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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[mark one]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-12784
WESTBANK CORPORATION
Massachusetts 04-2830731
------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
225 Park Avenue, West Springfield, Massachusetts 01090-0149
------------------------------------------------ ------------
(Address of Principal Executive Office) (Zip Code)
(413) 747-1400
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(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $2.00 Par Value
Preferred stock, $5.00 Par Value
--------------------------------
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer[ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [ ] No [ X ]
Based on the closing sales price on June 30, 2005, the aggregate market value of
the voting stock held by non-affiliates of the registrant was $69,406,472.
The number of shares outstanding of the registrant's common stock, $2.00 par
value, was 4,757,959 on February 28, 2006.
Portions of the Annual Report to Stockholders for the year ended December 31,
2005 are incorporated by reference into Parts I and II.
Portions of the Proxy Statement issued by the Corporation in connection with the
Annual Meeting to be held on April 19, 2006 are incorporated by reference into
Part III.
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WESTBANK CORPORATION
INDEX TO FORM 10-K
PART I
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Item 1 Business I-1
Item 1A Risk Factors I-21
Item 1B Unresolved Staff Comments I-24
Item 2 Properties I-24
Item 3 Legal Proceedings I-24
Item 4 Submission of Matters to a Vote of Security Holders I-24
PART II
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Item 5 Market for the Corporation's Common Stock, Related
Stockholder Matters and Issuer Purchases of Equity Securities II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations II-1
Item 7A Quantitative and Qualitative Disclosures About Market Risk II-1
Item 8 Financial Statements and Supplementary Data II-1
Item 9 Changes In and Disagreements with Accountant
on Accounting and Financial Disclosure II-1
Item 9A Controls and Procedures II-2
Item 9B Other Information II-2
PART III
- --------
Item 10 Directors and Executive Officers of the Registrant III-1
Item 11 Executive Compensation III-1
Item 12 Security Ownership of Certain Beneficial Owners
and Management, and Related Stockholder Matters III-1
Item 13 Certain Relationships and Related Transactions III-1
Item 14 Principal Accounting Fees and Services III-1
PART IV
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Item 15 Exhibits and Financial Statement Schedules IV-1
Signatures IV-2
Exhibit Index IV-3
WESTBANK CORPORATION
PART I
------
ITEM 1 BUSINESS
- -------------------
Westbank Corporation (hereinafter sometimes referred to as the "Corporation") is
a Massachusetts corporation incorporated on November 15, 1983. The Corporation
is registered with the Federal Reserve Board as a bank holding company for
Westbank (hereinafter sometimes referred to as the "Bank"), a
Massachusetts-chartered commercial bank and trust company formed on September 7,
2001 as a result of the merger of the Corporation's two wholly-owned
subsidiaries: Park West Bank and Trust Company, a Massachusetts trust company,
and Cargill Bank, a Connecticut-chartered savings and loan association. The core
business of the Bank dates back to 1962. The Corporation was organized to
facilitate the expansion and diversification of the business of the Bank, and
its predecessors. The Corporation is headquartered in West Springfield,
Massachusetts.
The Bank offers a full range of retail banking services to individuals,
businesses and nonprofit organizations through 17 banking offices located in
Massachusetts and Connecticut. Such services include a wide range of checking
and savings accounts, loans, safe deposit facilities, and automated teller
machines at selected branch locations and two off-site locations. The Bank also
provides lending, depository and related financial services to commercial,
industrial, financial and governmental customers. In the lending area, these
include short- and long-term loans and revolving credit arrangements, letters of
credit, inventory and accounts receivable financing, real estate construction
lending, mortgage loans and equipment leasing.
The Bank provides trust and investment services through its Wealth Management
Division. The Bank prides itself in investment management services that are
personal and client-focused, specializing in assisting individuals, non-profit
organizations and corporations with investable assets of $150,000 or more.
Through the Wealth Management Division, the Bank offers its customers an
investment management account which is monitored by investment professionals
employed by the Bank. These investment professionals monitor each customer's
investment portfolio and are responsible for buying and selling securities on
the customer's behalf.
The Corporation now offers non-deposit investment products at the Bank's branch
offices through our newly formed Westco Financial Services Division. Westco
Financial Services offers a full range of investment services, annuities and
other insurance products.
Web Site and Availability of Periodic Filings
The Corporation's Web site is www.westbankcorponline.com. The Corporation makes
available, free of charge, on or through its Web site, its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after the Corporation electronically files such material, or
furnishes it to the Securities and Exchange Commission (the "SEC"). The SEC also
maintains an electronic database of all periodic reports filed by public
companies at www.sec.gov, through which the Corporation's periodic reports are
also available, free of charge.
Market Area and Competition
The Bank's primary service area consists of Hampden, Hampshire, Franklin and
Worcester Counties in Massachusetts and Windham County in Connecticut. Featuring
an attractive mix of rural, residential and urban property, the combined market
area is home to a variety of key sectors, including financial services,
healthcare, education, manufacturing, tourism, agriculture and construction. The
economic forecast points to continued slow to moderate growth in 2006.
The Bank's banking, real estate activity and trust services are competitive with
other financial institutions. The Bank's primary competition includes local,
regional and super-regional commercial banks, mutual savings banks, savings and
loan associations, credit unions, consumer finance companies, loan offices,
money market funds and other financing organizations. Additionally, competition
for trust services from major commercial banks is high, with efforts continuing
by those banks to solicit new business. The Bank's Wealth Management Division
prides itself on being one of the few remaining corporate fiduciaries providing
personal services locally. Insurance companies, mutual savings banks, investment
counseling firms, and other business firms and individuals also offer active
competition for such business. The competitive landscape is also likely to
become even more crowded with mergers, acquisitions, expansions and new market
entries planned in 2006.
I-1
Lending Activities - General
The Bank originates commercial real estate, commercial loans and leases, and
consumer loans in addition to a traditional emphasis on residential lending. The
Bank generally retains the majority of the loans that it originates. During the
past 12 months, the Bank sold approximately $47,400,000 in 1-4-family fixed-rate
residential real estate loans. At December 31, 2005, the Bank had total loans of
$432,459,000, of which $171,215,000, or 40%, were 1-4 family residential
mortgages, including residential construction and home equity loans,
$141,557,000 or 33% were commercial real estate loans, including commercial
construction; $75,361,000, or 17% were commercial loans and leases; while
consumer loans totaled $43,041,000 or 10% of total loans.
The Bank's loans are subject to federal and state laws and regulations. The
interest rates the Bank charges on loans are principally affected by the demand
for loans, the supply of money available for lending purposes and the interest
rates offered by the Bank's competitors. These factors are, in turn, affected by
general and local economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies, and
governmental budgetary matters.
I-2
Loan Portfolio
The following table sets forth the classification (in thousands) of the
Corporation's loans by major category at December 31, 2005.
2005 2004 2003 2002 2001
====================================================================================================
Commercial $ 64,679 $ 65,849 $ 64,974 $ 61,115 $ 53,756
- ----------
Real estate:
Construction 8,180 11,009 7,045 8,700 5,154
Residential (1-4 family) 135,257 158,111 188,100 242,297 238,809
Home equity 32,580 32,090 28,570 25,022 20,982
Commercial properties 136,756 116,379 103,508 94,637 83,443
- ----------------------------------------------------------------------------------------------------
Total Real Estate 312,773 317,589 327,223 370,656 348,388
- ----------------------------------------------------------------------------------------------------
Consumer 43,041 42,562 40,847 39,730 37,292
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Leases 10,682 12,384 7,024 7,743 4,841
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Gross Loans 431,175 438,384 440,068 479,244 444,277
Deferred loan origination
(fees) - net of costs 1,284 985 699 365 332
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Total Loans 432,459 439,369 440,767 479,609 444,609
Allowance for loan losses (4,199) (4,356) (4,428) (5,111) (4,179)
- ----------------------------------------------------------------------------------------------------
Net Loans $ 428,260 $ 435,013 $ 436,339 $ 474,498 $ 440,430
====================================================================================================
The Corporation's loan portfolio is not concentrated within a single industry or
a group of related industries; however, underlying collateral values are
dependent upon market fluctuations in the western and central Massachusetts and
northeastern Connecticut areas. The aggregate amount of loans to executive
officers, Directors and organizations with which they are associated amounted to
$12,595,000 or 26.6% of stockholders' equity as of December 31, 2005, compared
to $11,388,000 or 24.0% as of December 31, 2004.
Loan Maturity
The following table provides the maturity distribution and sensitivity to
changes in interest rates of commercial loans and commercial real estate
construction loans at December 31, 2005.
12 Months 1 - 5 After
(Dollars in thousands) or Less Years 5 Years Total
=========================================================================
Commercial $ 48,020 $ 15,418 $ 1,241 $ 64,679
Real estate:
Construction 4,801 - - 4,801
Commercial 24,845 78,268 33,643 136,756
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Totals $ 77,666 $ 93,686 $ 34,884 $ 206,236
=========================================================================
Of the commercial loans that mature beyond one year, approximately $38,052,000
have fixed rates and the remaining $90,518,000 are floating rate loans.
In the normal course of business, various commitments and contingent liabilities
are outstanding, such as guarantees, standby letters of credit, commitments to
extend credit and various financial instruments with off-balance-sheet risk that
are not reflected in the financial statements. The most significant of these are
commitments to extend credit and commitments to advance funds under existing
loan agreements, which were $20,607,000 and $75,393,000 respectively at December
31, 2005 and $19,320,000 and $69,023,000 respectively in 2004.
I-3
The following table presents, as of December 31, 2005, the dollar amount of all
loans contractually due after December 31, 2006 and whether these loans have
fixed interest rates or adjustable interest rates.
Due after December 31, 2006
-----------------------------------
(Dollars in thousands) Fixed Adjustable Total
==================================================================
Residential mortgage loans $ 97,357 $ 23,958 $ 121,315
Commercial real estate loans 22,159 89,752 111,911
Commercial loans 15,893 766 16,659
Consumer loans 36,457 101 36,558
- ------------------------------------------------------------------
Totals $ 171,866 $ 114,577 $ 286,443
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Residential Mortgage Lending
The Bank's residential mortgage loan portfolio is comprised of mortgage loans
secured by one-to-four family properties that serve as the primary residence of
the owner, residential construction loans and home equity loans and lines of
credit. The Bank originates residential loans primarily in Massachusetts and
Connecticut. At December 31, 2005, loans on one-to-four family residential
properties accounted for $135,257,000, or 31.3% of the Bank's total loan
portfolio. Of residential mortgage loans outstanding on that date, 25% were
adjustable-rate loans, and 75% were fixed rate loans. Most of these loan
originations are from existing or past customers of the Bank, its local
communities or referrals from local real estate agents, attorneys and builders.
