Pursuant to Rule 424(b)3
Registration No. 333-85913
1,700,000 Capital Securities
[LOGO] WESTBANK CAPITAL TRUST I
9.60% Capital Securities fully guaranteed by
Westbank Corporation
- --------------------------------------------------------------------------------
Westbank Corporation: We are a bank holding company that offers, through
our subsidiaries Park West Bank and Trust Company and Cargill Bank, a full range
of community banking and related financial services to our customers in
Massachusetts and Connecticut.
Westbank Capital Trust I: Westbank Capital Trust I is a subsidiary of
Westbank Corporation and a statutory business trust created under Delaware law.
The Offering: In connection with this offering, the Trust will:
. sell capital securities to the public and common securities to us;
. use the proceeds from these sales to buy an equivalent principal amount
of 9.60% subordinated debentures due September 30, 2029 issued by us;
and
. distribute the future cash payments it receives on the subordinated
debentures to the holders of the capital and common securities.
The capital securities represent preferred ownership interests in the
assets of the Trust.
Each capital security pays a cumulative quarterly distribution at the
annual rate of 9.60% of the $10.00 liquidation amount of each capital security,
beginning December 31, 1999.
The capital securities have been approved for listing on the Nasdaq
National Market under the symbol "WBKCP." If approved for listing, we expect
trading to commence within 30 days after the capital securities are first
issued.
The capital securities will be ready for delivery in book-entry form only
through The Depository Trust Company on or about September 30, 1999.
We will sell our subordinated debentures to the Trust, which will be its
sole asset. We may defer interest payments on the subordinated debentures from
time to time for up to 20 consecutive quarterly periods. We may redeem the
subordinated debentures on or after September 30, 2004, and before
September 30, 2004 upon the occurrence of a tax, investment company or bank
regulatory event described in this prospectus.
Investing in the capital securities involves certain risks which are
described in the "Risk Factors" section beginning on page 14 of this
prospectus. You should read this prospectus carefully before you invest in the
capital securities.
Neither the SEC nor any state securities commission has approved or
disapproved of the capital securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The capital securities are not deposits or other obligations of a bank or
savings association and are not insured by the Federal Deposit Insurance
Corporation or any other governmental agency.
Per capital security Total
------------------------ ------------
Public Offering Price............... $ 10.00 $17,000,000
Proceeds to the Trust............... $ 10.00 $17,000,000
The Trust will use all proceeds to purchase the subordinated debentures. We
will pay all underwriting discounts and commissions, equal to $0.35 per capital
security or a total of $595,000.
Tucker Anthony Cleary Gull
The date of this prospectus is September 23, 1999.
[Map of Westbank Corporation's market area.]
TABLE OF CONTENTS
Page
----
Forward-looking Statements Relating to Future Performance or Expectations..................... 4
Summary Information........................................................................... 5
Summary Selected Consolidated Financial Data.................................................. 11
Risk Factors.................................................................................. 14
Westbank Corporation.......................................................................... 23
Management.................................................................................... 27
Westbank Capital Trust I...................................................................... 29
Use of Proceeds............................................................................... 30
Capitalization................................................................................ 31
Accounting Treatment.......................................................................... 35
Description of Capital Securities............................................................. 35
Description of Subordinated Debentures........................................................ 50
Description of Guarantee...................................................................... 62
Relationship Among the Capital Securities, the Subordinated Debentures and the Guarantee...... 65
Certain Federal Income Tax Consequences....................................................... 67
ERISA Considerations.......................................................................... 72
Underwriting.................................................................................. 74
Legal Matters................................................................................. 76
Experts....................................................................................... 76
Where You Can Find More Information........................................................... 76
Additional Information We Have Incorporated in the Prospectus................................. 77
Annual Report on Form 10-K/A for the Year Ended December 31, 1998............................. A-1
Quarterly Report on Form 10-Q for the Three and Six Months Ended June 30, 1999................ B-1
3
Forward-looking Statements Relating to Future Performance or Expectations
We have used and incorporated by reference "forward-looking statements" in
this prospectus. Words such as "believes," "expects," "may," "will," "should,"
"projected," "contemplates" or "anticipates" may constitute forward-looking
statements. These statements are within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to risks and uncertainties that
could cause our actual results to differ materially. We have used these
statements to describe our expectations and estimates in various areas,
including:
. our overall business conditions particularly in the markets in which
we operate,
. fiscal and monetary policy,
. the market for mortgage originations and purchases,
. year 2000 compliance issues,
. competitive products and pricing,
. credit risk management and
. changes in regulations affecting financial institutions.
Our actual results could vary materially from the future results covered in our
forward-looking statements. The statements in the "Risk Factors" section are
cautionary statements identifying important factors, including certain risks and
uncertainties, that could cause our results to vary materially from the future
results covered in such forward-looking statements. Other factors, such as the
general state of the United States economy, could also cause actual results to
vary materially from the future results covered in such forward-looking
statements. We disclaim any obligation to announce publicly future events or
developments that affect the forward-looking statements in this prospectus.
Certain persons participating in this offering may engage in transactions that
stabilize, maintain, or otherwise affect the price of the capital securities
being offered, including over-alloting shares of the capital securities and
bidding for and purchasing such securities at a level above that which otherwise
might prevail in the open market. For a description of these activities, see
"Underwriting." Such stabilizing transactions, if commenced, may be discontinued
at any time. In connection with this offering, certain underwriters (and selling
group members) may engage in passive market making transactions in the capital
securities on the Nasdaq National Market in accordance with Rule 103 of
Regulation M. See "Underwriting."
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations not contained in this prospectus in
connection with the offering of the capital securities. If given or made, such
information or representations must not be relied upon as having been authorized
by us or the underwriters. This prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy, the capital securities in any jurisdiction
where, or to any person to whom, it is unlawful to make such offer or
solicitation. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, imply that there has not been any
change in the facts in this prospectus or our affairs since the date of this
prospectus.
4
Summary Information
The following information is a summary of the major terms of the offering
of capital securities. You should carefully read the more detailed discussion
and financial information appearing elsewhere or incorporated in this prospectus
before you decide to invest in the capital securities. In this prospectus,
references to "we," "us," "our" and "Westbank" are to Westbank Corporation
Westbank Corporation
Overview
We are a Massachusetts chartered bank holding company headquartered in West
Springfield, Massachusetts. As a registered bank holding company, we are subject
to regulation by the Board of Governors of the Federal Reserve System (which we
refer to in this prospectus as the "Federal Reserve Board" or the "FRB").
Through our wholly-owned subsidiaries, Park West Bank and Trust Company ("Park
West") and Cargill Bank ("Cargill"), we provide community banking services to
our principal market areas of western Massachusetts and northeast Connecticut.
We have grown to $434.4 million in assets and $370.1 million in deposits at
June 30, 1999. Our deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to FDIC limits (generally $100,000 per depositor).
Our principal executive office is located at 225 Park Avenue, West
Springfield, Massachusetts 01089 and our telephone number is (413) 747-1400.
Park West Bank & Trust
Park West is chartered as a state bank and trust company by The
Commonwealth of Massachusetts. Its deposits are insured by the Bank Insurance
Fund of the FDIC, and it is subject to regulation by the Massachusetts
Commissioner of Banks and the FDIC. Park West offers a full range of retail
banking services to individuals, businesses, and nonprofit organizations through
thirteen banking offices located in Hampden County, Massachusetts. Such services
include a wide range of retail checking and savings accounts, loans, safe
deposit facilities, and automated teller machines at selected branch locations.
As of June 30, 1999, Park West had total assets of $385.0 million.
Park West also provides lending, depository and related financial services
to commercial, industrial, financial, and governmental customers. These services
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.
Park West also operates a Trust Department which provides services normally
associated with holding property in a fiduciary or agency capacity. The Trust
Department had $114.0 million under management as of June 30, 1999.
5
Cargill Bank
On January 29, 1999, we acquired Cargill Bancorp, Inc., the holding company
for Cargill Bank, which now retains its name and charter as a separate
subsidiary of Westbank. Cargill is a Connecticut chartered savings and loan
association which provides a variety of deposit, loan and investment products
and services to small businesses and consumers. Cargill's deposits are insured
by the Savings Association Insurance Fund of the FDIC, and is regulated by the
Office of Thrift Supervision (the "OTS") and the Commissioner of Banking of the
State of Connecticut. The business of Cargill is to attract deposits from the
general public and to make loans secured by mortgages on residential and other
real estate, enabling borrowers to purchase, refinance, construct or improve
property. In addition, Cargill makes consumer loans and holds investment
securities. Cargill's market area is northeastern Connecticut and is made up
primarily of the towns of Putnam, Woodstock, Pomfret, Thompson, Killingly and
Eastford. Cargill operates three offices, the main office in Putnam and branch
offices in Quinebaug, which is part of Thompson, and Woodstock. The region in
which Cargill operates is 30 miles south of Worcester, Massachusetts and
centrally located between Boston, Massachusetts, Providence Rhode Island and
Hartford, Connecticut. As of June 30, 1999 Cargill had total assets of $49.0
million.
Business Strategy
We seek growth by developing our core banking operations, deepening our
market penetration by providing additional banking services to our present
customers, expanding our geographic market area and customer base through
selective acquisitions of other banks and by opening new offices in selected
areas. The major components of our growth-oriented community banking strategy
are set forth below:
. Growth of Our Community Banking Franchise
. Becoming a Full-Service Financial Provider
. Selective Acquisitions and Branch Expansion
. Efficient Capital Management and Consistent Shareholder Returns
Pending Acquisition of Two New London Trust, FSB Branches
On April 12, 1999, we announced the signing of a definitive agreement to
purchase two branches located in Danielson and Putnam, Connecticut from New
London Trust, FSB. The transaction, which is subject to regulatory approval, is
currently expected to close in the fourth quarter of 1999. Cargill has filed the
regulatory applications necessary to obtain the required regulatory approvals.
Under the agreement, Cargill will acquire all of the deposits and certain
loans associated with these two branches. At June 30, 1999, the branches had
approximately $109.3 million in deposits and approximately $86.5 million in
loans.
6
Westbank Capital Trust I
We organized the Trust as a statutory Delaware business trust on August
25, 1999. The Trust will sell its capital securities to the public and its
common securities to us. The Trust will use all of the proceeds from the sale of
the capital securities and the common securities to buy our 9.60% subordinated
debentures due September 30, 2029. The subordinated debentures have the same
financial terms as the capital securities. We are obligated to make interest
payments under the subordinated debentures to the Trust, which the Trust will
use to make distributions on the capital securities to you. Our obligations
under the subordinated debentures are unsecured and rank junior to all of our
other borrowings, except borrowings that by their terms rank equal or junior to
the capital securities. We will, on a subordinated basis, fully, irrevocably and
unconditionally guarantee the payment by the Trust of the amounts that are
required to be paid on the capital securities, to the extent that the Trust has
funds available for such payment.
The Trust intends to maintain its status as an entity that is not taxable
as a corporation for federal income tax purposes. The Trust has no separate
financial statements. The statements would not be meaningful to you, because the
Trust has no independent operations. The Trust has a term of approximately 30
years, but may be dissolved earlier.
The Offering
Securities Offered....................... The underwriter is offering
1,700,000 9.60% capital securities,
each with a liquidation amount of
$10.00. Each capital security
represents an undivided preferred
beneficial interest in the assets of
the Trust. Each capital security
that you own will entitle you to
receive quarterly distributions as
described in this prospectus.
The Offering Price....................... The Trust is offering capital
securities at a price of $10.00 for
each capital security.
Distributions............................ If you purchase any capital
securities, you will be entitled to
receive quarterly cash distributions
at an annual rate of % of the
liquidation amount of $10.00 for
each capital security. You will be
entitled to be paid distributions on
March 31, June 30, September 30 and
December 31 of each year, beginning
December 31, 1999. The amount of
each distribution will include
amounts accrued up to the date the
distribution is due. The
distribution payable on September
30, 1999 will equal the amount
accrued from December 31, 1999
through December 31, 1999. These
payments are identical to the
payments that we are required to
make under the subordinated
debentures.
Subordinated Debentures.................. The Trust will invest the proceeds
from the issuance of the capital
securities and the common securities
in an equivalent amount of our 9.60%
subordinated debentures.
7
Maturity........................... The subordinated debentures are scheduled
to mature on September 30, 2029 unless we
shorten the maturity date. We will not
shorten the maturity date unless we have
first received any required regulatory
approvals. The Trust must redeem the
capital securities when the subordinated
debentures are paid on the maturity date,
or following any earlier redemption of the
subordinated debentures.
We Have the Ability to
Defer Payment of Your
Distributions................... We can, on one or more occasions, defer
interest payments on the subordinated
debentures for up to 20 consecutive
quarters, unless an event of default
exists under the subordinated debentures.
We cannot defer interest payments beyond
September 30, 2029, the stated maturity
date of the subordinated debentures.
If we defer interest payments on the
subordinated debentures, the Trust will
also defer distributions on the capital
securities. During this deferral period,
the capital securities will still
accumulate distributions at an annual rate
of 9.60% of the liquidation amount of
$10.00 for each capital security.
Additionally, any unpaid distributions on
the capital securities will accumulate
additional distributions at the same rate,
compounded quarterly, to the extent
permitted by law. If the Trust defers your
distributions, you will still be required
to accrue interest income and include it
in your gross income for United States
federal income tax purposes, even if you
are a cash basis taxpayer.
Our Guarantee of
the Capital Securities.......... We will fully, irrevocably and
unconditionally guarantee, on a
subordinated basis, to the extent that the
Trust has funds legally available to make
the following payment obligations:
. payment of distributions on the
capital securities,
. payments on liquidation of the
Trust, and
. payments on maturity or earlier
redemption of the capital
securities.
If we do not make a payment on the
subordinated debentures, the Trust will
not have sufficient funds to make
payments on the capital securities. Our
guarantee does not cover the payment of
distributions when the Trust does not
have sufficient funds to pay the
distributions. Our obligations under
the guarantee and under the
subordinated debentures are unsecured
and rank junior to all of our other
8
borrowings, except borrowings that
by their terms rank equal or junior
to the subordinated debentures.
Redemption......................... The Trust will redeem the capital
securities when we pay the subordinated
debentures at maturity on September 30,
2029. In addition, if we redeem some or
all of the subordinated debentures before
maturity, the Trust will use the cash it
receives from the redemption of the
subordinated debentures to redeem
proportionately an amount of capital
securities and common securities having an
aggregate liquidation amount (which is the
number of securities times $10.00) equal
to the aggregate principal amount of the
subordinated debentures that we redeem.
We can redeem some or all but not less
than all of the subordinated debentures
before September 30, 2004 at their
principal amount plus any accrued and
unpaid interest to the date of redemption
at any time on or after September 30,
2004.
We can redeem all of the subordinated
debentures before September 30, 2029 at
their principal amount plus any accrued
and unpaid interest to the date of
redemption at any time if changes in bank
regulatory, investment company or tax laws
occur that would adversely affect the
status of the Trust, the capital
securities or the subordinated debentures.
We may have to obtain regulatory
approvals, including the approval of the
Federal Reserve Board, before we redeem
any subordinated debentures prior to
maturity.
Distribution of
Subordinated Debentures......... We have the right at any time to dissolve
the Trust and cause the subordinated
debentures to be distributed to holders of
capital securities in liquidation of the
Trust, subject to receiving prior approval
of the FRB to do so if we are then
required under applicable capital
guidelines or policies of the FRB. See
"Description of Capital Securities--
Liquidation of the Trust and Distribution
of Subordinated Debentures."
Trustees of Westbank
Capital Trust I................. There are five trustees of the Trust.
Wilmington Trust Company will be the
property trustee, Wilmington Trust Company
will be the Delaware trustee and three
individuals who are employees of Westbank
will be the administrative trustees of the
Trust.
As the sole holder of the common
securities, we can replace or remove any
of the trustees. However, if an event of
default exists under the trust agreement
governing the Trust,
9
only the holders of a majority in
aggregate liquidation amount of the
capital securities would be able to remove
and replace the property trustee and the
Delaware trustee. As owner of all of the
common securities, only we can remove or
replace the administrative trustees. The
duties and obligations of each trustee are
governed by the trust agreement.
Form of the Capital Securities
When They Are Issued............ The capital securities will be represented
by one or more global securities that will
be deposited with and registered in the
name of The Depository Trust Company, New
York, New York ("DTC") or its nominee.
This means that you will not receive a
physical certificate for the capital
securities. We expect that the capital
securities will be ready for delivery
through DTC on or about September 30,
1999.
Purchases of the Capital
Securities for an Employee
Benefit Plan.................... If you are purchasing the capital
securities for an employee benefit plan,
you should read "ERISA Considerations" for
a discussion of prohibited transactions
and your fiduciary duties.
Limited Voting Rights.............. If you purchase the capital securities,
you will have no voting rights, except in
limited circumstances. See "Description of
Capital Securities--Voting Rights;
Amendment of Trust Agreement."
Use of Proceeds.................... All the proceeds to the Trust from the
sale of the capital securities and the
common securities will be invested by the
Trust in the subordinated debentures. Of
the $17.0 million in proceeds, we will
contribute approximately $16.0 million in
net proceeds to Cargill as equity capital
to support the pending acquisition of two
Connecticut branches of New London Trust,
FSB. The offering of the capital
securities is not contingent upon
consummation of the pending branch
acquisition. If the branch acquisition is
not consummated, we intend to use the
proceeds for expansion of our lending and
investment activities and for general
corporate purposes.
Listing of the Capital
Securities...................... The capital securities have been approved
for listing on the Nasdaq National Market
under the symbol "WBKCP."
10
Summary Selected Consolidated Financial Data (Unaudited)
We have selected highlights from our consolidated financial data as of, and
for the three and six months ended June 30, 1999 and 1998 and as of, and for the
five years ended December 31, 1998. You should read our consolidated financial
statements and related notes included in our annual report on Form 10-K/A, for
the year ended December 31, 1998 and the quarterly reports on Form 10-Q for the
three and six months ended June 30, 1999, which we have attached to this
prospectus as Appendix A and Appendix B, respectively.
The unaudited selected consolidated financial information set forth below
gives effect to the merger with Cargill Bancorp, Inc. on January 29, 1999 under
the pooling-of-interests accounting method. The selected statement of income
data treats the merger as if the respective companies had been combined for all
periods presented. Westbank's fiscal year ends December 31 and Cargill's fiscal
year ends September 30.
11
At or For the Six
Months Ended
June 30, At of For the Years Ended December 31,
--------------------- -------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- -------- --------- --------- --------- ---------
(Dollars in thousands, excluding per share data)
SELECTED BALANCE SHEET
DATA:
Total assets.......................... $434,423 $397,898 $402,623 $355,567 $331,803 $299,590 $284,814
Cash and cash equivalents............. 14,682 29,381 14,240 16,526 25,176 14,953 14,349
Loans, net............................ 338,164 287,389 293,113 268,254 254,948 233,527 225,193
Securities............................ 70,195 69,244 84,328 60,312 40,584 36,651 33,580
Deposits.............................. 370,084 347,636 342,267 314,679 298,014 269,478 256,668
Borrowed funds........................ 32,057 18,796 27,807 11,884 9,269 7,677 8,625
Stockholders' equity.................. 30,966 29,359 30,490 26,918 22,717 20,786 17,355
SELECTED STATEMENT OF
INCOME DATA:
Total interest and dividend income.... $ 14,996 $ 13,878 $ 28,631 $ 26,724 $ 24,059 $ 23,475 $ 19,647
Total interest expense................ 6,806 6,381 13,292 12,091 10,524 10,145 7,481
-------- -------- -------- -------- -------- -------- --------
Net interest income................... 8,190 7,497 15,339 14,633 13,535 13,330 12,166
Provision for loan losses............. 77 40 41 306 944 2,907 1,528
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses..................... 8,113 7,457 15,298 14,327 12,591 10,423 10,638
Non-interest income................... 1,110 1,257 2,427 2,529 2,340 3,104 2,641
Non-interest expenses................. 5,854 5,693 12,200 11,066 11,278 9,969 11,234
-------- -------- -------- -------- -------- -------- --------
Income before income taxes............ 3,369 3,021 5,525 5,790 3,653 3,558 2,045
Income taxes (benefit)................ 1,277 1,182 2,148 2,406 1,516 1,132 (307)
-------- -------- -------- -------- -------- -------- --------
Net income before cumulative effect
of accounting change................ 2,092 1,839 3,337 3,384 2,137 2,426 2,352
Cumulative effect of accounting
change for income taxes............. - - - - - - (22)
-------- -------- -------- -------- -------- -------- --------
Net income............................ $ 2,092 $ 1,839 $ 3,377 $ 3,384 $ 2,137 $ 2,426 $ 2,330
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Basic earnings per share.............. $ 0.50 $ 0.45 $ 0.82 $ 0.88 $ 0.59 $ 0.69 $ 0.67
Diluted earnings per share............ 0.48 0.43 0.79 0.85 0.57 0.67 0.65
Book value per share.................. 7.32 7.08 7.26 6.84 6.19 5.89 5.25
Dividends per share................... 0.20 0.20 0.40 0.30 0.24 0.20 0.00
12
At or For the Six
Months Ended
June 30, At or For the Years Ended December 31,
---------------------- -------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ---------- ------------ ---------- ---------- ---------- ---------
PERFORMANCE RATIOS(1):
Return on average total assets......... 1.01% 1.00% 0.88% 0.97% 0.68% 0.81% 0.86%
Return on average stockholders' equity. 13.50 12.96 11.55 13.73 9.81 12.29 13.20
Interest rate spread(2)................ 3.49 3.57 3.49 3.74 3.92 4.10 4.30
Interest rate margin(2)................ 4.15 4.31 4.22 4.45 4.62 4.78 4.79
Average earnings assets to average
interest-bearing liabilities........ 119.10 121.09 122.32 119.27 119.37 118.63 116.49
Efficiency ratio(2) (3)................ 62.95 65.03 68.67 64.48 71.04 60.66 75.87
EARNINGS TO FIXED CHARGES
RATIOS(4):
Including interest on deposits......... 1.50x 1.49x 1.42x 1.48x 1.35x 1.35x 1.27x
Excluding interest on deposits......... 7.79 12.85 9.77 20.90 15.00 13.99 11.23
ASSET QUALITY RATIOS:
Nonperforming loans to total loans..... 0.25% 0.35% 0.37% 0.68% 1.23% 2.89% 2.57%
Allowance for loan losses to total
loans............................... 0.80 0.95 0.90 1.13 1.05 1.65 1.49
Allowance for loan losses to non-
performing loans.................... 316.67 273.98 259.24 166.87 85.41 55.42 51.70
Net charge-offs to average loans(1).... 0.01 0.13 0.15 (0.02) 0.88 1.03 0.76
CAPITAL RATIOS:
Stockholders' equity to total assets... 7.12% 7.39% 7.53% 7.44% 7.00% 6.86% 6.44%
Tier 1 risk-based capital ratio........ 11.44 11.89 11.94 11.57 10.58 10.29 9.10
Total risk-based capital ratio......... 12.41 13.00 13.00 12.77 11.76 11.45 10.38
Core capital (to tangible assets)...... 7.12 7.39 7.53 7.44 7.00 6.86 6.44
Tangible capital (to
tangible assets)......................... 7.12 7.39 7.53 7.44 7.00 6.86 6.44
_________________________
(1) Ratios are annualized for the six months ended June 30, 1999 and 1998.
(2) Ratios are calculated using fully tax equivalent (FTE) interest income.
(3) Equals non-interest expenses divided by net interest income (FTE) plus non-
interest income (excluding net gains or losses on securities transactions).
(4) For purposes of computing the ratios of earnings to fixed charges, earnings
represent income before income taxes plus fixed charges. Fixed charges
represent total interest expense, including and excluding interest on
deposits.
13
Risk Factors
An investment in the capital securities involves a number of risks. Some
of these risks relate to the capital securities and others relate to us. We
urge you to carefully consider this information, together with the other
information in this prospectus and in the documents that we have incorporated by
reference in this prospectus.
Risks related to your investment in the capital securities
We will depend primarily on any dividends we may receive from our subsidiaries
in making payments under the subordinated debentures, which could affect the
payments made to you under the capital securities
Because we are a bank holding company, substantially all of our operating
assets are owned by Park West and Cargill. We rely primarily on dividends from
Park West and Cargill to pay principal and interest on our outstanding debt
obligations and corporate expenses. The boards of directors of Park West and
Cargill have the sole discretion to declare and pay any dividends to us. In
addition, the FRB limits all capital distributions by Park West and Cargill
directly or indirectly to us, including dividend payments. Without prior
approval, neither Park West nor Cargill may declare a dividend if the total
amount of all dividends declared by either bank in any calendar year exceeds the
total of their respective retained net income for the current year and retained
net income for the preceding two years. Under federal law, neither Park West
nor Cargill can pay any dividend if, after paying the dividend, it will be
"undercapitalized." The FRB may declare a dividend payment to be unsafe and
unsound even though Park West or Cargill would continue to meet its capital
requirements (imposed by the FDIC and the Massachusetts Commissioner of Banks in
the case of Park West, and the OTS and the Commissioner of Banking of the State
of Connecticut in the case of Cargill) after the dividend. If either Park West
or Cargill do not pay dividends to us and we are unable to make payments on the
subordinated debenture, the Trust will not be able to pay distributions and
other payments on the capital securities and the guarantee will not apply.
We cannot make payments under the guarantee or the subordinated debentures if we
default on our other obligations that are more senior
Our obligations under the guarantee issued for your benefit are unsecured
and rank
. junior to all of our other borrowings, except those borrowings that by
their terms are equal or junior to the guarantee;
. senior to our common stock.
This means that we cannot pay under the guarantee if we default on payments
of any of our other borrowings, unless, by their terms, those borrowings are
equal or junior to the guarantee. If we liquidate, go bankrupt or dissolve, we
would be able to pay under the guarantee only after we have paid all our other
liabilities that are senior to the guarantee.
Our obligations under the subordinated debentures are unsecured and rank
junior in priority to all of our senior indebtedness, which includes our
borrowings that are not by their
14
terms equal or junior to the subordinated debentures. If we default on a payment
on our senior indebtedness, we cannot pay principal or interest on the
subordinated debentures. If we liquidate, go bankrupt or dissolve, we would be
able to pay the Trust under the subordinated debentures only after we have made
all payments on our senior indebtedness. As of June 30, 1999, we had senior
indebtedness of $19.1 million.
If we default on our obligations to pay principal or interest on the
subordinated debentures, the Trust will not have sufficient funds to make
distribution payments or liquidation payments on the capital securities. As a
result, you will not be able to rely upon our guarantee for payment of these
amounts. Instead, you or the property trustee may enforce the rights of the
Trust under the subordinated debentures against us. For more information, please
refer to "Description of Subordinated Debentures--Enforcement of Certain Rights
by Holders."
The capital securities, the guarantee, the subordinated debentures and the
indenture do not limit our ability or the ability of any subsidiary to incur
additional debt, including debt that is senior in priority of payment.
For more information on payments under the guarantee and the subordinated
debentures, you should refer to "Description of Guarantee--Status of the
Guarantee" and "Description of Subordinated Debentures--Subordination."
We may defer interest payments on the subordinated debentures which could have
adverse consequences to you
We have the right, at one or more times, unless an event of default exists
under the subordinated debentures, to defer interest payments on the
subordinated debentures for up to 20 consecutive quarters, but not beyond
September 30, 2029. If we defer interest payments, the Trust will defer paying
distributions to you on your capital securities during the deferral period.
However, during this period, the capital securities would still accumulate
distributions at the rate of 9.60% per year, compounded quarterly, to the extent
permitted by law. During any deferral period, we will be prohibited from
declaring or paying cash dividends on our capital stock or from paying on or
repaying, repurchasing or redeeming any debt which ranks equal or junior to the
subordinated debentures. For more information, please refer to "Description of
Capital Securities--Distributions."
When any deferral period ends and we pay all interest then accrued and
unpaid on the subordinated debentures, we may elect to begin a new deferral
period. There is no limitation on the number of times that we may elect to
begin a deferral period. See "Description of Capital Securities--Distributions"
and "Description of Subordinated Debentures--Option to Extend Interest Payment
Date."
If we exercise our right to defer payments of interest on the subordinated
debentures, you will be required to accrue income as original issue discount
(OID) in respect of the deferred stated interest allocable to your capital
securities for United States federal income tax purposes, which will be
allocated but not distributed to you. As a result, you will be required to
recognize income for United States federal income tax purposes before you
receive any cash and will not receive the cash related to this interest income
from the Trust if you dispose of your capital securities prior to the record
date for the distribution payment. For more information, you should read
"Certain
15
Federal Income Tax Consequences--Interest Income and Original Issue Discount"
and "--Sales or Redemption of Capital Securities."
We do not currently intend to exercise our right to defer interest payments
on the subordinated debentures. However, if we exercise this right in the
future, the market price of the capital securities will probably be affected.
The capital securities may trade at a price that does not fully reflect the
value of accrued but unpaid interest on the subordinated debentures. If you
sell your capital securities during a deferral period, you may not receive the
same return on your investment as someone else who continues to hold the capital
securities.
The guarantee covers payments only if the Trust has cash available
If we default on our obligations to pay principal or interest on the
subordinated debentures, the Trust will not have sufficient funds to make
distribution payments or liquidation payments on the capital securities.
Because our guarantee does not cover payments when the Trust does not have
sufficient funds, you will not be able to rely upon the guarantee for payment of
these amounts. Instead, you or the property trustee may enforce the rights of
the Trust under the subordinated debentures against us. For more information,
please refer to "Description of Subordinated Debenture--Enforcement of Certain
Rights by Holders."
The Trust may redeem the capital securities before September 30, 2004 if a
special event occurs; you may be taxed on the redemption proceeds and you may
not be able to reinvest the redemption proceeds at the same or a higher rate of
return
If there are changes in bank regulatory, investment company or tax laws
that would adversely affect the status of the Trust, the capital securities or
the subordinated debentures, we have the right to redeem the subordinated
debentures, in whole but not in part. Our redemption of the subordinated
debentures will cause the Trust to redeem the capital securities and the common
securities at a price equal to $10.00 per security plus any accrued and unpaid
distributions. Under current United States federal income tax law, the
redemption of the capital securities would be a taxable event to you. In
addition, depending upon capital market conditions at the time of such
redemptions, you may not be able to reinvest the money you receive in the
redemption at a rate that is equal to or higher than the rate of return you
received on the capital securities. We may have to obtain regulatory approval,
including the approval of the FRB, before we redeem any subordinated debentures.
