WESTBANK CORPORATION
2001 ANNUAL REPORT
STRONGER THAN EVER
[PHOTO OF JANE M. KNAPP ] [PHOTO OF STANLEY F. OSOWSKI]
Jane M. Knapp Stanley F. Osowski
May 16, 1955 - November 15, 2001 January 14, 1944 - March 10, 2002
Stanley F. Osowski, Senior Vice President of the Residential Real Estate
Division, and Jane M. Knapp, Vice President and Compliance Officer, both
recently lost their courageous battles with cancer.
Stan joined the Bank as a Senior Vice President in 1986 when Westbank
merged with the former Chicopee Cooperative Bank. While at Chicopee Cooperative,
Stan served as President of its mortgage banking subsidiary, Colonial Mortgage
Corporation. A U.S. Army veteran, Stan graduated from Westfield High School and
American International College.
Jane began her career with Westbank as a summer teller while attending
college. A graduate of both the MacDuffie School and Skidmore College, Jane
joined the Bank full-time in 1977, holding several key positions, including
Branch Manager and Director of Human Resources.
Stan and Jane were highly admired and respected co-workers who contributed
mightily to the success of the Corporation over the years. But above all, they
were our friends. They will be greatly missed by those who had the privilege of
knowing them.
We dedicate this annual report to their memory.
1
FINANCIAL HIGHLIGHTS
Westbank Corporation and Subsidiaries
FOR THE YEAR ENDED DECEMBER 31
(Dollars in Thousands) 2001 2000 1999
======================================================================================================================
Net income $ 4,073 $ 3,788 $ 4,167
Net interest income 20,397 19,417 17,121
Non-interest income 3,489 2,652 2,330
Non-interest expense 16,841 15,841 12,598
Provision for loan losses 944 472 77
YEAR END DECEMBER 31
(Dollars in Thousands)
======================================================================================================================
Investments $ 142,442 $ 97,676 $ 81,320
Loans, net 439,723 429,231 438,567
Allowance for loan losses 4,179 3,670 3,908
Total assets 628,922 574,596 576,150
Total deposits 509,849 499,140 478,896
Total stockholders' equity 39,016 34,860 31,543
COMMON SHARE INFORMATION
Average diluted shares 4,298,114 4,273,384 4,333,326
Earnings per diluted share $.95 $.89 $.96
GROWTH IN ASSET LOANS AND INVESTMENTS (AT COST) BAR CHART
(Dollars in Thousands)
======================================================================================================================
Assets Loans Investments (at Cost)
------ ----- ---------------------
1997 $335,567 $268,254 $ 60,208
1998 402,623 293,113 83,975
1999 576,150 438,567 84,373
2000 574,596 429,231 97,971
2001 628,922 439,723 140,367
2
CHAIRMAN AND PRESIDENT'S LETTER
Westbank Corporation and Subsidiaries
Dear Shareholder:
In the annals of banking history, 2001 will be remembered as a year that was
shaped by a series of extraordinary events that not only affected the banking
industry, but the lives of all Americans. The economy officially entered into a
recession for the first time since the early 1990's. The Federal Reserve made a
record 11 rate adjustments. Mortgage rates dropped to a 40-year low, spurring
one of the biggest refinancing booms in recent memory. Core deposits increased
substantially as nervous investors made the flight to safety from a tumultuous
stock market. And, most notably, the nation fell victim to a terrorist attack on
September 11.
While the attack on America certainly changed our lives forever, it also
succeeded in galvanizing our great nation. Despite the initial shock and
subsequent economic ripple effect of the attacks, America has begun to bounce
back. Consumer confidence continues to improve, the housing market remains
exceptionally strong and unemployment levels are holding steady. Recent reports
even go so far as to suggest that the current recession may be one of the
shortest on record. But there's more to this renewed strength than some positive
economic indicators - the country has united with a resolve not seen since World
War II. There is a feeling of hope and a new sense of purpose. America might
have been weakened on September 11, but it has emerged stronger than ever.
We're pleased to report that, like America, Westbank Corporation is also
stronger than ever. For the year ended December 31, 2001, net income totaled
$4,073,000 or $.95 per diluted share versus $3,788,000 or $.89 per diluted share
for the year ended December 31, 2000, an increase of nearly 8%. On a cash basis
(excluding amortization of goodwill), earnings per diluted share represented
$1.05 for the year ended December 31, 2001. This rate of growth includes a
one-time expense of $300,000, the cost of merging our Park West Bank and Trust
Company and Cargill Bank subsidiaries.
As of December 31, 2001, assets totaled $629 million, a 9.5% increase versus one
year ago. Investments grew to $142 million, loans totaled $440 million and
deposits ended the year at $510 million, an $11 million increase compared to
December 31, 2000. Shareholders' equity increased 12% to $39.0 million,
representing a book value of $9.14 per share. Recently, the Corporation also
increased its annual cash dividend by 10% to $0.44 per share, a further
indication of its financial strength and viability. The net interest margin also
improved in 2001, increasing to 3.68% from 3.59% in 2000. This was achieved by
closely monitoring the changing interest rate environment and aggressively
managing the overall cost of funds.
Our success in 2001 can be attributed to two factors: a sound strategic plan and
the completion of a number of planned initiatives. By far, the most important
objective we accomplished was the merger of our Cargill Bank and Park West Bank
and Trust Company subsidiaries on September 7, 2001. This merger is the
cornerstone of our long-term plan to consolidate operations, reduce expenses and
strengthen our brand identity. Despite occurring just prior to the infamous
attack on America, the merger went very smoothly and according to plan. As a
result of the merger, Westbank now has 170 employees and operates 17 branch
offices and 20 ATMs in Massachusetts and Connecticut.
In conjunction with the merger, the Corporation renamed its Park West Bank and
Trust Company subsidiary "Westbank" to be consistent with the holding company's
name. By operating with one unified brand name, we can begin the long-term
process of building our brand in our market area. The merger is also expected to
yield significant cost savings achieved through economies of scale and
streamlined operations. Of course these results will not be achieved overnight.
A sustained investment in marketing, personnel and community resources will be
required to successfully build the Westbank brand name and acquire additional
market share.
The Federal Reserve's 11 rate adjustments in 2001 had a direct impact on our
loan performance, most notably with regard to our residential and commercial
loan portfolios. Spurred by the lowest rates since the 1960's, our Residential
Loan Division originated over $90 million in residential real estate loans in
2001. With over $11.3 million scheduled
3
for closing in the first quarter, all indications are that this trend will
continue well into 2002 or until such time as rates begin to adjust upward. In
response to the increased loan demand, Westbank augmented its Residential
Mortgage Department by hiring two additional mortgage originators and two
processors in 2001.
Our business banking team also benefited from the Federal Reserve's rate
adjustments, originating over $48.9 million in new commercial loans and
commercial mortgages in 2001, while our Equipment Leasing Division also enjoyed
a successful year with $4.8 million in leases originated. To further boost
commercial loan activity in 2002, Westbank launched an aggressive business
banking advertising campaign in December 2001. The campaign promotes the fact
that Westbank has $100 million to lend area businesses and is designed to
increase Westbank's commercial loan portfolio, capture additional market share
and build awareness of our business banking unit. Other planned business banking
initiatives include the addition of an online 401(k) product, which will be
offered and administered through our Trust and Investments Division.
Our Indirect Lending Division, which underwrites automobile loans directly
through auto dealers, continues to perform well. Despite the proliferation of 0%
financing offered by the major auto manufacturers and the impact of the
September 11 attack, our Indirect Lending Division still managed to book $19.9
million in new auto loans in 2001, an increase of 58%. Westbank currently has
some 65 dealer affiliations in Connecticut and Massachusetts, up from 50
affiliations in 2000.
To meet the increased demand for trust and investment services, the
Corporation's Trust and Investments Division was restructured in 2001. As part
of this restructuring, a new Vice President and Trust Marketing Director was
hired in September 2001. In 2002, this Division will continue to build long-term
client relationships in Massachusetts and Connecticut, and has added 401(k)
plans to its current product offerings. The new 401(k) product features over 60
different options utilizing 7 different mutual fund families. It is a full
turnkey product that combines the investment options with the administration
requirements, including 24-hour, 7-day-a-week access at the sponsor and
participant level.
The Corporation also introduced 3 new products in 2001. In June, we launched our
much-anticipated Online Banking product, providing customers with the ability to
transfer funds, pay loans, pay bills and view upcoming transactions from any
computer with Internet access. In the 8 months since this product was rolled
out, we have enrolled over 600 customers, 15% of whom have signed up for Web
Bill Pay, a fee-generating product. In November, we introduced Online Business
Banking to our business banking customers. This product offers many of the same
features as the consumer version, but also allows users to perform wire
transfers and ACH origination. Response to this new product has been very
favorable to date. Looking ahead, the Corporation plans to fully leverage its
investment in Internet technology by enhancing its Web site to make it a true
delivery channel.
Following the successful introduction of a consumer debit card in June 2000,
Westbank introduced a business debit card in May 2001, geared to the unique
needs of business customers. In 2001, the consumer and business debit cards
combined to generate over $84,000 in fee income.
Sadly, we must also note the passing of two friends. Stanley F. Osowski, Senior
Vice President of the Residential Real Estate Division and Jane M. Knapp, Vice
President and Compliance Officer, both passed away following courageous battles
with cancer.
Stan joined the Bank as a Senior Vice President in 1986 when Westbank merged
with the former Chicopee Cooperative Bank. A U.S. Army veteran, Stan graduated
from Westfield High School and American International College. A graduate of the
MacDuffie School, Jane began her career at Westbank as a summer teller while
attending Skidmore College. Upon graduation from Skidmore, Jane joined the Bank
in 1977, holding several positions, including Branch Manager and Director of
Human Resources. Stan and Jane were highly respected co-workers and friends who
will be greatly missed by all of us.
In 2002, the Corporation will seek to maximize its profitability across all
existing lines of business and keep a close eye on operating expenses. We intend
to achieve this by remaining steadfast in our efforts to actively manage the net
4
interest margin, attract and retain core deposits, increase the acquisition and
usage levels of our fee-generating products, and closely monitor the overall
cost of funds in a challenging economic climate.
With the merger of Cargill Bank and Park West Bank and Trust Company now
complete, the Corporation is well positioned for continued growth and
achievement. We fully expect that our financial performance will continue to
improve in 2002 and will even surpass our results for 2001. As we approach our
40th anniversary of doing business, we remain as committed as ever to finding
ways to enhance shareholder value and build a stronger, more profitable
Corporation for our shareholders, customers and employees. With a solid
strategic plan, a highly motivated management team and a resolute determination
to succeed, we remain confident that we will be `stronger than ever' in the
years to come.
Thank you for your loyalty, confidence and continued support of Westbank
Corporation.
Sincerely,
Donald R. Chase Ernest N. Laflamme, Jr.
President and Chairman of the Board
Chief Executive Officer
5
Business
Westbank Corporation and Subsidiaries
CORPORATE ORGANIZATION
Westbank Corporation (hereinafter sometimes referred to as "the Corporation") is
a registered Bank Holding Company organized to facilitate the expansion and
diversification of the business of Westbank (hereinafter sometimes referred to
as "the Bank"). Westbank Corporation is also the owner of a wholly owned
subsidiary, Westbank Capital Trust 1, which was organized for the purpose of
facilitating the issuance of the mandatory redeemable preferred stock that was
issued on September 30, 1999.
The Corporation is headquartered in West Springfield, Massachusetts. As of
December 31, 2001, the Corporation has seventeen (17) offices located in
Massachusetts and Connecticut.
WESTBANK
The Bank is a Massachusetts chartered commercial bank and trust company, is a
member of the Federal Deposit Insurance Corporation ("FDIC"), and is subject to
regulation by the Massachusetts Commissioner of Banks and the FDIC. Westbank is
the resultant financial institution formed with the merger of the Corporation's
two (2) wholly owned subsidiaries, Park West Bank and Trust Company ("Park
West") and Cargill Bank ("Cargill'). On September 7, 2001, Cargill was merged
with and into Park West operating under the name Westbank.
A full range of retail banking services is furnished to individuals, businesses
and nonprofit organizations through seventeen (17) banking offices located in
Massachusetts and Connecticut. Such services include a wide range of checking
and savings accounts, loans, safe deposit facilities, and automated teller
machines at selected branch locations.
The Bank also provides lending, depository and related financial services to
commercial, industrial, financial and governmental customers. In the lending
area, these include short- and long-term loans and revolving credit
arrangements, letters of credit, inventory and accounts receivable financing,
real estate construction lending, and mortgage loans.
Lorac Leasing Corp., Park West Securities Corporation, Park West Real Estate
Investment Trust, Inc., and P W B & T, Inc., are all wholly owned subsidiaries
of the Bank.
The Bank also operates a Trust Department providing services normally associated
with holding property in a fiduciary or agency capacity. The value of the
property held by the Trust Department at December 31, 2001 amounted to
$106,438,000 and is not included in the accompanying financial statements since
such items are not assets of the Bank.
EMPLOYEES
As of December 31, 2001, the Corporation and its subsidiaries had the equivalent
of 167 full-time officers and staff.
