The accounting and reporting policies of the Corporation are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. In reviewing and understanding financial information for the Corporation, you are encouraged to read and understand the significant accounting policies that are used in preparing the Corporation’s consolidated financial statements. These policies are described in Note 1 to the consolidated financial statements in the Corporation’s Annual Report on Form 10-K.
Certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities. These accounting policies 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 other-than-temporary impairment analysis, accounting for loans and the allowance for loan losses and goodwill impairment are the critical accounting policies that require the most significant estimates and assumptions and are particularly susceptible to significant change in the preparation of the consolidated financial statements.
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. If an investment security is deemed other-than-temporarily impaired, the write-down of that security would have a negative impact on earnings.
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 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.
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-based allowance allocation is calculated by applying loss factors to outstanding loans by category. Loss factors are based on historical loss experience. 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 the allowance for loan losses 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. The allowance for loan losses is a significant estimate and losses incurred in excess of the allowance would adversely impact earnings.
At June 30, 2006, the allowance for loan losses totaled $4,123,000, representing 0.92% of total loans and 204.51% of non-performing loans. The Corporation participates in a program to purchase commercial mortgages guaranteed by the United States Department of Agriculture (USDA) and the United States Small Business Association (SBA). At June 30, 2006, these commercial mortgages totaled $13,969,000. The Corporation does not provide an allowance for loan losses for these purchased commercial loans as they are 100% guaranteed. At June 30, 2006, the allowance for loan losses represents 0.95% of total loans, excluding these loans guaranteed by the USDA and SBA. Please see “Provision and Allowance for Loan Losses” in this Management’s Discussion and Analysis for further discussion of the Corporation’s methodology in determining the allowance as of June 30, 2006.
Goodwill Impairment -
The Corporation tests its goodwill for impairment on an annual basis and when other indicators are present. The test for goodwill impairment is dependent on certain factors that are subject to change. The Corporation selected December 31st as its annual goodwill impairment testing date. If our goodwill is ever found to be impaired, we would be required to write off all or part of our goodwill, which would negatively impact our earnings. As of December 31, 2005, the Corporation deemed that no impairment existed.
Overview -
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 formed in 1962. The Bank has two subsidiaries: Park West Securities Corporation and PWB&T. The Corporation is headquartered in West Springfield, Massachusetts. As of June 30, 2006, 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, unparalleled service and effective capital management.
Recent Developments -
In June 2006, the Bank opened its newly-constructed branch office in Southwick, Massachusetts.
On July 18, 2006, the Corporation announced that it had entered into a definitive agreement whereby NewAlliance will acquire the Corporation for approximately $116,000,000 in cash and stock. The terms of the merger agreement call for each outstanding share of Westbank common stock to be converted into the right to receive $23.00 in cash or stock. The stock exchange ratio will be determined by dividing $23.00 by a 20-day average daily closing price of NewAlliance common stock on the New York Stock Exchange, provided that should the average NewAlliance price be below $13.30, the exchange ratio will be fixed at 1.7293, or should the average NewAlliance price be above $14.70, the exchange ratio will be fixed at 1.5646. The Corporation’s shareholders will have the right to elect either cash or stock, with the constraint that the overall transaction must be consummated with 50% of the payout in stock and 50% in cash. If there is an imbalance in elections, there will be a proration of proceeds to achieve the 50/50 split.
The definitive agreement has been approved by the Boards of Directors of both NewAlliance and the Corporation. The transaction is subject to approval by the shareholders of the Corporation, as well as customary regulatory approvals, including the banking departments of both Connecticut and Massachusetts and the FDIC. The transaction is expected to close in early 2007.
Comparison of Financial Condition at June 30, 2006 and December 31, 2005 -
Total assets increased by $13,389,000 to $822,096,000 at June 30, 2006 from $808,707,000 at December 31, 2005, primarily due to an increase in loans.
Earning assets increased primarily as a result of an increase in gross loans of $16,230,000. As of June 30, 2006 and December 31, 2005, earning assets amounted to $774,539,000 or 94.2% of total assets and $762,374,000 or 94.3% 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.
14
Net loans increased by $16,306,000, or 3.8%, to $444,566,000 at June 30, 2006 from $428,260,000 at December 31, 2005. The net increase in loans consists of the following changes:
• | Commercial real estate and commercial and industrial loans increased by $15,866,000, or 7.7%, to $222,004,000 at June 30, 2006 from $206,138,000 at December 31, 2005. The Corporation purchased approximately $11,450,000 of commercial mortgages during the six-month period ended June 30, 2006. These commercial mortgages are guaranteed by the USDA and the SBA. |
• | Residential real estate loans, including home equity loans, increased by $5,212,000, or 3%, to $176,427,000 at June 30, 2006 from $171,215,000 at December 31, 2005. |
• | Indirect auto loans decreased by $4,088,000, or 10.2%, to $36,061,000 at June 30, 2006 from $40,149,000 at December 31, 2005. |
Total deposits increased by $6,971,000, or 1.2%, to $606,330,000 at June 30, 2006 from $599,359,000 at December 31, 2005. Borrowings increased approximately $6,382,000 during the first six months of 2006 and totaled $144,836,000 at June 30, 2006 compared to $138,454,000 at December 31, 2005. The increase in borrowings includes an increase in Federal Home Loan Bank of Boston (FHLB) option advances of $40,000,000, offset by a decrease in short-term FHLB advances of approximately $20,000,000 and $11,700,000 in option advances called by the FHLB. The Corporation increased its level of borrowings to fund its asset growth.
