EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA
Westbank Corporation and Subsidiaries
Year Ended December 31,
(Dollars in thousands, except share amounts) 2005 2004 2003 (1) 2002(1)(2) 2001(1)(2)
========================================================================================================================
Interest and dividend income $ 38,890 $ 36,809 $ 35,852 $ 40,576 $ 41,088
Interest expense 16,226 14,274 14,085 18,055 20,691
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 22,664 22,535 21,767 22,521 20,397
Provision for (recovery of) loan losses 140 225 (354) 1,333 944
Non-interest income 4,010 3,441 4,536 4,090 3,489
Non-interest expense 19,254 19,149 17,439 16,412 16,841
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,280 6,602 9,218 8,866 6,101
Income taxes 2,175 1,991 3,164 2,857 2,028
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 5,105 $ 4,611 $ 6,054 $ 6,009 $ 4,073
========================================================================================================================
Common share data:
Earnings per share:
Basic $ 1.08 $ 1.00 $ 1.32 $ 1.30 $ 0.87
Diluted 1.05 0.95 1.26 1.27 0.86
Cash dividends declared 0.56 0.56 0.48 0.44 0.40
Ending book value 9.97 10.06 9.78 9.30 8.30
AT DECEMBER 31:
Securities $ 323,431 $ 267,829 $ 236,484 $ 128,473 $ 138,183
Loans, net 428,260 435,013 436,339 474,498 440,430
Assets 808,707 756,441 725,442 684,166 630,155
Non-performing assets 2,846 2,765 3,308 1,558 2,034
Deposits 599,359 590,032 537,310 562,524 510,556
Borrowings 138,454 97,354 122,204 56,392 57,666
Mandatorily redeemable preferred stock:
Junior subordinated debentures 17,526 17,526 17,526 17,526 17,526
Stockholders' equity 47,378 47,462 45,275 42,612 39,016
AVERAGE FOR YEAR:
Loans 441,259 432,864 459,765 463,488 440,454
Assets 766,581 738,878 658,002 666,120 595,592
Deposits 590,809 577,258 537,151 537,309 486,694
Stockholders' equity 47,354 45,824 43,272 40,380 36,920
Weighted shares outstanding - basic 4,708,589 4,606,094 4,597,930 4,626,909 4,688,306
Weighted shares outstanding - diluted 4,883,724 4,859,071 4,790,081 4,735,460 4,738,671
SELECTED RATIOS:
Return on average assets 0.67% 0.62% 0.92% 0.90% 0.68%
Return on average stockholders' equity 10.78 10.06 13.99 14.88 11.03
Average stockholders' equity to average assets 6.18 6.20 6.58 6.06 6.20
Dividend pay-out ratio 51.83 55.54 34.85 30.77 41.59
Allowance for loan losses to loans at year end 0.97 0.99 1.01 1.07 0.94
Non-performing loans as a percentage
of total loans at year end 0.51 0.49 0.75 0.33 0.41
Net charge-off's as a
percentage of average loans 0.03 0.07 0.07 0.09 0.10
Non-performing assets as a percentage of assets 0.35 0.37 0.46 0.23 0.32
(1) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in May 2004.
(2) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in January 2003.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS
Westbank Corporation and Subsidiaries
Information Concerning Forward-Looking Statements
The following forward-looking statements are made in accordance with the Private
Securities Litigation Reform Act of 1995.
Westbank Corporation (the "Corporation") has made, and may make in the future,
forward-looking statements concerning future performance, including, but not
limited to, future earnings and events or conditions that may affect such future
performance. These forward-looking statements are based upon management's
expectations and belief concerning possible future developments and the
potential effect of such future developments on the Corporation. There is no
assurance that such future developments will be in accordance with management's
expectations and belief or that the effect of any future developments on the
Corporation will be those anticipated by management.
All assumptions that form the basis of any forward-looking statements regarding
future performance, as well as events or conditions that may affect such future
performance, are based on factors that are beyond the Corporation's ability to
control or predict with precision, including future market conditions and the
behavior of other market participants. Factors that could cause actual results
to differ materially from such forward-looking statements include, but are not
limited to, the following:
1. The status of the economy in general, as well as in the Corporation's
primary market areas of western Massachusetts, central Massachusetts and
northeastern Connecticut;
2. The real estate market in western and central Massachusetts, and
northeastern Connecticut;
3. Competition in the Corporation's primary market area from other banks,
especially in light of continued consolidation in the New England banking
industry;
4. Any changes in federal and state bank regulatory requirements;
5. Changes in interest rates;
6. The cost and other effects of unanticipated legal and administrative cases
and proceedings, settlements and investigations;
7. Unanticipated changes in laws and regulations, including federal and state
banking laws and regulations, to which the Corporation and its subsidiaries
are subject;
8. Changes in accounting policies and practices, as may be adopted by the
Financial Accounting Standards Board or any regulatory agency having
authority over the Corporation and/or its subsidiaries; and
9. Disruption in general economic conditions due to military or terrorist
activity.
Forward-looking statements speak only as of the date they were made. While the
Corporation periodically reassesses material trends and uncertainties affecting
the Corporation's performance in connection with its preparation of management's
discussion and analysis of results of operations and financial condition
contained in its quarterly and annual reports, the Corporation does not intend
to review or revise any particular forward-looking statement.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of Westbank Corporation are in accordance
with accounting principles generally accepted in the United States of America
and conform to general practices within the banking industry. In reviewing and
understanding financial information for the Corporation, you are encouraged to
read and understand the significant accounting policies that are used in
preparing the Corporation's consolidated financial statements. These policies
are described in Note 1 to the consolidated financial statements.
Certain accounting policies require significant estimates and assumptions that
have a material impact on the carrying value of certain assets and liabilities.
These accounting policies are considered to be critical accounting policies. The
estimates and assumptions used are based on historical experience and other
factors that we believe reasonable under the circumstances. Actual results could
differ significantly from these estimates and assumptions, which could have a
material impact on the carrying values of assets and liabilities at the balance
sheet dates and on the results of operations for the reporting periods. Of these
policies, management believes that other-than-temporary impairment analysis,
accounting for loans and the allowance for loan losses and goodwill impairment
analysis are the critical accounting policies that require the most significant
estimates and assumptions and are particularly susceptible to significant change
in the preparation of the consolidated financial statements.
OTHER-THAN-TEMPORARY IMPAIRMENT OF INVESTMENT SECURITIES
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis and more frequently when economic or market conditions warrant
such evaluation. Consideration is given to the length of time and the extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the intent and ability of the Corporation
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value. Securities that have experienced an
other than temporary decline in value are written down to estimated fair value,
establishing a new cost basis with the amount of the write-down expensed as a
realized loss.
At December 31, 2005, the Corporation had $323,431,000 of investment securities.
If an investment security is deemed other-than-temporarily impaired, the
write-down of that security would have a negative impact on earnings.
ACCOUNTING FOR LOANS
Interest income on loans is recorded on an accrual basis. Loan origination fees,
net of certain direct loan origination costs, are deferred and recognized as
income over the life of the related loan as an adjustment to the loan's yield.
Non-accrual loans are loans on which the accrual of interest ceases when the
collection of principal or interest payments is determined to be doubtful by
management. It is the general policy of the Corporation to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days,
unless the loan principal and interest are determined by management to be fully
collectible. Any unpaid amounts previously accrued on these loans are reversed
from income. Interest received on a loan in non-accrual status is applied to
reduce principal or, if management determines that the principal is collectible,
applied to interest on a cash basis. A loan is returned to accrual status after
the borrower has brought the loan current and has demonstrated compliance with
the loan terms for a sufficient period, and management's doubts concerning
collectibility have been removed.
The Corporation measures impairment of loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting 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 homogenous loans, including
residential real estate and consumer loans, are excluded from the provisions of
SFAS No. 114. Generally, income on impaired loans is recognized based on a cash
basis.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or fair value in the aggregate. Net unrealized
losses are recognized through a valuation allowance charged to income. At
December 31, 2005, there were no mortgage loans held for sale.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
ALLOWANCE FOR LOAN LOSSES
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is based on the Corporation's loan loss history, among other
factors. Quarterly, based on an internal review of the loan portfolio, the
Corporation identifies required allowance allocations targeted to specific
recognized problem loans that, in the opinion of management, have potential loss
exposure or uncertainties relative to the depth of the collateral on these same
loans. In addition, the Corporation maintains a formula-based general allowance
against the remainder of the loan portfolio, based on the overall mix of the
loan portfolio and the loss history of each loan category. The formula-based
allowance allocation is calculated by applying loss factors to outstanding loans
by category. Loss factors are based on historical loss experience. The amount of
the recorded allowance above the minimum of the formula range is based on
management's evaluation of relevant factors (e.g., local area economic
statistics, credit quality trends, loan concentrations, industry conditions and
delinquency levels) and the percentage of loan loss reserves to aggregate loans.
The appropriateness of the allowance for loan losses is evaluated quarterly by
management. Factors considered in evaluating the appropriateness of the
allowance include the size and concentration of the portfolio, previous loss
experience, current economic conditions and their effect on borrowers, the
financial condition of individual borrowers and the related performance of
individual loans in relation to contract terms. The provision for loan losses
charged to operating expense is based upon management's judgment of the amount
necessary to maintain the allowance at an appropriate level to absorb losses.
Management also retains an independent loan review consultant to provide advice
on the appropriateness of the loan loss allowance. Loan losses are charged
against the allowance for loan losses when management believes the
collectibility of the principal is unlikely. The allowance for loan losses is a
significant estimate and losses incurred in excess of the allowance would
adversely impact earnings.
At December 31, 2005, the allowance for loan losses totaled $4,199,000,
representing 0.97% of total loans and 189.49% of non-performing loans.
GOODWILL IMPAIRMENT
The Corporation tests its goodwill for impairment on an annual basis and when
other indicators are present. The test for goodwill impairment is dependent on
certain factors that are subject to change. 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.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
Overview
The Corporation is a Massachusetts corporation and a registered bank holding
company. The Corporation has a wholly-owned bank subsidiary, Westbank (the
"Bank"), a Massachusetts-chartered commercial bank and trust company formed in
1962. The Bank has two subsidiaries: Park West Securities Corporation and PWB&T.
The Corporation is headquartered in West Springfield, Massachusetts. The
Corporation operates 17 branch offices located in Massachusetts and Connecticut
that provide a full range of retail banking services to individuals, businesses
and nonprofit organizations.
Westbank Corporation has a growth-oriented strategy focused on shareholder
value, expanding its banking franchise, unparalleled service and effective
capital management.
The primary source of the Corporation's revenue is interest earned on loans and
securities and fee income. During 2005 the Corporation experienced strong growth
and increased revenue from its commercial real estate lending. This growth was
more than offset by a decrease in the residential real estate portfolio.
Residential real estate loans decreased primarily as the result of loan sales of
approximately $47,400,000 of fixed-rate long-term residential mortgages during
2005. During 2005, the Corporation also purchased approximately $19,000,000 in
shorter-term residential mortgages. These transactions were the result of
management seeking to minimize the effects of the rising interest rate
environment.
Management anticipates another strong year of commercial real estate growth
during 2006.
RECENT DEVELOPMENTS
The Corporation is always striving to find new and improved ways to serve its
customers. During 2005, two new services have been introduced. The Corporation
now offers non-deposit investment products at the Bank's branch offices through
our newly formed Westco Financial Services Division. Westco Financial Services
offers a full range of investment services, annuities and other insurance
products. On October 26, 2005, the Corporation launched "Overdraft Privilege".
Overdraft Privilege is an overdraft protection service for all Westbank checking
customers. Westbank will honor overdrafts up to a pre-determined limit based on
type of checking account. Management anticipates that these new services will
increase non-interest income over the next year.
The Corporation is planning to relocate its Southwick, Massachusetts, branch.
Construction has started on our new branch and we anticipate opening its doors
during the second quarter of 2006. The location of this new branch is expected
to expand our market penetration in Southwick and the surrounding areas. It is
anticipated that the customers from our smaller existing Southwick branch will
be moved into this new location. The Corporation continues to look at new areas
for expansion and increased market share with an emphasis on northern
Connecticut and the Worcester, Massachusetts area.
In August 2005, the Corporation closed its branch located at 1 East Silver
Street in Westfield, Massachusetts. The majority of the customers from the
closed branch have been incorporated into the Corporation's branch located at 10
Broad Street, Westfield, Massachusetts.
SUMMARY OF RESULTS
The Corporation reported earnings of $5,105,000 or $1.05 per diluted share in
2005 as compared to earnings of $4,611,000 or $0.95 per diluted share during
2004. The increase in 2005 earnings includes an increase in net interest income
of $129,000 and an increase in non-interest income of $569,000 as compared to
2004.
Balance sheet growth during 2005 was strong with assets totaling $808,707,000 at
December 31, 2005 as compared to $756,441,000 at December 31, 2004. Investment
securities increased $55,602,000 and deposits increased $9,327,000 year over
year with loans decreasing $6,753,000 during 2005. The decrease in loans was
primarily due to a decrease in residential real estate loans of $23,270,000 for
the year. Residential real estate loans decreased during 2005 primarily as the
result of loan sales of approximately $47,400,000 of fixed-rate long-term
residential mortgages. Despite the decrease in overall loans, commercial real
estate loans increased approximately $17,900,000 or 15% over year-end 2004. In
this rising interest rate environment, the Corporation has increased its
emphasis on commercial real estate loans.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
DISCUSSION OF MARKET RISK
Market risk is the risk of loss due to adverse changes in market prices and
rates. The Corporation's primary market risk is its exposure to interest rate
risk, which is inherent in its lending, investing and deposit activities. The
management of interest rate risk, coupled with directives to build shareholder
value and profitability, is an integral part of the Corporation's overall
operating strategy. The Corporation's approach to interest rate risk management,
concentrates on fundamental strategies to structure its balance sheet including
the composition of its assets and liabilities. Its approach reflects managing
interest rate risk through the use of fixed and adjustable rate loans and
investments, rate-insensitive checking accounts, as well as a combination of
fixed and variable rate deposit products and borrowed funds. The Corporation
does not utilize interest rate futures, swaps or options transactions.
The Corporation seeks to control its interest rate risk exposure in a manner
that allows for adequate levels of earnings and capital over a range of possible
interest rate environments. Changes in interest rates can either positively or
negatively affect our results of operations depending on the current position of
the Corporation. The Corporation has adopted formal policies and procedures to
monitor and manage interest rate risk exposure. The corporate policy includes
required limits on the sensitivity of net interest income under various interest
rate scenarios. As part of this effort, the Corporation actively manages and
monitors interest rate risk through the use of a simulation model.
The Corporation is subject to certain external factors and uncertainties that
are beyond the control of management. Loan prepayments and call activity on
investment securities can vary widely based on current market conditions. Loan
repayment periods can be significantly influenced by changes in interest rates
and other factors such as strength of the regional economy and competition. The
amount and types of deposits can also be subjective to changes in market
conditions including prevailing interest rates. The economy is presently
experiencing a level of rising interest rates. In a rising interest rate
environment adjustable rate loans are preferable to fixed rate loans in that
they will likely produce higher levels of interest income. Loan prepayment rates
are usually lower in an increasing interest rate environment.
In order to reduce its exposure to interest rate fluctuations, the Corporation
has developed strategies to manage its liquidity, shorten the effective
maturities of certain interest-earning assets and increase the effective
maturities of certain interest-bearing liabilities. The Corporation has focused
its residential lending on a combination of fixed and adjustable rate mortgages
with an emphasis on shortening the weighted average maturity of its residential
loan portfolio. During 2005, the Corporation sold approximately $47,400,000 of
fixed-rate long-term loans and purchased approximately $19,000,000 in shorter
term mortgages. The Corporation has also increased its commercial mortgage and
consumer lending portfolios as these loans tend to be shorter term in nature.
The Corporation purchased $2,800,000 in commercial mortgages during 2005.
On a quarterly basis, an interest rate risk exposure compliance report is
prepared and presented to the Corporation's Board of Directors. The risk
exposure report contains a simulation model that measures the sensitivity of
future net interest income to changes in interest rates. All changes are
measured as percentage changes from projected net interest income in a flat rate
scenario (base level). The estimated changes in net interest income are compared
to current limits established by management and approved by the Board of
Directors. The following table represents the estimated change in net interest
income given a 100 or 200 basis point change in interest rates over the
subsequent twelve month period:
Percentage Change in
Change in Interest Rates Net Interest Income
(In Basis Points) 2005 2004
===================================================
+200 (4.91)% (1.00)%
+100 (2.40) 0.00
Base Level - -
-100 1.83 0.00
-200 0.00 (1.00)
The simulation model utilized to create the results presented above uses various
assumptions regarding cash flows from principal repayments on loans and
mortgage-backed securities and/or call activity on investment securities. Actual
results could differ significantly from these assumptions, which could result in
significant differences in the calculated projected change.