For more information, you should refer to "Description of Capital Securities--
Redemption."
If we distribute the subordinated debentures, there may be an adverse effect on
the trading market and trading price of your investment, and there may be
adverse tax effects
We may dissolve the Trust at any time and, after satisfying the liabilities
owed to the Trust's creditors under applicable law, the Trust will distribute
the subordinated debenture to you, as a holder of capital securities, and us, as
the holder of common securities.
If the trustees distribute the subordinated debentures to you, we will use
our best efforts to list the subordinated debentures on the Nasdaq National
Market. We cannot be sure that the subordinated debentures will be approved for
listing on Nasdaq or that a trading market will exist for the subordinated
debentures. Accordingly, the capital securities or the subordinated debentures
16
may trade at a discount from the price that an investor paid to purchase the
capital securities. Because holders of capital securities may receive
subordinated debentures in liquidation of the Trust and because distributions
are otherwise limited to payments on the subordinated debentures, prospective
purchasers of capital securities are also making an investment decision with
regard to the subordinated debentures and should carefully review all the
information regarding the subordinated debentures contained in this prospectus.
Under current United States federal income tax law, a distribution of the
subordinated debentures following the dissolution of the Trust would not be a
taxable event to you unless the distribution occurs at a time when the Trust is
treated as an association taxable as a corporation. However, any distributions
of cash for the subordinated debentures would be a taxable event to you. You
should refer to "Certain Federal Income Tax Considerations--Receipt of
Subordinated Debentures or Cash Upon Liquidation of the Trust" for more
information.
You will have limited voting rights
As a holder of capital securities, you will have limited voting rights. You
can vote only to modify the capital securities and to exercise the Trust's
rights as a holder of the subordinated debentures. In general, only we can
replace or remove any of the trustees. However, if an event of default exists
under the trust agreement, the holders of the capital securities may replace the
property trustee and the Delaware trustee.
We, along with the property trustee and the administrative trustees, may
amend the trust agreement without your consent even if these actions adversely
affect your interests, to ensure that the Trust:
(a) will not be classified as an association taxable as a corporation for
United States federal income tax purposes and
(b) will not be required to register as an "investment company" under the
Investment Company Act of 1940.
You will have no voting rights with respect to any matters submitted to a
vote of our stockholders. For more information on your voting rights, please
refer to "Description of Capital Securities--Voting Rights; Amendment of the
Trust Agreement" and "--Removal of Trustees."
The holders of the capital securities and the subordinated debentures are not
protected by covenants in the indenture and the trust agreement
Neither the indenture, which sets forth the terms of the subordinated
debentures, nor the trust agreement, which sets forth the terms of the capital
securities and the common securities, protects holders of the subordinated
debentures or the capital securities, respectively, in the event we experience
significant adverse changes in our financial condition or results of operations.
In addition, neither the indenture nor the trust agreement limits our ability or
the ability of any subsidiary to incur additional indebtedness. Therefore, the
provisions of these governing instruments should not be considered a significant
factor in evaluating whether we will be able to comply with our obligations
under the subordinated debentures or the guarantee.
17
Trading price may not reflect the full value of the capital securities
We cannot predict the market prices for the capital securities or the
subordinated debentures that may be distributed if we dissolve the Trust. The
capital securities or the subordinated debentures may trade at a discount from
the price that you paid for the capital securities and may trade at prices that
do not fully reflect the value of any accrued and unpaid interest on the
underlying subordinated debentures.
A holder who uses the accrual method of accounting for tax purposes (and a
cash method holder, if the subordinated debentures are deemed to have been
issued with OID) and who disposes of its capital securities between record dates
for payments of distributions will be required to include accrued but unpaid
interest on the subordinated debentures through the date of disposition in
income as ordinary income (i.e., interest or, possibly, OID), and to add such
amount to its adjusted tax basis in its share of the underlying subordinated
debenture deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis (which will include all accrued but unpaid
interest), a holder will recognize a capital loss. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes. See "Certain Federal Income Tax
Considerations--Interest Income and Original Issue Discount" and "--Sales or
Redemptions of Capital Securities."
The capital securities have been approved for listing on the Nasdaq
National Market. Although the underwriter of the offering has indicated that it
intends to make a market in the capital securities, it is not obligated to do so
and may stop any market-making activities at any time without notice. We cannot
be sure that there will be a liquid trading market for the capital securities.
Risks Related to Westbank
We may experience difficulties in managing our growth
As part of our general strategy we may continue to acquire banks and businesses
that we believe provide a strategic fit with our business. To the extent that we
do grow, we cannot assure you that we will be able to adequately and profitably
manage our growth. Acquiring other banks and businesses, including but not
limited to our recent acquisition of Cargill, will involve risks commonly
associated with acquisitions, including:
. potential exposure to liabilities of banks and businesses we
acquire;
. difficulty and expense of integrating the operations and personnel
of banks and businesses we acquire;
. potential disruption to our business;
. potential diversion of our management's time and attention;
. impairment of relationships with and the possible loss of key
employees and customers of the banks and businesses we acquire; and
. incurrence of amortization expense if we account for an acquisition
as a purchase.
18
The success of our internal growth strategy will depend primarily on our
ability to generate an increasing level of loans and deposits at acceptable risk
levels and on acceptable terms without significant increases in non-interest
expenses relative to revenues generated. There is no assurance that we will be
successful in implementing our internal growth strategy. Our financial
performance also depends, in part, on our ability to manage various portfolios
and our ability to successfully introduce additional financial products and
services. There can be no assurance that additional financial products and
services will be introduced or, if introduced, that such financial products and
services will be successful. Furthermore, the success of our growth strategy
will depend on our ability to maintain sufficient regulatory capital levels and
general economic conditions that are beyond our control.
If we are unable to successfully compete for customers in our market area, our
financial condition and results of operations could be adversely affected
We face intense and increasing competition in making loans, attracting
deposits and providing other financial products and services. The market area
in which we operate, has numerous financial institutions that we compete with
for customers. Our competition for loans comes principally from:
. commercial banks . mortgage banking companies
. savings banks . finance companies
. savings and loan associations . credit unions
Our competition for deposits comes principally from:
. commercial banks . brokerage firms
. savings banks . insurance companies
. savings and loan associations . money market mutual funds
. credit unions . mutual funds (such as corporate
and government securities funds)
Many of these competitors have greater financial resources and name
recognition, more locations, more advanced technology and more financial
products to offer than we have. Our profitability depends on our continued
ability to attract new customers and compete in western Massachusetts and
northeastern Connecticut. If we are unable to successfully compete, our
financial condition and results of operations will be adversely affected.
19
Because we primarily serve Western Massachusetts and Northeast Connecticut, a
decline in the local economy could lower our profitability
We serve the Hampden County area of western Massachusetts with our main
office and twelve Park West branches and the Putnam County area of northeast
Connecticut with our three Cargill locations. The level of our profits depend
on providing products and services to customers in this local region. An
increase in unemployment, a decrease in real estate values or an increase in
interest rates are among the factors that could weaken the local economy. With
a weaker local economy:
. customers may not want or need our products and services,
. borrowers may be unable to repay their loans,
. the value of the collateral securing our loans to borrowers may
decline, and
. the overall quality of our loan portfolio may decline.
Making mortgage loans is a significant source of our profits. If customers
in the local area do not want these loans, our profits may decrease. Although
we could make other investments, we may earn less revenue on these investments
than on loans. Also, our losses on loans may increase if borrowers are unable
to make payments on their loans.
Our future profits will be affected by our ability to successfully integrate the
new branches to be acquired from New London Trust, FSB
Cargill has agreed, subject to regulatory approval, to purchase two
branches located in Danielson and Putnam, Connecticut. Under the agreement,
Cargill will acquire all of the deposits and certain of the loans associated
with these branches (approximately $109.3 million and $86.5 million,
respectively, as of June 30, 1999). Our future profits will be affected by
Cargill's ability to retain the acquired deposits, to generate revenues from the
new locations, to manage the costs associated with the acquisition and to
otherwise successfully integrate the new branches into its operations.
Interest rate changes may reduce our profitability
To be profitable, we have to earn more money in interest income and fee
income than we pay as interest on deposits and other interest-bearing
liabilities and as other expenses. If interest rates fall, the amount of
interest we earn on loans, and investment securities may decrease more quickly
than the amount of interest we pay on deposits and other interest-bearing
liabilities. This would result in a decrease in our profitability.
Changes in the level or structure of interest rates also affect
. our ability to originate loans,
. the value of our loan and securities portfolios,
. our ability to realize gains from the sale of loans and securities,
20
. the average life of our deposits and
. our ability to obtain deposits.
Fluctuations in interest rates will ultimately affect both the level of income
and expense we record on a large portion of our assets and liabilities, and the
market value of all interest-earning assets, other than interest-earning assets
that mature in the short term. Our interest rate management strategy is designed
to stabilize net interest income and preserve capital over a broad range of
interest rate movements by matching the interest rate sensitivity of assets and
liabilities. Although we believe that our current mix of loans, mortgage-backed
securities, investment securities and deposits is reasonable, significant
fluctuations in interest rates may have a negative effect on our profitability.
In addition, Cargill is assuming $109.3 million of deposit liabilities from
New London Trust, FSB and creating $17.0 million in interest-bearing liabilities
in connection with this offering. The assumption of these interest-bearing
liabilities could affect our interest rate risk.
We cannot predict how changes in technology will affect our business
The financial services market, including banking services, is increasingly
affected by advances in technology, including developments in:
. telecommunications,
. data processing,
. automation,
. Internet-based banking,
. telebanking, and
. debit cards and so-called "smart cards."
Our ability to compete successfully in the future will depend on whether we
can anticipate and respond to technological changes. To develop these and other
new technologies we will likely have to make additional capital investments.
Although we continually invest in new technology, we cannot assure you that we
will have sufficient resources or access to the necessary proprietary technology
to remain competitive in the future.
The year 2000 problem could hurt our operations and profits
We rely upon computers to conduct our daily business. If our computer
systems fail to recognize a date using "00" as the year 2000, we may be unable
to do our routine business and provide service to our customers. The failure of
the computer systems of parties we do business with or utilities, including the
electric and telephone companies, to recognize the year 2000 may also disrupt
our operations. For example, we may not be able to process withdrawals or
deposits, prepare account statements or engage in any of the transactions that
constitute our normal operations. Any one or more of these events could hurt
our profits.
21
We primarily use third party vendors to process our electronic data. Our
vendor has modified or replaced many of its computer applications and systems
necessary to correct the year 2000 date issue. We have substantially completed
testing these modified applications and systems. We also use a combination of
purchased and contract-based software as well as other third party vendors for
many of our data processing needs. Our assessment of potential computer issues
for the year 2000 has been substantially completed. Where potential computer
issues have been identified, the vendors have committed to definitive dates to
resolve such issues. We have established contingency plans for systems for
which year 2000 issues will not be corrected. If our vendors do not achieve
year 2000 compliance, our operations could be adversely affected.
The FDIC and the OTS, our primary federal bank regulators, along with the
other federal and state bank regulators, have identified the year 2000 issue as
a substantive area of examination for both regularly scheduled and special bank
examinations. In accordance with regulatory guidelines issued by the banking
regulators, we have substantially completed our testing of both internally and
externally supplied systems and all renovations as of June 30, 1999. Because of
this oversight by the bank regulatory agencies, if we do not become year 2000
compliant, we could become subject to administrative remedies similar to those
imposed on financial institutions otherwise found not to be operating in a safe
and sound manner, including remedies available under prompt corrective action
regulations.
There has been limited litigation filed against corporations regarding the
year 2000 problem and a corporation's compliance efforts. However, the law in
this area will probably continue to develop well into the new millennium. If we
experience a year 2000 failure, our exposure could be significant and material,
unless there is legislative action to limit year 2000 liability. Legislation
has been introduced in several jurisdictions regarding the year 2000 problem.
However, we cannot be sure that legislation will be enacted in jurisdictions
where we do business that will limit any potential liability. Through June 30,
1999, we had incurred approximately $218,000 in costs associated with achieving
year 2000 compliance. We expect to incur approximately $100,000 in additional
costs to achieve year 2000 compliance during 1999.
We may be adversely affected by changes in laws and regulations affecting the
financial services industry
Park West and Cargill (the "Banks") are subject to extensive regulation and
supervision as a state-chartered bank and trust company and state-chartered
savings and loan association, respectively. The regulatory authorities have
extensive discretion in connection with their supervision and enforcement
activities and their examination policies, including the imposition of
restrictions on the operation of a bank, the classification of assets by an
institution and requiring an increase in a national bank's allowance for loan
losses. Any change in the regulatory structure or the applicable statutes or
regulations, whether by the regulators or Congress, could have a material effect
on us, the Banks, and the operations of each.
22
Westbank Corporation
Overview
We are a Massachusetts-chartered bank holding company headquartered in West
Springfield, Massachusetts. Through our wholly-owned subsidiaries, Park West
and Cargill, we provide community banking services to our principal market area
of western Massachusetts and northeast Connecticut.
We have grown to $434.4 million in assets and $370.1 million in deposits at
June 30, 1999. Our deposits are insured by the FDIC up to FDIC limits (generally
$100,000 per depositor).
Our principal executive office is located at 225 Park Avenue, West
Springfield, Massachusetts 01089 and our telephone number is (413) 747-1400.
Park West Bank & Trust
Park West is chartered as a state bank and trust company by The
Commonwealth of Massachusetts, is a member of the FDIC, and is subject to
regulation by the Massachusetts Commissioner of Banks and the FDIC. Park West
offers a full range of retail banking services to individuals, businesses, and
nonprofit organizations through thirteen banking offices located in Hampden
County, Massachusetts. Such services include a wide range of checking and
savings accounts, loans, safe deposit facilities, and automated teller machines
at selected branch locations. As of June 30, 1999, Park West had total assets of
$385.0 million.
Park West also provides lending, depository and related financial services
to commercial, industrial, financial, and governmental customers. These services
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.
Park West also operates a Trust Department which provides services normally
associated with holding property in a fiduciary or agency capacity. The Trust
Department had $114.0 million under management as of June 30, 1999.
Cargill Bank
On January 29, 1999, we acquired Cargill Bancorp, Inc., the holding company
for Cargill Bank, which now retains its name and charter as a separate
subsidiary of Westbank. Cargill is a Connecticut chartered savings and loan
association which provides a variety of deposit, loan and investment products
and services to small businesses and consumers. Cargill is regulated by the OTS
and the Commissioner of Banking of the State of Connecticut. The business of
Cargill is to attract deposits from the general public and to make loans secured
by mortgages on residential and other real estate, enabling borrowers to
purchase, refinance, construct or improve property. In addition, Cargill makes
consumer loans and holds investment securities. Cargill's market area is
northeastern Connecticut and is made up primarily of the towns of Putnam,
Woodstock, Pomfret, Thompson, Killingly and Eastford. Cargill operates three
offices, the main office in Putnam and branch offices in Quinebaug, which is
part of Thompson, and Woodstock. The region in which Cargill operates is 30
miles south of Worcester, Massachusetts and centrally located between Boston,
Massachusetts, Providence, Rhode Island and Hartford, Connecticut. As of June
30, 1999 Cargill had total assets of $49.0 million.
23
Business Strategy
We seek growth by developing our core banking operations, deepening our
market penetration by providing additional banking services to our present
customers, by expanding our geographic market area and customer base through
selective acquisitions of other banks and by opening new offices in selected
areas. The major components of our growth-oriented community banking strategy
are set forth below.
. Growth of Our Community Banking Franchise
We strive to serve as a community-oriented bank focused on developing long-
term customer relationships by providing personalized service, convenient
locations, and the flexibility to meet the needs of individuals and
businesses in our market area. In this regard, we currently offer an
array of community banking products and services through both Park West and
Cargill from Park West's main office and twelve branch locations in
Massachusetts and Cargill's three locations in Connecticut. Cargill will
also add two additional locations in Connecticut upon completion of the
New London Trust, FSB branch acquisition. Large bank mergers have
negatively affected small-to medium-sized businesses, which creates
opportunities for a community bank that offers both a broad range of
products to businesses and exceptional service to consumers. Because
customer needs seldom fall into neat categories and usually cross from one
type of banking product to another, we believe that organizing around our
customers and their needs, not around products, provides us with a
competitive advantage. Our local decision-making process in our banking
offices allows our employees to listen to our customers and understand
their needs and empowers them to deliver customer solutions.
. Becoming a Full-Service Financial Provider
We offer a full-range of deposit, loan, trust, securities brokerage,
insurance and other financial products and services to our customers. We
view these products and services as a natural extension of our community
banking franchise. We are an active business lender and seek to achieve a
greater diversification of assets on our balance sheet. We offer small- to
medium-sized businesses in our market area traditional loan products and
commercial services including short and long term loans and revolving
credit arrangements, letters of credit, inventory and accounts receivable
financing, real estate construction lending, and mortgage loans. Our
commercial and commercial real estate loan portfolios have grown to $114.0
million at June 30, 1999 from $81.7 million at December 31, 1996. Our
Trust Department has a well-diversified line of services that is able to
meet the changing needs of our customers throughout each phase of their
life cycle. The mission of our Trust Department is to build long-term
relationships with customers through all market conditions. That means
consistently providing the capabilities and capacity to serve customers as
their needs and situations change. The Trust Department has built high
quality customer relationships based on the trust their customers place in
them. At June 30, 1999, fiduciary accounts totaled in excess of $114.0
million. We plan to begin offering trust services to our new customers in
Connecticut by January 1, 2000. By becoming a full-service provider of
financial services, we have enhanced our ability to attract and retain both
retail and commercial customers in our market area.
24
. Selective Acquisitions and Branch Expansion
We are presently positioned and have sufficient resources and
infrastructure to expand through acquisition and branch expansion.
Consistent with our corporate strategies of expanding our geographic market
area and customer base, Park West has recently established branches in
Ludlow and Southwick, Massachusetts. These new full-service banking offices
have generated a combined total of $18.0 million in new deposits through
June 30, 1999. Park West also added an additional satellite mortgage
correspondent bank, which has an excellent reputation in the Franklin
County area of Western Massachusetts. In addition, our acquisition of
Cargill will allow Cargill to offer a wider range of products and services,
while at the same time achieving our corporate objective of expanding our
market area and customer base into Connecticut. In this regard, on April
12, 1999, Cargill agreed to acquire two retail banking offices from New
London Trust, FSB located in Putnam and Danielson, Connecticut. We will
acquire certain of the loans and all of the deposit liabilities associated
with these offices (approximately $86.5 million and $109.3 million,
respectively, at June 30, 1999). We will continue to pursue opportunities
for growth in our defined market area as well as in markets that are
contiguous to our present market area, which include Connecticut, Rhode
Island and Central Massachusetts. We constantly evaluate our technology,
operations and product offerings to assess growth opportunities in those
areas.
. Efficient Capital Management and Consistent Shareholder Returns
Our policy has always been to maintain our financial strength through risk
management, conservative loan underwriting standards, investment in high
grade assets and consistent earnings. We have provided a more attractive
return on equity over the past few years primarily as a result of the
growth of our loan portfolio and deposit liabilities, increases in non-
interest income and controlled growth of non-interest expenses, while
maintaining our commitment to capital strength and asset quality. We have
paid a cash dividend in each of the last 18 quarters and, in recent years,
we have a history of increasing quarterly cash dividends to enhance returns
for our shareholders. Additionally, we will consider repurchasing shares
of our common stock from time to time at prevailing market prices in order
to enhance our return on equity.
25
Pending Acquisition of Two New London Trust, FSB Branches
On April 12, 1999, we announced the signing of a definitive agreement to
purchase two branches located in Danielson and Putnam, Connecticut from New
London Trust, FSB. The transaction, which is subject to regulatory approval, is
currently expected to close in the fourth quarter of 1999. Cargill has filed
the regulatory applications necessary to obtain the required regulatory
approvals.
Under the agreement, Cargill will acquire all of the deposits and certain
of the loans related to the two branches. At June 30, 1999, the total amount of
deposits to be acquired were approximately $109.3 million, classified as
follows:
Weighted Average
Amount Interest Rate
--------------- -----------------
(Unaudited)
(In thousands)
Deposits:
Demand............. $ 3,348 -%
NOW................ 7,497 0.94
Money market....... 7,869 3.20
Savings............ 18,172 2.51
Time............... 72,445 5.12
-------- ----
Total deposits. $109,331 4.23%
======== ====
At June 30, 1999, the total amount of loans to be acquired were approximately
$86.5 million, categorized as follows:
Weighted Average
Amount Interest Rate
--------------- ------------------
(Unaudited)
(In thousands)
Loans:
Real estate:
Residential....... $62,335 7.55%
Commercial........ 16,860 8.81
Construction...... 1,230 6.98
Consumer.............. 2,194 7.79
Commercial............ 3,834 8.60
------- ----
Total loans $86,453 7.91%
======= ====
26
Management
Set forth below is certain biographical information with respect to our
Directors and Executive Officers, each of whom has been engaged in the principal
occupation or employment specified for the past five years unless otherwise
noted.
Directors
Roland O. Archambault, age 67, a resident of Chicopee, MA, has served on
the Board of Directors of Westbank since 1989 and on the Board of Directors of
Park West since 1991. Mr. Archambault is the former President/owner of Park
Supply Company, a new and used brick/masonry supply business, where he retired
after 38 years of service in 1998. Mr. Archambault is currently the
President/owner of Pinnacle Raceway.
Mark A. Beauregard, age 47, a resident of South Hadley, MA, has served on
the Board of Directors of Park West since 1986 and has served on the Board of
Directors of Westbank since 1991. Mr. Beauregard joined the law firm of Resnic,
Beauregard, Waite & Driscoll, P.C. in 1977 and became a partner in the firm in
1979.
David R. Chamberland, age 60, a resident of West Springfield, MA, has
served on the Board of Directors of both Westbank and Park West for ten years.
Since 1979, Mr. Chamberland has been the President/owner of Chiocopee Building
Supply, specializing in cedar and mahogany building materials.
Donald R. Chase, age 52, has been employed by Park West since 1972, holding
a variety of positions of increasing responsibility throughout the years. Mr.
Chase was appointed to serve on the Board of Directors of Park West in 1987. In
December 1988, he was named President and Chief Executive Officer of Park West.
In September 1990, he was appointed to the Board of Directors of Westbank and
named President and Chief Executive Officer. In April 1999, Mr. Chase was also
appointed Vice Chairman of the Company. Mr. Chase was elected to serve on the
Board of Directors of Cargill in February 1999. Mr. Chase is active in the
community serving on several boards and committees, including Eastern States
Exposition, Westover Metropolitan Development Corporation, Holyoke Community
College Foundation, and the United Way.
Leroy F. Jarrett, age 71, a resident of Chatham, MA, has served on the
Board of Directors of both Westbank and Park West since 1961. Mr. Jarrett is
the former President and Treasurer of New England Church Interiors where he
retired in early 1995. Mr. Jarrett has served as past Vice Chairman of
Westbank.
Ernest N. Laflamme, Jr., age 68, a resident of Chicopee, MA, has served on
the Board of Directors of Westbank since 1987 and the Board of Park West since
1991. Mr. Laflamme began his career as an Assessor for the City of Chicopee in
1964 and has held the position of Treasurer for the past 29 years. Mr. Laflamme
is currently the Chairman of Westbank.
G. Wayne McCary, age 57, a resident of Longmeadow, MA, has served on the
Board of Directors of both Westbank and Park West since February 1999. Mr.
McCary has been employed by Eastern States Exposition (State Fairgrounds) for
approximately 25 years and was named President in 1991.
27
Robert J. Perlak, age 63, a resident of Chicopee, MA, has served on the
Board of Directors of Westbank since 1987 and has served on the Board of Park
West since 1991. Mr. Perlak is a former Assistant Chief Probation Officer for
Hampden County. In 1993, Mr. Perlak, retired from that position after 27 years.
Mr. Perlak is currently the Clerk of the Corporation of Westbank.
George R. Sullivan, age 45, a resident of Longmeadow, MA, was appointed to
the Board of Directors of both Westbank and Park West in May 1997. Mr. Sullivan
is the Chief Executive Officer of Sullivan Paper Company where he has been
employed since 1971. Mr. Sullivan is Assistant Clerk of the Corporation and
Westbank.
James E. Tremble, age 60, a resident of Longmeadow, MA, has served on the
Board of Directors for Park West since 1986 and was appointed to the Board of
Directors of Westbank in 1991. Mr. Tremble is the President of Valley
Communication Systems, Inc., a family-owned communications business, where he
has been employed since January 1976.
Executive Officers who are not Directors
John M. Lilly, age 51, has been employed by Park West for 26 years in a
variety of positions in the finance and audit areas. In December 1988, Mr.
Lilly was appointed Executive Vice President and Treasurer of Park West, and, in
December 1991, he was named Treasurer and Chief Financial Officer of Westbank.
Gary L. Briggs, age 48, has held a variety of positions in the lending area
of Park West since 1979. In December 1998, Mr. Briggs was elected Executive
Vice President of Lending at Park West. Prior to coming to Park West, he was
employed at Household Finance Corporation from 1973 - 1979. Mr. Briggs was
named Executive Vice President of Cargill Bank in April 1999.
Robert A. Gibowicz, age 56, has been employed by the Bank for 16 years. In
December 1983, he was hired as Trust Officer, and in October 1986, he was named
Senior Trust Officer. Prior to coming to Park West, Mr. Gibowicz held a variety
of trust positions beginning in 1964 and continuing through December 1983 at
Franklin County Trust Company and Shawmut Bank of Hampshire County,
respectively.
28
Westbank Capital Trust I
We organized the Trust as a statutory business trust under Delaware law
pursuant to the trust agreement that we, as sponsor, and the trustees executed.
We, together with the trustees, filed a certificate of trust with the Delaware
Secretary of State on August 25, 1999.
The Trust exists solely to:
. issue and sell the capital securities to the public and the common
securities to us;
. use the proceeds from the sale of the capital securities and common
securities to purchase our subordinated debentures, which will be the
only assets of the Trust;
. maintain its status as a grantor trust for federal income tax
purposes; and
. engage in other activities that are necessary or incidental to these
purposes.
We will purchase all of the common securities of the Trust. The common
securities will represent an aggregate liquidation amount equal to 3% of the
Trust's total capitalization. The capital securities will represent the
remaining 97% of the Trust's total capitalization. The common securities will
have terms substantially identical to the capital securities. However, if we
default on our payments under the subordinated debentures, the Trust will only
pay cash distributions and liquidation, redemption and other amounts payable to
us with respect to the common securities after it pays you these amounts on the
capital securities.
The Trust has a term of approximately 30 years, but we may dissolve it
earlier as provided in the trust agreement. The trustees conduct the Trust's
business and affairs. We appoint each trustee. The trustees are:
. Wilmington Trust Company, as property trustee;
. Wilmington Trust Company, as Delaware trustee; and
. Three individuals who are our employees, as administrative trustees.
As the sole holder of the common securities, we can replace or remove any
of the trustees. However, if an event of default exists under the trust
agreement, the holders of the capital securities with at least a majority of
aggregate liquidation amount of the capital securities will be able to remove
and replace the property trustee and the Delaware trustee. Only we, as owner of
all of the common securities, can remove or replace the administrative trustees.
The duties and obligations of each trustee are governed by the trust agreement.
We will pay all fees and expenses related to the Trust and the offering of
the capital securities, as well as all of the ongoing costs and expenses of the
Trust. We will not be responsible for the Trust's obligations under the capital
securities, except as provided by our guarantee of the capital securities.
The Trust has no separate financial statements. The statements would not
be meaningful to you because the Trust has no independent operations.
29
The principal executive office of the Trust is c/o Westbank Corporation,
225 Park Avenue, West Springfield, MA 01089-3326 and its telephone number is
(413) 747-1400.
Use of Proceeds
All the proceeds to the Trust from the sale of the capital securities and
the common securities will be invested by the Trust in the subordinated
debentures of the $17.0 million in proceeds, we will contribute approximately
$16.0 million to Cargill as equity capital to support the pending acquisition of
two branches from New London Trust, FSB. The offering of the capital securities
is not contingent upon consummation of the pending branch acquisition. If the
branch acquisition is not consummated, we will use the proceeds for the
expansion of our lending and investment activities and for general corporate
purposes.
30
Capitalization
The following table presents our pro forma consolidated capitalization at
June 30, 1999 and as adjusted to show the effect of the completion of the
offering of the capital securities and the issuance of the subordinated
debentures to the Trust. You should read this table together with the
consolidated financial statements and notes incorporated by reference to our
Annual Report on Form 10-K/A, for the fiscal year ended December 31, 1998 and
our Quarterly Report on Form 10-Q for the three and six months ended June 30,
1999 and the "Use of Proceeds" section in this prospectus.
June 30, 1999
-------------------------------------------------------
as Adjusted
---------------------------------------
Securities Sale and
Actual Securities Sale Branch Acquisition
-------------- ---------------- --------------------
(Unaudited)
(Dollars in thousands)
Guaranteed preferred beneficial interest in our
subordinated debentures(1)....................................... $ - $17,000 $17,000
Stockholders' equity:
Common stock, $2.00 par value, 9,000,000 shares authorized
4,229,931 issued and outstanding............................... 8,460 8,460 8,460
Additional paid-in capital....................................... 11,337 11,337 11,337
Retained earnings................................................ 12,094 12,094 12,094
Accumulated other comprehensive loss............................. (925) (925) (925)
------- ------- -------
Total stockholders' equity..................................... $30,966 $30,966 $30,966
------- ------- -------
Total guaranteed preferred beneficial interest in our
subordinate debentures and stockholder equity................ $30,966 $47,966 $47,966
======= ======= =======
Consolidated capital ratios (2):
Tier 1 risk-based capital ratio.................................. 11.44% 15.65% 10.04%
Total risk-based capital ratio................................... 12.41% 19.00% 12.98%
Leverage ratio................................................... 7.34% 9.27% 5.84%
____________________
(1) The sole assets of the Trust, which we will treat as one of our
subsidiaries, will be $17.5 million aggregate principal amount of our
subordinated debentures, which will mature on September 30, 2029. Westbank
will own all of the common securities issued by the Trust.