COMPETITION
The Corporation's banking, real estate activity and trust services are
competitive with other financial institutions. Its service area is in western
Massachusetts and northeastern Connecticut. Competitors include other commercial
banks, mutual savings banks, savings and loan associations, credit unions,
consumer finance companies, loan offices, money market funds, and other
financing organizations.
Competition for trust services from major commercial banks is high, with
continuing efforts by those banks to solicit new business. The Trust Department
prides itself as one of the few remaining corporate fiduciaries providing
personal services locally. Insurance companies, mutual savings banks, investment
counseling firms, and other business firms and individuals also offer active
competition for such business.
6
SELECTED CONSOLIDATED FINANCIAL DATA
Westbank Corporation and Subsidiaries
Year ended December 31,
(Dollars in Thousands Except Share Amounts) 2001 2000 1999 1998 1997
====================================================================================================================================
Interest and dividend income $ 41,088 $ 42,645 $ 32,437 $ 28,631 $ 26,724
Interest expense 20,691 23,228 15,316 13,292 12,091
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 20,397 19,417 17,121 15,339 14,633
Provision for loan losses 944 472 77 41 306
Non-interest income 3,489 2,652 2,330 2,427 2,529
Non-interest expense 16,841 15,841 12,598 12,200 11,066
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,101 5,756 6,776 5,525 5,790
Income taxes 2,028 1,968 2,609 2,148 2,406
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,073 $ 3,788 $ 4,167 $ 3,377 $ 3,384
====================================================================================================================================
Common share data:
Earnings per share:
Basic $ .96 $ .90 $ .98 $ .82 $ .88
Diluted .95 .89 .96 .79 .85
Cash dividends declared .40 .40 .40 .40 .30
Ending book value 9.14 8.26 7.36 7.26 6.84
AT DECEMBER 31:
Total loans - net $ 439,723 $ 429,231 $ 438,567 $ 293,113 $ 268,254
Total assets 628,922 574,596 576,150 402,623 355,567
Total non-performing assets 2,034 2,737 2,881 1,494 2,025
Total deposits 509,849 499,140 478,896 342,267 314,679
Total borrowings 57,666 20,992 46,546 27,807 11,884
Mandatory redeemable preferred stock 17,000 17,000 17,000
Total stockholders' equity 39,016 34,860 31,543 30,490 26,918
AVERAGE FOR YEAR:
Loans 440,454 445,846 349,614 284,629 270,066
Assets 595,592 581,328 450,691 382,924 348,561
Deposits 486,694 488,396 384,410 335,110 312,725
Stockholders' equity 36,920 32,096 31,187 29,229 24,638
Weighted shares outstanding - basic 4,252,432 4,229,105 4,244,402 4,143,009 3,845,698
- diluted 4,298,114 4,273,384 4,333,326 4,272,682 4,003,015
SELECTED RATIOS:
Return on average total assets .68% .65% .92% .88% .97%
Return on average stockholders' equity 11.03 11.80 13.36 11.55 13.73
Allowance for loan losses to total loans at year end .94 .85 .88 .90 1.13
Non-performing loans as a percentage
of total loans at year end .41 .51 .55 .35 .68
Net charge-offs (recoveries) as a
percentage of average loans .10 .16 .14 .15 (.02)
Non-performing assets as a percentage of total assets .32 .48 .50 .37 .57
7
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS
Westbank Corporation and Subsidiaries
This section presents discussion and analysis of the Corporation's consolidated
financial condition at December 31, 2001 and 2000 and consolidated results of
operations for each of the three (3) years in the period ended December 31,
2001. The Corporation is consolidated with its wholly owned subsidiary,
Westbank. This discussion and analysis should be read in conjunction with the
financial statements and supplementary financial information contained elsewhere
in this Annual Report on Form 10-K.
Effective January 29, 1999, Cargill Bank was merged with and into Westbank
Corporation, pursuant to a plan of merger dated July 15, 1998. Each share of
Cargill common stock was converted into 1.365 shares of the Corporation's common
stock. Approximately 400,164 of the Corporation's common shares were issued for
the outstanding common stock of Cargill.
The transaction was accounted for using the pooling-of-interests method of
accounting and, accordingly, all historical financial data has been restated to
include both entities for all periods presented. The restatement of the
historical data is based on the Corporation's fiscal year-end December 31 and
Cargill's fiscal year-end September 30 for all periods prior to 1999.
On October 29, 1999, Cargill Bank completed its acquisition of the Connecticut
division of New London Trust. The two New London Trust offices became offices of
Cargill Bank. The acquisition resulted in $106 million of assets (loans of $84
million) and $106 million of liabilities being acquired as of October 29, 1999.
The Corporation has accounted for this acquisition on the purchase accounting
method. On September 7, 2001, Cargill was merged with and into Park West,
operating under the name Westbank.
For 2001, the Corporation reported net income of $4,073,000 or $.95 per diluted
share after providing $944,000 for loan losses. This compares to net income of
$3,788,000 or $.89 per diluted share for 2000. The Corporation's 2000 earnings
reflected a provision for loan losses of $472,000. On a cash basis (excluding
amortization of goodwill), the Corporation's 2001 earnings per diluted share
were $1.05 versus $.99 per diluted share for the year ended December 31, 2000.
CASH EARNINGS BAR CHART
(Dollars in Thousands)
================================================================================
1997 $3,384
1998 3,377
1999 4,228
2000 4,239
2001 4,531
Net interest income increased by $980,000 from 2000 to 2001. Non-interest income
increased by $837,000 in 2001 over 2000, primarily the result of an increase of
$168,000 in service charges on deposit accounts, an increase of $107,000 in
Trust Department fees, the recognition of $254,000 in cash value of life
insurance and an overall increase in other fees and services, coupled with a
decline of $239,000 in loan servicing fees.
Non-interest expenses amounted to $16,841,000 in 2001, an increase of $1,000,000
or 6%. The increase in operating expenses for 2001 is a result of the overall
growth of the Corporation, as well as approximately $300,000 in merger costs
associated with the merger of the Corporation's banking subsidiaries. Income
taxes totaled $2,028,000, an increase of $60,000 versus 2000.
At December 31, 2001, the Corporation's total assets were $628,922,000, an
increase of $54,326,000 or 9% compared to year-end 2000.
Non-performing assets amounted to $2,034,000 or .32% of total assets at December
31, 2001, compared with $2,737,000 or .48% at the end of 2000.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
imposes significant regulatory restrictions and requirements on banking
institutions insured by the FDIC and their holding companies. FDICIA established
capital categories into which financial institutions are placed based on capital
level. Each capital category establishes different degrees of regulatory
restrictions that can apply to a financial institution. As of December 31, 2001,
the Bank's capital was at a level that placed the Bank in the "well capitalized"
category as defined by FDICIA.
FDICIA imposes a variety of other restrictions and requirements on insured
banks. These include significant regulatory reporting requirements such as
insuring that a system of risk-based deposit insurance premiums and civil money
penalties for inaccurate deposit reporting exists. In addition, FDICIA imposes a
system of regulatory standards for bank and bank holding company operations,
detailed truth in savings disclosure requirements, and restrictions on
activities authorized by state law but not authorized for national banks.
COMPONENTS OF CAPITAL
As of December 31, 2001, stockholders' equity increased to $39 million, a 12%
increase compared to December 31, 2000. Stockholders' equity increased as a
result of the Corporation's net income of $4.1 million and an improvement in the
unrealized gain on securities available for sale of $1.4 million, net of taxes
less $1.7 million paid in dividends to shareholders and the repurchase of
$215,000 in the Corporation's stock. In addition, the Corporation reissued
34,787 shares of Treasury stock totaling $266,000, primarily for the purpose of
the Corporation's dividend reinvestment program.
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:
2001 2000 1999
---- ---- ----
Tier 1 leverage capital (to average assets) 6.96% 6.45% 6.92%
Tier 1 risk-based capital (minimum required 4%) 10.79 10.34 10.17
Total risk-based capital (minimum required 8%) 13.03 12.84 12.50
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 mandatory 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.
DISCUSSION OF MARKET RISK
Market risk is the risk of loss due to adverse changes in market prices and
rates. The management of this 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 risk management, primarily
interest rate risk management, concentrates on fundamental strategies to
structure the balance sheet and the composition of assets and liabilities. Since
the Corporation does not utilize interest rate futures, swaps or options
transactions, its asset/liability profile is not complex. It reflects a simple
approach to managing 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. Bank policy
includes required limits on the sensitivity of net interest income under various
interest rate scenarios.
The Bank 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. The Bank has adopted formal policies and practices
to monitor and manage interest rate risk exposure. As part of this effort, the
Bank actively manages interest rate risk through the use of a simulation model
that measures the sensitivity of future net interest income to changes in
interest rates. In addition, the Bank regularly monitors interest rate
sensitivity through gap analysis, which measures the terms to maturity or next
repricing date of interest-earning assets and interest-bearing liabilities.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
On a quarterly basis, an interest rate risk exposure compliance report is
prepared and presented to the Bank's Board of Directors. This report presents an
analysis of the change in net interest income resulting from an increase or
decrease in the level of interest rates. All changes are measured as percentage
changes from the projected net interest income in the flat rate scenario. The
calculated estimates of change in net interest income are compared to current
limits established by management and approved by the Board of Directors. The
following is a summary of the interest rate exposure report as of December 31,
2001 and 2000:
Percentage Change in
Change in Interest Rates Net Interest Income
(In Basis Points) 2001 2000
================================================================================
+200 0% 0%
Level 0 0
-200 (1.00) (1.00)
The model utilized to create the results presented above makes various estimates
at each level of interest rate change 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
estimates which would result in significant differences in the calculated
projected change.
In order to reduce the 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 Bank has focused its
residential lending on a combination of fixed and adjustable rate mortgages.
Commercial loans, commercial mortgages and consumer lending focus on adjustable
and short term loans. The Bank also attempts to maintain and/or increase its
savings and transaction accounts, which are considered relatively insensitive to
changes in interest rates.
The Corporation also measures sensitivity to changes in interest rates using
interest rate sensitivity gap analysis which is the difference between the cash
flow amounts of interest-sensitive assets and liabilities that will be
refinanced (or repriced) during a given period. For example, if the asset amount
to be repriced exceeds the corresponding liability amount for a certain day,
month, year, or longer period, the institution is in an asset-sensitive gap
position. In this situation, net interest income would increase if market
interest rates rose or decrease if market interest rates fell. If,
alternatively, more liabilities than assets will reprice, the institution is in
a liability-sensitive position. Accordingly, net interest income would decline
when rates rise and increase when rates fall. Also, these examples assume that
interest-rate changes for assets and liabilities are of the same magnitude,
whereas actual interest-rate changes generally differ in magnitude for assets
and liabilities.
The following table sets forth the distribution of the repricing of the
Corporation's earning assets and interest-bearing liabilities as of December 31,
2001, the interest rate sensitivity gap, (i.e., interest rate sensitive assets
less interest rate sensitive liabilities), the cumulative interest rate
sensitivity gap, the interest rate sensitivity gap ratio and the cumulative
interest rate sensitivity gap ratio. The table also sets forth the time periods
in which earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. However, the table does not
necessarily indicate the impact of general interest rate movements on the net
interest margin since the repricing of various categories of assets and
liabilities is subject to competitive pressures and the needs of the Bank's
customers. In addition, various assets and liabilities indicated as repricing
within the same period may, in fact, reprice at different times within such
period and at different rates.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
Three Over Three Over One Over
Months Months to Year to Five
(Dollars in Thousands) or Less A Year Five Years Years Total
====================================================================================================================================
EARNING ASSETS
Investments $ 8,034 $ 5 $ 1,361 $133,042 $142,442
Interest bearing cash 332 332
Loans 67,967 64,760 145,182 165,993 443,902
Federal funds sold 319 319
- ------------------------------------------------------------------------------------------------------------------------------------
76,652 64,765 146,543 299,035 586,995
INTEREST BEARING LIABILITIES
Savings deposits 10,479 94,320 104,799
NOW accounts 2,926 26,325 29,251
Money market accounts 19,544 19,544
Other time deposits 102,470 127,430 55,344 51 285,295
Borrowed funds and preferred stock 29,115 4,000 24,551 17,000 74,666
- ------------------------------------------------------------------------------------------------------------------------------------
$ 151,129 $ 144,835 $ 200,540 $ 17,051 $513,555
====================================================================================================================================
Interest Rate
Sensitivity Gap $ (74,477) $ (80,070) $ (53,997) $281,984 $ 73,440
Cumulative Interest Rate
Sensitivity Gap (74,477) (154,547) (208,544) 73,440
Interest Rate
Sensitivity Gap Ratio (12.69)% (13.64)% (9.20)% 48.04% 12.51%
Cumulative Interest Rate
Sensitivity Gap Ratio (12.69) (26.33) (35.53) 12.51
The presentation of a run off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $10,479,000 and
$2,926,000, respectively, included in the three-month to one-year category and
the remainder placed in the one- to five-year category of the interest-bearing
liabilities.
Westbank seeks to manage the mix of asset and liability maturities to control
the effect of changes in the general level of interest rates on net interest
income. Except for its effect on the general level of interest rates, inflation
does not have a material impact on Westbank's earnings due to the rate of
variability and short-term maturities of its earning assets.
