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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 September 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 the registrant as specified in its charter)
Massachusetts 04-2830731
(State of other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
225 Park Avenue, West Springfield, Massachusetts 01090-0149
(Address of principal executive offices) (Zip Code)
(413) 747-1400
(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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Common stock, par value $2.00 per share: 4,769,459 shares outstanding as of
October 31, 2005.
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WESTBANK CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Stockholders' Equity 5
Condensed Consolidated Statements of Comprehensive Income 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7-10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-24
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 25
ITEM 4. Controls and Procedures 25
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
ITEM 3. Defaults Upon Senior Securities 26
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 5. Other Information 26
ITEM 6. Exhibits 26
Signatures 27
2
ITEM 1. FINANCIAL STATEMENTS
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands, except share data) September 30, 2005 December 31, 2004
- ------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks:
Non-interest-bearing $ 15,152 $ 12,451
Interest-bearing 9 34
Federal funds sold 61 669
- ------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 15,222 13,154
- ------------------------------------------------------------------------------------------------------
Investment securities available for sale, at fair value 154,386 155,405
Investment securities held to maturity, at amortized cost
(fair value of $127,117 at September 30, 2005
and $112,158 at December 31, 2004) 128,946 112,424
- ------------------------------------------------------------------------------------------------------
Total investment securities 283,332 267,829
- ------------------------------------------------------------------------------------------------------
Investment in Federal Home Loan Bank stock 6,450 6,450
Loans, net of allowance for loan losses ($4,283 at
September 30, 2005 and $4,356 at December 31, 2004) 431,337 434,119
Property and equipment, net 7,255 6,885
Accrued interest receivable 3,637 3,655
Other real estate owned 630 630
Goodwill 8,837 8,837
Bank-owned life insurance 9,073 9,204
Investment in unconsolidated investee 526 526
Deferred income taxes 703 1,477
Other assets 4,084 2,781
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 771,086 $ 755,547
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 84,338 $ 83,864
Interest-bearing 505,457 505,274
- ------------------------------------------------------------------------------------------------------
Total deposits 589,795 589,138
Borrowed funds 111,574 97,354
Interest payable on deposits and borrowings 571 550
Junior subordinated debentures 17,526 17,526
Other liabilities 4,089 3,517
- ------------------------------------------------------------------------------------------------------
Total liabilities 723,555 708,085
- ------------------------------------------------------------------------------------------------------
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
4,770,589 in 2005 and 4,746,397 in 2004 9,541 9,493
Unearned compensation restricted stock (1,479) (1,652)
Additional paid in capital 19,004 20,377
Retained earnings 21,835 19,958
Treasury stock, at cost (9,315 shares at September 30, 2005
and 28,818 shares at December 31, 2004) (167) (606)
Accumulated other comprehensive loss (1,203) (108)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 47,531 47,462
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 771,086 $ 755,547
======================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) --------------------------------- ---------------------------------
(Dollar amounts in thousands, except per share data) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Interest and Dividend Income:
Interest and fees on loans $ 6,528 $ 6,140 $ 19,315 $ 18,448
Interest and dividend income on securities 3,102 3,227 9,332 9,331
Interest on federal funds sold 2 8 7 17
- --------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 9,632 9,375 28,654 27,796
Interest expense:
Interest on deposits 3,121 2,645 8,776 7,828
Interest on borrowed funds 928 1,048 2,835 3,022
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 4,049 3,693 11,611 10,850
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Net interest income 5,583 5,682 17,043 16,946
Provision for loan losses - 150 140 150
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Net interest income after
provision for loan losses 5,583 5,532 16,903 16,796
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Non-interest income:
Gain on sale of securities - 280 96 507
Other-than-temporary impairment
of investment securities - (583) - (583)
Gain on sale of loans 250 14 415 441
Other non-interest income 752 778 2,610 2,335
- --------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 1,002 489 3,121 2,700
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Non-interest expense:
Salaries and benefits 2,736 2,644 8,253 7,807
Other non-interest expense 1,682 2,426 5,003 5,506
Occupancy - net 420 387 1,324 1,233
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Total non-interest expense 4,838 5,457 14,580 14,546
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Income before income taxes 1,747 564 5,444 4,950
Provision for income taxes 549 112 1,587 1,468
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Net Income $ 1,198 $ 452 $ 3,857 $ 3,482
================================================================================================================================
Earnings per share
Basic $ 0.26 $ 0.10 $ 0.82 $ 0.76
Diluted $ 0.25 $ 0.09 $ 0.79 $ 0.72
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 NINE MONTHS ENDED SEPTEMBER 30, 2005
COMMON STOCK UNEARNED ACCUMULATED
(Unaudited) ------------------ COMPENSATION ADDITIONAL TREASURY STOCK OTHER
(Dollar amounts in thousands, PAR RESTRICTED PAID IN RETAINED ----------------- COMPREHENSIVE
except share data) SHARES VALUE STOCK CAPITAL EARNINGS SHARES AMOUNT INCOME (LOSS) TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE - JANUARY 1, 2004 4,523,480 $ 9,047 $ 14,524 $ 22,724 114,232 $ (1,692) $ 672 $ 45,275
===================================================================================================================================
Net income 4,611 4,611
Cash dividends declared
($.56 per share) (2,561) (2,561)
Issuance of shares for
stock option plan (611) (92,847) 1,369 758
Issuance of shares for
dividend reinvestment and
stock purchase plan 126 (34,076) 561 687
Change in unrealized
gain/(loss) on securities
available for sale (780) (780)