(2) The capital ratios, as adjusted, are computed including the total net
estimated proceeds from the sale of the capital securities and the exclusion
of goodwill related to the acquisition of branches from New London Trust,
FSB, in a manner consistent with FRB guidelines.
The following table sets forth the unaudited pro forma condensed
consolidated balance sheet and statements of income as of and for the six months
ended June 30, 1999 and the year ended December 31, 1998 for Westbank
Corporation. The tables for the historical, as reported, as adjusted for the
securities issuance and pro forma branch acquisition, are based on the
assumptions described in the notes to pro forma condensed consolidated balance
sheet and statements of income.
The data set forth below should be read in conjunction with, and is
qualified in its entirety by the historical consolidated financial statements of
Westbank Corporation, including the related notes. The data set forth below is
not necessarily indicative of the results of the future operations of Westbank
Corporation upon consummation of the acquisition and securities sale or the
actual results that would have been achieved had the acquisition and securities
sale been consummated prior to the periods presented.
31
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1999
(Dollars in thousands)
Pro Forma
After
Capital Capital Acquisition Pro Forma
Westbank Securities Securities of NLT Westbank
June 30, 1999 Issuance(1) Issuance Branches(2) June 30, 1999
------------- ----------- ---------- ----------- -------------
Assets
Cash and due from banks...................... $ 13,816 $ - $ 13,816 $ 449 $ 14,265
Federal funds sold........................... 866 16,405 17,271 8,213 25,484
-------- ------- -------- -------- --------
Cash and cash equivalents.................. 14,682 16,405 31,087 8,662 39,749
Securities available for sale, at fair value. 60,229 - 60,229 3,691 63,920
Investment securities held to maturity,
at amortized cost.......................... 9,966 - 9,966 - 9,966
Net loans.................................... 338,164 - 338,164 85,240 423,404
Accrued interest receivable.................. 2,601 - 2,601 540 3,141
Bank premises and equipment.................. 6,910 - 6,910 1,590 8,100
Other real estate owned...................... 85 - 85 167 652
Intangible assets............................ - 595 595 9,635 10,230
Other assets................................. 1,786 - 1,786 - 1,786
-------- ------- -------- -------- --------
Total assets............................... $434,423 $17,000 $451,423 $109,525 $560,948
======== ======= ======== ======== ========
Liabilities, Guaranteed Preferred Beneficial
Interests in our Subordinated Debentures
and Stockholders' Equity
Deposits..................................... $370,084 $ - $370,084 $109,331 $479,415
Borrowed funds............................... 32,057 - 32,057 - 32,057
Accrued interest payable..................... 470 - 470 194 664
Other liabilities............................ 846 - 846 - 846
-------- ------- -------- -------- --------
Total liabilities.......................... 403,457 - 403,457 109,525 512,982
-------- ------- -------- -------- --------
Guaranteed Preferred Beneficial Interests in
our Subordinated Debentures.............. - 17,000 17,000 - 17,000
-------- ------- -------- -------- --------
Stockholders' equity:
Common stock............................... 8,460 - 8,460 - 8,460
Additional paid-in capital................. 11,337 - 11,337 - 11,337
Retained earnings.......................... 12,094 - 12,094 - 12,094
Accumulated other comprehensive loss....... (925) - (925) - (925)
-------- ------- -------- -------- --------
Total stockholders' equity................ 30,966 - 30,966 - 30,966
-------- ------- -------- -------- --------
Total liabilities, guaranteed
beneficial interests in our
subordinated debentures and
stockholders' equity.................... $434,423 $17,000 $451,423 $109,525 $560,948
======== ======= ======== ======== ========
__________________
(1) Represents the issuance of the capital securities, with the net proceeds reflected as federal funds sold. The estimated
offering costs of $595,000 will be included in other assets and amortized over the 30 year term of the subordinated debentures.
Does not reflect additional offering expenses estimated to be approximately $330,000.
(2) Represents, as of June 30, 1999, the unaudited assets acquired and liabilities assumed in the proposed acquisition of the two
branches from New London Trust, FSB. Loans to be acquired approximates the assets' fair value. The deposits assumed are all
considered to be at market rates and, accordingly, approximate fair value. Intangible assets represents the tax deductible
deposit premium of 8.8% of the deposits assumed, including accrued interest payable, which will be amortized over 15 years on a
straight-line basis plus $441,000 or more in transaction costs. The net cash received in the settlement of the transaction
has been shown as federal funds sold.
32
WESTBANK CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(Dollars in Thousands)
Pro Forma
Capital Westbank
Securities Acquisition of December 31,
Westbank Issuance NLT Branches 1998
---------- ---------- -------------- -------------
Income:
Interest and fees on loans......................... $ 23,645 $ - $7,093 $ 30,738
Interest and dividend income on securities......... 4,614 1,208 196 6,018
Interest on temporary investments.................. 372 - 725 1,097
---------- ------ ------ ----------
Total interest and dividend income.................. 28,631 1,208 8,014 37,853
Interest expense.................................... 13,292 1,632 5,097 20,021
---------- ------ ------ ----------
Net interest income................................. 15,339 (424) 2,917 17,832
Provision for loan losses........................... 41 - 187 228
---------- ------ ------ ----------
Net interest income after provision
for loan losses.................................... 15,298 (364) 2,730 17,604
---------- ------ ------ ----------
Non-interest income:
Investment security gains (losses)................. 141 - - 141
Other non-interest income.......................... 2,286 - 822 3,108
---------- ------ ------ ----------
Total non-interest income........................... 2,427 - 822 3,249
---------- ------ ------ ----------
Non-interest expenses:
Salaries and benefits.............................. 5,797 - 1,378 7,175
Other non-interest expense......................... 5,601 - 1,075 6,676
Occupancy - net.................................... 802 - 272 1,074
Goodwill........................................... - - 682 682
---------- ------ ------ ----------
Total non-interest expense.......................... 12,200 - 3,407 15,607
---------- ------ ------ ----------
Income before income taxes.......................... 5,525 (424) 145 5,246
Income taxes....................................... 2,148 (161) 55 2,042
---------- ------ ------ ----------
Net Income.......................................... $ 3,377 $ (263) $ 90 $ 3,204
========== ====== ====== ==========
Net income per share:
Basic.............................................. $ 0.82 $ 0.77
Diluted............................................ $ 0.79 $ 0.75
Weighted average shares outstanding:
Basic.............................................. 4,143,009 4,143,009
Diluted............................................ 4,272,682 4,272,682
- ---------------
(1) Does not include costs savings expected and revenue enhancements to be
achieved in connection with the acquisition of the NLT branches and
combination with Cargill.
33
WESTBANK CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1999
(Dollars in Thousands)
Capital Pro Forma
Securities Acquisition of Westbank
Westbank Issuance NLT Branches June 30, 1999
---------- ---------- -------------- -------------
Income:
Interest and fees on loans........................ $ 12,533 $ - $3,407 $ 15,940
Interest and dividend income on securities........ 2,390 604 134 3,128
Interest on temporary investments................. 73 - 197 270
---------- ----- ------ ----------
Total interest and dividend income................. 14,996 604 3,738 19,338
Interest expense................................... 6,806 816 2,326 9,948
---------- ----- ------ ----------
Net interest income................................ 8,190 (212) 1,412 9,390
Provision for loan losses.......................... 77 - 90 167
---------- ----- ------ ----------
Net interest income after provision
for loan losses................................... 8,113 (212) 1,322 9,223
---------- ----- ------ ----------
Non-interest income:
Investment security gains (losses)................ 92 - - 92
Other non-interest income......................... 1,018 - 345 1,363
---------- ----- ------ ----------
Total non-interest income.......................... 1,110 - 345 1,455
---------- ----- ------ ----------
Non-interest expenses:
Salaries and benefits............................. 2,967 - 734 3,701
Other non-interest expense........................ 2,273 - 424 2,697
Occupancy - net................................... 614 - 118 732
Goodwill.......................................... - - 341 341
---------- ----- ------ ----------
Total non-interest expense......................... 5,854 - 1,617 7,471
---------- ----- ------ ----------
Income before income taxes......................... 3,369 (212) 50 3,237
Income taxes...................................... 1,277 (80) 19 1,227
---------- ----- ------ ----------
Net Income......................................... $ 2,092 $(132) $ 31 $ 2,010
========== ===== ====== ==========
Net income per share:
Basic............................................. $ 0.50 $ 0.47
Diluted........................................... $ 0.48 $ 0.46
Weighted average shares outstanding:
Basic............................................. 4,218,407 4,218,407
Diluted........................................... 4,336,579 4,336,579
- ---------------
(1) Does not include costs savings expected and revenue enhancements to be
achieved in connection with the acquisition of the NLT branches and
combination with Cargill.
34
Accounting Treatment
For financial reporting purposes, we will treat the Trust as our
subsidiary. We will include the Trust's accounts in our consolidated financial
statements. The capital securities will be presented as a separate line item in
our consolidated balance sheet as mandatory redeemable preferred stock and will
not be included in stockholders' equity and appropriate disclosures about the
capital securities, the guarantee and the subordinated debentures will be
included in the notes to our consolidated financial statements. For financial
reporting purposes, we will record distributions payable on the capital
securities as an expense in our consolidated statements of income.
Description of Capital Securities
This summary describes the material provisions of the capital securities.
It is not a complete description and you should refer to the trust agreement,
including the definitions used in the trust agreement, and the Trust Indenture
Act for more information. We have filed the form of the trust agreement as an
exhibit to the registration statement of which this prospectus is a part.
General
The capital securities of the Trust will rank equal to, and payments made
on the capital securities will be made on a pro rata basis with, the common
securities of the Trust, except as described under "--Subordination of Common
Securities." The property trustee will have legal title to the subordinated
debentures and will hold them in trust for the benefit of you and the other
holders of the capital securities. Our guarantee for the benefit of the holders
of the capital securities will be a guarantee on a subordinated basis with
respect to the capital securities, but will not guarantee payment of
distributions or amounts payable on redemption or liquidation of the capital
securities when the Trust does not have funds legally available to pay
distributions or other amounts to the holders of the capital securities. You
should read "Description of Guarantee" for more information about our guarantee.
Distributions
The capital securities represent beneficial ownership interests in the
Trust. Distributions on the capital securities will be cumulative, and will
accumulate from the date that the capital securities are first issued.
Distributions will be made at the annual rate of 9.60% of the stated
liquidation amount of $10.00, payable quarterly in arrears on the distribution
dates, which are March 31, June 30, September 30 and December 31 of each year,
to holders of the capital securities on the relevant record dates. If the
capital securities are in book-entry form, the record dates will be one business
day prior to the relevant distribution date. If the capital securities are not
in book-entry form, record dates will be the 15/th/ day of the month in which
the distribution is to be paid.
The first distribution date for the capital securities will be December
31, 1999. The period beginning on and including the date the capital securities
are first issued and ending on but excluding December 31, 1999, and each period
thereafter beginning on and including a distribution date and ending on but
excluding the next distribution date is a distribution period.
35
The amount of distributions payable for any distribution period will be based on
a 360-day year of twelve 30-day months.
If any distribution date would otherwise fall on a day that is not a
business day, the distribution date will be postponed to the next day that is a
business day without any additional payments for the delay, unless the
distribution would fall in the next calendar year, in which case the
distribution date will be the last business day of the calendar year. A
business day means any day other than a Saturday or a Sunday, or a day on which
banks in New York, New York or Wilmington, Delaware are authorized or required
by law or executive order to remain closed or a day on which the principal
corporate trust office of the property trustee is closed for business.
The Trust's revenue available for distribution to holders of the capital
securities will be limited to our payments to the Trust under our subordinated
debentures. For more information, please refer to "Description of Subordinated
Debentures -- General." If we do not make interest payments on the subordinated
debentures, the property trustee will not have funds available to pay
distributions on the capital securities and on the common securities. We will
guarantee the payment of distributions if and to the extent that the Trust has
funds legally available to pay the distributions. You should read "Description
of Guarantee" for more information about the extent of our guarantee.
Option to Defer Interest Payments
As long as no event of default exists, we have the right under the
indenture to elect to defer the payment of interest on the subordinated
debentures, at any time or from time to time, for no more than 20 consecutive
quarters with respect to each deferral period, provided that no deferral period
will end on a date other than an interest payment date on the subordinated
debentures, or extend beyond September 30, 2029, the maturity date of the
debentures. If we defer payments, the Trust will defer quarterly distributions
on the capital securities during a deferral period. During any deferral period
distributions will continue to accrue on the capital securities and on any
accrued and unpaid distributions, compounded quarterly from the relevant
distribution date at the applicable distribution rate, which will be equal to
the applicable interest rate on the subordinated debentures. The term
distributions includes any accumulated additional distributions.
Before the end of any deferral period, we may extend the deferral period,
as long as the extension does not cause the deferral period to exceed 20
consecutive quarters, or, to end on a date other than an interest payment date
or extend beyond September 30, 2029. At the end of any deferral period and
upon the payment of all amounts then due on any interest payment date, we may
elect to begin a new deferral period, subject to the above requirements. No
interest shall be due and payable during a deferral period until the deferral
period ends. We must give the property trustee, the administrative trustees and
the debenture trustee notice of our election to defer interest payments or to
extend a deferral period at least five business days before the earlier of:
. the date the distributions on the capital securities would have been
payable except for the election to begin a deferral period; and
. the date the administrative trustees are required to give notice to
any securities exchange or automated quotation system or to holders of
the capital securities of the record date or the date such
distributions are payable, but in any event not less than five
business days prior to such record date.
36
There is no limitation on the number of times that we may elect to begin a
deferral period. Please refer to "Description of Subordinated Debentures--Option
to Extend Interest Payment Date" and "Certain Federal Income Tax Consequences--
Interest Income and Original Issue Discount."
During any deferral period, we may not:
. declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to,
any of our capital stock;
. make any payment of principal of, or interest, if any, on or
repay, repurchase or redeem any debt securities that rank equal
or junior to the subordinated debentures; or
. make any guarantee payments with respect to any guarantee of the
debt securities of any subsidiary (including our guarantee of the
capital securities issued by the Trust and other similar
guarantees) if such guarantee ranks equal or junior to the
subordinated debentures.
Notwithstanding the foregoing, during a deferral period we may make the
following payments:
(a) dividends or distributions in shares of, or options, warrants or
rights to subscribe for or purchase shares of, our common stock,
(b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of
rights, stock or other property under any such plan in the
future, or the redemption or repurchase of any such rights
pursuant thereto,
(c) payments under the guarantee,
(d) as a result of a reclassification of our capital stock or the
exchange or conversion of one class or series of our capital
stock or indebtedness for another class or series of our capital
stock,
(e) the purchase of fractional interests in shares of our capital
stock pursuant to the conversion or exchange provisions of such
capital stock or the security being converted or exchanged and
(f) purchases of common stock related to the issuance of common stock
or rights under any of our benefit plans for our directors,
officers or employees or any of our dividend reinvestment plans.
We do not currently intend to exercise our right to defer payments of
interest on the subordinated debentures. Our obligations under the guarantee to
make payments of distributions is limited to the extent that the Trust has funds
legally available to pay distributions. You should read "Description of
Guarantee" for more information about the extent of our guarantee.
37
Redemption
Upon repayment on September 30, 2029 or prepayment, in whole or in part
prior to September 30, 2029, of the subordinated debentures (other than
following the distribution of the subordinated debentures to you as a holder of
the capital securities and us, as the holder of the common securities), the
property trustee will apply the proceeds from the repayment or prepayment of the
subordinated debentures (as long as the property trustee has received written
notice no later than 45 days before the repayment) to redeem an amount of
capital securities having an aggregate liquidation amount equal to the principal
amount of the subordinated debentures paid to the Trust. We will give notice of
any redemption between 30 and 60 days prior to the redemption date.
If we prepay less than all of the subordinated debentures on a redemption
date, then the property trustee will allocate the proceeds of the prepayment on
a pro rata basis among the capital securities and the common securities. If a
court of competent jurisdiction enters an order to dissolve the Trust, the
subordinated debentures will be subject to optional prepayment in whole, but not
in part, on or after September 30, 2004.
We will have the right to prepay the subordinated debentures:
(1) in whole or in part, on or after September 30, 2004; and
(2) in whole but not in part, at any time prior to September 30, 2004, if
there are changes in the bank regulatory, investment company or tax laws that
would adversely affect the status of the Trust, the capital securities or the
subordinated debentures.
We may have to obtain regulatory approval, including the approval of the
FRB, before we redeem any subordinated debentures.
Please refer to "Description of Subordinated Debentures--Optional
Prepayment" and "--Special Event Prepayment" for information on prepayment of
the subordinated debentures.
Liquidation of the Trust and Distribution of Subordinated Debentures
We, as holder of the outstanding common securities, will have the right at
any time to dissolve the Trust and, after satisfying the liabilities owed to the
Trust's creditors as required by applicable law, we will have the right to
distribute the subordinated debentures to the holders of the capital securities
and to us as holder of the common securities. Our right to dissolve the Trust
is subject to our receiving:
. an opinion of counsel to the effect that if we distribute the
subordinated debentures, the holders of the capital securities will
not experience a taxable event; and
. any required regulatory approval.
The Trust will automatically dissolve if:
(1) certain bankruptcy events occur, or we dissolve or liquidate;
38
(2) we distribute subordinated debentures having a principal amount equal
to the liquidation amount of the capital securities to holders of the capital
securities and we, as holder of the common securities, have given written
directions to the property trustee to dissolve the Trust (which direction is at
our option and, except as described above, wholly within our discretion, as
holder of the common securities);
(3) the Trust redeems all of the capital securities as described
under "-- Redemption;"
(4) the Trust's term expires; or
(5) a court of competent jurisdiction enters an order for the dissolution
of the Trust.
If the Trust is dissolved as described in clause (1), (2), (4), or (5)
above, the Trust will be liquidated by the trustees as quickly as the trustees
determine to be possible by distributing to holders of the capital securities,
after satisfying the liabilities owed to the Trust's creditors as provided by
applicable law, subordinated debentures having a principal amount equal to the
liquidation amount of the capital securities, unless the property trustee
determines that this distribution is not practicable. If the property trustee
determines that this distribution is not practicable, the holders of the capital
securities will be entitled to receive an amount equal to the aggregate in
liquidation amount plus accumulated and unpaid distributions on the capital
securities to the date of payment (such amount being the "liquidation
distribution") out of the assets of the Trust legally available for distribution
to holders, after satisfying the liabilities owed to the Trust's creditors as
provided by applicable law. If the liquidation distribution can be paid only in
part because the Trust has insufficient assets legally available to pay the full
amount of the liquidation distribution, or if a debenture event of default
exists, the capital securities will have a payment priority over the common
securities. For more information, please refer to "--Subordination of Common
Securities."
After the liquidation date is fixed for any distribution of subordinated
debentures to holders of the capital securities:
(1) the capital securities and the common securities will no longer be
deemed to be outstanding;
(2) DTC or its nominee will receive in respect of each registered global
certificate representing capital securities and the common securities a
registered global certificate representing the subordinated debentures to be
delivered upon this distribution; and
(3) any certificates representing capital securities and the common
securities not held by DTC or its nominee will be deemed to represent
subordinated debentures having a principal amount equal to the liquidation
amount of those capital securities, and bearing accrued and unpaid interest in
an amount equal to the accumulated and unpaid distributions on those capital
securities until such certificates are presented to the administrative trustees
or their agent for cancellation, in which case we will issue to those holders,
and the Delaware trustee will authenticate, a certificate representing the
subordinated debentures.
We cannot assure you of the market prices for the capital securities or the
subordinated debentures that may be distributed to you in exchange for the
capital securities if a dissolution and liquidation of the Trust were to occur.
Accordingly, the capital securities that you purchase, or the
39
subordinated debentures that you may receive upon a dissolution and liquidation
of the Trust, may trade at a discount to the price that you paid to purchase the
capital securities offered by this prospectus.
If we elect not to prepay the subordinated debentures prior to maturity and
either elect not to or we are unable to liquidate the Trust and distribute the
subordinated debentures to holders of the capital securities, the capital
securities will remain outstanding until the repayment of the subordinated
debentures on September 30, 2029.
Redemption Procedures
If we redeem the subordinated debentures, the Trust will redeem capital
securities and the common securities at the applicable redemption price with the
proceeds that it receives from our redemption of the subordinated debentures.
Any redemption of the capital securities and the common securities will be made
and the applicable redemption price will be payable on the redemption date only
to the extent that the Trust has funds legally available to pay the applicable
redemption price. For more information, you should refer to "--Subordination of
Common Securities."
If the Trust gives a notice of redemption for the capital securities, then,
by 12:00 noon, New York City time, on the redemption date, to the extent funds
legally are available, with respect to:
. the capital securities held by DTC or its nominees, the property
trustee will deposit, or cause the paying agent to deposit,
irrevocably with DTC funds sufficient to pay the applicable redemption
price and will give DTC irrevocable instructions and authority to pay
the redemption price to the holders of the capital securities. For
more information, you should refer to "--Form, Denomination, Book-
Entry Procedures and Transfer."
. the capital securities held in certificated form, the property trustee
will irrevocably deposit with the paying agent funds sufficient to pay
the applicable redemption price and will give the paying agent
irrevocable instructions and authority to pay the applicable
redemption price to the holders upon surrender of their certificates
evidencing the capital securities. For more information, you should
refer to "--Payment and Paying Agency."
The paying agent will initially be the property trustee and any co-paying
agent chosen by the property trustee and acceptable to the administrative
trustees and us.
Notwithstanding the foregoing, distributions payable on or before the
redemption date will be payable to the holders of the capital securities on the
relevant record dates for the related distribution dates. If the Trust gives a
notice of redemption and funds are deposited as required, then upon the date of
the deposit, all rights of the holders of the capital securities called for
redemption will cease, except the right of the holders of the capital securities
to receive the applicable redemption price, without interest, and the capital
securities called to be redeemed will cease to be outstanding.
40
If any redemption date for the capital securities is not a business day,
then the applicable redemption price, without interest or any other payment in
respect of the delay, will be paid on the next business day, except that, if the
next business day falls in the next calendar year, the payment shall be made on
the last business day of the calendar year. If payment of the applicable
redemption price is improperly withheld or refused and not paid either by the
Trust or by us pursuant to the guarantee:
(1) distributions on the capital securities will continue to accumulate at
9.60%, from the redemption date originally established by the Trust to the date
such applicable redemption price is actually paid; and
(2) the actual payment date will be the redemption date for purposes of
calculating the applicable redemption price.
Notice of any redemption will be mailed between 30 and 60 days before the
redemption date to each holder of capital securities at its registered address.
Unless we default in payment of the applicable redemption price on, or in the
repayment of, the subordinated debentures, on and after the redemption date,
distributions will cease to accrue on the capital securities called for
redemption.
Subject to applicable law (including, without limitation, U.S. federal
securities laws), we or our subsidiaries may at any time, and from time to time,
purchase outstanding capital securities in the open market or by private
agreement.
Subordination of Common Securities
Payment of distributions on, and the redemption price of, the capital
securities and the common securities, as applicable, will generally be made on a
pro rata basis. However, if a debenture event of default exists on any
distribution or redemption date, no payment of any distribution on, or
applicable redemption price of, any of the common securities, and no other
payment on account of the redemption, liquidation or other acquisition of the
common securities, will be made unless payment in full in cash of all
accumulated and unpaid distributions on all of the outstanding capital
securities for all distribution periods terminating on or before the
distribution or redemption date, or payment of the applicable redemption price
is made in full. All funds available to the property trustee will first be
applied to the payment in full in cash of all distributions on, or redemption
price of, the capital securities then due and payable.
In the case of any event of default, we, as holder of all of the common
securities, will be deemed to have waived any right to act with respect to the
event of default until the effect of the event of default has been cured, waived
or otherwise eliminated. Until any event of default has been cured, waived or
otherwise eliminated, the property trustee will act solely on behalf of the
holders of the capital securities and not on our behalf, and only the holders of
the capital securities will have the right to direct the property trustee to act
on their behalf.
Events of Default; Notice
An event of default under the indenture constitutes an event of default
under the trust agreement. See "Description of Subordinated Debentures--
Debenture Events of Default."
41
The trust agreement provides that within five (5) business days after any
event of default actually known to the property trustee occurs, the property
trustee will give notice of the event of default to the holders of the capital
securities, the administrative trustees and to us, as sponsor, unless the event
of default has been cured or waived. We, as sponsor, and the administrative
trustees are required to file annually with the property trustee a certificate
as to whether we and the administrative trustees have complied with the
applicable conditions and covenants of the trust agreement.
If a debenture event of default exists, the capital securities will have a
payment preference over the common securities as described under "--Liquidation
of the Trust and Distribution of Subordinated Debentures" and "--Subordination
of Common Securities." An event of default does not entitle the holders of
capital securities to accelerate the maturity date of the capital securities.
Removal of Trustees
Unless a debenture event of default exists, we may remove the property
trustee and the Delaware trustee at any time. If a debenture event of default
exists, the property trustee and the Delaware trustee may be removed only by the
holders of a majority in liquidation amount of the outstanding capital
securities. In no event will the holders of the capital securities have the
right to vote to appoint, remove or replace the administrative trustees, because
these voting rights are vested exclusively in us as the holder of all of the
common securities. No resignation or removal of the property trustee or the
Delaware trustee and no appointment of a successor trustee shall be effective
until the acceptance of appointment by the successor trustee in accordance with
the trust agreement.
Merger or Consolidation of Issuer Trustees
If the property trustee, the Delaware trustee or any administrative trustee
that is not a natural person is merged, converted or consolidated into another
entity, or the property trustee is a party to a merger, conversion or
consolidation which results in a new entity, or an entity succeeds to all or
substantially all of the corporate trust business of the property trustee, the
new entity shall be the successor of the respective trustee under the trust
agreement, provided that the entity is otherwise qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The Trust may not merge with or into, consolidate, amalgamate or be
replaced by, or convey, transfer or lease substantially all of its properties
and assets to any corporation or other entity, except as described below or as
otherwise described under "--Liquidation of the Trust and Distribution of
Subordinated Debentures." The Trust may, at our request, as sponsor, and with
the consent of the administrative trustees but without the consent of the
holders of the capital securities, merge with or into, consolidate, amalgamate
or be replaced by or convey, transfer or lease substantially all of its
properties and assets to a trust organized as such under the laws of any state;
provided, that:
(1) the successor either:
(a) expressly assumes all of the obligations of the Trust with
respect to the capital securities and the common securities or
42
(b) substitutes securities for the capital securities and the common
securities that have substantially the same terms as the capital securities
and the common securities so long as the substitute securities rank equal
to the capital securities and the common securities in priority with
respect to distributions and payments upon liquidation, redemption and
otherwise;
(2) we appoint a trustee of the successor possessing the same powers and
duties as the property trustee with respect to the subordinated debentures;
(3) the substitute securities are listed, or any substitute securities
will be listed upon notification of issuance, on any national securities
exchange or other organization on which the capital securities and the common
securities are then listed or quoted, if any;
(4) if the capital securities, substitute securities or subordinated
debentures are rated by any nationally recognized statistical rating
organization prior to such transaction, the transaction does not cause any of
those securities to be downgraded by the rating organization;
(5) the transaction does not adversely affect the rights, preferences and
privileges of the holders of the capital securities (including any successor
securities) in any material respect;
(6) the successor has a purpose substantially identical to that of the
Trust;
(7) prior to the transaction, we received an opinion from independent
counsel to the Trust experienced in such matters to the effect that
(a) the transaction does not adversely affect the rights, preferences
and privileges of the holders of the capital securities (including any
successor securities) in any material respect (other than any dilution of
such holders' interests in the new entity), and
(b) following the transaction, neither the Trust nor the successor
will be required to register as an investment company under the Investment
Company Act; and
(8) we, or any permitted successor or assignee owns all of the common
securities of the successor and guarantees the obligations of the successor
under the substituted securities at least to the extent provided by the
guarantee and the common securities guarantee.
Notwithstanding the foregoing, the Trust shall not, except with the consent
of holders of 100% in liquidation amount of the capital securities, consolidate,
amalgamate, merge with or into, or be replaced by or convey, transfer or lease
its properties and assets as an entirety or substantially as an entirety to, any
other entity or permit any other entity to consolidate, amalgamate, merge with
or into, or replace it if the transaction would cause the Trust or the successor
to be classified as an association taxable as a corporation for United States
federal income tax purposes.
Voting Rights; Amendment of the Trust Agreement
Except as provided below and under "--Mergers, Consolidations,
Amalgamations or Replacements of the Trust" and "Description of
Guarantee--Amendments and Assignment" and as otherwise required by law and the
trust agreement, the holders of the capital securities will have no voting
rights.
43
We, as holder of the common securities, together with the property trustee
and the administrative trustees, may amend the trust agreement from time to
time, without the consent of the holders of the capital securities:
(1) to cure any ambiguity, correct or supplement any provisions in the
trust agreement that may be inconsistent with any other provision, or to make
any other provisions with respect to matters or questions arising under the
trust agreement, which are not inconsistent with the other provisions of the
trust agreement; or
(2) to modify, eliminate or add to any provisions of the trust agreement
as is necessary to ensure that at all times that any capital securities are
outstanding, the Trust will not be classified as an association taxable as a
corporation or to enable the Trust to qualify as a grantor trust, in each case
for United States federal income tax purposes, or to ensure that the Trust will
not be required to register as an investment company under the Investment
Company Act,
provided, however, that in the case of clause (1) the amendment would not
adversely affect in any material respect the interests of the holders of the
capital securities. Any amendments of the trust agreement pursuant to the
foregoing shall become effective when notice of the amendment is given to the
holders of the capital securities.