Stockholders’ equity at June 30, 2006 and December 31, 2005 was $46,353,000 and $47,378,000 respectively, which represented 5.6% of total assets as of June 30, 2006 and 5.9% of total assets as of December 31, 2005. The decrease in stockholders’ equity for the first six months of 2006 is primarily comprised of an unrealized loss on securities available for sale, net of taxes, which amounted to approximately $1,939,000, the payment of quarterly dividends, which aggregated $1,331,000 and the repurchase of 22,150 shares of common stock for a total of $364,000.
These decreases were partially offset by net income of $1,490,000 for the six months ended June 30, 2006, the exercise of stock options aggregating approximately $550,000, and the issuance of shares related to the dividend reinvestment and stock purchase plan, with a combined total of $280,000.
Results of Operations -
Summary
The Corporation reported net income of $581,000, or $0.12 per diluted share, for the quarter ended June 30, 2006 as compared to $1,248,000, or $0.25 per diluted share, for the same period in 2005. For the first six months of 2006, net income was $1,490,000 or $0.31 per diluted share, as compared to $2,659,000, or $0.54 per diluted share, for the first six months of 2005. The decrease in net income was largely driven by an increased level of borrowings and deposits and an increased cost of funds during the first six months of 2006. The increased cost of funds is due to the increasing interest rate environment.
Interest Income
Interest income for the second quarter of 2006 increased $1,240,000, or 12.9% and totaled $10,866,000 as compared to $9,626,000 for the second quarter of 2005. For the six months ended June 30, 2006, interest income was $21,374,000, an increase of $2,352,000 or 12.4% over the six months ended June 30, 2005. Interest income increased for the three- and six-month periods ended June 30, 2006 primarily due to the Corporation earning higher interest rates on its loan portfolio and greater volume of investment securities. For the three- and six-month periods ended June 30, 2006, the increase in interest income was more than offset by an increase in interest expense.
Interest Expense
Interest expense increased $1,982,000 or 51.3% for the three months ended June 30, 2006 and totaled $5,845,000 as compared to $3,863,000 for the same period in 2005. Interest expense for the first six months of 2006 was $10,950,000, an increase of $3,388,000 or 44.8% as compared to $7,562,000 for the first six months of 2005. The increase in interest expense for the three- and six-month periods ended June 30, 2006 was driven principally by the increased level of borrowings and deposits, and the increased cost of funds.
15
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 following tables set forth the information relating to the Bank’s average balances at, and net interest income for, the three- and six-month periods ended June 30, 2006 and 2005, 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.
| | Three Months Ended June 30, | |
| |
| |
| | 2006 | | 2005 | |
| |
| |
| |
(Dollar amounts in thousands) | | Average
Balance | | Interest (a) | | Average
Rate | | Average
Balance | | Interest (a) | | Average
Rate | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
ASSETS | | | | | | | | | | | | | | | | | | | |
Federal funds sold and temporary investments | | $ | 828 | | $ | 9 | | | 4.35 | % | $ | 153 | | $ | 2 | | | 5.23 | % |
Securities | | | 329,044 | | | 3,812 | | | 4.63 | | | 272,718 | | | 3,087 | | | 4.53 | |
Loans (b) | | | 449,770 | | | 7,084 | | | 6.30 | | | 445,324 | | | 6,571 | | | 5.90 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total earning assets | | | 779,642 | | $ | 10,905 | | | 5.59 | % | | 718,195 | | $ | 9,660 | | | 5.38 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loan loss allowance | | | (4,200 | ) | | | | | | | | (4,566 | ) | | | | | | |
All other assets | | | 47,866 | | | | | | | | | 44,821 | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
TOTAL ASSETS | | $ | 823,308 | | | | | | | | $ | 758,450 | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 517,930 | | $ | 3,986 | | | 3.08 | % | $ | 499,850 | | $ | 2,904 | | | 2.32 | % |
Borrowed funds | | | 176,288 | | | 1,859 | | | 4.22 | | | 125,329 | | | 959 | | | 3.06 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total interest-bearing liabilities | | | 694,218 | | $ | 5,845 | | | 3.37 | % | | 625,179 | | $ | 3,863 | | | 2.47 | % |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
| |
Demand deposits | | | 78,656 | | | | | | | | | 84,496 | | | | | | | |
Other liabilities | | | 4,576 | | | | | | | | | 1,064 | | | | | | | |
Shareholders’ equity | | | 45,858 | | | | | | | | | 47,711 | | | | | | | |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