Purchase of common stock 41,395 (842) (842)
Income tax benefit for
exercise of non-qualified
stock options 182 182
Stock option compensation 11 11
Issuance of restricted stock
award (1,785) 1,785 -
Amortization of unearned
compensation 133 133
5% common stock dividend 222,917 446 4,360 (4,816) 114 (2) (12)
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BALANCE - DECEMBER 31, 2004 4,746,397 9,493 (1,652) 20,377 19,958 28,818 (606) (108) 47,462
===================================================================================================================================
Net income 3,857 3,857
Cash dividends declared
($.42 per share) (1,980) (1,980)
Issuance of shares for
stock option plan (200) (14,356) 303 103
Issuance of shares for
dividend reinvestment and
stock purchase plan 24,192 48 330 (10,282) 221 599
Purchase of common stock 5,135 (85) (85)
Change in unrealized
gain/(loss) on securities
available for sale (1,095) (1,095)
Acquisition of common
stock for Restricted Stock
Plan (Note G) (1,547) (1,547)
Income tax benefit for
exercise of non-qualified
stock options 44 44
Amortization of unearned
compensation (Note G) 173 173
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BALANCE - SEPTEMBER 30, 2005 4,770,589 $ 9,541 $ (1,479) $ 19,004 $ 21,835 9,315 $ (167) $ (1,203) $ 47,531
===================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited) ---------------------------------- ----------------------------------
(Dollar amounts in thousands) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,198 $ 452 $ 3,857 $ 3,482
- ----------------------------------------------------------------------------------------------------------------------------------
Change in unrealized gain (loss) on securities
available for sale, net of income tax expense
(benefit) of $(605) and $1,028 for the three-month and
$(596) and $(410) for the nine-month periods ended
September 30, 2005 and 2004, respectively (1,051) 1,996 (1,038) (796)
Less reclassification adjustment for gains
included in net income, net of income tax expense
(benefit) of $- and $103 for the three-month and
$39 and $(26) for the nine-month periods ended
September 30, 2005 and 2004, respectively - 200 (57) 50
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Other Comprehensive (Loss) Income (1,051) 2,196 (1,095) (746)
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Comprehensive Income $ 147 $ 2,648 $ 2,762 $ 2,736
==================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
5
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited) ----------------------------------
(Dollar amounts in thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 3,857 $ 3,482
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 140 150
Net amortization of premiums and discounts
on investments and loans 9 (108)
Loan originations - available-for-sale (2,063) (4,134)
Proceeds from sale of available-for-sale loans 2,061 4,193
Depreciation and amortization 603 641
Gain on sale of securities (96) (507)
Other-than-temporary impairment of investment securities - 583
Gain on sale of loans (415) (441)
(Increase) decrease in mortgage servicing asset (222) 38
Excess bank-owned life insurance proceeds over book value (472) (182)
Increase in cash surrender value of bank-owned life insurance (236) (262)
Gain on sale of other assets (1) -
Deferred income taxes 774 (1,283)
Stock compensation 173 80
Income tax benefit for exercise of non-qualified stock options 44 102
Changes in assets and liabilities:
Accrued interest receivable 18 (492)
Other assets (477) 765
Accrued interest payable on deposits and borrowings 21 32
Other liabilities 572 1,835
=====================================================================================================================
Net cash provided by operating activities 4,290 4,492
=====================================================================================================================
Investing activities:
Securities:
Held to maturity:
Purchases (26,270) (72,256)
Proceeds from maturities and principal payments 9,725 9,268
Available for sale:
Purchases (7,621) (78,393)
Proceeds from sales 1,918 42,220
Proceeds from maturities and principal payments 5,080 91,258
Purchase of loans (19,648) -
Net increase in loans (21,893) (12,771)
Proceeds from loan sales 44,630 17,094
Purchases of property and equipment (973) (691)
Proceeds from bank-owned life insurance 839 484
Proceeds from sale of other assets 24 -
=====================================================================================================================
Net cash used in investing activities (14,189) (3,787)
=====================================================================================================================
Financing activities:
Net increase in deposits 657 57,638
Net decrease in short-term borrowings (2,429) (31,789)
Proceeds from long-term borrowing 20,000 2,500
Repayment of long-term borrowings (3,351) (6,623)
Proceeds from junior subordinated debentures - 17,526
Repayment of junior subordinated debentures - (17,526)
Purchase of common stock (1,632) (816)
Proceeds from exercise of stock options,
stock purchase plan and dividend reinvestment 702 1,161
Dividends paid (1,980) (1,916)
=====================================================================================================================
Net cash provided by financing activities 11,967 20,155
=====================================================================================================================
Increase in cash and cash equivalents 2,068 20,860
Cash and cash equivalents at beginning of period 13,154 14,678
=====================================================================================================================
Cash and cash equivalents at end of period $ 15,222 $ 35,538
=====================================================================================================================
Cash paid:
Interest on deposits and borrowings $ 11,590 $ 10,818
Income taxes 972 1,643
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 (1,095) (746)
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
NINE MONTHS ENDED SEPTEMBER 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 September 30, 2005, the Bank had
seventeen 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 nine-month periods ended September 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 nine-month period
ended September 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 September 30, 2004 financial
statements have been reclassified to conform to the September 30, 2005
presentation. The reclassifications consist primarily of changes to the
Statement of Cash Flows for the nine months ended September 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 was delayed. 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 FASB
Staff Position (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 the fourth quarter of 2005.
