================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
Commission file number 0 - 12784
WESTBANK CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2830731
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
225 Park Avenue, West Springfield, Massachusetts 01090-0149
(Address of principal executive offices) (Zip Code)
(413) 747-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
YES [X] NO [ ]
Common stock, par value $2 per share: 4,735,441 shares outstanding
as of April 30, 2005.
================================================================================
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 Flow 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
March 31, December 31,
(Dollar amounts in thousands, except per share data) 2005 2004
- -----------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and due from banks:
Non-interest bearing $ 13,533 $ 12,451
Interest bearing 18 34
Federal funds sold 46 669
- -----------------------------------------------------------------------------------------
Total cash and cash equivalents 13,597 13,154
- -----------------------------------------------------------------------------------------
Investment securities available for sale, at fair value 150,556 155,405
Investment securities held to maturity, at amortized cost
(approximate fair value of $114,051
in 2005 and $112,158 in 2004) 115,934 112,424
- -----------------------------------------------------------------------------------------
Total securities 266,490 267,829
- -----------------------------------------------------------------------------------------
Investment in Federal Home Loan Bank stock 6,450 6,450
Loans, net of allowance for loan losses ($4,481 at
March 31, 2005 and $4,356 at December 31, 2004) 439,145 434,119
Property and equipment, net 6,897 6,885
Other real estate held for sale - net 630 630
Accrued interest receivable 3,742 3,655
Goodwill 8,837 8,837
Bank-owned life insurance 9,041 9,204
Investment in unconsolidated investee 526 526
Net deferred tax asset 2,016 1,477
Other assets 2,962 2,781
- -----------------------------------------------------------------------------------------
TOTAL ASSETS $ 760,333 $ 755,547
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 80,543 $ 83,864
Interest bearing 501,090 505,274
- -----------------------------------------------------------------------------------------
Total deposits 581,633 589,138
Borrowed funds 109,684 97,354
Interest payable on deposits and borrowings 645 550
Other liabilities 3,471 3,517
Payable to Westbank Capital Trust II 8,763 8,763
Payable to Westbank Capital Trust III 8,763 8,763
- -----------------------------------------------------------------------------------------
Total liabilities 712,959 708,085
- -----------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock - $5 par value
Authorized - 100,000 shares
Issued - none
Common stock - $2 par value
Authorized - 9,000,000 shares
Issued - 4,746,397 shares in 2005 and 2004 9,493 9,493
Unearned compensation - restricted stock award (1,597) (1,652)
Additional paid in capital 20,236 20,377
Retained earnings 20,708 19,958
Treasury stock at cost 11,547 shares in 2005
and 28,818 shares in 2004) (218) (606)
Accumulated other comprehensive income (loss) (1,248) (108)
- -----------------------------------------------------------------------------------------
Total Stockholders' Equity 47,374 47,462
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 760,333 $ 755,547
=========================================================================================
See accompanying notes to condensed consolidated financial statements.
3
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollar amounts in thousands, except per share data)
Three months ended March 31, 2005 2004
- -----------------------------------------------------------------------------------------
Income:
Interest and fees on loans $ 6,246 $ 6,189
Interest and dividend income on securities 3,147 2,864
Interest on federal funds sold 3 7
- -----------------------------------------------------------------------------------------
Total interest and dividend income 9,396 9,060
Interest expense 3,699 3,529
- -----------------------------------------------------------------------------------------
Net interest income 5,697 5,531
Provision for loan losses 140
- -----------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,557 5,531
- -----------------------------------------------------------------------------------------
Non-interest income:
Gain on sale of securities available for sale 96 62
Gain on sale of loans 16 380
Other non-interest income 1,105 874
- -----------------------------------------------------------------------------------------
Total non-interest income 1,217 1,316
- -----------------------------------------------------------------------------------------
Non-interest expenses:
Salaries and benefits 2,697 2,596
Other non-interest expense 1,726 1,529
Occupancy - net 499 461
- -----------------------------------------------------------------------------------------
Total non-interest expense 4,922 4,586
- -----------------------------------------------------------------------------------------
Income before income taxes 1,852 2,261
Income taxes 441 676
- -----------------------------------------------------------------------------------------
Net Income $ 1,411 $ 1,585
=========================================================================================
Earnings per share
- Basic $ 0.30 $ 0.34 *
- Diluted $ 0.29 $ 0.32 *
Weighted average shares outstanding
- Basic 4,728,089 4,671,668
- Dilutive Option Shares 120,380 267,661
- -----------------------------------------------------------------------------------------
- Diluted 4,848,469 4,939,329
=========================================================================================
* Earnings-per-share data has been adjusted for the 5% stock dividend
declared and distributed in May 2004.