TOTAL LIABILITIES AND EQUITY | | $ | 823,308 | | | | | | | | $ | 758,450 | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net interest-earning assets | | $ | 85,424 | | | | | | | | $ | 93,016 | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net interest income (tax equivalent basis)/Interest rate spread (c) | | | | | $ | 5,060 | | | 2.22 | % | | | | $ | 5,797 | | | 2.91 | % |
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
| |
Net interest margin (d) | | | | | | | | | 2.60 | % | | | | | | | | 3.23 | % |
|
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|
|
|
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|
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|
|
|
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| |
Deduct tax equivalent adjustment | | | | | | 39 | | | | | | | | | 34 | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net Interest Income | | | | | $ | 5,021 | | | | | | | | $ | 5,763 | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(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. |
16
| | Six Months Ended June 30, | |
| |
| |
| | 2006 | | 2005 | |
| |
| |
| |
(Dollar amounts in thousands) | | Average
Balance | | Interest (a) | | Average
Rate | | Average
Balance | | Interest (a) | | Average
Rate | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
ASSETS | | | | | | | | | | | | | | | | | | | |
Federal funds sold and temporary investments | | $ | 748 | | $ | 16 | | | 4.28 | % | $ | 156 | | $ | 5 | | | 6.41 | % |
Securities | | | 329,015 | | | 7,678 | | | 4.67 | | | 274,976 | | | 6,237 | | | 4.54 | |
Loans (b) | | | 443,671 | | | 13,761 | | | 6.20 | | | 444,147 | | | 12,847 | | | 5.79 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total earning assets | | | 773,434 | | $ | 21,455 | | | 5.55 | % | | 719,279 | | $ | 19,089 | | | 5.31 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loan loss allowance | | | (4,223 | ) | | | | | | | | (4,505 | ) | | | | | | |
All other assets | | | 47,624 | | | | | | | | | 44,911 | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
TOTAL ASSETS | | $ | 816,835 | | | | | | | | $ | 759,685 | | | | | | | |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
| |
LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 511,851 | | $ | 7,365 | | | 2.88 | % | $ | 500,278 | | $ | 5,655 | | | 2.26 | % |
Borrowed funds | | | 173,988 | | | 3,585 | | | 4.12 | | | 127,454 | | | 1,907 | | | 2.99 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total interest-bearing liabilities | | | 685,839 | | $ | 10,950 | | | 3.19 | % | | 627,732 | | $ | 7,562 | | | 2.41 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Demand deposits | | | 79,988 | | | | | | | | | 83,107 | | | | | | | |
Other liabilities | | | 4,642 | | | | | | | | | 1,324 | | | | | | | |
Shareholders’ equity | | | 46,366 | | | | | | | | | 47,522 | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
TOTAL LIABILITIES AND EQUITY | | $ | 816,835 | | | | | | | | $ | 759,685 | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net interest-earning assets | | $ | 87,595 | | | | | | | | $ | 91,547 | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net interest income (tax equivalent basis)/Interest rate spread (c) | | | | | $ | 10,505 | | | 2.36 | % | | | | $ | 11,527 | | | 2.90 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net interest margin (d) | | | | | | | | | 2.72 | % | | | | | | | | 3.21 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deduct tax equivalent adjustment | | | | | | 81 | | | | | | | | | 67 | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net Interest Income | | | | | $ | 10,424 | | | | | | | | $ | 11,460 | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(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. |
17
VOLUME RATE ANALYSIS
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.
| | Three Months Ended June 30, 2006
Compared to
Three Months Ended June 30, 2005 | |
| |
| |
| | Change Due to | | | | |
| |
| | | | |
(Dollar amounts in thousands) | | Volume | | Rate | | Net Change | |
|
|
|
|
|
|
|
|
|
| |
Interest Income: | | | | | | | | | | |
Loans | | $ | 77 | | $ | 436 | | $ | 513 | |
Securities | | | 652 | | | 73 | | | 725 | |
Federal Funds | | | 7 | | | — | | | 7 | |
|
|
|
|
|
|
|
|
|
| |
Total Interest Earned | | | 736 | | | 509 | | | 1,245 | |
|
|
|
|
|
|
|
|
|
| |
Interest Expense: | | | | | | | | | | |
Interest-bearing deposits | | | 106 | | | 976 | | | 1,082 | |
Other borrowed funds | | | 464 | | | 436 | | | 900 | |
|
|
|
|
|
|
|
|
|
| |
Total Interest Expense | | | 570 | | | 1,412 | | | 1,982 | |
|
|
|
|
|
|
|
|
|
| |
Change in Net Interest Income (Tax Equivalent Basis) | | $ | 166 | | $ | (903 | ) | $ | (737 | ) |
|
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|
| |
Net interest and dividend income, on a tax-equivalent basis, decreased by $737,000 to $5,060,000 for the quarter ended June 30, 2006 as compared to $5,797,000 for the same period in 2005. The net interest margin was 2.60% for the quarter ended June 30, 2006 and 3.23% for the quarter ended June 30, 2005.