The Corporation seeks to manage the mix of asset and liability maturities to
control the effect of changes in the general level of interest rates on net
interest income. Except for its effect on the general level of interest rates,
inflation does not have a material impact on the Corporation's earnings due to
the rate of variability and short-term maturities of its earning assets.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
The following table presents the condensed consolidated average balance sheets
for 2005, 2004 and 2003. The total dollar amount of interest income from earning
assets and the resultant yields are calculated on a taxable equivalent basis.
The interest paid on interest-bearing liabilities, expressed both in dollars and
rates, is shown in the table. Yields and costs are derived by dividing interest
income by the average balance of interest-earning assets and interest expense by
the average balance of interest-bearing liabilities for the periods shown.
Average balances are derived from actual daily balances over the periods
indicated. Interest income includes fees earned from making changes in loan
rates and terms and fees earned when real estate loans are prepaid or
refinanced.
2005 2004 2003
Average Average Average
Interest Yield/ Interest Yield/ Interest Yield/
Average Income/ Rate Average Income/ Rate Average Income/ Rate
(Dollars in Thousands) Balance Expense Paid Balance Expense Paid Balance Expense Paid
===================================================================================================================================
ASSETS
Securities:
U.S. Treasury $ - $ - -% $ 411 $ 1 0.24% $ 107 $ - -%
Federal agencies 275,792 12,542 4.55 247,332 11,672 4.72 132,227 6,855 5.18
Tax exempt federal (a) 1,538 85 5.53 1,933 80 4.14 1,514 77 5.09
Other securities 7,096 345 4.86 8,524 291 3.41 7,979 235 2.95
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 284,426 12,972 4.56 258,200 12,044 4.66 141,827 7,167 5.05
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing cash and
temporary investments - 4 - 35 1 2.86 117 1 0.85
- -----------------------------------------------------------------------------------------------------------------------------------
Loans: (b)
Commercial 66,315 4,225 6.37 62,492 3,406 5.45 62,300 3,406 5.47
Leases 11,497 639 5.56 9,904 624 6.30 7,133 538 7.54
Tax exempt federal (a) 10,319 691 6.70 11,332 616 5.44 9,364 554 5.92
Real estate 276,126 16,561 6.00 275,455 16,579 6.02 315,256 20,552 6.52
Home equities 32,441 1,845 5.69 29,819 1,394 4.67 26,471 1,289 4.87
Consumer 44,561 2,146 4.82 43,862 2,175 4.96 39,241 2,293 5.84
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 441,259 26,107 5.92 432,864 24,794 5.73 459,765 28,632 6.23
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 217 7 3.23 6,962 100 1.44 18,312 168 0.92
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 725,902 $ 39,090 5.39% 698,061 $ 36,939 5.29% 620,021 $ 35,968 5.80%
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (4,479) (4,357) (5,033)
Cash and due from banks 12,387 12,904 13,823
Other assets 32,771 32,270 29,191
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 766,581 $ 738,878 $ 658,002
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing deposits:
Savings $ 85,680 315 0.37% $ 96,844 $ 478 0.49% $ 98,934 $ 674 0.68%
Money market 20,832 203 0.97 36,507 402 1.10 38,174 453 1.19
NOW accounts 56,471 792 1.40 31,372 82 0.26 30,625 61 0.20
Negotiated rate
certificates 80,587 2,697 3.35 66,272 1,988 3.00 54,446 1,785 3.28
Other time deposits 262,891 8,127 3.09 262,258 7,615 2.90 240,355 7,794 3.24
- -----------------------------------------------------------------------------------------------------------------------------------
Total time deposits 506,461 12,134 2.40 493,253 10,565 2.14 462,534 10,767 2.33
Borrowed funds/trust
preferred secuties 126,238 4,092 3.24 113,887 3,709 3.26 74,169 3,318 4.47
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 632,699 $ 16,226 2.56% 607,140 $ 14,274 2.35% 536,703 $ 14,085 2.62%
Demand deposits 84,348 84,005 74,617
Other liabilities 2,180 1,909 3,410
Stockholders' equity 47,354 45,824 43,272
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 766,581 $ 738,878 $ 658,002
===================================================================================================================================
Net interest income (tax
equivalent basis) $ 22,864 $ 22,665 $ 21,883
Interest rate spread (c) 2.83% 2.94% 3.18%
Net interest margin (d) 3.15 3.25 3.53
Deduct tax equivalent
adjustment 200 130 116
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 22,664 $ 22,535 $ 21,767
===================================================================================================================================
(a) Tax equivalent basis. Interest income on non-taxable investment securities
and loans includes the effects of the tax equivalent adjustments using the
marginal federal tax rate of 34% in adjusting tax exempt interest income
to a fully taxable basis.
(b) Average loan balances above include non-accrual loans. When a loan is
placed in non-accrual status, interest income is recorded to the extent
actually received in cash or is applied to reduce principal.
(c) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(d) Net interest margin represents net interest income (tax equivalent)
divided by average interest-earning assets.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
RATE/VOLUME ANALYSIS
The following table sets forth, for each major category of interest-earning
assets and interest-bearing liabilities, the dollar amounts of interest income
(calculated on a taxable equivalent basis at 34%), interest expense and net
interest income and changes therein for 2005 as compared with 2004 and 2004 as
compared with 2003. For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to: (1) changes in volume (change in volume multiplied by the prior
rate), (2) changes in rate (change in rate multiplied by the prior volume), and
(3) the net change. The changes attributable to both changes in volume and rate
have been allocated proportionately to the changes due to volume and the changes
due to rate.
2005 Compared with 2004 2004 Compared with 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Increase Due to Increase Due to
(Dollars in Thousands) 2005 2004 (Decrease) Volume Rate 2004 2003 (Decrease) Volume Rate
===================================================================================================================================
Interest earned:
Securities:
U.S. Treasury $ - $ 1 $ (1) $ (1) $ - $ 1 $ - $ 1 $ - $ 1
Federal agencies 12,542 11,672 870 1,306 (436) 11,672 6,855 4,817 5,482 (665)
Tax exempt federal 85 80 5 (18) 23 80 77 3 19 (16)
Other securities 345 291 54 (55) 109 291 235 56 17 39
Interest-bearing cash 4 1 3 2 1 1 1 - (1) 1
Loans:
Commercial 4,225 3,406 819 218 601 3,406 3,406 - 10 (10)
Leases 639 624 15 94 (79) 624 538 86 185 (99)
Tax exempt federal 691 616 75 (59) 134 616 554 62 110 (48)
Real estate 16,561 16,579 (18) 40 (58) 16,579 20,552 (3,973) (2,471) (1,502)
Home equity 1,845 1,394 451 130 321 1,394 1,289 105 158 (53)
Consumer 2,146 2,175 (29) 34 (63) 2,175 2,293 (118) 252 (370)
Federal funds sold 7 100 (93) (150) 57 100 168 (68) (135) 67
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earned 39,090 36,939 2,151 1,541 610 36,939 35,968 971 3,626 (2,655)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings 315 478 (163) (51) (112) 478 674 (196) (14) (182)
Money market 203 402 (199) (157) (42) 402 453 (51) (19) (32)
NOW accounts 792 82 710 110 600 82 61 21 2 19
Negotiated rate
certificates 2,697 1,988 709 462 247 1,988 1,785 203 364 (161)
Other time deposits 8,127 7,615 512 18 494 7,615 7,794 (179) 676 (855)
Borrowed funds 4,092 3,709 383 400 (17) 3,709 3,318 391 1,456 (1,065)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 16,226 14,274 1,952 782 1,170 14,274 14,085 189 2,465 (2,276)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income
(tax equivalent
basis) $ 22,864 $ 22,665 $ 199 $ 759 $ (560) $ 22,665 $ 21,883 $ 782 $ 1,161 $ (379)
===================================================================================================================================
Net interest income for 2005 increased to $22,864,000, up 0.88% from $22,665,000
in 2004. A 3.99% increase in average earning assets and a 10 basis point
increase in average rate of return resulted in an increase in volume of
$1,541,000 and an increase in rate of $610,000. An increase of 4.21% in average
interest-bearing liabilities and a 21 basis point increase in average rate of
interest paid contributed to an increase in volume of $782,000 and an increase
in rate of $1,170,000.
Net interest income for 2004 increased to $22,665,000, up 3.57% from $21,883,000
in 2003. A 12.59% increase in average earning assets and a 51 basis point
decrease in average rate of return resulted in an increase in volume of
$3,626,000 and a decrease in rate of $2,655,000. An increase of 13.12% in
average interest-bearing liabilities and a 27 basis point decrease in average
rate of interest paid contributed to an increase in volume of $2,465,000 and a
decrease in rate of $2,276,000.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Corporation's ability to generate adequate amounts of
cash to fund loan originations, security purchases, deposit withdrawals,
dividends on the Corporation's common stock and amounts due under the junior
subordinated debentures. The Corporation's liquidity position is monitored by
the Asset/Liability Committee, based on policies approved by the Board of
Directors. The Committee meets regularly to review and direct the Bank's
investment, lending and deposit-gathering activities. Liquidity management
requires close scrutiny of the mix and maturity of deposits, borrowings and
short-term investments. Cash and due from banks, federal funds sold, investment
securities and mortgage-backed securities available for sale, as compared to
deposits and borrowings, are used by the Corporation to compute its liquidity on
a daily basis. Management of the Corporation believes that its current liquidity
is sufficient to meet current and anticipated funding needs.
In addition to cash flow from loan and securities payments and prepayments, as
well as from sales of available-for-sale securities and mortgage loans, the
Corporation has significant borrowing capacity available to fund liquidity
needs. During 2005, the Corporation increased its utilization of borrowings as a
cost efficient addition to deposits as a source of funds. The average balance of
borrowings for 2005 and 2004 were $108,599,000 and $96,360,000 respectively. The
Corporation's borrowings to date have consisted primarily of advances from the
Federal Home Loan Bank of Boston, of which the Bank is a member. Under terms of
the Collateral Agreement with the Federal Home Loan Bank, the Bank pledges
residential mortgage loans, federal agencies and mortgage-backed securities, as
well as the Bank's stock in the Federal Home Loan Bank, as collateral for such
transactions.
At December 31, 2005, the Corporation maintained cash and cash equivalents and
investments available for sale totaling $186,006,000, representing 23% of total
year-end assets, versus $169,000,000 or 22% of total assets at December 31,
2004.
The following tables summarize the Corporation's contractual obligations, as
well as commitments to fund loans.
December 31, 2005 Due in Over
(Dollars in Thousands) Due in 1 Year Due in 1-3 Years Due in 3-5 Years 5 Years Total
=================================================================================================================================
Contractual Obligations
Total borrowings $ 80,483 $ 11,701 $ 10,270 $ 36,000 $ 138,454
Junior subordinated debentures - - 17,526 - 17,526
Annual rental commitments
under non-cancellable leases 309 449 242 22 1,022
- ---------------------------------------------------------------------------------------------------------------------------------
$ 80,792 $ 12,150 $ 28,038 $ 36,022 $ 157,002
=================================================================================================================================
Expires in Expires in Expires in Expires in
(Dollars in Thousands) 1 Year 1-3 Years 3-5 Years Over 5 Years Total
=================================================================================================================================
Commitments
Commitments to extend credit $ 21,338 $ - $ - $ - $ 21,338
Commitments to purchase loans 3,072 - - - 3,072
Loan sales commitments 440 - - - 440
Undisbursed portion of loans in
process and unused portions
of lines of credit 45,031 2,252 1,912 26,198 75,393
- ---------------------------------------------------------------------------------------------------------------------------------
$ 69,881 $ 2,252 $ 1,912 $ 26,198 $ 100,243
=================================================================================================================================
The loan sales commitment of $440,000 represents loans not originated at
December 31, 2005. At December 31, 2005, the Corporation had certificates of
deposit maturing within the next 12 months amounting to $229,220,000. Based on
historical experience, the Corporation anticipates that a significant portion of
the maturing certificates of deposit will be renewed with the Corporation.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
On September 20, 2004, the Corporation completed a private placement of an
aggregate of $17,000,000 of trust preferred securities through two newly-formed
Delaware trust affiliates, Westbank Capital Trust II ("Trust II") and Westbank
Capital Trust III ("Trust III") (collectively, "the Trusts"), as part of a
pooled transaction with several other financial institutions. As part of this
transaction, the Corporation issued an aggregate principal amount of $8,763,000
of floating rate junior subordinated deferrable interest debentures to Trust II,
which debentures bear an interest rate that resets quarterly at 3-month LIBOR
plus 2.19% and an aggregate principal amount of $8,763,000 of fixed/floating
rate junior subordinated deferrable interest to Trust III, which debentures bear
an initial interest rate of 5.98% until December 2009, at which time they will
be reset quarterly at 3-month LIBOR plus 2.19%. These debentures were each
issued pursuant to the terms on an Indenture dated September 20, 2004 between
the Corporation and Wilmington Trust Corporation as Trustee. The debentures
obligate the Corporation to pay interest on their principal sum quarterly in
arrears on March 20, June 20, September 20 and December 20 of each year. The
Corporation has the right to defer these interest payments for up to 20
consecutive quarterly periods. The debentures mature on September 20, 2034 but
may be redeemed by the Corporation, in whole or in part, beginning on September
20, 2009, or in whole within 120 days of the occurrence of certain special
redemption events. Special redemption events relate to the regulatory capital
treatment of the issuances, the Trust not being deemed investment companies and
the non-occurrence of certain tax events. The proceeds were used to redeem the
security issued by Westbank Capital Trust I, as discussed in Note 7 of the
Consolidated Financial Statements.
Capital guidelines issued by the Federal Reserve Board require the Corporation
to maintain certain capital ratios. As of December 31, the Corporation's
regulatory capital ratios were as follows:
2005 2004 2003
----- ----- -----
Tier 1 leverage capital (to average assets) 7.19% 7.35% 7.65%
Tier 1 risk-based capital (minimum required 4%) 11.58 11.82 11.71
Total risk-based capital (minimum required 8%) 12.88 13.04 13.24
Regulatory risk-based capital requirements take into account the different risk
categories of banking organizations by assigning risk weights to assets and the
credit equivalent amounts of off-balance sheet exposures. In addition, capital
is divided into two tiers. In this Corporation, Tier 1 includes the common
stockholders' equity and a portion of the mandatorily redeemable preferred
stock; total risk-based or supplementary capital includes not only the equity
but also a portion of the allowance for loan losses and a portion of the
mandatory redeemable preferred stock.
The primary source of funds for the payment of dividends by the Corporation is
dividends paid to the Corporation by the Bank. Bank regulatory authorities
generally restrict the amounts available for payment of dividends, if the effect
thereof would cause the capital of the Bank to be reduced below applicable
capital requirements. These restrictions indirectly affect the Corporation's
ability to pay dividends.
OFF-BALANCE SHEET ARRANGEMENTS
The Corporation does not have any off-balance-sheet arrangements that have or
are reasonable likely to have a current or future effect on the Corporation's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
is material to investors. The Corporation's primary financial instruments with
off-balance-sheet risk are limited to loan servicing for others, obligations to
fund loans to customers pursuant to existing commitments and commitments to sell
mortgage loans through loan sales agreements.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2005 AND 2004
Total assets were $808,707,000 at December 31, 2005, an increase of $52,266,000
or 6.9% from $756,441,000 at December 31, 2004. The Corporation's investment
portfolio increased 20.8% to $323,431,000 at the end of 2005 from $267,829,000
at the end of 2004. Net loans totaled $428,260,000 at December 31, 2005, a
decrease of $6,753,000 from $435,013,000 at December 31, 2004.
Commercial real estate and commercial and industrial loans, including commercial
construction loans, increased by $16,767,000, or 9%, to $206,137,000 at December
31, 2005 from $189,370,000 at December 31, 2004. The Corporation purchased
approximately $2,800,000 in commercial mortgages during 2005. These commercial
mortgages are guaranteed by the United States Department of Agriculture.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
Residential real estate loans, including residential construction loans,
decreased by $23,270,000, or 14.4%, to $138,635,000 at December 31, 2005 from
$161,906,000 at December 31, 2004. The primary driver for the decrease in
residential real estate loans is the sale of approximately $47,400,000 of
fixed-rate, long-term mortgages during 2005. This decrease is offset by a
purchase of approximately $19,000,000 in shorter-term mortgages during the
second quarter of 2005. The 2005 sales and purchase of loans were part of the
Corporation's efforts to reduce its exposure to interest rate risk.
Indirect auto loans increased by $2,139,000, or 5.6%, to $40,149,000 at December
31, 2005 from $38,010,000 at December 31, 2004. Indirect auto loans are included
in consumer loans.