It will be effective for periods beginning after December 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 September 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 September 30, 2005 are approximately
$281,000, all of which will expire within one year. 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 Corporation's defined benefit portion of the Directors
and Executives Supplemental Retirement Plan includes the following components:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------
Service cost $ 41,822 $ 30,319 $ 118,186 $ 90,957
Interest cost 56,960 43,032 162,710 129,096
Amortization of prior service cost 31,235 31,235 93,705 93,705
Amortization of net loss 20,571 - 47,508 -
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 150,588 $ 104,586 $ 422,109 $ 313,758
===========================================================================================================
The weighted average assumptions utilized to determine the benefit obligation
and net benefit cost are as follows:
At September 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 nine-month period ended September 30, 2005, the Corporation, through a
Trustee, purchased 92,505 shares of common stock, for a total purchase price of
$1,547,000, 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 nine
months ended September 30, 2005, the Corporation recognized compensation expense
of $173,000 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 would have been
recognized for the three months ended September 30, 2005 and 2004 respectively.
For the nine months ended September 30, 2005 and 2004, the Corporation would
have recognized additional compensation expense totaling $28,900 and $12,900
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-month periods ended September 30, 2005 and
2004, 88,900 and 100,905 potentially dilutive common shares, respectively, were
excluded from the following table because the effect was antidilutive. For the
nine-month periods ended September 30, 2005 and 2004, 95,276 and 69,937
potentially dilutive common shares, respectively, were excluded from the
following table because the effect was antidilutive. The following table sets
forth the components of basic and diluted earnings per share:
Three Months Ended September 30,
----------------------------------
(Dollar amounts in thousands, except per-share data) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 1,198 $ 452
Weighted average shares outstanding
Basic weighted average shares outstanding 4,694,043 4,694,391
Dilutive potential common shares 176,512 255,705
- ---------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 4,870,555 4,950,096
- ---------------------------------------------------------------------------------------------------------------------
Earnings per share
Basic earnings per share $ 0.26 $ 0.10
Diluted earnings per share $ 0.25 $ 0.09
- ---------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
----------------------------------
(Dollar amounts in thousands, except per-share data) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 3,857 $ 3,482
Weighted average shares outstanding
Basic weighted average shares outstanding 4,717,454 4,572,912
Dilutive potential common shares 189,045 258,202
- ---------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 4,906,499 4,831,114
- ---------------------------------------------------------------------------------------------------------------------
Earnings per share
Basic earnings per share $ 0.82 $ 0.76
Diluted earnings per share $ 0.79 $ 0.72
- ---------------------------------------------------------------------------------------------------------------------
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 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, revise or update any particular forward-looking statement.
11
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
September 30, 2005, there were no mortgage loans held for sale.
ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR UNFUNDED LOAN COMMITMENTS -
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.
12
The appropriateness of the allowance for loan losses is evaluated quarterly by
management. Factors considered in evaluating the appropriateness of the
allowance include the size and concentration of the portfolio, previous loss
experience, current economic conditions and their effect on borrowers, the
financial condition of individual borrowers and the related performance of
individual loans in relation to contract terms. The provision for loan losses
charged to operating expense is based upon management's judgment of the amount
necessary to maintain the allowance at an appropriate level to absorb losses.
Management also retains an independent loan review consultant to provide advice
on the appropriateness of the loan loss allowance. Loan losses are charged
against the allowance for loan losses when management believes the
collectibility of the principal is unlikely.
At September 30, 2005, the allowance for loan losses totaled $4,283,000,
representing 0.98% of total loans and 214.90% 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 September 30, 2005.
In addition to the allowance for loan losses, the Corporation also maintains an
allowance for losses for unfunded loan commitments ("the reserve"). The reserve
relates to available home equity lines, commercial lines of credit, and unfunded
commercial and construction loans. At September 30, 2005, the reserve totaled
$149,000 and is included in other liabilities in the accompanying condensed
consolidated balance sheet. At December 31, 2004, the reserve totaling
approximately $160,000 was included in the allowance for loan losses. On a
quarterly basis, management evaluates and determines a reserve level appropriate
for the unfunded loan commitments.
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 September 30, 2005, the
Bank had seventeen 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 interest earned on loans and
securities and fee income. 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 is always striving to find new and improved ways to serve its
customers. During 2005, two new services have been introduced. The Corporation
now offers non-deposit investment products at the Bank's branch offices. These
non-deposit investment products are made available through an alliance with
Infinex Financial Group. These services include a full range of investment
services, annuities and other insurance products. On October 26, 2005, the
Corporation launched "Overdraft Privilege". Overdraft Privilege is an overdraft
protection service for all Westbank checking customers. Westbank will honor
overdrafts up to a pre-determined limit based on type of checking account.
Management anticipates that these new services will increase non-interest income
over the next year.
The Corporation is planning to relocate its Southwick, Massachusetts, branch.