We, as holder of the common securities, together with the trustees, may
amend the trust agreement:
(1) with the consent of holders representing a majority (based upon
liquidation amount) of the outstanding capital securities; and
(2) upon receipt by the trustees of an opinion of counsel experienced in
such matters to the effect that the amendment or the exercise of any power
granted to the trustees in accordance with the amendment will not affect the
Trust's classification as an entity that is not taxable as a corporation or as
being a grantor trust for United States federal income tax purposes or the
Trust's exemption from status as an investment company under the Investment
Company Act,
provided that, without the consent of each holder of capital securities, no
amendment may change the amount or timing of any distribution on the capital
securities and the common securities or otherwise adversely affect the amount of
any distribution required to be made in respect of the capital securities and
the common securities as of a specified date; or restrict the right of a holder
of capital securities and the common securities to sue for the enforcement of
any payment on or after the specified date.
So long as any subordinated debentures are held by the property trustee,
the trustees may not:
. direct the time, method and place of conducting any proceeding for any
remedy available to the debenture trustee, or execute any trust or
power conferred on the debenture trustee with respect to the
subordinated debentures;
. waive certain past defaults under the indenture;
44
. exercise any right to rescind or annul a declaration accelerating the
maturity of the principal of the subordinated debentures; or
. consent to any amendment, modification or termination of the indenture
or the subordinated debentures, where such consent shall be required,
without, in each case, obtaining the prior consent of the holders of a majority
in liquidation amount of all outstanding capital securities; provided, however,
that where a consent under the indenture would require the consent of each
holder of subordinated debentures affected by the amendment, modification or
termination, the property trustee will not give consent without the prior
approval of each holder of the capital securities.
The trustees shall not revoke any action previously authorized or approved
by a vote of the holders of the capital securities except by subsequent vote of
such holders. The property trustee shall notify each holder of capital
securities of any notice of default with respect to the subordinated debentures.
In addition to obtaining the approvals of the holders of the capital securities,
prior to taking any of the foregoing actions, the trustees shall obtain an
opinion of counsel experienced in such matters to the effect that the Trust will
not be classified as an association taxable as a corporation for United States
federal income tax purposes on account of such action.
Any required approval of holders of capital securities may be given at a
meeting of the holders convened for the purpose of approving the matter or
pursuant to written consent. The property trustee will cause a notice of any
meeting at which holders of capital securities are entitled to vote, or of any
matter upon which action by written consent of such holders has been taken, to
be given to each holder of record of capital securities in accordance with the
trust agreement.
No vote or consent of the holders of capital securities will be required
for the Trust to redeem and cancel the capital securities in accordance with the
trust agreement.
Notwithstanding that holders of the capital securities are entitled to vote
or consent under any of the circumstances described above, any of the capital
securities that are owned by us, the trustees or any of our or any trustee's
affiliates, shall, for purposes of such vote or consent, be treated as if they
were not outstanding.
Depositary Procedures
DTC has advised the Trust and us that it is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participating organizations (collectively, "participants") and to facilitate the
clearance and settlement of transactions in those securities between
participants through electronic book-entry changes in accounts of its
participants, to eliminate the need for physical movement of certificates.
Participants include securities brokers and dealers (including the
underwriters), banks, trust companies, clearing corporations and certain other
organizations. Indirect access to DTC's system is also available to banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly (collectively,
"indirect participants"). Persons who are not participants may beneficially own
securities held by
45
or on behalf of DTC only through participants or indirect
participants. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of participants and indirect participants.
DTC also has advised the Trust and us that, pursuant to procedures
established by it, (1) upon deposit of the global capital securities, DTC will
credit the accounts of participants designated by the underwriters with portions
of the liquidation amount of the global capital securities and (2) ownership of
interests in the global capital securities will be shown on, and the transfer of
ownership of the global capital securities, will be effected only through
records maintained by DTC (with respect to participants) or by participants and
indirect participants (with respect to other owners of beneficial interests in
the global capital securities).
Registration of Capital Securities
The capital securities will be represented by one or more global
certificates registered in the name of DTC or its nominee. Beneficial interests
in the capital securities will be shown on, and transfers of the global capital
securities will be effected only through, records maintained by participants.
Except as described below, capital securities in certificated form will not be
issued in exchange for the global certificates. See "Exchange of Book-Entry
Capital Securities for Certificated Capital Securities."
You may hold your interests in the global capital security directly through
DTC if you are a participant, or indirectly through organizations that are
participants. All interests in a global capital security will be subject to the
procedures and requirements of DTC. The laws of some states require that
certain persons take physical delivery in certificated form of securities that
they own. Consequently, the ability to transfer beneficial interests in a
global capital security to those persons will be limited to that extent.
Because DTC can act only on behalf of participants, which in turn act on behalf
of indirect participants and certain banks, the ability of a person having
beneficial interests in a global capital security to pledge its interests to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of its interests, may be affected by the lack of a physical
certificate evidencing its interests. For certain other restrictions on the
transferability of the capital securities, see "--Exchange of Book-Entry Capital
Securities for Certificated Capital Securities."
Payments on the global capital security registered in the name of DTC, or
its nominee, will be payable by the property trustee to DTC in its capacity as
the registered holder under the trust agreement. Under the terms of the trust
agreement, the property trustee will treat the persons in whose names the
capital securities, including the global capital securities, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Neither the property trustee nor any agent
thereof has or will have any responsibility or liability for:
. any aspect of DTC's records or any participant's or indirect
participant's records relating to, or payments made on account of,
beneficial ownership interests in the global capital securities, or
for maintaining, supervising or reviewing any of DTC's records or any
participant's or indirect participant's records relating to the
beneficial ownership interests in the global capital securities; or
46
. any other matter relating to the actions and practices of DTC or any
of its participants or indirect participants.
DTC has advised the Trust and us that its current practice, upon receipt of
any payment on the capital securities, is to credit the accounts of the relevant
participants with the payment on the payment date, in amounts proportionate to
their respective holdings in liquidation amount of the capital securities as
shown on the records of DTC unless DTC has reason to believe it will not receive
payment on the payment date. Payments by participants and indirect participants
to the beneficial owners of capital securities will be governed by standing
instructions and customary practices and will be the responsibility of
participants or indirect participants and will not be the responsibility of DTC,
the property trustee, the Trust or us. None of the Trust, Westbank nor the
property trustee will be liable for any delay by DTC or any of its participants
or indirect participants in identifying the beneficial owners of the capital
securities, and the Trust, Westbank and the property trustee may conclusively
rely on, and will be protected in relying on, instructions from DTC or its
nominee for all purposes.
Any secondary market trading activity in interests in the global capital
securities will settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its participants. Transfers between
participants in DTC will be effected in accordance with DTC's procedures, and
will settle in same-day funds.
DTC has advised the Trust and us that it will take any action permitted to
be taken by a holder of capital securities (including, without limitation,
presenting the capital securities for exchange as described below) only at the
direction of one or more participants who have an interest in DTC's global
capital securities in respect of the portion of the liquidation amount of the
capital securities as to which the participant or participants has or have given
direction. However, if an event of default exists under the trust agreement,
DTC reserves the right to exchange the global capital securities for legended
capital securities in certificated form and to distribute the certificated
capital securities to its participants.
We believe that the information in this section concerning DTC and its
book-entry system has been obtained from reliable sources, but we do not take
responsibility for the accuracy of this information.
Although DTC has agreed to the procedures described in this section to
facilitate transfers of interests in the global capital securities among
participants in DTC, DTC is not obligated to perform or to continue to perform
these procedures, and these procedures may be discontinued at any time. None of
the Trust, Westbank nor the property trustee will have any responsibility or
liability for any aspect of the performance by DTC or its participants or
indirect participants of any of their respective obligations under the rules and
procedures governing their operations or for maintaining, supervising or
reviewing any records relating to the global capital securities that are
maintained by DTC or any of its participants or indirect participants.
Exchange of Book-Entry Capital Securities for Certificated Capital Securities
A global capital security can be exchanged for capital securities in
registered certificated form if:
48
(1) DTC notifies the Trust that it is unwilling or unable to continue as
depositary for the global capital security and the Trust fails to appoint a
successor depositary within 90 days of receipt of DTC's notice, or has ceased to
be a clearing agency registered under the Exchange Act and the Trust fails to
appoint a successor depositary within 90 days of becoming aware of this
condition;
(2) the Trust, in its sole discretion, elects to cause the capital
securities to be issued in certificated form; or
(3) an event of default, or any event which after notice or lapse of time
or both would be an event of default, exists under the trust agreement.
In addition, beneficial interests in a global capital security may be
exchanged by or on behalf of DTC for certificated capital securities upon
request by DTC, but only upon at least 20 days' prior written notice given to
the property trustee in accordance with DTC's customary procedures. In all
cases, certificated capital securities delivered in exchange for any global
capital security will be registered in the names, and issued in any approved
denominations, requested by or on behalf of DTC (in accordance with its
customary procedures).
Payment and Paying Agency
The Trust will make payments on the capital securities that are held in
global form to DTC, which will credit the relevant accounts at DTC on the
applicable distribution dates. The Trust will make payments on the capital
securities that are not held by DTC by mailing a check to the address of the
holder entitled to the payment as the holder's address appears on the register.
The paying agent will initially be the property trustee and any co-paying agent
chosen by the property trustee and acceptable to the administrative trustees and
us. The paying agent will be permitted to resign as paying agent upon 30 days'
notice to the property trustee, the administrative trustees and us. In the
event that the property trustee is no longer the paying agent, the
administrative trustees will appoint a successor (which must be a bank or trust
company acceptable to the administrative trustees and us) to act as paying
agent.
Registrar and Transfer Agent
The property trustee will act as registrar and transfer agent for the
capital securities.
The Trust will register transfers of the capital securities without charge,
except for any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. The Trust will not be required to have
the transfer of the capital securities registered after they have been called
for redemption.
Information Concerning the Property Trustee
Except if an event of default exists, the property trustee will undertake
to perform only the duties specifically set forth in the trust agreement. After
an event of default, the property trustee must exercise the same degree of care
and skill as a prudent person would exercise or use in the conduct of his or her
own affairs. Subject to this provision, the property trustee is not obligated
to exercise any of the powers vested in it by the trust agreement at the request
of any holder of capital securities, unless it is offered reasonable indemnity
against the costs, expenses and liabilities that it
49
might incur. If no event of default exists and the property trustee is required
to decide between alternative causes of action, construe ambiguous provisions in
the trust agreement or is unsure of the application of any provision of the
trust agreement, and the matter is not one on which holders of the capital
securities or the common securities are entitled under the trust agreement to
vote, then the property trustee shall take such action as directed by us and, if
not directed, shall take such action as it deems advisable and in the best
interests of the holders of the capital securities and will have no liability,
except for its own bad faith, negligence or willful misconduct.
Miscellaneous
The administrative trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that:
(1) The Trust will not be deemed to be an investment company required to
be registered under the Investment Company Act;
(2) The Trust will be classified as a grantor trust for United States
federal income tax purposes; and
(3) the subordinated debentures will be treated as our indebtedness for
United States federal income tax purposes.
We, together with the administrative trustees, are authorized to take any
action, not inconsistent with applicable law, the certificate of trust of the
Trust or the trust agreement, that we and the administrative trustees determine
in our discretion is necessary or desirable, as long as it does not materially
adversely affect the interests of the holders of the capital securities.
The trust agreement provides that holders of the capital securities have no
preemptive or similar rights to subscribe for any additional capital securities
and the issuance of capital securities is not subject to preemptive rights.
The Trust may not borrow money, issue debt, execute mortgages or pledge any
of its assets.
Description of Subordinated Debentures
This summary describes the material provisions of the subordinated
debentures. This description is not complete and you should refer to the
indenture and the Trust Indenture Act for more information. We have filed the
indenture as an exhibit to the registration statement of which this prospectus
is a part. Wilmington Trust Company will act as debenture trustee under the
indenture. The indenture is qualified under the Trust Indenture Act.
General
The Trust will invest the proceeds from the sale of the capital securities
and the common securities in the subordinated debentures issued by us. The
subordinated debentures will bear interest at the annual rate of 9.60% of
the principal amount of the subordinated debentures, payable quarterly in
arrears on interest payment dates of March 31, June 30, September 30 and
December 31 of each year and at maturity to the person in whose name each
subordinated
49
debenture is registered at the close of business on the relevant record date.
The first interest payment date for the subordinated debentures will be December
31, 1999. The period beginning on and including the date the subordinated
debentures are first issued and ending on but excluding December 31, 1999, and
each period beginning on and including an interest payment date, and ending on
but excluding the next interest payment date is an interest period.
We anticipate that, until the liquidation, if any, of the Trust, each
subordinated debenture will be held by the property trustee in trust for the
benefit of the holders of the capital securities. The amount of interest payable
for any interest period will be computed on the basis of a 360-day year of
twelve 30-day months. In the event that any interest payment date would
otherwise fall on a day that is not a business day, the interest payment date
will be postponed to the next business day (without any interest or other
payment due to the delay) unless it would fall in the next calendar year, in
which case the interest payment date shall be the last business day of the
calendar year.
Accrued interest that is not paid on the applicable interest payment date
will bear additional interest (to the extent permitted by law) at the rate of
% per annum, compounded quarterly from the relevant interest payment
date. The term "interest" as used in this prospectus includes quarterly interest
payments and interest on quarterly interest payments not paid on the applicable
interest payment date.
Notwithstanding anything to the contrary set forth above, if the maturity
date falls on a day that is not a business day, the payment of principal and
interest will be paid on the next business day, with the same force and effect
as if made on the maturity date, and no interest on such payments will accrue
from and after the maturity date.
The subordinated debentures will be issued as a series of subordinated
debentures under the indenture.
The subordinated debentures will mature on September 30, 2029.
The subordinated debentures will rank equal to all of our other
subordinated debentures which have been or may be issued to other trusts
established by us, in each case similar to the Trust, and will be unsecured and
rank subordinate and junior to all indebtedness for money that we borrow to the
extent and in the manner set forth in the indenture. See "--Subordination."
We are a bank holding company regulated by the FRB, and substantially all
of our operating assets are owned by Park West and Cargill. We are a legal
entity separate and distinct from our subsidiaries. Holders of subordinated
debentures should look only to us for payments on the subordinated debentures.
The principal sources of our income are dividends, interest and fees from Park
West and Cargill. We rely primarily on dividends from Park West and Cargill to
meet our obligations for payment of principal and interest on our outstanding
debt obligations and corporate expenses. Dividend payments from Park West and
Cargill are subject to regulatory limitations, generally based on current and
retained earnings, imposed by the various regulatory agencies with authority
over Park West and Cargill. In addition to regulatory restrictions on the
payment of dividends, Park West and Cargill are subject to restrictions imposed
by federal law on any extensions of credit to us and other affiliates of Park
West and Cargill and on investments in stock or other securities of affiliates.
Also, as a bank holding company, our right to receive distributions from Park
West and Cargill may be limited if such entity is liquidated or reorganized.
50
For more information about these regulatory limits , you should read "Risk
Factors -- Risks related to your investment in the capital securities -- We will
depend primarily on any dividends we may receive from our subsidiaries in making
payments under the subordinated debentures, which could affect the payments made
to you under the capital securities."
The subordinated debentures will be effectively subordinated to all
existing and future liabilities of Park West and Cargill (including their
deposit liabilities) and all liabilities of any of our future subsidiaries. The
indenture does not limit us, Park West or Cargill from incurring or issuing
other secured or unsecured debt, including senior indebtedness. See "--
Subordination."
Form, Registration and Transfer
If the subordinated debentures are distributed to the holders of the
capital securities, the subordinated debentures may be represented by one or
more global certificates registered in the name of Cede & Co., as the nominee of
DTC. The depositary arrangements for such subordinated debentures are expected
to be substantially similar to those in effect for the capital securities. For
a description of DTC and the terms of the depositary arrangements relating to
payments, transfers, voting rights, redemptions and other notices and other
matters, you should read "Description of Capital Securities--Form, Denomination,
Book-Entry Procedures and Transfer."
Payment and Paying Agents
Payment of principal of and interest on the subordinated debentures will be
made at the office of the debenture trustee in New York, New York or at the
office of such paying agent or paying agents as we may designate from time to
time, except that, at our option, payment of any interest may be made, except in
the case of subordinated debentures in global form:
. by check mailed to the address of the person or entity entitled to the
interest payment as such address shall appear in the register for the
subordinated debentures; or
. by transfer to an account maintained by the person or entity entitled
to the interest payment as specified in the register, provided that
proper transfer instructions have been received by the relevant record
date.
Payment of any interest on any subordinated debenture will be made to the
person or entity in whose name the subordinated debenture is registered at the
close of business on the record date for the interest payment date, except in
the case of defaulted interest. We may at any time designate additional paying
agents or rescind the designation of any paying agent; however we will always be
required to maintain a paying agent in each place of payment for the
subordinated debentures.
Any moneys deposited with the debenture trustee or any paying agent, or
then held by us, in trust for the payment of the principal of or interest on any
subordinated debenture and remaining unclaimed for two years after such
principal or interest has become due and payable shall, at our request, be
repaid to us and the holder of the subordinated debenture shall thereafter look,
as a general unsecured creditor, only to us for payment.
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Option to Extend Interest Payment Date
So long as no debenture event of default exists, we will have the right
under the indenture to defer the payment of interest on the subordinated
debentures, at any time and from time to time, for no more than 20 consecutive
quarters for each deferral period, provided that no deferral period shall end on
a date other than an interest payment date or extend beyond September 30, 2029.
At the end of a deferral period, we must pay all interest then accrued and
unpaid (together with interest thereon at the rate of 9.60% per year, compounded
quarterly from the relevant interest payment date, to the extent permitted by
applicable law). During a deferral period, interest will continue to accrue, and
holders of the capital securities or, if the subordinated debentures have been
distributed to holders of the capital securities, holders of subordinated
debentures, will be required to include that deferred interest in gross income
for United States federal income tax purposes on an accrual method of accounting
prescribed by the Internal Revenue Code of 1986 (the "Code") and Treasury
regulation provisions on original issue discount prior to the receipt of cash
attributable to that income. See "Certain Federal Income Tax Consequences--
Original Issue Discount."
During any such deferral period, we may not:
(1) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of our capital
stock;
(2) make any payment of principal of, or interest or premium, if any, on
or repay, repurchase or redeem any of our debt securities that rank equal to or
junior to the subordinated debentures; or
(3) make any guarantee payments with respect to any guarantee by us of the
debt securities of any of our subsidiaries (including our guarantee of the
capital securities of the Trust and any other guarantees) if such guarantee
ranks equal or junior to the subordinated debentures other than
(a) dividends or distributions in shares of, or options, warrants or
rights to subscribe for or purchase shares of, our common stock,
(b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of
rights, stock or other property under any such plan in the future, or
the redemption or repurchase of any rights pursuant thereto,
(c) payments under the guarantee,
(d) as a result of a reclassification of our capital stock or the
exchange or conversion of one class or series of our capital stock or
indebtedness for another class or series of our capital stock,
(e) the purchase of fractional interests in shares of our capital
stock pursuant to the conversion or exchange provisions of such
capital stock or the security being converted or exchanged and
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(f) purchases of our common stock related to the issuance of common
stock or rights under any of our benefit plans for our directors,
officers or employees or any of our dividend reinvestment plans.
We do not currently intend to exercise our option to defer payments of
interest on the subordinated debentures.
Before the end of any deferral period, we may extend the deferral period,
as long as no event of default exists and the extension does not cause the
deferral period to exceed 20 consecutive quarterly periods, to end on a date
other than an interest payment date or to extend beyond September 30, 2029. At
the end of any deferral period and upon the payment of all then accrued and
unpaid interest (together with interest thereon at the rate of 9.60% per year,
compounded quarterly, to the extent permitted by applicable law), we may elect
to begin a new deferral period, subject to the requirements set forth herein. No
interest shall be due and payable during a deferral period until the deferral
period ends. We must give the property trustee, the administrative trustees and
the debenture trustee notice of our election at least five business days before
the earlier of:
. the date the distributions on the capital securities and the common
securities would have been payable except for the election to begin or
extend such deferral period;
. the date the administrative trustees are required to give notice to
any securities exchange or automated quotation system on which the
capital securities are listed or quoted or to holders of capital
securities of the record date for such distributions; or
. the date such distributions are payable, but at least five business
days prior to the record date.
The debenture trustee will notify holders of the capital securities of our
election to begin or extend a new deferral period.
There is no limit on the number of times that we may elect to begin a
deferral period.
Optional Prepayment
We may prepay the subordinated debentures, in whole or in part, at our
option on or after September 30, 2004, subject to our receipt of any required
regulatory approval, at an optional prepayment price equal to 100% of the
principal amount of the subordinated debentures.
Special Event Prepayment
If there are changes in the bank regulatory, investment company or tax laws
that adversely affect the status of the Trust, the capital securities or the
subordinated debentures, we may, at our option, and subject to our receipt of
any required regulatory approval, prepay the subordinated debentures, in whole
but not in part, at any time within 90 days of the change in the law. If we
exercise our option to prepay the subordinated debentures under these
circumstances, then the proceeds of that prepayment must be applied to redeem
the capital securities at a prepayment price equal to 100% of the principal
amount of the subordinated debentures so prepaid, plus, in each
53
case, accrued and unpaid interest on the subordinated debentures, if any, to the
date of prepayment. See "Description of Capital Securities--Redemption."
A change in the bank regulatory law means our receipt of an opinion of
independent bank regulatory counsel experienced in such matters to the effect
that, as a result of
. any amendment to, or change (including any announced prospective
change) in, any laws or regulations of the United States or any rules,
guidelines or policies of an applicable regulatory agency or authority
or
. any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations,
which amendment or change is effective or which pronouncement or decision is
announced on or after the date the capital securities and the common securities
are first issued, the capital securities do not constitute, or within 90 days of
the opinion will not constitute, Tier 1 Capital (or its then equivalent if we
were subject to such capital requirement).
A change in the investment company law means the receipt by us and the
Trust of an opinion of independent securities counsel experienced in such
matters to the effect that, as a result of:
. any amendment to, or change (including any announced prospective
change) in, any laws or regulations of the United States or any rules,
guidelines or policies of any applicable regulatory agency or
authority, or
. any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations,
which amendment or change is effective or which pronouncement or decision is
announced on or after the date the capital securities are first issued, the
Trust is, or within 90 days of the date of the opinion will be, considered an
investment company that is required to be registered under the Investment
Company Act.
A change in tax law means the receipt by us and the Trust of an opinion of
independent tax counsel experienced in such matters to the effect that, as a
result of:
. any amendment to, or change (including any announced prospective
change) in, any laws or regulations of the United States or any
political subdivision or taxing authority thereof or therein, or
. any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations,
which amendment or change is effective or which pronouncement or decision is
announced on or after the date the capital securities are first issued, there is
more than an insubstantial risk that:
54
. the Trust is, or will be within 90 days of the date of such opinion,
subject to United States federal income tax with respect to any income
received or accrued on the subordinated debentures;
. interest payable by us on the subordinated debentures is not, or
within 90 days of the date of such opinion will not be, deductible by
us, in whole or in part, for United States federal income tax
purposes; or
. the Trust is, or will be within 90 days of the date of such opinion,
subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
We will mail any notice of prepayment between 30 and 60 days before the
prepayment date to each holder of subordinated debentures to be prepaid at its
registered address. Unless we default in payment of the prepayment price, on
the prepayment date interest shall cease to accrue on the subordinated
debentures called for prepayment.
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a change in the tax law, we will pay as
additional amounts on the subordinated debentures any amounts as may be
necessary in order that the amount of distributions then due and payable by the
Trust on the outstanding capital securities shall not be reduced as a result of
any additional sums, including taxes, duties or other governmental charges to
which the Trust has become subject as a result of a change in the tax law.
Certain Covenants by Us
We will also covenant that we will not:
(1) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our capital stock;
(2) make any payment of principal of, or interest or premium, if any, on
or repay, repurchase or redeem any of our debt securities that rank equal or
junior to the subordinated debentures; or
(3) make any guarantee payments with respect to any of our guarantees of
the debt securities of any of our subsidiaries if such guarantee ranks equal or
junior to the subordinated debentures, other than
(a) dividends or distributions in shares of, or options, warrants or
rights to subscribe for or purchase shares of, our common stock,
(b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of
rights, stock or other property under any such plan in the future, or
the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the guarantee,
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(d) as a result of a reclassification of our capital stock or
indebtedness or the exchange or conversion of one class or series of
our capital stock for another class or series of our capital stock,
(e) the purchase of fractional interests in shares of our capital
stock pursuant to the conversion or exchange provisions of such
capital stock or the security being converted or exchanged, and
(f) purchases of our common stock related to the issuance of common
stock or rights under any of our benefit plans for its directors,
officers or employees or any of our dividend reinvestment plans,
if at such time:
. we have actual knowledge that there is any event that is, or with the
giving of notice or the lapse of time, or both, would be, a debenture
event of default and that we have not taken reasonable steps to cure;
. we are in default with respect to our payment of any obligations under
the guarantee; or
. we have given notice of our election to exercise our right to defer
interest payments on the subordinated debentures as provided in the
indenture and the deferral period, or any extension of the deferral
period, is continuing.
So long as the capital securities and common securities remain outstanding,
we also will covenant:
. to maintain 100% direct or indirect ownership of the common
securities; provided, however, that any of our permitted successors
under the indenture may succeed to our ownership of the common
securities;
. to use commercially reasonable efforts to cause the Trust to remain a
business trust, except in connection with the distribution of
subordinated debentures to the holders of capital securities in
liquidation of the Trust, the redemption of all of the capital
securities, or certain mergers, consolidations or amalgamations, each
as permitted by the trust agreement;
. to use commercially reasonable efforts to cause the Trust to otherwise
continue not to be classified as an association taxable as a
corporation and to be classified as a grantor trust for United States
federal income tax purposes;
. to use commercially reasonable efforts to cause each holder of capital
securities to be treated as owning an undivided beneficial interest in
the subordinated debentures; and
. to not cause, as sponsor of the Trust, or permit, as holder of the
common securities, the dissolution, winding-up or liquidation of the
Trust, except as provided in the trust agreement.
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Modification of Indenture
From time to time, we, together with the debenture trustee, may, without
the consent of the holders of subordinated debentures, amend the indenture for
specified purposes, including, among other things, curing ambiguities, defects
or inconsistencies, provided that any amendment in the indenture does not
materially adversely affect the interest of the holders of subordinated
debentures, and qualifying, or maintaining the qualification of, the indenture
under the Trust Indenture Act.
The indenture permits us and the debenture trustee, with the consent of the
holders of a majority in aggregate principal amount of subordinated debentures,
to modify the indenture in a manner affecting the rights of the holders of the
subordinated debentures; provided that no modification may, without the consent
of the holders of each outstanding subordinated debenture affected:
. change the stated maturity date, or reduce the principal amount, of
the subordinated debentures,
. reduce the amount payable on prepayment or reduce the rate or extend
the time of payment of interest except pursuant to our right under the
indenture to defer the payment of interest (see "--Option to Extend
Interest Payment Date"),
. make the principal of, or interest on, the subordinated debentures
payable in any coin or currency other than that provided in the
subordinated debentures,
. impair or affect the right of any holder of subordinated debentures to
institute suit for the payment thereof, or
. reduce the percentage of the principal amount of the subordinated
debentures, the holders of which are required to consent to any such
modification.
Debenture Events of Default
A "debenture event of default" is:
. our failure for 30 days to pay any interest (including compounded
interest and additional sums, if any) on the subordinated debentures
or any other debentures when due (subject to the deferral of any
interest due date in the case of a deferral period with respect to the
subordinated debentures or other debentures as the case may be),
. our failure to pay any principal on the subordinated debentures or any
other debentures when due whether at maturity, upon prepayment, by
accelerating the maturity or otherwise,
. our failure to observe or perform, in any material respect, any other
covenant contained in the indenture for 90 days after written notice
to us from the debenture trustee or to us and the debenture trustee
from the holders of at least 25% in aggregate outstanding principal
amount of subordinated debentures, or
57
. certain events related to our bankruptcy, insolvency or
reorganization.
The holders of a majority in aggregate outstanding principal amount of the
subordinated debentures have, subject to certain exceptions, the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the debenture trustee. The debenture trustee or the holders of not less than
25% in aggregate outstanding principal amount of the subordinated debentures may
declare the principal due and payable immediately upon a debenture event of
default. The holders of a majority in aggregate outstanding principal amount of
the subordinated debentures may annul this declaration and waive the default if
the default (other than the non-payment of the principal of the subordinated
debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the debenture trustee.
The holders of a majority in aggregate outstanding principal amount of the
subordinated debentures affected may, on behalf of the holders of all the
subordinated debentures, waive any past default, except a default in the payment
of principal or interest (unless such default has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the debenture trustee) or
a default in respect of a covenant or provision which under the indenture cannot
be modified or amended without the consent of the holder of each outstanding
subordinated debenture.
The indenture requires that we file with the debenture trustee a
certificate annually as to the absence of defaults specified under the
indenture.
The indenture provides that the debenture trustee may withhold notice of a
debenture event of default from the holders of the subordinated debentures if
the debenture trustee considers it in the interest of the holders to do so.
Enforcement of Certain Rights by Holders of Capital Securities
If a debenture event of default exists that is attributable to our failure
to pay the principal of or interest (including compounded interest and
additional sums, if any) on the subordinated debentures on the due date, a
holder of capital securities may institute a direct action. We may not amend
the indenture to remove this right to bring a direct action without the prior
written consent of the holders of all of the capital securities.
Notwithstanding any payments that we make to a holder of capital securities in
connection with a direct action, we shall remain obligated to pay the principal
of or interest (including compounded interest and additional sums, if any) on
the subordinated debentures, and we shall be subrogated to the rights of the
holder of the capital securities with respect to payments on the capital
securities to the extent that we make any payments to a holder in any direct
action.
The holders of the capital securities will not be able to exercise directly
any remedies, other than those described in the above paragraph, available to
the holders of the subordinated debentures, unless an event of default exists
under the trust agreement. See "Description of Capital Securities--Events of
Default; Notice."