Deposits increased during 2005 by $9,327,000 or 1.6% versus December 31, 2004
and totaled $599,359,000 at December 31, 2005. Deposit growth has become
increasingly challenging in the current competitive market place. NOW accounts
increased by $17,398,000 or 40.6% from December 31, 2004 to December 31, 2005.
This increase is primarily attributed to the introduction of the capital access
account in late 2004. Capital access accounts are tiered accounts that allow the
depositor increased flexibility to access their funds, while earning premium
interest rates. The increase in NOW accounts was more than offset by a decrease
in savings and money market accounts of 23% or $28,402,000. During the fourth
quarter of 2005 the Corporation purchased approximately $21,000,000 in broker
sponsored time deposits, making up the increase in time deposits for the year.
These deposits provided a lower cost of funding as compared to funding asset
growth through additional borrowings.
Borrowings increased by $41,100,000 during 2005 and totaled $138,454,000 at
December 31, 2005 compared to $97,354,000 at December 31, 2004. The increase in
borrowings was primarily due to an increase in Federal Home Loan Bank
borrowings. The Corporation increased its level of borrowings in order to fund
its asset growth.
Stockholders' equity totaled $47,378,000 at December 31, 2005, compared to
$47,462,000 at December 31, 2004. This change was primarily due to net income of
$5,105,000, which was more than offset by the purchase of common shares for the
restricted stock plan totaling $1,547,000, the payment of cash dividends of
$2,646,000 and an increase in the unrealized loss on securities available for
sale of $1,752,000.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
COMPARISON OF OPERATING RESULTS
As of December 31, 2005, the principal earning assets of the holding company
consist of a commercial bank, Westbank. Noteworthy are the effects of sources of
income from earning assets and expense of interest-bearing liabilities.
Presented below is a comparative summary of percentages of increases and
decreases for the three years ended December 31, 2005. The significant changes
are discussed in the analysis that follows the summary.
Percentage
Increase (Decrease)
2005 2004
Over Over
(Dollars in Thousands) 2005 2004 2003 2004 2003
======================================================================================================================
Net interest income $ 22,664 $ 22,535 $ 21,767 0.57% 3.53%
Provision for (recovery of) loan losses 140 225 (354) (37.78) 163.56
Non-interest income 4,010 3,441 4,536 16.54 (24.14)
Non-interest expense 19,254 19,149 17,439 0.55 9.81
Income taxes 2,175 1,991 3,164 9.24 (37.07)
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 5,105 $ 4,611 $ 6,054 10.71% (23.84)%
======================================================================================================================
NET INCOME
Net income for 2005 of $5,105,000, or $1.08 per share basic and $1.05 per share
diluted, is based on a weighted average of 4,708,589 basic and 4,883,724 diluted
shares outstanding, compared with net income for 2004 of $4,611,000 or $1.00 per
share basic and $0.95 per share diluted based on a weighted average of 4,606,094
basic and 4,859,071 diluted shares outstanding. Net income in 2003 was
$6,054,000 or $1.32 per share basic and $1.26 per share diluted based on
weighted average shares of 4,597,930 basic and 4,790,081 diluted shares
outstanding.
INTEREST AND DIVIDEND INCOME
The Corporation's earning assets include a diverse portfolio of interest-earning
instruments ranging from the Corporation's core business of loan extensions to
interest-bearing securities issued by federal, state and municipal authorities.
These earning assets are financed through a combination of interest-bearing and
interest-free sources.
Total interest and dividend income for 2005 was $38,890,000 as compared to
$36,809,000 for 2004 and $35,852,000 for 2003. For 2005, this represents an
increase of $2,081,000 or 5.7% versus 2004, while interest income increased by
$957,000 or 2.7% in 2004 over 2003. The increase in 2005 is the result of an
increase in average earning assets of $27,841,000 and an increase of 10 basis
points in average earning interest rate. The increase in 2004 from 2003 is the
result of an increase in average earning assets of $78,040,000 and a decrease of
51 basis points in average earning interest rate.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
INTEREST EXPENSE
Interest expense for 2005 on deposits and borrowings amounted to $16,226,000 as
compared to $14,274,000 in 2004 and $14,085,000 in 2003. Interest expense
increased by $1,952,000 or 13.7% during 2005 compared to 2004. During 2004,
interest expense increased by $189,000 or 1.3% versus 2003. The 2005 increase is
the result of an increase in average interest-bearing liabilities of $25,559,000
and a 21 basis point increase in the average rate of interest paid compared to
2004. The increase in 2004 is the result of an increase in average
interest-bearing liabilities of $70,437,000 and a 27 basis point decrease in the
average rate of interest paid compared to 2003.
NET INTEREST INCOME
Net interest income, the most significant component of earnings, is the amount
by which the interest generated by assets exceeds the interest expense on
liabilities. The Corporation's management analyzes its performance by utilizing
the concepts of interest rate spread and net yield on earning assets. The
interest rate spread represents the difference between yield on earning assets
and interest paid on interest-bearing liabilities. The net yield on earning
assets is the difference between the rate of interest on earning assets and the
effective rate paid on all funds, interest-bearing liabilities, as well as
interest-free sources (primarily demand deposits and stockholders' equity).
The following table sets forth Westbank's net interest income:
(Dollars in thousands) 2005 2004 2003
===========================================================================
Total interest income $ 38,890 $ 36,809 $ 35,852
Total interest expense 16,226 14,274 14,085
- ---------------------------------------------------------------------------
Net interest income $ 22,664 $ 22,535 $ 21,767
===========================================================================
Please see the average balance sheets and net interest income analysis and the
rate/volume analysis in this Management's Discussion and Analysis for a detailed
analysis of interest-earning assets and interest-bearing liabilities that result
in net interest income.
PROVISION FOR (RECOVERY OF) LOAN LOSSES
When determining the provision for loan losses, management evaluates several
factors including new loan originations, actual and projected charge-off's, and
risk characteristics inherent in the loan portfolio. The provision for loan
losses brings the allowance for loan losses to a level determined appropriate by
management. For 2005, the Corporation recorded a provision for loan losses of
$140,000 compared with a provision of $225,000 in 2004, a decrease of $85,000.
The decrease in the provision for loan losses during 2005 was a result of a
reduction of impaired loans and an improvement in the asset quality of the
remainder of the portfolio. A decrease in total loan volume also played a role
in the decrease of the provision. The increase in the provision for loan losses
during 2004 as compared to 2003 is attributable to the overall mix and asset
quality of the overall loan portfolio. During 2003, the Corporation recorded a
recovery of a provision of $354,000. The recovery of loan losses during 2003 is
attributable to the overall mix, asset quality and a decline in the size of the
overall loan portfolio. Based on these facts, management determined that a
decrease in the provision was warranted for 2003.
NON-INTEREST INCOME
Non-interest income was $4,010,000 for the year-ended December 31, 2005, an
increase of $569,000 over $3,441,000 for 2004. Gains on the sale of loans and
securities available for sale were $470,000 higher in 2004 than in 2005. The
2004 gains on the sale of loans and securities available for sale were partially
offset by a write-down of $628,000 related to investment securities that were
deemed other-than temporarily impaired in 2004. Non-interest income also
reflects an increase in Trust Department earnings of $50,000 for the year-ended
December 31, 2005 as compared to prior year. The increase in other non-interest
income for the year ended 2005 versus 2004 reflects an increase in ATM and debit
card fees of $58,000 and the addition of $86,000 generated by the Westco
Financial Services Division, which was introduced in June of 2005.
Non-interest income in 2004 was $3,441,000 as compared to $4,536,000 in 2003.
Non-interest income for 2004 as compared to 2003 reflects an increase in Trust
Department earnings of $8,000, a decrease in service charges on deposit accounts
and loan servicing income of $106,000, a decrease in gains recognized from the
sale of investments of $631,000, an increase from gain on sale of mortgages of
$145,000 and an increase in other non-interest income of $136,000. Non-interest
income for 2004 also included a write-down totaling $628,000 related to
investment securities that were deemed other-than temporarily impaired.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
NON-INTEREST EXPENSE
The components of non-interest expense are as follows:
(Dollars in Thousands) 2005 2004 2003
===============================================================================
Salaries and benefits $ 10,908 $ 10,393 $ 9,741
Occupancy 1,411 1,192 1,221
Other non-interest expense 6,848 7,365 6,464
Other real estate owned expense 87 199 13
- -------------------------------------------------------------------------------
$ 19,254 $ 19,149 $ 17,439
===============================================================================
Non-interest expense was $19,254,000 in 2005, an increase of $105,000 or 0.5%
versus 2004. The increase in operating expenses for 2005 is due to a combination
of the following: salaries and benefits increased by $515,000, occupancy expense
increased $219,000 and all other non-interest expense accounts decreased
$629,000. The increase in salaries and benefits was due to annual increases in
salaries and benefits. The increase in occupancy expense for the year ended
December 31, 2005 compared to 2004 was primarily due to increases in the cost of
utilities and building maintenance. The decrease in other non-interest expense
was primarily the result of a write-off of origination costs totaling $807,000
during the third quarter of 2004. These origination costs were related to the
Corporation's initial trust preferred financing, which was redeemed during the
third quarter of 2004. Not including the write-off of origination costs, there
was a $290,000 increase in other non-interest expense for the year ended
December 31, 2005 as compared to the same period in 2004. The main drivers of
the increase in other non-interest expense were higher marketing costs and audit
and examination fees. The increase in marketing costs is the result of the
increasingly competitive banking environment in Western Massachusetts and
Connecticut.
Overall non-interest expense increased during 2004 by $1,710,000 versus 2003.
During 2004, salaries and benefits increased by $652,000, occupancy expense
declined $29,000 and all other non-interest expense accounts increased
$1,087,000. The increase in other non-interest expense was partially related to
the 2004 write-off of origination costs totaling $807,000 related to the
redemption of the initial trust preferred securities.
INCOME TAXES
For the year ended December 31, 2005, the Corporation recorded a tax expense of
$2,175,000 compared to 2004, when the Corporation recorded a tax expense of
$1,991,000 and a 2003 tax expense of $3,164,000. The increase in tax expense for
2005 is primarily related to the increase in income before income taxes. The
effective tax rate was 29.9% in 2005 versus 30.2% in 2004. The decrease in the
effective tax rate was due to higher non-taxable life insurance proceeds and
other tax exempt income in 2005 as compared to 2004.
During 2003, the Commonwealth of Massachusetts enacted legislation that
clarified the real estate investment trust ("REIT") dividend-received deduction
(the "Deduction") between a bank and its subsidiary operating as a REIT for
years ending on or after December 31, 1999. In light of the Commonwealth of
Massachusetts' legislation repealing the Deduction, the Corporation dissolved
Park West REIT and distributed its assets to its shareholders, which process was
completed as of February 9, 2004.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Changes and Error Corrections
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 154, "Accounting Changes and Error
Corrections - a Replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 requires retrospective application for reporting
a change in accounting principle, unless impracticable. The statement clarifies
that a reporting entity shall change an accounting principle only if (a) the
change is required by a newly issued accounting pronouncement or (b) the entity
can justify the use of an allowable alternative accounting principle on the
basis that it is preferable. SFAS No. 154 is effective for accounting changes
and corrections of errors for fiscal years beginning after December 15, 2005,
which is January 1, 2006 for the Corporation. The adoption of SFAS No. 154 on
January 1, 2006 had no impact on the Corporation's financial condition or
results of operations.
Share-Based Payment
On December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment", (SFAS No. 123(R)), which is an amendment of FASB Statements Nos. 123
and 95. The fair-value-based method of expense recognition in SFAS No. 123(R) is
similar to the fair-value-based method described in SFAS No. 123 in most
respects. The Corporation will be required to adopt SFAS No. 123(R) using the
modified prospective method of transition because it had previously adopted the
fair-value-based method of expense recognition under SFAS No. 123 on January 1,
2003. Under the modified prospective method, compensation cost is recognized on
or after the effective date for the portion of awards for which the requisite
service has not yet been rendered.
The Corporation adopted SFAS No. 123 (R) on January 1, 2006. The adoption of
SFAS No. 123(R) did not have a material effect on the Corporation's financial
condition or results of operations because the service periods for all options
granted prior to the Corporation's adoption of SFAS No. 123 have been rendered.
Other-than-Temporary Impairment
At its March 2004 meeting, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 03-1, "Meaning of Other-than-Temporary Impairment
and Its Application to Certain Investments" ("EITF 03-1"), that prescribes
guidance to be used to determine when an investment in debt and equity
securities is considered impaired, whether the impairment is other than
temporary and the measurement of an impairment loss. The guidance also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment. The effective date for the impairment
measurement and recognition guidance of EITF 03-1 was delayed.
On November 3, 2005, the FASB staff issued FASB Staff Position (FSP) FSP FAS
115-1 and 124-1, "The Meaning of Other-than-Temporary Impairment and its
Application to Certain Investments." FSP 115-1 nullifies certain guidance set
forth in EITF Issue 03-1 and references existing guidance in SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." FSP 115-1
also carries forward the disclosure requirements that were set forth in EITF
03-1, which had been previously implemented by the Corporation. FSP 115-1 is
effective for reporting periods beginning after December 15, 2005, with early
adoption permitted. The implementation of this guidance had no material impact
on the Corporation's financial condition or results of operations as the
Corporation already followed the other-than-temporary impairment guidance under
SFAS No. 115.
Concentration of Credit Risk
In December 2005, the FASB issued FSP SOP 94-6-1, "Terms of Loan Products that
May Give Rise to a Concentration of Credit Risk." FSP SOP 94-6-1 addresses (1)
the circumstances under which the terms of loan products give rise to a
concentration of credit risk and (2) the disclosures or other accounting
considerations that apply for entities that originate, hold, guarantee, service
or invest in loan products with terms that may give rise to a concentration of
credit risk. This FSP is intended to emphasize the requirement to assess the
adequacy of disclosures for all lending products (including both secured and
unsecured loans) and the effect of changes in market or economic conditions on
the adequacy of those disclosures. This FSP indicates that possible shared
characteristics for determining concentration of credit risk include borrowers
subject to significant payment increases, loans with terms that permit negative
amortization and loans with high loan-to-value ratios. The guidance for
determining concentrations of credit risk is effective for interim and annual
periods ending after December 19, 2005. The adoption of this FSP did not have an
impact on the Corporation's financial condition or results of operations.
15
CONSOLIDATED BALANCE SHEETS
Westbank Corporation and Subsidiaries
December 31,
(Dollars in Thousands, Except Per Share Amounts) 2005 2004
==================================================================================================
ASSETS
Cash and due from banks:
Non-interest bearing $ 13,899 $ 12,451
Interest bearing 10 34
- --------------------------------------------------------------------------------------------------
13,909 12,485
Federal funds sold 24 669
- --------------------------------------------------------------------------------------------------
Total cash and cash equivalents 13,933 13,154
- --------------------------------------------------------------------------------------------------
Investment securities:
Investment securities available for sale, at fair value 172,073 155,405
Investment securities held to maturity, at amortized cost
(fair value of $148,582 at December 31, 2005
and $112,158 at December 31, 2004) 151,358 112,424
- --------------------------------------------------------------------------------------------------
Total investment securities 323,431 267,829
- --------------------------------------------------------------------------------------------------
Investment in Federal Home Loan Bank stock 6,450 6,450
Loans, net of allowance for loan losses
of $4,199 at December 31, 2005
and $4,356 at December 31, 2004 428,260 435,013
Property and equipment, net 7,577 6,885
Other real estate owned 630 630
Accrued interest receivable 4,418 3,655
Goodwill 8,837 8,837
Bank-owned life insurance 9,149 9,204
Investment in unconsolidated investee 526 526
Deferred income tax asset, net 1,471 1,477
Other assets 4,025 2,781
- --------------------------------------------------------------------------------------------------
Total assets $ 808,707 $ 756,441
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 84,300 $ 84,758
Interest-bearing 515,059 505,274
- --------------------------------------------------------------------------------------------------
Total Deposits 599,359 590,032
Borrowed funds 138,454 97,354
Interest payable on deposits and borrowings 806 550
Junior subordinated debentures 17,526 17,526
Other liabilities 5,184 3,517
- --------------------------------------------------------------------------------------------------
Total liabilities 761,329 708,979
- --------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
- --------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $5 per share, authorized
100,000 shares; none issued
Common stock, par value $2 per share, authorized
9,000,000 shares; issued 4,780,274 shares
in 2005 and 4,746,397 shares in 2004 9,560 9,493
Unearned compensation - restricted stock (1,424) (1,652)
Additional paid-in capital 19,105 20,377
Retained earnings 22,417 19,958
Treasury stock, at cost
(27,317 shares at December 31, 2005
and 28,818 shares at December 31, 2004) (420) (606)
Accumulated other comprehensive loss (1,860) (108)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 47,378 47,462
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 808,707 $ 756,441
==================================================================================================
See accompanying notes to consolidated financial statements.