DISTRIBUTION OF ASSETS, LIABILITIES AND
STOCKHOLDERS' EQUITY - INTEREST RATES AND INTEREST DIFFERENTIAL
The following table presents the condensed consolidated average balance sheets
for 2001, 2000 and 1999. 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:
11
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
2001 2000 1999
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 $ 450 $ 27 6.00% $ 534 $ 32 6.00% $ 812 $ 49 6.03%
Federal agencies 105,260 6,926 6.58 90,018 6,422 7.13 69,536 4,638 6.67
Tax exempt federal(a) 614 42 7.00 616 42 6.82 284 20 7.04
Other securities 6,988 408 5.84 4,007 292 7.29 1,910 155 8.12
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 113,312 7,403 6.53 95,175 6,788 7.13 72,542 4,862 6.70
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing cash and
temporary investments 351 15 4.27 765 41 5.36 2,559 123 4.81
- ------------------------------------------------------------------------------------------------------------------------------------
Loans:(b)
Commercial 58,689 4,524 7.71 60,064 5,608 9.34 52,356 4,221 8.06
Tax exempt federal(a) 4,534 423 9.33 4,653 413 8.88 2,191 198 9.04
Real estate 324,139 24,513 7.56 333,757 26,008 7.79 258,639 20,120 7.78
Consumer 53,092 4,210 7.93 47,372 3,708 7.83 36,428 2,815 7.73
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 440,454 33,670 7.64 445,846 35,737 8.02 349,614 27,354 7.82
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 5,013 158 3.15 3,793 234 6.17 3,287 171 5.20
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 559,130 $41,246 7.38% 545,579 $42,800 7.84% 428,002 $32,510 7.60%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (4,039) (3,937) (3,019)
Cash and due from banks 13,435 14,054 12,033
Other assets 27,066 25,632 13,675
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $595,592 $581,328 $450,691
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings $133,742 $ 2,665 1.99% $127,764 $ 3,365 2.63% $ 63,611 $ 1,742 2.74%
Money market 18,258 387 2.12 24,021 765 3.18 29,465 883 3.00
Negotiated rate certificates 48,817 2,325 4.76 50,391 2,899 5.75 34,934 1,754 5.02
Other time deposits 221,311 11,731 5.30 225,609 12,464 5.52 202,834 9,296 4.58
- ------------------------------------------------------------------------------------------------------------------------------------
Total time deposits 422,128 17,108 4.05 427,785 19,493 4.56 330,844 13,675 4.13
Borrowed funds/preferred stock 68,032 3,583 5.27 57,717 3,735 6.47 33,001 1,641 4.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 490,160 $20,691 4.22% 485,502 $23,228 4.78% 363,845 $15,316 4.21%
Demand deposits 64,566 60,610 53,566
Other liabilities 3,946 3,120 2,093
Stockholders' equity 36,920 32,096 31,187
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $595,592 $581,328 $450,691
====================================================================================================================================
Net interest income $20,555 $19,572 $17,194
Yield spread 3.16% 3.06% 3.39%
Net yield on earning assets/net
interest margin 3.68% 3.59% 4.02%
Deduct tax equivalent adjustment 158 155 73
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $20,397 $19,417 $17,121
====================================================================================================================================
(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.
During 2001, the yield spread increased to 3.16% versus 3.06% in 2000. The
Corporation's net interest margin increased during 2001 to 3.68% from 3.59% in
2000, an increase of 9 basis points. The section titled Rate/Volume Analysis
further describes the change in yields.
During 2000, the yield spread declined to 3.06% versus 3.39% in 1999. The
Corporation's net interest margin decreased during 2000 to 3.59% from 4.02% in
1999, a decrease of 43 basis points.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
RATE/VOLUME ANALYSIS OF INTEREST MARGIN ON EARNING ASSETS
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), interest expense and net interest
income and changes therein for 2001 as compared with 2000 and 2000 compared with
1999.
2001 Compared with 2000 2000 Compared with 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Increase Due to * Increase Due to *
(Dollars in Thousands) 2001 2000 (Decrease) Volume Rate 2000 1999 (Decrease) Volume Rate
====================================================================================================================================
Interest earned:
Securities:
U.S. Treasury $ 27 $ 32 $ (5) $ (5) $ 32 $ 49 $ (17) $ (17)
Federal agencies 6,926 6,422 504 1,029 $ (525) 6,422 4,638 1,784 1,444 $ 340
Tax exempt federal 42 42 42 20 22 23 (1)
Other securities 408 292 116 183 (67) 292 155 137 151 (14)
Interest-bearing cash 15 41 (26) (19) (7) 41 123 (82) (98) 16
Loans:
Commercial 4,524 5,608 (1,084) (126) (958) 5,608 4,221 1,387 667 720
Tax exempt federal 423 413 10 (10) 20 413 198 215 219 (4)
Real estate 24,513 26,008 (1,495) (738) (757) 26,008 20,120 5,888 5,857 31
Consumer 4,210 3,708 502 453 49 3,708 2,815 893 856 37
Federal funds sold 158 234 (76) 61 (137) 234 171 63 29 34
- ------------------------------------------------------------------------------------------------------------------------------------
41,246 42,800 (1,554) 828 (2,382) 42,800 32,510 10,290 9,131 1,159
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings 2,665 3,365 (700) 151 (851) 3,365 1,742 1,623 1,687 (64)
Money market 387 765 (378) (158) (220) 765 883 (118) (177) 59
Negotiated rate
certificates 2,325 2,899 (574) (88) (486) 2,899 1,754 1,145 861 284
Other time deposits 11,731 12,464 (733) (237) (496) 12,464 9,296 3,168 1,121 2,047
Borrowed funds 3,583 3,735 (152) 607 (759) 3,735 1,641 2,094 1,493 601
- ------------------------------------------------------------------------------------------------------------------------------------
20,691 23,228 (2,537) 275 (2,812) 23,228 15,316 7,912 4,985 2,927
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $20,555 $19,572 $ 983 $ 553 $ 430 $19,572 $17,194 $ 2,378 $4,146 $(1,768)
====================================================================================================================================
* The dollar amount of changes in interest income and interest expense
attributable to changes in rate and volume has been allocated between rate
and volume based on changes in rates times the prior year's volume and the
changes in volume times the prior year's rate.
Net interest income for 2001 increased to $20,555,000, up 5.0% from $19,572,000
in 2000. A 2.48% increase in average earning assets and a 46 basis point
decrease in average rate of return resulted in an increase in volume of $828,000
and a decrease in rate of $2,382,000. A decrease of .96% in average
interest-bearing liabilities and a 56 basis point decrease in average rate of
interest paid contributed to an increase in volume of $275,000 and a decrease in
rate of $2,812,000.
Net interest income for 2000 increased to $19,572,000, up 14% from $17,194,000
in 1999. A 27% increase in average earning assets and a 24 basis point increase
in average rate of return resulted in an increase in volume of $9,131,000 and an
increase in rate of $1,159,000. An increase of 33% in average interest-bearing
liabilities and a 57 basis point increase in average rate of interest paid
contributed to an increase in volume of $4,985,000 and in increase in rate of
$2,927,000.
LIQUIDITY
Liquidity refers to our ability to generate adequate amounts of cash to fund
loan originations, security purchases and deposit withdrawals. Liquidity
management requires close scrutiny of the mix and maturity of deposits and
borrowings and short-term investments. Cash and due from banks, federal funds
sold, investment securities and mortgage-backed securities, as compared to
deposits, are used by Westbank to compute its liquidity on a daily basis as
adjusted for regulatory purposes. In addition, Westbank is subject to Regulation
D of the Federal Reserve Bank ("FRB"), which requires depository institutions to
maintain reserve balances on deposit with the FRB based on certain average
depositor balances. Westbank is in compliance with Regulation D. Management of
Westbank believes that its current liquidity is sufficient to meet current and
anticipated funding needs. Refer to Note 7 in the Notes To Consolidated
Financial Statements for a discussion of the Corporation's external sources of
liquidity.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
INVESTMENT PORTFOLIO
Refer to Note 2 in the Notes to Consolidated Financial Statements of this report
which covers the maturity distribution and fair values at December 31, 2001 of
the securities portfolio. The following table shows the amortized cost (in
thousands) of the Corporation's securities held to maturity at December 31:
2001 2000 1999
=====================================================================================================================
U. S. Government obligations $ 499 $ 499
Federal agency obligations 9,448 9,459
Mortgage-backed securities $ 757 1,462 1,846
- ---------------------------------------------------------------------------------------------------------------------
Amortized cost $ 757 $11,409 $11,804
=====================================================================================================================
The following table shows the estimated fair value (in thousands) of the
Corporation's securities available for sale at December 31:
2001 2000 1999
=====================================================================================================================
U. S. Government obligations $ 66 $ 38 $ 11
Federal agency obligations 72,659 61,465 50,379
Mortgage-backed securities 60,359 18,929 16,504
Municipal bonds 633 624 598
Equity securities 7,968 5,211 2,024
- ---------------------------------------------------------------------------------------------------------------------
Estimated fair value 141,685 86,267 69,516
Gross unrealized (gain) loss on
securities available for sale (2,075) 295 3,053
- ---------------------------------------------------------------------------------------------------------------------
Amortized cost $ 139,610 $86,562 $72,569
=====================================================================================================================
The following table shows weighted average yields and maturity distribution of
debt securities at December 31, 2001:
Within 1 Year 1 to 5 Years 5 to 10 Years After 10 Years Total
Average Amortized Average Amortized Average Amortized Average Amortized Average Amortized
Yield Cost Yield Cost Yield Cost Yield Cost Yield Cost
====================================================================================================================================
U. S. Government
obligations 2.00% $66 $ 66
Federal agency
obligations 7.00% $1,000 6.33% $69,365 6.38% $1,000 6.34% 71,365
Mortgage-backed
securities 7.50 5 6.56 317 6.21 362 6.51 59,661 6.51 60,345
Municipal bonds 4.56 614 4.56 614
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt
Securities 2.39% $71 6.89% $1,317 6.31% $70,341 6.51% $60,661 6.41% $132,390
====================================================================================================================================
The weighted average yield has been computed by dividing annualized interest
income, including the accretion of discount and the amortization of premiums, by
the book value of securities outstanding. For purposes of the above table,
mortgage-backed securities are distributed using actual maturity dates.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
LOAN PORTFOLIO
The following table sets forth the classification (in thousands) of the
Corporation's loans by major category at December 31:
2001 2000 1999 1998 1997
=======================================================================================================================
Commercial $ 58,597 $ 60,652 $ 56,276 $ 41,760 $ 41,661
- -----------------------------------------------------------------------------------------------------------------------
Real Estate:
Construction 5,154 5,160 5,952 5,998 5,302
Residential (1-4 family) 259,791 248,059 263,832 168,744 152,896
Commercial properties 83,443 84,833 85,385 60,348 55,127
- -----------------------------------------------------------------------------------------------------------------------
Total Real Estate 348,388 338,052 355,169 235,090 213,325
- -----------------------------------------------------------------------------------------------------------------------
Consumer 37,292 34,578 31,556 19,277 16,648
- -----------------------------------------------------------------------------------------------------------------------
Gross loans 444,277 433,282 443,001 296,127 271,634
Deferred loan origination
fees-net of costs (375) (381) (526) (349) (323)
- -----------------------------------------------------------------------------------------------------------------------
Total Loans 443,902 432,901 442,475 295,778 271,311
Allowance for loan
losses (4,179) (3,670) (3,908) (2,665) (3,057)
- -----------------------------------------------------------------------------------------------------------------------
Net loans $ 439,723 $ 429,231 $ 438,567 $ 293,113 $ 268,254
=======================================================================================================================
The Corporation's loan portfolio is not concentrated within a single industry or
a group of related industries; however, underlying collateral values are
dependent upon market fluctuations in the Western Massachusetts and Northeastern
Connecticut areas. The aggregate amount of loans to executive officers,
directors and organizations with which they are associated amounted to
$3,649,000 or 9.4% of stockholders' equity as of December 31, 2001, compared to
$3,798,000 or 11% as of December 31, 2000.
The following table provides the maturity distribution and sensitivity to
changes in interest rates of commercial loans and commercial real estate
construction loans at December 31, 2001:
12 Months 1 - 5 After
Dollars in Thousands) or Less Years 5 Years Total
=======================================================================================================================
Commercial $42,989 $15,105 $ 503 $ 58,597
Real estate:
Construction 5,154 5,154
Commercial 25,778 44,484 13,181 83,443
- -----------------------------------------------------------------------------------------------------------------------
Totals $73,921 $59,589 $13,684 $147,194
=======================================================================================================================
Of the commercial loans which mature beyond one year, approximately $14,328,000
have fixed rates and the remaining $1,280,000 are floating rate loans.