Approximately 25% of all residential loan originations during fiscal 2005 were
refinancings of loans already in the Bank's portfolio.
Residential mortgage loan originations are generally for terms from 10 to 30
years, amortized on a monthly basis with interest and principal due each month.
Residential real estate loans may remain outstanding for significantly shorter
periods than their contractual terms as borrowers may refinance or prepay loans
at their option without penalty. Conventional residential mortgage loans
extended by the Bank customarily contain "due-on-sale" clauses that permit the
Bank to accelerate the indebtedness of the loan upon transfer of ownership of
the mortgage property.
The Bank makes residential mortgage loans with a loan-to-value ratio up to 100%.
All mortgages originated with a loan-to-value ratio of 80% or greater have
Private Mortgage Insurance ("PMI") with 25-35% coverage. PMI insurance is not
required on loans with an 80% or less loan-to-value ratio. The Bank at times may
originate mortgages outside of secondary market guidelines, tailored to the
needs of its customers.
The Bank also offers residential construction loans to customers in its primary
lending market. Generally, the Bank will make construction loans up to 80%
loan-to-value ratio and up to 90% with PMI. The program allows for mortgagors to
receive up to six advances during the construction phase. The Bank uses
third-party inspectors and Bank personnel as inspectors to determine the advance
amount. The loan converts to permanent financing upon completion of the
construction period. The interest rate on the permanent financing is locked in
at the time of the closing of the construction mortgage or, at the customer's
choice, upon completion of the construction period. At December 31, 2005, there
were outstanding residential construction loans totaling $3,379,000.
The Bank also offers adjustable-rate mortgage loans with a maximum term of 30
years. Adjustable-rate loans offered by the Bank include loans that provide for
an interest rate based on the interest paid on U.S. Treasury securities of
corresponding terms plus a margin. The Bank currently offers adjustable-rate
loans with initial rates below those that would prevail under the foregoing
computations, based upon a determination of market factors and competitive rates
for adjustable-rate loans in its market area. For adjustable-rate loans,
borrowers are qualified at the initial rate.
The Bank's adjustable-rate mortgages include limits on increase or decrease in
the interest rate of the loan. The interest rate will generally increase or
decrease by a maximum of 2% per adjustment period, with a ceiling rate of
between 5% and 6% over the life of the loan. The retention of adjustable-rate
mortgage loans in our loan portfolio helps reduce exposure to changes in
interest rates.
The Bank's home equity lines of credit totaled $32,580,000 and comprised 7.5% of
its total loan portfolio at December 31, 2005. These loans may be originated in
equity amounts in excess of the existing first mortgage or up to 80% of the
value of the property securing the loan. The term to maturity of the Bank's home
equity and home improvement loans may be for 5, 10 or 15 years, or undefined
with a review every 3 years.
I-4
Commercial Real Estate Loans
The Bank originates commercial real estate loans to finance the purchase of real
property, which generally consists of developed real estate. These loans
generally are made to a broader geographic region of borrowers than residential
loans and are extended throughout Massachusetts and Connecticut. In underwriting
commercial real estate loans, consideration is given to the property's historic
cash flow, current and projected occupancy, location, and physical condition. At
December 31, 2005, the commercial real estate loan portfolio consisted of loans
totaling $141,557,000 or 32.7% of total loans. Most of the commercial real
estate portfolio consists of loans that are collateralized by properties in the
Bank's primary market. The Bank's commercial real estate loan portfolio is
diverse and does not have any significant loan concentration by type of industry
or borrower. The Bank generally lends up to a maximum loan-to-value ratio of 80%
on commercial properties and generally requires a minimum debt coverage ratio of
1.2. Commercial real estate lending involves additional risks compared with
one-to-four-family residential lending. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties and/or the collateral value of the
commercial real estate securing the loan, repayment of such loans may be
subject, to a greater extent, to adverse conditions in the real estate market or
the economy. Also, commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. The Bank's loan
policies limit the amount of loans to a single borrower or group of borrowers to
reduce this risk.
The commercial real estate loan portfolio includes $4,801,000 of commercial
construction loans. Recognizing the risks inherent to this type of lending, it
is the Bank's practice to minimize lending risk by carefully studying project
feasibility, developing a detailed knowledge of the borrower/guarantor's entire
business operation, assessing both primary and secondary sources of repayment,
and by structuring the credit in a manner appropriate to the project.
The Bank will only consider construction lending where it holds a first position
mortgage lien on the subject premises. No construction loan will be advanced
without permanent financing approved by the Bank or another lender. Commitments
from any source other than the Bank must be reviewed for capacity and
conditions. The Bank requires that up-front equity requirements be met in cash
or free and clear value of the land directly associated with the project. The
ratio of projected cash flow versus debt service coverage generally will equal
or exceed 1.2. Construction loans may have interest-only payments until
completion of the project. Funds are disbursed only after proper documentation
of work completed.
Commercial Loans and Leases
In addition to commercial real estate loans, the Bank also engages in equipment
leasing, small business commercial lending, including business installment
loans, lines of credit, and other commercial loans. At December 31, 2005, the
Bank's commercial loan portfolio consisted of loans totaling $64,679,000, or 15%
of total loans. A portion of the Bank's commercial loans is participation loans.
Unless otherwise structured as a mortgage on commercial real estate, such loans
generally are limited to terms of seven years or less. Substantially all such
commercial loans have variable interest rates tied to the prime rate. Whenever
possible, the Bank collateralizes these loans with a lien on commercial real
estate or, alternatively, with a lien on business assets and equipment and the
personal guarantees from principals of the borrower. Interest rates on
commercial loans generally have higher yields than residential mortgages.
Commercial loans are generally considered to involve a higher degree of risk
than residential mortgage loans because the collateral may be in the form of
intangible assets and/or inventory subject to market obsolescence. Commercial
loans may also involve relatively large loan balances to single borrowers or
groups of related borrowers, with the repayment of such loans typically
dependent on the successful operation and income stream of the borrower. Such
risks can be significantly affected by economic conditions.
The Bank offers commercial leasing services administered by its Commercial
Lending Division. This Division's goal has been to give business owners
borrowing opportunities for modernization, inventory, equipment, construction,
consolidation, real estate, working capital, vehicle purchases and the
refinancing of existing corporate debt. At December 31, 2005, the Bank had
$10,682,000 in equipment leases. The Bank does not require a down payment for
equipment leases and tailors payments to be monthly, quarterly or bi-annually.
Consumer Loans
The Bank offers a variety of consumer loans. At December 31, 2005, the consumer
loan portfolio totaled $43,041,000, or 10% of total loans. Consumer loans
generally are offered for terms of up to six years, depending on the collateral,
at fixed interest rates. The Bank's consumer loan portfolio consists primarily
of automobile loans. To a lesser extent, the consumer loan portfolio also
includes student loans and personal installment loans. The Bank's level of
consumer loan delinquencies generally has been low.
Indirect automobile loans currently represent the largest portion of the Bank's
consumer loan portfolio. As of December 31, 2005, the Bank's Indirect Lending
Division, which underwrites automobile loans directly through automobile
dealers, booked over $20,000,000 in new auto loans. At the end of 2005, the Bank
had 105 dealer affiliations in Massachusetts and Connecticut.
I-5
Origination Fees and Other Fees
The Bank currently collects origination fees on some of the real estate loan
products offered. Fees to cover the costs of appraisals, credit reports and
other direct costs are also collected. The Bank may also impose late charges on
all loans with the exception of loans secured by deposits. The Bank also
collects prepayment premiums and partial release fees on commercial real estate
and construction loans where such items are negotiated as part of the loan
agreement
Loan Approval Procedures and Authority
The Bank's lending policies are established by its Board of Directors and are
designed to ensure non-discriminatory underwriting standards and loan
origination practices. The policies differ depending on the type of loan
involved.
The Bank has three separate methods for authorizing loans:
1. Loan officers are individually granted authorities.
2. Loans above individual granted authorities are approved by the Officers'
Loan Committee.
3. Loans above the Officers' Loan Committee's authority are approved by the
Directors' Loan Committee.
The loan authorities of all Bank loan officers are given in specific categories,
as required to make the Bank's lending process efficient. These authorities are
limited to those areas of lending where the officer is proficient and
knowledgeable, and to those areas where his duties require loan authority.
Current Lending Procedures
Upon receipt of a completed loan application from a prospective borrower, the
Bank orders a credit report and verifies certain other information. If
necessary, the Bank obtains additional financial or credit-related information.
The Bank requires an appraisal for mortgage loans over $250,000, including loans
made to refinance existing mortgage loans. Appraisals over $250,000 are
performed by licensed or certified third-party appraisal firms that have been
approved by the Bank's Board of Directors. The Bank also requires title
insurance on all secondary market mortgage loans and certain other loans. The
Bank requires borrowers to obtain hazard insurance and, if applicable, the Bank
may require borrowers to obtain flood insurance prior to closing. Available to
borrowers is the option to advance funds on a monthly basis together with each
payment of principal and interest to a mortgage escrow account from which the
Bank makes disbursements for items such as real estate taxes, flood insurance,
and private mortgage insurance premiums, if required.
Asset Quality
One of the Bank's key operating objectives has been and continues to be
maintaining a high level of asset quality. Through a variety of strategies,
including, but not limited to, borrower workout arrangements and aggressive
marketing of foreclosed properties, the Bank has been proactive in addressing
problem and non-performing assets.
Delinquent Loans and Foreclosed Assets
The Bank's policies require that management continuously monitor the status of
the loan portfolio and report to the Board of Directors on a quarterly basis.
These reports include information on delinquent loans and foreclosed real estate
and the Bank's actions and plans to cure the delinquent status of the loans and
to dispose of the real estate.
Non-performing Assets
Non-performing assets totaled $2,846,000 at December 31, 2005.
The following table sets forth information with regard to non-performing loans
as of the end of each year indicated.
(Dollars in thousands) 2005 2004 2003 2002 2001
========================================================================================
Loans on a non-accrual basis $ 1,583 $ 1,614 $ 3,111 $ 1,372 $ 1,040
========================================================================================
Non-accrual loans as a percentage
of total net loans outstanding 0.37% 0.37% 0.71% 0.29% 0.24%
Non-accrual loans as a percentage
of total assets 0.20 0.21 0.43 0.20 0.17
Loans contractually past due 90 days
or more and still accruing $ 633 $ 521 $ 197 $ 186 $ 790
I-6
With the exception of first mortgage loans insured or guaranteed by the Federal
Housing Administration or the Veterans Administration or for which the borrower
has obtained private mortgage insurance, the Bank stops accruing income on loans
when interest or principal payments are 90 days in arrears or earlier when the
timely collectibility of such interest or principal is doubtful. The Bank
designates loans on which it stops accruing income as non-accrual loans and it
reverses outstanding interest that it previously credited. The Bank may
recognize income in the period that it collects such income, when the ultimate
collectibility of principal is no longer in doubt. The Bank returns a
non-accrual loan to accrual status when factors indicating doubtful collection
no longer exist. The Bank defines non-performing loans as loans that are both
non-accruing and accruing loans whose payments are 90 days or more past due.