16
CONSOLIDATED STATEMENTS OF INCOME
Westbank Corporation and Subsidiaries
Years ended December 31,
(Dollars in Thousands, Except Per Share Amounts) 2005 2004 2003
=======================================================================================================================
Interest and dividend income:
Interest and fees on loans $ 25,927 $ 24,679 $ 28,529
Interest and dividend income from securities 12,952 12,029 7,154
Interest from interest-bearing cash equivalents
and federal funds sold 11 101 169
- -----------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 38,890 36,809 35,852
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 12,134 10,565 10,767
Interest on borrowed funds 4,092 3,709 3,318
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 16,226 14,274 14,085
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 22,664 22,535 21,767
Provision for (recovery of) loan losses 140 225 (354)
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for (recovery of) loan losses 22,524 22,310 22,121
- -----------------------------------------------------------------------------------------------------------------------
Non-interest income:
Trust 699 649 641
Service charges on deposits 1,010 1,012 1,137
Other-than-temporary impairment of investment securities - (628) -
Gain on sale of securities available for sale 96 507 1,138
Life insurance proceeds 455 215 -
Gain on sale of loans 419 478 333
Other non-interest income 1,331 1,208 1,287
- -----------------------------------------------------------------------------------------------------------------------
Total non-interest income 4,010 3,441 4,536
- -----------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and benefits 10,908 10,393 9,741
Depreciation and amortization 714 724 734
Data processing 1,765 1,762 1,771
Marketing 742 573 628
Audits and examinations 604 435 200
Supplies 307 339 312
Occupancy 1,411 1,192 1,221
Other real estate owned 87 199 13
Other non-interest expense 2,716 3,532 2,819
- -----------------------------------------------------------------------------------------------------------------------
Total non-interest expense 19,254 19,149 17,439
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,280 6,602 9,218
Provision for income taxes 2,175 1,991 3,164
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 5,105 $ 4,611 $ 6,054
=======================================================================================================================
Earnings per share
Basic $ 1.08 $ 1.00 $ 1.32
Diluted 1.05 0.95 1.26
=======================================================================================================================
See accompanying notes to consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Westbank Corporation and Subsidiaries
Common Stock Unearned Accumulated
------------------- Compensation Additional Treasury Stock Other
Dollars in Thousands, Par Restricted Paid-In Retained -------------------- Comprehensive
Except Share Data Shares Value Stock Capital Earnings Shares Amount Income (Loss) Total
===================================================================================================================================
Balance January 1, 2003 4,523,480 $ 9,047 $ - $ 14,497 $ 18,780 155,705 $ (2,091) $ 2,379 $ 42,612
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 6,054 6,054
Cash dividends declared
($.48 per share) (2,110) (2,110)
Issuance of shares for
stock option plan (278) (54,850) 744 466
Issuance of shares for
dividend reinvestment
and stock purchase
plan 105 (42,305) 559 664
Purchase of common stock 55,682 (904) (904)
Change in unrealized
gain (loss) on
securities available
for sale (1,707) (1,707)
Stock option compensation 95 95
Income tax benefit from
exercise of non-qualified
stock options 105 105
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2003 4,523,480 9,047 14,524 22,724 114,232 (1,692) 672 45,275
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 4,611 4,611
Cash dividends declared
($.56 per share) (2,561) (2,561)
Issuance of shares for
stock option plan (611) (92,847) 1,369 758
Issuance of shares for
dividend reinvestment and
stock purchase plan 126 (34,076) 561 687
Change in unrealized gain
(loss) on securities
available for sale (780) (780)
Purchase of common stock 41,395 (842) (842)
Income tax benefit from
exercise of non-qualified
stock options 182 182
Stock option compensation 11 11
Issuance of restricted stock (1,785) 1,785 -
Amortization of unearned
compensation 133 133
5% common stock dividend 222,917 446 4,360 (4,816) 114 (2) (12)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2004 4,746,397 9,493 (1,652) 20,377 19,958 28,818 (606) (108) 47,462
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 5,105 5,105
Cash dividends declared
($.56 per share) (2,646) (2,646)
Issuance of shares for
stock option plan (216) (15,458) 326 110
Issuance of shares for
dividend reinvestment and
stock purchase plan 33,877 67 443 (11,478) 243 753
Purchase of common stock 25,435 (383) (383)
Change in unrealized gain
(loss) on securities
available for sale (1,752) (1,752)
Acquisition of common
stock held in trust for
Restricted Stock Plan (1,547) (1,547)
Income tax benefit from
exercise of non-qualified
stock options 48 48
Amortization of unearned
compensation 228 228
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2005 4,780,274 $ 9,560 $ (1,424) $ 19,105 $ 22,417 27,317 $ (420) $ (1,860) $ 47,378
===================================================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
(Dollars in Thousands) 2005 2004 2003
=====================================================================================================
Net income $ 5,105 $ 4,611 $ 6,054
- -----------------------------------------------------------------------------------------------------
Unrealized loss on securities available for sale,
net of income tax benefit of $977 in 2005,
$479 in 2004 and $495 in 2003 (1,695) (858) (960)
Less: reclassification adjustment for (gains) losses
included in net income, net of income tax expense
(benefit) of $39 in 2005, $(43) in 2004 and $391 in 2003 (57) 78 (747)
- -----------------------------------------------------------------------------------------------------
Other comprehensive loss (1,752) (780) (1,707)
- -----------------------------------------------------------------------------------------------------
Comprehensive income $ 3,353 $ 3,831 $ 4,347
=====================================================================================================
See accompanying notes to consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
Westbank Corporation and Subsidiaries
Years ended December 31,
(Dollars in Thousands) 2005 2004 2003
======================================================================================================================
Operating activities:
Net income $ 5,105 $ 4,611 $ 6,054
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for (recovery of) loan losses 140 225 (354)
Write-down of other real estate owned held for sale - 76 -
Depreciation and amortization 714 724 734
Net amortization of premiums and discounts
of investments and loans 5 (117) (94)
Loan originations - available-for-sale (2,710) (6,630) (827)
Proceeds from sale of available-for-sale loans 2,709 6,707 838
Gain on sale of securities (96) (507) (1,138)
Other-than-temporary impairment of investment securities - 628 -
Gain on sale of loans (419) (478) (333)
Loss (gain) on sale of other assets 4 (4) -
Increase in cash surrender value of bank-owned life insurance (312) (322) (370)
Excess bank-owned life insurance proceeds over book value (455) (215) -
Deferred income taxes 1,016 (341) (1,719)
Stock compensation 228 144 95
Income tax benefit from exercise of non-qualified stock options 48 182 105
Changes in assets and liabilities
Accrued interest receivable (763) (475) (143)
Other assets (1,268) 455 (2,001)
Accrued interest payable on deposits and borrowings 256 (25) (90)
Other liabilities 1,667 965 (176)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,869 5,603 581
======================================================================================================================
Investing activities:
Securities:
Held to maturity:
Purchases (50,946) (127,205) -
Proceeds from maturities and principal payments 11,990 15,068 186
Available for sale:
Purchases (28,622) (82,607) (217,627)
Proceeds from sales 1,918 42,220 50,885
Proceeds from maturities and principal payments 7,341 119,957 83,141
Purchases of Federal Home Loan Bank stock - (872) (1,319)
Purchases of property and equipment (1,406) (860) (897)
Proceeds from sale of other assets 24 4 -
Proceeds from bank-owned life insurance 822 538 -
Purchase of loans (21,831) - -
Proceeds from loan sales 44,630 17,094 38,509
Net increase in loans (15,724) (16,366) (24,666)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (51,804) (33,029) (71,788)
======================================================================================================================
Financing activities:
Net increase (decrease) in deposits 9,327 52,722 (25,293)
Net increase (decrease) in short-term borrowings 37,442 (9,517) 31,645
Proceeds from long-term borrowings 20,000 12,500 50,000
Repayment of long-term borrowings (16,342) (27,833) (15,833)
Proceeds from exercise of stock options, stock
purchase plan and dividend reinvestment 863 1,445 1,130
Proceeds of junior subordinated debentures - 17,526 -
Repayment of junior subordinated debentures - (17,526) -
Purchase of common stock (1,930) (854) (904)
Dividends paid (2,646) (2,561) (2,110)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 46,714 25,902 38,635
======================================================================================================================
Increase (decrease) in cash and cash equivalents 779 (1,524) (32,572)
Cash and cash equivalents at beginning of year 13,154 14,678 47,250
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 13,933 $ 13,154 $ 14,678
======================================================================================================================
Cash paid during the year:
Interest on deposits and other borrowings $ 15,970 $ 14,299 $ 13,995
Income taxes 1,187 1,803 5,882
Supplemental disclosure of cash flow information:
Securitization of loans into mortgage-backed securities - - 26,079
Transfers of loans to other real estate owned - 574 -
Unrealized loss on securities available for sale, net of taxes (1,752) (780) (1,707)
Transfer of loans to loans held for sale 44,682 16,893 38,328
See accompanying notes to consolidated financial statements.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Westbank Corporation and Subsidiaries
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Westbank Corporation (the
"Corporation") and its subsidiaries are in conformity with accounting principles
generally accepted in the United States of America and general practices within
the banking industry. The following is a description of the more significant
policies.
NATURE OF BUSINESS
As of December 31, 2005, the Corporation, a bank holding company, provides
financial services through its wholly-owned subsidiary, Westbank, a commercial
bank and trust company (the "Bank") with 17 offices located in Massachusetts and
Connecticut. A full range of retail banking services is furnished to
individuals, businesses and non-profit organizations. The Corporation's primary
source of revenue is derived from providing loans to customers, predominantly
located in western and central Massachusetts and northeastern Connecticut.
The Corporation'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. Insurance
companies, mutual savings banks, investment counseling firms, and other business
firms and individuals also offer active competition for such business.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, Westbank, and its subsidiaries, Park West
Securities Corporation and PWB&T Inc. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts in the 2004
and 2003 consolidated financial statements have been reclassified to conform to
the 2005 presentation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and affect the reported amounts of income
and expenses for each year. Material estimates that are particularly susceptible
to significant change relate to the determination of the allowance for loan
losses, valuation of securities and impairment of goodwill and investment
securities. Actual results could differ significantly from these estimates. In
addition, various regulatory agencies, as an integral part of the examination
process, periodically review the Corporation's allowance for losses on loans,
the valuation of securities and other real estate owned. Such agencies may
require the Corporation to recognize additions to the allowance or other
valuation adjustments based on their judgments about information available to
them at the time of their examination.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
CASH AND CASH EQUIVALENTS
The Corporation classifies cash and due from banks and federal funds sold on an
overnight basis to be cash and cash equivalents. At December 31, 2005, the
Corporation had $1,096,000 on deposit with the Federal Reserve Bank and other
financial institutions pursuant to compensatory balance arrangements or other
requirements.
SECURITIES
Securities that management has the positive intent and ability to hold until
maturity are stated at cost, adjusted for amortization of premiums and accretion
of discounts. Those securities that have been identified as assets for which
there is not a positive intent to hold to maturity, including all marketable
equity securities, are classified as available for sale with unrealized gains
(losses), net of income taxes, reported as a separate component of stockholders'
equity. The Corporation determines if securities will be classified as held to
maturity or available for sale at the time of purchase. In addition, any
mortgage-backed securities securitized from the Corporation's own inventory of
residential real estate loans are also considered available for sale. Gains and
losses on sales of securities are recognized in non-interest income at the time
of sale on a specific identification basis. The Corporation does not engage in
trading activities.
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis and more frequently when economic or market conditions warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. Securities that
have experienced an other-than-temporary decline in value are written down to
estimated fair value, establishing a new cost basis with the amount of the
write-down expensed as a realized loss.
LOANS
Interest income on loans is recorded on an accrual basis. Loan origination fees,
net of certain direct loan origination costs, are deferred and recognized as
income over the life of the related loan as an adjustment to the loan's yield.
Non-accrual loans are loans on which the accrual of interest is ceased when the
collection of principal or interest payments is determined to be doubtful by
management. It is the general policy of the Corporation to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days,
unless the loan principal and interest are determined by management to be fully
collectible and are in the process of collection. Any unpaid amounts previously
accrued on these loans are reversed from income. Interest received on a loan in
non-accrual status is applied to reduce principal or, if management determines
that the principal is collectible, applied to interest on a cash basis. A loan
is returned to accrual status after the borrower has brought the loan current
and has demonstrated compliance with the loan terms for a sufficient period, and
management's doubts concerning collectibility have been removed.
The Corporation measures impairment of loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting 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 homogenous 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 approach the Corporation uses in determining the adequacy of the allowance
for loan losses is based on the SFAS No. 114 analysis and a formula-based
allowance that incorporates the Corporation's loan loss history, among other
factors. For the SFAS No. 114 analysis, on a quarterly basis the Corporation
performs an internal review of the loan portfolio and 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 Corporation
maintains a formula-based allowance that is computed from the overall mix of the
remainder 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 within 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. Loan losses are charged against the allowance for
loan losses when management believes the collectibility of the principal is
unlikely.
The formula allowance allocation is calculated by applying loss factors to
outstanding loans by loan category. Loss factors are based on various factors,
including historical loss experience. The allowance allocation also incorporates
general business and economic conditions, credit quality trends, loan
concentrations, industry conditions within portfolio segments and overall
delinquency levels.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method.
Amortization of leasehold improvements is charged over the terms of the
respective leases, including option periods, or the estimated lives of the
improvements, whichever is shorter. Gains and losses are recognized upon
disposal of assets. The cost of maintenance and repairs is charged to income as
incurred, whereas significant repairs are capitalized.
OTHER REAL ESTATE OWNED HELD FOR SALE
Other real estate owned ("OREO") includes properties the Corporation has
acquired through foreclosure and are held for sale. OREO is recorded at the
lower of cost or fair value at the date of acquisition, less estimated selling
costs. At the time of foreclosure, the excess, if any, of the loan amount over
the fair value of the asset acquired is charged off against the allowance for
loan losses. Operating expenses to administer OREO properties are charged
directly to operating expenses. Valuation allowances are established subsequent
to acquisition, as necessary, based upon management's continuing assessment of
the fair values of the properties. Loans granted in conjunction with sales of
OREO are required to comply with the Corporation's standard underwriting
criteria, including receipt of an adequate down payment.
LOAN SALES AND SERVICING RIGHTS
The Corporation periodically sells loans in the secondary market and retains the
related servicing rights. Mortgage servicing rights are recognized as an asset
when loans are sold with servicing retained, by allocating the cost of an
originated mortgage loan between the loan and the servicing right based on
relative estimated fair values. The value allocated to servicing rights is
capitalized as a separate asset and is amortized over the estimated net
servicing income period.
Capitalized mortgage servicing rights are evaluated for impairment by comparing
the asset's unamortized cost to its current estimated fair value. Fair values
are estimated using a discounted cash flow approach, which considers future
servicing income and costs, current market interest rates, and anticipated
prepayment and default rates. In making impairment evaluations, mortgage
servicing rights are stratified based on one or more of the predominant risk
characteristics of the underlying loans. The Corporation has stratified its
servicing portfolio for this purpose between fixed and adjustable rate loans.
Impairment losses, if any, are recognized through a valuation allowance for each
impaired stratum. Adjustments to the valuation allowance are charged or credited
to income. At December 31, 2005 and 2004, the mortgage servicing asset totaled
$890,000 and $755,000 respectively, for which there was no valuation allowance.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Corporation follows the provision of SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
140"), which provides for a financial-components approach that recognizes the
financial and servicing assets it controls and the liabilities it has occurred,
derecognizes assets when control has been surrendered and derecognizes
liabilities when extinguished.
INCOME TAXES
The Corporation uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. A valuation allowance is provided on deferred tax assets when it is more
likely than not that some portion of the assets will not be realized. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
PENSION PLAN
The Corporation has a defined contribution pension and a 401K plan covering
substantially all employees. The Corporation funds these plans based on
applicable federal tax laws. In addition, the Corporation has a supplemental
retirement plan for certain executive officers and directors' that is accounted
for in accordance with SFAS No. 87, "Employers' Accounting for Pensions." The
Corporation funds the supplemental retirement plan as benefits become payable.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
STOCK DIVIDEND
On April 12, 2004, the Corporation announced a five percent (5%) stock dividend,
payable to shareholders of record May 12, 2004. As a result of the stock
dividend, all earnings-per-share data for 2004 and 2003 was adjusted
retroactively in accordance with SFAS No. 128, "Earnings per Share." Shares
outstanding for 2004 and 2003 have also been restated to reflect the May 18,
2004 stock dividend.
