ 0.56 $ 0.67
Diluted $ 0.25 $ 0.30 $ 0.54 $ 0.63
See accompanying notes to condensed consolidated financial statements.
4
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2004 AND SIX MONTHS ENDED JUNE 30, 2005
COMMON STOCK* UNEARNED
----------------------------- COMPENSATION ADDITIONAL
(Dollar amounts in thousands, except NUMBER PAR RESTRICTED PAID-IN
per share data) OF SHARES VALUE STOCK CAPITAL
- --------------------------------------------------------------------------------------------------------
BALANCE - JANUARY 1, 2004 4,409,248 $ 9,047 $ 14,524
========================================================================================================
Net income
Cash dividends declared
($.56 per share)
Shares issued from treasury stock:
Stock option plan 92,847 (611)
Dividend reinvestment and
stock purchase plan 34,076 126
Changes in unrealized gain (loss)
on securities available for sale
Repurchase of common stock (41,395)
Income tax benefit for exercise of
non-qualified stock options 182
Stock option compensation 11
Issuance of restricted stock award (1,785) 1,785
Amortization of
unearned compensation 133
5% common stock dividend 222,803 446 4,360
- --------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2004 4,717,579 9,493 (1,652) 20,377
- --------------------------------------------------------------------------------------------------------
(Unaudited)
Net income
Cash dividends declared
($.28 per share)
Shares issued from treasury stock:
Stock option plan 11,601 (180)
Dividend reinvestment and
stock purchase plan 9,724 (35)
Issuance of additional shares:
Dividend reinvestment plan 11,142 22 169
Stock purchase plan 1,454 3 22
Changes in unrealized gain (loss)
on securities available for sale
Acquisition of common stock
for restricted stock plan (Note G) (878)
Income tax benefit for exercise of
non-qualified stock options 44
Amortization of unearned
compensation (Note G) 117
- --------------------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 2005 4,751,500 $ 9,518 $ (1,535) $ 19,519
========================================================================================================
ACCUMULATED
OTHER
(Dollar amounts in thousands, except RETAINED TREASURY COMPREHENSIVE
per share data) EARNINGS STOCK INCOME/(LOSS) TOTAL
- --------------------------------------------------------------------------------------------------------
BALANCE - JANUARY 1, 2004 $ 22,724 $ (1,692) $ 672 $ 45,275
========================================================================================================
Net income 4,611 4,611
Cash dividends declared
($.56 per share) (2,561) (2,561)
Shares issued from treasury stock:
Stock option plan 1,369 758
Dividend reinvestment and
stock purchase plan 561 687
Changes in unrealized gain (loss)
on securities available for sale (780) (780)
Repurchase of common stock (842) (842)
Income tax benefit for exercise of
non-qualified stock options 182
Stock option compensation 11
Issuance of restricted stock award 0
Amortization of
unearned compensation 133
5% common stock dividend (4,816) (2) (12)
- --------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2004 19,958 (606) (108) 47,462
- --------------------------------------------------------------------------------------------------------
(Unaudited)
Net income 2,659 2,659
Cash dividends declared
($.28 per share) (1,324) (1,324)
Shares issued from treasury stock:
Stock option plan 254 74
Dividend reinvestment and
stock purchase plan 211 176
Issuance of additional shares:
Dividend reinvestment plan 191
Stock purchase plan 25
Changes in unrealized gain (loss)
on securities available for sale (44) (44)
Purchase of restricted stock (Note G) (878)
Income tax benefit for exercise of
non-qualified stock options 44
Vesting of restricted stock (Note G)
Amortization of unearned
compensation (Note G) 117
- --------------------------------------------------------------------------------------------------------
BALANCE - JUNE 30, 2005 $ 21,293 $ (141) $ (152) $ 48,502
========================================================================================================
See accompanying notes to condensed consolidated financial statements.
* Net of treasury stock
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------------------------
(Dollars in thousands) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,248 $ 1,444 $ 2,659 $ 3,029
- --------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale,
net of income tax expense (benefit) of $639 and $(1,891)
for the three-month and $7 and $(1,438) for the
six-month periods ended June 30, 2005 and 2004, respectively 1,096 (3,670) 13 (2,792)
Less reclassification adjustment for gains included in net income,
net of income tax expense of $0 and $56 for the
three-month and $39 and $77 for the six-month
periods ended June 30, 2005 and 2004, respectively 0 (109) (57) (150)
- --------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 1,096 (3,779) (44) (2,942)
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 2,344 $ (2,335) $ 2,615 $ 87
================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
5
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Six Months Ended June 30,
(Unaudited) ---------------------------
(Dollar amounts in thousands) 2005 2004
- ------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 2,659 $ 3,029
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 140
Accretion of investment discounts 13 (104)
Loan originations - held-for-sale (1,055) (3,573)
Proceeds from sale of held-for-sale loans 1,058 3,622
Depreciation and amortization 402 436
Realized gain on sale of securities (96) (227)
Realized gain on sale of loans (165) (427)
Income from bank-owned life insurance (472) (182)
Gain on sale of property and equipment (10)
Deferred income taxes 510 (375)
Exercise of non-qualified stock options 44 102
Stock compensation 117 24
Changes in assets and liabilities
Increase in accrued interest receivable (139) (803)
Increase in bank-owned life insurance (158) (178)
Increase in other assets (769) (643)
Increase in interest payable on deposits and borrowings 82 10
Increase in other liabilities 151 700
======================================================================================================
Net cash provided by operating activities 2,312 1,411
======================================================================================================
Investing activities:
Securities:
Held to maturity:
Purchases (10,714) (72,256)
Proceeds from maturities and principal payments 7,658 551
Available for sale:
Purchases (67) (77,480)
Proceeds from sales 1,918 24,433
Proceeds from maturities and principal payments 3,069 76,875
Purchases of property and equipment (555) (323)
Proceeds from loan sales 22,663 17,094
Proceeds from bank-owned life insurance 839 484
Proceeds from sale of property and equipment 10
Purchase of FHLB stock (528)
Net increase in loans (36,563) (5,479)
======================================================================================================
Net cash used in investing activities (11,742) (36,629)
======================================================================================================
Financing activities:
Net increase in deposits 6,733 47,494
Net increase (decrease) in short-term borrowings 7,153 (3,414)
Proceeds from long-term borrowing 2,500
Repayment of long-term borrowings (2,370) (5,003)
Issuance of common stock 216
Purchase of restricted stock (878)
Treasury stock repurchases (717)
Proceeds from exercise of stock options
and stock purchase plan 250 960
Dividends paid (1,324) (1,245)
======================================================================================================
Net cash provided by financing activities 9,780 40,575
======================================================================================================
Increase in cash and cash equivalents 350 5,357
Cash and cash equivalents at beginning of period 13,154 14,678
======================================================================================================
Cash and cash equivalents at end of period $ 13,504 $ 20,035
======================================================================================================
Cash paid:
Interest on deposits and other borrowings $ 7,480 $ 7,147
Income taxes 952 1,283
Supplemental disclosure of cash flow information:
Transfer of loans to other real estate owned 574
Unrealized loss on securities available for sale, net of taxes (44) (2,942)
Transfer of loans to loans held for sale 21,954
See accompanying notes to condensed consolidated financial statements.