58
Consolidation, Merger, Sale of Assets and Other Transactions
The indenture provides that we will not consolidate with or merge into any
other person or convey, transfer or lease all or substantially all of our
properties to any person, and no person shall consolidate with or merge into us
or convey, transfer or lease all or substantially all of its properties to us,
unless:
. in case we consolidate with or merge into another person or convey or
transfer all or substantially all of our properties to any person, the
successor is organized under the laws of the United States or any
state or the District of Columbia, and the successor expressly assumes
our obligations under the indenture with respect to the subordinated
debentures;
. immediately after giving effect to the transaction, no debenture event
of default, and no event which, after notice or lapse of time or both,
would become a debenture event of default, exists; and
. certain other conditions as prescribed in the indenture are met.
The general provisions of the indenture do not afford holders of the
subordinated debentures protection in the event of a highly leveraged or other
transaction that we may become involved in that may adversely affect holders of
the subordinated debentures.
Satisfaction and Discharge
The indenture provides that when, among other things,
. all subordinated debentures not previously delivered to the debenture
trustee for cancellation have become due and payable or will become due and
payable at maturity or called for prepayment within one year, and
. we deposit or cause to be deposited with the debenture trustee funds,
in trust, for the purpose and in an amount sufficient to pay and discharge
the entire indebtedness on the subordinated debentures not previously
delivered to the debenture trustee for cancellation, for the principal and
interest (including compounded interest and additional sums, if any) to the
date of the prepayment or to September 30, 2029, as the case may be,
then the indenture will cease to be of further effect (except as to our
obligations to pay all other sums due pursuant to the indenture and to provide
the officers' certificates and opinions of counsel), and we will be deemed to
have satisfied and discharged the indenture.
Subordination
We have promised that any subordinated debentures issued under the
indenture will be ranked junior to all senior indebtedness to the extent
provided in the indenture. Upon any payment or distribution of our assets to
creditors upon our liquidation, dissolution, winding up, reorganization,
assignment for the benefit of our creditors, marshaling of our assets or any
bankruptcy, insolvency, debt restructuring or similar proceedings in connection
with any
59
insolvency or bankruptcy proceeding of us, the senior indebtedness must be paid
in full before the holders of the subordinated debentures will be entitled to
receive or retain any payment in respect thereof.
If the maturity of subordinated debentures is accelerated, the holders of
all senior indebtedness outstanding at such time will first be entitled to
receive payment in full of such senior indebtedness before the holders of
subordinated debentures will be entitled to receive or retain any payment in
respect of the principal of or interest, if any, on the subordinated debentures.
No payments on account of principal or interest, if any, in respect of the
subordinated debentures may be made if there is a default in any payment with
respect to senior indebtedness, or an event of default exists with respect to
any senior indebtedness that accelerates the maturity of the senior
indebtedness, or if any judicial proceeding shall be pending with respect to the
default.
Indebtedness for money borrowed means any obligation of or any obligation
guaranteed by us, to repay borrowed money, whether or not evidenced by bonds,
debentures, notes or other written instruments; except that indebtedness for
money borrowed does not include trade accounts payable or accrued liabilities
arising in the ordinary course of business.
Indebtedness ranking on a parity with the subordinated debentures means:
. indebtedness for money borrowed, whether outstanding on the date the
indenture is executed or created, assumed or incurred after the date
that the indenture is executed, to the extent the indebtedness for
money borrowed by its terms ranks equal to and not prior to the
subordinated debentures in the right of payment upon the happening of
our dissolution, winding-up, liquidation or reorganization, and
. all other debt securities, and guarantees in respect of those debt
securities, issued to any trust other than the Trust, or a trustee of
the trust, partnership or other entity affiliated with us, that is our
financing vehicle (a "financing entity"), in connection with the
issuance by the financing entity of equity securities or other
securities guaranteed by us pursuant to an instrument that ranks equal
to, with or junior to the guarantee, including the guarantee issued
with respect to the capital securities of the Trust. The securing of
any indebtedness otherwise constituting indebtedness ranking on a
parity with the subordinated debentures shall not be deemed to prevent
such indebtedness from constituting indebtedness ranking on a parity
with the subordinated debentures.
Indebtedness ranking junior to the subordinated debentures means any
indebtedness for money borrowed, whether outstanding on the date the indenture
is executed or created, assumed or incurred after the date the indenture is
executed, to the extent the indebtedness for money borrowed by its terms ranks
junior to and not equal to or prior to the subordinated debentures (and any
other indebtedness ranking on a parity with the subordinated debentures) in
right of payment upon the happening of our dissolution or winding-up or
liquidation or reorganization. The securing of any indebtedness for money
borrowed otherwise constituting indebtedness ranking junior to the subordinated
debentures shall not be deemed to prevent the indebtedness for money borrowed
from constituting indebtedness ranking junior to the subordinated debentures.
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Senior indebtedness means all indebtedness for money borrowed, whether
outstanding on the date the indenture is executed or created, assumed or
incurred after the date the indenture is executed, except indebtedness ranking
on a parity with the subordinated debentures or indebtedness ranking junior to
the subordinated debentures, and any deferrals, renewals or extensions of the
senior indebtedness.
For more information regarding the regulatory limitations applicable to
dividends and other payments by the Bank, you should read "Risk Factors -- Risks
related to your investments in the capital securities -- We will depend
primarily on any dividends we may receive from our subsidiaries in making
payments under the subordinated debentures, which could affect the payments made
to you under the capital securities."
Governing Law
The indenture and the subordinated debentures will be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to conflict of law principles.
Information Concerning the Debenture Trustee
The debenture trustee will have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to these provisions, the debenture trustee is not
obligated to exercise any of the powers vested in it by the indenture at the
request of any holder of subordinated debentures, unless offered reasonable
indemnity by the holder against the costs, expenses and liabilities which might
be incurred thereby. The debenture trustee is not required to expend or risk
its own funds or otherwise incur personal financial liability in the performance
of its duties under the indenture if the debenture trustee reasonably believes
that repayment or adequate indemnity is not reasonably assured to it.
Description of Guarantee
The guarantee will be executed and delivered by us at the same time as the
capital securities. Wilmington Trust Company will act as guarantee trustee under
the guarantee to comply with the Trust Indenture Act. The guarantee will be
qualified as an indenture under the Trust Indenture Act. This summary of the
material provisions of the guarantee is not a complete description and you
should refer to the guarantee and the Trust Indenture Act for more information.
The form of the guarantee has been filed as an exhibit to the registration
statement of which this prospectus is part. The guarantee trustee will hold the
guarantee for the benefit of the holders of the capital securities.
General
We will irrevocably agree to pay in full on a subordinated basis, to the
extent set forth herein, the payments with respect to the capital securities to
the extent not paid by the Trust. The payments that will be subject to the
guarantee are:
. any accumulated and unpaid distributions required to be paid on the
capital securities, to the extent that the Trust has funds legally
available at that time;
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. the applicable redemption price with respect to the capital securities
called for redemption, to the extent that the Trust has funds legally
available at that time; and
. upon a voluntary or involuntary dissolution, winding-up or liquidation
of the Trust (other than in connection with the distribution of the
subordinated debentures to holders of the capital securities or the
redemption of all capital securities), the lesser of (a) the
liquidation distribution, to the extent the Trust has funds legally
available at that time, and (b) the amount of assets of the Trust
remaining available for distribution to holders of capital securities
after satisfying the liabilities owed to the Trust's creditors as
required by applicable law.
The guarantee will rank subordinate and junior to all senior indebtedness
to the extent provided in the guarantee. See "--Status of the Guarantee." Our
obligation to make a guarantee payment may be satisfied by our direct payment of
the required amounts to the holders of the capital securities or by causing the
Trust to pay these amounts to the holders of the capital securities.
The guarantee will be an irrevocable guarantee on a subordinated basis of
the Trust's obligations under the capital securities, but will apply only to the
extent that the Trust has funds sufficient to make these payments. If we do not
make interest payments on the subordinated debentures held by, the Trust will
not be able to pay you distributions on the capital securities and will not have
funds legally available. Please refer to the "Relationship Among the Capital
Securities, the Subordinated Debentures and the Guarantee" section of this
prospectus. The guarantee does not limit us from incurring or issuing other
secured or unsecured debt, including senior indebtedness, whether under the
indenture, any other indenture that we may enter into in the future or
otherwise.
The holders of at least a majority in aggregate liquidation amount of the
capital securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the guarantee trustee in
respect of our guarantee or to direct the exercise of any trust power conferred
upon the guarantee trustee under our guarantee. Any holder of the capital
securities may institute a legal proceeding directly against us to enforce their
rights under the guarantee without first instituting a legal proceeding against
the Trust, the guarantee trustee or any other person or entity.
If we default on our obligation to pay amounts payable under the
subordinated debentures, the Trust will lack funds for the payment of
distributions or amounts payable on redemption of the capital securities or
otherwise, and the holders of the capital securities will not be able to rely
upon the guarantee for payment of such amounts. Instead, if a debenture event
of default exists that is attributable to our failure to pay principal of or
interest on the subordinated debentures on a payment date, then any holder of
capital securities may institute a direct action against us pursuant to the
terms of the indenture for enforcement of payment to that holder of the
principal of or interest on such subordinated debentures having a principal
amount equal to the aggregate liquidation amount of the capital securities of
that holder. In connection with a direct action, we will not be liable to the
extent that we made any payment to the holder of capital securities in the
direct action. Except as described herein, holders of capital securities will
not be able to exercise directly any other remedy available to the holders of
the subordinated debentures or assert directly any other rights in respect of
the subordinated debentures. The trust agreement provides that each
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holder of capital securities by accepting the capital securities agrees to the
provisions of the guarantee and the indenture.
We will, through our guarantee, the trust agreement, the subordinated
debentures and the indenture, taken together, fully, irrevocably and
unconditionally guarantee all of the Trust's obligations under the capital
securities. No single document standing alone, or operating in conjunction with
fewer than all of the other documents, constitutes that guarantee. Only the
combined operation of these documents provides a full, irrevocable and
unconditional guarantee of the Trust's obligations under the capital securities.
You should refer to "Relationship Among the Capital Securities, the Subordinated
Debentures and the Guarantee" for more information about our guarantee.
Status of the Guarantee
Our guarantee will constitute an unsecured obligation and will rank
subordinate and junior to all senior indebtedness in the same manner as the
subordinated debentures. See "Description of Subordinated Debentures--
Subordination." In addition, because we are a bank holding company, our right
to participate in any distribution of Park West's or Cargill's assets upon the
liquidation or reorganization of either is subject to the prior claims of their
respective creditors (including its depositors), except to the extent we may be
recognized as a creditor of Park West or Cargill. Accordingly, our obligations
under the guarantee effectively will be subordinated to all existing and future
liabilities of our present and future subsidiaries (including depositors of Park
West and Cargill). As a result, claimants should look only to our assets for
payments under the guarantee. See "Description of Subordinated Debentures--
General."
Our guarantee will rank equal to all of our other guarantees with respect
to preferred beneficial interests issued by other trusts. Our guarantee of the
Trust's capital securities does not limit the amount of secured or unsecured
debt, including senior indebtedness, that we or any of our subsidiaries may
incur. We expect from time to time that we will incur additional indebtedness
and that our subsidiaries will also incur additional liabilities. Our guarantee
will constitute a guarantee of payment and not of collection, enabling the
guaranteed party to institute a legal proceeding directly against us to enforce
their rights under the guarantee without first instituting a legal proceeding
against any other person or entity. Our guarantee will be held for the benefit
of the holders of the capital securities. Our guarantee will not be discharged,
except by payment of the guarantee payments in full to the extent that the Trust
has not paid, or upon distribution of the subordinated debentures to, the
holders of the capital securities.
Events of Default
There will be an event of default under the guarantee if we fail to perform
any of our payment or other obligations under the guarantee; except that with
respect to a default in payment of any guarantee payment, we shall have received
notice of default and shall not have cured the default within 60 days after
receipt of the notice. The holders of at least a majority in liquidation amount
of the capital securities will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the guarantee
trustee in respect of our guarantee or to direct the exercise of any trust or
power conferred upon the guarantee trustee under our guarantee.
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Any holder of the capital securities may institute a legal proceeding
directly against us to enforce the rights of the holders of the capital
securities under the guarantee without first instituting a legal proceeding
against the Trust, the guarantee trustee or any other person or entity.
We, as guarantor, will be required to file annually with the guarantee
trustee a certificate regarding our compliance with the applicable conditions
and covenants under our guarantee.
Amendments and Assignment
Except with respect to any changes that do not materially adversely affect
the rights of holders of the capital securities (in which case no vote will be
required), the guarantee may not be amended without the prior approval of the
holders of a majority of the liquidation amount of such outstanding capital
securities. You should read "Description of Capital Securities--Voting Rights;
Amendment of the Trust Agreement" for more information about the manner of
obtaining the holders' approval. All guarantees and agreements contained in the
guarantee agreement shall bind our successors, assigns, receivers, trustees and
representatives and shall inure to the benefit of the holders of the capital
securities then outstanding.
Termination of the Guarantee
Our guarantee will terminate and be of no further force and effect upon:
. full payment of the applicable redemption price of all outstanding
capital securities,
. full payment of the liquidation amount payable upon liquidation of
the Trust, or
. distribution of subordinated debentures to the holders of the
capital securities.
Our guarantee will continue to be effective or will be reinstated, as the
case may be, if at any time any holder of the capital securities must restore
payment of any sums paid under the capital securities or the guarantee.
Information Concerning the Guarantee Trustee
The Delaware trustee shall act as the guarantee, except if we default under
the guarantee, and will undertake to perform only such duties as are
specifically set forth in the guarantee and, in case a default with respect to
the guarantee has occurred, must exercise the same degree of care and skill as a
prudent person would exercise or use in the conduct of his or her own affairs.
Subject to this provision, the guarantee trustee will not be obligated to
exercise any of the powers vested in it by the guarantee at the request of any
holder of the capital securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that it might incur.
Governing Law
The guarantee will be governed by and construed in accordance with the laws
of the State of New York, without regard to conflict of law principles.
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Relationship among the Capital Securities, the
Subordinated Debentures and the Guarantee
Full and Unconditional Guarantee to the extent that the Trust has Funds Legally
Available to Pay Distributions
We will irrevocably guarantee payments of distributions and other amounts
due on the capital securities to the extent the Trust has funds legally
available to pay distributions as and to the extent set forth under "Description
of Guarantee." Taken together, our obligations under the subordinated
debentures, the indenture, the trust agreement and the guarantee will provide, a
full, irrevocable and unconditional guarantee of the Trust's payments of
distributions and other amounts due on the capital securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes this guarantee. Only the combined operation of
these documents effectively provides a full, irrevocable and unconditional
guarantee of the Trust's obligations under the capital securities.
If and to the extent that we do not make the required payments on the
subordinated debentures, the Trust will not have sufficient funds to make its
related payments, including distributions on the capital securities. Our
guarantee will not cover any payments when the Trust does not have sufficient
funds legally available to make those payments. Your remedy, as a holder of
capital securities, is to institute a direct action. Our obligations under the
guarantee will be subordinate and junior to all senior indebtedness.
Sufficiency of Payments
As long as we pay the interest and other payments when due on the
subordinated debentures, the Trust will have sufficient funds to cover
distributions and other payments due on the capital securities, primarily
because:
. the aggregate principal amount or prepayment price of the subordinated
debentures will equal the sum of the liquidation amount or redemption
price, as applicable, of the securities;
. the interest rate and interest payment dates and other payment dates
on the subordinated debentures will match the distribution rate and
distribution payment dates and other payment dates for the capital
securities;
. as sponsor, we will pay for all and any costs, expenses and
liabilities of the Trust, except for the Trust's obligations to
holders of capital securities; and
. the trust agreement also provides that the Trust is not authorized to
engage in any activity that is not consistent with its limited
purposes.
Enforcement Rights of Holders of Capital Securities
You, as holder of capital securities, may institute a legal proceeding
directly against us to enforce your rights under our guarantee without first
instituting a legal proceeding against the guarantee trustee, the Trust or any
other person or entity.
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A default or event of default under any senior indebtedness would not
constitute a default or event of default under the trust agreement. However, if
there are payment defaults under, or accelerations of, senior indebtedness, the
subordination provisions of the indenture provide that we cannot make payments
in respect of the subordinated debentures until we have paid the senior
indebtedness in full or we have cured any payment default or a payment default
has been waived. Our failure to make required payments on subordinated
debentures would constitute an event of default under the trust agreement.
Limited Purpose of the Trust
The capital securities will represent beneficial interests in the Trust,
and the Trust exists for the sole purpose of issuing and selling the capital
securities, using the proceeds from the sale of the capital securities to
acquire our subordinated debentures and engaging in only those other activities
necessary, advisable or incidental thereto. A principal difference between the
rights of a holder of a capital security and a holder of a subordinated
debenture is that a holder of a subordinated debenture will be entitled to
receive from us the principal amount of and interest on subordinated debentures
held, while a holder of capital securities is entitled to receive distributions
from the Trust (or, in certain circumstances, from us under our guarantee) if
and to the extent the Trust has funds legally available to pay the
distributions.
Rights Upon Dissolution
Unless the subordinated debentures are distributed to holders of
securities, if the Trust is voluntarily or involuntarily dissolved, wound-up or
liquidated, after satisfying the liabilities owed to the Trust's creditors as
required by applicable law, the holders of the capital securities will be
entitled to receive, out of assets held by the Trust, the liquidation
distribution in cash. See "Description of Capital Securities--Liquidation of
the Trust and Distribution of Subordinated Debentures."
If we are voluntarily or involuntarily liquidated or bankrupted, the
property trustee, as holder of the subordinated debentures, would be one of our
subordinated creditors, subordinated in right of payment to all senior
indebtedness, but entitled to receive payment in full of principal and interest,
before any of our stockholders receive payments or distributions. Since we will
be the guarantor under the guarantee and will agree to pay all costs, expenses
and liabilities of the Trust (other than the Trust's obligations to the holders
of its capital securities), the positions of a holder of capital securities and
a holder of subordinated debentures relative to other creditors and to our
stockholders in the event of our liquidation or bankruptcy are expected to be
substantially the same.
Certain Federal Income Tax Consequences
General
In the opinion of Thacher Proffitt & Wood, special federal income tax
counsel to us and the Trust, the following describes the material United States
federal income tax consequences of the purchase, ownership and disposition of a
capital security.
This summary addresses only the tax consequences to a person that acquires
a capital security on its original issuance at its original issue price and that
holds the security as a capital asset. This summary does not address all tax
consequences that may be applicable to a beneficial
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owner of a capital security and does not address the tax consequences to holders
subject to special tax regimes (like banks, thrifts, real estate investment
trusts, regulated investment companies, insurance companies, dealers in
securities or currencies, tax-exempt investors or persons that will hold a
capital security as a position in a "straddle," as part of a "synthetic
security" or "hedge" or as part of a "conversion transaction" or other
integrated investment). This summary does not include any description of any
alternative minimum tax consequences or the tax laws of any state or local
government or of any foreign government that may apply to a capital security.
Except as noted below in the discussion of Non-U.S. Holders, this discussion is
addressed to a U.S. Holder, which is defined as a beneficial owner of a capital
security that, for U.S. federal income tax purposes, is (or is treated as)
(1) a citizen or individual resident of the United States,
(2) a corporation or partnership (or entity treated for federal income tax
purposes as a corporation or partnership) created or organized in or
under the laws of the United States or any political subdivision
thereof,
(3) an estate the income of which is includible in gross income for U.S.
federal income tax purposes without regard to its source, or
(4) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have the ability to control all substantial decisions of the
trust.
This summary does not address the tax consequences to any shareholder,
partner or beneficiary of a holder of a capital security. This summary is based
on the Code, Treasury regulations thereunder and the administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. An opinion of Thacher Proffitt & Wood
is not binding on the Internal Revenue Service (the "IRS") or the courts. No
rulings have been or are expected to be sought from the IRS with respect to any
of the matters described herein. We can give no assurance that the opinions
expressed herein will not be challenged by the IRS or, if challenged, that the
challenge will not be successful.
Classification of the Subordinated Debentures
We intend to take the position that the subordinated debentures will be
classified for U.S. federal income tax purposes as our indebtedness. Thacher
Proffitt & Wood will render its opinion that, under then current law, based on
the representations, facts and assumptions set forth in this prospectus and
certain assumptions and qualifications referenced in the opinion, and assuming
full compliance with the terms of the indenture (and other relevant documents),
the subordinated debentures will be characterized for U.S. federal income tax
purposes as our indebtedness. We, together with the Trust and the holders of
the capital securities (by acceptance of a beneficial interest in a capital
security) will agree to treat the subordinated debentures as our indebtedness
for all U.S. federal income tax purposes. We cannot be sure that this position
will not be challenged by the IRS or, if challenged, that the challenge will not
be successful. The remainder of this discussion assumes that the subordinated
debentures will be classified as our indebtedness for U.S. federal income tax
purposes.
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Classification of the Trust
In connection with the issuance of the capital securities, Thacher Proffitt
& Wood will render its opinion that, under then current law and assuming full
compliance with the terms of the trust agreement and the indenture (and certain
other documents), and based on certain facts and assumptions contained in that
opinion, the Trust will not be classified for U.S. federal income tax purposes
as an association taxable as a corporation. Accordingly, for U.S. federal
income tax purposes, the Trust will not be subject to U.S. federal income tax,
and each holder of a capital security will be required to include in its gross
income any interest (or accrued original issue discount) with respect to its
allocable share of the subordinated debentures.
Interest Income and Original Issue Discount
Under the indenture, we have the right to defer the payment of interest on
the subordinated debentures at any time or from time to time for one or more
deferral periods not exceeding 20 consecutive quarterly periods each, provided
that no deferral period shall end on a date other than an interest payment date
or extend beyond September 30, 2029. By reason of that right, the Treasury
regulations will subject the subordinated debentures to the rules in the Code
and Treasury regulations on debt instruments issued with original issue discount
(the "OID Rules"), unless the indenture or subordinated debentures contain terms
or conditions that make the likelihood of exercise of the deferral option
remote. Under the Treasury regulations, a "remote" contingency that stated
interest will not be timely paid will be ignored in determining whether a debt
instrument is issued with original issue discount. Although there is no
authority directly on point, we believe that the likelihood that we would
exercise our option to defer payments of interest is "remote" since exercising
that option would, among other things, prevent us from declaring dividends on
any class of our equity securities. Accordingly, we intend to take the position
that the subordinated debentures will not be considered to be issued with
original issue discount and, accordingly, stated interest on the subordinated
debentures generally will be taxable to a holder as ordinary income at the time
it is paid or accrued in accordance with such holder's method of accounting.
Under the Treasury regulations, if we were to exercise our option to defer
payments of interest, the subordinated debentures would at that time be treated
as issued with original issue discount, and all stated interest on the
subordinated debentures would thereafter be treated as original issue discount
as long as the subordinated debentures remain outstanding. If this occurred, all
of a holder's interest income with respect to the subordinated debentures would
thereafter be accounted for on an economic accrual basis regardless of such
holder's method of tax accounting, and actual distributions of stated interest
would not be reported as taxable income. Consequently, a holder of a capital
security would be required to include in gross income original issue discount
even though we would not make actual cash payments during a deferral period. The
amount of such includible original issue discount could be significant. Also,
under the Treasury regulations, if the option to defer the payment of interest
were determined not to be "remote," the subordinated debentures would be treated
as having been originally issued with original issue discount. In such event, a
holder would be required to include in gross income an amount of original issue
discount each taxable year that approximates the amount of interest that accrues
on the subordinated debentures at the stated interest rate, regardless of such
holder's method of tax accounting, and actual cash payments of interest on the
subordinated debentures would not be separately includible in gross income.
These Treasury regulations have not yet been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take a
position contrary to the interpretation described herein.
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Because income on the capital securities will constitute interest or
original issue discount, corporate holders of the capital securities will not be
entitled to a dividends-received deduction with respect to any income recognized
with respect to the capital securities.
Receipt of Subordinated Debentures or Cash Upon Liquidation of the Trust
We will have the right at any time to liquidate the Trust and cause the
subordinated debentures to be distributed to the holders of the capital
securities. Under current law, the liquidation of the Trust and the
distribution of the subordinated debentures to trust security holders, for U.S.
federal income tax purposes, would be treated as a nontaxable event to each
holder, and the aggregate tax basis of each holder in the subordinated
debentures received by such holder would be equal to the holder's aggregate tax
basis in those capital securities surrendered. A holder's holding period in the
subordinated debentures received in liquidation of the Trust would be no shorter
than the period during which the capital securities were held by that holder.
The subordinated debentures may be prepaid in cash, and the proceeds of
that prepayment would be distributed to holders in redemption of their capital
securities. Under current law, that redemption would constitute, for U.S.
federal income tax purposes, a taxable disposition of the redeemed capital
securities, the tax consequences of which are described below under "--Sales or
Redemptions of Capital Securities."
Sales or Redemptions of Capital Securities
On a sale or redemption of a capital security for cash, a holder will
recognize gain or loss equal to the difference between its adjusted tax basis in
the capital security and the amount realized on the sale or redemption of that
capital security. If the rules regarding original issue discount do not apply,
a holder's adjusted basis in a capital security generally will be its initial
purchase price, and if the holder uses an accrual method of accounting, the
holder will have a basis in any accrued but unpaid interest. If the rules
regarding original issue discount apply, a holder's adjusted basis in a capital
security generally will be its initial purchase price increased by any original
issue discount previously included in the holder's gross income to the date of
disposition and decreased by any payments received on the capital security.
Gain or loss recognized on a sale or redemption of a capital security will be
capital gain or loss. Capital gain recognized by an individual in respect of a
capital security held for more than one year as of the date of sale or
redemption is subject to a maximum U.S. federal income tax rate of 20 percent.
The capital securities may trade at a price that discounts any accrued but
unpaid interest on the subordinated debentures. Therefore, the amount realized
by a holder who disposes of a capital security between distribution payment
dates and whose adjusted basis in the capital security has been increased by the
amount of any accrued but unpaid original issue discount (or interest) may be
less than the holder's adjusted basis in the capital security. A holder's basis
in a capital security could be increased either under the rules regarding
original issue discount or, if those rules do not apply, in the case of a holder
that uses an accrual method of accounting, under the accrual accounting rules.
In that case, the holder will recognize a capital loss. Subject to a limited
exception in the case of individual taxpayers, capital losses cannot be applied
to offset ordinary income for U.S. federal income tax purposes.
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Non-U.S. Holders
For purposes of this discussion, a "Non-U.S. Holder" generally is any
corporation, individual, partnership, estate or trust that is not a U.S. Holder
for U.S. federal income tax purposes.
Under current U.S. federal income tax laws, subject to the discussion below
of backup withholding, payments by the Trust or any of its paying agents to a
Non-U.S. Holder will not be subject to U.S. federal withholding tax, provided
that (a) the Non-U.S. Holder does not own, actually or constructively, ten
percent or more of the total combined voting power of all classes of our stock
entitled to vote, (b) the Non-U.S. Holder is not a controlled foreign
corporation that is related to us through stock ownership, (c) the Non-U.S.
Holder is not a bank whose receipt of interest on the subordinated debentures is
described in Section 881(c)(3)(A) of the Code, and (d) either (A) the Non-U.S.
Holder certifies to the Trust or its agent, under penalties of perjury, that it
is not a U.S. Holder and provides its name and address or (B) a securities
clearing organization, bank or other financial institution that holds customers'
securities in the ordinary course of business (a "Financial Institution") and
holds the capital security in that capacity certifies to the Trust or its agent,
under penalties of perjury, that the statement has been received from the Non-
U.S. Holder by it or by a Financial Institution between it and the Non-U.S.
Holder and furnishes the Trust or its agent with a copy thereof. New Treasury
regulations provide alternative methods for satisfying the certification
requirements described in clause (1)(d), effective for certain payments made
after December 31, 2000.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the capital securities (or the subordinated debentures) is
effectively connected with the conduct of that trade or business, the Non-U.S.
Holder, although exempt from the withholding tax discussed above, will be
subject to U.S. federal income tax on that interest on a net income basis in
generally the same manner as if it were a U.S. Holder. In addition, if such
Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30% of its effectively connected earnings and profits that are
repatriated or treated as repatriated. For this purpose, the interest income
would be included in the foreign corporation's earnings and profits. In the
case of a Non-U.S. Holder entitled to the benefits of a tax treaty with the
United States, the foregoing discussion generally applies only if the Non-U.S.
Holder is engaged in business in the United States through a U.S. permanent
establishment and the income on the subordinated debentures is attributable to
that permanent establishment within the meaning of the treaty, and the rate of
the branch profits tax may be limited to a rate prescribed by the treaty for the
withholding of tax on dividends. New final Treasury regulations generally
prescribe new methods for certifying that a Non-U.S. Holder is exempt from the
withholding of U.S. federal income tax by reason of being engaged in trade or
business in the United States.
Any gain recognized upon a sale or other disposition of capital securities
(or subordinated debentures) generally will not be subject to U.S. federal
income tax unless (1) the gain is, or is treated as, effectively connected with
a U.S. trade or business of the Non-U.S. Holder or (2) in the case of a Non-U.S.
Holder who is an individual, that individual is present in the United States for
183 days or more in the taxable year of the sale or other disposition, and
certain other conditions are met.
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Backup Withholding Tax and Information Reporting
The amount of interest, including original issue discount, accrued on
capital securities held of record by U.S. persons (other than corporations and
other exempt holders) will be reported to the IRS. "Backup" withholding at a
rate of 31% will apply to payments of interest to non-exempt U.S. persons unless
the holder furnishes its taxpayer identification number in the manner prescribed
in applicable Treasury regulations, certifies that the number is correct,
certifies as to no loss of exemption from backup withholding and meets certain
other conditions.
Payment of the proceeds from the disposition of capital securities to or
through the United States office of a broker is subject to information reporting
and backup withholding unless the holder or beneficial owner establishes an
exemption from information reporting and backup withholding.
Non-U.S. Holders are generally exempt from the information reporting and
backup withholding rules but may be required to comply with certain
certification and identification requirements to prove their exemption.