The decrease in net interest margin is primarily the result of an increase in the cost of funds. The average cost of interest-bearing liabilities increased 90 basis points to 3.37% for the three months ended June 30, 2006 from 2.47% for the same period in 2005. The increase in the average cost of funds was partially offset by an increase in the average volume and average yield on earning assets.
The primary driver for the increase in the cost of funds is an increase in interest paid on certificates of deposit and borrowed funds. Interest rates paid to customers on certificates of deposit have been increasing due to the rising interest rate environment. The cost of borrowed funds has also increased due to the rising interest rate environment. Higher deposit rates coupled with an increase in the average borrowings outstanding is the largest driver for the higher costs. The Corporation has increased its level of borrowings in order to fund its asset growth.
18
| | Six Months Ended June 30, 2006
Compared to
Six Months Ended June 30, 2005 | |
| |
| |
| | Change Due to | | | | |
| |
| | | | |
(Dollar amounts in thousands) | | Volume | | Rate | | Net Change | |
|
|
|
|
|
|
| |
Interest Income: | | | | | | | | | | |
Loans | | $ | (14 | ) | $ | 928 | | $ | 914 | |
Securities | | | 1,257 | | | 184 | | | 1,441 | |
Federal Funds | | | 13 | | | (2 | ) | | 11 | |
|
|
|
|
|
|
|
|
|
| |
Total Interest Earned | | | 1,256 | | | 1,110 | | | 2,366 | |
|
|
|
|
|
|
|
|
|
| |
Interest Expense: | | | | | | | | | | |
Interest-bearing deposits | | | 134 | | | 1,576 | | | 1,710 | |
Other borrowed funds | | | 825 | | | 853 | | | 1,678 | |
|
|
|
|
|
|
|
|
|
| |
Total Interest Expense | | | 959 | | | 2,429 | | | 3,388 | |
|
|
|
|
|
|
|
|
|
| |
Change in Net Interest Income (Tax Equivalent Basis) | | $ | 297 | | $ | (1,319 | ) | $ | (1,022 | ) |
|
|
|
|
|
|
|
|
|
| |
Net interest and dividend income, on a tax-equivalent basis, decreased by $1,022,000 to $10,505,000 for the six months ended June 30, 2006 as compared to $11,527,000 for the same period in 2005. The net interest margin was 2.72% for the six months ended June 30, 2006 and 3.21% for the six months ended June 30, 2005.
The decrease in net interest margin is primarily the result of an increase in the cost of funds. The average cost of interest-bearing liabilities increased 78 basis points to 3.19% for the six months ended June 30, 2006 from 2.41% for the same period in 2005. The increase in the average cost of funds was partially offset by an increase in the average volume and average yield on earning assets.
The primary driver for the increase in the cost of funds is an increase in interest paid on certificates of deposit and borrowed funds. Interest rates paid to customers on certificates of deposit have been increasing due to the rising interest rate environment. The cost of borrowed funds has also increased due to the rising interest rate environment. Higher borrowed funds rates coupled with an increase in the average borrowings outstanding is the largest driver for the higher costs. The Corporation has increased its level of borrowings in order to fund its asset growth.
Provision for Loan Losses
For the quarters ended June 30, 2006 and 2005, the Bank provided no provision for loan losses. For the quarters ended June 30, 2006 and 2005, recoveries totaled $31,000 and $6,000, respectively, and charge-offs totaled $81,000 and $25,000 respectively. For the six months ended June 30, 2006 and 2005, the Bank provided no provision for loan losses and $140,000, respectively. Recoveries totaled $35,000 and $20,000 for the six months ended June 30, 2006 and 2005, respectively. Charge-offs totaled $111,000 for the six-month period ended June 30, 2006 as compared to $54,000 for the same period in the prior year. The increase in charge-offs and recoveries for the quarter and six months ended June 30, 2006 is partially due to activity related to the Corporation’s Overdraft Privilege program that was introduced late in 2005. Charge-offs and recoveries related to the Overdraft Privilege program flow through the allowance for loan losses. There was no activity related to this program during the quarter and six months ended June 30, 2005. The provision for loan losses brings the Bank’s allowance for loan losses to a level determined appropriate by management. During the second quarter of 2006, management deemed the allowance for loan losses adequate and determined no additional provision was required.