STOCK-BASED COMPENSATION
Effective January 1, 2003, the Corporation adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation",
prospectively for all employee awards granted, modified or settled after January
1, 2003, as permitted by SFAS No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure." In accordance with SFAS No. 123, the Corporation
expensed the cost of the stock-based employee compensation for all new employee
awards granted subsequent to January 1, 2003.
EARNINGS PER SHARE
Basic earnings per share is the result of dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the year. Diluted earnings per share gives effect to all potentially dilutive
common shares that were outstanding during the year. For the years ended
December 31, 2005 and 2004, there were 88,900 and 100,905 potentially dilutive
common shares, respectively, excluded from the dilutive earnings-per-share
calculation because their effect was anti-dilutive. There were no anti-dilutive
common stock equivalents excluded from the weighted average number of common
shares outstanding in 2003.
GOODWILL
The Corporation accounts for its goodwill in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets." Under SFAS No. 142, the Corporation is
required to perform an impairment analysis on an annual basis and when other
indicators are present. The Corporation uses a December 31 measurement date for
its annual impairment test. The Corporation performed annual impairment tests as
of December 31, 2005 and 2004, and determined that no impairment existed as of
the valuation date, as the fair value of the Corporation's net assets exceeded
the carrying value.
GUARANTEES
The Corporation has financial letters of credit that require the Corporation to
make payment in the event of the customer's default, as defined in the
agreements. The Corporation measures and considers recognition of the fair value
of the guarantee obligation at inception. The Corporation estimates the initial
fair value of the letters of credit based on the fee received from the customer.
The fees collected as of December 31, 2005 were immaterial; therefore, these
guarantee obligations are not reflected in the accompanying consolidated
financial statements. The maximum potential undiscounted amount of future
payments related to these letters of credit as of December 31, 2005 are
approximately $521,000, all of which will expire within one year. Amounts due
under these letters of credit would be reduced by any proceeds that the
Corporation would be able to obtain in liquidating the collateral for the loans,
which varies depending on the customer. The Corporation has not recorded any
contingent liabilities related to these letters of credit.
TRUST DEPARTMENT
Assets held by the Corporation for customers in a fiduciary or agency capacity
are not included in the consolidated financial statements, as such items are not
assets of the Corporation. Such assets totaled approximately $202,970,000 and
$165,501,000 at December 31, 2005 and 2004, respectively. Trust income is
recognized on an accrual basis.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Changes and Error Corrections
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No.
154, "Accounting Changes and Error Corrections - a Replacement of APB Opinion
No. 20 and FASB Statement No. 3" ("SFAS No. 154"). SFAS No. 154 requires
retrospective application for reporting a change in accounting principle, unless
impracticable. The statement clarifies that a reporting entity shall change an
accounting principle only if (a) the change is required by a newly issued
accounting pronouncement or (b) the entity can justify the use of an allowable
alternative accounting principle on the basis that it is preferable. SFAS No.
154 is effective for accounting changes and corrections of errors for fiscal
years beginning after December 15, 2005, which is January 1, 2006 for the
Corporation. The adoption of SFAS No. 154 on January 1, 2006 had no impact on
the Corporation's financial condition or results of operations.
Share-Based Payment
On December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment", (SFAS No. 123(R)), which is an amendment of FASB Statements Nos. 123
and 95. The fair-value-based method of expense recognition in SFAS No. 123(R) is
similar to the fair-value-based method described in SFAS No. 123 in most
respects. The Corporation will be required to adopt SFAS No. 123(R) using the
modified prospective method of transition because it had previously adopted the
fair-value-based method of expense recognition under SFAS No. 123 on January 1,
2003. Under the modified prospective method, compensation cost is recognized on
or after the effective date for the portion of awards for which the requisite
service has not yet been rendered.
The Corporation adopted SFAS No. 123(R) on January 1, 2006. The adoption of SFAS
No. 123(R) did not have a material effect on the Corporation's financial
condition or results of operations because the service periods for all options
granted prior to the Corporation's adoption of SFAS No. 123 had been rendered.
Other-than-Temporary Impairment
At its March 2004 meeting, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 03-1, "Meaning of Other-than-Temporary Impairment
and Its Application to Certain Investments" ("EITF 03-1"), that prescribes
guidance to be used to determine when an investment in debt and equity
securities is considered impaired, whether the impairment is other than
temporary and the measurement of an impairment loss. The guidance also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment. The effective date for the impairment
measurement and recognition guidance of EITF 03-1 was delayed.
On November 3, 2005, the FASB staff issued FASB Staff Position (FSP) FSP FAS
115-1 and 124-1, "The Meaning of Other-than-Temporary Impairment and its
Application to Certain Investments." FSP 115-1 nullifies certain guidance set
forth in EITF Issue 03-1 and references existing guidance in SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." FSP 115-1
also carries forward the disclosure requirements that were set forth in EITF
03-1, which had been previously implemented by the Corporation. FSP 115-1 is
effective for reporting periods beginning after December 15, 2005, with early
adoption permitted. The implementation of this guidance had no material impact
on the Corporation's financial condition or results of operations as the
Corporation already followed the other-than-temporary impairment guidance under
SFAS No. 115.
Concentration of Credit Risk
In December 2005, the FASB issued FSP SOP 94-6-1, "Terms of Loan Products that
May Give Rise to a Concentration of Credit Risk." FSP SOP 94-6-1 addresses (1)
the circumstances under which the terms of loan products give rise to a
concentration of credit risk and (2) the disclosures or other accounting
considerations that apply for entities that originate, hold, guarantee, service
or invest in loan products with terms that may give rise to a concentration of
credit risk. This FSP is intended to emphasize the requirement to assess the
adequacy of disclosures for all lending products (including both secured and
unsecured loans) and the effect of changes in market or economic conditions on
the adequacy of those disclosures. This FSP indicates that possible shared
characteristics for determining concentration of credit risk include borrowers
subject to significant payment increases, loans with terms that permit negative
amortization and loans with high loan-to-value ratios. The guidance for
determining concentrations of credit risk is effective for interim and annual
periods ending after December 19, 2005. The adoption of this FSP did not have an
impact on the Corporation's financial condition or results of operations.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
2 - SECURITIES
Investment securities held to maturity at December 31 are as follows:
2005
- ----
Gross Gross
Amortized unrealized unrealized Fair
(Dollars in Thousands) cost gains losses value
================================================================================================================
Federal agency obligations $ 98,632 $ - $ (1,659) $ 96,973
Mortgage-backed securities 52,726 37 (1,154) 51,609
- ----------------------------------------------------------------------------------------------------------------
$ 151,358 $ 37 $ (2,813) $ 148,582
================================================================================================================
2004
- ----
Gross Gross
Amortized unrealized unrealized Fair
(Dollars in Thousands) cost gains losses value
- ----------------------------------------------------------------------------------------------------------------
Federal agency obligations $ 69,400 $ 119 $ (164) $ 69,355
Mortgage-backed securities 43,024 135 (356) 42,803
- ----------------------------------------------------------------------------------------------------------------
$ 112,424 $ 254 $ (520) $ 112,158
================================================================================================================
During 2005, 2004 and 2003, there were no sales of investment securities
classified as held to maturity.
Investment securities available for sale at December 31 are as follows:
2005
- ----
Gross Gross
Amortized unrealized unrealized Fair
(Dollars in Thousands) cost gains losses value
================================================================================================================
Federal agency obligations $ 132,733 $ 2 $ (2,073) $ 130,662
Mortgage-backed securities 40,213 20 (913) 39,320
Municipal bonds 1,554 27 - 1,581
Equity securities 502 28 (20) 510
- ----------------------------------------------------------------------------------------------------------------
$ 175,002 $ 77 $ (3,006) $ 172,073
================================================================================================================
2004
- ----
Gross Gross
Amortized unrealized unrealized Fair
(Dollars in Thousands) cost gains losses value
================================================================================================================
Federal agency obligations $ 114,113 $ 181 $ (68) $ 114,226
Mortgage-backed securities 37,579 48 (432) 37,195
Municipal bonds 1,556 64 - 1,620
Equity securities 2,324 47 (7) 2,364
- ----------------------------------------------------------------------------------------------------------------
$ 155,572 $ 340 $ (507) $ 155,405
================================================================================================================
The Corporation recorded gross gains for 2005, 2004 and 2003 on securities
available for sale totaling $96,000, $595,000 and $1,233,000, respectively.
During 2004 and 2003, the Corporation also recorded gross losses totaling
$88,000 and $95,000, respectively. There were no gross losses recorded on the
sale of securities available for sale for the year ended December 31, 2005.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 2005 are as follows (actual maturities may differ from contractual
maturities because certain issuers have the right to call or prepay
obligations):
Amortized Fair
(Dollars in Thousands) cost value
============================================================================
Held to Maturity:
Within 1 year $ 24,507 $ 24,333
Over 1 year to 5 years 37,200 36,474
Over 5 years to 10 years 36,925 36,166
- ----------------------------------------------------------------------------
98,632 96,973
Mortgage-backed securities 52,726 51,609
- ----------------------------------------------------------------------------
Total debt securities $ 151,358 $ 148,582
============================================================================
Amortized Fair
(Dollars in Thousands) cost value
============================================================================
Available for sale:
Within 1 year $ 18,873 $ 18,808
Over 1 year to 5 years 58,466 57,300
Over 5 years to 10 years 56,613 55,796
Over 10 years 335 339
- ----------------------------------------------------------------------------
134,287 132,243
Mortgage-backed securities 40,213 39,320
- ----------------------------------------------------------------------------
Total debt securities $ 174,500 $ 171,563
============================================================================
At December 31, 2005, securities with a carrying amount and fair value of
$53,992,000 and $52,955,000, respectively, were pledged to secure public
deposits, repurchase agreements and for other purposes as required by law. At
December 31, 2005, there were also $34,076,000 of investment securities pledged
as collateral for Federal Home Loan Bank (FHLB) borrowings.
Information pertaining to securities with gross unrealized losses at December
31, 2005, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows.
Less than Twelve Months Over Twelve Months
----------------------- -----------------------
Gross Gross
Unrealized Fair Unrealized Fair
(Dollars in Thousands) Losses Value Losses Value
==============================================================================================================================
Held to maturity
U.S. government and federal agency $ 882 $ 67,750 $ 777 $ 29,223
Mortgage-backed 513 25,775 641 16,741
- ------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 1,395 $ 93,525 $ 1,418 $ 45,964
==============================================================================================================================
Securities available for sale
Debt securities
U.S. government and federal agency $ 1,188 $ 87,771 $ 885 $ 37,515
Mortgage-backed 232 11,011 681 22,799
- ------------------------------------------------------------------------------------------------------------------------------
Total debt securities 1,420 98,782 1,566 60,314
Marketable equity securities - - 20 480
- ------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 1,420 $ 98,782 $ 1,586 $ 60,794
==============================================================================================================================
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
Information pertaining to securities with gross unrealized losses at December
31, 2004, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows.
Less than Twelve Months Over Twelve Months
---------------------- -----------------------
Gross Gross
Unrealized Fair Unrealized Fair
(Dollars in Thousands) Losses Value Losses Value
==============================================================================================================================
Held to maturity
U.S. government and federal agency $ 164 $ 29,834 $ - $ -
Mortgage-backed 356 25,487 - -
- ------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 520 $ 55,321 $ - $ -
==============================================================================================================================
Securities available for sale
Debt securities
U.S. government and federal agency $ 68 $ 28,432 $ - $ -
Mortgage-backed 401 31,636 31 1,707
- ------------------------------------------------------------------------------------------------------------------------------
Total debt securities 469 60,068 31 1,707
Marketable equity securities 7 493 - -
- ------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 476 $ 60,561 $ 31 $ 1,707
==============================================================================================================================
The Corporation's investment portfolio does include a high degree of
concentration. However, the concentrations are limited to federal agency debt
securities and mortgage-backed securities issued by government sponsored
agencies. The Corporation's mortgage-backed securities are directly or
indirectly insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae.
Market risk from changes in interest rates also may have a significant impact on
the market value of the Corporation's investment portfolio. The Corporation
takes these factors into account when evaluating securities for other than
temporary impairment.
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis and more frequently when economic or market conditions warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
At December 31, 2005, the Corporation had 94 debt securities and one equity
security in an unrealized loss position, with an unrealized loss of 1.91% from
the securities' aggregate amortized cost. In analyzing if a decline in fair
value is other than temporary in nature management considers an issuer's
financial condition, whether the securities have been issued by the federal
government or its agencies, whether downgrades by bond rating agencies have
occurred and industry analysts' reports. At December 31, 2005, management has
concluded that these unrealized losses relate primarily to the increase in
interest rates during 2005. As the credit quality of the securities remains
sound and management has the ability and intent to hold these securities until
maturity or for the foreseeable future, the declines in fair value are deemed to
be temporary in nature.
At December 31, 2004, management evaluated four adjustable rate securities for
other than temporary impairment and determined that the impairments were other
than temporary and that the declines in fair value reflected changes in
short-term interest rates and the length and timing of the adjustment features.
The securities were in an unrealized loss position for more than twelve months.
For the year ended December 31, 2004, management recognized impairment
write-downs on these four securities totaling $628,000.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
3 - LOANS, ALLOWANCE FOR LOAN LOSSES AND MORTGAGE SERVICING RIGHTS
Loans consisted of the following at December 31:
(Dollars in Thousands) 2005 2004
============================================================================
Commercial $ 64,679 $ 65,849
Real estate construction 8,180 11,009
Real estate 304,593 306,580
Consumer 43,041 42,562
Leases 10,682 12,384
Deferred loan origination costs - net 1,284 985
- ----------------------------------------------------------------------------
432,459 439,369
Allowance for loan losses (4,199) (4,356)
- ----------------------------------------------------------------------------
$ 428,260 $ 435,013
============================================================================
Changes in the allowance for loan losses are summarized as follows:
(Dollars in Thousands) 2005 2004 2003
===================================================================================================
Balance, beginning of year $ 4,356 $ 4,428 $ 5,111
Provision for (recovery of) loan losses 140 225 (354)
Loans charged off (178) (321) (448)
Recoveries 30 24 119
Transfer to accrual for losses on unfunded loan commitments (149) - -
- ---------------------------------------------------------------------------------------------------
Balance, end of year $ 4,199 $ 4,356 $ 4,428
===================================================================================================
The aggregate principal balance of non-accrual loans was $1,583,000 and
$1,614,000 at December 31, 2005 and 2004 respectively. Contractual interest
income that would have been accrued on such non-accrual loans was $63,000,
$36,000 and $106,000 for 2005, 2004 and 2003 respectively. No income was
recognized on non-accrual loans during this period.
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 real estate values in western and central
Massachusetts and northeastern Connecticut. Of the $304,593,000 in real estate
loans at December 31, 2005, $167,836,000 is collateralized by 1-4 family homes.
The majority of the collateral for these loans is located in the Corporation's
market areas of western Massachusetts and northeastern Connecticut. Commercial
real estate and real estate construction loans represented $144,936,000 in
outstanding principal at December 31, 2005. These loans encompass a wider
region, extending throughout Massachusetts and southern New England. Most are
collateralized by commercial real estate. Commercial loans both collateralized
and uncollateralized of $64,679,000 at December 31, 2005 represent loans made to
businesses primarily in western Massachusetts and northeastern Connecticut. At
December 31, 2004, real estate loans totaled $306,580,000, of which $190,201,000
was collateralized by 1-4 family homes, while commercial real estate and real
estate construction loans totaled $127,388,000 at December 31, 2004.
There were no loans held for sale at December 31, 2005 and 2004.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The value of loans pledged as collateral on borrowings at December 31, 2005 and
2004 was $130,925,000 and $116,219,000 respectively.
The Corporation has had, and expects to have in the future, banking transactions
in the ordinary course of business with its directors and officers. Such loans,
in the opinion of management, do not include more than the normal risk of
collectibility nor other unfavorable factors. The following summarizes the
activity with respect to indebtedness, both direct and indirect, for directors,
policy-making officers and major stockholders during the years ended December
31:
(Dollars in Thousands) 2005 2004
============================================================================
Balance at beginning of year $ 11,388 $ 10,191
New loans granted 11,837 4,226
Repayments of principal and loans sold (10,630) (3,029)
- ----------------------------------------------------------------------------
Balance at end of year $ 12,595 $ 11,388
============================================================================
Included in the aggregate loans to insiders listed above is a loan relationship
with the Eastern States Exposition, a not-for-profit company. The Corporation
and Bank's President and Chief Executive Officer, Donald R. Chase, is the
Chairman of the Board of this not-for-profit, and the Corporation and Bank's
Director G. Wayne McCary is its President and Chief Executive Officer. As of
December 31, 2005, the Eastern States Exposition had indebtedness from the Bank
in the principal amount of $4,335,000. This loan is collateralized primarily by
real estate and was granted under the same terms, including interest rates and
collateral, as similar commercial real estate loans.