Any amount withheld from a holder under the backup withholding rules will
be allowed as a refund or a credit against such holder's U.S. federal income tax
liability, provided the required information is furnished to the IRS.
It is anticipated that income on capital securities will be reported to
holders on Form 1099 (or any successor form) and mailed to holders of capital
securities by January 31 following each calendar year.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISER WITH RESPECT TO THE
TAX CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF A CAPITAL
SECURITY, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN U.S. FEDERAL OR OTHER TAX LAWS.
ERISA Considerations
The primary purpose of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") is to protect the interests of participants in employee
benefit plans by mandating standards of conduct, obligations and
responsibilities for the people who serve as the fiduciaries of these plans. A
person will be considered to be a fiduciary with respect to an employee benefit
plan under ERISA to the extent that he or she exercises discretionary authority
over the management or the investment of the plan's assets. Accordingly, before
investing the assets of an employee benefit plan in capital securities, a
fiduciary will be required to determine whether the investment satisfies the
prudence and diversification requirements of ERISA and whether the investment,
itself, is permitted under the plan's governing documents.
Section 406 of ERISA and Section 4975 of the Code prohibit plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of the
Code, from engaging in certain transactions involving "plan assets" with persons
who are "parties-in-interest" under ERISA or
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"disqualified persons" under the Code with respect to the plan. Violation of the
"prohibited transaction" rules will result in the imposition of an excise tax or
other liabilities on the "parties-in-interest" or the "disqualified persons," as
applicable, unless exemptive relief is available under a statutory or
administrative exemption. Employee benefit plans that are governmental plans (as
defined in Section 3(32) of ERISA), certain church plans (as defined in Section
3(33) of ERISA) and foreign plans (as described in Section 4(b)(4) of ERISA) are
not subject to the requirements of ERISA or Section 4975 of the Code; however,
governmental plans may be subject to similar provisions under applicable state
laws.
The U.S. Department of Labor has issued special regulations governing
certain investments by employee benefits plans covered by ERISA. These
regulations are known as the "Plan Asset Regulations." Under these Regulations,
the assets of the Trust will be deemed to be the assets of the employee benefit
plan for purposes of ERISA and Section 4975 of the Code if the plan's assets are
used to acquire an equity interest in the Trust and no exception under the Plan
Asset Regulations applies to the transaction. An "equity interest" is defined
in the Plan Asset Regulations to specifically include a beneficial interest in a
trust such as the Trust.
The Plan Asset Regulations do, however, contain certain exceptions to this
general rule. Under one exception, the assets of the Trust will not be deemed to
be the "plan assets" of the investing plans if, at all times, less than 25% of
the value of each class of equity interest in the Trust is held by all employee
benefit plans, including, for this purpose, employee benefit plans not subject
to ERISA or Section 4975 of the Code, such as governmental, church and foreign
plans, and any other plans whose assets qualify as "plan assets" under the Plan
Asset Regulations (collectively, the "Benefit Plan Investors"). Alternatively,
the assets of the Trust will not be deemed to be "plan assets" of the investing
plans if the capital securities constitute "publicly-offered securities" within
the meaning of the Plan Asset Regulations. Potential employee benefit plan
investors should be aware that although these exceptions exist, we cannot give
plan investors any assurance that the capital securities held by Benefit Plan
Investors will be less than 25% of the total value of the capital securities
either at the completion of this offering or at any subsequent time. In
addition, no assurance can be given that the capital securities offered in this
Prospectus constitute "publicly-offered securities" within the meaning of the
Plan Asset Regulations. We will purchase and initially hold all of the common
securities of the Trust.
By operation of the Plan Asset Regulations, certain transactions involving
the Trust and an employee benefit plan may be deemed to constitute direct or
indirect prohibited transactions under ERISA and Section 4975 of the Code. A
direct or indirect prohibited transaction may occur if the assets of the Trust
are deemed to be the "plan assets" of the plan investing in the Trust. For
example, if we were a party- in-interest with respect to a plan (either directly
or by reason of its ownership of the Bank or other subsidiaries), an extension
of credit between us and the Trust (as represented by the subordinated
debentures and the guarantee) would occur which is likely to be prohibited by
Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code, unless
exemptive relief is available. In addition, if we qualify as a fiduciary with
respect to the Trust as a result of certain powers it holds under the Trust
Indenture (such as the powers to remove and replace the property trustee and the
administrative trustees), it is possible that the optional redemption or
acceleration of the subordinated debentures would be considered to be prohibited
transactions under Section 406(b) of ERISA and Section 4975(c)(1)(E) of the
Code. In order to avoid engaging in these prohibited transactions, each
investing plan, by purchasing capital securities, will be deemed to have
directed the Trust to invest in the subordinated debentures and to have
appointed the property trustee.
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The DOL has issued five separate prohibited transaction class exemptions
("PTCEs") that may provide exemptive relief to an employee benefit plan for
direct or indirect prohibited transactions that may arise from the purchase or
holding of the capital securities. The available PTCE's include:
. PTCE 96-23 which may be applicable for certain transactions involving
in-house asset managers;
. PTCE 95-60 which may be applicable for certain transactions
involving insurance company general accounts;
. PTCE 91-38 which may be applicable for certain transactions
involving bank collective investment funds;
. PTCE 90-1 which may be applicable for certain transactions involving
insurance company separate accounts; and
. PTCE 84-14 which may be applicable for certain transactions
involving independent qualified asset managers.
Because the capital securities may be deemed to be equity interests in
Westbank for us of applying ERISA and Section 4975 of the Code, these capital
securities may not be purchased or held by any employee benefit plan ("Plan"),
any entity whose underlying assets include "plan assets" by reason of any plan's
investment in the entity (a "Plan Asset Entity") or any person investing the
"plan assets" of any plan, unless the purchaser or holder is exempt from all of
ERISA's prohibited transaction rules because of the relief provided under one of
the PTCE's identified above or another applicable exemption. Any purchaser or
holder of capital securities (or any interest in such securities) will be deemed
to have represented, through the fact of the purchase and holding of the capital
securities, that the purchaser either (a) is not a Plan or a Plan Asset Entity
and is not purchasing the capital securities on behalf of, or with the "plan
assets" of, any Plan or (b) is exempt from ERISA's prohibited transaction rules
because of the relief provided under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or
another applicable exemption. If a Plan or Plan Asset Entity purchases or holds
capital securities and elects to rely on an exemption other than PTCE 96-23, 95-
60, 91-38, 90-1 or 84-14, we, together with the Trust, may require an opinion of
legal counsel or other satisfactory evidence that such exemption is available.
Due to the complexity of these rules and the penalties that may be imposed
on persons involved in non-exempt prohibited transactions, it is critical that
Plan fiduciaries consult with legal counsel regarding the consequences that may
result if the assets of the Trust are deemed to be the "plan assets" of the Plan
by operation of the Plan Asset Regulations and the exemptive relief, described
above, is not available.
73
Underwriting
Subject to the terms and conditions set forth in the underwriting
agreement, dated September 23, 1999, we together with the Trust, have agreed
that the Trust will sell to Tucker Anthony Cleary Gull ("Tucker Cleary") and
Ryan, Beck & Co., Inc. ("Ryan Beck") and together with Tucker Cleary, the
Underwriters have agreed to purchase from the Trust, the respective number of
capital securities set forth opposite their respective names below:
Number of
Capital Securities
------------------
Tucker Anthony Cleary Gull 1,133,400
Ryan, Beck & Co. 566,600
Total...................................... 1,700,000
==================
Under the terms and conditions of the underwriting agreement, the
Underwriters are committed to take and pay for all of the capital securities if
any are taken.
We will pay the Underwriters compensation of $0.35 for each capital
security sold in the offering. The Underwriters will then offer the capital
securities in part directly to the public at the initial public offering price
set forth on the cover page of this prospectus and in part to several securities
dealers at the initial public offering price less a concession of no more than
$0.20 for each capital security. The Underwriters and such dealers may allow and
reallow, a concession of no more than $0.075 for each capital security to other
brokers and dealers. After the capital securities are released for sale to the
public, the initial public offering price and other selling terms may from time
to time be varied by Tucker Cleary. The Underwriters will not execute any
transaction in a discretionary account without prior approval of the customer.
In addition, we have agreed to pay Tucker Cleary a fee of $50,000 for its
services in managing the offering.
Prior to the offering, there has been no public market for the capital
securities. Although certain Underwriters have indicated to us and to the Trust
that they intend to make a market in the capital securities, they are not
obligated to do so and may discontinue any such market-making activities at any
time without notice. No assurance can be given as to the liquidity of the
trading markets for the capital securities.
We, together with the Trust, have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act.
Until the distribution of the capital securities is completed, rules of the
SEC may limit the ability of the Underwriters to bid for and purchase the
capital securities. As an exception to these rules, the Underwriters are
permitted to engage in certain transactions that stabilize the price of the
capital securities. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the capital securities.
74
If the Underwriters create a short position in the capital securities in
connection with the offering, i.e., if it sells a greater aggregate number of
capital securities than is set forth on the cover page of this prospectus, the
Underwriters may reduce the short position by purchasing capital securities in
the open market.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase capital securities in the
open market to reduce their short position or to stabilize the price of the
capital securities, they may reclaim the amount of the selling concession from
the selling group members who sold those capital securities as part of the
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither we nor the Underwriters make any representations or prediction as
to the direction or magnitude of any effect that the transactions described
above may have on the price of the capital securities. In addition, neither we
nor the Underwriters make any representation that the Underwriters will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
During a period of 180 days from the date of this Prospectus, neither the
Trust nor Westbank will, subject to certain exceptions, without the prior
written consent of Tucker Cleary, directly or indirectly, sell, offer to sell,
grant any option for sale of, or otherwise dispose of, any capital securities,
any security convertible into or exchangeable into or exercisable for capital
securities or the subordinated debentures or any debt securities substantially
similar to the subordinated debentures or equity securities substantially
similar to the capital securities (except for the subordinated debentures and
the capital securities offered hereby).
Because the National Association of Securities Dealers, Inc. (the "NASD")
is expected to view the capital securities as interests in a direct
participation program, the offering of the capital securities is being made in
compliance with the applicable provisions of Rule 2810 of the NASD's Conduct
Rules.
It is expected that delivery of the capital securities will be made in
book-entry form only through the facilities of DTC in New York, New York against
payment therefor on or about September 30, 1999, as agreed upon by us, the Trust
and Tucker Cleary in accordance with Rule 15c6-1 under the Exchange Act.
Tucker Cleary or its affiliates have provided from time to time, and expect
to provide in the future, investment services to us and our affiliates, for
which Tucker Cleary or its affiliates have received or will receive customary
fees and commissions.
Legal Matters
Certain legal matters will be passed upon for us by Thacher Proffitt & Wood
and for the Underwriters by Sullivan & Worcester LLP. Certain matters relating
to United States federal income tax considerations described in this prospectus
will be passed upon for us by Thacher Proffitt & Wood.
75
Experts
The consolidated financial statements of Westbank Corporation as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, included and incorporated by reference in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is included and incorporated herein by reference. Insofar
as the report of Deloitte & Touche LLP relates to the amounts included for
Cargill Bancorp, Inc. at September 30, 1998 and 1997 and for each of the three
years in the period ended September 30, 1998, it is based solely on the report
of Snyder & Haller P.C., independent auditors; such report being included and
incorporated herein by reference, and has been so included and incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document in our public files
at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the SEC's regional offices at 7 World Trade Center, 13/th/ Floor,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Avenue, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-
0330 for further information on the public reference rooms. Our SEC filings are
also available to the public from the SEC's web site at http://www.sec.gov
through the SEC's electronic data gathering, analysis and retrieval system,
EDGAR. Our common stock is listed on the Nasdaq National Market under the symbol
"Westbank." Information about us also is available from the NASD, 1735 K Street,
N.W., Washington, D.C. 20006.
This prospectus is part of a registration statement that we and the Trust
filed with the SEC. Because the SEC allows us to omit parts of the registration
statement from this prospectus, we did not include all the information in the
registration statement in this prospectus. You should review the registration
statement, including the exhibits, for additional information regarding the
Trust, the capital securities and us. The registration statement and its
exhibits may be inspected at the SEC's offices described in the previous
paragraph.
76
Additional Information We Have Incorporated in the Prospectus
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents that are considered part of this prospectus.
Information that we file with the SEC after the date of the registration
statement will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934 by us (1) after the date of the filing of our registration statement
and prior to its effectiveness and (2) until our offering of securities has been
completed.
. Annual Report on Form 10-K/A for the year ended December 31, 1998 and
all amendments thereto.
. Quarterly Report on Form 10-Q for the three months ended March 31,
1999.
. Quarterly Report on Form 10-Q for the three and six months ended June
30, 1999.
. Current Report on Form 8-K dated January 29, 1999.
. Definitive Proxy Statement on Schedule 14A dated March 16, 1999.
. Current Report on Form 8-K dated March 31, 1999.
. Current Report on Form 8-K dated April 12, 1999.
For your convenience, we have attached a copy of our Annual Report on Form
10-K/A, as amended, for the year ended December 31, 1998 (without exhibits), and
the Quarterly Report on Form 10-Q for the three and six months ended June 30,
1999 to this prospectus as Appendix A and B. You may obtain a copy of our
filings with the SEC at no cost, by writing or telephoning us at the following
address:
Westbank Corporation
225 Park Avenue
West Springfield, MA 01089-3326
(413) 747-1400
Attention: Robert J. Perlak, Clerk
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. This prospectus is an offer to
sell only the capital securities referred to in this prospectus, and only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of the date of the prospectus.
77
Appendix A
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[mark one] [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-12784
WESTBANK CORPORATION
Massachusetts 04-2830731
(State of Incorporation) (I.R.S. Employer Identification Number)
225 Park Avenue, West Springfield, Massachusetts 01090-0149
(Address of principal executive office) (Zip Code)
(413) 747-1400
(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $2.00 Par Value
Preferred stock, $5.00 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
Based on the closing sales price on March 1, 1999 the aggregate market value of
the voting stock held by nonaffiliates of the registrant was $47,936,445.
The number of shares outstanding of the registrants common stock, $2.00 par
value was 4,214,193 on March 1, 1999.
Portions of the Annual Report to Stockholders for the year ended December 31,
1998 are incorporated by reference into Parts I and II.
Portions of the Proxy Statement issued by the Corporation in connection with the
Annual Meeting to be held on April 21, 1999 are incorporated by reference into
Part III.
WESTBANK CORPORATION
WESTBANK CORPORATION IS SUBMITTING THIS FORM 10-K/A
AS A RESULT OF THE ACQUISITION OF CARGILL
BANCORP, INC., ON JANUARY 29, 1999.
ALL FINANCIAL INFORMATION HAS BEEN RESTATED AS
REQUIRED, ACCOUNTING FOR THE ACQUISITION OF
CARGILL BANCORP, INC., AS A POOLING OF
INTERESTS.
INDEX TO FORM 10-K
PART I
Item 1 Business I - 1
Item 2 Properties I - 2
Item 3 Legal Proceedings I - 3
Item 4 Submission of Matters to a vote of Security Holders I - 3
PART II
Item 5 Market for the Corporation's Common Stock
and Related Stockholder Matters II - 1
Item 6 Selected Financial Data II - 1
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations II - 1
PART III
Item 8 Financial Statements and Supplementary Data III - 1
Item 9 Changes in and Disagreements with Accountant
on Accounting and Financial Disclosure III - 1
Item 10 Directors and Executive Officers of the Registrant III - 1
Item 11 Executive Compensation III - 1
Item 12 Security Ownership of Certain Beneficial
Owners and Management III - 1
Item 13 Certain Relationships and Related Transactions III - 1
PART IV
Item 14 Exhibits, Financial Statement
Schedules and Reports on Form 8-K IV - 1
Signatures IV - 2
Exhibit Index IV - 3
WESTBANK CORPORATION, WEST SPRINGFIELD, MASSACHUSETTS
PART I
ITEM 1 BUSINESS
Reference is made to Page 4 of the Corporation's Annual Report to Stockholders
for the year ended December 31, 1998, wherein this subject is covered.
Statistical Disclosure by Bank Holding Companies
The following statistical tables and accompanying text provide required
financial data about the Corporation and should be read in conjunction with the
Consolidated financial statements and related notes, appearing in the 1998
Annual Report to Stockholders and is incorporated herein by reference thereto:
Page of
Annual Report
I. Distribution of Assets, Liabilities and
Stockholders' Equity:
Interest Rates and Interest Differential 10
Rate/Volume Analysis of Interest
Margin on Earning Assets 11
II. Investment Portfolio 12, 27, 28, 30, 31 and 38
III. Loan Portfolio 13, 28, 29, 31, 32 and 38
a. Types of Loans 13
b. Maturities and Sensitivities
to Changes in Interest Rates 7, 8, 9 and 13
c. Risk Elements 7, 8, 14, 15, 16, 28, 31 and 32
IV. Summary of Loan Loss Experience 14 and 15
V. Deposits 16, 33 and 42
VI. Return on Equity and Assets 17
VII. Short Term Borrowing 17, 34 and 43
I - 1
ITEM 2 PROPERTIES
The Corporation's principal banking subsidiary, Park West Bank and Trust Company
("Park West") operates thirteen banking offices throughout Western
Massachusetts, located as follows:
- -----------------------------------------------------------------------
LOCATION OWNED LEASED TOTAL
- -----------------------------------------------------------------------
Agawam (Feeding Hills) 1 1
- -----------------------------------------------------------------------
Chicopee 1 1
- -----------------------------------------------------------------------
Chicopee - Supermarket 1 1
- -----------------------------------------------------------------------
East Longmeadow 1 1
- -----------------------------------------------------------------------
East Longmeadow -
Supermarket 1 1
- -----------------------------------------------------------------------
Holyoke 1 1
- -----------------------------------------------------------------------
Ludlow 1 1
- -----------------------------------------------------------------------
Southwick 1 1
- -----------------------------------------------------------------------
West Springfield 2 1 3
- -----------------------------------------------------------------------
Westfield 1 1
- -----------------------------------------------------------------------
Westfield Supermarket 1 1
- -----------------------------------------------------------------------
TOTAL 6 7 13
- -----------------------------------------------------------------------
As a result of the acquisition of Cargill Bancorp, Inc., the Corporation's other
banking subsidiary, Cargill Bank, operates three Northern Connecticut branches,
located as follows:
- -----------------------------------------------------------------------
LOCATION OWNED LEASED TOTAL
- -----------------------------------------------------------------------
Putnam 1 1
- -----------------------------------------------------------------------
Quinebaug 1 1
- -----------------------------------------------------------------------
Woodstock 1 1
- -----------------------------------------------------------------------
TOTAL 2 1 3
- -----------------------------------------------------------------------
All general banking offices except the Park West Holyoke office have drive-in
facilities and twenty-four hour automated teller machines
Title to the properties described as owned in the foregoing table is held by the
subsidiary banks with warranty deed with no material encumbrances. Park West
owns, with no material encumbrances, land adjacent to the main office which is
available for parking and, through a subsidiary, also owns one other property
adjacent to the main office consisting of land also used as a parking lot. The
Corporation also owns the property on which its former Operations Center was
located and is presently leased. In addition, the Bank holds other real estate
as a result of foreclosure proceedings.
All of the property described as leased in the foregoing table is leased
directly from independent parties. Management considers the terms and conditions
of each of the existing leases to be in the aggregate favorable to the Bank.
I-2
ITEM 3 LEGAL PROCEEDINGS
Certain litigation is pending against the Corporation and the Bank. Management,
after consultation with legal counsel, does not anticipate that any liability
arising out of such litigation will have a material effect on the Corporation's
Financial Statements.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
I-3
PART II
ITEM 5 MARKET FOR CORPORATION'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Reference is made to Page 49 of the Corporation's Annual Report to Stockholders
for the year ended December 31, 1998, wherein this subject is covered.
ITEM 6 SELECTED FINANCIAL DATA
Reference is made to Page 5 of the Corporation's Annual Report to Stockholders
for the year ended December 31, 1998, wherein this subject is covered.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to Pages 6 through 19 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1998, wherein this subject is
covered.
Information Concerning Forward-Looking Statements.
Westbank has made and may make in the future forward-looking statements
concerning future performance, including, but not limited to, future earnings,
and events or conditions which may affect such future performance. These
forward-looking statements are based upon management's expectations and belief
concerning possible future developments and the potential effect of such future
developments on Westbank. There is no assurance that such future developments
will be in accordance with management's expectations and belief or that the
effect of any future developments on Westbank will be those anticipated by
Westbank management.
All assumptions that form the basis of any forward-looking statements regarding
future performance, as well as events or conditions which may affect such future
performance, are based on factors that are beyond Westbank's ability to control
or predict with precision, including future market conditions and the behavior
of other market participants. Among the factors that could cause actual results
to differ materially from such forward-looking statements are the following:
1. The status of the economy in general, as well as in Westbank's
primary market area, Western Massachusetts;
2. The real estate market in Western Massachusetts;
3. Competition in Westbank's primary market area from other banks,
especially in light of continued consolidation in the New England
banking industry.
4. Any changes in federal and state bank regulatory requirements;
5. Changes in interest rates; and
6. The cost and other effects of unanticipated legal and
administrative cases and proceedings, settlements and
investigations.
The assumptions listed above, as they relate to Cargill Bank, are the same with
the exception of the market area, which is Northeast Connecticut.
While Westbank periodically reassesses material trends and uncertainties
affecting the Corporation's performance in connection with is preparation of
management's discussion and analysis of results of operations and financial
condition contained in its quarterly and annual reports, Westbank does not
intend to review or revise any particular forward-looking statement in light of
future events.
II-1
PART III
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 21 through 41 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1998, wherein this subject is
covered.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to pages 4 through 7 of the Corporation's Proxy Statement to
Stockholders for the 1999 Annual Meeting scheduled for April 21, 1999, wherein
this subject is covered.
ITEM 11 EXECUTIVE COMPENSATION
References is made to pages 8 through 12, of the Corporation's Proxy Statement
to Stockholders for the 1999 Annual Meeting scheduled for April 21, 1999,
wherein this subject is covered.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to pages 6 and 7, of the Corporation's Proxy Statement to
Stockholders for the 1999 Annual Meeting scheduled for April 21, 1999, wherein
this subject is covered.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to pages 6 through 15, of the Corporation's Proxy Statement to
Stockholders for the 1999 Annual Meeting scheduled for April 21, 1999, wherein
this subject is covered under the caption "Beneficial Ownership of Stock and
Executive Compensation - Miscellaneous".
III - 1
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
1. Financial Statements
The following financial statements are incorporated in this Annual
Report on Form 10-K by reference to the Corporation's Annual Report to
Stockholders for the year ended December 31, 1998:
WESTBANK CORPORATION
Page of
Annual
Report
------
Independent Auditors' Reports 42
Consolidated Balance Sheets at
December 31, 1998 and 1999 20
Consolidated Statements of Income
for the years ended December
31, 1998, 1997 and 1996 21
Consolidated Statement of Stockholders'
Equity from January 1, 1996, to
December 31, 1998 22
Consolidated Statements of Comprehensive
Income for the years ended December 31, 1998,
1997 and 1996 22
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 23
Notes to Consolidated Financial Statements 24 - 41
Current reports on Form 8-K Reporting other Events were filed by
the Registrant on:
NONE
2. Financial Statement Schedules
Financial Statement Schedules are omitted because they are
inapplicable or not required.
3 Exhibits
See accompanying Exhibit Index.
IV - 1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESTBANK CORPORATION
By: /s/ Donald R. Chase
Donald R. Chase
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Donald R. Chase President and Chief Executive Officer and Director August 18, 1999
- -------------------------
Donald R. Chase
/s/ Ernest N. Laflamme, Jr. Chairman of the Board and Director August 18, 1999
- -------------------------
Ernest N. Laflamme, Jr.
/s/ John M. Lilly Treasurer and Chief Financial Officer August 18, 1999
- -------------------------
John M. Lilly
/s/ Roland O. Archambault Director August 18, 1999
- -------------------------
Roland O. Archambault
/s/ Mark A. Beauregard Director August 18, 1999
- -------------------------
Mark A. Beauregard
/s/ David R. Chamberland Director August 18, 1999
- -------------------------
David R. Chamberland
/s/ Leroy F. Jarrett Director August 18, 1999
- -------------------------
Leroy F. Jarrett
/s/ G. Wayne McCary Director August 18, 1999
- -------------------------
G. Wayne McCary
/s/ Robert J. Perlak Corporate Clerk and Director August 18, 1999
- -------------------------
Robert J. Perlak
/s/ George R. Sullivan Director August 18, 1999
- -------------------------
George R. Sullivan
/s/ James E. Tremble Director August 18, 1999
- -------------------------
James E. Tremble
IV-2
EXHIBIT INDEX
Page No.
--------
3. Articles of Organization, as amended **
(a) Articles of Organization, as amended *
(b) By-Laws, as amended *
10.1 Employment Contract dated October 1, 1986, between
William A. Franks, Jr. and Westbank Corporation ***
10.12 Termination Agreement dated February 20, 1987, between
Donald R. Chase and Park West Bank and Trust Company ***
10.14 Termination Agreement dated February 20, 1987,
between Stanley F. Osowski and CCB, Inc. ***
10.15 1985 Incentive Stock Option Plan for Key Employees *
10.16 1995 Directors Stock Option Plan ****
10.17 1996 Stock Incentive Plan *****
13. 1995 Annual Report to Stockholders ARS (IFC 1-36 IBC)
21. Subsidiaries of Registrant TO BE INCLUDED
27. Financial Data Schedule TO BE INCLUDED
* Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1988
** Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1987
*** Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1986
**** Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995
***** Incorporated by reference to identically numbered exhibits contained
in Registrant's 1996 Proxy Statement
IV-3
Table of Contents
Financial Highlights...................................... 1
Letter to Stockholders.................................... 2-3
Business - Westbank Corporation and Subsidiaries ........ 4
Selected Consolidated Financial Data.................... . 5
Management's Discussion and Analysis - Financial Results.. 6-20
Consolidated Balance Sheets............................... 21
Consolidated Statements of Income......................... 23
Consolidated Statements of Comprehensive Income........... 24
Consolidated Statements of Stockholders' Equity........... 25
Consolidated Statements of Cash Flows..................... 25
Notes to Consolidated Financial Statements................26-45
Independent Auditors' Report..............................46-47
Corporate Directory....................................... 48
Corporate Information..................................... 49
FINANCIAL HIGHLIGHTS
Westbank Corporation and Subsidiaries
FOR THE YEAR ENDED DECEMBER 31
(Dollars in Thousands) 1998 1997 1996
- ------------------------------------------------------------------------
Net income $ 3,377 $ 3,384 $ 2,137
Net interest income 15,339 14,633 13,535
Non-interest income 2,427 2,529 2,340
Non-interest expense 12,200 11,066 11,278
Provision for loan losses 41 306 944
YEAR END DECEMBER 31
(Dollars in Thousands)
- -------------------------------------------------------------------------
Investment and
mortgage-backed securities $ 84,328 $ 60,213 $ 39,764
Loans, net 293,113 268,254 254,948
Allowance for loan losses 2,665 3,057 2,699
Total assets 402,623 355,567 331,803
Total deposits 342,266 314,679 298,014
Total stockholders' equity 30,490 26,918 22,717
COMMON SHARE INFORMATION
Basic weighted average
shares outstanding 4,143,009 3,845,698 3,643,270
Basic net earnings per share $ .82 $ .88 $ .59
CHAIRMAN'S AND PRESIDENT'S LETTER
Westbank Corporation and Subsidiaries
Dear Shareholder:
The past year was especially rewarding because we have achieved our topmost
objectives, record earnings and measured growth. Our growth strategy is based on
the premise: Succeeding today and investing for tomorrow. We seek to grow at a
measured, orderly pace by nurturing our core banking operations, deepening our
market penetration by providing more banking services to our present customers,
by acquisitions of other banks and opening new offices in selected areas.
We are proud to report that net income for the year ended December 31, 1998
totaled $3.3 million or $0.84 per diluted share, compared to $3.2 million or
$0.89 per diluted share for the same period a year ago. Included in the results
of operations during the fourth quarter of 1998 were $400 thousand of merger
costs associated with the acquisition of Cargill Bancorp, Inc., of Putnam,
Connecticut, which was consummated on January 29, 1999.
We look forward to the opportunity to work with the Cargill shareholders, staff
and customers. The affiliation will allow Cargill to offer a wider range of
products and services, while at the same time Westbank will achieve its
corporate objective of expanding its market into Connecticut.
Westbank is presently positioned and has sufficient resources and infrastructure
to expand through acquisition. We will pursue opportunities for growth in our
defined market area as well as in markets that are contiguous to our present
market area, which include Connecticut, Rhode Island and Central Massachusetts.
Consistent with our corporate strategies of building market share, we have
expanded our geographical reach into Ludlow and Southwick, Massachusetts. These
new full-service banking offices have exceeded all expectations by generating a
combined total of $11 million in new deposits last year.
At year-end assets totaled $355 million, an increase of $46.7 million or 15%
compared to the same period in 1997. Deposits increased by $27.5 million or 10%
and totaled $299.1 million.
The Corporation's capital was $27.3 million at year end, representing a capital
ratio of 7.69% while the Corporation's book value totaled $7.19 versus $6.63 for
the same period in the prior year.
Particularly gratifying was the fact that we were able to expand our loan
portfolio last year while continuing to maintain our disciplined loan criteria,
ample evidence that loans can be increased substantially while maintaining high
credit standards. During 1998 loans increased by $26.9 million or 12% and
totaled $259.3 million.
At Westbank, profitability is achieved through hard work and a clear focus on
what we do well. We reinvest in growth businesses and emphasize our core
competencies, which include credit and service quality, both of which are
absolutely essential to compete effectively. Banks cannot consistently generate
exceptional profits without being top-flight credit underwriters. Westbank is
recognized industry-wide for our relentless focus on maintaining superior credit
quality. Customer's needs seldom fall into neat categories, and usually cross
from one type of banking product to another. A clear competitive advantage for
Westbank is the fact that we organize around our customers and their needs, not
around products. To be focused on the customer, we have to know what the
customer wants, therefore, we listen to them and hear what they really need.