6
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(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 subsidiaries: Park West
Securities Corporation and PWB&T, Inc. (PWB&T). The Corporation is headquartered
in West Springfield, Massachusetts. As of June 30, 2005, the Bank had eighteen
offices located in Massachusetts and Connecticut that provide a full range of
retail banking services to individuals, businesses and nonprofit organizations.
The accompanying unaudited condensed consolidated financial statements include
the Corporation, the Bank and the Bank's two subsidiaries. All significant
intercompany balances and transactions have been eliminated in the accompanying
unaudited condensed consolidated financial statements.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for the
three-month and six-month periods ended June 30, 2005 and 2004 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, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. 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, 2004.
NOTE C - FINANCIAL STATEMENT RECLASSIFICATIONS
Certain amounts in the December 31, 2004 and June 30, 2004 financial statements
have been reclassified to conform to the June 30, 2005 presentation. The
reclassifications consist primarily of changes to the Statement of Cash Flows
for the six months ended June 30, 2004.
7
NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 154, "Accounting Changes and Error
Corrections - a Replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 requires retrospective application for reporting
a change in accounting principle, unless impracticable. The statement clarifies
that a reporting entity shall change an accounting principle only if (a) the
change is required by a newly issued accounting pronouncement or (b) the entity
can justify the use of an allowable alternative accounting principle on the
basis that it is preferable. SFAS No. 154 is effective for accounting changes
and corrections of errors for fiscal years beginning after December 15, 2005,
which is January 1, 2006 for the Corporation.
On December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment", (SFAS No. 123(R)), which is an amendment of FASB Statements Nos. 123
and 95. SFAS No. 123(R) has been deferred to January 1, 2006. The
fair-value-based method of expense recognition in SFAS No. 123(R) is similar to
the fair-value-based method described in SFAS No. 123 in most respects. The
Corporation will be required to adopt SFAS No. 123(R) using the modified
prospective method of transition because it had previously adopted the
fair-value-based method of expense recognition under SFAS No. 123 on January 1,
2003. Under the modified prospective method, compensation cost is recognized on
or after the effective date for the portion of awards for which the requisite
service has not yet been rendered.
Management is currently evaluating the effect of the adoption of SFAS No. 123(R)
but does not expect its adoption to have a material effect on the Corporation's
financial condition or results of operations because the service periods for all
options granted prior to the Corporation's adoption of SFAS No. 123 have been
rendered. For further information regarding the accounting for stock-based
compensation, see Note G, "Stock-Based Compensation."
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 impairment loss. The guidance also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment. 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 (FSP) expected to provide additional
implementation guidance.
On June 29, 2005, the FASB staff decided not to provide additional guidance on
the meaning of other-than-temporary impairment but to issue guidance emphasizing
other relevant other-than-temporary guidance, such as in SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The staff
will issue proposed FSP EITF 03-1-a, under the new title FSP FAS 115-1. FSP
115-1 will replace the guidance set forth in EITF Issue 03-1. FSP 115-1 will
clarify that an investor should recognize an impairment loss no later than when
the impairment is deemed other-than-temporary, even if a decision to sell has
not been made. The final FSP is expected to be issued in August 2005. It will be
effective for periods beginning after September 15, 2005.
NOTE E - FINANCIAL LETTERS OF CREDIT
The Corporation has financial letters of credit that require the Corporation to
make payment in the event of the customer's default, as defined in the
agreements. The Corporation measures and considers recognition of the fair value
of the guarantee obligation at inception. 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, 2005 were immaterial; therefore, these
guarantee obligations are not reflected in the accompanying condensed
consolidated financial statements. The maximum potential undiscounted amount of
future payments of letters of credit as of June 30, 2005 are approximately
$271,000, of which $2,000 will expire in 2005, and $269,000 will expire in 2006.
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.
8
NOTE F - 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:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------------------------
2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------
Service cost $ 41,822 $ 30,319 $ 76,364 $ 60,638
Interest cost 56,960 43,032 105,750 86,064
Amortization of prior service cost 31,235 31,235 62,470 62,470
Amortization of net (gain) loss 20,571 26,937
- ----------------------------------------------------------------------------------------------
Net periodic benefit cost $ 150,588 $ 104,586 $ 271,521 $ 209,172
==============================================================================================
The weighted average assumptions utilized to determine the benefit obligation
and net benefit cost are as follows:
At June 30, 2005 2004
- -----------------------------------------------------------
Discount rate 5.75% 6.30%
Rate of increase in compensation levels 5.00% 5.00%
The Corporation does not expect to contribute to the Directors and Executives
Supplemental Retirement Plan in 2005.
NOTE G - STOCK-BASED COMPENSATION
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
authorized the acquisition of not more than 92,505 shares of common stock on the
open market. During 2004, the Board of Directors granted 92,505 shares of
restricted stock pursuant to the RRP. Shares generally vest at a rate of 12.5%
per year over eight years, with acceleration upon retirement. The aggregate
purchase price of all shares acquired by the RRP is reflected as a reduction of
stockholders' equity. Compensation expense is being amortized over the
eight-year vesting period.