At December 31, 2005 and 2004, the recorded investment in impaired loans was
$339,000 and $2,762,000 respectively, of which $339,000 and $-0-, respectively,
were in non-accrual status. For the years ended December 31, 2005, 2004 and
2003, the average recorded investment in impaired loans was $1,154,000, $690,000
and $767,000, respectively. As applicable, each impaired loan has a related
allowance for loan losses determined in accordance with SFAS No. 114. The total
allowance for loan losses allocated to these impaired loans was $128,000 and
$385,000 at December 31, 2005 and 2004. Interest income recognized during 2005,
2004 and 2003 on impaired loans was not significant. At December 31, 2005, the
investment in impaired loans was comprised of commercial loans, for which the
allowance for loan losses was determined based on the fair value of the
underlying collateral.
The Corporation had no commitments to lend additional funds to borrowers having
loans that are on non-accrual status, impaired or restructured.
The Corporation services loans for others that are not included in the
consolidated balance sheets. The unpaid balances of these loans totaled
$131,591,000, $108,276,000 and $130,852,000 at December 31, 2005, 2004 and 2003
respectively.
The fair value of the servicing rights were $1,206,000, $788,000 and $849,000
respectively at December 31, 2005, 2004 and 2003. The fair value of servicing
rights was determined using discount rates ranging from 9% to 10% and prepayment
speeds ranging from 9.7% to 22.7%, depending upon the stratification of the
specific right.
The Corporation is required to carry mortgage servicing rights at the lower of
amortized cost or fair value. At December 31, 2005 and 2004, the amortized cost
was lower than the estimated fair value. At December 31, 2003, servicing rights
were written down by $85,000 to fair value.
(Dollars in Thousands) 2005 2004 2003
===================================================================================================
Mortgage servicing rights:
Balance at beginning of year $ 755 $ 849 $ 571
Mortgage servicing rights capitalized 473 200 570
Mortgage servicing rights amortized (338) (294) (207)
Provision for loss in fair value - - (85)
- ---------------------------------------------------------------------------------------------------
Balance at end of year $ 890 $ 755 $ 849
===================================================================================================
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
4 - PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31 are summarized as
follows:
Estimated
(Dollars in Thousands) 2005 2004 Lives
================================================================================
Land $ 2,145 $ 2,001 -
Buildings 5,123 5,243 15-40 years
Building under capital lease 264 264 15 years
Furniture and equipment 5,388 4,873 3-10 years
Leasehold and building improvements 3,013 2,707 5-15 years
Motor vehicles 99 122 3 years
- --------------------------------------------------------------------------------
16,032 15,210
Accumulated depreciation 8,455 8,325
- --------------------------------------------------------------------------------
Property and equipment, net $ 7,577 $ 6,885
================================================================================
5 - DEPOSITS
Deposit accounts, by type, and the related average interest rates as of December
31 are summarized as follows:
Average Average
(Dollars in Thousands) 2005 Rate 2004 Rate
======================================================================================
Demand deposit $ 84,300 -% $ 84,758 -%
Savings 79,684 0.35 93,308 0.40
NOW 60,222 1.49 42,824 0.56
Money market 15,375 0.92 30,153 1.05
Time deposits 359,778 3.32 338,989 2.91
- --------------------------------------------------------------------------------------
$ 599,359 $ 590,032
======================================================================================
As of December 31, 2005 and December 31, 2004, $98,886 and $116,211 in overdrawn
demand deposit balances were reclassified as loans. In the ordinary course of
business the Corporation maintains deposit relationships with its policy-making
officers, directors and their affiliates. At December 31, 2005 and 2004, these
related party deposits totaled $5,500,000 and $4,100,000, respectively.
At December 31, 2005, the scheduled maturities of time deposits with a fixed
maturity are as follows:
(Dollars in Thousands)
=============================================================================
Year ending December 31,
2006 $ 229,220
2007 80,592
2008 32,638
2009 12,568
2010 and after 4,760
- -----------------------------------------------------------------------------
$ 359,778
=============================================================================
Certificates of deposit with balances greater than or equal to $100,000 were
$97,251,000 and $75,446,000 as of December 31, 2005 and 2004, respectively.
Interest paid on these deposits totaled approximately $2,697,000 and $1,988,000
during 2005 and 2004, respectively.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
6 - BORROWED FUNDS
Short-term borrowings as of December 31 are as follows:
(Dollars in Thousands) 2005 2004
===============================================================================
Securities sold under agreements to repurchase $ 13,455 $ 14,085
Purchased federal funds 59,215 21,330
Treasury tax and loan notes 2,203 2,016
- -------------------------------------------------------------------------------
Total short-term borrowings $ 74,873 $ 37,431
===============================================================================
The above short-term borrowings generally mature daily. Interest expense on
short-term borrowings was $1,153,000, $222,000 and $84,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.
The following table summarizes short-term borrowings. Average interest rates
during each year were computed by dividing total interest expense by the average
amount borrowed.
(Dollars in Thousands) 2005 2004
========================================================================
Balance at year-end $ 74,873 $ 37,431
Average amount outstanding 49,314 26,468
Maximum amount outstanding at any month-end 75,114 48,559
Average interest rate for the year 2.34% 0.84%
Average interest rate on year-end balance 3.40% 1.58%
The Corporation maintains a revolving line of credit with Bankers' Bank
Northeast of $2,000,000 and a Federal Funds Agreement with Bank of America to
purchase up to $6,000,000 of federal funds that are renewed annually. There were
no amounts outstanding against either agreement as of December 31, 2005 or 2004.
The Corporation has short-term borrowing capacity of $6,301,000 with the FHLB
through its Ideal Way program that was unused at December 31, 2005 and 2004.
Advances from the FHLB are collateralized by the Corporation's holdings of FHLB
stock, residential real estate loans and investment securities. The value of
investment securities used as collateral on borrowings at December 31, 2005 was
$34,076,000. There were no investment securities used as collateral at December
31, 2004. The value of loans pledged as collateral on borrowings at December 31,
2005 and 2004 was $130,925,000 and $116,219,000, respectively.
Long-term borrowings as of December 31 are as follows:
(Dollars in Thousands) 2005 2004
================================================================================================================
Principal Principal
Maturity Payments Payments
Dates Due Rate Due Rate
================================================================================================================
2005 $ - -% $ 4,343 4.00%
2006 5,610 4.14 15,609 2.91
2007 1,174 3.70 1,174 3.70
2008 10,527 2.86 20,527 2.58
2009 270 3.50 10,270 2.89
2010 10,000 3.80 - -
After 2010 36,000 4.07 8,000 4.59
- ----------------------------------------------------------------------------------------------------------------
$ 63,581 3.83% $ 59,923 3.11%
================================================================================================================
The Corporation's long-term debt includes $58,000,000 of FHLB option advances.
The maturities of the Corporation's option advances from the FHLB are March
2006, December 2008, September 2010, February 2011, September 2012, December
2012 and December 2015. The amounts due, with respect to their final maturities,
are $2,000,000, $10,000,000, $10,000,000, $6,000,000, $10,000,000, $10,000,000
and $10,000,000. After a certain period, the FHLB has the right to call the
option advances. During 2006 and 2007, the Corporation has $46,000,000 and
$10,000,000 in of option advances that are eligible to be called. Interest
expense on long-term borrowings totaled $1,928,000, $1,975,000 and $1,602,000
for the years ended December 31, 2005, 2004 and 2003, respectively.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
7 - TRUST PREFERRED SECURITIES
On September 30, 2004, the Corporation redeemed the outstanding principal
balance of the $17,526,000 of 9.50% junior subordinated deferrable interest
debentures it issued on September 30, 1999 to Westbank Capital Trust I ("Trust
I"), a Delaware statutory business trust formed by the Corporation to facilitate
the Trust's mandatorily redeemable preferred stock offering. Concurrently with
the Corporation's redemption of the debentures, Trust I redeemed all of its
issued and outstanding preferred and common securities.
The Corporation raised capital to redeem the 9.60% debentures issued to Trust I
by engaging in two new pooled private placements of trust preferred securities
at more advantageous interest rates.
On September 20, 2004, Westbank Capital Trust II ("Trust II"), a Delaware
statutory trust formed by the Corporation, completed the sale of $8,763,000 of
4.06% floating rate capital securities, adjustable every three months at LIBOR
plus 219 basis points ("Capital Securities II"). Trust II also issued common
securities to the Corporation and used the net proceeds from the offering to
purchase a like amount of 4.06% floating rate junior subordinated deferrable
interest debentures ("Debentures II") of the Corporation. Debentures II are the
sole assets of Trust II. The Corporation used the proceeds to redeem the
securities issued by Trust I, which were callable on September 30, 2004.
Capital Securities II accrues and pays distributions quarterly at a floating
annual rate initially set at 4.06% of the stated liquidation amount of
$8,763,000 per capital security. The Corporation has fully and unconditionally
guaranteed all of the obligations of Trust II. The guarantee covers the
quarterly distributions and payments on liquidation or redemption of Capital
Securities II, but only to the extent that Trust II has funds necessary to make
these payments.
On September 20, 2004, Westbank Capital Trust III ("Trust III"), a Delaware
statutory trust formed by the Corporation, completed the sale of $8,763,000 of
5.98% fixed-floating rate capital securities ("Capital Securities III"). Trust
III also issued common securities to the Corporation and deferrable interest
debentures ("Debentures III") of the Corporation. Debentures III are the sole
assets of Trust III. The Corporation used the proceeds to redeem the securities
issued by Trust I, which were callable on September 30, 2004.
Capital Securities III accrues and pays distributions quarterly at an annual
rate of 5.98% of the stated liquidation amount of $8,763,000 per capital
security through September 20, 2009, at which time the interest rate will become
the three-month LIBOR plus 219 basis points and will be adjustable every three
months. The Corporation has fully and unconditionally guaranteed all of the
obligations of Trust III. The guarantee covers the quarterly distributions and
payments on liquidation or redemption of Capital Securities III, but only to the
extent that Trust III has funds necessary to make these payments.
Capital Securities II and III are mandatorily redeemable upon the maturing of
Debentures II and III on September 20, 2034 or upon earlier redemption, as
provided in the Indenture. The Corporation has the right to redeem Debentures II
and III, in whole or in part, on or after September 20, 2009 at the liquidation
amount plus any accrued but unpaid interest to the redemption date.
The costs of the Trust I refinancing were amortized over the original life of
the debentures and, as a result of the early redemption, the Corporation
recorded a charge of $807,000 for the unamortized costs in the third quarter of
2004.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
8 - INCOME TAXES
The provision for income taxes was as follows:
(Dollars in Thousands) 2005 2004 2003
===================================================================================================
Current provision:
Federal $ 1,052 $ 2,145 $ 3,905
State 107 187 978
- ---------------------------------------------------------------------------------------------------
Total current 1,159 2,332 4,883
- ---------------------------------------------------------------------------------------------------
Deferred tax provision (benefit):
Federal 756 (341) (1,719)
State 260 - -
- ---------------------------------------------------------------------------------------------------
Total deferred 1,016 (341) (1,719)
- ---------------------------------------------------------------------------------------------------
Provision for income taxes $ 2,175 $ 1,991 $ 3,164
===================================================================================================
The difference between the effective tax rate and the federal statutory tax rate
on income before taxes is reconciled as follows:
2005 2004 2003
===================================================================================================
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 3.3 0.8 2.4
Tax exempt income (2.3) (0.3) (1.9)
Bank-owned life insurance (3.7) (2.8) (1.4)
Other (1.4) (1.5) 1.2
- ---------------------------------------------------------------------------------------------------
Effective tax rate 29.9% 30.2% 34.3%
===================================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31 are presented below.
(Dollars in Thousands) 2005 2004
===================================================================================================
Deferred tax assets:
Investment impairment $ - $ 257
Unrealized loss on securities 1,069 59
Allowance for loan losses 1,596 1,121
Non-accrual interest 15 15
Employee benefit plans 772 895
Other - 77
- ---------------------------------------------------------------------------------------------------
Total gross deferred tax assets 3,452 2,424
- ---------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 408 601
Deferred loan fees 144 37
Mortgage servicing rights 364 309
Other 1,065 -
- ---------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 1,981 947
- ---------------------------------------------------------------------------------------------------
Deferred income tax asset, net $ 1,471 $ 1,477
===================================================================================================
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
generally dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax assets and liabilities and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not that the Corporation will realize the benefits of these
deductible differences.
The Commonwealth of Massachusetts enacted legislation that clarified the real
estate investment trust ("REIT") dividend-received deduction (the "Deduction")
between a bank and its subsidiary operating as a REIT for years ending on or
after December 31, 1999. In light of the Commonwealth of Massachusetts'
legislation repealing the Deduction, the Corporation dissolved Park West REIT
and distributed its assets to its shareholders in 2004, which process was
completed as of February 9, 2004.
9 - EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Corporation has a defined contribution pension plan (money purchase),
covering substantially all of its employees. Contributions to the money purchase
plan are based on a percentage of the respective employee's salary. Total
expense for the years ended 2005, 2004 and 2003 was $395,000, $443,000 and
$453,000 respectively.
The Corporation also sponsors a 401K plan. Each employee reaching the age of
twenty-one (21) automatically becomes a participant of the plan. The plan
provides for voluntary contributions by participants, up to 15% of compensation,
subject to certain limits based on federal tax laws. The Corporation makes
matching contributions up to 50% of the first 6% of compensation. The total 401K
plan expense for the years ended December 31, 2005, 2004 and 2003 was $146,000,
$141,000 and $130,000 respectively.
In addition, the Corporation had a supplemental defined contribution plan for
certain executive officers. The defined contribution cost incurred by the
Corporation related to this plan was $47,000, $77,000 and $75,000 for the years
ended December 31, 2005, 2004 and 2003 respectively. This supplemental defined
contribution plan was terminated in November 2005. All vested benefits accrued
under this plan were paid out by the Corporation.
DIRECTORS AND EXECUTIVES SUPPLEMENTAL RETIREMENT PLAN
The Westbank Directors and Executives Supplemental Retirement Plan was
established during 2001. Under the Supplemental Retirement Plan, the Bank
provides post-retirement benefits for non-employee Directors who retire from the
Board after reaching age seventy-two (72) and certain executive officers who
retire after age sixty-five (65). The retirement benefit is in the amount of
seventy-five percent (75%) of the Director's or executive's final compensation
at retirement and is payable for the life of the retiree. For the executives,
this amount is reduced by fifty percent (50%) of the primary insurance amount
from Social Security and any employer-provided qualified retirement plan
benefit. The Corporation uses a December 31 measurement date for the plan.
The combined cost for the defined benefit portion of the Directors and
Executives Supplemental Retirement Plan includes the following components:
For the year ended December 31, 2005 2004
============================================================================
Service cost $ 160,008 $ 121,275
Interest cost 219,672 172,128
Net amortization of prior service cost 124,938 124,938
Net actuarial loss 68,079 -
- ----------------------------------------------------------------------------
Net periodic benefit cost $ 572,697 $ 418,341
============================================================================
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The combined funded status of the defined benefit portion of the Directors and
Executives Retirement Plan was as follows:
December 31, 2005 2004
=====================================================================================================================
PROJECTED BENEFIT OBLIGATION:
Balance at beginning of year $ 3,394,224 $ 2,732,198
Service cost 160,008 121,275
Interest cost 219,672 172,128
Benefit payments (10,500) -
Plan amendment 865,136 -
Actuarial loss 556,621 368,623
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 5,185,161 $ 3,394,224
=====================================================================================================================
PLAN ASSETS AT FAIR VALUE:
Balance at beginning of year $ - $ -
Contributions 10,500 -
Benefit payments (10,500) -
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of year $ - $ -
=====================================================================================================================
FUNDED STATUS:
Deficiency of plan assets less than projected benefit obligation $ (5,185,161) $ (3,394,224)
Unrecognized net loss 1,057,130 568,588
Unrecognized prior service costs 2,239,463 1,499,265
- ---------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (1,888,568) $ (1,326,371)
=====================================================================================================================
Amounts recognized in the concolidated balance sheet consist of:
Accumulated benefit obligation $ (3,680,779) $ (2,187,947)
Intangible asset 1,792,211 861,576
- ---------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (1,888,568) $ (1,326,371)
=====================================================================================================================
The amortization of the prior service cost is determined using a straight-line
amortization over the average remaining service period of employees and
Directors expected to receive benefits under the plan.