In the normal course of business, various commitments and contingent liabilities
are outstanding, such as guarantees, standby letters of credit, commitments to
extend credit and various financial instruments with off-balance-sheet risk that
are not reflected in the financial statements. The most significant of these are
commitments to grant loans and commitments to advance funds under existing loan
agreements which were $11,855,000 and $47,031,000, respectively, at December 31,
2001 and $8,460,000 and $38,569,000, respectively, in 2000. See further
discussion in Note 14 to the Consolidated Financial Statements.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
LOAN LOSS EXPERIENCE
The provision for loan losses is an amount charged to income to bring the
allowance for loan losses to a level deemed appropriate by management. The
provision for losses is dependent on actual net write-offs and an evaluation of
the collectibility of the loan portfolio, taking into consideration such factors
as the financial condition of individual borrowers, historical loss experience
with respect to various portfolio segments, current and near-term economic
conditions, and the size of the portfolio. Based on a review of these factors
and the provision for loan losses recorded, the allowance for loan losses at
December 31, 2001 is deemed to be adequate by management. In the determination
of the allowance for loan losses, management obtains independent appraisals for
a significant number of properties. Management has also retained an independent
loan review consultant to provide advice on the adequacy of the loan loss
allowance.
The following table sets forth the historical relationship among the average
amount of loans outstanding, the allowance for loan losses, provision for loan
losses charged to operating expenses, losses charged off, recoveries and
selected ratios:
Year Ended December 31,
(Dollars in Thousands) 2001 2000 1999 1998 1997
====================================================================================================================================
Balance at beginning of year $ 3,670 $ 3,908 $ 2,665 $ 3,057 $ 2,699
Provision charged to expense 944 472 77 41 306
Acquisition 1,669
- ------------------------------------------------------------------------------------------------------------------------------------
4,614 4,380 4,411 3,098 3,005
- ------------------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Loans secured by real estate 52 163 78 318 394
Commercial and
industrial loans 358 538 455 153 250
Consumer loans 117 88 90 47 116
- ------------------------------------------------------------------------------------------------------------------------------------
527 789 623 518 760
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Loans secured by real estate 60 32 79 42 354
Construction/land development 14
Commercial and
industrial loans 19 27 15 30 445
Consumer loans 13 20 12 13 13
- ------------------------------------------------------------------------------------------------------------------------------------
92 79 120 85 812
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 435 710 503 433 (52)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 4,179 $ 3,670 $ 3,908 $ 2,665 $ 3,057
====================================================================================================================================
Average loans outstanding $440,454 $445,846 $349,614 $284,629 $ 270,066
====================================================================================================================================
Net charge-offs (recoveries) as a percentage
of average loans 0.10% 0.16% 0.14% 0.15% (0.02)%
Net charge-offs (recoveries) as a percentage of
the allowance at January 1 11.85 18.17 18.87 14.16 (1.93)
Allowance as a percentage of total
loans at December 31 0.94 0.85 0.88 0.90 1.13
Allowance as a percentage of
non-performing loans
at December 31 228.36 167.12 160.23 259.24 166.87
16
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
Allocation of the balance as of December 31 of the allowance for loan losses
applicable to:
(Dollars in Thousands) 2001 2000 1999 1998 1997
================================================================================================================================
% of % of % of % of % of
Total Total Total Total Total
Loan Category Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- --------------------------------------------------------------------------------------------------------------------------------
Real Estate $2,216 77.24% $2,212 76.83% $2,986 78.84% $1,764 77.38% $2,083 76.55%
Construction 15 1.16 17 1.19 64 1.34 70 2.03 83 1.97
Commercial 1,799 13.20 1,164 14.00 581 12.70 628 14.10 697 15.35
Consumer 149 8.40 277 7.98 277 7.12 203 6.49 194 6.13
- --------------------------------------------------------------------------------------------------------------------------------
$4,179 100% $3,670 100% $3,908 100% $2,665 100% $3,057 100%
================================================================================================================================
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses and the required provision is the combination of a target
reserve for impaired and classified loans and a general reserve allocation.
Quarterly, based on an internal review of the loan portfolio, the Corporation
identifies required reserve allocations targeted to recognized problem loans
that, in the opinion of management, have potential loss exposure or questions
relative to the adequacy of the collateral on these same loans. In addition, the
Corporation allocates a general reserve against the remainder of the loan
portfolio. The increase in the allowance for loan losses from 1998 to 1999 is
primarily the result of the acquisition of a loan loss allowance totaling
$1,669,000 related to the loans acquired with the purchase of the New London
Trust offices.
NON-PERFORMING ASSETS
LOANS
Loans on which interest and principal payments are 90 days or more past due are
placed on a non-accrual basis (earlier, if deemed appropriate) and interest is
reversed unless management determines that the collectibility of principal and
interest is not reasonably considered in doubt. The following table sets forth
information with regard to non-performing loans as of the end of each year
indicated:
(Dollars in Thousands) 2001 2000 1999 1998 1997
================================================================================================================================
Loans on a non-accrual basis $1,040 $1,778 $2,001 $ 797 $ 1,648
================================================================================================================================
Non-accrual loans as a percentage
of total net loans outstanding 0.24% 0.41% 0.46% 0.27% 0.61%
Non-accrual loans as a percentage
of total assets 0.17 0.31 0.35 0.20 0.46
Loans contractually past due 90
days or more and still accruing $ 790 $ 418 $ 438 $ 231 $ 184
The gross amount of interest that would have been accrued at the original
contract rate on loans on a non-accrual basis was $148,000, $159,000, $77,000,
$35,000 and $79,000 for 2001, 2000, 1999, 1998 and 1997, respectively. The
Corporation did not recognize any interest income related to non-accrual loans
during the five(5)-year period.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
The Bank evaluates loans for impairment in accordance with SFAS No. 114
"Accounting for Impaired Loans." Generally, income is recorded only on a cash
basis for impaired loans. Interest income recognized during 2001 and 2000 on
impaired loans was not significant. At December 31, 2001 and 2000, the recorded
investment in impaired loans was $336,000 and $609,000 respectively, for which
no additional specific allowance for loan losses was recorded. For the twelve
months ended December 31, 2001, the average recorded investment in impaired
loans was $629,000 compared to $441,000 for 2000 and $442,000 for 1999.
RESTRUCTURED LOANS
A restructured loan is one for which the Corporation has modified the
contractual terms to provide a reduction in the rate of interest and, in most
instances, an extension of payments of principal or interest or both because of
a deterioration in the financial position of the borrower. Restructured loans
are considered to be impaired as described in Note 1 to the financial
statements. At December 31, 2001, the Corporation had no restructured loans.
OTHER REAL ESTATE OWNED
The following table sets forth information regarding other real estate owned at
December 31:
(Dollars in Thousands) 2001 2000 1999 1998 1997
================================================================================================================================
Other real estate owned - net $204 $541 $442 $466 $353
Other real estate owned as a
percentage of total assets .03% .09% .08% .12% .10%
DEPOSITS
The following table sets forth the average amounts of, and average rates paid
on, various classifications of deposits:
2001 2000 1999
(Dollars in Thousands) Amount Rate Amount Rate Amount Rate
================================================================================================================================
Savings $133,742 1.99% $127,764 2.63% $ 63,611 2.74%
Money market 18,258 2.12 24,021 3.18 29,465 3.00
Certificates of deposit 48,817 4.76 50,391 5.75 34,934 5.02
Other time deposits 221,311 5.30 225,609 5.52 202,834 4.58
- --------------------------------------------------------------------------------------------------------------------------------
422,128 4.05% 427,785 4.56% 330,844 4.13%
Demand deposits 64,566 60,610 53,566
- --------------------------------------------------------------------------------------------------------------------------------
$486,694 $488,395 $384,410
================================================================================================================================
Certificates of deposit of $100,000 and over at December 31, 2001 had the
following maturities:
3 Months 3 to 6 6 to 12 1 Year to
(Dollars in Thousands) or Less Months Months 5 Years Total
================================================================================================================================
Totals $24,427 $9,805 $11,446 $8,230 $53,908
================================================================================================================================
18
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
RETURN ON EQUITY AND ASSETS
The Corporation's return on average equity and assets for each of the years
ended December 31 were as follows:
2001 2000 1999
==================================================================================================================
Return on average total assets .68% .65% .92%
Return on average stockholders' equity 11.03 11.80 13.36
Average stockholders' equity to average total assets 6.20 5.52 6.92
Dividend payout ratio 41.59 44.80 39.67
BORROWINGS
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) 2001 2000 1999
==================================================================================================================
Balance at year end $25,415 $13,992 $39,546
Average amount outstanding 28,582 33,144 23,755
Maximum amount outstanding at any month-end 51,149 43,535 39,623
Average interest rate for the year 2.88% 4.98% 3.87%
Average interest rate on year-end balance 1.36 4.97 4.75
COMPARISON OF OPERATING RESULTS
In the following sections of Management's Discussion and Analysis of the
Statements of Income, the comparative results of 2001, 2000 and 1999 will be
covered in greater detail. As of December 31, 2001, 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,
2001. The significant changes are discussed in the analysis that follow the
summary.
Percentage of
increase (decrease)
2001 2000
Over Over
(Dollars in Thousands) 2001 2000 1999 2000 1999
==================================================================================================================
Net interest income $20,397 $19,417 $17,121 5.05% 13.41%
Provision for loan losses 944 472 77 100.00 512.99
Non-interest income 3,489 2,652 2,330 31.56 13.82
Non-interest expense 16,841 15,841 12,598 6.31 25.74
Income taxes 2,028 1,968 2,609 3.05 (24.57)
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 4,073 $ 3,788 $ 4,167 7.52% (9.09)%
==================================================================================================================
INTEREST INCOME
Westbank's earning assets include a diverse portfolio of interest-earning
instruments ranging from Westbank'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 income for 2001 amounted to $41,088,000 as compared to
$42,645,000 for 2000 and $32,437,000 for 1999. For 2001 this represents a
decrease of $1,557,000 or 3.66% versus 2000, while interest income increased by
$10,208,000 or 31% in 2000 over 1999. The decrease in 2001 is the result of an
increase in average earning assets of $13,551,000 or 2.48%, offset by a decrease
of 46 basis points in average earning interest rate. The increase in 2000 over
1999 is the result of an increase in average earning assets of $117,577,000 and
an increase of 24 basis points in average earning interest rate.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
INTEREST EXPENSE
Interest expense for 2001 on deposits and borrowings amounted to $20,691,000 as
compared to $23,228,000 in 2000 and $15,316,000 for 1999. Interest expense
decreased by $2,537,000 or 10.9% during 2001 compared to 2000; during 2000,
interest expense increased by $7,912,000 or 52% versus 1999. The 2001 decrease
is the result of a decrease in average interest-bearing liabilities of
$4,658,000 and a 56 basis point decrease in the average rate of interest paid
compared to 2000. The increase in interest expense during 2000 versus 1999 is
the result of an increase of average interest-bearing liabilities of
$121,657,000 combined with a 57 basis point decrease in average interest rate
paid.
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. Westbank'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 the yield on earning assets and
interest paid on interest-bearing liabilities. The net yield on earning assets
is the difference between the rate of interest on earning assets and the
effective rate paid on all funds, interest-bearing liabilities, as well as
interest-free sources (primarily demand deposits and stockholders' equity).
The following table sets forth Westbank's net interest income:
(Dollars in Thousands) 2001 2000 1999
==================================================================================================================
Total interest income $41,088 $42,645 $32,437
Total interest expense 20,691 23,228 15,316
- ------------------------------------------------------------------------------------------------------------------
Net interest income $20,397 $19,417 $17,121
==================================================================================================================
The RATE/VOLUME ANALYSIS OF INTEREST MARGIN ON EARNING ASSETS section includes
and sets forth each major category of interest-earning assets and
interest-bearing liabilities which result in net interest income.
PROVISION FOR LOAN LOSSES
The 2001 provision for loan losses totaled $944,000 compared with $472,000 in
2000. The increase in the provision for loan losses during 2001 is attributable
to an increase in the percentage the Corporation utilizes in its analysis and
risk assessment of the loan portfolio. Based on this and the weakened economy,
management determined that an increase in the provision was warranted. During
2000, the provision increased by $395,000 versus 1999. A full discussion appears
previously under the headings of LOAN LOSS EXPERIENCE and NON-PERFORMING ASSETS.
NON-INTEREST INCOME
Income from sources other than interest was $3,489,000 in 2001, an increase of
$837,000 from the prior year and an increase of $1,159,000 versus 1999.
Non-interest income for 2001 reflects an increase in Trust Department earnings
of $107,000, an increase in service charges on deposit accounts and other
non-interest income of $948,000, a decrease in loan servicing income of $239,000
and a net increase from the gain on sale of investments, other real estate,
mortgages and equipment totaling $21,000 compared to 2000.