For the six-month period ended June 30, 2005, the Corporation, through a
Trustee, purchased 53,005 shares of common stock on the open market pursuant to
the RRP. These restricted common shares are currently held in trust until
vested. On May 25, 2005, 12,005 shares of the award vested and became
unrestricted shares of common stock. For the six months ended June 30, 2005, the
Corporation recognized compensation expense of $117,000 based on the fair value
of the common stock on the grant date.
The Corporation currently accelerates compensation cost for retired employees
and Directors at the date of retirement. Upon adoption of SFAS No. 123 (R), for
any new Awards granted, the Corporation will recognize compensation expense for
the period from the date of grant through the date that the employee first
becomes eligible for retirement. In some cases, this will result in the
recognition of compensation cost over a shorter period than the stated vesting
period. Had the Corporation applied the accelerated vesting methodology in SFAS
No. 123 (R), additional compensation expense of $9,600 and $3,200 would have
been recognized for the three months ended June 30, 2005 and 2004 respectively.
For the six months ended June 30, 2005 and 2004, the Corporation would have
recognized additional compensation expense totaling $19,300 and $3,200
respectively.
9
NOTE H - EARNINGS PER SHARE
Basic earnings per share represents income available to common shareholders
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if certain potentially dilutive common shares were issued
during the period. For the three- and six-month periods ended June 30, 2005 and
2004, 8,400 stock options were excluded from the following table because the
options' exercise price was greater than the average market price of common
shares (antidilutive). The following table sets forth the components of basic
and diluted earnings per share:
Three Months Ended June 30,
---------------------------
(Dollar amounts in thousands, except per-share data) 2005 2004
- ----------------------------------------------------------------------------------
Net income $ 1,248 $ 1,444
Weighted average shares outstanding
Basic weighted average shares outstanding 4,730,604 4,573,803
Dilutive potential common shares 174,754 265,806
- ----------------------------------------------------------------------------------
Diluted weighted average shares outstanding 4,905,358 4,839,609
- ----------------------------------------------------------------------------------
Earnings per share
Basic earnings per share $ 0.26 $ 0.32
Diluted earnings per share $ 0.25 $ 0.30
- ----------------------------------------------------------------------------------
Six Months Ended June 30,
---------------------------
(Dollar amounts in thousands, except per-share data) 2005 2004
- ----------------------------------------------------------------------------------
Net income $ 2,659 $ 3,029
Weighted average shares outstanding
Basic weighted average shares outstanding 4,729,354 4,511,505
Dilutive potential common shares 195,329 271,036
- ----------------------------------------------------------------------------------
Diluted weighted average shares outstanding 4,924,683 4,782,541
- ----------------------------------------------------------------------------------
Earnings per share
Basic earnings per share $ 0.56 $ 0.67
Diluted earnings per share $ 0.54 $ 0.63
- ----------------------------------------------------------------------------------
NOTE I - ACCOUNTING FOR LOAN DISCOUNTS AND PREMIUMS
SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases," calls for
recognizing the premiums or discounts associated with a purchase of loans over
the average contractual life of the loans. On June 29 2005, the Corporation
purchased a loan portfolio at a discount. The Corporation is accounting for the
discount in accordance with SFAS No. 91, recognizing the discount over the
average contractual life of the loans using the effective interest method, which
results in an adjustment of yield (interest income) over the life of the loans.
At June 30, 2005, the unamortized discount totaled $480,500. The unamortized
discount is reported on the face of the consolidated balance sheet as part of
the loan balance.
10
NOTE J - LOAN SALES COMMITMENTS
The Corporation generally retains the majority of the loans that it originates.
However, on a periodic basis in order to reduce its exposure to interest rate
fluctuations, the Corporation sells loans in an effort to manage its interest
rate risk. The sales are originated through the use of loan sales commitments.
On June 15, 2005, the Corporation entered into a loan sales commitment with an
unrelated third party to sell approximately $22,400,000 of loans. At June 30,
2005, the Corporation had $22,305,000 outstanding in loan sales commitments. The
$22,305,000 includes a final loan sales commitment of $21,954,000 to the
unrelated third party and several smaller loan sales commitments, which make up
the remaining $351,000. The $351,000 was committed to be sold before origination
and was never included in portfolio. The final loan sales commitment of
$21,954,000 consisted of 152 loans and closed on July 20, 2005.
Of the total outstanding loan sales commitments, $351,000 represent derivative
instruments in accordance with SFAS No. 133, as amended by SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities",
(collectively referred to as SFAS No. 133). The remaining $21,954,000 does not
qualify for derivative treatment under SFAS No. 133.
The Corporation designates its derivative loan sales commitments as non-hedging
instruments. Under SFAS No. 133, non-hedging derivative instruments are recorded
on the balance sheet at fair value with changes in fair value recognized in
income. The Corporation recognized no fair value upon inception of these
derivative instruments, as they were market-rate transactions. At June 30, 2005,
the Corporation calculated the changes in fair value from the period of
inception through the period ended June 30, 2005 and concluded that the changes
were quantitatively and qualitatively immaterial to the condensed consolidated
financial statements. The Corporation has not recorded any liabilities or
recognized any income or expense in the accompanying condensed consolidated
financial statements associated with any of its outstanding loan sales
commitments.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
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 which 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. 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 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.
12
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Corporation are in accordance with
generally accepted accounting principles 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 reasonable under the circumstances. Actual results could differ
significantly from these estimates and assumptions, which 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 the other-than-temporary impairment analysis, 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.
OTHER-THAN-TEMPORARY IMPAIRMENT -
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis and more frequently when economic or market conditions warrant
such evaluation. Consideration is given to the length of time and the extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the intent and ability of the Corporation
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value. Securities that have experienced an
other than temporary decline in value are written down to estimated fair value,
establishing a new cost basis with the amount of the write-down expensed as a
realized loss.
ACCOUNTING FOR LOANS -
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. 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.
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. At June
30, 2005, there were $21,954,000 of mortgage loans held for sale.
ALLOWANCE FOR LOAN LOSSES -
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
specific 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
general 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.