A loan is recognized as impaired when it is probable that either principal or
interest is not collectable in accordance with the terms of the loan agreement.
Impaired loans are individually assessed to determine whether a loan's carrying
value is not in excess of the fair value of the collateral or the present value
of the loan's cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage loans and
consumer loans, are specifically excluded from the impaired loan portfolio. The
Bank's recorded investment in loans that are considered impaired totaled
$339,000 at December 31, 2005. If all non-accrual loans had been current in
accordance with their terms during the years ended December 31, 2005, 2004,
2003, 2002 and 2001, interest income on such loans would have amounted to
$63,000, $36,000, $106,000, $159,000 and $148,000, respectively. At December 31,
2005, the Bank did not have any loans not included above which are "troubled
debt restructurings" as defined in SFAS No. 15.
Real Estate Owned
Real estate acquired by the Bank as a result of foreclosure or by deed in lieu
of foreclosure is classified as real estate owned until sold. When property is
acquired it is recorded at fair market value at the date of foreclosure,
establishing a new cost basis. Holding costs and declines in fair value after
acquisition are expensed. The following table sets forth information regarding
other real estate owned at December 31, 2005.
(Dollars in thousands) 2005 2004 2003 2002 2001
=============================================================================
Other real estate owned - net $ 630 $ 630 $ - $ - $ 204
Other real estate owned as a
percentage of total assets 0.08% 0.08% 0% 0% 0.03%
I-7
Allowance for Loan Losses
The following table sets forth the historical relationship among the average
amount of loans outstanding, the allowance for loan losses, provision for loan
losses charged to operating expenses, loans charged off, recoveries and selected
ratios.
Year Ended December 31,
(Dollars in thousands) 2005 2004 2003 2002 2001
==============================================================================================================
Balance at beginning of year $ 4,356 $ 4,428 $ 5,111 $ 4,179 $ 3,670
Provision charged to (recovery of) expense 140 225 (354) 1,333 944
- --------------------------------------------------------------------------------------------------------------
4,496 4,653 4,757 5,512 4,614
- --------------------------------------------------------------------------------------------------------------
Charge-off's:
Loans secured by real estate - 97 11 134 52
Commercial and industrial loans 70 134 313 169 358
Consumer loans 108 90 124 186 117
- --------------------------------------------------------------------------------------------------------------
178 321 448 489 527
- --------------------------------------------------------------------------------------------------------------
Recoveries:
Loans secured by real estate - 6 102 12 60
Commercial and industrial loans 10 - 13 39 19
Consumer loans 20 18 4 37 13
- --------------------------------------------------------------------------------------------------------------
30 24 119 88 92
- --------------------------------------------------------------------------------------------------------------
Net charge-off's 148 297 329 401 435
- --------------------------------------------------------------------------------------------------------------
Transfer to accrual for losses on
unfunded loan commitments (149) - - - -
Balance at end of year $ 4,199 $ 4,356 $ 4,428 $ 5,111 $ 4,179
==============================================================================================================
Average loans outstanding $ 441,259 $ 432,864 $ 459,765 $ 463,488 $ 440,454
==============================================================================================================
Net charge-off's as a percentage
of average loans 0.03% 0.07% 0.07% 0.09% 0.10%
Net charge-off's as a percentage
of the allowance at January 1 3.40 6.71 6.44 9.60 11.85
Allowance as a percentage of total loans
at December 31 0.97 0.99 1.01 1.07 0.94
Allowance as a percentage of non-performing
loans at December 31 189.49 204.03 133.86 328.05 228.36
The approach the Bank uses in determining the adequacy of the allowance for loan
losses is based on the Bank's loan loss history, among other factors. Quarterly,
based on an internal review of the loan portfolio, the Bank identifies required
allowance allocations targeted to recognized problem loans that, in the opinion
of management, have probable loss exposure or uncertainties relative to the
depth of the collateral on these same loans. In addition, the Bank maintains a
formula-based 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 methodology is based on a range of
estimated loss percentages based on loan type. The amount of the recorded
allowance 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 allowance to aggregate loans.
I-8
The Bank measures impairment of loans in accordance with SFAS No. 114,
"Accounting by Creditors 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
homogeneous loans, including residential real estate and consumer loans, are
excluded from the provisions of SFAS No. 114. Income on impaired loans is
recognized based on the payment history of each loan.
The formula allowance allocation is calculated by applying loss factors to
outstanding loans by loan category. Loss factors are based on historical loss
experience. 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
Bank's allowance for loan losses as an integral part of their examination
process. Such agencies may require the Bank 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. During 2005, the Bank recorded an
addition to the allowance of $140,000, an addition to the allowance of $225,000
for 2004 and a recovery to the allowance of $354,000 during 2003. During 2005,
2004 and 2003, recoveries totaled $30,000, $24,000 and $119,000 respectively,
and charge-off's totaled $178,000, $321,000 and $448,000 respectively. The
following table represents the allowance for loan losses allocated to each loan
category and the percentage of loan category to total loans:
(Dollars in thousands) 2005 2004 2003 2002 2001
===========================================================================================================================
% of % of % of % of % of
Total Total Total Total Total
Loan Category Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ---------------------------------------------------------------------------------------------------------------------------
Real Estate $ 2,334 70.43% $ 2,298 69.77% $ 2,160 72.64% $ 2,965 75.47% $ 2,216 77.20%
Construction 84 1.89 85 2.51 38 1.60 49 1.82 15 1.16
Commercial 1,385 14.96 1,562 14.99 1,806 14.74 1,674 12.74 1,726 12.09
Leases 139 2.47 176 2.82 105 1.59 116 1.61 73 1.09
Consumer 257 10.25 235 9.91 319 9.43 307 8.36 149 8.46
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,199 100% $ 4,356 100% $ 4,428 100% $ 5,111 100% $ 4,179 100%
===========================================================================================================================
I-9
Investment Activities
General
The Board of Directors of the Bank reviews and approves its investment policy on
an annual basis. The Board of Directors has been delegated primary
responsibility for ensuring that the guidelines in the investment policy are
followed by the Chief Financial Officer. The Chief Financial Officer reports to
the Asset Liability Management Committee weekly and to the Executive Committee
monthly.
The Bank's investment policy is designed primarily to manage the interest rate
sensitivity of its assets and liabilities, to generate a favorable return
without incurring undue interest rate and credit risk, to complement its lending
activities, and to provide and maintain liquidity within established guidelines.
In establishing its investment strategies, management of the Bank considers its
interest rate sensitivity, the types of securities to be held, liquidity and
other factors. Massachusetts-chartered bank and trust companies have authority
to invest in various types of assets, including U.S. Government obligations,
securities of various federal agencies, obligations of states and
municipalities, mortgage-backed securities, certain time deposits of insured
banks and savings institutions, certain bankers' acceptances, repurchase
agreements, loans of federal funds, corporate debt, equity securities and
commercial paper.
The Bank classifies securities as held-to-maturity or available-for-sale at the
date of purchase. Held-to-maturity securities are reported at cost, adjusted for
amortization of premium and accretion of discount. Available-for-sale securities
are reported at fair market value.
The Bank invests in mortgage-backed securities, all of which are directly or
indirectly insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae, and
consist of both securities with maturities of 15 to 30 years and 7-year balloon
securities. The latter are so named because they mature (i.e., balloon) prior to
completing their normal amortization.
The Bank also invests in state and municipal obligations rated at least AA by
Moody's, Standard & Poors or Fitch. The Bank invests in these securities because
of their favorable after-tax yields in comparison to U.S. Government and U.S.
Government Agency securities of comparable maturity.
Finally, the Bank has investments in Federal Home Loan Bank stock and other
equity securities, which are classified as "available-for-sale."
The following table shows the amortized cost (in thousands) of the Corporation's
securities held to maturity at December 31, 2005.
2005 2004 2003
============================================================
Federal agency obligations $ 98,632 $ 69,400 $ -
Mortgage-backed securities 52,726 43,024 250
- ------------------------------------------------------------
Amortized cost $ 151,358 $ 112,424 $ 250
============================================================
The following table shows the estimated fair value (in thousands) of the
Corporation's securities available for sale at December 31, 2005.
2005 2004 2003
======================================================================
U.S. government obligations $ - $ - $ 7,611
Federal agency obligations 130,662 114,226 183,152
Mortgage-backed securities 39,320 37,195 40,901
Municipal bonds 1,581 1,620 1,638
Equity securities 510 2,364 2,932
- ----------------------------------------------------------------------
Estimated fair value 172,073 155,405 236,234
Net unrealized loss (gain) on
securities available for sale 2,929 167 (1,050)
- ----------------------------------------------------------------------
Amortized cost $ 175,002 $ 155,572 $ 235,184
======================================================================
I-10
Investment Securities Portfolio
Maturities and Yields
The following table sets forth the scheduled maturities, amortized cost and
weighted average yields for the Bank's investment debt securities at
December 31, 2005.
Within 1 Year 1 to 5 Years 5 to 10 Years After 10-Years Total
Average Amortized Average Amortized Average Amortized Average Amortized Average Amortized
(Dollars in thousands) Yield Cost Yield Cost Yield Cost Yield Cost Yield Cost
==========================================================================================================================
Federal agency obligations 5.08% $ 43,380 4.59% $ 95,055 4.64% $ 92,930 -% $ - 4.70% $ 231,365
Mortgage-backed securities 7.80 3 3.31 2,969 3.78 5,603 4.58 84,364 4.49 92,939
Municipal bonds - - 4.59 611 3.86 608 4.05 335 4.19 1,554
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities 5.08% $ 43,383 4.55% $ 98,635 4.59% $ 99,141 4.57% $ 84,699 4.64% $ 325,858
==========================================================================================================================
The weighted average yield for the above securities has been computed by
dividing annualized interest income, including the accretion of discount and the
amortization of premiums, by the book value of securities outstanding. For
purposes of the above table, mortgage-backed securities are distributed using
contractual maturity dates.
Deposit Activity and Other Sources of Funds
General
Deposits, borrowings, scheduled amortization and prepayments of loan principal,
maturities, and calls of investments securities and funds provided by operations
are the Bank's primary sources of funds for use in lending, investing and for
other general purposes. See "Management's Discussion and Analysis - Liquidity
and Capital Resources."
Deposits
The Bank offers a variety of deposit accounts having a range of interest rates
and terms. The Bank currently offers regular statement savings deposits,
interest-bearing demand accounts, non-interest-bearing demand accounts, money
market accounts and time deposits.