The allowance was $4,123,000 or 0.92% of total loans at June 30, 2006 as compared to $4,199,000 or 0.97% of total loans at December 31, 2005. The reduction in the allowance for loan losses is due in part to net charge-offs associated with the Overdraft Privilege program. The Corporation participates in a program to purchase commercial mortgages guaranteed by the USDA and SBA. At June 30, 2006, these commercial mortgages totaled $13,969,000. The Corporation does not provide an allowance for loan losses for these purchased commercial loans as they are 100% guaranteed. At June 30, 2006, the allowance for loan losses represents 0.95% of total loans, excluding these loans guaranteed by the USDA and SBA.
For additional information, see “Provision and Allowance for Loan Losses” in this Management’s Discussion and Analysis.
19
Non-interest Income
Non-interest income remained relatively unchanged, totaling $900,000 for the quarter ended June 30, 2006 and $902,000 in the same period of 2005. A decrease in income earned on the sale of loans was offset by an increase in other non-interest income. Other non-interest income increased approximately $150,000 for the second quarter 2006 as compared to the second quarter 2005. The increase in other non-interest income consists of an increase totaling $113,000 on income generated from service charges on deposit accounts and an increase of approximately $50,000 in investment service fee income.
For the six months ended June 30, 2006, non-interest income was $1,813,000, as compared to $2,119,000 for the same period in 2005. The decrease in non-interest income is partially due to a decrease in income earned on the sale of securities and loans. Other non-interest income also decreased for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005. The decrease in other non-interest income was primarily due to the recognition of non-taxable life insurance proceeds of approximately $470,000 recognized during the six months ended June 30, 2005 as compared to no life insurance proceeds recognized during 2006. Not including the non-taxable life insurance proceeds, other non-interest income increased by $410,000 for the six-month period ended June 30, 2006 as compared to the same period in the prior year. This increase was primarily driven by an increase in income generated from service charges on deposit accounts of $200,000 and an increase of approximately $143,000 in investment service fee income. Of the $143,000 increase in investment service fee income, $66,000 is related to the Westco Financial Services Division, which was introduced in June 2005.
Non-interest Expense
Non-interest expense was $5,105,000 and $4,820,000 for the quarters ended June 30, 2006 and 2005, respectively. The main driver for the increase in non-interest expense for the quarter ended June 30, 2006 as compared to the quarter ended June 30, 2005 was an increase in other non-interest expense. Other non-interest expense increased primarily due to an increase in professional and legal fees and advertising costs.
For the six months ended June 30, 2006 and 2005, non-interest expense totaled $10,098,000 and $9,742,000, respectively. The increase in non-interest expense for the six months ended June 30, 2006 was principally driven by an increase in salaries and benefits followed by an increase in other non-interest expense. The increase in salaries and benefits was due to annual increases in salaries and benefits and an expansion of the Corporation’s staff during the first quarter of 2006. The main drivers of the increase in other non-interest expense were higher professional and legal fees and data processing costs.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| |
| |
| |
(Dollar amounts in thousands) | | 2006 | | 2005 | | 2006 | | 2005 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance at beginning of period | | $ | 4,173 | | $ | 4,481 | | $ | 4,199 | | $ | 4,356 | |
Provision for loan losses | | | — | | | — | | | — | | | 140 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | | 4,173 | | | 4,481 | | | 4,199 | | | 4,496 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Less charge-offs: | | | | | | | | | | | | | |
Commercial and industrial loans | | | 34 | | | 4 | | | 34 | | | 4 | |
Consumer loans | | | 47 | | | 21 | | | 77 | | | 50 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total charge-offs | | | 81 | | | 25 | | | 111 | | | 54 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Add recoveries: | | | | | | | | | | | | | |
Commercial and industrial loans | | | 14 | | | — | | | 14 | | | 10 | |
Consumer loans | | | 17 | | | 6 | | | 21 | | | 10 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total recoveries | | | 31 | | | 6 | | | 35 | | | 20 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net charge-offs | | | 50 | | | 19 | | | 76 | | | 34 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance at end of period | | $ | 4,123 | | $ | 4,462 | | $ | 4,123 | | $ | 4,462 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net charge-offs to: | | | | | | | | | | | | | |
Average loans | | | 0.01 | % | | — | | | 0.02 | % | | 0.01 | % |
Loans at end of period | | | 0.01 | % | | — | | | 0.02 | % | | 0.01 | % |
Allowance for loan losses at January 1 | | | 1.19 | % | | 0.44 | % | | 1.81 | % | | 0.78 | % |
Allowance for loan losses at June 30 as a percentage of | | | | | | | | | | | | | |
Average loans | | | 0.92 | % | | 1.00 | % | | 0.93 | % | | 1.00 | % |
Loans at end of period | | | 0.92 | % | | 1.04 | % | | 0.92 | % | | 1.04 | % |
Loans at end of period (excluding USDA and SBA loans) | | | 0.95 | % | | n/a | | | 0.95 | % | | n/a | |
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. 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 the allowance for loan losses to aggregate loans.