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 THREE MONTHS ENDED MARCH 31, 2005
(Dollar amounts in thousands, except per share data)
COMMON STOCK: * UNEARNED ACCUMULATED
-------------------- COMPENSATION ADDITIONAL OTHER
NUMBER PAR RESTRICTED PAID-IN RETAINED TREASURY COMPREHENSIVE
OF SHARES VALUE STOCK AWARD CAPITAL EARNINGS STOCK INCOME/LOSS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - JANUARY 1, 2004 4,409,248 $ 9,047 $ 14,524 $ 22,724 $ (1,692) $ 672 $ 45,275
=================================================================================================================================
Net income 4,611 4,611
Cash dividends declared
($.56 per share) (2,561) (2,561)
Shares issued from treasury stock:
Stock option plan 92,847 (611) 1,369 758
Dividend reinvestment
and stock purchase plan 34,076 126 561 687
Changes in unrealized gain/(loss)
on securities available for sale (780) (780)
Repurchase of common stock (41,395) (842) (842)
Income tax benefit for exercise of
non-qualified stock options 182 182
Stock option compensation 11 11
Issuance of restricted stock award (1,785) 1,785 0
Amortization of unearned compensation 133 133
5% common stock dividend 222,803 446 4,360 (4,816) (2) (12)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2004 4,717,579 9,493 (1,652) 20,377 19,958 (606) (108) 47,462
=================================================================================================================================
(Unaudited)
Net income 1,411 1,411
Cash dividends declared
($.14 per share) (661) (661)
Shares issued from treasury stock:
Stock option plan 8,295 (145) 190 45
Dividend reinvestment
and stock purchase plan 8,976 (33) 198 165
Changes in unrealized gain/(loss)
on securities available for sale (1,140) (1,140)
Income tax benefit for exercise of
non-qualified stock options 37 37
Amortization of unearned compensation 55 55
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - MARCH 31, 2005 4,734,850 $ 9,493 $ (1,597) $ 20,236 $ 20,708 $ (218) $ (1,248) $ 47,374
=================================================================================================================================
* Net of treasury stock
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
Three months ended March 31, 2005 2004
- -----------------------------------------------------------------------------------------
Net Income $ 1,411 $ 1,585
- -----------------------------------------------------------------------------------------
Unrealized (loss) gain on securities available for sale,
net of income tax (benefit) expense of $(629) in 2005
and $501 in 2004 (1,083) 878
Less reclassification adjustment for gains
included in net income, net of income taxes
expense of $39 in 2005 and $21 in 2004 (57) (41)
- -----------------------------------------------------------------------------------------
Other Comprehensive (Loss) Income (1,140) 837
- -----------------------------------------------------------------------------------------
Comprehensive Income $ 271 $ 2,422
=========================================================================================
See accompanying notes to condensed consolidated financial statements.
5
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollar amounts in thousands)
Three months ended March 31, 2005 2004
- ---------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 1,411 $ 1,585
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 140
Accretion of investment discounts (8) (66)
Depreciation and amortization 202 202
Loan originations - held-for-sale (1,054) (1,769)
Proceeds from sale of held-for-sale loans 1,058 1,793
Realized gain on sale of securities (96) (62)
Realized gain on sale of loans (16) (380)
Gain from bank-owned life insurance (315) (182)
Deferred income taxes prepaid (539)
Exercise of non-qualified stock options 37 88
Stock compensation 55
Changes in assets and liabilities:
Increase in accrued interest receivable (87) (285)
Increase in bank-owned life insurance (82) (90)
(Increase) Decrease in other assets 481 (1,025)
Increase in accrued interest payable on deposits 95 113
(Increase) Decrease in other liabilities (46) 548
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,236 470
- ---------------------------------------------------------------------------------------------------------
Investing activities:
Securities:
Held to maturity:
Purchases (9,700) (43,077)
Proceeds from maturities and principal payments 6,215 22
Available for sale:
Purchases (28) (59,422)
Proceeds from sales 1,918 19,942
Proceeds from maturities and principal payments 1,236 70,248
Purchases of property and equipment (214) (71)
Proceeds from bank-owned life insurance 560 484
Proceeds from loan sales 17,098
Net increase in loans (5,154) (2,912)
- ---------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (5,167) 2,312
- ---------------------------------------------------------------------------------------------------------
Financing activities:
Net increase (decrease) in short-term borrowings 13,554 (28,833)
Repayment of long-term borrowings (1,224) (1,494)
Net (decrease) increase in deposits (7,505) 33,954
Treasury stock issued, net 210 190
Dividends paid (661) (621)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,374 3,196
- ---------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 443 5,978
Cash and cash equivalents at beginning of period 13,154 14,678
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,597 $ 20,656
=========================================================================================================
Cash paid:
Interest on deposits and other borrowings $ 3,604 $ 3,642
Income taxes 36 437
Supplemental disclosure of cash flow information:
Transfer of loans to other real estate owned 574
Unrealized gain (loss) on securities available for sale, net of taxes (1,140) 837
See accompanying notes to condensed consolidated financial statements.
6
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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 (2) subsidiaries: Park West
Securities Corporation and PWB&T, Inc. (PWB&T). The Corporation is headquartered
in West Springfield, Massachusetts. As of March 31, 2005, the Bank had eighteen
(18) offices located in Massachusetts and Connecticut that provide a full range
of retail banking services to individuals, businesses and nonprofit
organizations. The accompanying unaudited condensed consolidated financial
statements include the Corporation, the Bank and the Bank's two (2)
subsidiaries. Substantially all operating income and net income of the
corporation are presently accounted for by the Bank. All significant
intercompany balances and transactions have been eliminated in the accompanying
unaudited condensed consolidated financial statements.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for the
quarters ended March 31, 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 three-month period ended March 31, 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 Corporation's Annual Report on Form 10-K
for the year ended December 31, 2004.
NOTE C - STOCK DIVIDEND
On April 12, 2004, the Corporation announced a five percent (5%) stock dividend
payable on May 18, 2004 to shareholders of record May 12, 2004. As a result of
the stock dividend, all earnings-per-share data has been restated for the period
ended March 31, 2004 to reflect the May 18, 2004 stock dividend.
NOTE D - FINANCIAL STATEMENT RECLASSIFICATION
Certain amounts in the December 31, 2004 financial statements have been
reclassified to conform to the March 31, 2005 presentation.
NOTE E - STOCK-BASED COMPENSATION
Accounting for Stock-Based Compensation Plans
Effective January 1, 2003, the Corporation adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation", prospectively to all employee awards granted,
modified or settled after January 1, 2003. In accordance with this Statement,
the Corporation began expensing the cost of the stock-based employee
compensation for all new employee awards granted.
7
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
NOTE E - STOCK-BASED COMPENSATION (continued)
RESTRICTED STOCK AWARD PLAN
On April 21, 2004, Westbank Corporation's stockholders approved the
Corporation's adoption of the 2004 Recognition and Retention Plan ("RRP"), which
allows the Corporation to grant restricted stock awards ("Awards") to certain
officers, employees and outside Directors. The RRP is authorized to acquire not
more than 92,505 shares of common stock on the open market. Shares generally
vest at a rate of 12.5% per year, with the first vesting period ending May 25,
2005. The aggregate purchase price of all shares acquired by the RRP is
reflected as a reduction of stockholders' equity. Compensation expense will be
amortized annually over an eight (8)-year period, as the Corporation's employees
and Directors become vested in their stock awards. As of March 31, 2005,
compensation expense amounted to $55,000 and is based on the fair value of the
common stock on the grant date.