The new Southwick branch opening is planned for the first quarter of 2006. In
August 2005, the branch located at 1 East Silver Street in Westfield,
Massachusetts, was closed. The majority of the customers from the closed branch
have been incorporated into the Bank's Westfield branch located at 10 Broad
Street.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 -
Total assets increased by $15,539,000 to $771,086,000 at September 30, 2005 from
$755,547,000 at December 31, 2004, primarily due to an increase in
held-to-maturity investment securities.
Earning assets increased as a result of an increase in investments of
$15,503,000 offset by a decrease in loans, federal funds sold and
interest-bearing cash of $3,488,000. As of September 30, 2005 and December 31,
2004, earning assets amounted to $725,472,000 or 94.0% of total assets and
$713,457,000 or 94.4% of total assets, respectively. 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 increased by $15,503,000, or 5.8%, to $283,332,000 at September 30,
2005 from $267,829,000 at December 31, 2004, primarily due to the purchase of
held-to-maturity investment securities.
Net loans decreased by $2,782,000, or 0.6%, to $431,337,000 at September 30,
2005 from $434,119,000 at December 31, 2004.
13
o Commercial real estate and commercial and industrial loans increased by
$21,838,000, or 11.5%, to $211,208,000 at September 30, 2005 from
$189,370,000 at December 31, 2004.
o Residential real estate loans decreased by $26,037,000, or 16.1%, to
$135,869,000 at September 30, 2005 from $161,906,000 at December 31, 2004.
The primary driver for the decrease in residential real estate loans is the
sale of approximately $44,000,000 of fixed-rate, long-term mortgages during
the second and third quarters of 2005. This decrease is offset by a
purchase of approximately $19,000,000 in shorter-term mortgages during the
second quarter of 2005.
o Indirect auto loans increased by $2,111,000, or 5.4%, to $41,015,000 at
September 30, 2005 from $38,904,000 at December 31, 2004.
Total deposits increased by $657,000, or 0.1%, to $589,795,000 at September 30,
2005 from $589,138,000 at December 31, 2004. The primary driver for the increase
in deposits is NOW accounts, which increased by $22,956,000 or 53.6% from
December 31, 2004 to September 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. Demand deposit
accounts also had a marginal increase of 0.6% or $475,000 from December 31, 2004
to September 30, 2005. These increases were offset primarily by a decrease in
savings and money market accounts of 17.8% or $21,964,000.
Stockholders' equity at September 30, 2005 and December 31, 2004 was $47,531,000
and $47,462,000 respectively, which represented 6.16% of total assets as of
September 30, 2005 and 6.28% of total assets as of December 31, 2004. The change
is primarily comprised of net income of $3,857,000 for the nine months ended
September 30, 2005, issuance of 48,830 shares of common stock for $702,000, the
payment of quarterly dividends of $0.14 per share on January 20, 2005, April 20,
2005 and July 20, 2005, which aggregated $1,980,000, the net unrealized loss on
securities available for sale amounting to $1,095,000 and amortization of
unearned compensation related to the restricted stock award of $173,000.
Stockholders' equity also decreased $1,547,000 due to the purchase of common
stock for the restricted stock plan and increased $44,000 due to the income tax
benefit due to the exercise of non-qualified stock options. During the third
quarter of 2005, the Corporation resumed its share repurchase plan with the
repurchase of 5,135 shares of common stock for a total of $85,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
AND SEPTEMBER 30, 2004 -
GENERAL
Net income was $1,198,000, or $0.25 per diluted share, for the quarter ended
September 30, 2005 as compared to $452,000, or $0.09 per diluted share, for the
same period in 2004. Net interest income decreased $99,000 to $5,583,000 for the
quarter ended September 30, 2005 as compared to $5,682,000 for the same period
in 2004. The decrease in net interest income was offset by an increase in
non-interest income and a decrease in non-interest expense.
Non-interest income increased $513,000 to $1,002,000 for the quarter ended
September 30, 2005 from $489,000 in the same period of 2004. The increase in
non-interest income is primarily due to an other-than-temporary impairment
charge of $583,000 recognized in the third quarter of 2004. The increase in
non-interest income is also due to an increase in gains related to the sale of
loans for the quarter ended September 30, 2005 as compared to the quarter ended
September 30, 2004. Other non-interest income decreased slightly for the three
months ended September 30, 2005 as compared to the same period in 2004,
primarily due to a decrease of $27,000 in income generated from service charges
on deposit accounts and a $6,000 decrease in mortgage servicing income. These
decreases were partially offset by an increase in ATM and debit card fees
totaling approximately $7,500.
Non-interest expense was $4,838,000 and $5,457,000 for the quarters ended
September 30, 2005 and September 30, 2004 respectively. Salaries and benefits
increased by $92,000 and occupancy increased by $33,000, while other
non-interest expense decreased by $744,000. The increases in salaries and
benefits and occupancy are primarily the result of general additions to staff
and overall growth of the Corporation. The decrease in other non-interest
expense is primarily the result of a write-off of origination costs totaling
$807,000 during the third quarter of 2004. These origination costs were related
to the Corporation's initial trust preferred financing, which was redeemed
during the third quarter of 2004. Not including the write-off of origination
costs, there was a $63,000 increase in other non-interest expense for the
quarter ended September 30, 2005 as compared to the same period in 2004.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
SEPTEMBER 30, 2004 -
GENERAL
Net income was $3,857,000 or $0.79 per diluted share for the nine months ended
September 30, 2005 as compared to $3,482,000 or $0.72 per diluted share for the
same period in 2004. Net interest income increased $97,000 to $17,043,000 for
the nine-month period ended September 30, 2005 as compared to $16,946,000 for
the same period in 2004. The increase in net interest income was partially
offset by an increase in non-interest expense.