NET INTEREST INCOME BAR CHART
(Dollars in Thousands)
==================================================================================================================
1997 $14,633
1998 15,339
1999 17,121
2000 19,417
2001 20,397
20
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
NON-INTEREST EXPENSE
The components of other operating expenses are as follows:
(Dollars in Thousands) 2001 2000 1999
==================================================================================================================
Salaries and benefits $ 8,381 $ 7,940 $ 6,541
Occupancy 1,062 983 881
Other non-interest expense 6,630 6,120 5,053
Intangible amortization 684 683 100
Other real estate owned expense 84 115 23
- ------------------------------------------------------------------------------------------------------------------
$16,841 $15,841 $12,598
==================================================================================================================
Overall non-interest expense increased during 2001 by $1,000,000 versus 2000 and
by $4,243,000 compared to 1999. During 2001, salaries and benefits increased by
$441,000, attributable to overall corporate growth. Occupancy increased by
$79,000 versus 2000. Other non-interest expense increased in 2001 by $510,000,
also the result of overall corporate growth and approximately $300,000 in
expenses related to the merger of the banking subsidiaries. Intangible
amortization during 2001 totaled $684,000, representing amortization of the
unidentifiable intangible asset that resulted from the branch acquisition.
INCOME TAXES
For the year ended December 31, 2001, Westbank Corporation recorded a tax
expense of $2,028,000 compared to 2000, when the Corporation recorded a tax
expense of $1,968,000 and a 1999 income tax expense of $2,609,000.
NET INCOME
The net income for 2001 of $4,073,000, or $.96 per share basic and $.95 per
share diluted, is based on a weighted average of 4,252,432 basic and 4,298,114
diluted shares outstanding, compared with a net income for 2000 of $3,788,000 or
$.90 per share basic and $.89 per share diluted based on a weighted average of
4,229,105 basic and 4,273,384 diluted. Net income in 1999 was $4,167,000, or
$.98 per share basic and $.96 per share diluted and based on weighted average
shares of 4,244,402 basic and 4,333,326 diluted.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities as amended by
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of FASB Statement No. 133, which establishes
accounting and reporting standards for derivatives, derivative instruments
embedded in other contracts and for hedging activities. In 2000, the FASB issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for certain
derivatives, derivative instruments embedded in other contracts and for certain
hedging activities. These Statements became effective for the Corporation on
January 1, 2001. The adoption of these standards did not have a significant
impact on the Corporation's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method. The Statement
further requires separate recognition of intangible assets that meet one of two
criteria. The Statement applies to all business combinations initiated after
June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recorded and measured based on its fair value. The Statement also
provides (1) that goodwill should not be amortized, but shall be tested for
impairment annually or more frequently, if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount and (2)
that existing goodwill continue to be amortized through the remainder of Fiscal
2001, at which time amortization should cease and a transitional goodwill
impairment test would be performed. Effective January 1, 2002, the Corporation
adopted SFAS No. 141 and SFAS No. 142. The adoption of these Statements did not
have a significant effect on the Corporation's consolidated financial
statements.
21
CONSOLIDATED BALANCE SHEETS
Westbank Corporation and Subsidiaries
December 31,
(Dollars in Thousands, except share amounts) 2001 2000
====================================================================================================================================
ASSETS
Cash and due from banks:
Non-interest bearing $ 16,800 $ 18,043
Interest bearing 332 227
- ------------------------------------------------------------------------------------------------------------------------------------
17,132 18,270
Federal funds sold 319 5,249
- ------------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 17,451 23,519
- ------------------------------------------------------------------------------------------------------------------------------------
Securities:
Investment securities available for sale, estimated fair value 141,685 86,267
Investment securities held to maturity, amortized cost
(estimated fair value of $779 in 2001 and $11,392 in 2000) 757 11,409
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 142,442 97,676
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net of allowance for loan losses
of $4,179 in 2001 and $3,670 in 2000 439,723 429,231
Property and equipment, net 6,516 7,292
Other real estate owned 204 541
Accrued interest receivable 3,285 3,977
Intangible assets, net of amortization
of $684 in 2001 and $683 in 2000 8,837 9,521
Other assets 10,464 2,839
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 628,922 $ 574,596
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 70,960 $ 63,609
Interest bearing 438,889 435,531
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 509,849 499,140
Borrowed funds 57,666 20,992
Interest payable on deposits 659 727
Other liabilities 4,732 1,877
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 572,906 522,736
- ------------------------------------------------------------------------------------------------------------------------------------
Mandatory redeemable preferred stock 17,000 17,000
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 14)
- ------------------------------------------------------------------------------------------------------------------------------------
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 4,315,795
shares in 2001 and 4,283,719 shares in 2000 8,632 8,567
Additional paid-in capital 11,782 11,608
Retained earnings 17,787 15,408
Treasury stock at cost
(49,412 shares in 2001 and 61,199 shares in 2000) (431) (526)
Accumulated other comprehensive income (loss) 1,246 (197)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 39,016 34,860
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 628,922 $ 574,596
====================================================================================================================================
See notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF INCOME
Westbank Corporation and Subsidiaries
Years ended December 31,
(Dollars in Thousands, except share amounts) 2001 2000 1999
====================================================================================================================================
Interest and dividend income:
Interest and fees on loans $33,526 $35,596 $27,288
Interest and dividend income from securities 7,389 6,774 4,855
Interest from interest-bearing cash
and federal funds sold 173 275 294
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 41,088 42,645 32,437
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 17,108 19,493 13,675
Interest on borrowed funds 3,583 3,735 1,641
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 20,691 23,228 15,316
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 20,397 19,417 17,121
Provision for loan losses 944 472 77
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 19,453 18,945 17,044
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Trust 635 528 502
Service charges on deposits 1,238 1,070 938
Loan servicing 171 410 292
Gain on sale of securities available for sale 36 92
Gain on sale of other real estate owned 43 16 34
Gain on sale of loans 233 302 4
Gain on sale of equipment 27
Other 1,106 326 468
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 3,489 2,652 2,330
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and benefits 8,381 7,940 6,541
Depreciation and amortization 892 992 968
Data processing 1,803 1,639 945
Advertising 610 612 432
Supplies 505 464 344
Occupancy 1,062 983 881
Other real estate owned 84 115 23
Other 2,820 2,413 2,364
Intangible amortization 684 683 100
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 16,841 15,841 12,598
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,101 5,756 6,776
Income taxes 2,028 1,968 2,609
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,073 $ 3,788 $ 4,167
====================================================================================================================================
Earnings per share:
- Basic $.96 $.90 $.98
- Diluted $.95 $.89 $.96
====================================================================================================================================
Weighted average shares outstanding:
- Basic 4,252,432 4,229,105 4,244,402
- Diluted 4,298,114 4,273,384 4,333,326
====================================================================================================================================
See notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Westbank Corporation and Subsidiaries
Accumulated
Common Stock Additional Other
Par paid-in Retained Treasury Comprehensive
(Dollars in Thousands, except share amounts) Shares Value capital earnings Stock Income/(Loss) Total
===================================================================================================================================
Balance, January 1, 1999 4,198,838 $ 8,397 $ 11,076 $10,803 $ 214 $ 30,490
Net income 4,167 4,167
Cash dividends declared
($.40 per share) (1,653) (1,653)
Shares issued:
Stock option plan 30,255 61 78 139
Dividend reinvestment
and stock purchase plan 54,626 109 479 588
Changes in unrealized gain (loss)
on securities available for sale (2,188) (2,188)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 4,283,719 8,567 11,633 13,317 (1,974) 31,543
Net income 3,788 3,788
Cash dividends declared
($.40 per share) (1,697) (1,697)
Shares reissued from Treasury stock:
Stock option plan 1,000 (3) $ 6 3
Dividend reinvestment
and stock purchase plan 65,121 (22) 595 573
Changes in unrealized gain (loss)
on securities available for sale 1,777 1,777
Repurchase of common stock (127,320) (1,127) (1,127)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 4,222,520 8,567 11,608 15,408 (526) (197) 34,860
Net income 4,073 4,073
Cash dividends declared
($.40 per share) (1,694) (1,694)
Shares issued:
Stock option plan 4,400 9 9 18
Dividend reinvestment
and stock purchase plan 27,676 56 209 265
Shares reissued from treasury stock:
Stock option plan 1,500 (6) 8 2
Dividend reinvestment
and stock purchase plan 33,287 (38) 302 264
Changes in unrealized gain (loss)
on securities available for sale 1,443 1,443
Repurchase of common stock (23,000) (215) (215)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 4,266,383 $ 8,632 $ 11,782 $17,787 ($ 431) $ 1,246 $39,016
===================================================================================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
(Dollars in Thousands) 2001 2000 1999
===================================================================================================================================
Net Income $4,073 $3,788 $ 4,167
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale,
net of income taxes (benefit) of $927 in 2001,
$915 in 2000 and ($1,376) in 1999 1,419 1,777 (2,245)
Less: reclassification adjustment for gains
included in net income, net of income
taxes of $12 in 2001 and $35 in 1999 24 57
- -----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 1,443 1,777 (2,188)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $5,516 $5,565 $ 1,979
===================================================================================================================================
See notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Westbank Corporation and Subsidiaries
Years ended December 31,
(Dollars in Thousands) 2001 2000 1999
====================================================================================================================================
Operating activities:
Net income $ 4,073 $ 3,788 $ 4,167
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 944 472 77
Provision for other real estate owned 62 31
Depreciation and amortization 892 992 968
Intangible amortization 684 623 100
Realized gain on sale of securities (36) (92)
Realized gain on sale of other real estate owned (43) (16) (34)
Realized gain on sale of loans (233) (136) (4)
Realized gain on sale of property and equipment (27)
Deferred income taxes 923 282 (104)
Change in assets and liabilities net of effects
from purchase of New London Trust:
Accrued interest receivable 692 (734) (786)
Other assets (7,625) 417 (2,138)
Interest payable on deposits (68) (5) 303
Other liabilities 1,928 385 (316)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,104 6,130 2,172
====================================================================================================================================
Investing activities:
Securities:
Held to maturity:
Purchases (1,050)
Proceeds from maturities 10,652 395 19,862
Available for sale:
Purchases (105,572) (22,773) (35,627)
Proceeds from sales 7,828 1,779 4,679
Proceeds from maturities 64,755 7,000 11,723
Purchases of property and equipment (116) (475) (1,926)
Net (increase)/decrease in loans (32,239) 7,617 (144,607)
Proceeds from sale of other real estate owned 497 258 382
Assumption of liabilities of New London
Trust, net of cash acquired (173) (9,971)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (54,195) (6,372) (156,535)
====================================================================================================================================
Financing activities:
Net increase in deposits 10,709 20,244 136,629
Net increase/(decrease) in short-term borrowings 11,423 (25,777) 18,962
Increase in long-term borrowings 25,251
Proceeds from mandatory redeemable preferred stock 17,000
Proceeds from exercise of stock options
and stock purchase plan 549 576 727
Treasury stock repurchases (215) (1,127)
Dividends paid (1,694) (1,697) (1,653)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 46,023 (7,781) 171,665
====================================================================================================================================
Increase (decrease) in cash and cash equivalents (6,068) (8,023) 17,302
Cash and cash equivalents at beginning of year 23,519 31,542 14,240
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 17,451 $ 23,519 $ 31,542
====================================================================================================================================
Cash paid during the year:
Interest on deposits and other borrowings $ 20,759 $ 23,233 $ 15,013
Income taxes 360 1,717 2,600
Supplemental disclosure of cash flow information:
Securitization of loans into mortgage-backed securities 20,079
Transfers of loans to other real estate owned 233 290
Loans to facilitate the sale of other real estate owned 57
Unrealized gain (loss) on securities available for sale, net of taxes 1,443 1,777 (2,188)
See notes to consolidated financial statements.
25
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 generally accepted
accounting principles and general practices within the banking industry. The
following is a description of the more significant policies.
NATURE OF BUSINESS
As of December 31, 2001, the Corporation, a bank holding company, provides
financial services through its wholly owned subsidiary, Westbank, a commercial
bank and trust company with seventeen (17) offices located in Massachusetts and
Connecticut. A full range of retail banking services are furnished to
individuals, businesses and non-profit organizations. The Corporation's primary
source of revenue is derived from providing loans to customers, predominately
located in western Massachusetts and northeastern Connecticut.
MERGER WITH CARGILL BANCORP, INC.
Effective January 29, 1999, Cargill Bancorp, Inc., and its subsidiary
("Cargill") were merged with and into Westbank Corporation pursuant to a plan of
merger dated July 15, 1998. Each share of Cargill common stock was converted
into 1.3655 shares of the Corporation's common stock. A total of 400,164 of the
Corporation's common shares were issued for the outstanding common stock of
Cargill.
The transaction was accounted for using the pooling-of-interests method of
accounting and, accordingly, all historical financial data has been restated to
include both entities for all periods presented.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
ACQUISITION
On October 29, 1999, the Corporation completed its acquisition of the
Connecticut division of New London Trust, F.S.B, consisting of two branch
offices that became part of Cargill Bank. Assets and liabilities acquired were
as follows:
(Dollars in Thousands)
================================================================================
Cash and cash equivalents $ 8,722
Loans 83,895
Other real estate owned 498
Bank premises and equipment 1,877
Intangible assets 10,071
Other assets 995
- --------------------------------------------------------------------------------
Total Assets $106,058
- --------------------------------------------------------------------------------
Deposits $105,516
Other liabilities 542
- --------------------------------------------------------------------------------
Total Liabilities $106,058
================================================================================
The Corporation has accounted for this acquisition on the purchase accounting
method, including the results of their operations since October 29, 1999. The
intangible assets totaling $10,071,000 are being amortized over fifteen years.