NOTE F - FINANCIAL AND PERFORMANCE LETTERS OF CREDIT
The Corporation has financial and performance letters of credit. Financial
letters of credit require the Corporation to make payment if the customer's
financial condition deteriorates, as defined in the agreements. Performance
letters of credit require the Corporation to make payments if the customer fails
to perform certain non-financial contractual obligations. The Corporation
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
March 31, 2005 were immaterial; therefore, these guarantee obligations are not
reflected in the accompanying financial statements. The maximum potential
undiscounted amount of future payments of letters of credit as of March 31, 2005
are approximately $112,000, of which $2,000 will expire on September 28, 2005,
$10,000 will expire on January 9, 2006, and $100,000 will expire on February 15,
2006. Amounts due under these letters of credit would be reduced by any proceeds
that the Corporation would be able to obtain in liquidating the collateral for
the loans, which varies depending on the customer. The Corporation has not
recorded any contingent liabilities related to these letters of credit.
NOTE G - NOTES PAYABLE TO WESTBANK CAPITAL TRUST I, II AND III
The Corporation's adoption of FIN 46(R), "Consolidation of Variable Interest
Entities," as of March 31, 2004 required the Corporation to remove Westbank
Capital Trust 1 from the Corporation's consolidated financial statements and to
record on its balance sheet the common stock of the Corporation in the amount of
$526,000 as an "Investment in Unconsolidated Investee" and the total amount
outstanding of $17,526,000 as "Note Payable to Westbank Capital Trust I."
Interest income and expense were recognized in the financial statements. The
adoption of FIN 46(R) did not have a material impact on the financial position
or results of operations. The two (2) new trust preferred placements effectuated
by the Corporation to finance the redemption of Trust I appear on the balance
sheet as "Payable to Westbank Capital Trust II" and "Payable to Westbank Capital
Trust III." The "Payable to Westbank Capital Trust I" was redeemed on September
30, 2004.
In response to FIN 46(R), the Federal Reserve Board issued a final rule
permitting bank holding companies to continue to treat the trust preferred
securities as Tier 1 capital up to the current 25% limit until March 31, 2009.
After March 31, 2009, the 25% limit will be calculated net of goodwill. The
final rule has resulted in no material change as of March 31, 2005 to the
regulatory capital treatment of the trust preferred securities issued by
Westbank Capital Trust II or III based on the adoption of FIN 46(R) prior to the
first revision of March 31, 2009.
8
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
NOTE H - DIRECTORS AND EXECUTIVES SUPPLEMENTAL RETIREMENT PLAN
The Westbank Directors and Executives Supplemental Retirement Plan was
established during 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 for the defined benefit portion of the Directors and
Executives Supplemental Retirement Plan includes the following components:
Three months ended March 31, 2005 2004
- ----------------------------------------------------------------------
Service cost $ 34,542 $ 30,319
Interest cost 48,790 43,032
Amortization of prior service cost 31,235 31,235
Amortization of net (gain) loss 6,366
- ----------------------------------------------------------------------
$ 120,933 $ 104,586
======================================================================
The weighted average assumptions utilized to determine the benefit obligation
and net benefit cost are as follows:
At March 31, 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.
9
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission staff released Staff Accounting Bulletin
(SAB) 105, "Loan Commitments Accounted for as Derivative Instruments." SAB 105
requires that a lender should not consider the expected future cash flows
related to loan servicing or include any internally developed intangible assets,
such as customer-related intangible assets, in determining the fair value of
loan commitments accounted for as derivatives. Corporations were required to
adopt SAB 105 effective for commitments entered into after March 31, 2004. The
requirements of SAB 105 will apply to the Corporation's mortgage loan interest
rate lock commitments to the extent it originates loans held for sale. The
Corporation adopted SAB 105 effective April 1, 2004 and the effect on the
Corporation's financial presentation was immaterial. At March 31, 2005, all loan
commitments were intended for the Bank's loan portfolio.
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.
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, effective January 1, 2003,
the Corporation adopted the fair value recognition provisions and has been
expensing the cost of the stock-based employee compensation for all new employee
awards granted and the service periods for all options granted prior to 2002
have been rendered.
At its March 2004 meeting, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 03-1, "Meaning of Other-than-Temporary Impairment
and Its Application to Certain Investments" ("EITF 03-1"), that prescribes
guidance to be used to determine when an investment in debt and equity
securities is considered impaired, whether the impairment is other than
temporary and the measurement of an impairment loss. The guidance also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment. The effective date for the impairment
measurement and recognition guidance of EITF 03-1 has been delayed until the
issuance of an FASB Staff Position expected to provide additional implementation
guidance.
NOTE J - 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. At March 31, 2005 and 2004, 8,400 stock options were excluded
from the following table because the options' exercise price was greater than
the average market price of common shares (antidilutive). The following table
sets forth the components of basic and diluted earnings per share.
Three months ended March 31,
(Dollar amounts in thousands, except per-share data) 2005 2004
- -----------------------------------------------------------------------------------------
Net income $ 1,411 $ 1,585
- -----------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic weighted average shared outstanding 4,728,089 4,671,668
Dilutive effect of stock options 120,380 267,661
- -----------------------------------------------------------------------------------------
Dilutive weighted average shares outstanding 4,848,469 4,939,329
=========================================================================================
Earnings per share:
Basic earnings per share $ 0.30 $ 0.34 *
Diluted earnings per share $ 0.29 $ 0.32 *
- -----------------------------------------------------------------------------------------
* Earnings-per-share data has been adjusted for the 5% stock dividend
declared and distributed in May 2004.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS -
The following forward looking statements are made in accordance with the Private
Securities Litigation Reform Act of 1995.