13
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, 2005, the allowance for loan losses totaled $4,462,000, representing
1.04% of total loans and 149.98% of non-performing loans. Please see "Provision
and Allowance for Loan Losses" in this Management's Discussion and Analysis for
further discussion of the Corporation's methodology in determining the allowance
as of June 30, 2005.
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, a Massachusetts
chartered commercial bank and trust company formed in 1962. The Bank has two
subsidiaries: Park West Securities Corporation and PWB&T. The Corporation is
headquartered in West Springfield, Massachusetts. As of June 30, 2005, the Bank
had eighteen offices located in Massachusetts and Connecticut that provide a
full range of retail banking services to individuals, businesses and nonprofit
organizations.
The primary source of Westbank's revenue is income from loans, deposits and
fees. The Corporation has experienced growth and increased revenue from its
commercial lending and leasing.
Westbank Corporation has a growth-oriented strategy focused on shareholder
value, expanding its banking franchise, unparalleled service and effective
capital management.
RECENT DEVELOPMENTS -
The Corporation continues to look for ways to increase its deposit base and
introduced a 30-month CD during July 2005. This new product is designed to give
the depositor increased flexibility at a premium interest rate.
The Corporation is planning to relocate its Southwick, Massachusetts, branch.
The new branch opening is planned for the first quarter of 2006. The Corporation
has formed an alliance with Infinex Financial Group to offer non-deposit
investment products at the Bank's branch offices. This new service will provide
a full range of investment services, annuities and other insurance products.
Management anticipates that the new financial services will increase
non-interest income over the next year.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2005 AND DECEMBER 31, 2004 -
Total assets increased by $12,789,000 to $768,336,000 at June 30, 2005 from
$755,547,000 at December 31, 2004, primarily due to an increase in loans
(including loans held for sale). At June 30, 2005, the Bank had an outstanding
loan sales commitment for $21,954,000 for loans in its portfolio.
Earning assets increased as a result of an increase in loans of $14,028,000,
offset by a decrease in securities and federal funds sold of $2,510,000. As of
June 30, 2005 and December 31, 2004, earning assets amounted to $724,975,000 or
94.4% of total assets and $713,457,000 or 94.4% of total assets. Earning assets
include a diverse portfolio of earning instruments, including loans and
securities issued by federal, state and municipal authorities. These earning
assets are financed through a combination of interest-bearing and interest-free
sources.
Securities decreased by $1,848,000, or 0.7%, to $265,981,000 at June 30, 2005
from $267,829,000 at December 31, 2004, primarily due to regularly scheduled
principal payments.
Net loans (excluding loans held for sale) decreased by $8,032,000, or 1.8%, to
$426,087,000 at June 30, 2005 from $434,119,000 at December 31, 2004.
.. Commercial real estate and commercial and industrial loans increased by
$15,880,000, or 8.4%, to $205,250,000 at June 30, 2005 from $189,370,000 at
December 31, 2004. o Residential real estate loans decreased by $24,818,000,
or 15.3%, to $137,088,000 at June 30, 2005 from $161,906,000 at December 31,
2004.
.. Residential real estate loans decreased primarily due to the $21,954,000 of
loans transferred to held-for-sale.
.. Indirect auto loans increased by $2,279,000, or 5.9%, to $41,183,000 at June
30, 2005 from $38,904,000 at December 31, 2004.
14
Total deposits increased by $6,733,000, or 1.1%, to $595,871,000 at June 30,
2005 from $589,138,000 at December 31, 2004. The primary driver for the increase
in deposits is NOW accounts, which increased by $19,250,000 or 45% from December
31, 2004 to June 30, 2005. The increase in NOW accounts is primarily attributed
to the new capital access account introduced in late 2004. This is a tiered
account that allows the depositor increased flexibility to access their funds,
while earning premium interest rates. Time deposits also had a marginal increase
of 1.6% or $5,378,000 from December 31, 2004 to June 30, 2005. These increases
were offset primarily by a decrease in savings and money market accounts of
14.1% or $17,372,000.
Stockholders' equity at June 30, 2005 and December 31, 2004 was $48,502,000 and
$47,462,000 respectively, which represented 6.31% of total assets as of June 30,
2005 and 6.28% of total assets as of December 31, 2004. The change is primarily
comprised of net income of $2,659,000 for the six months ended June 30, 2005,
issuance of 33,921 shares of common stock for $466,000, the declaration by the
Board of Directors of a dividend of $0.14 per share on January 20, 2005 and
April 20, 2005, which aggregated $1,324,000, the net unrealized loss on
securities available for sale amounting to $44,000 and amortization of unearned
compensation related to the restricted stock award of $117,000. Stockholders'
equity also decreased $878,000 due to the purchase of common stock for the
restricted stock award plan and increased $44,000 due to the income tax benefit
due to the exercise of non-qualified stock options.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE, 2005 AND
JUNE 30, 2004 -
GENERAL
Net income was $1,248,000, or $0.25 per diluted share, for the quarter ended
June 30, 2005 as compared to $1,444,000, or $0.30 per diluted share, for the
same period in 2004. Net interest income increased $101,000 to $5,763,000 for
the quarter ended June 30, 2005 as compared to $5,662,000 for the same period in
2004. The increase in net interest income was offset by a decrease in
non-interest income and an increase in non-interest expense. Income tax expense
decreased $84,000 to $597,000 for the quarter ended June 30, 2005 as compared to
$681,000 for the quarter ended June 30, 2004. The decrease in income tax expense
was attributable to higher non-taxable life insurance proceeds in 2005 as
compared to 2004.
Non-interest income decreased $64,000 to $902,000 for the quarter ended June 30,
2005 from $966,000 in the same period of 2004. The change in non-interest income
reflects a $30,000 increase in ATM and debit card fees, a $19,000 decrease in
income generated from service charges on deposit accounts, a $55,000 decrease in
mortgage servicing income, a $165,000 decrease on net gains on the sale of
securities, a $102,000 increase in the gain on the sale of mortgages, a $38,000
increase in life insurance proceeds and a $5,000 increase in other non-interest
income.