Non-interest income increased $421,000 to $3,121,000 for the nine months ended
September 30, 2005 from $2,700,000 in the same period of 2004. The increase in
non-interest income is primarily due to an other-than-temporary impairment
charge of $583,000 recognized in the third quarter of 2004. In addition, other
non-interest income increased by $275,000 for the nine-month period ended
September 30, 2005 as compared to the nine-month period ended September 30,
2004. The main drivers of the increase in other non-interest income were an
increase in life insurance proceeds totaling $290,000, higher ATM and debit card
fees amounting to $70,000, and higher trust department earnings of $50,000.
These increases were partially offset by a decrease of $73,000 in income
generated from service charges on deposit accounts and a $30,000 decrease in
mortgage servicing income.
14
Non-interest expense was $14,580,000 and $14,546,000 for the nine-month periods
ended September 30, 2005 and 2004 respectively. Salaries and benefits increased
by $446,000 and occupancy increased by $91,000, while other non-interest expense
decreased by $503,000. The increases in salaries and benefits and occupancy are
primarily the result of general additions to staff and overall growth of the
Corporation and an additional $93,000 in stock compensation expense recognized
in the nine months ended September 30, 2005 as compared to the same period in
the prior year. The decrease in other non-interest expense is primarily the
result of a write-off of origination costs totaling $807,000 during the third
quarter of 2004. These origination costs were related to the Corporation's
initial trust preferred financing, which was redeemed during the third quarter
of 2004. Excluding the write-off of origination costs, there was an increase of
$304,000 in other non-interest expense for the nine-month period ended September
30, 2005 as compared to the same period in 2004. The main drivers of the
increase in other non-interest expense were higher advertising costs and audit
and exam fees. The increase in advertising costs is the result of the
increasingly competitive banking environment in Western Massachusetts and
Connecticut.
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 nine months ended
September 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.
15
Three Months Ended September 30,
------------------------------------------------------------------------------------------
2005 2004
- ------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest (a) Rate Balance Interest (a) Rate
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Federal funds sold and
temporary investments $ 255 $ 2 3.14% $ 1,971 $ 8 1.62%
Securities 274,477 3,106 4.53 278,800 3,231 4.64
Loans (b) 438,094 6,557 5.99 433,542 6,169 5.69
- ------------------------------------------------------------------------------------------------------------------------
Total earning assets 712,826 $ 9,665 5.42% 714,313 $ 9,408 5.27%
- ------------------------------------------------------------------------------------------------------------------------
Loan loss allowance (4,543) (4,250)
All other assets 45,281 46,515
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 753,564 $ 756,578
========================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits $ 506,673 $ 3,121 2.46% $ 495,705 $ 2,645 2.13%
Borrowed funds 113,257 928 3.28 128,163 1,048 3.27
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 619,930 4,049 2.61 623,868 3,693 2.37
- ------------------------------------------------------------------------------------------------------------------------
Demand deposits 83,278 85,652
Other liabilities 2,648 1,434
Shareholders' equity 47,708 45,624
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 753,564 $ 756,578
========================================================================================================================
Net interest-earning assets $ 92,896 $ 90,445
- ------------------------------------------------------------------------------------------------------------------------
Net interest income (tax
equivalent basis)/Interest
rate spread (c) $ 5,616 2.81% $ 5,715 2.90%
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin (d) 3.15% 3.20%
- ------------------------------------------------------------------------------------------------------------------------
Deduct tax equivalent
adjustment 33 33
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 5,583 $ 5,682
========================================================================================================================
(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 September 30, 2005, a decrease in average earning assets
of $1,487,000 or 0.21% and a 15-basis-point increase in average rate of return
resulted in a decrease in volume of $18,000 and an increase in rate of $275,000.
A decrease in average interest-bearing liabilities of $3,938,000 or 0.63% and a
24-basis-point increase in average rate of interest paid contributed to a
decrease in volume of $60,000 and an increase in rate of $416,000.
16
Nine Months Ended September 30,
------------------------------------------------------------------------------------------
2005 2004
- ------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollar amounts in thousands) Balance Interest (a) Rate Balance Interest (a) Rate
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Federal funds sold and
temporary investments $ 161 $ 7 5.80% $ 2,281 $ 17 0.99%
Securities 274,808 9,343 4.53 264,396 9,342 4.71
Loans (b) 442,107 19,404 5.85 430,974 18,534 5.73
- ------------------------------------------------------------------------------------------------------------------------
Total earning assets 717,076 $ 28,754 5.35% 697,651 $ 27,893 5.33%
- ------------------------------------------------------------------------------------------------------------------------
Loan loss allowance (4,518) (4,348)
All other assets 45,035 45,263
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 757,593 $ 738,566
========================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits $ 502,433 $ 8,776 2.33% $ 488,913 $ 7,828 2.13%
Borrowed funds 122,641 2,835 3.08 121,567 3,022 3.31
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 625,074 11,611 2.48 610,480 10,850 2.37
- ------------------------------------------------------------------------------------------------------------------------
Demand deposits 83,165 80,728
Other liabilities 1,770 1,823
Shareholders' equity 47,584 45,535
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 757,593 $ 738,566
========================================================================================================================
Net interest-earning assets $ 92,002 $ 87,171
- ------------------------------------------------------------------------------------------------------------------------
Net interest income (tax
equivalent basis)/Interest
rate spread (c) $ 17,143 2.87% $ 17,043 2.96%
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin (d) 3.19% 3.26%
- ------------------------------------------------------------------------------------------------------------------------
Deduct tax equivalent
adjustment 100 97
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 17,043 $ 16,946
========================================================================================================================
(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 nine months ended September 30, 2005, an increase in average earning
assets of $19,425,000 or 2.78% and a 2-basis-point increase in average rate of
return resulted in an increase in volume of $813,000 and an increase in rate of
$48,000. An increase in average interest-bearing liabilities of $14,594,000 or
2.39% and an 11-basis-point increase in average rate of interest paid
contributed to an increase in volume of $247,000 and an increase in rate of
$514,000.