The Corporation has made and may make in the future forward-looking statements
concerning future performance, including but not limited to future earnings and
events or conditions that may affect such future performance. These
forward-looking statements are based upon management's expectations and belief
concerning possible future developments and the potential effect of such future
developments on the Corporation. There is no assurance that such future
developments will be in accordance with management's expectations and belief or
that the effect of any future developments on the Corporation will be those
anticipated by the Corporation's management.
All assumptions that form the basis of any forward-looking statements regarding
future performance, as well as events or conditions which may affect such future
performance, are based on factors that are beyond the Corporation's ability to
control or predict with precision, including future market conditions and the
behavior of other market participants. Factors that could cause actual results
to differ materially from such forward-looking statements include, but are not
limited to, the following:
1. The status of the economy in general, as well as in the Corporation's
primary market areas of western and central Massachusetts, and northeastern
Connecticut;
2. The real estate market in western and central Massachusetts, and
northeastern Connecticut;
3. Competition in the Corporation's primary market area from other banks,
especially in light of continued consolidation in the New England banking
industry;
4. Any changes in federal and state bank regulatory requirements;
5. Changes in interest rates;
6. The cost and other effects of unanticipated legal and administrative cases
and proceedings, settlements and investigations;
7. Unanticipated changes in laws and regulations, including federal and state
banking laws and regulations, to which the Corporation and its subsidiaries
are subject;
8. Changes in accounting policies and practices, as may be adopted by the
Financial Accounting Standards Board or any regulatory agency having
authority over the Corporation and/or its subsidiaries; and
9. Disruption in general economic conditions due to military or terrorist
activity.
Forward-looking statements speak only as of the date they were made. While the
Corporation periodically reassesses material trends and uncertainties affecting
the Corporation's performance in connection with its preparation of management's
discussion and analysis of results of operations and financial condition
contained in its quarterly and annual reports, the Corporation does not intend
to review or revise any particular forward-looking statement.
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 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.
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.
ALLOWANCE FOR LOAN LOSSES -
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is an exposure method based on the Corporation's loan loss
history, among other factors. Quarterly, based on an internal review of the loan
portfolio, the Corporation identifies required reserve allocations targeted to
recognized problem loans that, in the opinion of management, have potential loss
exposure or uncertainties relative to the depth of the collateral on these same
loans. In addition, the Corporation maintains a formula-based reserve against
the remainder of the loan portfolio, based on the overall mix of the loan
portfolio and the loss history of each loan category. The formula-based reserve
allocation is calculated by applying loss factors to outstanding loans by
category. Loss factors are based on historical loss experience combined with a
comparison to a group of peer banks. The amount of the recorded reserve above
the minimum of the formula range is based on management's evaluation of relevant
factors (e.g., local area economic statistics, credit quality trends, loan
concentrations, industry conditions and delinquency levels) and the percentage
of loan loss reserves to aggregate loans.
The 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 March 31, 2005, the allowance for loan losses totaled $4,481,000,
representing 1.01% of total loans and 96.53% 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 March 31, 2005.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or fair value in the aggregate. Net unrealized
losses are recognized through a valuation allowance charged to income.
12
OVERVIEW -
Westbank Corporation (the "Corporation" or "Westbank") is a Massachusetts
chartered corporation and a registered bank holding company. The Corporation has
a wholly-owned bank subsidiary, Westbank, a Massachusetts chartered commercial
bank and trust company formed in 1962. The Bank has two (2) subsidiaries: Park
West Securities Corporation and PWB&T. The Corporation is headquartered in West
Springfield, Massachusetts. As of March 31, 2005, the Bank had eighteen (18)
offices located in Massachusetts and Connecticut that provide a full range of
retail banking services to individuals, businesses and nonprofit organizations.
The primary source of Westbank's revenue is income from loans, deposits and
fees. The Corporation has experienced growth and increased revenue from its
commercial lending and leasing.
Westbank Corporation has a growth-oriented strategy focused on (1) shareholder
value, (2) expanding its banking franchise, (3) unparalleled service and (4)
effective capital management.
RECENT DEVELOPMENTS -
The Corporation continues to look for ways to increase its deposit base and
recently introduced two (2) new deposit products: an eighteen(18)-month "Flex
CD" and a Capital Access NOW Account. Each of these new products is designed to
give the depositor increased flexibility in accessing their funds and a premium
interest rate.
The Corporation's newest full-service office opened in September 2003 in
Webster, Massachusetts, and has been an excellent source of deposits and
commercial loan business. The Corporation is also planning to relocate its
Southwick, Massachusetts, branch during the first quarter of 2006. The
Corporation recently announced an alliance with Infinex Financial Group to offer
non-deposit investment products at the Corporation's branch offices. This new
service will provide a full range of investment services, annuities and other
insurance products.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2005 AND DECEMBER 31, 2004 -
Total assets increased by $4,786,000 to $760,333,000 at March 31, 2005 from
$755,547,000 at December 31, 2004, primarily due to a net increase in earning
assets. Earning assets increased during the first three months of 2005 as a
result of an increase in loans of $5,151,000 offset by a decrease in other
earning assets of $1,978,000. As of March 31, 2005 and December 31, 2004,
earning assets amounted to $716,630,000 or 94.3% of total assets and
$713,457,000 or 94.4% of total assets. Earning assets include a diverse
portfolio of earning instruments including loans and securities issued by
federal, state and municipal authorities.
Securities decreased by $1,339,000, or 0.5%, to $266,490,000 at March 31, 2005
from $267,829,000 at December 31, 2004, primarily due to the decline in fair
value of the investment securities available for sale.
Net loans increased by $5,026,000, or 1.2%, to $439,145,000 at March 31, 2005
from $434,119,000 at December 31, 2004.
o Commercial real estate and commercial and industrial loans increased
by $6,646,000, or 3.51%, to $196,016,000 at March 31, 2005 from
$189,370,000 at December 31, 2004.
o Residential real estate loans decreased by $808,000, or 0.5%, to
$161,098,000 at March 31, 2005 from $161,906,000 at December 31, 2004.
o Indirect auto loans increased by $65,000, or 0.17%, to $38,969,000 at
March 31, 2005 from $38,904,000 at December 31, 2004.