The weighted average assumptions utilized to determine the benefit obligation
and net benefit cost were as follows:
At December 31, 2005 2004
=====================================================================================================================
Discount rate 5.75% 5.75%
Rate of increase in compensation levels 5.00 5.00
The Corporation funds the Directors and Executives Supplemental Retirement Plan
as benefits become payable. The expected benefit payments for the Directors and
Executives Supplemental Retirement Plan through 2015 are as follows:
Annual Payments
---------------
2006 $ 10,500
2007 23,000
2008 37,000
2009 37,000
2010 51,000
2011 - 2015 2,825,000
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
10 - STOCK-BASED INCENTIVE PLANS
STOCK OPTION PLANS
The Corporation has four (4) fixed stock option plans that reserve shares of
common stock for executives, key employees and Directors. The 1985 Incentive
Stock Option Plan offered shares of common stock to officers and key employees.
All remaining options were exercised during 2004. No options are available for
future grants under the 1985 Incentive Stock Option Plan.
The Cargill Directors and Officers Plan was adopted by Cargill Bank in 1992. All
remaining options were exercised during 2005. No options are available for
future grants.
The 1995 Directors Stock Option Plan granted options totaling 1,000 shares on
February 15th of each year to qualified Directors, as determined prior to grant.
Unless exercised, options expire ten (10) years after grant. As of February 15,
2005, the 1995 Directors Stock Option Plan expired. No options are available for
future grants.
The 1996 Incentive Stock Option Plan for Directors and employees was established
in 1996 and amended at the 2002 Annual Meeting of Shareholders. Employee options
are granted at the discretion of the Board of Directors. Directors are granted
options totaling 1,000 shares immediately following the Corporation's Annual
Meeting each year only if the Corporation achieved a return on average equity of
12% or higher. Directors' options expire twenty (20) years after the grant date,
if unexercised, while employee options expire ten (10) years after the grant
date. The Directors portion of this plan has expired. A total of 20,948 options
are available for future employee grants at December 31, 2005.
The following is a summary of the status of the Corporation's four stock option
plans as of December 31, 2005, 2004 and 2003, and changes during the years ended
on those dates. The exercise prices are equal to the market price on the date of
the grant.
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2005 Price 2004 Price 2003 Price
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 562,020 $ 10.81 627,080 $ 10.78 638,489 $ 11.05
5% stock dividend - - 27,787 10.27 31,772 10.52
Granted - - 8,000 22.90 16,000 13.92
Exercised (15,458) 7.15 (92,847) 8.16 (54,850) 8.51
Terminated/cancelled - - (8,000) 13.92 (4,331) 11.34
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 546,562 $ 10.91 562,020 $ 10.81 627,080 $ 10.78
======================================================================================================================
Options exercisable at year-end 546,562 562,020 556,815
Weighted average fair value of
options granted during the year $ - $ 7.34 $ 5.93
======================================================================================================================
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The following table summarizes information about options outstanding at
December 31, 2005.
Weighted Weighted Weighted
Options Average Average Options Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at December 31, 2005 Contractual Life Price at December 31, 2005 Price
==================================================================================================================
$ 6.47 to $ 7.94 87,921 1.42 $ 7.35 87,921 $ 7.35
8.17 to 9.53 104,169 4.89 9.08 104,169 9.08
10.89 to 12.13 326,651 5.04 12.02 326,651 12.02
13.25 to 13.84 19,421 8.37 13.51 19,421 13.51
21.81 8,400 8.13 21.81 8,400 21.81
- ------------------------------------------------------------------------------------------------------------------
$ 6.47 to $ 21.81 546,562 4.60 $ 10.91 546,562 $ 10.91
==================================================================================================================
The fair value of each option granted has been estimated on the date of grant,
using the binomial option-pricing model with the following weighted-average
assumptions. Each grant was amortized over its vesting period. During 2004 and
2003, the Corporation recognized compensation expense of $11,000 and $95,000,
respectively, related to these grants. There were no stock options granted
during 2005.
Years ended December 31, 2004 2003
=============================================================
Dividend yield 2.45% 3.12%
Expected life 10 years 10 years
Expected volatility 28% 48%
Risk-free interest rate 3.97% 3.35%
=============================================================
RESTRICTED STOCK PLAN
On April 21, 2004, Westbank Corporation's stockholders approved the
Corporation's adoption of the 2004 Recognition and Retention Plan ("RRP"), which
allows the Corporation to grant restricted stock awards to certain officers,
employees and outside Directors. The RRP authorized the acquisition of not more
than 92,505 shares of common stock on the open market. During 2004, the Board of
Directors granted 92,505 shares of restricted stock pursuant to the RRP. Shares
generally vest at a rate of 12.5% per year over 8 years, with acceleration upon
retirement. Compensation expense is being amortized over the 8-year vesting
period.
For the year ended December 31, 2005, the Corporation, through a Trustee,
purchased all 92,505 shares of common stock for a total purchase price of
$1,547,000 on the open market, pursuant to the RRP. The purchase of these shares
is reflected as a reduction of stockholders' equity. These restricted common
shares are held in trust until vested. On May 25, 2005, 12,005 shares of the
award vested and became unrestricted shares of common stock. During 2005 and
2004, the Corporation recognized compensation expense related to the restricted
stock plan totaling $228,000 and $133,000, respectively, based on the fair value
of the common stock on the grant date.
The Corporation currently accelerates the recognition of compensation cost for
retired employees and Directors at the date of retirement. Upon adoption of SFAS
No. 123(R), for any new awards granted, the Corporation will recognize
compensation expense for the period from the date of grant through the date that
the employee first becomes eligible for retirement. In some cases, this will
result in the recognition of compensation cost over a shorter period than the
stated vesting period. Had the Corporation applied the accelerated vesting
methodology in SFAS No. 123(R), additional compensation expense totaling $38,600
and $22,500 would have been recognized for the years ended December 31, 2005 and
2004 respectively.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
11 - EARNINGS PER SHARE
Basic earnings per share represents income available to common shareholders
divided by the weighted average number of common shares outstanding during the
year. Diluted earnings per share reflects additional common shares that would
have been outstanding if certain potentially dilutive common shares were issued
during the year. For the year ended December 31, 2005 and 2004, there were
88,900 and 100,905, respectively, potentially dilutive common shares excluded
from the following table because their effect was anti-dilutive. There were no
anti-dilutive shares for the year-ended December 31, 2003. The following table
sets forth the components of basic and diluted earnings per share:
Weighted
Net Average Earnings
(Dollar amounts in thousands, except share data) Income Shares per Share
============================================================================================
Basic Earnings Per Share:
2005 $ 5,105 4,708,589 $ 1.08
2004 (1) 4,611 4,606,094 1.00
2003 (1) 6,054 4,597,930 1.32
Effect of Dilutive Option Shares:
2005 5,105 175,135 0.03
2004 (1) 4,611 252,977 0.05
2003 (1) 6,054 192,151 0.06
Diluted Earnings per Share:
2005 5,105 4,883,724 1.05
2004 (1) 4,611 4,859,071 0.95
2003 (1) 6,054 4,790,081 1.26
(1) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in May 2004.
12 - LEASES
The Corporation leases certain facilities under non-cancelable lease agreements.
The majority of these leases are operating leases. The following is a schedule
of future minimum lease payments for such non-cancelable leases as of
December 31, 2005.
(Dollars in Thousands)
===========================================
2006 $ 309
2007 288
2008 161
2009 124
2010 118
After 2010 22
- -------------------------------------------
Total minimum lease payments $ 1,022
===========================================
Included in the future minimum lease payments above are the future minimum lease
payments for the Corporation's capital lease obligation. Future minimum lease
payments due under this capital lease agreement are $19,100 in 2006, $17,200 in
2007, $15,300 in 2008, $13,100 in 2009 and $4,800 in 2010. These future minimum
lease payments include interest of $8,200 in 2006, $6,300 in 2007, $4,400 in
2008, $2,200 in 2009 and $250 in 2010.
Rent expense for 2005, 2004 and 2003 was $373,000, $388,000 and $359,000
respectively.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
13 - COMMITMENTS AND CONTINGENT LIABILITIES
LOANS
In the normal course of business, various commitments and contingent liabilities
are outstanding, such as guarantees, standby letters of credit and commitments
to extend credit, that are not reflected in the consolidated financial
statements. Management does not anticipate any significant losses as a result of
these transactions.
The following table summarizes the contractual value of commitments at
December 31:
(Dollars in Thousands) 2005 2004
=========================================================================
Commitments to extend credit $ 20,607 $ 19,320
Commitments to purchase loans 3,072 -
Loan sales commitments 440 -
Stand-by letters of credit and financial guarantees 731 697
Undisbursed portion of loans in process and
unused portions of lines of credit 75,393 69,023
The Corporation uses the same credit policies in making commitment and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since commitments may be expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing properties.
In the normal course of business, certain litigation is pending against the
Corporation. Management, after consultation with legal counsel, does not
anticipate that any ultimate liability arising out of such litigation will have
a material effect on the Corporation's financial condition or results of
operations.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Bank has entered into a three-year employment agreement with its President
and Chief Executive Officer. The agreement generally provides for a base salary
and the continuation of certain benefits currently received. The employment
agreement renews on an annual basis. Under certain specified circumstances, the
employment agreement requires specified payments to be made for certain reasons
other than termination for cause, including a "change in control" as defined in
the agreement. However, such employment may be terminated for cause, as defined,
without incurring any continuing obligations.
The Bank has also entered into three-year change in control agreements with
certain officers, none of whom are covered by an employment agreement. The
change in control agreements are renewable on an annual basis and generally
provide a severance payment and the continuation of certain benefits currently
received following a "change in control" as defined in the agreements.
14 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
addresses the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions, and regulations concerning
internal controls, accounting and operations.
Both the Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's or Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of the Corporation's and the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Corporation's and the Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (as
defined in the regulations) of total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets. Management believes, as of December 31,
2005, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
Regulatory risk-based capital requirements take into account the different risk
categories by assigning risk weights to assets and the credit equivalent amounts
of off-balance sheet exposures. In addition, capital is divided into two tiers.
Tier 1 includes common stockholders' equity and a portion of the mandatorily
redeemable preferred stock reduced by goodwill and other intangible assets;
total risk-based, or supplementary, capital includes not only the equity but
also a portion of the allowance for loan losses and the portion of the
mandatorily redeemable preferred stock not included in Tier 1 capital.
As of December 31, 2005, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Corporation's and the Bank's actual capital amounts and ratios are presented
in the following table.
Minimum Capital
To Be Considered
Well Capitalized
Under Prompt
Minimum Capital Corrective Action
Actual Adequacy Purposes Provisions
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
===============================================================================================================
DECEMBER 31, 2005
Total Capital
(To risk-weighted assets):
Westbank $ 58,614 12.52% $ 37,460 8.00% $ 46,825 10.00%
Corporation - Consolidated 60,407 12.88 37,526 8.00 N/A N/A
Tier 1 Capital
(To risk-weighted assets):
Westbank 54,260 11.59 18,730 4.00 28,095 6.00
Corporation - Consolidated 54,320 11.58 18,763 4.00 N/A N/A
Tier 1 Capital
(To average assets):
Westbank 54,260 6.93 31,322 4.00 39,152 5.00
Corporation - Consolidated 54,320 7.19 30,235 4.00 N/A N/A
DECEMBER 31, 2004
Total Capital
(To risk-weighted assets):
Westbank $ 57,859 12.79% $ 36,177 8.00% $ 45,221 10.00%
Corporation - Consolidated 59,165 13.04 36,293 8.00 N/A N/A
Tier 1 Capital
(To risk-weighted assets):
Westbank 53,489 11.83 18,088 4.00 27,132 6.00
Corporation - Consolidated 53,616 11.82 18,147 4.00 N/A N/A
Tier 1 Capital
(To average assets):
Westbank 53,489 7.36 29,056 4.00 36,320 5.00
Corporation - Consolidated 53,616 7.35 29,164 4.00 N/A N/A
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The Bank's retained earnings at December 31, 2005 include $458,000 that is set
aside in accordance with existing provisions of the Internal Revenue Code to
absorb losses on loans. If, in the future, this amount were used for any other
purposes, a tax liability could be incurred. It is not anticipated that such
amount will be made available for dividends or that a tax thereon will be
imposed.
SHAREHOLDER RIGHTS PLAN
On November 19, 1997, the Board of Directors of the Corporation adopted an
Amended and Restated Shareholder Rights Plan (the "Rights Plan"). Pursuant to
the terms of the Rights Plan, the Board of Directors declared a dividend
distribution to stockholders of record as of the close of business on December
4, 1997 (the "Record Date") of one Preferred Stock Purchase Right (a "Right")
for each outstanding share of common stock of the Corporation. In addition, one
Right automatically attaches to each share of common stock issued subsequent to
the Record Date, until November 19, 2007. Each Right entitles the registered
holder to purchase from the Corporation a unit of one ten-thousandths of a share
(a "Unit") of Series A Junior Participating Cumulative Preferred Stock, par
value $5.00 per share ("Preferred Stock"), at a cash exercise price of $60.00
per unit of preferred stock, subject to adjustment. The Corporation has reserved
12,000 shares of Preferred Stock for issuance upon exercise of the Rights.
Currently, the Rights are not exercisable and are attached to and trade with the
outstanding shares of common stock. The Rights will separate from the common
stock and become exercisable upon the earliest to occur of (i) the close of
business on the tenth calendar day following the first public announcement that
a person or group of affiliated or associated persons has acquired beneficial
ownership of 15% or more of the outstanding shares of the Corporation's common
stock (an "Acquiring Person"), (ii) the close of business on the tenth business
day (or such date as the Board of Directors may determine) following the
commencement of a tender offer or exchange offer that would result, upon its
consummation, in a person or a group becoming the beneficial owner of 15% of the
outstanding shares of the Corporation's common stock, or (iii) the determination
by the Board of Directors that any person is an "Adverse Person."
Upon the occurrence of any one of the above events, each holder of a Right
(other than the Acquiring Person or the Adverse Person, as the case may be) is
entitled to acquire such number of Units of the Preferred Stock of the
Corporation as are equivalent to such number of shares of common stock having a
value twice the current exercise price of the Right. If the Corporation is
acquired in a merger or other business combination transaction, after any such
event each holder of a Right is then entitled to purchase, at the then current
exercise price, shares of the acquiring company's common stock having a value of
twice the exercise price of the Right.
Until a Right is exercised, the holder has no rights as a stockholder of the
Corporation (beyond those rights as an existing stockholder), including the
right to vote or to receive dividends. While the distribution of the Rights is
not taxable to stockholders or to the Corporation, stockholders may, depending
upon the circumstances, recognize taxable income in the event the Rights become
exercisable for Units, other securities of the Corporation, other consideration
or for shares of common stock of an acquiring company.
The Rights may be redeemed in whole by the Corporation, under certain
circumstances, at a price of $.001 per Right. The Rights and the Rights Plan
expire on November 19, 2007.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
15 - EMPLOYEES' STOCK OWNERSHIP PLAN
The Corporation established an Employees' Stock Ownership Plan ("ESOP") in 1989.
The ESOP has been funded by a $100 contribution from the Corporation. At
December 31, 2005 and 2004, the ESOP held no shares of the Corporation's stock.
16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Corporation's financial instruments. The following table represents the carrying
amount and estimated fair value of the Corporation's financial instruments at
December 31.
(Dollars in thousands) 2005 2004
==========================================================================================================
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 13,909 $ 13,909 $ 12,485 $ 12,485
Federal funds sold 24 24 669 669
Investment securities held to maturity 151,358 148,582 112,424 112,158
Investment securities available for sale 172,073 172,073 155,405 155,405
Federal Home Loan Bank stock 6,450 6,450 6,450 6,450
Loans 428,260 422,084 435,013 438,876
Accrued interest receivable 4,418 4,418 3,655 3,655
Liabilities:
Deposits 599,359 594,127 590,032 588,209
Borrowed funds 138,454 138,392 97,354 98,341
Junior subordinated debentures 17,526 17,456 17,526 16,956
Accrued interest payable 806 806 550 550
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
The carrying amount for cash and due from banks and for federal funds sold
approximates fair value, as these instruments mature in 90 days or less.
INVESTMENT SECURITIES
The fair value of securities is estimated based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar instruments.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, such as commercial, commercial
real estate, residential mortgage and other consumer. Each loan category is
further segmented into fixed and adjustable rate interest terms, and by
performing and non-performing categories.
The fair value of performing loans, except residential mortgages, is calculated
by discounting scheduled cash flows through the estimated maturity, using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the Corporation's
historical experience with repayments for each loan classification, modified, as
required, by an estimate of the effect of current economic and lending
conditions. For performing residential mortgage loans, including loans held for
sale, fair value is estimated by discounting contractual cash flows adjusted for
prepayment estimates, using discount rates based on secondary market sources
adjusted to reflect differences in servicing and credit costs.