20
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 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 judgments 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 June 30, 2006, 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.
NON-ACCRUAL, PAST DUE AND NON-PERFORMING LOANS
(Dollar amounts in thousands) | | June 30,
2006 | | March 31,
2006 | | December 31,
2005 | | September 30,
2005 | | June 30,
2005 | |
|
Non-accrual loans | | $ | 1,624 | | $ | 1,377 | | $ | 1,583 | | $ | 1,286 | | $ | 2,012 | |
|
Loans contractually past due 90 days or more still accruing | | | 392 | | | 429 | | | 633 | | | 707 | | | 963 | |
|
Total non-performing loans | | $ | 2,016 | | $ | 1,806 | | $ | 2,216 | | $ | 1,993 | | $ | 2,975 | |
|
Non-performing loans as a percentage of total loans | | | 0.45 | % | | 0.41 | % | | 0.51 | % | | 0.46 | % | | 0.69 | % |
|
Allowance for loan losses as a percentage of non-performing loans | | | 204.51 | % | | 231.06 | % | | 189.49 | % | | 214.90 | % | | 149.98 | % |
|
Other real estate owned – net | | | 608 | | | 608 | | | 630 | | | 630 | | | 630 | |
|
Total non-performing assets | | $ | 2,624 | | $ | 2,414 | | $ | 2,846 | | $ | 2,623 | | $ | 3,605 | |
|
Non-performing assets as a percentage of total assets | | | 0.32 | % | | 0.29 | % | | 0.35 | % | | 0.34 | % | | 0.47 | % |
|
21
DISCUSSION OF MARKET RISK
Market risk is the risk of loss due to adverse changes in market prices and rates. The Corporation’s primary market risk is its exposure to interest rate risk, which is inherent in its lending, investing and deposit activities. The management of interest rate risk, coupled with directives to build shareholder value and profitability, is an integral part of the Corporation’s overall operating strategy. The Corporation’s approach to interest rate risk management, concentrates on fundamental strategies to structure its balance sheet including the composition of its assets and liabilities. Its approach reflects managing interest rate risk through the use of fixed and adjustable rate loans and investments, rate–insensitive checking accounts, as well as a combination of fixed and variable rate deposit products and borrowed funds. The Corporation does not utilize interest rate futures, swaps or options transactions.
On a quarterly basis, an interest rate risk exposure compliance report is prepared and presented to the Corporation’s Board of Directors. The risk exposure report contains a simulation model that measures the sensitivity of future net interest income to changes in interest rates. All changes are measured as percentage changes from projected net interest income in a flat rate scenario (base level). The estimated changes in net interest income are compared to current limits established by management and approved by the Board of Directors. The following table sets forth, as of June 30, 2006, the estimated change in net interest income given a 100 or 200 basis point change in interest rates over the subsequent twelve month period:
Change in Interest Rates
(In Basis Points) | | Percentage Change in
Net Interest Income |
|
+200 | | (6.00)% |
+100 | | (3.00) |
Base Level | | — |
-100 | | 2.00 |
-200 | | 5.00 |
The simulation model utilized to create the results presented above uses various assumptions regarding cash flows from principal repayments on loans and mortgage–backed securities and/or call activity on investment securities. Actual results could differ significantly from these assumptions, which could result in significant differences in the calculated projected change.
The Corporation 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 the Corporation’s earnings due to the rate of variability and short–term maturities of its earning assets.
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 due under the junior subordinated debentures. 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. 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.
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 FHLB, of which the Bank is a member. Under the terms of the collateral agreement with the FHLB, the Bank pledges residential mortgage loans and mortgage-backed securities, as well as the Bank’s stock in the FHLB, as collateral for such transactions. During the second quarter of 2006, the Corporation increased its utilization of borrowings as a source of funds. The average balance of borrowings for the second quarters of 2006 and 2005 were $176,288,000 and $125,329,000 respectively.
Liquidity management requires close scrutiny of the mix and maturity of deposits, borrowings and short-term investments. Cash and due from banks, federal funds sold, investment securities and mortgage-backed securities available for sale, as compared to deposits and borrowings, are used by the Corporation to compute its liquidity on a daily basis. The Corporation’s liquidity position is monitored by the Asset/Liability Committee, based on policies approved by the Board of Directors. The Committee meets regularly to review and direct the Bank’s investment, lending and deposit-gathering activities.
At June 30, 2006, the Corporation maintained cash balances, short-term investments and investments available for sale totaling $178,830,000, representing 21.8% of total assets, versus $186,006,000 or 23% of total assets at December 31, 2005. At June 30, 2006, the Corporation had certificates of deposit maturing within the next 12 months amounting to $301,083,000. Based on historical experience, the Corporation anticipates that a significant portion of the maturing certificates of deposit will be renewed with the Corporation. Management of the Corporation believes that its current liquidity is sufficient to meet current and anticipated funding and operating needs.