Total deposits decreased by $7,505,000, or 1.27%, to $581,633,000 at March 31,
2005 from $589,138,000 at December 31, 2004. Time deposits decreased by
$5,078,000, or 1.50%, to $333,911,000 at March 31, 2005 from $338,989,000 at
December 31, 2004. Non-interest-bearing checking, NOW, savings and money market
accounts decreased by $2,426,000, or 0.97%, to $247,723,000 at March 31, 2005
from $250,149,000 at December 31, 2004. The Bank's strategic plan calls for a
lesser reliance on time deposit accounts in order to decrease the Bank's cost of
funds.
The decrease in deposits was offset by a $12,731,000 increase in Federal Home
Loan Bank borrowings, which totaled $93,445,000 at March 31, 2005. Borrowings
increased due to the decline of deposits and the increase in loans.
Stockholders' equity at March 31, 2005 and December 31, 2004 was $47,374,000 and
$47,462,000 respectively, which represented 6.23% of total assets as of March
31, 2005 and 6.28% of total assets as of December 31, 2004. The change is
primarily comprised of net income of $1,411,000 for the three months ended March
31, 2005, issuance of 17,271 shares of common stock for $247,000, the
declaration by the Board of Directors of a dividend of $0.14 per share on
January 20, 2005, which aggregated $661,000, the net unrealized loss on
securities available for sale amounting to $1,140,000 and recognition of
unearned compensation of $55,000.
13
COMPARISON OF OPERATING RESULTS FOR THE THREE (3) MONTHS ENDED MARCH 31, 2005
AND MARCH 31, 2004 -
GENERAL
Net income was $1,411,000, or $0.29 per diluted share, for the quarter ended
March 31, 2005 as compared to $1,585,000, or $0.32 per diluted share, for the
same period in 2004. Net interest income increased $166,000 to $5,697,000 for
the quarter ended March 31, 2005 as compared to $4,531,000 for the same period
in 2004. The increase in net interest income was offset by a decrease in
non-interest income and an increase in non-interest expense. Income tax expense
decreased $235,000 to $441,000 for the quarter ended March 31, 2005 as compared
to $661,000 for the quarter ended March 31, 2004. The decrease in income tax
expense was attributable to higher non-taxable life insurance proceeds in 2005
as compared to 2004.
Non-interest income decreased $99,000 to $1,217,000 for the quarter ended March
31, 2005 from $1,316,000 in the same period of 2004. This reflects a $25,000
increase in earnings from the Trust Department of the Bank, a $27,000 decrease
in income generated from service charges on deposit accounts, a $30,000 increase
in loan servicing income, a $34,000 increase on net gains on the sale of
securities, a $364,000 decrease in the sale of real estate owned and mortgages,
a $252,000 increase in life insurance proceeds and a $49,000 decrease in other
non-interest income.
Non-interest expense was $4,922,000 and $4,586,000 for the quarters ended March
31, 2005 and March 31, 2004 respectively. For the three-month period ended March
31, 2005, operating expenses increased by approximately $336,000 versus the 2004
period. Salaries and benefits increased by $101,000, while other non-interest
expense increased by $197,000 and occupancy increased by $38,000. The increase
is a direct result of general additions to staff, the overall growth of the
Corporation.
NET INTEREST AND DIVIDEND INCOME
The following tables set forth the information relating to the Bank's average
balances at, and net interest income for, the three months ended March 31, 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.
14
QUARTER-TO-DATE AVERAGE BALANCES
INTEREST EARNED - INTEREST EXPENSE
(Dollar amounts in thousands)
Three months ended March 31, 2005 2004
- -----------------------------------------------------------------------------------------------------------------
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------
Federal funds sold and
temporary investments $ 160 $ 3 7.50% $ 3,791 $ 7 0.74%
Securities (a) 277,258 3,151 4.55 236,484 2,868 4.85
Loans (b) 443,839 6,275 5.66 437,018 6,217 5.69
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 721,257 $ 9,429 5.23% 677,293 $ 9,092 5.37%
- -----------------------------------------------------------------------------------------------------------------
Loan loss allowance (4,443) (4,460)
All other assets 45,002 43,181
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 761,816 $ 716,014
=================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits $ 500,711 $ 2,751 2.20% $ 472,566 $ 2,528 2.14%
Borrowed funds 129,602 948 2.93 120,615 1,001 3.32
- -----------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 630,313 $ 3,699 2.35 593,181 $ 3,529 2.38
- -----------------------------------------------------------------------------------------------------------------
Interest rate spread 2.88% 2.99%
Demand deposits 82,586 75,169
Other liabilities 1,587 1,933
Shareholders' equity 47,330 45,731
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 761,816 $ 716,014
=================================================================================================================
Net Interest Income
(tax equivalent basis) $ 5,730 $ 5,563
Interest Earned/Earning Assets 5.23% 5.37%
Interest Expense/Earning Assets 2.05 2.08
- -----------------------------------------------------------------------------------------------------------------
Net Yield on Earning Assets 3.18% 3.29%
Deduct tax equivalent adjustment 33 32
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income $ 5,697 $ 5,531
=================================================================================================================
(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.
For the quarter ended March 31, 2005, an increase in average earning assets of
$43,964,000 or 6.49% and a 14-basis-point decrease in average rate of return
resulted in an increase in volume of $554,000 and a decrease in rate of
$217,000. An increase in average interest-bearing liabilities of $37,132,000 or
6.26% and a 3-basis-point decrease in average rate of interest paid contributed
to an increase in volume of $224,000 and a decrease in rate of $54,000. Net
interest earned on a tax equivalent basis increased to $5,730,000 for the first
quarter of 2005, up $167,000 as compared with the quarter ended March 31, 2004.
15
The following table shows 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.