Non-interest expense was $4,820,000 and $4,503,000 for the quarters ended June
30, 2005 and June 30, 2004 respectively. Salaries and benefits increased by
$253,000, while other non-interest expense increased by $44,000 and occupancy
increased by $20,000. The increases are a direct result of general additions to
staff and the overall growth of the Corporation. In addition, another driver of
the increase in salaries and benefits is the recognition of $62,000 in
compensation expense related to the restricted stock awards for the three months
ended June 30, 2005 compared to $21,000 during the second quarter of 2004.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND
JUNE 30, 2004 -
GENERAL
Net income was $2,659,000 or $0.54 per diluted share for the six months ended
June 30, 2005 as compared to $3,029,000 or $0.63 per diluted share for the same
period in 2004. Net interest income increased $196,000 to $11,460,000 for the
six-month period ended June 30, 2005 as compared to $11,264,000 for the same
period in 2004. The increase in net interest income was offset by a decrease in
non-interest income and an increase in non-interest expense. Income tax expense
decreased $319,000 to $1,038,000 for the six months ended June 30, 2005 as
compared to $1,357,000 for the six months ended June 30, 2004. The decrease in
income tax expense was attributable to higher non-taxable life insurance
proceeds of $290,000 in 2005 as compared to 2004, which lowered the effective
tax rate to 28% for the six-month period ended June 30, 2005 as compared to an
effective tax rate of 31% for the same period in 2004.
Non-interest income decreased $92,000 to $2,119,000 for the six months ended
June 30, 2005 from $2,211,000 in the same period of 2004. The change in
non-interest income reflects a $42,000 increase in earnings from the Trust
Department of the Bank, a $46,000 decrease in income generated from service
charges on deposit accounts, a $24,000 decrease in mortgage servicing income, a
$131,000 decrease on net gains on the sale of securities, a $262,000 decrease in
the gain on the sale of mortgages, a $290,000 increase in life insurance
proceeds, a $63,000 increase in ATM and debit card fees and a $24,000 decrease
in other non-interest income.
15
Non-interest expense was $9,742,000 and $9,089,000 for the six-month periods
ended June 30, 2005 and 2004 respectively. Salaries and benefits increased by
$354,000, while other non-interest expense increased by $241,000 and occupancy
increased by $58,000. The increases are a direct result of general additions to
staff and the overall growth of the Corporation. In addition, another driver of
the increase in salaries and benefits is the recognition of $117,000 of
compensation expense related to the restricted stock awards during the first six
months of 2005 compared to $21,000 during the same period in 2004.
NET INTEREST AND DIVIDEND 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.
The following tables set forth the information relating to the Bank's average
balances at, and net interest income for, the three months and six months ended
June 30, 2005 and 2004, and reflect the average yield on assets and average cost
of liabilities for the periods indicated. Yields and costs are derived by
dividing interest income by the average balance of interest-earning assets and
interest expense by the average balance of interest-bearing liabilities for the
periods shown. Average balances are derived from actual daily balances over the
periods indicated. Interest income includes fees earned from making changes in
loan rates and terms and fees earned when real estate loans are prepaid or
refinanced.
16
Three months ended June 30,
---------------------------------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest(a) Rate Balance Interest (a) Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
temporary investments $ 153 $ 2 5.23% $ 1,157 $ 2 0.69%
Securities 272,718 3,087 4.53 277,746 3,244 4.67
Loans (b) 445,324 6,571 5.90 422,335 6,077 5.76
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 718,195 9,660 5.38% 701,238 $ 9,323 5.32%
- -----------------------------------------------------------------------------------------------------------------------------------
Loan loss allowance (4,566) (4,334)
All other assets 44,821 45,558
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 758,450 $ 742,462
===================================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits $ 499,850 $ 2,904 2.32% $ 498,394 $ 2,655 2.13%
Borrowed funds 125,329 959 3.06 115,404 973 3.37
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 625,179 $ 3,863 2.47% 613,798 $ 3,628 2.36%
- -----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 84,496 81,309
Other liabilities 1,064 2,106
Shareholders' equity 47,711 45,249
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 758,450 $ 742,462
===================================================================================================================================
Net Interest-Earning Assets $ 93,016 $ 87,440
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (tax equivalent
basis)/Interest rate spread (c) $ 5,797 2.91% $ 5,695 2.96%
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin (d) 3.23% 3.25%
- -----------------------------------------------------------------------------------------------------------------------------------
Deduct tax equivalent adjustment 34 33
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 5,763 $ 5,662
===================================================================================================================================
(a) Tax equivalent basis. Interest income on non-taxable investment securities
and loans includes the effects of the tax equivalent adjustments using the
marginal federal tax rate of 34% in adjusting tax exempt interest income to
a fully taxable basis.
(b) Average loan balances above include non-accrual loans. When a loan is
placed in non-accrual status, interest income is recorded to the extent
actually received in cash or is applied to reduce principal.
(c) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(d) Net interest margin represents net interest income (tax equivalent) divided
by average interest-earning assets.
For the quarter ended June 30, 2005, an increase in average earning assets of
$16,957,000 or 2.42% and a 6-basis-point increase in average rate of return
resulted in an increase in volume of $277,000 and an increase in rate of
$60,000. An increase in average interest-bearing liabilities of $11,381,000 or
1.85% and an 11-basis-point increase in average rate of interest paid
contributed to an increase in volume of $83,000 and an increase in rate of
$152,000.