At close of business September 7, 2001, Cargill Bank was merged with and into
Park West Bank and Trust Company operating under the name Westbank.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, Westbank, its subsidiaries, Lorac Leasing
Corp., Park West Securities Corporation, Park West Real Estate Investment Trust,
Inc. and PWB&T Inc. All material intercompany balances and transactions have
been eliminated upon consolidation. Certain amounts in the 2000 and 1999
financial statements have been reclassified to conform to the 2001 presentation.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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, the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans, and intangible assets. In connection with the
determination of the allowances for loan losses and other real estate owned,
management obtains independent appraisals for significant properties. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Corporation's allowances for losses on loans
and other real estate owned. Such agencies may require the Corporation to
recognize additions to the allowances based on their judgments about information
available to them at the time of their examination.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities as amended by
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of FASB Statement No. 133, which establishes
accounting and reporting standards for derivatives, derivative instruments
embedded in other contracts and for hedging activities. In 2000, the FASB issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for certain
derivatives, derivative instruments embedded in other contracts and for certain
hedging activities. These Statements became effective for the Corporation on
January 1, 2001. The adoption of these standards did not have a significant
impact on the Corporation's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method. The Statement
further requires separate recognition of intangible assets. The Statement
applies to all business combinations initiated after June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The Statement also
provides (1) that goodwill should not be amortized, but shall be tested for
impairment annually or more frequently, if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount and (2)
that existing goodwill will continue to be amortized through the remainder of
2001, at which time amortization should cease and goodwill will be tested
annually for impairment. Effective January 1, 2002, the Corporation adopted SFAS
No. 141 and SFAS No. 142. The adoption of these Statements did not have a
significant effect on the Corporation's consolidated financial statements.
CASH AND CASH EQUIVALENTS
The Corporation defines cash and due from banks and federal funds sold to be
cash and cash equivalents. The Bank is required to maintain reserve balances
with the Federal Reserve Bank. These balances can be in the form of either vault
cash or funds left on deposit with the Federal Reserve Bank. The average amount
of these balances was $4,055,000 for 2001.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 which 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 created out of 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. Securities which 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. The Corporation does not engage in trading activities.
Mortgage-backed securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts determined by a method that
approximates the level-yield method. Management has the positive ability and the
intent to hold these assets until maturity.
LOANS
Loans have been reduced by deferred loan fees and the allowance for loan losses.
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 SFAS No. 114,
"Accounting for Impairment of a Loan as Amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(collectively SFAS No. 114). A loan is recognized as impaired when it is
probable that either principal or interest are not collectable in accordance
with the terms of the loan agreement. Measurement of impairment for commercial
loans is generally based on the present value of expected future cash flows
discounted at the loan's effective interest rate. Commercial real estate loans
are generally measured based on the fair value of the underlying collateral. If
the estimated fair value of the impaired loan is less than the related recorded
amount, a specific valuation allowance is established or a write-down is charged
against the allowance for loan losses. Smaller balance homogenous loans,
including residential real estate and consumer loans, are excluded from the
provisions of SFAS No. 114. Generally, income is recorded only on a cash basis
for impaired loans.
The adequacy of the allowance for loan losses is evaluated quarterly by
management. Factors considered in evaluating the adequacy 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 a level adequate to absorb losses. Loan losses are
charged against the allowance for loan losses when management believes the
collectibility of the principal is unlikely.
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.
29
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 useful 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
Other real estate owned ("OREO") includes properties the Corporation has
acquired through foreclosure. 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 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 estimated
relative fair values. The cost allocated to the servicing right is capitalized
as a separate asset and amortized in proportion to, and over the period of,
estimated net servicing income.
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, 2001 and 2000, the mortgage servicing asset totaled
$457,000 and $293,000 respecively, 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 provides consistent application of a financial-components approach that
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes assets when control has been surrendered and
derecognizes liabilities when extinguished.
INCOME TAXES
The asset and liability method of accounting for income taxes is utilized.
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. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance will
be established. 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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
PENSION PLAN
The Corporation has a trusteed defined contribution pension plan covering
substantially all employees. The Corporation's policy is to fund accrued pension
cost.
STOCK OPTIONS
The Corporation measures compensation cost of stock options on the intrinsic
value of the common stock options granted. Intrinsic value is the excess of the
market value of the common stock over the exercise price at the date of grant.
Because stock options are granted with fixed terms and with an exercise price
equal to the market price of the common stock at the date of grant, there is no
measured compensation cost of stock options.
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 $106,438,000 and
$117,713,000 at December 31, 2001 and 2000, respectively. Trust income is
recognized on a cash basis. The amounts recognized under this method are not
materially different from amounts that would be recognized on the accrual basis.
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.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
2 - SECURITIES
Investment securities held to maturity at December 31 are as follows:
2001
Gross Gross Estimated Net
Amortized unrealized unrealized fair unrealized
(Dollars in Thousands) cost gains losses value gain
====================================================================================================================================
Mortgage-backed securities $757 $22 $779 $22
====================================================================================================================================
2000
Gross Gross Estimated Net
Amortized unrealized unrealized fair unrealized
(Dollars in Thousands) cost gains losses value gain/(loss)
====================================================================================================================================
U.S. Government obligations $ 499 $ 3 $ 502 $ 3
Federal agency obligations 9,448 2 $45 9,405 (43)
Mortgage-backed securities 1,462 28 5 1,485 23
- ------------------------------------------------------------------------------------------------------------------------------------
$11,409 $33 $50 $11,392 $(17)
====================================================================================================================================
During 2001, 2000 and 1999 there were no sales of investment securities
classified as held to maturity.
Investment securities available for sale at December 31 are as follows:
2001
Gross Gross Estimated Net
Amortized unrealized unrealized fair unrealized
(Dollars in Thousands) cost gains losses value gain/(loss)
====================================================================================================================================
U.S. Government obligations $ 66 $ 66
Federal agency obligations 71,365 $1,294 72,659 $1,294
Mortgage-backed securities 59,588 833 $ 62 60,359 771
Municipal bonds 614 19 633 19
Equity securities 7,977 57 66 7,968 (9)
- ------------------------------------------------------------------------------------------------------------------------------------
$139,610 $2,203 $128 $141,685 $2,075
====================================================================================================================================
2000
Gross Gross Estimated Net
Amortized unrealized unrealized fair unrealized
(Dollars in Thousands) cost gains losses value gain/(loss)
====================================================================================================================================
U.S. Government obligations $ 38 $ 38
Federal agency obligations 61,805 $162 $502 61,465 $(340)
Mortgage-backed securities 18,955 90 116 18,929 (26)
Municipal bonds 614 10 624 10
Equity securities 5,150 61 5,211 61
- ------------------------------------------------------------------------------------------------------------------------------------
$86,562 $323 $618 $86,267 $(295)
====================================================================================================================================
During 2001, 2000 and 1999, the Corporation recognized gross realized gains on
securities available for sale totaling $36,000, $0 and $92,000, respectively.
The contractual maturities of held-to-maturity and available-for-sale
securities, other than equity securities, as of December 31, 2001, are
summarized in the following tables. Actual maturities may differ from
contractual maturities because certain issuers have the right to call or prepay
obligations.
For the purposes of the following December 31, 2001 maturity table,
mortgage-backed securities, which are not due at a single maturity date, have
been allocated over maturity groupings based on the contractual maturities of
underlying collateral. The mortgage-backed securities may mature earlier than
their contractual maturities because of principal repayments.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
Estimated
Amortized fair
(Dollars in Thousands) cost value
=============================================================================================================================
Held to Maturity:
Within 1 year $ 5 $ 5
Over 1 year to 5 years 168 174
Over 5 years to 10 years 283 291
Over 10 years 301 309
- -----------------------------------------------------------------------------------------------------------------------------
Total debt obligations $757 $779
=============================================================================================================================
Estimated
Amortized Fair
(Dollars in Thousands) cost value
=============================================================================================================================
Available for Sale:
Within 1 year $ 66 $ 66
Over 1 year to 5 years 1,149 1,193
Over 5 years to 10 years 70,058 71,304
Over 10 years 60,360 61,154
- -----------------------------------------------------------------------------------------------------------------------------
Total debt obligations $131,633 $133,717
=============================================================================================================================
At December 31, 2001 securities with a carrying amount and estimated fair value
of $30,951,000 and $31,640,000, respectively, were pledged to secure public
deposits, repurchase agreements and for other purposes as required by law.
3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consisted of the following at December 31:
(Dollars in Thousands) 2001 2000
=============================================================================================================================
Commercial $ 58,597 $ 60,652
Real estate construction 5,154 5,160
Real estate 343,234 332,892
Consumer 37,292 34,578
- -----------------------------------------------------------------------------------------------------------------------------
444,277 433,282
Allowance for loan losses (4,179) (3,670)
Deferred loan origination fees (375) (381)
- -----------------------------------------------------------------------------------------------------------------------------
$439,723 $429,231
=============================================================================================================================
Changes in the allowance for loan losses are summarized as follows:
(Dollars in Thousands) 2001 2000 1999
=============================================================================================================================
Balance, beginning of year $3,670 $3,908 $2,665
Acquisition 1,669
Provision for loan losses 944 472 77
Loans charged off (527) (789) (623)
Recoveries 92 79 120
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $4,179 $3,670 $3,908
=============================================================================================================================
The aggregate principal balance of non-accrual loans was $1,040,000 and
$1,778,000 at December 31, 2001 and 2000, respectively. Contractual interest
income that would have been accrued on such non-accrual loans was $148,000,
$159,000 and $77,000 for 2001, 2000 and 1999, respectively. No income was
recognized on non-accrual loans during this period.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The Corporation did not sell any loans with recourse during 2001 or 2000. The
remaining recourse exposure on prior sales was $606,442 at December 31, 2001.
Management does not believe that its recourse obligations subject the
Corporation to any material risk of loss in the future. The Corporation has
suffered no losses as a result of these recourse obligations.
Of the $343,234,000 in real estate loans at December 31, 2001, $259,791,000 is
collateralized by 1-4 family dwellings. The majority of the collateral for these
loans is located in the Corporation's market area of Western Massachusetts and
Northeast Connecticut. Commercial real estate and real estate construction loans
represented $88,597,000 in outstanding principal at December 31, 2001. 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 $58,597,000 at December 31, 2001,
represent loans made to businesses primarily in western Massachusetts and
northeastern Connecticut.
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 features. 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) 2001 2000
===========================================================================================================================
Balance at beginning of year $3,798 $ 3,266
New loans granted 687 1,915
Repayments of principal/(sold) 836 (1,383)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $3,649 $ 3,798
===========================================================================================================================
At December 31, 2001 and 2000, the recorded investment in impaired loans was
$336,000 and $609,000, respectively, of which $336,000 and $609,000,
respectively, were in non-accrual status. For the years ended December 31, 2001,
2000 and 1999, the average recorded investment in impaired loans was $629,000,
$441,000 and $442,000, respectively. As applicable, each impaired loan has a
related allowance for loan losses determined in accordance with SFAS No. 114.
The carrying amount of impaired loans for which there was an allowance for loan
losses was $336,000 and $609,000 at December 31, 2001 and 2000. The total
allowance for loan losses allocated to these impaired loans was $94,000 and
$140,000 at December 31, 2001 and 2000. Interest income recognized during 2001,
2000 and 1999 on impaired loans was not significant.
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 which are not included in the
consolidated balance sheets. The unpaid balances of these loans totaled
$114,044,000, $84,966,000 and $97,622,000 at December 31, 2001, 2000 and 1999,
respectively.
4 - PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31 are summarized as
follows:
Estimated
(Dollars in Thousands) 2001 2000 Lives
===========================================================================================================================
Property (including land of $1,659
in 2001 and $1,664 in 2000) $ 6,134 $ 7,191 15-40 years
Capital lease building 264 263 15 years
Furniture and equipment 3,637 4,517 3-10 years
Leasehold and building
improvements 2,465 2,624 5-15 years
Motor vehicles 91 114 3 years
- ---------------------------------------------------------------------------------------------------------------------------
12,591 14,709
Accumulated depreciation 6,075 7,417
- ---------------------------------------------------------------------------------------------------------------------------
Property and equipment, net $ 6,516 $ 7,292
===========================================================================================================================
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
5 - OTHER REAL ESTATE OWNED
At December 31, other real estate owned consisted of properties acquired through
foreclosure as follows:
(Dollars in Thousands) 2001 2000
====================================================================================================================================
Real estate acquired through foreclosure - net of OREO allowance $204 $541
====================================================================================================================================
Changes in the allowance for other real estate owned losses are summarized as
follows:
(Dollars in Thousands) 2001 2000 1999
====================================================================================================================================
Balance, beginning of year $ 31
Acquisition $31
Provision for other real estate owned charged to operations $18 62
Write-downs (net of payments) (18) (93)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 0 $ 0 $31
====================================================================================================================================
6 - DEPOSITS
Deposit accounts by type as of December 31 are summarized as follows:
(Dollars in Thousands) 2001 Rate 2000 Rate
====================================================================================================================================
Demand deposit $ 70,960 $ 63,609
Savings 104,799 1.52% 104,859 3.34%
NOW 29,251 .27 29,644 .64
Money market 19,544 1.69 18,849 3.16
Other time deposits 285,295 4.57 282,179 6.09
- ------------------------------------------------------------------------------------------------------------------------------------
$509,849 $499,140
====================================================================================================================================
At December 31, 2001, the scheduled maturities of time deposits and IRA deposits
with a fixed maturity are as follows:
(Dollars in Thousands)
====================================================================================================================================
Year ending December 31,
2002 $226,699
2003 49,065
2004 8,559
2005 827
2006 and after 145
- ------------------------------------------------------------------------------------------------------------------------------------
$285,295
====================================================================================================================================
Certificates of deposit with balances greater than or equal to $100,000 amounted
to $54,383,000 and $53,239,000 as of December 31, 2001 and 2000, respectively.