CHANGES IN NET INTEREST INCOME
(Dollar amounts in thousands)
THREE MONTHS ENDED MARCH 31, 2005
OVER
THREE MONTHS ENDED MARCH 31, 2004
- ------------------------------------------------------------------------
CHANGE DUE TO
VOLUME RATE TOTAL
- ------------------------------------------------------------------------
Interest Income:
Loans $ 97 $ (39) $ 58
Securities 470 (187) 283
Federal Funds (13) 9 (4)
- ------------------------------------------------------------------------
Total Interest Earned 554 (217) 337
Interest Expense:
Interest-bearing deposits 153 70 223
Other borrowed funds 71 (124) (53)
- ------------------------------------------------------------------------
Total Interest Expense 224 (54) 170
- ------------------------------------------------------------------------
Net Interest Income $ 330 $ (163) $ 167
========================================================================
Net interest and dividend income increased by $167,000 to $5,730,000 for the
quarter ended March 31, 2005 as compared to $5,563,000 for the same period in
2004. The net interest margin was 3.18% for the quarter ended March 31, 2005 as
compared to 3.29% for the same period in 2004.
The decrease in the net interest margin was primarily the result of the decline
of interest earned to earning assets. The yield of interest-earning assets
decreased 14 basis points to 5.23% for the quarter ended March 31, 2005 from
5.37% for the same period in 2004. The average cost of interest-bearing
liabilities decreased by 3 basis points to 2.35% for the quarter ended March 31,
2005 from 2.38% for the same period in 2004.
PROVISION FOR LOAN LOSSES
For the quarter ended March 31, 2005, the Bank provided $140,000 for loan
losses, compared to $0 for the same period in 2004. For the quarters ended March
31, 2005 and 2004, recoveries totaled $14,000 and $13,000 and charge-offs
totaled $29,000 and $147,000 respectively. The allowance was $4,481,000 or 1.01%
of total loans at March 31, 2005 as compared to $4,356,000 or 0.99% of total
loans at December 31, 2004. The provision for loan losses brings the Bank's
allowance for loan losses to a level determined appropriate by management.
Non-performing loans increased $2,507,000 to $4,642,000 at March 31, 2005, or
1.05% of total loans, as compared to $2,135,000 or 0.49% of total loans at
December 31, 2004, primarily due to the recognition of an impaired loan as
non-performing. The increase in non-performing loans is primarily the result of
one commercial loan relationship classified as impaired. The Corporation
anticipates the resolution of this loan relationship during the second quarter
of 2005. The percentage of non-performing and past due loans compared to total
assets at March 31, 2005 and December 31, 2004 amounted to 0.61% and 0.28%
respectively.
Non-interest income decreased $99,000 to $1,217,000 for the quarter ended March
31, 2005 from $1,316,000 in the same period of 2004. This reflects a $25,000
increase in earnings from the Trust Department of the Bank, a $27,000 decrease
in income generated from service charges on deposit accounts, a $30,000 increase
in loan servicing income, a $34,000 increase on net gains on the sale of
securities, a $364,000 decrease in the sale of real estate owned and mortgages,
a $250,000 increase in life insurance proceeds and a $47,000 decrease in other
non-interest income.
16
NON-INTEREST EXPENSE
The components of total operating expenses for the periods and their percentage
of gross income are as follows:
(Dollar amounts in thousands)
Three months ended March 31, 2005 2004
- -----------------------------------------------------------------------------
Amount Percent Amount Percent
- -----------------------------------------------------------------------------
Salaries and benefits $ 2,697 25.41% $ 2,596 25.02%
Other non-interest expense 1,726 16.26 1,529 14.74
Occupancy - net 499 4.70 461 4.44
- -----------------------------------------------------------------------------
Total Operating Expenses $ 4,922 46.37% $ 4,586 44.20%
=============================================================================
For the three-month period ended March 31, 2005, operating expenses increased by
approximately $336,000 versus the 2004 period. Salaries and benefits increased
by $101,000, while other non-interest expense increased by $197,000 and
occupancy increased by $38,000. The increase is a direct result of general
additions to staff, the overall growth of the Corporation.
NET INTEREST INCOME
The Corporation's earning assets include a diverse portfolio of earning
instruments ranging from the Corporation's core business of loan extensions to
interest-bearing securities issued by federal, state and municipal authorities.
These earning assets are financed through a combination of interest-bearing and
interest-free sources.
Net interest income, the most significant component of earnings, is the amount
by which the interest generated by assets exceeds the interest expense on
liabilities. For analytical purposes, the interest earned on tax exempt assets
is adjusted to a "tax equivalent" basis to recognize the income tax savings
which facilitates comparison between taxable and tax exempt assets.
The Corporation analyzes its performance by utilizing the concepts of interest
rate spread and net yield on earning assets. The interest rate spread represents
the difference between the yield on earning assets and interest paid on
interest-bearing liabilities. The net yield on earning assets is the difference
between the rate of interest on earning assets and the effective rate paid on
all funds interest-bearing liabilities, as well as interest-free sources
(primarily demand deposits and stockholders' equity).
The balances and rates derived for the analysis of net interest income presented
on the following pages reflect the consolidated assets and liabilities of the
Corporation's principal earning subsidiary, Westbank.
(Dollar amounts in thousands)
Three months ended March 31, 2005 2004
- --------------------------------------------------------------
Interest and dividend income $ 9,396 $ 9,060
Interest expense 3,699 3,529
- --------------------------------------------------------------
Net interest income 5,697 5,531
Tax equivalent adjustment 33 32
==============================================================
Net interest income (taxable equivalent) $ 5,730 $ 5,563
==============================================================
17
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
(Dollar amounts in thousands)
Three months ended March 31, 2005 2004
- --------------------------------------------------------------------------------------
Average Average
Balance Rate Balance Rate
- --------------------------------------------------------------------------------------
Earning Assets $ 721,257 5.23% $ 677,293 5.37%
- --------------------------------------------------------------------------------------
Interest-bearing liabilities 630,313 2.35 593,181 2.38
- --------------------------------------------------------------------------------------
Interest rate spread 2.88 2.99
- --------------------------------------------------------------------------------------
Interest-free resources used
to fund earning assets 90,944 84,112
- --------------------------------------------------------------------------------------
Total Sources of Funds $ 721,257 $ 677,293
======================================================================================
Net Yield on Earning Assets 3.18% 3.29%
======================================================================================
18
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 March 31,
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.