Through our local decision-making process in our banking offices our employees
are empowered to deliver customer solutions.
We've helped many businesses grow from the spare bedroom to the oak boardroom.
Technology helps us offer services in a more timely manner. However, sometimes
customers want the personal touch. Westbank offers both. This is the essence of
Westbank and the basis of the Westbank Advantage: Our products; our people; our
entire company is focused on meeting the needs of the customer.
Large bank mergers have negatively impacted small and medium sized businesses,
which indicates that there is and will be a growing need for a community bank
that offers not only a broad range of products both to businesses and consumers
but also provides exceptional service. The Residential Mortgage Department
continued its strong record of growth and significantly exceeded 1998 goals.
Westbank assisted six hundred families in terms of purchasing a home, building
their dream home or lowering their existing payments by closing on $61,000,000
in residential loans. Park West Bank and Trust Company also added an additional
satellite mortgage correspondent bank, which has an excellent reputation in the
Franklin County area of Western Massachusetts.
We converted a portion of our mortgages into mortgage-backed securities for sale
on Wall Street, providing the Bank with excellent investment grade securities
and immediate liquidity. This enables Westbank to realize additional income
without relinquishing its relationship with the borrower. With activity
remaining strong at the end of 1998, we anticipate another strong year in 1999.
Westbank's relatively new Indirect Lending Program has had a very positive
impact on loan originations. Through this program Westbank receives consumer
loan applications from Bank-approved automobile and recreational vehicle
dealerships whose customers wish to finance their purchases. These applications
are then processed according to the Bank's normal consumer loan underwriting
criteria. In 1998, indirect consumer loans accounted for approximately 28.5% of
the Bank's total consumer loan originations excluding mortgages.
As wealth grows, so do the opportunities for those of us who manage and invest
that wealth. Customer needs change as they marry, purchase homes, have children
or retire. These lifestyle changes, coupled with changing market conditions,
make understanding all the more difficult. Our Trust Department has a
well-diversified line of services that is able to meet the changing needs of our
customers throughout each phase of their life cycle. Their "job" is building
long-term relationships with customers through all market conditions. That means
consistently providing the capabilities and capacity to serve customers as their
needs and situations change. During 1998, the Trust Department made significant
strides. They have built high quality customer relationships based on the trust
their customers place in them. At year-end, fiduciary accounts totaled in excess
of $119 million.
There is, of course, a lot of work that goes on behind the scenes that improves
our ability to compete effectively. For example, we are testing and changing
systems to be certain that we will cross the threshold into the next millennium.
Work on Year 2000 compliance is well advanced. Credit for this accomplishment
can be placed squarely on the shoulders of our Y2K Committee that is comprised
of executive officers in charge of each functional area of the bank. The
Committee is responsible for implementing our Year 2000 plan, and reporting its
progress monthly to the board of directors.
Our success is attributable to an exceptional team of employees, many of whom
are shareholders. They work hard every day to meet and exceed the expectations
of their customers and are determined that Westbank be recognized as a leader in
the financial services industry. The critical link between customer satisfaction
and shareholder value has always been the quality of our employees.
Westbank is focused on a growth momentum. However, size is not a strategy. It is
a statistic; i.e. growth only for the sake of getting bigger cannot be an
objective. Westbank will grow but only in ways that lead to a stronger and more
profitable company.
CORPORATE VISION IS NOTHING WITHOUT FOCUS. Our focus will be on three strategic
initiatives: Revenue Growth, Cost Control and Asset Management. Westbank will
continue to emphasize the growth of its core business this year. We expect to
build lending and deposit relationships with local customers in a very
competitive market. Westbank has the advantage of being a reliable community
bank that has a well-earned reputation for knowledgeable service by its
experienced staff.
Nineteen Hundred and Ninety-Nine will be a challenging year for us as we strive
to enhance the environment necessary to support and expand a diversified and
profitable financial services company. We will remain intently focused not only
on growth, but also on operational integrity and the effectiveness required to
achieve a predictable, sustainable financial performance. We are confident in
the strategic direction we have chosen and where we expect it to take us
throughout 1999 and beyond.
Westbank Corporation and its shareholders have been fortunate over the years to
be well served by a strong management team and Board of Directors. After
thirty-eight years of dedicated service to the Company, Alfred C. Whitaker and
Paul J. McKenna, DMD, will retire from the Board of Directors in April of 1999.
Their dedication to Westbank and its shareholders is as strong today as it was
when they, along with a small group of other businessmen, founded the Bank in
1961. We would like to take this opportunity to thank them for their leadership
and loyalty. We wish them well in their retirement. We welcome to the Board of
Directors G. Wayne McCary, President and Chief Executive Officer of Eastern
States Exposition, the sixth largest fair in North America located in West
Springfield, Massachusetts.
We appreciate your loyalty, confidence and support of Westbank Corporation. Your
investment in our Company is foremost in our minds as we plan for the future. We
look forward to the ever-present challenges and the accompanying opportunities
of the twenty-first century. We are optimistic that with your continued support
we will continue to focus on growth and earnings.
Sincerely,
Alfred C. Whitaker Donald R. Chase
Chairman of the Board President and
Chief Executive Officer
BUSINESS
Westbank Corporation and Subsidiaries
CORPORATE ORGANIZATION
Westbank Corporation (hereinafter sometimes referred to as "Westbank" or the
"Corporation") is a registered Bank Holding Company organized to facilitate the
expansion and diversification of the business of Park West Bank and Trust
Company (hereinafter sometimes referred to as "Park West" or the "Bank") into
additional financial services related to banking.
PARK WEST BANK AND TRUST COMPANY
As of December 31, 1998, substantially all operating income and net income of
the Corporation are presently accounted for by Park West. Park West is chartered
as a state bank and trust company by the Commonwealth of Massachusetts, is a
member of the Federal Deposit Insurance Corporation ("FDIC"), and is subject to
regulation by the Massachusetts Commissioner of Banks and the FDIC. A full range
of retail banking services is furnished to individuals, businesses, and
nonprofit organizations through thirteen banking offices located in Hampden
County. Such services include a wide range of checking and savings accounts,
loans, safe deposit facilities, and automated teller machines at selected branch
locations.
Park West 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.
Park West 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, 1998 amounted to
$119,797,000 and is not included in the accompanying financial statements since
such items are not assets of the Bank.
EMPLOYEES
As of December 31, 1998, the Corporation and its subsidiaries had the equivalent
of 125 full-time officers and staff.
COMPETITION
Westbank's banking, real estate activity and trust services are competitive with
other Massachusetts financial institutions. Its service area is in Western
Massachusetts, primarily Hampden County. Westbank's 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 by 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.
ACQUISITION OF CARGILL BANCORP, INC.
On July 15, 1998, the Corporation entered into an agreement to acquire Cargill
Bancorp, Inc., which is a Delaware corporation and the holding company for
Cargill Bank, a $47.0 million asset Connecticut chartered stock savings and loan
association headquartered in Putnam, Connecticut.
Under the terms of the agreement, Cargill Bancorp will be merged into Westbank
Corporation. Cargill Bank will retain its local identity and remain a separate
subsidiary of Westbank Corporation. Each share of Cargill Bancorp common stock
will be exchanged for 1.3655 shares of Westbank common stock.
On November 3, 1998, the Corporation filed a registration statement to register
approximately 565,096 shares of common stock in order to facilitate this merger.
Cargill shareholders approved the merger at a shareholders meeting held on
December 16, 1998, and final regulatory approval was received on January 14,
1999.
SELECTED CONSOLIDATED FINANCIAL DATA
Westbank Corporation and Subsidiaries
Year ended December 31,
(Dollars in Thousands Except Share Amounts) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 28,631 $ 26,724 $ 24,059 $ 23,475 $ 19,647
Interest expense 13,292 12,091 10,524 10,145 7,481
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 15,339 14,633 13,535 13,330 12,166
Provision for loan losses 41 306 944 2,907 1,528
Non-interest income 2,427 2,529 2,340 3,104 2,641
Non-interest expense 12,200 11,066 11,278 9,969 11,234
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,525 5,790 3,653 3,558 2,045
Income taxes (benefit) 2,148 2,406 1,516 1,132 (307)
- -------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of changes in accounting principle 3,377 3,384 2,137 2,426 2,352
Cumulative effect of changes in
accounting principle for income taxes (22)
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,377 $ 3,384 $ 2,137 $ 2,426 $ 2,330
===============================================================================================================================
Common share data:
Earnings per share:
Basic $ .82 $ .88 $ .59 $ .69 $ .67
Diluted $ .79 $ .85 $ .57 $ .67 $ .65
Cash dividends declared $ .40 $ .30 $ .24 $ .20
Ending book value $ 7.26 $ 6.84 $ 6.19 $ 5.80 $ 5.25
AT DECEMBER 31:
Total loans -- net $ 293,113 $ 268,254 $ 254,948 $ 233,527 $ 225,193
Total assets 402,623 355,567 331,803 299,590 284,814
Total non-performing assets 1,494 2,025 3,791 8,655 8,313
Total deposits 342,266 314,679 298,014 269,478 256,668
Total borrowings 27,807 11,884 9,269 7,677 8,625
Total stockholders' equity 30,490 26,918 22,717 20,786 17,355
AVERAGE FOR YEAR:
Loans 284,629 270,066 246,366 232,422 214,846
Assets 382,924 348,561 313,063 297,676 273,214
Deposits 335,110 312,725 280,855 269,105 246,845
Stockholders' equity 29,229 24,638 21,777 19,741 17,655
Weighted shares outstanding - basic 4,143,009 3,845,698 3,643,270 3,539,919 3,491,111
- diluted 4,272,682 4,003,015 3,762,419 3,630,052 3,562,162
SELECTED RATIOS:
Rate of return on average total assets .88% .97% .68% .81% .86%
Rate of return on average stockholders' equity 11.55% 13.73% 9.81% 12.29% 13.20%
Stockholders' equity to total assets at year end 7.57% 7.57% 6.85% 6.93% 6.09%
Average total stockholders' equity
to average total assets 7.63% 7.07% 6.96% 6.63% 6.46%
Allowance for loan losses to total loans at year end .90% 1.13% 1.05% 1.65% 1.49%
Non-performing loans as a percentage
of total loans at year end .37% .68% 1.23% 2.89% 2.57%
Net charge-offs as a percentage
of average loans .15% .02% .88% 1.03% .76%
Other real estate owned as a percentage of total assets .12% .10% .19% .53% .61%
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS
Westbank Corporation and Subsidiaries
Management's discussion of operations and financial position is based on the
selected consolidated financial data and should be read in conjunction with the
consolidated financial statements and notes thereto. Effective January 29, 1999,
Cargill Bancorp, Inc., and its subsidiary ("Cargill") were merged with and into
Westbank Corporation ("Westbank"), 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. Approximately 400,164 of Westbank common shares were
issued for the outstanding common stock of Cargill.
The transaction was accounted for using the pooling-of-interests method and,
accordingly, all historical financial data has been restated to include both
entities for all periods presented. Westbank's fiscal year ends December 31 and
Cargill's fiscal year ends September 30.
For 1998, the Corporation reported net income of $3,377,000, or $.82 per share
basic and $.79 diluted, after providing $41,000 for loan losses. This compares
to net income for 1997 of $3,384,000, or $.88 per share basic and $.85 diluted.
The Corporation's 1997 earnings reflected a provision for loan losses of
$306,000. Net interest income increased $706,000 from 1997 to 1998.
Non-interest expense amounted to $12,200,000 in 1998 compared to $11,066,000 in
1997, an increase of $1,134,000, or 10%. The increase in operating expenses for
1998 is a direct result of reflecting $595,000 for merger costs related to the
acquisition of Cargill Bancorp, Inc., and the remaining increase is a result of
the overall growth of the Corporation. Non-interest income declined by $102,000
compared to 1997. During 1998, Trust Department earnings increased by $33,000
over 1997. Gains on sale of investments and other real estate declined by
$142,000, gains on sale of mortgages totaled $120,000, while service charges on
deposit accounts and other non-interest income declined by $108,000 compared to
1997. Income taxes in 1998 totaled $2,148,000, a decrease of $258,000 versus
1997.
At December 31, 1998, the Corporation's total assets were $402,623,000, an
increase of $47,056,000 or 13%, from $355,567,000 at year-end 1997. The higher
level of assets resulted primarily from an increase in net loans and investments
totaling $48,875,000 funded by the growth in deposits.
Non-performing assets amounted to $1,494,000 or .37% of total assets at December
31, 1998, compared with $2,025,000 or .68% at the end of 1997.
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 which can apply to a financial institution. As of December 31,
1998, Park West's and Cargill's capital was at a level that placed each Bank in
the "well capitalized" category as defined by FDICIA.
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
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
The following table presents the Corporation's components of capital as of
December 31. The table also presents the ratio of capital to total assets.
(Dollars in Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Stockholders' Equity
Common stock $ 8,397 $ 7,865 $ 7,343
Additional paid-in-capital 11,076 9,711 8,386
Retained earnings 10,803 9,282 7,087
Accumulated other
comprehensive income (loss) 214 60 (99)
- -------------------------------------------------------------------------------
Total Capital $30,490 $26,918 $22,717
===============================================================================
Ratio of capital
to average total assets 7.53% 7.44% 7.00%
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; total risk-based, or supplementary, capital includes not
only the equity but also a portion of the allowance for loan losses.
The following are the Corporation's risk-based capital ratios at December 31:
1998 1997 1996
Tier 1 risk-based capital (minimum required 4%) 11.94% 11.57% 10.58%
Total risk-based capital (minimum required 8%) 13.00% 12.77% 11.76%
==============================================================================
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, is quite basic and concentrates on fundamental
strategies to restructure the balance sheet and 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 will
allow 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.
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,
1998 and 1997:
Percentage Change in
Change in Interest Rates Net Interest Income
(In Basis Points) 1998 1997
- --------------------------------------------------------------------------------
+200 (5.21)% (1.41)%
Level 0% 0%
-200 (0.71)% 1.40%
The change in net interest income between 1998 and 1997 when rates decline 200
basis points is primarily the result of the current low interest rate
environment. In the current year, many deposit rates were not able to be
decreased by the full 200 basis points. The inability to reduce deposit rates
would cause net interest income to decline during a falling interest rate
environment despite the Corporation being liability-sensitive.
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,
1998, 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.
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
Securities including
mortgage-backed securities $ 3,174 $ 1,549 $ 6,380 $ 73,225 $ 84,328
Interest bearing cash 391 595 894 1,880
Loans 50,916 45,162 97,771 101,929 295,778
Federal funds sold 1,069 1,069
- --------------------------------------------------------------------------------------------------------
55,550 47,306 105,045 175,154 383,055
INTEREST BEARING LIABILITIES
Savings deposits 5,369 48,320 53,689
NOW Accounts 2,600 23,393 25,993
Money market accounts 29,659 29,659
Negotiated rate certificates 13,299 8,439 3,373 25,111
Other time deposits 39,198 78,436 38,786 156,420
Borrowed funds 20,309 510 6,988 27,807
- --------------------------------------------------------------------------------------------------------
$102,465 $ 95,354 $ 120,860 $318,679
========================================================================================================
Interest Rate
Sensitivity Gap $(46,915) $(48,048) $ (15,815) $175,154 $ 64,376
Cumulative Interest Rate
Sensitivity Gap $(46,915) $(94,963) $(110,778) $ 64,376
Interest Rate
Sensitivity Gap Ratio (12.24%) (12.54%) (4.15%) 45.68% 16.75%
Cumulative Interest Rate
Sensitivity Gap Ratio (12.24%) (24.79%) (28.93%) 16.75%
The presentation of a run off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $5,369,000 and
$2,600,000, 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. In periods of rising interest rates, Westbank's negative interest rate
sensitivity gap as to earning assets and interest-bearing liabilities maturing
in less than one year may cause a diminution of Westbank's income;
correspondingly, in periods of declining interest rates, a negative interest
rate sensitivity gap may provide additional 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 average balance sheets for 1998, 1997
and 1996. 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:
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
1998 1997 1996
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 $ 3,663 $ 221 6.03% $ 6,978 $ 430 6.16% $ 9,150 $ 591 6.46%
Federal agencies 61,856 3,994 6.46 42,072 2,833 6.73 26,044 1,768 6.79
Other securities 4,969 304 6.12 3,835 240 6.26 4,158 279 6.71
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 70,488 4,519 6.41 52,885 3,503 6.62 39,352 2,638 6.70
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing cash and
temporary investments 792 29 3.66 1,340 73 5.45 2,592 163 6.29
- -----------------------------------------------------------------------------------------------------------------------------------
Loans: (a)
Commercial 41,129 3,810 9.26 38,058 3,640 9.56 35,558 3,351 9.42
Real estate 213,377 17,400 8.15 205,984 17,153 8.33 190,235 15,871 8.34
Consumer 30,123 2,435 8.08 26,024 2,100 8.07 20,573 1,789 8.70
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 284,629 23,645 8.31 270,066 22,893 8.48 246,366 21,011 8.53
Federal funds sold 7,761 438 5.64 4,800 255 5.31 4,845 247 5.10
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 363,670 $ 28,631 7.87% 329,091 $ 26,724 8.12% 293,155 $ 24,059 8.21%
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (2,920) (2,840) (3,383)
Cash and due from banks 11,120 10,888 10,704
Other assets 11,054 11,422 12,587
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $382,924 $348,561 $313,063
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing deposits:
Savings $ 50,588 $ 1,382 2.73% $ 47,020 $ 1,160 2.47% $ 43,932 $ 978 2.23%
Money market 31,663 1,195 3.77 17,132 572 3.34 14,172 373 2.63
Negotiated rate certificates 22,977 1,118 4.87 18,528 922 4.98 16,621 829 4.99
Other time deposits 181,085 8,967 4.95 184,165 9,146 4.97 162,154 8,083 4.98
- -----------------------------------------------------------------------------------------------------------------------------------
Total time deposits 286,313 12,662 4.42 266,845 11,800 4.42 236,879 10,263 4.33
Borrowed funds 16,906 630 3.73 9,065 291 3.21 8,714 261 3.00
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 303,219 13,292 4.38 275,910 12,091 4.38 245,593 10,524 4.29
Demand deposits 48,797 45,880 43,976
Other liabilities 1,679 2,133 1,717
Stockholders' equity 29,229 24,638 21,777
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $382,924 $348,561 $ 313,063
===================================================================================================================================
Net interest income $ 15,339 $ 14,633 $ 13,535
Yield spread 3.49% 3.74% 3.92%
Net Yield on earning assets 4.22% 4.45% 4.62%
===================================================================================================================================
(a) 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 1998, the yield spread declined to 3.49% from 3.74% in 1997, down 25
basis points. The Corporation's net interest margin decreased during 1998 to
4.22% from 4.45% in 1997, a decrease of 23 basis points
During 1997, the yield spread declined to 3.74% from 3.92% in 1996, down 18
basis points. The Corporation's net interest margin decreased during 1997 to
4.45% from 4.62% in 1996, a decrease of 17 basis points. The section titled
Rate/Volume Analysis further describes the change in yields.
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) and interest expense and changes
therein for 1998 as compared with 1997 and 1997 compared with 1996.
1998 Compared With 1997 1997 Compared With 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Increase Due to* Increase Due to*
(Dollars in Thousands) 1998 1997 (Decrease) Volume Rate 1997 1996 (Decrease) Volume Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Interest earned:
Securities:
U.S. Treasury $ 221 $ 430 $(209) $ (200) $ (9) $ 430 $ 591 $ (161) $ (140) $ (21)
Federal agencies 3,994 2,833 1,161 1,281 (120) 2,833 1,768 1,065 1,058 7
Other securities 304 240 64 69 (5) 240 279 (39) (18) (21)
Interest-bearing cash 29 73 (44) (24) (20) 73 163 (90) (86) (4)
Loans:
Commercial 3,810 3,640 170 286 (116) 3,640 3,351 289 239 50
Real estate 17,400 17,153 247 600 (353) 17,153 15,871 1,282 1,314 (32)
Consumer 2,435 2,100 335 332 3 2,100 1,789 311 446 (135)
Federal funds sold 438 255 183 166 17 255 247 8 (2) 10
- -----------------------------------------------------------------------------------------------------------------------------------
28,631 26,724 1,907 2,510 (603) 26,724 24,059 2,665 2,811 (146)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings 1,382 1,160 222 93 129 1,160 978 182 73 109
Money market 1,195 572 623 540 83 572 373 199 87 112
Negotiated rate certificates 1,118 922 196 218 (22) 922 829 93 96 (3)
` Other time deposits 8,967 9,146 (179) (142) (37) 9,146 8,083 1,063 1,109 (46)
Borrowed funds 630 291 339 285 54 291 261 30 11 19
- -----------------------------------------------------------------------------------------------------------------------------------
13,292 12,091 1,201 994 207 12,091 10,524 1,567 1,376 191
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $15,339 $14,633 $ 706 $1,516 $(810) $14,633 $13,535 $1,098 $1,435 $(337)
===================================================================================================================================
* 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 1998 increased to $15,339,000, up 5% from $14,633,000 in
1997. An 11% increase in average earning assets and a 25 basis point decline in
average rate of return resulted in an increase in volume of $2,510,000 and a
decrease in rate of $603,000. An increase of 10% in average interest-bearing
liabilities and a 1 basis point increase in average rate of interest paid
contributed to an increase in volume of $994,000 and an increase in rate of
$207,000.
Net interest income for 1997 increased to $14,633,000, up 8% from $13,535,000 in
1996. A 16% increase in average earning assets and a 9 basis point decline in
average rate of return resulted in an increase in volume of $2,811,000 and a
decrease in rate of $146,000. An increase of 12% in average interest-bearing
liabilities and a 9 basis point increase in average rate of interest paid
contributed to an increase in volume of $1,376,000 and an increase in rate of
$191,000.
LIQUIDITY
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.
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 market values at December 31, 1998 of
the securities portfolio. The following table shows the amortized cost (in
thousands) of the Corporation's securities held to maturity at December 31:
1998 1997 1996
- ----------------------------------------------------------------------
U. S. Government obligations $ 998 $ 4,246 $ 7,296
Federal agency obligations 26,890 32,927 13,827
Mortgage-backed securities 2,728 2,330 1,814
Other debt securities 99 2,440
- ----------------------------------------------------------------------
Amortized cost $30,616 $39,602 $25,377
======================================================================
The following table shows the fair value (in thousands) of the Corporation's
securities available for sale at December 31:
1998 1997 1996
- --------------------------------------------------------------------------------
U. S. Government obligations $ 928 $ 2,058 $ 1,990
Federal agency obligations 26,667 3,486 2,465
Mortgage-backed securities 24,372 13,502 8,807
Equity securities 1,745 1,664 1,125
- --------------------------------------------------------------------------------
53,712 20,710 14,387
Gross unrealized (gain) loss on
securities available for sale (352) (104) 170
- --------------------------------------------------------------------------------
Amortized cost $ 53,360 $ 20,606 $ 14,557
================================================================================
The following table shows weighted average yields and maturity distribution of
debt securities at December 31, 1998:
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 5.61% $ 1,428 6.25% $ 498 5.78% $ 1,926
Federal agency
obligations 5.19 1,499 6.43 4,442 6.21% $44,477 6.49% $ 3,400 6.22% 53,818
Mortgage-backed
securities 5.50 56 6.26 1,440 6.48 1,004 6.58 23,987 6.56 26,487
- ------------------------------------------------------------------------------------------------------------------------------
Total debt
Securities 5.40% $ 2,983 6.37% $ 6,380 6.22% $45,481 6.57% $27,387 6.32% $82,231
==============================================================================================================================
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.
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:
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
Commercial $ 41,760 $ 41,661 $ 36,153 $ 36,080 $ 35,156
- -------------------------------------------------------------------------------------------
Real Estate:
Construction 5,998 5,302 6,662 8,526 8,900
Residential (1-4 family) 168,744 152,896 153,781 132,530 113,327
Commercial properties 60,348 55,127 45,506 51,059 61,311
- -------------------------------------------------------------------------------------------
Total Real Estate 235,090 213,325 205,949 192,115 183,538
- -------------------------------------------------------------------------------------------
Consumer 19,277 16,648 15,943 9,701 10,240
- -------------------------------------------------------------------------------------------
Gross loans 296,127 271,634 258,045 237,896 228,934
Deferred loan origination
fees-net of costs (349) (323) (398) (445) (339)
- -------------------------------------------------------------------------------------------
Total Loans 295,778 271,311 257,647 237,451 228,595
Allowance for loan
losses (2,665) (3,057) (2,699) (3,924)
(3,402)
- -------------------------------------------------------------------------------------------
Net loans $ 293,113 $ 268,254 $ 254,948 $ 233,527 $ 225,193
===========================================================================================
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
$3,041,000 or 7.8% of stockholders' equity as of December 31, 1998, compared to
$2,386,000 or 8.9% as of December 31, 1997.
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, 1998:
12 Months 1 - 5 After
(Dollars in Thousands) or Less Years 5 Years Total
- -------------------------------------------------------------------------------
Commercial $32,576 $ 7,457 $ 1,727 $41,760
Commercial real estate-construction 5,998 5,998
- -------------------------------------------------------------------------------
Totals $38,574 $ 7,457 $ 1,727 $47,758
===============================================================================
Of the commercial loans which mature beyond one year, approximately $4,291,000
have fixed rates and the remaining $4,893,000 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 $9,281,000 and $31,457,000, respectively, at December 31,
1998 and $10,257,000 and $29,533,000, respectively, in 1997. See further
discussion in Note 13 to the Consolidated Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
LOAN LOSS EXPERIENCE
The provision for loan losses is an amount added to the allowance against which
loan losses are charged. 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 these reviews, the allowance for loan losses at December 31,
1998, 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) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 3,057 $ 2,699 $ 3,924 $ 3,402 $ 3,511
Provision charged to expense 41 306 944 2,907 1,528
- --------------------------------------------------------------------------------------------------------------------------
3,098 3,005 4,868 6,309 5,039
- --------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Loans secured by real estate 318 394 1,745 2,180 1,305
Construction/land development 190 12
Commercial and
industrial loans 153 250 510 246 487
Consumer loans 47 116 94 122 96
- --------------------------------------------------------------------------------------------------------------------------
518 760 2,539 2,560 1,888
- --------------------------------------------------------------------------------------------------------------------------
Recoveries:
Loans secured by real estate 42 354 324 24 25
Construction/land developing 14 75
Commercial and
industrial loans 30 445 12 51 210
Consumer loans 13 13 20 25 16
- --------------------------------------------------------------------------------------------------------------------------
85 812 370 175 251
- --------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 433 (52) 2,169 2,385 1,637
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 2,665 $ 3,057 $ 2,699 $ 3,924 $ 3,402
Average loans outstanding $ 284,629 $ 270,066 $ 246,366 $ 232,423 $ 214,846
==========================================================================================================================
Net charge-offs (recoveries) as a percentage
of average loans 0.15% (0.02)% 0.88% 1.03% 0.76%
Net charge-offs (recoveries) as a percentage of
the allowance at January 1 14.16 (1.93) 55.28 70.11 46.62
Allowance as a percentage of total
loans at December 31 0.90 1.13 1.05 1.65 1.49
Allowance as a percentage of
non-performing loans
at December 31 259.24 166.87 85.41 55.42 51.70
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) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- -----------------------------------------------------------------------------------------------------------------------------------
Loans secured by
real estate $1,764 77.38% $2,083 76.55% $1,763 77.23% $2,898 77.17% $2,626 76.28%
Construction/land
development 70 2.03 83 1.97 94 2.58 156 3.58 127 3.89
Commercial and industrial
loans 628 14.10 697 15.35 685 14.01 776 15.17 522 15.36
Consumer loans 203 6.49 194 6.13 157 6.18 94 4.08 127 4.47
- -----------------------------------------------------------------------------------------------------------------------------------
$2,665 100% $3,057 100% $2,699 100% $3,924 100% $3,402 100%
===================================================================================================================================
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is the combination of a target reserve and 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 decline in the allowance for loan losses from 1997 to
1998 is a result of the improved credit quality of the loan portfolio, in
combination with the continued improvement in the local economy.
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) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Loans on a non-accrual basis $ 797 $ 1,648 $ 2,878 $ 6,578 $ 5,378
- ------------------------------------------------------------------------------------------------------
Non-accrual loans as a percentage
of total net loans outstanding 0.27% 0.61% 1.13% 2.82% 2.39%
Non-accrual loans as a percentage
of total assets 0.20% 0.46% 0.87% 2.20% 1.89%
Loans contractually past due 90
days or more and still accruing $ 231 $ 184 $ 282 $ 503 $ 1,202
The gross amount of interest that would have been accrued at the original
contract rate on loans on a non-accrual basis (in thousands) was $35,000,
$79,000, $240,000, $331,000 and $408,000 for 1998, 1997, 1996, 1995 and 1994,
respectively. Interest income included in the results of operations relating to
these loans was $20,000 in 1994. The decrease in non-accrual loans from 1997 is
attributable to the continued resolution of non-performing loans throughout
1998. During the second quarter of 1998, the Corporation sold a pool of non-
performing loans. The decrease in the allowance for loan losses is attributable
to charging off previously-reserved amounts directly related to the sale of non-
performing loans referred to above.
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
The Bank evaluates each impaired loan to determine the appropriate income
recognition practice. Generally, income is recorded only on a cash basis for
impaired loans. Interest income recognized during 1998 and 1997 on impaired
loans was not significant. At December 31, 1998 and 1997, the recorded
investment in impaired loans was $1,419,000 and $1,809,000 respectively, for
which no additional specific allowance for loan losses was recorded. For the
twelve months ended December 31, 1998, the average recorded investment in
impaired loans was $1,366,000 compared to $2,080,000 for 1997.
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
modified prior to January 1, 1995, which are performing in accordance with their
new terms are not included in non-accrual loans, unless concern exists as to the
ultimate collection of principal or interest, and are not considered to be
impaired. Those entered into after January 1, 1995, are considered to be
impaired as described in Note 1 to the financial statements Restructured loans,
which are classified as accruing loans, amounted to $773,000 in 1995 and
$681,000 in 1994. Interest income reduction because of restructuring was not
significant for 1995 and 1994.