Interest paid on these deposits totaled approximately $2,325,000 and $2,898,000,
respectively.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
7 - BORROWED FUNDS
Short-term borrowings as of December 31 are as follows:
(Dollars in Thousands) 2001 2000
====================================================================================================================================
Securities sold under agreements
to repurchase $14,284 $11,937
Purchased federal funds 9,244 400
Treasury tax and loan notes 1,887 1,655
- ------------------------------------------------------------------------------------------------------------------------------------
Total short term borrowings $25,415 $13,992
====================================================================================================================================
The above short-term borrowings generally mature daily.
The following information relates to the Bank's long-term debt as of December:
2001 2000
Principal Principal
Maturity Payments Interest Payments Interest
Dates Due Rate Due Rate
====================================================================================================================================
2002 $ 6,369 4.14%
2003 12,474 5.23 $7,000 5.87%
2004 2,114 4.42
2005 868 5.16
2006 2,426 4.65
After 2006 8,000 4.59
- ------------------------------------------------------------------------------------------------------------------------------------
$32,251 4.75% $7,000 5.87%
====================================================================================================================================
The Bank's long-term debt includes $10,000,000 of Federal Home Loan Bank (FHLB)
Option advances. The maturities of the Bank's Option advances from the FHLB are
March 2006, February 2011 and March 2011. The amounts due, respective to their
final maturities, are $2,000,000, $6,000,000 and $2,000,000. If there were a
change in interest rates, the FHLB would have the option of calling the advances
in 2002, 2003 and 2004. During the years 2002, 2003 and 2004, respectively, the
Bank has $3,700,000, $4,600,000 and $1,700,000 in Option advances.
The following table summarizes borrowings. Average interest rates during each
year were computed by dividing total interest expense by the average amount
borrowed:
(Dollars in Thousands) 2001 2000 1999
====================================================================================================================================
Balance at year end $57,666 $20,992 $46,546
Average amount outstanding 51,032 40,717 28,751
Maximum amount outstanding at any month-end 85,091 50,742 46,769
Average interest rate for the year 3.82% 5.16% 5.37%
Average interest rate on year-end balance 3.26 4.02 4.97
The Corporation maintains a revolving line of credit with the Fleet Bank of
Massachusetts for $3,000,000 that is renewed on an annual basis. There were no
amounts outstanding against this line as of December 31, 2001 or 2000. The
Corporation had short-term borrowing capacity through the FHLB of $6,301,000
through its Ideal Way program that was unused at year-end 2001. Advances from
the FHLB are collateralized by the Company's holdings of FHLB stock and
residential real estate loans.
8 - MANDATORY REDEEMABLE PREFERRED STOCK
On September 30, 1999, the Corporation completed its offering of 1,700,000
shares, 9.6% trust preferred stock, each with a liquidation amount of $10. The
Corporation has the right to prepay the trust preferred stock in whole or in
part at anytime on or after September 30, 2004. The $17 million trust preferred
debentures are due September 30, 2029. Quarterly cash distributions were paid
beginning December 31, 1999. The trust preferred stock qualifies as Tier 1
capital under the Federal Reserve Board and risk-based capital guidelines. Of
the $17 million in proceeds, the Corporation contributed $15.5 million of the
net proceeds to Cargill Bank as equity capital to support the acquisition of two
Connecticut branches of New London Trust, F.S.B. (see Note 1).
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
9 - INCOME TAXES
The income taxes were as follows:
(Dollars in Thousands) 2001 2000 1999
====================================================================================================================================
Current tax:
Federal $1,039 $1,569 $2,327
State 66 117 386
- -----------------------------------------------------------------------------------------------------------------------------------
Total current 1,105 1,686 2,713
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred taxes 923 282 (104)
- -----------------------------------------------------------------------------------------------------------------------------------
Total income taxes $2,028 $1,968 $2,609
====================================================================================================================================
The differences between the effective tax rate and the federal statutory tax
rate on income before taxes are reconciled as follows:
2001 2000 1999
====================================================================================================================================
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 1.8 .2 4.0
Other (2.6) .1 .5
- -----------------------------------------------------------------------------------------------------------------------------------
33.2% 34.3% 38.5%
====================================================================================================================================
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) 2001 2000
====================================================================================================================================
Deferred tax assets:
Deferred loan fees $ 41
Unrealized loss on securities $ 98
Reserve for loan losses 948 1,094
Non-accrual interest 71 69
Amortization 60 71
Other 76 53
- ------------------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,196 1,385
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Bond accretion 12
Unrealized gain on securities 748
Depreciation 189 243
Allowance for loan losses 781 1,342
REIT dividend 1,339
Other 119 22
- ------------------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 3,188 1,607
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $(1,992) $ (222)
====================================================================================================================================
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
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.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
10 - EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
The Corporation has a defined contribution pension plan (money purchase),
covering substantially all of its employees. Contributions to the money purchase
plan are a percentage of individual employees' salary. Total pension expense for
2001, 2000 and 1999 amounted to $307,000, $318,000 and $242,000, respectively.
At December 31, 2001, the most recent plan year end of the money purchase plan,
total plan assets were $4,062,894. The money purchase plan assets are invested
in money market funds, government bonds, corporate and government agency bonds
and marketable securities.
In addition, the corporation has 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 their
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, 2001,
2000 and 1999 amounted to $107,000, $107,000 and $104,000 respectively.
DIRECTORS RETIREMENT PLAN
The Westbank Directors Supplemental Retirement Plan ("the Directors Retirement
Plan") was established during 2001. Under the Directors Retirement Plan, the
Bank provides post-retirement benefits for non-employee Directors who retire
from the Board after reaching age seventy-two (72). The retirement benefit is in
the amount of seventy-five percent (75%) of the Director's final compensation at
retirement and is payable for the life of the Director. Expenses recognized for
Directors were $60,000 in 2001.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
The Corporation has supplemental retirement plans for its executive officers and
certain other participants that would have been provided under the Money
Purchase Plan but were not provided as a result of the limitations imposed by
IRS code. The Corporation recognized expenses under the supplemental plans
during 2001, 2000 and 1999 totaling $163,000, $42,000 and $29,000 respectively.
11 - STOCK OPTIONS
The Corporation has four fixed-option plans that reserve shares of common stock
for issuance to executives, key employees and directors. During 2001, 2000 and
1999, no compensation cost was required to be recognized for the stock option
plans based on the intrinsic method of accounting for stock options. Had
compensation costs for the Corporation's four stock option plans been determined
based on the fair value, utilizing the Black-Scholes option pricing model, at
the grant date for awards in 2001, 2000 and 1999 consistent with the provisions
of SFAS No. 123, the Corporation's net earnings and earnings per share would
have been as follows:
(Dollars in Thousands, except per share data) 2001 2000 1999
=====================================================================================================
Net earnings - as reported $4,073 $3,788 $4,167
Net earnings - pro forma 4,042 3,762 4,096
Earnings per share - as reported - Basic .96 .90 .98
- Diluted .95 .89 .96
Earnings per share - pro forma - Basic .95 .89 .97
- Diluted .94 .88 .95
=====================================================================================================
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
11 - STOCK OPTIONS (CONTINUED)
The fair value of each option grant is estimated on the date of grant, using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Years ended December 31, 2001 2000 1999
====================================================================================================================================
Dividend yield 4.55% 5.71% 4.64%
Expected life 10 years 10 years 10 years
Expected volatility 46% 48% 27%
Risk-free interest rate 5.2% 5.14% 6.44%
====================================================================================================================================
The Corporation offers shares of common stock to officers and key employees
pursuant to the 1985 Incentive Stock Option Plan. As of December 31, 2001, all
options granted are exercisable. The following is a summary of the changes in
options outstanding:
2001 2000 1999
Average Average Average
Weighted Weighted Weighted
Exercise Exercise Exercise
Options Price Options Price Options Price
====================================================================================================================================
Options granted and exercisable
at the beginning of the year 38,828 $5.36 39,828 $5.38 44,284 $4.94
Options exercised:
at $2.00 (2,500)
at $2.50 (1,200)
at $6.00 (2,200) (1,000) (3,301)
Options terminated at $6.00 (1,155)
- ---------------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
at the end of the year 32,928 $5.68 38,828 $5.36 39,828 $5.38
====================================================================================================================================
Unless exercised the options will expire ten years after granting. No options
are available for future grants.
The Corporation adopted a Cargill Directors and Officers Stock Option Plan
during 1992.
The following is a summary of the changes in options outstanding under the
Cargill Directors and Officers Stock Option Plan:
2001 2000 1999
Average Average Average
Weighted Weighted Weighted
Exercise Exercise Exercise
Options Price Options Price Options Price
====================================================================================================================================
Options granted and exercisable
at the beginning of the year 43,908 $4.02 43,908 $4.02 65,862 $4.02
Options terminated (10,977) (21,954)
- ------------------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
at the end of the year 32,931 $4.02 43,908 $4.02 43,908 $4.02
====================================================================================================================================
Unless exercised the options will expire twenty years after granting. No options
are available for future grants.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The Corporation adopted a Directors Stock Option Plan during 1995.
The following is a summary of the changes in options outstanding under the
Directors Stock Option Plan:
2001 2000 1999
Average Average Average
Weighted Weighted Weighted
Exercise Exercise Exercise
Options Price Options Price Options Price
====================================================================================================================================
Options granted and exercisable
at the beginning of the year 62,000 $9.51 51,000 $9.68 46,000 $8.80
Options granted and exercisable:
at $12.00 10,000
at $8.75 8,000
at $8.8125 3,000
at $7.9375 8,000
Options exercised at $6.00 (4,000)
at $7.125 (1,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
at the end of the year 70,000 $9.33 62,000 $9.51 51,000 $9.68
====================================================================================================================================
Options available for future grants 29,000 37,000 58,000
====================================================================================================================================
Unless exercised, the options will expire twenty years after granting.
The Corporation adopted an incentive stock option plan during 1996 for directors
and employees. At the 1998 Annual Meeting of Shareholders, the 1996 Incentive
Stock Option Plan was amended to increase the number of shares reserved for
issuance by 200,000 shares. The following is a summary of the changes in the
1996 Incentive Stock Option Plan:
2001 2000 1999
Average Average Average
Weighted Weighted Weighted
Exercise Exercise Exercise
Options Price Options Price Options Price
====================================================================================================================================
Options available 19,000 27,000 119,500
====================================================================================================================================
Options granted and exercisable
at the beginning of the year 357,000 $10.46 349,000 $10.50 256,500 $10.62
- ------------------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
to directors at $9.00 8,000
Options granted and exercisable
to directors at $10.50 9,000
Options granted and exercisable
to employees at $10.125 83,500
- ------------------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
at the end of the year 357,000 $10.46 357,000 $10.46 349,000 $10.50
====================================================================================================================================
Options available for future grants 19,000 19,000 27,000
====================================================================================================================================
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
12 - EARNINGS PER SHARE
The following is a reconciliation of the shares and earnings per share utilized
for the basic and diluted earnings per share computations:
Shares Per Share
==================================================================================================================
Basic Earnings Per Share:
2001 4,252,432 $.96
2000 4,229,105 .90
1999 4,244,402 .98
Effect of Dilutive Option Shares:
2001 45,682 .01
2000 44,279 .01
1999 88,924 .02
Diluted Earnings Per Share:
2001 4,298,114 .95
2000 4,273,384 .89
1999 4,333,326 .96
13 - LEASES
The Corporation leases certain facilities under long-term operating lease
agreements. The following is a schedule of future minimum lease payments for
such operating leases as of December 31, 2001:
(Dollars in Thousands)
==================================================================================================================
2002 $ 360
2003 284
2004 257
2005 246
2006 194
After 2006 133
- ------------------------------------------------------------------------------------------------------------------
Total minimum lease payments $1,474
==================================================================================================================
Rent expense for 2001, 2000 and 1999 amounted to $360,000, $358,000 and
$291,000, respectively.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
14 - COMMITMENTS AND CONTINGENT LIABILITIES
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) 2001 2000
==============================================================================================================
Commitments to grant loans $11,855 $ 8,460
Stand-by letters of credit and financial guarantees 325 631
Commitments to advance funds under existing loan agreements 47,031 38,569
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 commercial 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.
15 - 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 new 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 banking subsidiary's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt correction action, a bank must meet specific capital guidelines that
involve quantitative measures of a bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. A
bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require a 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, 2001, that
the Corporation meets all capital adequacy requirements to which it is subject.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 mandatory 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.