Deposit flows are influenced significantly by general and local economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. The Bank's deposits are primarily obtained from areas surrounding
its offices and the Bank relies primarily on paying competitive rates, service
and long-standing relationships with customers to attract and retain these
deposits. During the fourth quarter of 2005, the Corporation purchased
approximately $21,000,000 in broker-sponsored deposits. These deposits provided
a lower cost of funding as compared to funding asset growth through additional
borrowings.
When the Bank determines its deposit rates, it considers local competition, U.S.
Treasury securities offerings and the rates charged on other sources of funds.
Core deposits (defined as savings deposits, money market accounts, demand
accounts and other interest-bearing accounts) represented 84% of total deposits
on December 31, 2005. At December 31, 2005, time deposits with remaining terms
to maturity of less than one year amounted to $229,200,000.
The following table sets forth the average of, and average rates paid on,
various classifications of deposits.
2005 2004 2003
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
========================================================================================
Savings $ 85,680 0.37% $ 96,845 0.49% $ 98,934 0.67%
NOW 56,471 1.40 31,371 0.26 30,625 0.20
Money market 20,832 0.97 36,507 1.10 38,174 1.19
Certificates of deposit 80,587 3.35 66,272 3.00 54,446 3.28
Other time deposits 262,891 3.09 262,258 2.90 240,355 3.24
- ----------------------------------------------------------------------------------------
506,461 2.40% 493,253 2.14% 462,534 2.33%
Demand deposits 84,348 84,005 74,617
- ----------------------------------------------------------------------------------------
$ 590,809 $ 577,258 $ 537,151
========================================================================================
Certificates of deposit of $100,000 and over at December 31, 2005 had the
following maturities:
3 Months 3 to 6 6 to 12 1 Year to
(Dollars in thousands) or Less Months Months 5 Years Total
=====================================================================================
Totals $ 21,590 $ 18,913 $ 28,994 $ 27,754 $ 97,251
=====================================================================================
I-11
Borrowings
In addition to deposits, borrowings from the Federal Home Loan Bank of Boston
(the "FHLB") are available as an additional source of funds to finance the
Bank's lending and investing activities. The FHLB functions as a central reserve
bank providing credit to its members. As a member, the Bank is required to own
capital stock in the FHLB and may apply for advances on the security of such
capital stock and certain of its mortgage loans and other assets. At December
31, 2005, the Bank had the ability to borrow a total of approximately
$310,888,000 from the FHLB and had outstanding advances totaling $122,366,000.
The following table summarizes short-term borrowings, which generally mature
daily. Average interest rates during each year were computed by dividing total
interest expense by the average amount borrowed.
(Dollars in Thousands) 2005 2004 2003
============================================================================
Balance at year-end $ 74,873 $ 37,431 $ 46,947
Average amount outstanding 49,314 26,468 14,864
Maximum amount outstanding at any month-end 75,114 48,559 46,947
Average interest rate for the year 2.34% 0.84% 0.57%
Average interest rate on year-end balance 3.40% 1.58% 0.86%
The Bank also maintains a revolving line of credit with Bankers' Bank for
$2,000,000 and a federal funds purchase agreement with Bank of America for
$6,000,000, both of which are renewed annually. As of December 31, 2005, there
were no amounts outstanding under either agreement.
Wealth Management
The Bank has a Wealth Management Division that is comprised of four key areas:
trust and investments, qualified plans, financial and estate planning, and a
private clients group. The Bank specializes in assisting individuals, non-profit
organizations and corporations with investable assets of $150,000 or more. As of
December 31, 2005, the Wealth Management Division of the Bank held property and
investments amounting to $202,970,000. The Bank holds these investments in a
fiduciary or agency capacity and thus such amounts are not included in the
financial statements of the Bank or deemed to be assets of the Bank. At December
31, 2005, this division of the Bank generated $699,000 in fees.
The Bank offers its customers an investment management account through which
investment professionals employed by the Bank oversee the customer's portfolio
and are responsible for buying and selling securities on the customer's behalf.
If a customer elects to have their account invested in equity instruments, the
Bank's investment supervision involves four (4) interrelated groups:
o ValueLine Investment Survey is an independent, weekly investment
advisory service registered with the United States Securities and
Exchange Commission that is not controlled by, nor affiliated with,
any bank, broker or insurance company. Value Line covers a broad field
of stocks (about 1,700 in 92 different industries), accounting for
about 96% of the trading volume on all the stock exchanges.
o Feldman Securities Group specializes in providing custom-tailored
investment programs to meet the objectives of each client by applying
a conservative and disciplined investment philosophy, while monitoring
portfolio asset allocations and securities. Feldman seeks to invest in
high quality companies that have demonstrated the ability to produce
superior rates of return for shareholders compounded over long periods
of time, using the financial strength, earning power and valuation of
the equity company.
o Northern Trust is one of the world's leading investment managers
and seeks to deliver consistently above-benchmark returns with
controlled risk through its disciplined process, innovation and
insight. Northern Trust supplies the Bank with a bond market outlook,
equity strategy, currently attractive issued, company reports,
portfolio guidelines and an economic outlook, review and forecast.
o The Westbank Trust Committee oversees the recommendations of the
research providers with a solid, disciplined philosophy that will
strive to protect the principle of client portfolios. With this
philosophy, a portfolio will not go down as quickly as the indices in
a down market, while understanding that a portfolio will not go up as
fast in an up market. The Trust Committee's recommendations are
designed to provide consistent returns for client portfolios.
Westco Financial Services
The Corporation now offers non-deposit investment products at the Bank's branch
offices through our newly formed Westco Financial Services Division, which
became active in June 2005. Westco Financial Services offers a full range of
investment services, annuities and other insurance products. During the first
six months in operation Westco Financial Services has shown steady growth, with
approximately $8,000,000 in assets under management at December 31, 2005. This
new service is expected to be an excellent blend with our Wealth Management
Division and will offer an excellent investment alternative to our traditional
banking deposit products.
I-12
Subsidiary Activities
The Corporation has two Delaware trust subsidiaries: Westbank Capital Trust II
and Westbank Capital Trust III. Each is used solely for the purpose of trust
preferred financing as described in Note 7 of the financial statements.
Park West Securities Corporation, a Massachusetts corporation, and PWB&T, Inc.,
a Massachusetts corporation, are wholly owned subsidiaries of the Bank.
Employees
As of December 31, 2005, the Corporation and its subsidiaries had the equivalent
of 177 full-time officers and staff.
FEDERAL AND STATE TAXATION
FEDERAL
General
For federal income tax purposes, the Corporation and its subsidiaries on a
consolidated basis report income on the basis of a taxable year ending December
31, using the accrual method of accounting, and are generally subject to federal
income taxation in the same manner as other corporations. The Corporation and
the Bank constitute an affiliated group of corporations and, therefore, are
eligible to report their income on a consolidated basis.
Distributions
To the extent that the Bank makes "non-dividend distributions" to the
Corporation, such distributions will be considered to result in distributions
from unrecaptured tax bad debt reserve as of December 31, 1987 (our "base year
reserve"), to the extent thereof and then from supplemental reserve for losses
on loans, and an amount based on the amount distributed will be included in
income. Non-dividend distributions include distributions in excess of current
and accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. Dividends paid out of current
or accumulated earnings and profits will not be included in income.
The amount of additional income created from a non-dividend distribution is
equal to the lesser of the base year reserve and supplemental reserve for losses
on loans or an amount that, when reduced by the tax attributable to the income,
is equal to the amount of the distribution. Thus, in some situations,
approximately one and one-half times the non-dividend distribution would be
included in gross income for federal income tax purposes, assuming a 34% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in the recapture of any portion of the bad debt reserves.
Corporate Alternative Minimum Tax
The Internal Revenue Code of 1986, as amended (the "Code"), imposes a tax on
alternative minimum taxable income at a rate of 20%. Only 90% of alternative
minimum taxable income can be offset by net operating loss carryovers of which
we currently have none. Alternative minimum taxable income is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items. The
Corporation has not been subject to a tax on alternative minimum taxable income
during the past five years.
Elimination of Dividends; Dividends Received Deduction
The Corporation may exclude from its income 100% of dividends received from the
Bank as a member of the same affiliated group of corporations.
STATE
The Bank files Massachusetts Financial Institution excise tax returns.
Generally, the income of financial institutions in Massachusetts, which is
calculated based on federal taxable income, subject to certain adjustments, is
subject to Massachusetts tax.
The Corporation is also required to file a Massachusetts income tax return and
is generally subject to a state income tax rate that is the same tax rate as the
tax rate for financial institutions in Massachusetts. However, Park West
Securities Corporation and PWB&T, Inc. are taxed at a rate that is currently
lower than income tax rates for commercial banks in Massachusetts.
I-13
REGULATION
General
The Bank is a Massachusetts-chartered commercial bank and trust company, and its
deposit accounts are insured up to applicable limits by the Bank Insurance Fund
of the FDIC. The Bank is subject to extensive regulation, examination and
supervision by the Commonwealth of Massachusetts Division of Banks (the
"Division") as its chartering regulator, and by the FDIC as its deposit insurer
and primary federal regulator.
The Corporation, as a bank holding company which holds 100% of the voting stock
of the Bank, is subject to the Bank Holding Company Act of 1956, as amended (the
"BHCA"), and the rules and regulations of the Federal Reserve Board (the "FRB")
under the BHCA. The Bank and the Corporation are additionally subject to the
provisions of the Massachusetts General Laws applicable to commercial bank and
trust companies and other depository institutions and their holding companies
and applicable regulations of the Division. The Corporation is also subject to
the rules and regulations of the SEC as the common stock of the Corporation is
registered with the SEC and is quoted on the Nasdaq National Market.
Any change in such laws and regulations, whether by the Division, the FDIC, the
FRB or the SEC or through legislation, could have a material adverse impact on
the Corporation and the Bank and their operations and stockholders.
MASSACHUSETTS REGULATION OF THE BANK
General
The Bank is subject to Massachusetts statutes and the rules and regulations of
the Division establishing the powers of the Bank, investment limitations and
minimum standards relative to the security and protection of the Bank for the
benefit of Bank employees, customers and the general public.
Loans-to-One-Borrower Limitations
With specified exceptions, the total obligations of a single borrower to a
Massachusetts-chartered commercial bank and trust company may not exceed 20% of
the Bank's total capital. However, the Bank may lend up to 25% of its total
capital to a single borrower, if the amount of the obligations in excess of the
20% limit is fully secured by obligations of the United States of like value. In
addition, the Bank may lend up to 100% of its total capital to a single
borrower, if the amount of the obligations in excess of the 20% limit is fully
secured by obligations of the United States of like value, which are due within
three years of the date of the note of the borrower. Loans to a single foreign
government or a political subdivision thereof are limited to 10% of capital. In
addition, all of the Bank's loans to foreign governments and the political
subdivisions thereof, combined, cannot exceed 50% of the Bank's total capital.