17
Six months ended June 30,
-----------------------------------------------------------------------------------------
2005 2004
-----------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest (a) Rate Balance Interest (a) Rate
- -------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
temporary investments $ 156 $ 5 6.41% $ 2,474 $ 9 0.73%
Securities 274,976 6,237 4.54 257,115 6,112 4.75
Loans (b) 444,147 12,847 5.79 429,676 12,365 5.76
- -------------------------------------------------------------------------------------------------------------------------------
Total earning assets 719,279 $ 19,089 5.31% 689,265 $ 18,486 5.36%
- -------------------------------------------------------------------------------------------------------------------------------
Loan loss allowance (4,505) (4,397)
All other assets 44,911 44,633
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 759,685 $ 729,501
===============================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits $ 500,278 $ 5,655 2.26% $ 485,480 $ 5,183 2.14%
Borrowed funds 127,454 1,907 2.99 118,272 1,974 3.34
- -------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 627,732 $ 7,562 2.41% 603,752 $ 7,157 2.37%
- -------------------------------------------------------------------------------------------------------------------------------
Demand deposits 83,107 78,239
Other liabilities 1,324 2,020
Shareholders' equity 47,522 45,490
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 759,685 $ 729,501
===============================================================================================================================
Net Interest-Earning Assets $ 91,547 $ 85,513
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (tax equivalent
basis)/Interest rate spread (c) $ 11,527 2.90% $ 11,329 2.99%
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin (d) 3.21% 3.29%
- -------------------------------------------------------------------------------------------------------------------------------
Deduct tax equivalent adjustment 67 65
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 11,460 $ 11,264
===============================================================================================================================
(a) Tax equivalent basis. Interest income on non-taxable investment securities
and loans includes the effects of the tax equivalent adjustments using the
marginal federal tax rate of 34% in adjusting tax exempt interest income to
a fully taxable basis.
(b) Average loan balances above include non-accrual loans. When a loan is
placed in non-accrual status, interest income is recorded to the extent
actually received in cash or is applied to reduce principal.
(c) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(d) Net interest margin represents net interest income (tax equivalent) divided
by average interest-earning assets.
For the six months ended June 30, 2005, an increase in average earning assets of
$30,014,000 or 4.35% and a 5-basis-point decrease in average rate of return
resulted in an increase in volume of $831,000 and a decrease in rate of
$228,000. An increase in average interest-bearing liabilities of $23,980,000 or
3.97% and a 4-basis-point increase in average rate of interest paid contributed
to an increase in volume of $307,000 and an increase in rate of $98,000.
18
The following tables show how changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected
the Corporation's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided with respect to changes attributable to:
(1) changes in volume (change in volume multiplied by the prior rate), (2)
changes in rate (change in rate multiplied by the prior volume), and (3) the net
change. The changes attributable to both changes in volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
VOLUME RATE ANALYSIS
THREE MONTHS ENDED JUNE 30, 2005
COMPARED TO
(Dollar amounts in thousands) THREE MONTHS ENDED JUNE 30, 2004
- -----------------------------------------------------------------------
CHANGE DUE TO
------------------------
VOLUME RATE NET CHANGE
- -----------------------------------------------------------------------
Interest Income:
Loans $ 322 $ 173 $ 495
Securities (57) (101) (158)
Federal Funds 12 (12) 0
- -----------------------------------------------------------------------
Total Interest Earned 277 60 337
- -----------------------------------------------------------------------
Interest Expense:
Interest-bearing deposits 8 241 249
Other borrowed funds 75 (89) (14)
- -----------------------------------------------------------------------
Total Interest Expense 83 152 235
- -----------------------------------------------------------------------
Change in Net Interest Income $ 194 $ (92) $ 102
=======================================================================
Net interest and dividend income, on a tax-equivalent basis, increased by
$102,000 to $5,797,000 for the quarter ended June 30, 2005 as compared to
$5,695,000 for the same period in 2004. The net interest margin was 3.23% for
the quarter ended June 30, 2005 and 3.25% for the quarter ended June 30, 2004.
The yield of interest-earning assets increased 6 basis points to 5.38% for the
quarter ended June 30, 2005 from 5.32% for the same period in 2004. The average
cost of interest-bearing liabilities increased by 11 basis points to 2.47% for
the quarter ended June 30, 2005 from 2.36% for the same period in 2004.
VOLUME RATE ANALYSIS
SIX MONTHS ENDED JUNE 30, 2005
COMPARED TO
(Dollar amounts in thousands) SIX MONTHS ENDED JUNE 30, 2004
- -----------------------------------------------------------------------
CHANGE DUE TO
------------------------
VOLUME RATE NET CHANGE
- -----------------------------------------------------------------------
Interest Income:
Loans $ 419 $ 63 $ 482
Securities 413 (288) 125
Federal Funds (1) (3) (4)
- -----------------------------------------------------------------------
Total Interest Earned 831 (228) 603
- -----------------------------------------------------------------------
Interest Expense:
Interest-bearing deposits 161 311 472
Other borrowed funds 146 (213) (67)
- -----------------------------------------------------------------------
Total Interest Expense 307 98 405
- -----------------------------------------------------------------------
Change in Net Interest Income $ 524 $ (326) $ 198
=======================================================================
Net interest and dividend income, on a tax-equivalent basis, increased by
$198,000 to $11,527,000 for the six months ended June 30, 2005 as compared to
$11,329,000 for the same period in 2004. The net interest margin was 3.21% for
the six months ended June 30, 2005 as compared to 3.29% for the same period in
2004.
The decrease in the net interest margin was the result of the decline of
interest earned to earning assets. The yield of interest-earning assets
decreased 5 basis points to 5.31% for the six months ended June 30, 2005 from
5.36% for the same period in 2004. The average cost of interest-bearing
liabilities increased by 4 basis points to 2.41% for the six months ended June
30, 2005 from 2.37% for the same period in 2004.
19
PROVISION FOR LOAN LOSSES
For the quarters ended June 30, 2005 and 2004, the Bank provided no provision
for loan losses. For the quarters ended June 30, 2005 and 2004, recoveries
totaled $6,000 and $1,000 and charge-offs totaled $25,000 and $68,000
respectively. For the six-month periods ended June 30, 2005 and 2004, the Bank
provided $140,000 and no provision for loan losses, respectively. For the
six-month periods ended June 30, 2005 and 2004, recoveries totaled $20,000 and
$14,000 and charge-offs totaled $54,000 and $215,000 respectively. The allowance
was $4,462,000 or 1.04% of total loans at June 30, 2005 as compared to
$4,356,000 or 0.99% of total loans at December 31, 2004. The provision for loan
losses brings the Bank's allowance for loan losses to a level determined
appropriate by management.