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.
17
VOLUME RATE ANALYSIS
Three Months Ended September 30, 2005
Compared to
Three Months Ended September 30, 2004
- ----------------------------------------------------------------------------
Change Due to
------------------------
(Dollar amounts in thousands) Volume Rate Net Change
- ----------------------------------------------------------------------------
Interest Income:
Loans $ 63 $ 325 $ 388
Securities (54) (71) (125)
Federal Funds (27) 21 (6)
- ----------------------------------------------------------------------------
Total Interest Earned (18) 275 257
- ----------------------------------------------------------------------------
Interest Expense:
Interest-bearing deposits 60 416 476
Other borrowed funds (120) - (120)
- ----------------------------------------------------------------------------
Total Interest Expense (60) 416 356
- ----------------------------------------------------------------------------
Change in Net Interest Income $ 42 $ (141) $ (99)
============================================================================
Net interest and dividend income, on a tax-equivalent basis, decreased by
$99,000 to $5,616,000 for the quarter ended September 30, 2005 as compared to
$5,715,000 for the same period in 2004. The net interest margin was 3.15% for
the quarter ended September 30, 2005 and 3.20% for the quarter ended September
30, 2004.
The decrease in net interest margin is a result of an increase in average yield
on earning assets more than offset by an increase in the average cost of
interest-bearing liabilities. The increase in average yield on earning assets is
driven by an increase in the average yield on loans, partially offset by a
decrease in the average yield on securities. The primary driver of the increase
in the average yield on loans is an increase in the average yield on home equity
loans and lines for the three-month period ended September 30, 2005 as compared
to the three-month period ended September 30, 2004. The increase in the average
yield on home equity loans and lines is a direct result of increases in the
prime rate during 2005.
The primary driver of the increase in the average cost of interest-bearing
liabilities is an increase in the average cost of NOW accounts for the three
months ended September 30, 2005 as compared to the same period in 2004. The
increase in the average cost of NOW accounts is related to the introduction of
the capital access account late in 2004. Capital access accounts are tiered
accounts that pay premium interest rates to customers.
VOLUME RATE ANALYSIS
Nine Months Ended September 30, 2005
Compared to
Nine Months Ended September 30, 2004
- ----------------------------------------------------------------------------
Change Due to
------------------------
(Dollar amounts in thousands) Volume Rate Net Change
- ----------------------------------------------------------------------------
Interest Income:
Loans $ 482 $ 388 $ 870
Securities 359 (358) 1
Federal Funds (28) 18 (10)
- ----------------------------------------------------------------------------
Total Interest Earned 813 48 861
- ----------------------------------------------------------------------------
Interest Expense:
Interest-bearing deposits 221 727 948
Other borrowed funds 26 (213) (187)
- ----------------------------------------------------------------------------
Total Interest Expense 247 514 761
- ----------------------------------------------------------------------------
Change in Net Interest Income $ 566 $ (466) $ 100
============================================================================
Net interest and dividend income, on a tax-equivalent basis, increased by
$100,000 to $17,143,000 for the nine months ended September 30, 2005 as compared
to $17,043,000 for the same period in 2004. The net interest margin was 3.19%
for the nine months ended September 30, 2005 as compared to 3.26% for the same
period in 2004.
The decrease in net interest margin is a result of the slight increase in
average yield on earning assets offset by a larger increase in the average cost
of interest-bearing liabilities. The increase in average yield on earning assets
is partially driven by an increase in the average yield on loans. The primary
driver of the increase in the average yield on loans is an increase in the
average yield on home equity loans and lines and lease financing for the
nine-month period ended September 30, 2005 as compared to the nine-month period
ended September 30, 2004. The increase in the average yield on home equity loans
and lines is a direct result of increases in the prime rate during 2005. The
increase in average yield on loans is more than offset by a decrease in average
yield on securities.
18
The increase in the average cost of interest-bearing liabilities is primarily
due to an increase in the average cost of interest-bearing deposits, offset by a
decrease in the average cost of borrowings. The primary driver of the increase
in the average cost of interest-bearing deposits is an increase in the average
cost of NOW accounts for the nine months ended September 30, 2005 as compared to
the same period in 2004. The increase in the average cost of NOW accounts is
related to the introduction of the capital access account late in 2004. Capital
access accounts are tiered accounts that pay premium interest rates to
customers. The decrease in the average cost of borrowings can be attributed to
the September 2004 redemption and replacement of the Corporation's high
interest-bearing trust preferred security to trust preferred securities bearing
a lower interest rate.