The Bank currently complies with applicable loans-to-one-borrower limitations.
Dividends
Under the Massachusetts banking laws, a commercial bank and trust company may,
subject to several limitations, declare and pay a dividend on its capital stock
out of the Bank's net profits. A dividend may not be declared, credited or paid
by a stock bank and trust company so long as there is any impairment of capital
stock. No dividend may be declared on the Bank's common stock for any period
other than for which dividends are declared upon preferred stock, except as
authorized by the Commissioner of the Division. The approval of the Commissioner
is also required for a commercial bank and trust company to declare a dividend,
if the total of all dividends declared by the commercial bank and trust company
in any calendar year shall exceed the total of its net profits for that year
combined with its retained net profits of the preceding two years, less any
required transfer to surplus or a fund for the retirement of any preferred
stock.
In addition, federal law may also limit the amount of dividends that may be paid
by the Bank. See "Federal Regulation of the Bank - Prompt Corrective Action."
Examination and Enforcement
The Division is required to periodically examine commercial bank and trust
companies at least once every calendar year or at least once each 18-month
period if the commercial bank and trust company qualifies as "well capitalized"
under the prompt corrective action provisions of the Federal Deposit Insurance
Act. See "Federal Regulation of the Bank - Prompt Corrective Action."
I-14
Community Reinvestment Act
The Bank is subject to provisions of the Massachusetts Community Reinvestment
Act, which are similar to those imposed by the federal Community Reinvestment
Act (see "Federal Regulation of the Bank - Community Reinvestment Act") with the
exception of the assigned exam ratings. Massachusetts banking law provides for
an additional exam rating of "high satisfactory" in addition to the federal
Community Reinvestment Act ratings of "outstanding," "satisfactory," "needs to
improve" and "substantial noncompliance." The Division is required to consider a
bank's Massachusetts Community Reinvestment Act rating when reviewing the Bank's
application to engage in certain transactions, including mergers, asset
purchases and the establishment or relocation of branch offices or automated
teller machines, and provides that such assessment may serve as a basis for the
denial of any such application. The Massachusetts Community Reinvestment Act
requires the Division to assess a bank's compliance and to make such assessment
available to the public. The Bank's latest Massachusetts Community Reinvestment
Act rating, from an exam dated January 10, 2005, was a rating of "Satisfactory."
FEDERAL REGULATION OF THE BANK
Capital Requirements
FDIC regulations require Bank Insurance Fund-insured banks, such as the Bank, to
maintain minimum levels of capital. The FDIC regulations define two classes of
capital known as Tier 1 and Tier 2 capital.
The FDIC regulations establish a minimum leverage capital requirement for banks
in the strongest financial and managerial condition, with a rating of 1 (the
highest examination rating of the FDIC for banks) under the Uniform Financial
Institutions Rating System, of not less than a ratio of 3.0% of Tier 1 capital
to total assets. For all other banks, the minimum leverage capital requirement
is 4.0%, unless the particular circumstances or risk profile of the depository
institution warrants a higher leverage capital ratio.
The FDIC regulations also require that banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of a ratio of total
capital (which is defined as the sum of Tier 1 capital and Tier 2 capital) to
risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted regulations
to require an assessment of an institution's exposure to declines in the
economic value of a bank's capital due to changes in interest rates when
assessing the Bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy. The Bank was considered "well-capitalized"
under FDIC guidelines at December 31, 2005.
Activity Restrictions on State-Chartered Banks
Section 24 of the Federal Deposit Insurance Act ("FDIA"), as amended, which was
added by the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), generally limits the activities and investments of state-chartered
FDIC insured banks and their subsidiaries to those permissible for national
banks and their subsidiaries, unless such activities and investments are
specifically exempted by Section 24 or consented to by the FDIC.
Before making a new investment or engaging in a new activity not permissible for
a national bank or not otherwise permissible under Section 24 or the FDIC
regulations thereunder, an insured bank must seek approval from the FDIC to make
such investment or engage in such activity. The FDIC will not approve the
activity unless the Bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
Enforcement
The FDIC has extensive enforcement authority over insured state-chartered
commercial bank and trust companies, including the Bank. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist orders, and to remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and to unsafe or unsound practices.
The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events.
I-15
Deposit Insurance
Pursuant to FDICIA, the FDIC established a system for setting deposit insurance
premiums based upon the risks a particular institution poses to its deposit
insurance fund. Under the risk-based deposit insurance assessment system, the
FDIC assigns an institution to one of three capital categories based on the
institution's history and its financial information as of the quarter ending
three months before the beginning of the assessment period. The three capital
categories are: (1) well capitalized, (2) adequately capitalized and (3)
undercapitalized, using capital ratios that are substantially similar to the
prompt corrective action capital ratios discussed under "Federal Regulation of
the Bank - Prompt Corrective Action" below. The FDIC also assigns an institution
to a supervisory subgroup based on a supervisory evaluation provided to the FDIC
by the institution's primary federal regulator and information that the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
assessment rate depends on the length of time the institution has been operating
and the capital category and supervisory category to which it is assigned. Under
the regulation, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates currently range from 0.0% of
deposits for an institution in the highest category (i.e., well-capitalized and
financial sound, with no more than a few minor weaknesses) to 0.27% of deposits
for an institution in the lowest category (i.e., undercapitalized and
substantial supervisory concern). The FDIC is authorized to raise the assessment
rates as necessary to maintain the required reserve ratio of 1.25%. Any increase
in insurance assessments could have an adverse effect on the earnings of insured
institutions, including the Bank.
Under FDICIA, the FDIC may terminate the insurance of an institution's deposits
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Transactions with Affiliates of the Bank
Transactions between an insured bank, such as the Bank, and any of its
affiliates are governed by the FRB's Regulation W and by Sections 23A and 23B of
the Federal Reserve Act (the "FRA"). In general, these transactions must be on
terms which are as favorable to the Bank as comparable transactions with
non-affiliates. In addition, certain types of these transactions referred to as
"covered transactions" are subject to quantitative limits based on a percentage
of the Bank's capital, thereby restricting the total dollar amount of
transactions the Bank may engage in with each individual affiliate and with all
affiliates in the aggregate.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of guarantees and other similar types of transactions. Further, most
loans by a bank to any of its affiliates must be secured by collateral in
amounts ranging from 100 to 130 percent of the loan amounts. In addition,
applicable regulations prohibit the Bank from lending to any of its affiliates
that engage in activities that are not permissible for bank holding companies
and from purchasing low-quality (i.e., non-performing) assets from an affiliate
or purchasing the securities of any affiliate, other than a subsidiary.
Loans to Insiders
The Bank's authority to extend credit to its directors, executive officers and
principal shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the FRB. Among other things, these provisions require that
extensions of credit to insiders (a) be made on terms that are substantially the
same as, and follow credit underwriting procedures that are not less stringent
than, those prevailing for comparable transactions with unaffiliated persons and
that do not involve more than the normal risk of repayment or present other
features that are unfavorable to the Bank and (b) not exceed certain limitations
on the amount of credit extended to such persons, individually and in the
aggregate, which limits are based, in part, on the amount of the Bank's capital.
The regulations allow small discounts on fees on residential mortgages for
directors, officers and employees. In addition, extensions for credit in excess
of certain limits must be approved by the Bank's Board of Directors.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), any insured depository
institution, including the Bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low- and moderate-income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community. The CRA requires the FDIC, in connection with its examination of a
commercial bank and trust company, to assess the depository institution's record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution, including
applications for additional branches and acquisitions.
The CRA requires the FDIC to provide a written evaluation of an institution's
CRA performance utilizing a four-tiered descriptive rating system and requires
public disclosure of an institution's CRA rating. The Bank received a
"Satisfactory" rating on its last CRA exam on January 19, 2005.
I-16
CRA regulations rate an institution based on its actual performance in meeting
community needs. In particular, the assessment system focuses on three tests:
o A lending test, to evaluate the institution's record of making loans
in its assessment areas;
o An investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses in its
assessment area, or a broad area that includes its assessment area;
and
o A service test, to evaluate the institution's delivery of services
through its retail banking channels and the extent and innovativeness
of its community development services.
Safety and Soundness Standards
Pursuant to the requirements of the FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, each federal banking agency,
including the FDIC, has adopted guidelines establishing general standards
relating to internal controls, information and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, earnings and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder.
In addition, the FDIC adopted regulations to require a bank that is given notice
by the FDIC that it is not satisfying any of such safety and soundness standards
to submit a compliance plan to the FDIC. If, after being so notified, a bank
fails to submit an acceptable compliance plan or fails in any material respect
to implement an accepted compliance plan, the FDIC may issue an order directing
corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of the FDICIA. If a bank fails to comply with such an order, the FDIC
may seek to enforce such an order in judicial proceedings and to impose civil
monetary penalties.
Prompt Corrective Action
The FDICIA also established a system of prompt corrective action to resolve the
problems of undercapitalized institutions. The FDIC, as well as the other
federal banking regulators, adopted regulations governing the supervisory
actions that may be taken against undercapitalized institutions. The regulations
establish five categories, consisting of "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." The severity of the action authorized or required
to be taken under the prompt corrective action regulations increases as a bank's
capital decreases within the three undercapitalized categories. All banks are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
bank would be undercapitalized. At December 31, 2005, the Bank met the criteria
for being considered "well capitalized."
Federal Reserve System
Under FRB regulations, the Bank is required to maintain noninterest-earning
reserves against its transaction accounts. Current FRB regulations generally
require that reserves of 3% must be maintained against aggregate transaction
accounts of $47,600,000 or less, subject to adjustment by the FRB. Total
transaction accounts in excess of $47,600,000 are required to have a reserve of
10% held against them, which are also subject to adjustment by the FRB. The
first $7,000,000 of otherwise reservable balances, subject to adjustments by the
FRB, are exempted from the reserve requirements. The Bank is in compliance with
these requirements. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. Federal Home Loan
Bank ("FHLB") System members are also authorized to borrow from the Federal
Reserve discount window, but FRB regulations require such institutions to
exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
I-17
Federal Home Loan Bank System
The Bank is a member of the FHLB system, which consists of 12 regional Federal
Home Loan Banks. The FHLB provides a central credit facility primarily for
member institutions. The Bank, as a member of the Federal Home Loan Bank of
Boston (the "FHLB -Boston"), is required to acquire and hold shares of capital
stock in the FHLB-Boston in an amount equal to at least 0.35% of the Bank's
"Membership Stock Investment Base", as defined by the FHLB-Boston, or $10,000,
whichever is greater. The Bank is also required to own activity-based stock,
which is based on 4.5% of the Bank's outstanding advances. However, the
activity-based stock investment requirement for overnight advances was reduced
to 3%, as of August 15, 2005. These percentages are subject to change by the
FHLB-Boston. The Bank was in compliance with this requirement with an investment
in FHLB-Boston stock at December 31, 2005 of $6,450,000. Any FHLB advances must
be secured by specified types of collateral, and all long-term advances may be
obtained only for the purpose of providing funds for residential housing
finance. The Federal Home Loan Banks are required to provide funds for certain
purposes including contributing funds for affordable housing programs. These
requirements could reduce the amount of dividends that the Federal Home Loan
Banks pay to their members and result in the Federal Home Loan Banks imposing a
higher rate of interest on advances to their members. If dividends were reduced,
or interest on future FHLB advances increased, the Bank's net interest income
would be affected.