Non-performing loans increased $840,000 to $2,975,000 at June 30, 2005, or 0.69%
of total loans, as compared to $2,135,000 or 0.49% of total loans at December
31, 2004, primarily due to the recognition of a commercial loan as
non-performing. The increase in non-performing loans is primarily the result of
one commercial loan relationship transferred to non-performing status.
Management anticipates the non-performing commercial loan to be paid in full
during the second half of 2005. The percentage of non-performing and past due
loans compared to total assets at June 30, 2005 and December 31, 2004 amounted
to 0.39% and 0.28% respectively. The financial outlook for the commercial loan
customer that had its loan classified as impaired at March 31, 2005 has
improved. Accordingly, that loan has been removed from impaired status at June
30, 2005.
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,
2005, 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 Banks
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.
Three Over Three Over One
Months Months to Year to Over Five
(Dollar amounts in thousands) or Less One Year Five Years Years Total
- --------------------------------------------------------------------------------------------------
Earning Assets $ 98,632 $ 48,081 $ 215,425 $ 362,837 $ 724,975
Interest-Bearing
Liabilities 145,396 198,736 279,954 8,107 632,193
- --------------------------------------------------------------------------------------------------
Interest Rate
Sensitivity Gap $ (46,764) $ (150,655) $ (64,529) $ 354,730 $ 92,782
==================================================================================================
Cumulative Interest
Rate Sensitivity Gap $ (46,764) $ (197,419) $ (261,948) $ 92,782
Interest Rate
Sensitivity Gap Ratio (6.45)% (20.78)% (8.90)% 48.93%
Cumulative Interest
Rate Sensitivity Gap Ratio (6.45)% (27.23)% (36.13)% 12.80%
The presentation of a run-off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $8,697,000 and
$6,207,000, 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 liability 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.
20
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Three Months Ended June 30, Six Months Ended June 30,
- ----------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 4,481 $ 4,294 $ 4,356 $ 4,428
Provision for loan losses 140
- ----------------------------------------------------------------------------------------------------------
4,481 4,294 4,496 4,428
- ----------------------------------------------------------------------------------------------------------
Less charge-offs:
Loans secured by real estate 82
Commercial and industrial loans 4 49 4 100
Consumer loans 21 19 50 33
- ----------------------------------------------------------------------------------------------------------
25 68 54 215
- ----------------------------------------------------------------------------------------------------------
Add recoveries:
Loans secured by real estate 1 1
Commercial and industrial loans 10 1
Consumer loans 6 10 12
- ----------------------------------------------------------------------------------------------------------
6 1 20 14
- ----------------------------------------------------------------------------------------------------------
Net charge-offs 19 67 34 201
- ----------------------------------------------------------------------------------------------------------
Balance at end of period $ 4,462 $ 4,227 $ 4,462 $ 4,227
==========================================================================================================
Net charge-offs (recoveries) to:
Average loans - .02% .01% .05%
Loans at end of period - .02% .01% .05%
Allowance for loan losses at January 1 .44% 1.51% .78% 4.54%
Allowance for loan losses at June 30
as a percentage of
Average loans 1.00% 1.00% 1.00% .98%
Loans at end of period 1.04% .99% 1.04% .99%
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
specific 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
general 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.
21
The general reserve allocation incorporates general business and economic
conditions, credit quality trends, loan concentrations, industry conditions
within portfolio segments and overall delinquency levels.
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, 2005 and 2004, the Bank made no additions to the
allowance for loan losses. For the quarters ended June 30, 2005 and 2004,
recoveries totaled $6,000 and $1,000, and charge-offs totaled $25,000 and
$68,000 respectively. At June 30, 2005, management believes the allowance for
loan losses is appropriate based on the stable economic conditions in the Bank's
overall market. Credit quality and delinquency trends are showing a slight
improvement over earlier in the year and management considers the loan portfolio
to have a manageable level of risk.
NON-ACCRUAL, PAST DUE AND NON-PERFORMING LOANS
June 30, March 31, December 31, September 30, June 30,
(Dollar amounts in thousands) 2005 2005 2004 2004 2004
- -------------------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 2,012 $ 4,105 $ 1,614 $ 1,245 $ 987
- -------------------------------------------------------------------------------------------------------------------------
Loans contractually past
due 90 days or more
still accruing 963 537 521 357 173
- -------------------------------------------------------------------------------------------------------------------------
Total non-performing loans $ 2,975 $ 4,642 $ 2,135 $ 1,602 $ 1,160
- -------------------------------------------------------------------------------------------------------------------------
Non-performing loans
as a percentage of total loans 0.69% 1.05% 0.49% 0.37% 0.27%
- -------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses
as a percentage of
non-performing loans 149.98% 96.53% 204.03% 368.36% 364.40%
- -------------------------------------------------------------------------------------------------------------------------
Other real estate owned - net 630 630 630 706 706
- -------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 3,605 $ 5,272 $ 2,765 $ 2,308 $ 1,866
- -------------------------------------------------------------------------------------------------------------------------
Non-performing assets as a
percentage of total assets 0.47% 0.69% 0.37% 0.31% 0.24%
- -------------------------------------------------------------------------------------------------------------------------
Non-performing loans increased $840,000 to $2,975,000 at June 30, 2005, or 0.69%
of total loans, as compared to $2,135,000 or 0.49% of total loans at December
31, 2004, primarily due to the recognition of a commercial loan as
non-performing. The increase in non-performing loans is primarily the result of
one commercial loan relationship transferred to non-performing status.
Management anticipates the non-performing commercial loan to be paid in full
during the second half of 2005. The financial outlook for the commercial loan
customer that had its loan classified as impaired at March 31, 2005 has
improved. Accordingly, the loan has been removed from impaired status at June
30, 2005.
22
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 primary sources of
liquidity are principal and interest payments on loans and investment
securities, as well deposits and sales of available-for-sale securities and
mortgage loans. Loan repayments and maturing investments are a relatively
predictable source of funds, while deposit flows and mortgage prepayments are
greatly influenced by interest rates and local and general economic factors.