PROVISION FOR LOAN LOSSES
For the quarters ended September 30, 2005 and 2004, the Bank provided no
provision and $150,000 for loan losses respectively. For the quarters ended
September 30, 2005 and 2004, recoveries totaled $2,000 each period and
charge-offs totaled $32,000 and $30,000 respectively. For the nine-month periods
ended September 30, 2005 and 2004, the Bank provided $140,000 and $150,000 for
loan losses, respectively. For the nine-month periods ended September 30, 2005
and 2004, recoveries totaled $22,000 and $16,000 and charge-offs totaled $86,000
and $245,000 respectively. The allowance was $4,283,000 or 0.98% of total loans
at September 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 decreased $142,000 to $1,993,000 at September 30, 2005 or
0.46% of total loans as compared to $2,135,000 or 0.49% of total loans at
December 31, 2004. The decrease in non-performing loans is the result of a
decrease in delinquencies. The percentage of non-performing loans compared to
total assets at September 30, 2005 and December 31, 2004 amounted to 0.26% and
0.28% respectively.
INTEREST RATE SENSITIVITY
The following table sets forth the distribution of the repricing of the
Corporation's earning assets and interest-bearing liabilities as of September
30, 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 $ 101,446 $ 46,090 $ 261,247 $ 316,689 $ 725,472
Interest-Bearing
Liabilities 120,364 191,188 304,830 18,175 634,557
- ------------------------------------------------------------------------------------------------------
Interest Rate
Sensitivity Gap $ (18,918) $ (145,098) $ (43,583) $ 298,514 $ 90,915
======================================================================================================
Cumulative Interest
Rate Sensitivity Gap $ (18,918) $ (164,016) $ (207,599) $ 90,915
Interest Rate
Sensitivity Gap Ratio (2.61)% (20.00)% (6.01)% 41.15%
Cumulative Interest
Rate Sensitivity Gap Ratio (2.61)% (22.61)% (28.62)% 12.53%
The presentation of a run-off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $8,349,000 and
$6,578,000, 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.
19
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(Dollar amounts in thousands) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 4,462 $ 4,227 $ 4,356 $ 4,428
Provision for loan losses - 150 140 150
- --------------------------------------------------------------------------------------------------------------------------------
4,462 4,377 4,496 4,578
- --------------------------------------------------------------------------------------------------------------------------------
Less charge-offs:
Loans secured by real estate - - - 82
Commercial and industrial loans - - 4 100
Consumer loans 32 30 82 63
- --------------------------------------------------------------------------------------------------------------------------------
32 30 86 245
- --------------------------------------------------------------------------------------------------------------------------------
Add recoveries:
Loans secured by real estate - - - 1
Commercial and industrial loans - - 10 1
Consumer loans 2 2 12 14
- --------------------------------------------------------------------------------------------------------------------------------
2 2 22 16
- --------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 30 28 64 229
- --------------------------------------------------------------------------------------------------------------------------------
Transfer to reserve for unfunded
loan commitments (149) - (149) -
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 4,283 $ 4,349 $ 4,283 $ 4,349
================================================================================================================================
Net charge-offs to:
Average loans - - 0.01% 0.01%
Loans at end of period - - 0.01% 0.01%
Allowance for loan losses at January 1 0.69% 0.63% 1.47% 5.17%
Allowance for loan losses at September 30
as a percentage of
Average loans 0.98% 1.00% 0.97% 1.01%
Loans at end of period 0.98% 1.00% 0.98% 1.00%
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 allowance 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 allowance 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 allowance 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 allowance above the minimum of the formula range is based on
management's evaluation of relevant factors (e.g. local area economic
statistics, credit quality trends, loan concentrations, industry conditions and
delinquency levels) and the percentage of loan loss reserves to aggregate loans.
The Corporation measures impairment of loans in accordance with SFAS No. 114,
"Accounting for Impairment of a Loan as Amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(collectively SFAS No. 114). A loan is recognized as impaired when it is
probable that either principal or interest is not collectible in accordance with
the terms of the loan agreement. Measurement of impairment for commercial loans
is generally based on the present value of expected future cash flows discounted
at the loan's effective interest rate. Commercial real estate loans are
generally measured based on the fair value of the underlying collateral. If the
estimated fair value of the impaired loan is less than the related recorded
amount, a specific valuation allowance is established or a write-down is charged
against the allowance for loan losses. Smaller balance homogenous loans,
including residential real estate and consumer loans, are excluded from the
provisions of SFAS No. 114. Generally, income is recorded only on a cash basis
for impaired loans.
20
The general allowance 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. At September 30, 2005,
management believes the allowance for loan losses is appropriate based on the
ongoing 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 stable and manageable
level of risk.
During the third quarter of 2005, the Corporation transferred $149,000 related
to unfunded loan commitments from its allowance for loan losses to a separate
allowance for credit losses related to these unfunded loan commitments. The
reserve for unfunded loan commitments ("the reserve") is included in other
liabilities in the accompanying condensed consolidated balance sheets. Net
income and prior period balances were not affected by this prospective balance
sheet classification.
On a quarterly basis, management evaluates the reserve to determine if it is
adequate to cover potential credit losses. Changes to the reserve will be
reflected in other non-interest expense and will be recorded in the period
deemed necessary. At September 30, 2005, management considers the reserve level
adequate.