22
Detailed information relating to off-balance sheet commitments and payments due under contractual obligations is presented in the Corporation’s Annual report on Form 10–K for the year ended December 31, 2005. There were no material changes in the Corporation’s off-balance sheet commitments during the first six months of 2006. There were no material changes to payments due under contractual obligations during the six months ended June, 2006, except for the addition of $40,000,000 in FHLB option advances. The scheduled maturities of these option advances are $10,000,000 in March 2011, $10,000,000 in January 2013 and $20,000,000 in January 2016.
At June 30, 2006, the Corporation exceeded each of the applicable regulatory capital requirements. As of June 30, 2006, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Corporation’s and the Bank’s actual capital ratios as of June 30, 2006 are also presented in the following table.
| | Actual | | Minimum for Capital
Adequacy Purposes | |
| |
| |
| |
| | Amount | | Ratio | | Amount | | Ratio | |
| |
|
| |
|
| |
|
| |
|
| |
June 30, 2006 | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | | | | | | | | | | | | |
Consolidated | | $ | 61,329 | | | 12.95 | % | $ | 37,897 | | | 8.00 | % |
Bank | | | 59,044 | | | 12.50 | | | 37,779 | | | 8.00 | |
Tier 1 Capital (to Risk Weighted Assets) | | | | | | | | | | | | | |
Consolidated | | | 56,243 | | | 11.87 | | | 18,948 | | | 4.00 | |
Bank | | | 54,766 | | | 11.60 | | | 18,890 | | | 4.00 | |
Tier 1 Capital (to Average Assets) | | | | | | | | | | | | | |
Consolidated | | | 56,243 | | | 6.92 | | | 32,507 | | | 4.00 | |
Bank | | | 54,766 | | | 6.70 | | | 32,704 | | | 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, unused lines of credit and commitments to sell mortgage loans through loan sales agreements.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item as of June 30, 2006, can be found in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Discussion of Market Risk.” A more detailed discussion of market risk is presented in the Corporation’s Annual Report on Form 10-K for the year-ended December 31, 2005.
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.
24
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 1A. | Risk Factors |
| |
| Except for the risk factors set forth below relating to the proposed acquisition of the Corporation by NewAlliance, there have been no material changes to the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005. |
| |
| The Corporation’s business could be adversely affected by uncertainty related to the proposed merger and contractual restrictions while the proposed merger is pending. |
| |
| Uncertainty about when and whether the merger will be completed and the effects of the merger may have an adverse effect on the Corporation. These uncertainties could cause depositors and others that deal with the Corporation to seek to change their existing business relationships with the Corporation, which could negatively affect growth, revenues and results of operations. In addition, the merger agreement restricts the Corporation from taking specified actions without the buyer’s approval. These restrictions could prevent the Corporation from pursuing attractive business opportunities that may arise prior to the completion of the proposed merger. |
| |
| Failure to complete the proposed merger could negatively impact the Corporation’s stock price, future business and financial results. |
| |
| Completion of the merger is subject to the satisfaction of various conditions, including the approval by the Corporation’s shareholders, as well as regulatory approvals. Although the Corporation’s board of directors will, subject to fiduciary exceptions, recommend that the Corporation’s shareholders approve and adopt the merger agreement, there is no assurance that the merger agreement and the merger will be approved, and there is no assurance that the other conditions to the completion of the merger will be satisfied. If the merger is not completed, we will be subject to several risks, including the following: |
| |
| • | under certain circumstances, if the merger is not completed, the Corporation may be required to pay the buyer a termination fee of $4,500,000; |
| | |
| • | the current market price of the Corporation’s common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a negative perception by the stock market of the Corporation generally and a decline in the market price of the Corporation’s common stock; |
| | |
| • | certain costs relating to the merger, such as legal, accounting and financial advisory fees, are payable by the Corporation whether or not the merger is completed; |
| | |
| • | matters related to the merger may distract the Corporation’s management and employees from day-to-day operations and require substantial commitments of time and resources which could otherwise have been devoted to other opportunities that could have been beneficial to the Corporation; |
| | |
| • | the Corporation would continue to face the risks that it currently faces as an independent company. |
25
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| |