In addition, the Corporation has significant borrowing capacity to fund its
liquidity needs. The majority of borrowings to date have consisted primarily of
advances from the Federal Home Loan Bank of Boston (FHLB), of which the Bank is
a member. Under the terms of the collateral agreement with the FHLB, the Bank
pledges residential mortgage loans and mortgage-backed securities, as well as
the Bank's stock in the FHLB, as collateral for such transactions. During the
second quarter of 2005, the Corporation increased its utilization of borrowings
and increased its use of deposits as a source of funds. The average balance of
borrowings for the second quarters of 2005 and 2004 were $125,329,000 and
$115,404,000 respectively.
The primary source of funds for the payment of dividends by the Corporation is
dividends paid to the Corporation by the Bank. The Corporation has not used any
off-balance-sheet financing arrangements for liquidity purposes.
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 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, 2005, the Corporation maintained cash balances, short-term
investments and investments available for sale totaling $164,028,000,
representing 21.35% of total assets, versus $168,559,000 or 22.31% of total
assets at December 31, 2004. Management of the Corporation believes that its
current liquidity is sufficient to meet current and anticipated funding and
operating needs.
23
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:
Total borrowings $ 50,570 $ 13,030 $ 30,536 $ 8,000 $ 102,136
Payable to Westbank Capital Trust II and III 0 0 0 17,526 17,526
Annual rental commitments under non-
cancelable operating leases 306 318 115 128 867
- -------------------------------------------------------------------------------------------------------------------------
$ 50,876 $ 13,348 $ 30,651 $ 25,654 $ 120,529
=========================================================================================================================
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 $ 27,684 $ 154 $ 0 $ 0 $ 27,838
Loan sales commitments 22,305 0 0 0 22,305
Undisbursed portion of loans in process and
unused portions of lines of credit 13,228 24,313 2,389 22,955 62,885
- -------------------------------------------------------------------------------------------------------------------------
$ 63,217 $ 24,467 $ 2,389 $ 22,955 $ 113,028
=========================================================================================================================
At June 30, 2005, the Corporation had certificates of deposit maturing within
the next 12 months amounting to $214,263,000. Based on historical experience,
the Corporation anticipates that a significant portion of the maturing
certificates of deposit will be renewed with the Corporation.
On September 20, 2004, the Corporation completed a private placement of an
aggregate of $17,000,000 of trust preferred securities through two newly-formed
Delaware trust affiliates, Westbank Capital Trust II ("Trust II") and Westbank
Capital Trust III ("Trust III") (collectively, "the Trusts"), as part of a
pooled transaction with several other financial institutions. As part of this
transaction, the Corporation issued an aggregate principal amount of $8,763,000
of floating rate junior subordinated deferrable interest debentures to Trust II,
which debentures bear an interest rate that resets quarterly at 3-month LIBOR
plus 2.19% and an aggregate principal amount of $8,763,000 of fixed/floating
rate junior subordinated deferrable interest to Trust III, which debentures bear
an initial interest rate of 5.98% until December 2009, at which time they will
be reset quarterly at 3-month LIBOR plus 2.19%. These debentures were each
issued pursuant to the terms of an indenture dated September 20, 2004 between
the Corporation and Wilmington Trust Corporation. The debentures obligate the
Corporation to pay interest on their principal sum quarterly in arrears on March
20, June 20, September 20 and December 20 of each year. As long as the
Corporation is current in its interest payments, it has the right to defer
payments of principal on the debentures by extending the interest payment period
on the debentures for up to 20 consecutive quarterly periods. The debentures
mature on September 20, 2034 but may be redeemed by the Corporation, in whole or
in part, beginning on September 20, 2009, or in whole within 120 days of the
occurrence of certain special redemption events. Special redemption events
relate to the regulatory capital treatment of the issuances, the Trusts not
being deemed investment companies and the non-occurrence of certain tax events.
The proceeds were used to redeem the security issued by Westbank Capital
Trust I.
24
REGULATORY CAPITAL
At June 30, 2005, the Corporation exceeded each of the applicable regulatory
capital requirements. As of June 30, 2005, 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 in the
following table. There are no conditions or events since that notification that
management believes have changed the Bank's category. The Corporation's and the
Bank's actual capital ratios as of June 30, 2005 are also presented in the
following table.
Minimum for Capital
Actual Adequacy Purposes
--------------------------- ---------------------------
Amount Ratio Amount Ratio
------------ ------------ ------------ ------------
June 30, 2005
Total Capital (to Risk Weighted Assets)
Consolidated $ 60,867 13.01% $ 39,831 8.00%
Bank 59,106 12.67 37,322 8.00
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 55,039 11.76 19,916 4.00
Bank 54,637 11.71 18,661 4.00
Tier 1 Capital (to Average Assets)
Consolidated 55,039 7.34 29,984 4.00
Bank 54,637 7.27 30,051 4.00
The primary source of funds for payments of dividends by the Corporation are
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 reasonable 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
is 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 through loan sales agreements. For more information on loan sales
agreements, see Note J, "Loan Sales Commitments."
25
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 2004 Annual Report
filed on Form 10-K with the Securities and Exchange Commission.
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 (i) recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and (ii) accumulated and
communicated to the Corporation's management, including the Corporation's
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. 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 extent 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.
26
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. 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.
There have been no repurchases of the Corporation's common stock
during the three months ended June 30, 2005.
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
The Corporation held its Annual Meeting of Shareholders on April 20,
2005. At the Annual Meeting, the shareholders of the Corporation
took the following actions:
a. Elected Mark A. Beauregard, Robert J. Perlak and James E.
Tremble to serve until the 2008 Annual Meeting of Shareholders.
The voting results for the election of Directors were as
follows:
Name For Withheld
------------------ --------- --------
Mark A. Beauregard 4,005,205 40,313
Robert J. Perlak 4,009,664 35,854
James E. Tremble 3,999,972 45,546
ITEM 5. Other Information - None
ITEM 6. 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-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer, pursuant to
Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer, pursuant to
Section 1350
32.2 Certification of Chief Financial Officer, pursuant to
Section 1350
* 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: August 5, 2005 /s/ Donald R. Chase
-------------------------------------
Donald R. Chase
President and Chief Executive Officer
Date: August 5, 2005 /s/ John M. Lilly
-------------------------------------
John M. Lilly
Treasurer and Chief Financial Officer
28