The Bank Secrecy Act
The Bank and the Corporation are subject to the Bank Secrecy Act, as amended by
the USA PATRIOT Act, which gives the federal government powers to address money
laundering and terrorist threats through enhanced domestic security measures,
expanded surveillance powers and mandatory transaction reporting guidelines. By
way of example, the Bank Secrecy Act imposes an affirmative obligation on the
Bank to report currency transactions that exceed certain thresholds and to
report other transactions determined to be suspicious.
Title III of the USA PATRIOT Act takes measures intended to encourage
information sharing among financial institutions, bank regulatory agencies and
law enforcement bodies. Further, certain provisions of Title III impose
affirmative obligations on a broad range of financial institutions, including
banks, thrifts, brokers, dealers, credit unions, money transfer agents and
parties registered under the Commodity Exchange Act. Among other requirements,
the USA PATRIOT Act imposes the following obligations on financial institutions:
o all financial institutions must establish anti-money laundering
programs that include, at minimum: (i) internal policies, procedures
and controls; (ii) specific designation of an anti-money laundering
compliance officer; (iii) ongoing employee training programs; and (iv)
an independent audit function to test the anti-money laundering
program;
o all financial institutions must establish and meet minimum standards
for customer due diligence, identification and verification;
o financial institutions that establish, maintain, administer or manage
private banking accounts or correspondent accounts in the United
States for non-United States persons or their representatives
(including foreign individuals visiting the United States) must
establish appropriate, specific and, where necessary, enhanced due
diligence policies, procedures and controls designed to detect and
report money laundering through those accounts;
o financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell
banks (foreign banks that do not have a physical presence in any
country) and are subject to certain recordkeeping obligations with
respect to correspondent accounts of foreign banks;
o bank regulators are directed to consider a bank's or holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
Office of Foreign Asset Control
The Bank and the Corporation, like all United States companies and individuals,
are prohibited from transacting business with certain individuals and entities
named on the Office of Foreign Asset Control's list of Specially Designated
Nationals and Blocked Persons. Failure to comply may result in fines and other
penalties. Recently, the Office of Foreign Asset Control issued guidance
directed at financial institutions in which it asserted that it may, in its
discretion, examine institutions determined to be high-risk or to be lacking in
their efforts to comply with these prohibitions.
I-18
FEDERAL HOLDING COMPANY REGULATION
Capital Requirements
The FRB has adopted capital adequacy guidelines pursuant to which it assesses
the adequacy of capital in examining and supervising a bank holding company and
in analyzing applications to it under the BHCA. The FRB capital adequacy
guidelines generally require bank holding companies to maintain total capital
equal to 8% of total risk-adjusted assets, with at least one-half of that amount
consisting of Tier 1, or core capital, and up to one-half of that amount
consisting of Tier 2, or supplementary capital. Tier 1 capital for bank holding
companies generally consists of the sum of common stockholders' equity and
perpetual preferred stock (subject in the case of the latter to limitations on
the kind and amount of such stocks which may be included as Tier 1 capital),
less goodwill and, with certain exceptions, intangibles. Tier 2 capital
generally consists of hybrid capital instruments; perpetual preferred stock that
is not eligible to be included as Tier 1 capital; term subordinated debt and
intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not past-due (90 days or more) or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, as are certain privately-issued mortgage-backed securities
representing indirect ownership of such loans. Off-balance-sheet items also are
adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the FRB requires bank
holding companies to maintain a minimum leverage capital ratio of Tier 1 capital
to total assets of 3.0%. Total assets for this purpose does not include goodwill
and any other intangible assets and investments that the FRB determines should
be deducted from Tier 1 capital. The FRB has announced that the 3.0% Tier 1
leverage capital ratio requirement is the minimum for the top-rated bank holding
companies without any supervisory, financial or operational weaknesses or
deficiencies or those that are not experiencing or anticipating significant
growth. Other bank holding companies are expected to maintain Tier 1 leverage
capital ratios of at least 4.0% to 5.0% or more, depending on their overall
condition.
The Corporation is in compliance with the above-described FRB regulatory capital
requirements.
Activities
The BHCA prohibits a bank holding company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank, or
increasing such ownership or control of any bank, without prior approval of the
FRB. No approval under the BHCA is required, however, for a bank holding company
already owning or controlling 50% of the voting shares of a bank to acquire
additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than banking or managing or controlling
banks. Under the BHCA, the FRB is authorized to approve the ownership of shares
by a bank holding company in any company, the activities of which the FRB has
determined to be so closely related to banking or to managing or controlling
banks as to be a proper incident thereto. In making such determinations, the FRB
is required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
In addition, a bank holding company which does not qualify and elect to be
treated as a financial holding company under the Gramm-Leach-Bliley Financial
Services Modernization Act is generally prohibited from engaging in, or
acquiring, direct or indirect control of any company engaged in non-banking
activities. One of the principal exceptions to this prohibition is for
activities found by the FRB to be so closely related to banking or managing or
controlling banks as to be permissible. Bank holding companies that do qualify
as, and elect to be treated as, financial holding companies may engage in
activities that are financial in nature or incident to activities which are
financial in nature. Bank holding companies may qualify to become financial
holding companies if they meet certain criteria set forth by the FRB.
Beginning June 1, 1997, the Interstate Banking Act permitted federal banking
agencies to approve merger transactions between banks located in different
states, regardless of whether the merger would be prohibited under the law of
the two states. The Interstate Banking Act also permitted a state to "opt in" to
the provisions of the Interstate Banking Act before June 1, 1997, and permitted
a state to "opt out" of the provisions of the Interstate Banking Act by adopting
appropriate legislation before that date. Accordingly, beginning June 1, 1997,
the Interstate Banking Act permitted a bank, such as the Bank, to acquire an
institution by merger in a state other than Massachusetts unless the other state
had opted out of the Interstate Banking Act. The Interstate Banking Act also
authorizes de novo branching into another state if the host state enacts a law
expressly permitting out of state banks to establish such branches within its
borders.
I-19
Acquisition of the Corporation or the Bank
Under the federal Change in Bank Control Act, any person (including a company),
or group acting in concert, seeking to acquire control of the Corporation or the
Bank will be required to submit prior notice to the FRB. Under the Change in
Bank Control Act, the FRB has 60 days within which to act on such notices,
taking into consideration factors, including the financial and managerial
resources of the acquirer, the convenience and needs of the communities served
by the Corporation and the Bank, and the anti-trust effects of the acquisition.
The term "control" is defined generally under the BHCA to mean the ownership or
power to vote 25% or more of any class of voting securities of an institution or
the ability to control in any manner the election of a majority of the
institution's directors. Additionally under the Bank Merger Act sections of the
Federal Deposit Insurance Act, the prior approval of an insured institution's
primary federal regulator is required for an insured institution to merge with
or transfer assets to another insured institution or an uninsured institution.
The Sarbanes-Oxley Act
As a public company, the Corporation is subject to the Sarbanes-Oxley Act which
implements a broad range of corporate governance and accounting measures for
public companies designed to promote honesty and transparency in corporate
America and better protect investors from the type of corporate wrongdoing that
occurred in Enron, WorldCom and similar companies. The Sarbanes-Oxley Act's
principal legislation and the derivative regulation and rule making promulgated
by the SEC includes:
o the creation of an independent accounting oversight board;
o auditor independence provisions which restrict non-audit services that
accountants may provide to their audit clients;
o additional corporate governance and responsibility measures, including the
requirement that the chief executive officer and chief financial officer
certify financial statements;
o a requirement that companies establish and maintain a system of internal
control over financial reporting and that a company's management provide an
annual report regarding its assessment of the effectiveness of such
internal control over financial reporting to the company's independent
accountants and that such accountants provide an attestation report with
respect to management's assessment of the effectiveness of the company's
internal control over financial reporting;
o the forfeiture of bonuses or other incentive-based compensation and profits
from the sale of an issuer's securities by directors and senior officers in
the twelve month period following initial publication of any financial
statements that later require restatement;
o an increase in the oversight of, and enhancement of, certain requirements
relating to audit committees of public companies and how they interact with
the Corporation's independent auditors;
o requirement that audit committee members must be independent and are
absolutely barred from accepting consulting, advisory or other compensatory
fees from the issuer;
o requirement that companies disclose whether at least one member of the
committee is an "audit committee financial expert" (as such term is defined
by the SEC) and if not, why not;
o expanded disclosure requirements for corporate insiders, including
accelerated reporting of stock transactions by insiders and a prohibition
on insider trading during pension blackout periods;
o a prohibition on personal loans to directors and officers, except certain
loans made by insured financial institutions;
o disclosure of a code of ethics and filing a Form 8-K for a change or waiver
of such code;
o mandatory disclosure by analysts of potential conflicts of interest; and
o a range of enhanced penalties for fraud and other violations.
I-20
Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of
personal loans to directors and executive officers of issuers. The prohibition,
however, does not apply to mortgages advanced by an insured depository
institution, such as the Bank, that are subject to the insider lending
restrictions of Section 22(h) of the Federal Reserve Act.
Although the Corporation has and will continue to incur additional expense in
complying with the provisions of the Sarbanes-Oxley Act and the resulting
regulations, such compliance will not have a material impact on its results of
operations or financial condition.
Federal Securities Law
The Corporation's common stock is registered with the SEC under Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Thus, the
Corporation is subject to information, proxy solicitation, insider trading
restrictions, and other requirements under the Exchange Act.
Massachusetts Holding Company Regulation
The Corporation as a Massachusetts-chartered corporation is governed by the
Massachusetts Business Corporation Law and the Corporation's Articles of
Organization and Bylaws. Under the Massachusetts banking laws, a company owning
or controlling two or more banking institutions, including a savings bank, is
regulated as a bank holding company. The Corporation or the Bank would become a
Massachusetts bank holding company if the Corporation acquired a second banking
institution and operated it separately from the Bank or the Bank acquired a
banking institution.