| Share Repurchase Plan - During the fourth quarter of 2003, the Board of Directors approved a new stock repurchase program of up to 5% of the Corporation’s stock. The value of the 5% stock of the Corporation at the time of the announcement was approximately $3,800,000. There is no termination date associated with the program. The following table represents repurchases of Westbank Corporation’s stock for the three months ended June 30, 2006. |
Period | | Total number of
shares purchased | | Average price paid
per share | | Total number of
shares purchased
as part of publicly
announced plans
or programs | | Maximum number
of shares yet to be
purchased under
announced plans
or programs | |
|
April 1-30, 2006 | | | 2,800 | | $ | 16.70 | | | 69,535 | | | 148,369 | |
May 1-31, 2006 | | | 1,800 | | | 16.70 | | | 71,335 | | | 146,569 | |
June 1-30, 2006 | | | 6,700 | | | 17.38 | | | 78,035 | | | 139,869 | |
|
Total | | | 11,300 | | $ | 17.10 | | | 78,035 | | | 139,869 | |
|
ITEM 3. | Defaults on Senior Securities - None |
| |
ITEM 4. | Submission of Matters to a Vote of Security Holders |
| |
| On April 19, 2006, the Corporation held its annual meeting of shareholders. The following matters were voted on at the annual meeting. |
| |
| 1) The election of David R. Chamberland, Ernest N. Laflamme, Jr., and G. Wayne McCary to serve as Directors of the Corporation for a term of three years until the 2009 annual meeting of shareholders. The voting results were as follows: |
Name | | For | | Withheld | |
| |
|
| |
|
| |
David R. Chamberland | | | 3,823,940.380 | | | 96,727.877 | |
Ernest N. Laflamme Jr. | | | 3,791,778.469 | | | 128,889.788 | |
Wayne McCary | | | 3,822,688.362 | | | 97,979.895 | |
| Other Directors who continue to serve as Directors after the 2006 annual meeting include Mark A. Beauregard, Donald R. Chase, Robert J. Perlak, George R. Sullivan and James R. Tremble. |
| |
| 2) The approval of the Westbank Corporation 2006 Equity Incentive Plan. |
For | | Against | | Abstain | |
| |
| |
| |
2,571,652.094 | | | 234,477.593 | | | 103,936.570 | |
ITEM 5. | Other Information - None |
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ITEM 6. | Exhibits | |
| | |
| 2.4 | Agreement and Plan of Merger by and among NewAlliance Bancshares, Inc., and NewAlliance Bank and Westbank Corporation and Westbank, dated as of July 18, 2006 (incorporated by reference to Exhibit 2.4 of Registrant’s Form 8-K filed with the SEC on July 19, 2006) |
| 3.1 | Articles of Organization, as amended (Incorporated by reference to Exhibit 3.1 of Registrant’s Form S-4/A filed with the SEC on November 3, 1998) |
| 3.2 | Bylaws, as amended (Incorporated by reference to Exhibit 3.2 of Registrant’s Form S-4 filed with the SEC on September 30, 1998) |
| 10.1 | 1995 Directors Stock Option Plan (Incorporated by reference to Exhibit A of Registrant’s Proxy Statement filed with the SEC on March 31, 1995) |
| 10.2 | 1996 Stock Incentive Plan (Incorporated by reference to Exhibit A of Registrant’s Proxy Statement filed with the SEC on March 21, 1996) |
| 10.3 | Westbank Corporation Dividend Reinvestment and Common Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 of Registrant’s Form S-3D filed with the SEC on June 19, 1997) |
| 10.4 | Employment Agreement dated December 17, 2003 between Westbank Corporation and Donald R. Chase (Incorporated by reference to Exhibit 10.1 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003) |
| 10.5 | Form of Change of Control Agreements among Westbank Corporation, Westbank and certain officers (Incorporated by reference to Exhibit 10.2 of Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003) |
| 10.6 | Westbank Corporation 2004 Recognition and Retention Plan (Incorporated by reference to Appendix A of Registrant’s Proxy Statement filed with the SEC on March 9, 2004) |
| 10.7 | Indenture by and between Westbank Corporation and Wilmington Trust Company, as Trustee, dated September 20, 2004 for Floating Rate Junior Subordinated Deferrable Interest Debentures (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed with the SEC on September 24, 2004) |
| 10.8 | Indenture by and between Westbank Corporation and Wilmington Trust Company, as Trustee, dated September 20, 2004 for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed with the SEC on September 24, 2004) |
| 10.9 | Guarantee Agreement by and between Westbank Corporation and Wilmington Trust Company, dated September 20, 2004 (Incorporated by reference to Exhibit 10.3 of Registrant’s Form 8-K filed with the SEC on September 24, 2004) |
| 10.10 | Guarantee Agreement by and between Westbank Corporation and Wilmington Trust Company, dated September 20, 2004 (Incorporated by reference to Exhibit 10.4 of Registrant’s Form 8-K filed with the SEC on September 24, 2004) |
| 10.11 | Westbank Corporation 2006 Equity Incentive Plan (Incorporated by reference to the Appendix of Registrant’s Proxy Statement filed with the SEC on March 14, 2006) |
| 10.12 | Employee Stock Ownership Plan (Executed prior to Edgar on January 1, 1989) |
| 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 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.
| WESTBANK CORPORATION |
| |
Date: August 4, 2006 | /s/ Donald R. Chase |
|
|
| Donald R. Chase |
| President and Chief Executive Officer |
| |
| |
Date: August 4, 2006 | /s/ John M. Lilly |
|
|
| John M. Lilly |
| Treasurer and Chief Financial Officer |
28