NON-ACCRUAL, PAST DUE AND NON-PERFORMING LOANS
September 30, June 30, March 31, December 31, September 30,
(Dollar amounts in thousands) 2005 2005 2005 2004 2004
- --------------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 1,286 $ 2,012 $ 4,105 $ 1,614 $ 1,245
- --------------------------------------------------------------------------------------------------------------------
Loans contractually past
due 90 days or more
still accruing 707 963 537 521 357
- --------------------------------------------------------------------------------------------------------------------
Total non-performing loans $ 1,993 $ 2,975 $ 4,642 $ 2,135 $ 1,602
- --------------------------------------------------------------------------------------------------------------------
Non-performing loans
as a percentage
of total loans 0.46% 0.69% 1.05% 0.49% 0.37%
- --------------------------------------------------------------------------------------------------------------------
Allowance for loan losses
as a percentage of
non-performing loans 214.90% 149.98% 96.53% 204.03% 271.47%
- --------------------------------------------------------------------------------------------------------------------
Other real estate owned - net 630 630 630 630 706
- --------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 2,623 $ 3,605 $ 5,272 $ 2,765 $ 2,308
- --------------------------------------------------------------------------------------------------------------------
Non-performing assets
as a percentage
of total assets 0.34% 0.47% 0.69% 0.37% 0.31%
- --------------------------------------------------------------------------------------------------------------------
Non-performing loans decreased $142,000 to $1,993,000 at September 30, 2005, or
0.46% of total loans, as compared to $2,135,000 or 0.49% of total loans at
December 31, 2004. The decrease in non-performing loans is the result of a
decrease in delinquencies. At March 31, 2005, non-performing loans were
$4,642,000 primarily due to one commercial loan relationship classified as
impaired. During the second quarter of 2005, the financial outlook for the
commercial loan customer improved and the loan was removed from impaired status
at June 30, 2005.
21
LIQUIDITY AND CAPITAL RESOURCES
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
third quarter of 2005, the Corporation increased its utilization of borrowings
as a source of funds. The average balance of borrowings for the third quarters
of 2005 and 2004 were $113,257,000 and $128,163,000 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 September 30, 2005, the Corporation maintained cash balances, short-term
investments and investments available for sale totaling $169,608,000,
representing 22.0% of total assets, versus $168,559,000 or 22.3% 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.
22
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 $ 70,801 $ 2,369 $ 20,404 $ 18,000 $ 111,574
Payable to Westbank
Capital Trust II and III - - - 17,526 17,526
Annual rental commitments under
non-cancelable operating leases 262 283 22 - 567
- --------------------------------------------------------------------------------------------------------------------
$ 71,063 $ 2,652 $ 20,426 $ 35,526 $ 129,667
====================================================================================================================
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 $ 20,075 $ - $ - $ - $ 20,075
Loan sales commitments 159 - - - 159
Unfunded loan commitments 43,442 2,800 1,770 25,114 73,126
- --------------------------------------------------------------------------------------------------------------------
$ 63,676 $ 2,800 $ 1,770 $ 25,114 $ 93,360
====================================================================================================================
At September 30, 2005, the Corporation had certificates of deposit maturing
within the next 12 months amounting to $194,795,000. 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.
23
At September 30, 2005, the Corporation exceeded each of the applicable
regulatory capital requirements. As of September 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 September 30, 2005 are
also presented in the following table.
Minimum for Capital
Actual Adequacy Purposes
---------------------------- ----------------------------
Amount Ratio Amount Ratio
------------ ------------ ------------ ------------
September 30, 2005
Total Capital (to Risk Weighted Assets)
Consolidated $ 60,895 13.02% $ 37,427 8.00%
Bank 59,157 12.68 37,311 8.00
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 54,781 11.71 18,714 4.00
Bank 54,725 11.73 18,655 4.00
Tier 1 Capital (to Average Assets)
Consolidated 54,781 7.37 29,751 4.00
Bank 54,725 7.35 29,792 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.
24
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.
25
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Certain litigation is pending against the Corporation and its
subsidiaries. Management, after consultation with legal counsel, does
not anticipate that any liability arising out of such litigation will
have a material effect on the Corporation's financial statements.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase Plan - During the fourth quarter of 2003, the Board
of Directors approved a new stock repurchase program of up to 5% of
the Corporation's stock. The value of the 5% stock of the Corporation
at the time of the announcement was approximately $3,800,000.
Total number of Maximum number of
shares purchased as shares yet to be
part of publicly purchased under
Total number of Average price paid announced plans or announced plans or
Period shares purchased per share programs programs
-----------------------------------------------------------------------------------------------------------
July 2005 - - - -
August 2005 - - - -
September 2005 5,135 $ 16.59 35,585 182,319
-----------------------------------------------------------------------------------------------------------
Total 5,135 $ 16.59 35,585 182,319
-----------------------------------------------------------------------------------------------------------
ITEM 3. Defaults on Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
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.
26
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned thereunto duly authorized.
WESTBANK CORPORATION
Date: November 4, 2005 /s/ Donald R. Chase
-------------------------------------
Donald R. Chase
President and Chief Executive Officer
Date: November 4, 2005 /s/ John M. Lilly
-------------------------------------
John M. Lilly
Treasurer and Chief Financial Officer
27