Quotation on NASDAQ
The Corporation's common stock is quoted on The NASDAQ Stock Market. In order to
maintain such quotation, the Corporation is subject to certain corporate
governance requirements, including:
o a majority of its board must be composed of independent directors;
o it is required to have an audit committee composed of at least three
directors, each of whom is an independent director, as such term is
defined by both the rules of the National Association of Securities
Dealers ("NASD") and by Securities Exchange Act regulations;
o its nominating committee and compensation committee must also be
composed entirely of independent directors;
o each of its audit committee and nominating committee must have a
publicly available written charter.
ITEM 1A RISK FACTORS
- -----------------------
These are general risk factors affecting Westbank Corporation. These potential
risks are further described under "Item 1 - Business" and in "Management's
Discussion and Analysis." These risks should be considered when deciding whether
or not to make an investment in the Corporation. Additional risks that are not
known to us at this time or risks that are currently deemed immaterial could
also have an adverse impact on our business.
Changes in market interest rates could adversely affect our financial condition
and results of operations.
Our financial condition and results of operations can be significantly affected
by changes in market interest rates. Our results of operations depend
substantially on our net interest income, which is the difference between the
interest income that we earn on our interest-earning assets and the interest
expense that we pay on our interest-bearing liabilities. Changes in market
interest rates are often affected by external factors beyond the control of
management, including inflation, recession and domestic and international
events. Interest rate changes can either negatively or positively impact our net
interest income depending on the current position of the Corporation, including
the make-up of its balance sheet and rate at which its interest-earning assets
and interest-bearing liabilities reprice.
I-21
We are currently in a period of rising interest rates. If interest rates
continue to increase as a result of an improving economy, we may have to
increase the rates paid on our deposits and borrowed funds more quickly than our
loans and investments reprice, resulting in a negative impact on our net
interest income. In addition, the impact of rising rates could be compounded if
deposit customers move funds from savings accounts back to higher rate
certificate of deposit accounts. Increases in interest rates may also decrease
loan demand and make it more difficult for borrowers to repay adjustable rate
loans. Conversely, should market interest rates fall below current levels, our
net interest margin could also be negatively affected if more interest-earning
assets reprice than interest-bearing liabilities.
Changes in the fair value of available-for-sale investments are recorded as
unrealized gains and (losses) and included as a component of stockholders'
equity. Decreases in the fair value of available-for-sale investments will
negatively affect stockholders' equity.
Our commercial real estate and commercial loan portfolio may increase our credit
risk.
We originate commercial real estate, including construction, and commercial
loans and leases in addition to our residential lending. Commercial real estate
and commercial loans are generally considered to involve a higher degree of risk
than residential mortgage loans because the collateral may be in the form of
intangible assets and or inventory subject to market obsolescence. Additionally,
commercial real estate and commercial loans usually consist of relatively large
loan balances to single borrowers or groups of related borrowers, with the
repayment of such loans typically dependent on the successful operation of the
business or property and income stream of the borrower. Such risks can be
significantly affected by economic conditions. Commercial real estate and
commercial loans are more susceptible to a risk of loss during a downturn in the
economy.
We have certain loan policies in place that limit the amount of loans to a
single borrower or group of borrowers to reduce this risk. However, the
underwriting, review and monitoring of these types of loans cannot eliminate all
of the risks related to these loans.
Increased competition in the banking and financial services industry may
unfavorably affect our business.
The banking and financial services industry is very competitive. Our primary
competition includes local, regional and super-regional commercial banks, mutual
savings banks, savings and loan associations, credit unions, consumer finance
companies, loan offices, money market funds and other financing organizations.
Consolidation among financial service providers has resulted in fewer national
and regional banks and financial institutions holding a larger accumulation of
assets. These institutions generally have greater resources and a wider
geographic presence. Our competitors sometimes are also able to offer more
services, more favorable pricing or greater customer convenience than we do.
Particularly intense competition exists for sources of funds including savings
and time deposits and loans. Changes in the regulatory landscape and
technological advances have allowed a wide range of competitors to compete more
effectively in local markets.
An inadequate allowance for loan losses would reduce our earnings.
We are exposed to the risk that customers will not be able to repay their loans.
This risk is inherent in the lending business. We also run the risk that the
customer's collateral will not be sufficient to cover the balance of their loan,
as underlying collateral values fluctuate with market changes. The fact that our
loan portfolio is not concentrated within a single industry or a group of
related industries helps mitigate this credit risk; however, we can not
eliminate the risk altogether. The Bank records an allowance for loan losses to
cover these potential losses.
The adequacy of the allowance for loan losses is evaluated quarterly by
management. Factors considered in evaluating the allowance for loan losses
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. At December 31, 2005, management believes
that the allowance for loan losses is adequate to cover any potential losses.
However, it is possible that borrower defaults could exceed our allowance for
loan losses which would reduce our earnings. We also may experience adverse
trends that would require us to significantly increase our allowance for loan
losses in the future, which would also reduce our earnings.
Improper functioning of our information technology systems could have an adverse
impact on our operations.
We rely heavily on our information technology systems, including the systems of
outside service providers. If our internal systems or external technological
sources were to fail or there is a breach of security, our ability to maintain
accurate financial records may be impaired, which could materially affect our
operations and financial condition.
I-22
Regulatory restrictions and reduced earnings may limit our dividend payments.
We presently pay a regular cash dividend on a quarterly basis. The granting of
those dividends is approved by the Board of Directors. While the Board of
Directors expects to continue its current policy of declaring regular quarterly
dividend payments, the policy will continue to be reviewed periodically in light
of future earnings, regulatory restrictions and other considerations. Therefore,
no assurance can be given that cash dividends on common stock will continue to
be paid in the future.
Failure to pay interest on our debt may adversely impact our business.
Deferral of interest payments where allowed on our trust preferred securities
and junior subordinated debentures may affect our ability to raise additional
debt and pay dividends on our common stock. Failure to pay interest on our other
borrowings would adversely affect our ability to continue our business
operations.
Changes in the value of our goodwill could reduce our earnings.
We are required under accounting principles generally accepted in the United
States of America to test our goodwill for impairment at least on an annual
basis. At December 31, 2005, our goodwill totaling $8,837,000 was deemed not to
be impaired. 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.
We are subject to extensive regulation that could restrict our activities or
impose financial limitations.
We are subject to extensive regulation, examination and supervision through
various state and federal regulators, including but not limited to the
Massachusetts Division of Banks, FDIC, FRB and SEC. We are also exposed to the
recent heightened regulatory scrutiny under the Bank Secrecy Act and the USA
PATRIOT Act. Management has policies and procedures in place to comply with all
state and federal regulations, including anti-money laundering laws, however we
can not assure that we are in full compliance at all times. Additionally, we are
subject to consumer protection laws which regulate our lending and deposit
activities. A significant claim against us under any of these laws and
regulations could have a material adverse impact on our business operations. The
regulation, examination and supervision to which we are subject limits the
activities in which we may engage. Regulatory authorities have extensive
discretion in the exercise of their supervisory and enforcement powers. They
may, among other things, impose restrictions on the operation of a banking
institution, the classification of assets by such institution and such
institution's allowance for loan losses. Any change in the laws or regulations
applicable to us, or in banking regulators' supervisory policies or examination
procedures could have a material adverse impact on our business operations. See
"Item 1 - Business" for additional information on the regulatory environment
that we operate in.
Our local economy may affect our future growth possibilities.
Our current market area is principally located in Hampden, Hampshire, Franklin
and Worcester Counties in Massachusetts and Windham County in Connecticut. Our
future growth opportunities depend on the growth and stability of our regional
economy and out ability to expand our market area. A downturn in our local
economy may limit funds available for deposit and may negatively affect our
borrowers' ability to repay their loans on a timely basis, both of which could
have an impact on our profitability.
We depend on our executive officers and key personnel to continue the
implementation of our long-term business strategy and could be harmed by the
loss of their services.
We believe that our continued growth and future success will depend in large
part upon the skills of our management team. The competition for qualified
personnel in the financial services industry is intense, and the loss of our key
personnel or an inability to continue to attract, retain and motivate key
personnel could adversely affect our business. We cannot assure you that we will
be able to retain our existing key personnel or attract additional qualified
personnel. Although we have an employment agreement with our President and Chief
Executive Officer, the loss of the services of one or more of our executive
officers and key personnel could impair our ability to continue to develop our
business strategy.
If we fail to maintain an effective system of internal control over financial
reporting, we may not be able to accurately report our financial results or
prevent fraud and, as a result, investors and depositors could lose confidence
in our financial reporting, which could adversely affect our business, the
trading price of our stock and our ability to attract additional deposits.
We are required to include in our annual reports filed with the Securities and
Exchange Commission (the "SEC") a report of our management regarding internal
control over financial reporting. As a result, we document and evaluate our
internal control over financial reporting in order to satisfy the requirements
of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and
SEC rules and regulations, which require an annual management report on our
internal control over financial reporting, including, among other matters,
management's assessment of the effectiveness of internal control over financial
reporting and an attestation report by our independent auditors addressing these
assessments. Accordingly, management has retained outside consultants to assist
us in (i) assessing and documenting the adequacy of our internal control over
financial reporting, (ii) improving control processes, where appropriate, and
(iii) verifying through testing that controls are functioning as documented. If
we fail to identify and correct any significant deficiencies in the design or
operating effectiveness of our internal control over financial reporting or fail
to prevent fraud, current and potential stockholders and depositors could lose
confidence in our financial reporting, which could adversely affect our
business, financial condition and results of operations, the trading price of
our stock and our ability to attract additional deposits.
I-23
ITEM 1B UNRESOLVED STAFF COMMENTS
- ------------------------------------
None.
ITEM 2 PROPERTIES
- ------ ----------
The Corporation had one principal banking subsidiary, Westbank, which operates
seventeen banking offices located in Massachusetts and Connecticut, as follows:
================================================ ================= ================ =================
LOCATION OWNED LEASED TOTAL
------------------------------------------------ ----------------- ---------------- -----------------
MASSACHUSETTS
Agawam (Feeding Hills) 1 1
Chicopee 1 1
Chicopee - supermarket 1 1
East Longmeadow 1 1
East Longmeadow - supermarket 1 1
Holyoke 1 1
Ludlow 1 1
Southwick 1 1
Webster 1 1
West Springfield 2 1 3
Westfield 1 1
CONNECTICUT
Danielson 1 1
Putnam 1 1 2
Woodstock 1 1
------------------------------------------------ ----------------- ---------------- -----------------
TOTALS 9 8 17
================================================ ================= ================ =================
All banking offices except the one in Holyoke, Massachusetts, and the
supermarket offices have drive-in facilities and twenty-four hour automated
teller machines.