(Dollar amounts in thousands)
Three Over Three Over One
Months Months to Year to Over Five
or Less One Year Five Years Years Total
- --------------------------------------------------------------------------------------------------------
Earning Assets $ 99,474 $ 47,560 $ 199,933 $ 369,663 $ 716,630
Interest-Bearing
Liabilities 162,521 204,461 261,155 163 628,300
- --------------------------------------------------------------------------------------------------------
Interest Rate
Sensitivity Gap $ (63,047) $ (156,901) $ (61,222) $ 369,500 $ 88,330
========================================================================================================
Cumulative Interest
Rate Sensitivity Gap $ (63,047) $ (219,948) $ (281,170) $ 88,330
Interest Rate
Sensitivity Gap Ratio (8.80)% (21.89)% (8.54)% 51.56%
Cumulative Interest
Rate Sensitivity Gap Ratio (8.80)% (30.69)% (39.23)% 12.33%
The presentation of a run-off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $8,755,000 and
$5,565,000, 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.
LIQUIDITY
Liquidity refers to the Corporation's ability to general adequate amounts of
cash to fund loan originations, security purchases, deposit withdrawals, and
fund dividends on the Corporation's common stock and the amount payable to
Westbank Capital Trust II and III.
The Corporation's liquidity position is monitored by the Asset/Liability
Committee, based on policies approved by the Board of Directors. The Committee
meets regularly to review and direct the Bank's investment, lending and
deposit-gathering activities.
At March 31, 2005, the Corporation maintained cash balances, short-term
investments and investments available for sale totaling $164,153,000,
representing 21.59% of total quarter-end assets, versus $168,559,000 or 22.31%
of total assets at December 31, 2004.
19
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 $ 57,104 $ 13,912 $ 30,668 $ 8,000 $ 109,684
Payable to Westbank Capital Trust II and III 17,526 17,526
Annual rental commitments under non-
cancelable operating leases 323 361 126 171 981
- ------------------------------------------------------------------------------------------------------------------
$ 57,427 $ 14,273 $ 30,794 $ 25,697 $ 128,191
==================================================================================================================
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 $ 22,539 $ 380 $ 22,919
Undisbursed portion of loans in process and
unused portions of lines of credit 40,434 $ 3,554 $ 1,299 22,628 67,915
- ------------------------------------------------------------------------------------------------------------------
$ 62,973 $ 3,554 $ 1,299 $ 23,008 $ 90,834
==================================================================================================================
At March 31, 2005, the Corporation had certificates of deposit maturing within
the next 12 months amounting to $226,853,000. Based on historical experience,
the Corporation anticipates that a significant portion of the maturing
certificates of deposit will be renewed with the Corporation.
In addition to cash flow from loan and securities payments and prepayments, as
well as from sales of available for sale securities and mortgage loans, the
Corporation has significant borrowing capacity available to fund liquidity
needs. During the first quarter of 2005, the Corporation increased its
utilization of borrowings and increased its use of deposits as a source of
funds. The average balance of borrowings for the first quarters of 2005 and 2004
were $129,602,000 and $109,236,000 respectively. The Bank's borrowings to date
have consisted primarily of advances from the Federal Home Loan Bank of Boston,
of which the Bank is a member. Under the terms of the collateral agreement with
the Federal Home Loan Bank, the Bank pledges residential mortgage loans and
mortgage-backed securities, as well as the Bank's stock in the Federal Home Loan
Bank, as collateral for such transactions. The notes payable to Westbank Capital
Trust II and III are callable in whole or in part on or after September 20,
2009.
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 bore an initial interest rate of 4.06% until December 2004,
after which time they were and will continue to be reset 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 interest 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, as discussed in Note G of the Consolidated Financial Statements.
20
The Corporation has not used any off-balance sheet financing arrangements for
liquidity purposes. Its primary financial instruments with off-balance sheet
risk are limited to loan servicing for others, obligations to fund loans to
customers pursuant to existing commitments and commitments to sell mortgage
loans. Liquidity management requires close scrutiny of the mix and maturity of
deposits, borrowings and short-term investments. Cash and due from banks,
federal funds sold, investment securities and mortgage-backed securities
available for sale, as compared to deposits and borrowings, are used by the
Corporation to compute its liquidity on a daily basis.
The primary source of funds for the payment of dividends by the Corporation is
dividends paid to the Corporation by the Bank. Bank regulatory authorities
generally restrict the amounts available for payment of dividends, if the effect
thereof would cause the capital of the Bank to be reduced below applicable
capital requirements. These restrictions indirectly affect the Corporation's
ability to pay dividends.
Management of the Corporation believes that its current liquidity is sufficient
to meet current and anticipated funding needs.
21
PROVISION AND ALLOWANCE FOR LOAN LOSSES
(Dollar amounts in thousands)
Three months ended March 31, 2005 2004
- -------------------------------------------------------------------------
Balance at beginning of period $ 4,356 $ 4,428
Provision for loan losses 140
- -------------------------------------------------------------------------
4,496 4,428
- -------------------------------------------------------------------------
Less charge-offs:
Loans secured by real estate 82
Commercial and industrial loans 51
Consumer loans 29 14
- -------------------------------------------------------------------------
29 147
- -------------------------------------------------------------------------
Add-recoveries:
Loans secured by real estate
Commercial and industrial loans 10 1
Consumer loans 4 12
- -------------------------------------------------------------------------
14 13
- -------------------------------------------------------------------------
Net charge-offs 15 134
- -------------------------------------------------------------------------
Balance at end of period $ 4,481 $ 4,294
=========================================================================
Net charge-offs (recoveries) to:
Average loans nil 0.03%
Loans at end of period nil 0.03%
Allowance for loan losses at January 1 0.03% 3.03%
Allowance for loan losses at March 31
as a percentage of:
Average loans 1.01% 0.98%
Loans at end of period 1.01% 1.01%
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is an exposure method based on the Corporation's loan loss
history, among other factors. Quarterly, based on an internal review of the loan
portfolio, the Corporation identifies required reserve allocations targeted to
recognized problem loans that, in the opinion of management, have potential loss
exposure or uncertainties relative to the depth of the collateral on these same
loans. In addition, the Corporation maintains a formula-based reserve against
the remainder of the loan portfolio, based on the overall mix of the loan
portfolio and the loss history of each loan category. The formula-based reserve
methodology is based on a range of estimated loss percentages based on loan
type. The amount of the recorded reserve above the minimum of the formula range
is based on management's evaluation of relevant qualitative factors (e.g. local
area economic statistics) 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.