As of December 31, 2001, 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 I risk-based,
Tier I leverage ratios. There are no conditions or events since that
notification that management believes have changed the institution's category.
Included in the Bank's capital is approximately $15.5 million contributed in
1999 by the holding company in connection with the preferred trust offering.
(Note 8)
The Corporation's and the Bank's actual capital amounts and ratios are also
presented in the following table, on a combined basis after giving effect to the
merger described in Note 1:
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, 2001
Total Capital
(To risk-weighted assets):
Westbank $48,685 12.71% $30,633 8.00% $38,292 10.00%
Holding Company 50,050 13.03 30,734 8.00 N/A N/A
Tier I Capital
(To risk-weighted assets):
Westbank 44,506 11.62 15,317 4.00 22,975 6.00
Holding Company 41,440 10.79 15,367 4.00 N/A N/A
Tier I Capital
(To average assets):
Westbank 44,506 7.56 23,542 4.00 29,428 5.00
Holding Company 41,440 6.96 23,824 4.00 N/A N/A
December 31, 2000
Total Capital
(To risk-weighted assets):
Westbank 44,559 12.46 28,604 8.00 35,756 10.00
Holding Company 46,200 12.84 28,788 8.00 N/A N/A
Tier I Capital
(To risk-weighted assets):
Westbank 40,867 11.43 14,302 4.00 21,453 6.00
Holding Company 37,194 10.34 14,394 4.00 N/A N/A
Tier I Capital
(To average assets):
Westbank 40,867 7.13 22,905 4.00 28,632 5.00
Holding Company 37,194 6.45 23,077 4.00 N/A N/A
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 share of Common 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.
The Bank's retained earnings at December 31, 2001 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.
Cargill Bank ("Cargill") previously converted from a state chartered mutual
savings and loan association to a state chartered stock savings and loan
association. At the time of conversion, Cargill established a liquidation
account in an amount equal to Cargill's net worth. In the event of a complete
liquidation (and only in such event), each eligible account holder will be
entitled to receive a liquidation distribution from the liquidation account
before any liquidation distribution may be made with respect to capital stock.
The balance in the liquidation account at December 31, 2001 was $85,000.
The Corporation purchased 23,000, 127,320 and 0 common shares at fair value for
Treasury stock at an aggregate cost of $215,000, $1,127,000 and $0 in 2001, 2000
and 1999 respectively. Treasury stock repurchases were made in connection with
the previously announced stock repurchase program.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
16 - EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation established an Employees' Stock Ownership Plan ("ESOP"). The
ESOP has been funded by a $100 contribution from the Corporation. At December
31, 2001 and 2000, the ESOP held no shares of the Corporation's stock.
17 - 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:
2001 2000
=========================================================================================================================
Carrying Estimated Carrying Estimated
(Dollars in Thousands) Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 17,132 $ 17,132 $ 18,270 $ 18,270
Federal funds sold 319 319 5,249 5,249
Investment securities held to maturity 757 779 11,409 11,392
Investment securities available for sale 139,610 141,685 86,267 86,267
Loans 439,723 451,682 429,231 432,745
Accrued interest receivable 3,285 3,285 3,977 3,977
Liabilities:
Deposits 509,849 513,080 499,140 499,382
Borrowed funds 57,666 57,973 20,992 21,264
Mandatory redeemable preferred stock 17,000 17,425 17,000 15,512
Accrued interest payable 659 659 727 727
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 and matures in 90 days or less.
INVESTMENT SECURITIES
The fair value of securities, except certain state and municipal securities, is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers.
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.
45
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 certificates of deposit
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 MANDATORY REDEEMABLE PREFERRED STOCK
The fair value of such borrowings and mandatory redeemable preferred stock 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 are not material.
18 - 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 or unit.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
19 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands, except per share amounts)
2001
------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Interest income $10,147 $10,115 $10,540 $10,286
Interest expense 5,298 4,996 5,349 5,048
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,849 5,119 5,191 5,238
Provision for losses 227 159 279 279
Non-interest income 760 987 909 833
Non-interest expense 3,991 4,249 4,429 4,172
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,391 1,698 1,392 1,620
Income taxes 471 580 452 525
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 920 $ 1,118 $ 940 $ 1,095
===================================================================================================================================
Earnings per share - Basic $.22 $.26 $.22 $.26
- Diluted $.22 $.26 $.22 $.25
===================================================================================================================================
2000
------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Interest income $10,283 $10,566 $10,839 $10,957
Interest expense 5,295 5,665 6,192 6,076
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,988 4,901 4,647 4,881
Provision for losses 65 75 13 319
Non-interest income 578 606 555 913
Non-interest expense 4,076 3,761 3,982 4,022
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,425 1,671 1,207 1,453
Income taxes 524 592 370 482
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 901 $ 1,079 $ 837 $ 971
===================================================================================================================================
Earnings per share - Basic $.21 $.26 $.20 $.23
- Diluted $.21 $.25 $.20 $.23
===================================================================================================================================
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
20 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
December 31,
(Dollars in Thousands) 2001 2000
===============================================================================================================================
BALANCE SHEETS
Assets
Cash $ 73 $ 69
Investment in subsidiaries 54,646 50,216
Other investments 72 41
Other assets 1,238 1,541
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 56,029 $ 51,867
===============================================================================================================================
Liabilities $ 13 $ 7
- -------------------------------------------------------------------------------------------------------------------------------
Mandatory redeemable preferred stock 17,000 17,000
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock - none
Common stock, par value $2 per share 8,632 8,567
Additional paid-in capital 11,782 11,608
Retained earnings 17,787 15,408
Treasury stock (431) (526)
Accumulated other comprehensive loss 1,246 (197)
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 39,016 34,860
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 56,029 $ 51,867
===============================================================================================================================
(Dollars in Thousands) 2001 2000 1999
===============================================================================================================================
STATEMENTS OF INCOME
Dividend from subsidiary $ 2,230 $ 2,598 $ 600
Interest income (expense) (1,627) (1,617) (385)
Other income (expense) - net (108) (135) (85)
- -------------------------------------------------------------------------------------------------------------------------------
Income before taxes and
undistributed income of subsidiaries 495 846 130
Income tax benefit 590 600 159
Undistributed income of subsidiaries 2,988 2,342 3,878
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,073 $ 3,788 $ 4,167
===============================================================================================================================
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
20 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
December 31,
(Dollars in Thousands) 2001 2000 1999
=================================================================================================================================
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 4,073 $ 3,788 $ 4,167
Operating activities:
Equity in income of subsidiaries (2,988) (2,342) (3,878)
Decrease (increase) in other assets 303 (184) (595)
Increase (decrease) in other liabilities 6 (9) (156)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,394 1,253 (462)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities (purchases) maturities (30) (32) 918
Contribution of capital to subsidiary (15,500)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (30) (32) (14,582)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from mandatory
redeemable preferred stock issue 17,000
Proceeds from stock options exercised 20 3 139
Proceeds from dividend reinvestment
and optional stock purchases 529 573 588
Treasury shares redeemed (215) (1,127)
Dividends paid (1,694) (1,697) (1,653)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,360) (2,248) 16,074
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4 (1,027) 1,030
Cash and cash equivalents at the beginning of the year 69 1,096 66
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 73 $ 69 $ 1,096
=================================================================================================================================
49
INDEPENDENT AUDITORS' REPORT
Westbank Corporation and Subsidiaries
Shareholders and Board of Directors,
Westbank Corporation
We have audited the consolidated balance sheets of Westbank Corporation and
subsidiaries (the "Corporation") as of December 31, 2001 and 2000 and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. 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. The consolidated financial statements give
retroactive effect to the merger on January 29, 1999, of Cargill Bancorp, Inc.,
and subsidiary and Westbank Corporation and subsidiaries, which has been
accounted for as a pooling of interests as described in Note 1 to the
consolidated financial statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Westbank Corporation and
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 25, 2002
50
CORPORATE DIRECTORY AND INFORMATION
Westbank Corporation and Subsidiaries
DIRECTORS
WESTBANK CORPORATION AND WESTBANK
- --------------------------------------------------------------------------------
ERNEST N. LAFLAMME, JR.
Chairman of the Board,
Westbank Corporation
Treasurer,
City of Chicopee
ROLAND O. ARCHAMBAULT
President and Owner,
Pinnacle Raceway
MARK A. BEAUREGARD
Attorney at Law,
Resnic, Beauregard, Waite & Driscoll
DAVID R. CHAMBERLAND
President,
Chicopee Building Supply, Inc.
DONALD R. CHASE
President and Chief Executive Officer,
Westbank Corporation
President and Chief Executive Officer,
Westbank
G. WAYNE MCCARY
President and Chief Executive Officer,
Eastern States Exposition
ROBERT J. PERLAK
Corporate Clerk,
Westbank Corporation
Private Investor
GEORGE R. SULLIVAN
Chief Executive Officer,
Sullivan Paper Company, Inc.
JAMES E. TREMBLE
President,
Valley Commmunications Systems, Inc.
OFFICERS
WESTBANK CORPORATION
- --------------------------------------------------------------------------------
DONALD R. CHASE
President and Chief Executive Officer
JOHN M. LILLY
Treasurer and Chief Financial Officer
GARY L. BRIGGS
Executive Vice President
KATHLEEN A. JALBERT
Senior Vice President
TRENTON E. TAYLOR
Senior Vice President
LLOYD S. HALL
Director of Auditing
WESTBANK
- --------------------------------------------------------------------------------
DONALD R. CHASE
President and Chief Executive Officer
AUDITING DIVISION
LLOYD S. HALL, CBA
Director of Auditing
BRANCH ADMINISTRATION/
HUMAN RESOURCES
KATHLEEN A. JALBERT
Senior Vice President
DEBORAH A. KUMIEGA
Assistant Vice President
KATHRYN J. SAUCIER
Assistant Vice President
ALMA D. MOREY
Branch Administration Officer
SUSAN M. ALDRICH
Human Resources Officer
EDP/OPERATIONS
S. STEVE KONIECKI
Senior Vice President
FINANCE DEPARTMENT
JOHN M. LILLY
Executive Vice President and Treasurer
HOWARD STANTON, III
Vice President
IRVING M. WALKER, JR., CMA
Controller
LOAN DIVISION
GARY L. BRIGGS
Executive Vice President
PAUL M. ACCORSI
Senior Vice President
DENISE M. BREWER
Senior Vice President
DAVID M. BARSZCZ
Vice President
CLIFFORD R. BORDEAUX
Vice President
GERARD E. DRAPEAU
Vice President
RICHARD N. HANCHETT
Vice President
JOSEPH S. LEMAY
Vice President
JOSEPH P. YOUNG
Vice President
J. KEVIN HOURIHAN
Dealer Account Officer
LOAN CREDIT AND COLLECTION
TRENTON E. TAYLOR
Senior Vice President
PATRICIA A. NEBOSKY
Vice President
JOHN E. O'BRIEN
Assistant Vice President
MARKETING
JAMES P. HICKEY, JR.
Vice President
RESIDENTIAL REAL ESTATE
STANLEY F. OSOWSKI
Senior Vice President
WOLFGANG A. ADAMETZ
Vice President
ANTONIO FILIPE
Vice President
TRUST DIVISION
ROBERT A. GIBOWICZ
Senior Trust Officer
WILLIAM M. VARANKA
Vice President
51
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 17, 2002 at nine o'clock in the morning at the Carriage House
at Storrowton Tavern, 1305 Memorial Avenue, West Springfield, Massachusetts.
TRANSFER AGENT AND REGISTRAR
Westbank-Trust Department
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Stamford, Connecticut
CORPORATE COUNSEL
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.
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 local
newspaper's listing of the NASDAQ regional market quotations.
- ------------------------------------------------------------------------------------
2001 2000
Bid Bid
High Low Dividend High Low Dividend
- ------------------------------------------------------------------------------------
First $ 8.25 $ 7.00 $ .10 $ 9.875 $ 8.250 $ 0.10
Second 9.55 7.80 .10 9.000 7.875 0.10
Third 9.95 9.23 .10 8.750 7.5625 0.10
Fourth 9.70 9.10 .10 8.625 6.875 0.10
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, 2002 the Corporation had 1,279 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. The
following firms make a market in Westbank Corporation's common stock:
Advest Inc.
Herzog, Heine, Geduld, Inc.
Keefe, Bruyette & Woods, Inc.
McConnell, Budd & Downes, Inc.
Moors & Cabot, Inc.
Ryan, Beck & Co., Inc.
Spears, Leeds & Kellogg
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, veterans status, age or handicap.
52
21. SUBSIDIARIES OF THE REGISTRANT
1. Westbank - Massachusetts
a. Lorac Leasing Corp. - Massachusetts
b. P W B & T, Inc. - Massachusetts
c. Park West Securities Corporation - Massachusetts
d. Park West Real Estate Investment Trust, Inc. - Delaware
e. New London Trust Financial Services Corporation - New
Hampshire
f. Cargill Mortgage Corporation
2. Westbank Capital Trust I - Delaware
225 Park Avenue
West Springfield, Massachusetts 01089
53