Fair value for significant non-performing loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows and discount rates are
judgmentally determined using available market information and specific borrower
information.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE
The carrying amounts of these items approximate fair value due to their
short-term nature.
DEPOSITS
The fair value of deposits with no stated maturity, such as non-interest-bearing
demand deposits, regular savings, NOW accounts and money market accounts, is
equal to the amount payable on demand. The fair value of time deposits is based
on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
BORROWED FUNDS AND JUNIOR SUBORDINATED DEBENTURES
The fair value of borrowings and junior subordinated debentures was estimated by
utilizing future cash flows discounted using current borrowing rates for similar
instruments. For short-term borrowings, the carrying amount approximates the
fair value due to their short-term nature.
COMMITMENTS TO EXTEND CREDIT
The stated fair value of commitments to extend credit is based on the current
fees charged for similar commitments. The estimated fair value for commitments
to extend credit is not material.
17 - SEGMENT INFORMATION
The Corporation has one reportable segment, "Community Banking." All of the
Corporation's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Corporation supports the
others. For example, commercial lending is dependent upon the ability of the
Bank to obtain funds through deposits and borrowings, and to manage interest
rate and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant operating decisions
are based upon analysis of the Corporation as one operating segment.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
18 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands, except per share amounts)
2005
--------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Interest income $ 9,396 $ 9,626 $ 9,632 $ 10,236
Interest expense 3,699 3,863 4,049 4,615
- ----------------------------------------------------------------------------------------------------------
Net interest income 5,697 5,763 5,583 5,621
Provision for loan losses 140 - - -
Non-interest income 1,217 902 1,002 889
Non-interest expense 4,922 4,820 4,838 4,674
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 1,852 1,845 1,747 1,836
Provision for income taxes 441 597 549 588
- ----------------------------------------------------------------------------------------------------------
Net income $ 1,411 $ 1,248 $ 1,198 $ 1,248
==========================================================================================================
Earnings per share - Basic $ 0.30 $ 0.26 $ 0.26 $ 0.27
- Diluted $ 0.29 $ 0.25 $ 0.25 $ 0.26
==========================================================================================================
2004
--------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Interest income $ 9,060 $ 9,361 $ 9,375 $ 9,013
Interest expense 3,529 3,628 3,693 3,424
- ----------------------------------------------------------------------------------------------------------
Net interest income 5,531 5,733 5,682 5,589
Provision for loan losses - - 150 75
Non-interest income 1,316 895 489 741
Non-interest expense 4,586 4,503 5,457 4,603
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 2,261 2,125 564 1,652
Provision for income taxes 676 680 112 523
- ----------------------------------------------------------------------------------------------------------
Net income $ 1,585 $ 1,445 $ 452 $ 1,129
==========================================================================================================
Earnings per share - Basic $ 0.34 $ 0.32 $ 0.10 $ 0.24
- Diluted $ 0.32 $ 0.30 $ 0.09 $ 0.23
==========================================================================================================
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31,
(Dollars in Thousands) 2005 2004
==============================================================================
Assets
Cash $ 333 $ 416
Investment in subsidiaries 63,111 63,150
Other investments 387 280
Investment in unconsolidated investee 526 526
Other assets 600 664
- ------------------------------------------------------------------------------
Total assets $ 64,957 $ 65,036
==============================================================================
Liabilities
Junior subordinated debentures $ 17,526 $ 17,526
Other liabilities 53 48
- ------------------------------------------------------------------------------
Total liabilities 17,579 17,574
Stockholders' equity
Preferred stock - none
Common stock, par value $2 per share 9,560 9,493
Unearned compensation - restricted stock (1,424) (1,652)
Additional paid-in capital 19,105 20,377
Retained earnings 22,417 19,958
Treasury stock (420) (606)
Accumulated other comprehensive loss (1,860) (108)
- ------------------------------------------------------------------------------
Stockholders' equity 47,378 47,462
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 64,957 $ 65,036
==============================================================================
STATEMENTS OF INCOME
(Dollars in Thousands) 2005 2004 2003
===============================================================================
Dividend from subsidiary $ 4,192 $ 2,998 $ 3,161
Interest expense (1,012) (1,511) (1,682)
Other expense - net (202) (1,093) (364)
- -------------------------------------------------------------------------------
Income before taxes and
undistributed income of subsidiary 2,978 394 1,115
Income tax benefit 413 669 678
Undistributed income of subsidiary 1,714 3,548 4,261
- -------------------------------------------------------------------------------
Net Income $ 5,105 $ 4,611 $ 6,054
===============================================================================
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands) 2005 2004 2003
==============================================================================================================
Cash Flows from operating activities:
Net income $ 5,105 $ 4,611 $ 6,054
Stock compensation 228 144 95
Income tax benefit from exercise of non-qualified stock options 48 182 105
Operating activities:
Equity in undistributed income of subsidiary (1,713) (3,548) (4,261)
Decrease (increase) in other assets 64 817 (48)
Increase (decrease) in other liabilities 5 (158) 186
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,737 2,048 2,131
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities purchased (107) (157) (89)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (107) (157) (89)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options
and stock purchase plan 863 1,445 1,130
Proceeds from junior subordinated debentures - 17,526 -
Repayment of junior subordinated debentures - (17,526) -
Purchase of common stock (1,930) (854) (904)
Dividends paid (2,646) (2,561) (2,110)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,713) (1,970) (1,884)
- --------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (83) (79) 158
Cash and cash equivalents at the beginning of the year 416 495 337
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 333 $ 416 $ 495
==============================================================================================================
Cash paid during the year:
Interest paid to Westbank Capital Trust I $ - $ 1,262 $ 1,632
Interest paid to Westbank Capital Trust II 468 134 -
Interest paid to Westbank Capital Trust III 508 86 -
Income taxes paid 1,189 1,803 5,882
46
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Westbank Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting. Westbank
Corporation's internal control over financial reporting is a process designed
under the supervision of the Corporation's Chief Executive Officer and Chief
Financial Officer to provide reasonable assurance to the Corporation's
management and Board of Directors regarding the reliability of financial
reporting and the preparation of the Corporation's financial statements for
external reporting purposes.
Westbank Corporation's internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and dispositions
of assets; provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that receipts and expenditures are being made only in accordance with
authorizations of management and the Directors of Westbank Corporation; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of Westbank Corporation's assets
that could have a material effect on the financial statements of the
Corporation.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Westbank Corporation's management assessed the effectiveness of the
Corporation's internal control over financial reporting as of December 31, 2005
based on the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO") in "Internal Control-Integrated Framework."
Based on the assessment, management determined that, as of December 31, 2005,
the Corporation's internal control over financial reporting is effective, based
on those criteria.
Deloitte & Touche LLP, an independent registered public accounting firm who has
audited the Corporation's consolidated balance sheet as of December 31, 2005 and
the related consolidated statement of income, comprehensive income,
stockholders' equity and cash flows for the year ended December 31, 2005
included in this 2005 Annual Report, has issued an attestation report on
management's assessment of the effectiveness of the Corporation's internal
control over financial reporting as of December 31, 2005, which attestation
report appears on Page 52.
Donald R. Chase John M. Lilly
President and Chief Executive Officer Treasurer and Chief Financial Officer
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Westbank Corporation, West
Springfield, MA
We have audited the accompanying consolidated balance sheet of Westbank
Corporation and subsidiaries (the "Company") as of December 31, 2005, and the
related statements of income, stockholders' equity, comprehensive income and
cash flow for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, such 2005 financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 2005, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America. We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of the Company's internal control over financial
reporting as of December 31, 2005, based on criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
March 1, 2006 expressed an unqualified opinion on management's assessment of the
effectiveness of the Company's internal control over financial reporting and an
unqualified opinion on the effectiveness of the Company's internal control over
financial reporting.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
March 1, 2006
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Westbank Corporation, West
Springfield, MA
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Westbank
Corporation and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2005 of the Company and our
report dated March 1, 2006 expressed an unqualified opinion on those financial
statements.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
March 1, 2006
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors,
Westbank Corporation
We have audited the accompanying consolidated balance sheet of Westbank
Corporation (the "Corporation") and subsidiaries as of December 31, 2004, and
the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Westbank Corporation and
subsidiaries as of December 31, 2004, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2004
in conformity with accounting principles generally accepted in the United States
of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Westbank
Corporation's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 10, 2005 (not separately included herein), expressed an
unqualified opinion.
GRANT THORNTON LLP
Boston, Massachusetts
March 10, 2005
50
Corporate Directory
WESTBANK CORPORATION AND SUBSIDIARIES
DIRECTORS
Westbank Corporation and Westbank
==============================================================================================================================
ERNEST N. LAFLAMME, JR. DONALD R. CHASE ROBERT J. PERLAK
Chairman of the Board, Vice Chairman of the Board, Corporate Clerk,
WESTBANK CORPORATION President and Chief Executive Officer, WESTBANK CORPORATION
Treasurer, WESTBANK CORPORATION Private Investor
CITY OF CHICOPEE President and Chief Executive Officer,
WESTBANK GEORGE R. SULLIVAN
MARK A. BEAUREGARD Chief Executive Officer,
Attorney At Law, G. WAYNE MCCARY SULLIVAN PAPER COMPANY, INC.
RESNIC, BEAUREGARD, WAITE & DRISCOLL President and Chief Executive Officer,
EASTERN STATES EXPOSITION JAMES E. TREMBLE
DAVID R. CHAMBERLAND President,
President, VALLEY COMMUNICATIONS SYSTEMS, INC.
CHICOPEE BUILDING SUPPLY
OFFICERS
Westbank Corporation
- ------------------------------------------------------------------------------------------------------------------------------
DONALD R. CHASE GARY L. BRIGGS TRENTON E. TAYLOR
President and Chief Executive Officer Executive Vice President Senior Vice President
JOHN M. LILLY KATHLEEN A. JALBERT LLOYD S. HALL, CBA
Treasurer and Chief Financial Officer Senior Vice President Director of Auditing
Westbank
- ------------------------------------------------------------------------------------------------------------------------------
DONALD R. CHASE INVESTMENT SERVICES DIVISION LOAN CREDIT AND COLLECTION
President and Chief Executive Officer RENE G.LEDOUX TRENTON E. TAYLOR
Senior Vice President Senior Vice President
WEALTH MANAGEMENT PATRICIA A. NEBOSKY
AUDITING DIVISION ROBERT A. GIBOWICZ Vice President
LLOYD S. HALL, CBA Senior Trust Officer JOHN E. O'BRIEN
Director of Auditing WILLIAM M.VARANKA Assistant Vice President
Vice President
WESTCO FINANCIAL SERVICES
BRANCH ADMINISTRATION/ BARBARA G. LUCIA MARKETING
HUMAN RESOURCES/SECURITY Vice President TAMMY L. BISCHOF
KATHLEEN A. JALBERT CHRISTOPHER L.KLECIAK Vice President, Director of Marketing
Senior Vice President Vice President
DEBORAH A. KUMIEGA
Vice President RESIDENTIAL REAL ESTATE
SUSAN M. ALDRICH LOAN DIVISION WOLFGANG A. ADAMETZ
Human Resources Officer GARY L. BRIGGS Vice President
Executive Vice President RONALD E.BRISSETTE
PAUL M. ACCORSI Mortgage Officer
COMPLIANCE Senior Vice President ARMAND P.DESLAURIERS
AMY B. SHEEHAN JOHN F. WHITE Mortgage Officer
Senior Vice President Senior Vice President MIRANDA E.RONKE-CZARNIECKI
CLIFFORD R. BORDEAUX Mortgage Officer
Vice President
EDP/OPERATIONS ROBERT D. FLUHARTY
S. STEVE KONIECKI Vice President
Senior Vice President RICHARD N. HANCHETT
TAMMY L. HOWE Vice President
Assistant Vice President MICHAEL J. HARRINGTON
Vice President
FINANCE DEPARTMENT JOSEPH S.LEMAY
JOHN M. LILLY Vice President
Executive Vice President and Treasurer J. KEVIN HOURIHAN
HOWARD STANTON, III Dealer Account Officer
Vice President
JENNIFER L.PAPADOPULOS
Accounting Officer
51
Massachusetts Connecticut
CHICOPEE OFFICE DANIELSON OFFICE
637 Front Street 203 Main Street
Chicopee, MA 01013 P.O. Box 270
(413) 747-1330 Danielson, CT 06239
(860) 774-8501
EAST LONGMEADOW OFFICE
6 Somers Road PUTNAM OFFICE
East Longmeadow, MA 01028 163 Providence Street
(413) 747-1351 Putnam, CT 06260
(860) 963-2265
FEEDING HILLS OFFICE
1340 Springfield Street STONEWALL COMMONS OFFICE
Feeding Hills, MA 01030 7 Providence Pike, Route 44
(413) 747-1320 Putnam, CT 06260
(860) 928-0855
HOLYOKE OFFICE
378 High Street WOODSTOCK OFFICE
Holyoke, MA 01040 Route 171
(413) 747-1340 P.O. Box 332
Woodstock, CT 06267
LUDLOW OFFICE (860) 963-4663
314 Center Street
Ludlow, MA 01056
(413) 747-1326 Supermarkets
MAIN OFFICE CHICOPEE BIG Y
Westbank Tower 650 Memorial Drive
225 Park Avenue Chicopee, MA 01020
West Springfield, MA 01089 (413) 747-1337
(413) 747-1400
EAST LONGMEADOW
MITTINEAGUE OFFICE STOP & SHOP
1440 Westfield Street Heritage Plaza
West Springfield, MA 01089 470 North Main Street
(413) 747-1310 East Longmeadow, MA 01028
(413) 747-1357
RIVERDALE OFFICE
1063 Riverdale Street
West Springfield, MA 01089
(413) 747-1300
SOUTHWICK OFFICE
515 College Highway
P.O. Box 1081
Southwick, MA 01077
(413) 747-1425
WEBSTER OFFICE
115 East Main Street
Webster, MA 01570
(508) 949-2221
WESTFIELD OFFICE
10 Broad Street
Westfield, MA 01085
(413) 747-1360
52
CORPORATE INFORMATION
Westbank Corporation and Subsidiaries
WESTBANK CORPORATION
Westbank Tower, 225 Park Avenue
West Springfield, MA 01089-3310
(413) 747-1400
ANNUAL MEETING
The Annual Meeting of Stockholders of Westbank Corporation will be held on
Wednesday, April 19, 2006 at nine o'clock in the morning at Storrowton Tavern,
1305 Memorial Avenue, West Springfield, Massachusetts.
TRANSFER AGENT AND REGISTRAR
Westbank-Trust Department
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Hartford, Connecticut
CORPORATE COUNSEL
Thacher Proffitt & Wood LLP
Washington, DC
Doherty, Wallace, Pillsbury and Murphy, P.C.
Springfield, Massachusetts
INFORMATION SERVICE
Westbank Corporation welcomes stockholder and public interest in our services
and activities. Questions pertaining to material presented in this Report and
requests for a copy of the Annual Report (Form 10-K) filed with the Securities
and Exchange Commission should be directed to John M. Lilly, Treasurer and Chief
Financial Officer, at the above address.
EQUAL OPPORTUNITY EMPLOYER
The Corporation has maintained its commitment to equal opportunity and
affirmative action in employment and personnel policies and pledges to recruit,
hire, train and promote persons in all job classifications without regard to
race, color, religion, sex, national origin, physical or mental disability,
veterans status or age.
COMMON STOCK - MARKET INFORMATION
The table below shows cash dividend data and the range of bid prices by quarter
for the Corporation's common stock. The source of the bid ranges is the NASDAQ
regional market quotations.
- ------------------------------------------------------------------------------
2005 2004*
Bid Bid
High Low Dividend High Low Dividend
- ------------------------------------------------------------------------------
First $ 18.66 $ 17.00 $ 0.14 $ 23.48 $ 18.08 $ 0.14
Second 17.68 15.55 0.14 23.39 17.80 0.14
Third 17.40 14.25 0.14 21.54 17.75 0.14
Fourth 15.50 13.81 0.14 21.50 18.31 0.14
* All stock prices have been adjusted for the 5% stock dividend declared and
distributed May 2004.
The above quotations of the Corporation's common stock represent prices between
dealers. They do not include retail markup, markdown or commissions. At January
31, 2006, the Corporation had 2,021 stockholders. Westbank Corporation's common
stock is traded on the NASDAQ National Market Exchange; the trading symbol is
"WBKC." For information on the Westbank Corporation Dividend Reinvestment and
Stock Purchase Plan, call Westbank's Trust Department at (413) 747-1400.
53