The formula reserve allocation is calculated by applying loss factors to
outstanding loans by category. Loss factors are based on historical loss
experience.
22
The general reserve allocation incorporates general business and economic
conditions, credit quality trends, loan concentrations, industry conditions
within portfolio segments and overall delinquency levels.
The allowance for loan losses is increased by provisions charged against current
earnings. Loan losses are charged against the allowance when management believes
that the collectibility of the loan principal is unlikely. Recoveries on loans
previously charged off are credited to the allowance. Management believes that
the allowance for loan losses is appropriate. While management uses available
information to assess possible losses on loans, future adjustments to the
allowance may be necessary based on changes in non-performing loans, changes in
economic conditions or for other reasons. Any future adjustments to the
allowance would be recognized in the period in which they were determined to be
necessary. In addition, various regulatory agencies periodically review the
Corporation's allowance for loan losses as an integral part of their examination
process. Such agencies may require the Corporation to recognize adjustments to
the allowance, based on judgements different from those of management.
Management also retains an independent loan review consultant to provide advice
on the appropriateness of the loan loss allowance.
For the quarter ended March 31, 2005, the Bank made additions to the allowance
for loan losses totaling $140,000. For the quarter ended March 31, 2004, the
Bank did not make any additions to the allowance for loan losses For the
quarters ended March 31, 2005 and 2004, recoveries totaled $14,000 and $13,000,
and charge-offs totaled $29,000 and $147,000 respectively.
NON-ACCRUAL, PAST DUE AND NON-PERFORMING LOANS
(Dollar amounts in thousands)
03-31-05 12-31-04 09-30-04 06-30-04 03-31-04
- --------------------------------------------------------------------------------------------------------
Non-accrual loans $ 4,105 $ 1,614 $ 1,245 $ 987 $ 997
- --------------------------------------------------------------------------------------------------------
Loans contractually past
due 90 days or more
still accruing 537 521 357 173 195
- --------------------------------------------------------------------------------------------------------
Total non-accrual and
past due loans $ 4,642 $ 2,135 $ 1,602 $ 1,160 $ 1,192
- --------------------------------------------------------------------------------------------------------
Non-accrual and past due loans
as a percentage of total loans 1.05% 0.49% 0.37% 0.27% 0.28%
- --------------------------------------------------------------------------------------------------------
Allowance for loan losses as a
percentage of non-accrual
and past due loans 96.53% 204.03% 368.36% 364.40% 360.23%
- --------------------------------------------------------------------------------------------------------
Other real estate owned - net 630 630 706 706 706
- --------------------------------------------------------------------------------------------------------
Total non-performing assets $ 5,272 $ 2,765 $ 2,308 $ 1,866 $ 1,898
- --------------------------------------------------------------------------------------------------------
Non-performing assets as a
percentage of total assets 0.69% 0.37% 0.31% 0.24% 0.26%
- --------------------------------------------------------------------------------------------------------
Non-performing loans increased $2,507,000 to $4,642,000 at March 31, 2005, or
1.05% of total loans, as compared to $2,135,000 or 0.49% of total loans at
December 31, 2004, primarily due to the recognition of an impaired loan as
non-performing. The increase in non-performing loans is primarily the result of
one commercial loan relationship classified as impaired. The Corporation
anticipates the resolution of this loan relationship during the second quarter
of 2005.
23
REGULATORY CAPITAL
At March 31, 2005, the Corporation exceeded each of the applicable regulatory
capital requirements. As of March 31, 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 March 31, 2005 are also presented in the
following table.
Minimum for Capital
Actual Adequacy Purposes
----------------------- -----------------------
Amount Ratio Amount Ratio
---------- ---------- ---------- ----------
March 31, 2005
Total Capital (to Risk Weighted Assets)
Consolidated $ 60,865 13.30% $ 36,609 8.00%
Bank 58,893 12.89 36,562 8.00
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 54,645 11.94 18,305 4.00
Bank 54,412 11.91 18,281 4.00
Tier 1 Capital (to Average Assets)
Consolidated 55,061 7.27 30,099 4.00
Bank 54,412 7.24 30,050 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.
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 the 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 2004, the Board of
Directors approved a new stock repurchase program of up to 5% of the
Corporation's stock. The value of the 5% stock of the Corporation at
the time of the announcement was approximately $3,800,000. The
following table summarizes repurchases of Westbank Corporation's stock
for the quarter ended March 31, 2005.
Total Number of Shares Maximum Number of
Purchased as Part of Shares that May Yet Be
Total Number of Average Price Paid Publicly Announced Purchased Under the
Period Shares Purchased Per Share Plans or Programs Plans or Programs
------------- ---------------- ------------------ ---------------------- ----------------------
January 2005
February 2005
March 2005 None
Total
ITEM 3. Defaults Upon 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
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1988.
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: May 6, 2005 /s/ Donald R. Chase
----------------------------------------
Donald R. Chase
President and Chief Executive Officer
Date: May 6, 2005 /s/ John M. Lilly
----------------------------------------
John M. Lilly
Treasurer and Chief Financial Officer
27