Title to the properties described as owned in the foregoing table is held by
Westbank with warranty deed with no material encumbrances. Westbank owns, with
no material encumbrances, land adjacent to the main office that is available for
parking and, through a subsidiary, also owns one other property adjacent to the
main office consisting of land also used as a parking lot.
ITEM 3 LEGAL PROCEEDINGS
- ------ -----------------
Other than ordinary routine litigation incidental to the business, no 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 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 2005.
I-24
PART II
-------
ITEM 5 MARKET FOR CORPORATION'S COMMON STOCK, RELATED
- ------ ----------------------------------------------
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------------------
Reference is made to the Corporation's Annual Report to Stockholders for the
year ended December 31, 2005, wherein this subject is covered.
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 program was
announced in October 2003. The value of the 5% stock of the Corporation at the
time of the announcement was approximately $3,800,000. The following table
summarizes repurchases of Westbank Corporation's stock for the three months
ended December 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
- ----------------------------------------------------------------------------------------------------------------------
October 2005 1,500 $ 14.14 37,085 180,819
November 2005 6,800 14.34 43,885 174,019
December 2005 12,000 14.98 55,885 162,019
- ----------------------------------------------------------------------------------------------------------------------
Total 20,300 $ 14.70 55,885 162,019
======================================================================================================================
ITEM 6 SELECTED FINANCIAL DATA
- ------ -----------------------
Reference is made to the Corporation's Annual Report to Stockholders for the
year ended December 31, 2005, wherein this subject is covered and is hereby
incorporated by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Reference is made to the Corporation's Annual Report to Stockholders for the
year ended December 31, 2005, wherein this subject is covered and is hereby
incorporated by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
Reference is made to the Corporation's Annual Report to Stockholders for the
year ended December 31, 2005, wherein the subject matter is covered and is
hereby incorporated by reference.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
Reference is made to the Corporation's Annual Report to Stockholders for the
year ended December 31, 2005, wherein this subject is covered, and is hereby
incorporated by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
NONE
II-1
PART II (continued)
-------------------
ITEM 9A 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, (i) is 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.
The report of management on the Corporation's internal control over financial
reporting and the attestation report of the Corporation's registered public
accounting firm are both incorporated by reference from the Annual Report to
Stockholders for the year ended December 31, 2005.
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.
ITEM 9B OTHER INFORMATION
- ------- -----------------
NONE
II-2
PART III
--------
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
Reference is made to the Corporation's Proxy Statement to Stockholders for the
2006 Annual Meeting scheduled for April 19, 2006, wherein this subject is
covered, and is hereby incorporated by reference.
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
Reference is made to the Corporation's Proxy Statement to Stockholders for the
2006 Annual Meeting scheduled for April 19, 2006, wherein this subject is
covered, and is hereby incorporated by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- ------- -----------------------------------------------
AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------
Reference is made to the Corporation's Proxy Statement to Stockholders for the
2006 Annual Meeting scheduled for April 19, 2006, wherein this subject is
covered, and is hereby incorporated by reference.
The following table sets forth certain information as of December 31, 2005
concerning outstanding awards and securities available for future issuance
pursuant to the Corporation's equity compensation plans.
------------------------------ -------------------------- ---------------------- -------------------------
(a) (b) (c)
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average equity compensation
issued upon exercise of exercise price of plans, excluding
outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights Column (a)
------------------------------ -------------------------- ---------------------- -------------------------
Equity compensation plans
approved by security
holders:
Stock option 546,562 $ 10.91 20,948
Restricted stock plan 80,500 $ 19.30 -
Equity compensation plans
not approved by security
holders N/A N/A N/A
------------------------------ -------------------------- ---------------------- -------------------------
Total 627,062 $ 11.99 20,948
------------------------------ -------------------------- ---------------------- -------------------------
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
Reference is made to the Corporation's Proxy Statement to Stockholders for the
2006 Annual Meeting scheduled for April 19, 2006, wherein this subject is
covered under the caption, "Beneficial Ownership of Stock and Executive
Compensation - Miscellaneous", and is hereby incorporated by reference.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
- ------- --------------------------------------
Reference is made to the Corporation's Proxy Statement for stockholders for the
2006 Annual Meeting scheduled for April 19, 2006, wherein this subject is
covered, and is hereby incorporated by reference.
III-1
PART IV
-------
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- ------- ------------------------------------------
The following documents are filed as a part of this report:
1. Financial Statements
The following financial statements are incorporated into this Annual
Report on Form 10-K by reference to the Corporation's Annual Report to
Stockholders for the year ended December 31, 2005:
WESTBANK CORPORATION
--------------------
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at December 31, 2005 and 2004
Consolidated Statements of Income for the years ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Stockholders' Equity from
January 1, 2003 to December 31, 2005
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Financial Statement Schedules are omitted because they are
inapplicable or not required.
3. Exhibits
See accompanying Exhibit Index.
IV-1
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WESTBANK CORPORATION
By: /s/ Donald R. Chase
-------------------------------------
Donald R. Chase
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
Signature Title Date
- ----------------------------------------------------------------------------------------------
President and
/s/ Donald R. Chase Chief Executive Officer March 1, 2006
- -------------------------------------
Donald R. Chase
Chairman of the Board
/s/ Ernest N. Laflamme, Jr. and Director March 1, 2006
- -------------------------------------
Ernest N. Laflamme, Jr.
Treasurer and
/s/ John M. Lilly Chief Financial Officer March 1, 2006
- -------------------------------------
John M. Lilly
/s/ Mark A. Beauregard Director March 1, 2006
- -------------------------------------
Mark A. Beauregard
/s/ David R. Chamberland Director March 1, 2006
- -------------------------------------
David R. Chamberland
/s/ G. Wayne McCary Director March 1, 2006
- -------------------------------------
G. Wayne McCary
/s/ Robert J. Perlak Corporate Clerk and Director March 1, 2006
- -------------------------------------
Robert J. Perlak
/s/ George R. Sullivan Director March 1, 2006
- -------------------------------------
George R. Sullivan
/s/ James E. Tremble Director March 1, 2006
- -------------------------------------
James E. Tremble
IV-2
EXHIBIT INDEX
Page No.
-------------
2.1 Stock Purchase Agreement dated April 12, 1999 among
Lake Sunapee Bank F.S.B., Mascoma Savings Bank and Cargill Bank ****
2.2 Purchase and Assumption Agreement dated April 12, 1999 among
Lake Sunapee Bank F.S.B., Mascoma Savings Bank and Cargill Bank ****
2.3 Asset and Liability Agreement dated April 12, 1999 among
Lake Sunapee Bank F.S.B., Mascoma Savings Bank and Cargill Bank ****
3. Articles of Organization and By-Laws, as amended **
(a) Articles of Organization, as amended *
(b) By-Laws, as amended *
4.1 Floating Rate Junior Subordinated Deferrable Interest Debentures
issues by Westbank Corporation to Wilmington Trust Company
dated September 20, 2004 ***
4.2 Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures
issued by Westbank Corporation to Wilmington Trust Company
dated September 20, 2004 ***
10.1 Employment Agreement with Donald R. Chase *****
10.2 Form of Change of Control Agreement *****
10.3 Indenture by and between Westbank Corporation and Wilmington Trust
Company, as Trustee, dated September 20, 2004 for Floating
Rate Junior Subordinated Deferrable Interest Debentures ******
10.4 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 *******
10.5 Guarantee Agreement by and between Westbank Corporation
and Wilmington Trust Company dated September 20, 2004 ********
10.6 Guarantee Agreement by and between Westbank Corporation
and Wilmington Trust Company dated September 20, 2004 *********
10.21 1985 Incentive Stock Option Plan for key employees **********
10.16 1995 Directors' Stock Incentive Plan ***********
10.17 1996 Stock Incentive Plan ************
10.18 2004 Recognition and Retention Plan *************
10.19 Dividend Reinvestment and Common Stock Purchase Plan X
10.20 Cargill Bank of Connecticut Stock Option Plan dated
September 31, 1992 as assumed by Westbank Corporation XX
10.22 Employee Stock Ownership Plan XXXX
13. Annual Report to Stockholders for year-end 2005 incorporated
by reference into this annual report on Form 10-K
14. Code of Ethics XXX
21. Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP
IV-3
31.1 Certification of Chief Executive Officer,
pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer, pursuant to
Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer, pursuant to
Section 1350
32.2 Certification of Chief Financial Officer,
pursuant to Section 1350
* Incorporated by reference to identically numbered exhibits
contained in Registrant's annual report on Form 10-K for the year
ended December 31, 1988.
** Incorporated by reference to identically numbered exhibits
contained in Registrant's annual report on Form 10-K for the year
ended December 31, 1987.
*** Incorporated by reference to Exhibits 10(a), 10(b) and 10(c),
respectively, contained in Registrant's Form 8-K filed September
20, 2004.
**** Incorporated by reference to identically numbered exhibits
contained in Registrant's annual report on Form 10-K for the
quarter ended March 31, 1999.
***** Incorporated by reference to identically numbered exhibits
contained in Registrant's annual report on Form 10-K for the year
ended December 31, 2003.
****** Incorporated by reference to Exhibit 10.1 contained in
Registrant's Form 8-K filed September 20, 2004.
******* Incorporated by reference to Exhibit 10.2 contained in
Registrant's Form 8-K filed September 20, 2004.
******** Incorporated by reference to Exhibit 10.3 contained in
Registrant's Form 8-K filed September 20, 2004.
********* Incorporated by reference to Exhibit 10.4 contained in
Registrant's Form 8-K filed September 20, 2004.
********** Incorporated by reference to identically numbered exhibit
contained in Registrant's annual report on Form 10-K for the year
ended December 31, 1988.
*********** Incorporated by reference to identically numbered exhibit
contained in Registrant's annual report on Form 10-K for the year
ended December 31, 1995.
************ Incorporated by reference to identically numbered exhibit
contained in Registrant's Proxy Statement on the Annual Meeting of
Shareholders on Form DEF 14-A filed April 17, 1996.
************* Incorporated by reference to Appendix A contained in Registrant's
Proxy Statement for the Annual Meeting of Shareholders on Form DEF
14-A filed April 21, 2004.
X Incorporated by reference to Exhibit 99.2 contained in
Registrant's Registration Statement on Form S-3 filed February
28, 2003.
XX Incorporated by reference to Exhibit 99 contained in Registrant's
Registration Statement on Form S-8 filed July 23, 2002.
XXX Incorporated by reference to Appendix D contained in Registrant's
Proxy Statement for the Annual Meeting of Shareholders on Form
14-A filed April 21, 2004.
XXXX Executed prior to EDGAR on January 1, 1989.
IV-4