OTHER REAL ESTATE OWNED
The following table sets forth information regarding other real estate owned at
December 31:
(Dollars in Thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
Other real estate owned - net $ 466 $ 353 $ 631 $ 1,574 $ 1,733
Other real estate owned as a
percentage of total assets .12% .10% .19% .53% .61%
DEPOSITS
The following table sets forth the average amounts of various classifications of
deposits:
1998 1997 1996
(Dollars in Thousands) Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------------
Savings $ 50,588 2.73% $ 47,020 2.47% $ 43,932 2.23%
Money market 31,663 3.77 17,132 3.34 14,172 2.63
Negotiated rate certificates 22,977 4.87 18,528 4.98 16,621 4.99
Other time deposits 181,085 4.95 184,165 4.97 162,154 4.98
- ------------------------------------------------------------------------------------------------------------------------------
286,313 4.42% 266,845 4.42% 236,879 4.33%
Demand deposits 48,797 45,880 43,976
- ------------------------------------------------------------------------------------------------------------------------------
$335,110 $312,725 $280,855
==============================================================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
Certificates of deposits of $100,000 and over at December 31, 1998 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 $13,298 $4,349 $4,090 $3,374 $26,880
=============================================================================================================================
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:
1998 1997 1996
- ----------------------------------------------------------------------------------------------
Return on average total assets .88% .97% .68%
Return on average stockholders' equity 11.55 13.73 9.81
Average stockholders' equity to average total assets 7.57 7.07 6.96
Dividend payout ratio 44.54 30.76 36.78
BORROWINGS
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) 1998 1997 1996
Balance at year end $27,807 $11,884 $ 9,269
Average amount outstanding 16,442 9,065 8,714
Maximum amount outstanding at any month-end 28,307 14,036 12,794
Average interest rate for the year 3.83% 3.20% 2.99%
Average interest rate on
year-end balance 3.85 3.15 3.03
STATEMENTS OF INCOME
In the following sections of Management's Discussion and Analysis of the
Statements of Income, the comparative results of 1998, 1997 and 1996 will be
covered in greater detail. As of December 31, 1998, the principal earning assets
of the holding company consist of a commercial bank, Park West Bank and Trust
Company, and a Connecticut state-chartered savings bank, Cargill Bank.
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,
1998. The significant changes are discussed in the analysis that follow the
summary.
Percentage of
increase (decrease)
1998 1997
Over Over
(Dollars in Thousands) 1998 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------
Net interest income $15,339 $14,633 $13,535 4.82% 8.11%
Provision for loan losses 41 306 944 (86.60) (67.58)
Non-interest income 2,427 2,529 2,340 (4.03) 8.08
Non-interest expense 12,200 11,066 11,278 10.25 (1.88)
Income taxes 2,148 2,406 1,516 (10.72) 58.71
- ------------------------------------------------------------------------------------------------------
Net Income $ 3,377 $ 3,384 $ 2,137 (0.21%) 58.35%
======================================================================================================
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 1998 amounted to $28,631,000 as compared to
$26,724,000 for 1997 and $24,059,000 for 1996. For 1998 this represents an
increase of $1,907,000 or 7% over 1997, while interest income increased by
$2,665,000 or 11% in 1997 versus 1996. The increase in 1998 is the result of an
increase in average earning assets of $34,579,000 or 11%, offset by a decrease
of 25 basis points in average earning interest rate. The increase in 1997 over
1996 is the result of an increase in average earning assets of $35,936,000
offset by a 9 basis point decrease in average earning interest rate.
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
INTEREST EXPENSE
Interest expense for 1998 on deposits and borrowings amounted to $13,292,000 as
compared to $12,091,000 in 1997 and $10,524,000 for 1996. Interest expense
increased by $1,201,000 or 10% during 1998 compared to 1997 and 1997 interest
expense increased by $1,567,000 or 15% versus 1996. The 1998 increase is the
result of an increase in average interest-bearing liabilities of $27,309,000 and
a 1 basis point increase in the average rate of interest paid compared to 1997.
The increase in interest expense during 1997 versus 1996 is the result of an
increase of average interest-bearing liabilities of $30,614,000 combined with a
9 basis point increase 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) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Total interest income $28,631 $26,724 $24,059
Total interest expense 13,292 12,091 10,524
- ----------------------------------------------------------------------------------------------------------------
Net interest income $15,339 $14,633 $13,535
================================================================================================================
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 1998 provision for loan losses totaled $41,000 compared with $306,000 in
1997, a decrease of 87%. During 1997, the provision decreased by $638,000 versus
1996, representing a decrease of 68%. The decrease in the provision for loan
losses during 1998 is directly attributable to the decrease in non-performing
loans and the overall credit quality of the Bank's loan portfolio. 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 $2,427,000 in 1998, a decrease of
$102,000 from the prior year and an increase of $189,000 versus 1996. Non-
interest income for 1998 reflects an increase in Trust Department earnings of
$33,000, a decrease in service charges on deposit accounts and other non-
interest income of $42,000 and decreases from the gain on sale of investments,
other real estate and mortgages totaling $27,000 compared to 1997.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
NON-INTEREST EXPENSE
The components of other operating expenses at December 31 are as follows:
(Dollars in Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Salaries and benefits $ 5,797 $ 5,461 $ 5,091
Occupancy 855 780 792
Other non-interest expense 5,444 4,604 4,781
Other real estate
owned expenses and provision 104 221 614
- ----------------------------------------------------------------------------
$12,200 $11,066 $11,278
============================================================================
Overall non-interest expense increased during 1998 by $1,058,000 versus 1997 and
by $1,099,000 compared to 1996. During 1998, salaries and benefits increased by
$385,000, attributable to overall corporate growth and the staff requirements
for the addition of two new branch offices during 1998. Occupancy remained level
with 1997. Finally, other non-interest expense and depreciation and amortization
expense increased in 1998 by $668,000, the result of the recognition of
approximately $595,000 of merger expense related to the acquisition of Cargill
Bancorp, Inc., combined with overall corporate growth during 1998.
INCOME TAXES
For the year ended December 31, 1998 Westbank Corporation recorded a tax expense
of $2,148,000 compared to 1997, when the Corporation recorded a tax expense of
$2,406,000. The lower tax expense for 1998 was the result of a lower tax rate
during 1998.
NET INCOME
The net income for 1998 of $3,377,000, or $.82 per share basic and $.79 per
share diluted, is based on a weighted average of 4,143,009 basic and 4,272,682
diluted shares outstanding, compared with a net income for 1997 of $3,384,000,
or $.88 per share basic and $.85 per share diluted based on a weighted average
of 3,845,698 basic and 4,003,015 diluted. Net income in 1996 was $2,137,000, or
$.59 per share basic and $.57 per share diluted and based on weighted average
shares of 3,643,270 basic and 3,762,419 diluted.
NEW ACCOUNTING STANDARDS
The Corporation adopted two new accounting standards in 1998, Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income,
and No. 131, Disclosures about Segments of an Enterprise and Related
Information. During 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS
No. 134, Accounting for Mortgage-Backed Securities retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.
For further discussion, see the Summary of Significant Accounting Policies in
the Notes to the Financial Statements.
YEAR 2000
The Corporation has taken steps to ensure that all of its computer systems (the
"Systems") are ready to operate accurately on and beyond January 1, 2000. In the
event that the Corporation's Systems are not Year 2000 compliant as of January
1, 2000, the Corporation would face significant operational difficulties. The
Corporation fully understands the need to prevent disruption of computer and
technical systems, and the Corporation is committed to providing its customers
with high quality services without interruption.
While the Corporation has determined that many of the Systems are Year 2000
compliant, the Corporation has prepared an action plan (the "Year 2000 Project")
to ensure the continued integrity of its Systems. The Year 2000 Project includes
five phases: (1) the awareness phase; (2) the assessment phase; (3) the
renovation phase; (4) the validation phase; and (5) the implementation phase.
The Corporation is currently in the implementation phase.
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
YEAR 2000
The Corporation relies on outside providers for the core banking software and
data processing portions of the Systems. The Year 2000 Project applies to such
vendors.
The Year 2000 Project also includes a contingency plan to be implemented in the
event that the Year 2000 Project reveals that any of the Systems are not Year
2000 compliant. In addition, in the event that despite the Year 2000 Project the
Corporation experiences disruption due to Year 2000 problems, the Corporation is
developing a business resumption plan which should be complete by June 30, 1999.
As of December 31, 1998, the Corporation has incurred approximately $141,000 in
Year 2000-related expenses and has estimated that capital expenditures related
to the Year 2000 issue will total approximately $510,000.
The Corporation has designed the Year 2000 Project based upon guidance from the
Federal Financial Institutions Examining Council. In addition, the FDIC monitors
the Corporation's preparation for the Year 2000 on a periodic basis.
The information set forth above is designed to be a "Year 2000 Readiness
Disclosure," as that term is defined in the Year 2000 Information Readiness and
Disclosure Act. This information is forward-looking information, and, as such,
it is subject to risks and uncertainties that would cause actual results to
differ materially from the projected results discussed in this report.
CONSOLIDATED BALANCE SHEETS
Westbank Corporation and Subsidiaries
December 31,
(Dollars in Thousands, except share amounts) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks:
Non-interest bearing $ 11,291 $ 10,783
Interest bearing 1,880 2,065
- -----------------------------------------------------------------------------------------------------------------------------
13,171 12,848
Federal funds sold 1,069 3,678
Total cash and cash equivalents 14,240 16,526
- -----------------------------------------------------------------------------------------------------------------------------
Securities (Note 2):
Investment securities available for sale 53,712 20,710
Investment securities held to maturity
(fair value of $30,817 in 1998 and $39,771 in 1997) 30,616 39,602
- -----------------------------------------------------------------------------------------------------------------------------
Total securities 84,328 60,312
- -----------------------------------------------------------------------------------------------------------------------------
Loans, net of allowance for loan losses
of $2,665 in 1998 and $3,057 in 1997 (Note 3) 290,767 263,808
Mortgage loans held for sale (Note 3) 2,346 4,446
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 293,113 268,254
- -----------------------------------------------------------------------------------------------------------------------------
Property and equipment (Note 4) 6,851 5,901
Other real estate owned, net of allowance for losses
$200 in 1997 (Note 5) 466 353
Accrued interest receivable 2,457 2,240
Other assets 1,168 1,981
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 402,623 $ 355,567
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 6):
Non-interest bearing $ 51,395 $ 50,443
Interest bearing 290,872 264,236
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits 342,267 314,679
Borrowed funds (Note 7) 27,807 11,884
Interest payable on deposits 429 385
Other liabilities 1,630 1,701
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 372,133 328,649
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 12 and 13)
Stockholders' equity (Notes 10, 11 and 15):
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 and outstanding
4,198,838 shares in 1998 and 3,932,535 shares in 1997 8,397 7,865
Additional paid-in capital 11,076 9,711
Retained earnings 10,803 9,282
Accumulated other comprehensive income 214 60
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 30,490 26,918
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 402,623 $ 355,567
=============================================================================================================================
CONSOLIDATED STATEMENTS OF INCOME
Westbank Corporation and Subsidiaries
Years ended December 31,
(Dollars in Thousands, except share amounts) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Interest and fees on loans $23,645 $22,893 $21,011
Interest and dividend income from securities 4,614 3,569 2,773
Interest from interest bearing cash
and federal funds sold 372 262 275
- -----------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 28,631 26,724 24,059
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 12,662 11,800 10,263
Interest on borrowed funds 630 291 261
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 13,292 12,091 10,524
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 15,339 14,633 13,535
Provision for loan losses (Note 3) 41 306 944
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 15,298 14,327 12,591
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Trust department income 498 465 425
Service charges on deposits 766 808 867
Loan servicing 470 494 505
Gain on sale of securities available for sale 141 259 112
Gain on sale of other real estate owned (Note 5) 43 67 3
Gain on sale of mortgages 120 5 9
Other non-interest income 389 431 419
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2,427 2,529 2,340
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and benefits (Note 9) 5,797 5,461 5,091
Depreciation and amortization 851 772 743
Data processing 808 751 652
Occupancy expense 802 794 802
Other real estate owned expenses (Note 5) 104 221 614
Other non-interest expense (Note 14) 3,838 3,067 3,376
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 12,200 11,066 11,278
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,525 5,790 3,653
Income taxes (Note 8) 2,148 2,406 1,516
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 3,377 $ 3,384 $ 2,137
=============================================================================================================================
Earnings per share (Note 11):
- Basic $ .82 $ .88 $ .59
- Diluted .79 .85 .57
=============================================================================================================================
Weighted average shares outstanding (Note 11):
- Basic 4,143,009 3,845,698 3,643,270
- Diluted 4,272,682 4,003,015 3,762,419
=============================================================================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Westbank Corporation and Subsidiaries
Years ended December 31,
(Dollars in Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Net Income $3,377 $3,384 $2,137
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale, net of income taxes
(benefit) of $150 in 1998, $271 in 1997, and ($71) in 1996. 249 327 (99)
Less: reclassification adjustment for gains
included in net income, net of income taxes of
$49 in 1998, $76 in 1997, and $46 in 1996. 92 168 66
- -------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 157 159 (165)
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $3,534 $3,543 $1,972
===============================================================================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Westbank Corporation and Subsidiaries
Accumulated
Common Stock Additional Other
Par paid-in Retained Comprehensive
(Dollars in Thousands, except share amounts) Shares Value capital earnings Income/(Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,530,981 $7,062 $ 7,816 $ 5,842 $66 $20,786
Net income 2,137 2,137
Cash dividends declared
($.24 per share) (784) (784)
Stock dividend
(1% on Cargill Bancorp shares) 15,248 30 78 (108)
Shares issued:
Stock option plan 30,584 61 25 86
Dividend reinvestment
and stock purchase plan 94,615 190 467 657
Change in unrealized gain (loss)
on securities available for sale (165) (165)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,671,428 7,343 8,386 7,087 (99) 22,717
Net income 3,384 3,384
Cash dividends declared
($.30 per share) (1,040) (1,040)
Stock dividend
(1% on Cargill Bancorp shares) 16,076 32 117 (149)
Shares issued:
Stock option plan 98,612 197 116 313
Dividend reinvestment
and stock purchase plan 146,419 293 1,092 1,385
Changes in unrealized gain (loss) on
securities available for sale 159 159
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,932,535 7,865 9,711 9,282 60 26,918
Net income 3,377 3,377
Cash dividends declared
($.40 per share) (1,503) (1,503)
Stock dividend
(1% on Cargill Bancorp shares) 17,389 35 93 (129) (1)
Shares issued:
Stock option plan 199,799 399 742 1,141
Dividend reinvestment
and stock purchase plan 49,115 98 530 628
Cargill interim loss for the quarter
ended December 31, 1998 (Note 1) (224) (224)
Changes in unrealized gain (loss) on
securities available for sale 154 154
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 4,198,838 $8,397 $11,076 $10,803 $214 $30,490
==============================================================================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Westbank Corporation and Subsidiaries
Years ended December 31,
(Dollars in Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 3,377 $ 3,384 $ 2,137
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Cargill interim loss for period ended December 31, 1998 (224)
Provision for loan losses 41 306 944
Provision for other real estate owned 22 109 501
Depreciation and amortization 851 772 743
Realized gain on sale of securities (141) (259) (112)
Realized gain on sale of other real estate owned (43) (67) (3)
Realized gain on miscellaneous assets (83)
Realized gain on sale of mortgages (120) (5) (9)
Deferred income taxes (107) 164 368
Change in:
(Increase)/Decrease in loans held for sale 2,100 (8,099) 1,313
(Increase)/Decrease in accrued interest receivable (217) (314) 13
Other assets 814 90 431
Interest payable on deposits 44 51 19
Increase/(Decrease)Other liabilities 36 147 272
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 6,433 (3,721) 6,534
==============================================================================================================================
Investing activities:
Securities:
Held to maturity:
Purchases (21,473) (28,920) (14,373)
Proceeds from maturities 30,459 15,557 10,467
Available for sale:
Purchases (41,210) (8,748) (3,013)
Proceeds from sales 8,607 10,019 2,857
Proceeds from maturities 5,164 2,484 6,858
Proceeds on sale of miscellaneous assets 296
Purchases of premises and equipment (1,801) (835) (1,099)
Net increase in loans (32,987) (15,210) (29,076)
Proceeds from sale of other real estate owned 618 791 1,182
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (52,623) (24,862) (25,901)
==============================================================================================================================
Financing activities:
Net increase in deposits 27,588 16,660 28,493
Net increase in short-term borrowings 8,923 2,615 1,592
Increase in long-term borrowings 7,000
Proceeds from exercise of stock options
and stock purchase plan 1,897 1,699 743
Dividends paid (1,504) (1,041) (785)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities 43,904 19,933 30,043
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,286) (8,650) 10,676
Cash and cash equivalents at beginning of year 16,526 25,176 14,500
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $14,240 $16,526 $25,176
==============================================================================================================================
Cash paid during the year:
Interest on deposits and other borrowings $13,075 $11,754 $10,506
Income taxes 2,103 1,990 1,287
Supplemental disclosure of cash flow information:
Securitization of loans into mortgage-backed securities 5,067 9,314 3,639
Transfers of loans to other real estate owned 701 806 1,280
Transfer of miscellaneous asset from other real estate owned
to premises and equipment 291
Loans to facilitate the sale of other real estate owned 618 120 667
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Westbank Corporation and Subsidiaries
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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, 1998, the Corporation operates two banking subsidiaries (the
"Banks"), Park West Bank and Trust Company ("Park West") with thirteen banking
offices and a trust department located in Hampden County, Massachusetts, and
Cargill Bank ("Cargill") with three offices in Windham County, 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 Northeast Connecticut.
MERGER
Effective January 29, 1999, Cargill Bancorp, Inc., and its subsidiary
("Cargill") were merged with and into Westbank Corporation ("Westbank"),
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 Westbank common shares were issued for the outstanding common
stock of Cargill.
The transaction was accounted for using the pooling-of-interests method and,
accordingly, all historical financial data has been restated to include both
entities for all periods presented. Directs costs of mergers accounted for by
the pooling-of-interests method are expensed as incurred. Merger-related costs
expensed in 1998 aggregated $595,000. These merger expenses included legal,
accounting, regulatory and severance costs, as well as integration costs such as
conversions, abandonments and relocations, etc. The restatement of the
historical financial data is based on Westbank's fiscal year end December 31 and
Cargill's fiscal year end September 30. The Cargill loss of $224,000 for the
quarter ended December 31, 1998, has been included directly in stockholders'
equity in order to conform Cargill's reporting periods to the Corporation's as
of December 31, 1998. For the quarter ended December 31, 1998, Cargill had net
interest income of $456,000 and a net loss of $224,000. Included in operating
expenses were $346,000 of merger and related costs that were primarily the cause
of their loss.
The following table presents summary results of operations for the companies for
the immediate years prior to the merger:
(Dollar amounts in thousands)
Westbank Cargill Combined
-------- ------- --------
1998: Net interest income $13,442 $1,897 $15,339
Net income 3,256 121 3,377
1997: Net interest income $12,784 $1,849 $14,633
Net income 3,231 153 3,384
1996: Net interest income $11,842 $1,693 $13,535
Net income (loss) 2,248 (111) 2,137
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiaries, Park West Bank and Trust Company, its
subsidiaries, Lorac Leasing Corp., Park West Securities Corporation and PWB&T
Inc., and Cargill Bank. All material intercompany balances and transactions have
been eliminated upon consolidation. Certain amounts in the 1997 and 1996
financial statements have been reclassified to conform to the 1998 presentation.
The Corporation operates two community banks offering different products and
services. Since the Corporation derives a significant portion of its revenue and
expense from the Banks, no meaningful allocation of its resources is possible.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles 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 and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. 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
As of January 1, 1998, the Corporation adopted a Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and displaying of comprehensive income and
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which establishes standards for the way public companies report
information about operating segments in both interim and annual financial
statements and related disclosures. Adoption of these statements did not impact
the Corporation's consolidated balance sheets, statements of income or cash
flows and was limited to the form and content of its disclosures. Both
statements were effective for fiscal years beginning after December 31, 1997,
and required restatement of all prior periods presented to conform to the
provisions of these statements.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement established accounting and reporting standards for derivative
instruments including derivative activities. This statement will be effective
for the Corporation's fiscal 2001 financial statements.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. This statement further amends SFAS No. 65 to
require that, after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold these investments. This statement will be effective for
the Corporation's 1999 financial statements. Management is currently evaluating
the future impact of these standards.
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 average
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 $3,049,000 for 1998.
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 other 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
LOANS
Loans have been reduced by deferred loan fees and the allowance for loan losses.
Interest on commercial and real estate loans is accrued on the principal amount
of loans outstanding. Interest on installment and other loans is calculated by
using the simple interest method on daily balances of the principal amount
outstanding. 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 commercial loans by using 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. Smaller balance homogenous loans, including
residential real estate and consumer loans, are collectively evaluated for
impairment based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral-dependent. The Corporation evaluates each impaired loan to
determine the appropriate income recognition practice. Generally, income is
recorded only on a cash basis for impaired loans.
The adequacy of the allowance for loan losses is evaluated regularly by
management. Factors considered in evaluating the adequacy of the allowance
include the size 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.
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 renewals 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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.
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.
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. The pro forma disclosures for net
income and earnings per share as if a fair value-based method of accounting had
been applied are contained in these Notes to the Consolidated Financial
Statements.
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 $119,797,000 and
$117,234,000 at December 31, 1998 and 1997, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
2 - SECURITIES
Investment securities held to maturity at December 31 are as follows:
1998
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government obligations $ 998 $ 28 $ 1,026 $ 28
Federal agency obligations 26,890 145 27,035 145
Mortgage-backed securities 2,728 30 $ 2 2,756 28
- ------------------------------------------------------------------------------------------------------------------------------
$30,616 $203 $ 2 $ 30,817 $ 201
==============================================================================================================================
1997
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government obligations $ 4,246 $ 35 $ 1 $ 4,280 $ 34
Federal agency obligations 32,927 121 20 33,028 101
Mortgage-backed securities 2,330 43 9 2,364 34
Certificates of deposit 99 99
- -----------------------------------------------------------------------------------------------------------------------------
$39,602 $ 199 $ 30 $ 39,771 $ 169
=============================================================================================================================
During 1998 and 1997 there were no sales of investment securities classified as
held to maturity. Investment securities available for sale at December 31 are as
follows:
1998
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain/(loss)
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government obligations $ 928 $ 928
Federal agency obligations 26,629 $124 $ 86 26,667 $ 38
Equity securities 1,716 29 1,745 29
Mortgage-backed securities 24,087 299 14 24,372 285
- -----------------------------------------------------------------------------------------------------------------------------
$53,360 $452 $100 $ 53,712 $ 352
=============================================================================================================================
1997
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain/(loss)
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government obligations $ 2,058 $ 2,058
Federal agency obligations 3,500 $ 3 $ 17 3,486 $(14)
Equity securities 1,642 22 1,664 22
Mortgage-backed securities 13,406 97 1 13,502 96
- ------------------------------------------------------------------------------------------------------------------------------
$20,606 $122 $18 $20,710 $104
==============================================================================================================================
During 1998 and 1997, the Corporation recognized gross gains on securities
available for sale totaling $141,000 and $259,000, respectively.
The contractual maturities of held-to-maturity and available-for-sale
securities, other than equity securities, as of December 31, 1998, 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 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
Amortized Fair
(Dollars in Thousands) cost value
- -----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
Within 1 year $ 499 $ 505
Over 1 year to 5 years 5,821 5,901
Over 5 years to 10 years 23,346 23,458
Over 10 years 950 953
- -----------------------------------------------------------------------------------------------------------------------------
Total bond and debt obligations $30,616 $ 30,817
=============================================================================================================================
Amortized Fair
(Dollars in Thousands) cost value
- -----------------------------------------------------------------------------------------------------------------------------
Available for Sale:
Within 1 year $ 2,484 $ 2,479
Over 1 year to 5 years 558 565
Over 5 years to 10 years 22,475 22,226
Over 10 years 26,454 26,696
- -----------------------------------------------------------------------------------------------------------------------------
Total bond and debt obligations $51,971 $ 51,966
=============================================================================================================================
At December 31, 1998 securities with a book value and fair value of $17,998,000
and $18,092,000, 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) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Commercial $ 41,760 $ 41,661
Real estate construction 5,998 5,302
Real estate 229,092 208,023
Consumer 19,277 16,648
- ----------------------------------------------------------------------------------------------------------------------------
296,127 271,634
Allowance for loan losses (2,665) (3,057)
Deferred loan origination fees (349) (323)
- ----------------------------------------------------------------------------------------------------------------------------
$293,113 $268,254
=============================================================================================================================
Changes in the allowance for loan losses are summarized as follows:
(Dollars in Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 3,057 $2,699 $3,924
Provision for loan losses 41 306 944
Loans charged off (518) (760) (2,539)
Recoveries 85 812 370
- -----------------------------------------------------------------------------------------------------------------------------
$ 2,665 $3,057 $2,699
=============================================================================================================================
The aggregate principal balance of non-accrual loans was $797,000 and $1,648,000
at December 31, 1998 and 1997 respectively. Contractual interest income that was
not recognized on such non-accrual loans was $35,000, $79,000 and $240,000 for
1998, 1997 and 1996, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The Corporation did not sell any loans with recourse during 1998 or 1997. The
remaining recourse exposure on prior sales was $2,007,000 at December 31, 1998.
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 $229,077,000 in real estate loans at December 31, 1998, $168,744,000 are
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 $60,348,000 in outstanding principal at December 31, 1998. These
loans encompass a wider region extending throughout Massachusetts and Southern
New England. Most are collateralized by commercial real estate developments.
Commercial loans both collateralized and uncollateralized of $41,760,000 at
December 31, 1998, represent loans made to businesses primarily in Western
Massachusetts.
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) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $2,386 $1,552
New loans granted 886 2,936
Repayments of principal (231) (2,102)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $3,041 $2,386
=============================================================================================================================
At December 31, 1998 and 1997, the recorded investment in impaired loans was
$1,419,000 and $1,809,000, respectively, for which no additional specific
allowance for loan losses was recorded. For the years ended December 31, 1998,
1997 and 1996, the average recorded investment in impaired loans was $1,366,000,
$2,080,000 and $3,890,000, respectively. Interest income recognized during 1998,
1997 and 1996 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
$115,391,000 and $133,359,000 at December 31, 1998 and 1997, respectively.
4 - PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31 are summarized as
follows:
Estimated
(Dollars in Thousands) 1998 1997 Lives
- -----------------------------------------------------------------------------------------------------------------------------
Property (including
land of $1,546 in 1998 and $1,187 in 1997) $5,214 $4,305 15-40 years
Capital lease building 263 263 15 years
Furniture and equipment 4,167 3,181 3-10 years
Leasehold and building
improvements 2,825 3,246 5-15 years
Motor vehicles 114 105 3 years
- -----------------------------------------------------------------------------------------------------------------------------
12,583 11,100
Accumulated depreciation 5,732 5,199
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment $6,851 $5,901
=============================================================================================================================
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) 1998 1997
Real estate acquired through foreclosure - net of OREO provision 466 353
=============================================================================================================================
Changes in the allowance for other real estate owned losses are summarized as
follows:
(Dollars in Thousands) 1998 1997 1996
=============================================================================================================================
Balance, beginning of year $200 $195 $65
Provision for other real estate owned charged to operations 22 29 390
Write-downs (net of payments) (222) (24) (260)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ $200 $195
=============================================================================================================================
6 - DEPOSITS
Deposit accounts by type as of December 31 are summarized as follows:
(Dollars in Thousands) 1998 1997
=============================================================================================================================
Demand deposit 51,395 50,443
Savings 53,689 45,902
N.O.W. 25,993 23,027
Money market deposits 29,659 25,677
Other time deposits 181,531 169,630
=============================================================================================================================
342,267 314,679
=============================================================================================================================
At December 31, 1998, the scheduled maturities of other time deposits and IRA
deposits with a fixed maturity are as follows:
(Dollars in Thousands)
===========================================================================================================
1999 130,174
2000 27,394
2001 10,219
2002 3,359
2003 and after 1,172
- -----------------------------------------------------------------------------------------------------------
172,318
Certificates of deposit with balances greater than or equal to $100,000 amounted
to $26,880,000 and $22,621,000 as of December 31, 1998 and 1997, respectively.
Interest paid on these deposits totaled approximately $1,250,000 and $1,046,000,
respectively.
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) 1998 1997
=============================================================================================================================
Securities sold under agreements
to repurchase $11,953 $8,020
Purchased federal funds 270 270
FHLB Advance 7,310
Treasury tax and loan notes 1,274 3,594
- -----------------------------------------------------------------------------------------------------------------------------
Total short term borrowings $20,807 $11,884
=============================================================================================================================
The above short-term borrowings generally mature daily.
The following information relates to long-term debt as of December 31, 1998:
(Dollars in Thousands)
=============================================================================================================================
FHLB Term advance 5.87% due May 12, 2003 $7,000
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) 1998 1997 1996
=============================================================================================================================
Balance at year end $27,807 $11,884 $ 9,269
Average amount outstanding 16,442 9,065 8,714
Maximum amount outstanding at any month-end 28,307 14,036 12,794
Average interest rate for the year 3.83% 3.20% 2.99%
Average interest rate on year-end balance 3.85% 3.15% 3.03%
The Corporation maintains lines of credit with the Fleet Bank of Massachusetts
for $3,000,000 and the Bank of Boston for $1,500,000. Both are revolving lines
of credit that are renewed on an annual basis. There were no amounts outstanding
against either line as of December 31, 1998 or 1997. The Corporation had
additional short term borrowing capacity through the Federal Home Loan Bank of
$7,244,000 through its Ideal Way program that was unused at year-end 1998.
Advances from the Federal Home Loan Bank of Boston (FHLB) are collateralized by
the Company's holdings of FHLB stock and residential real estate loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
8 - INCOME TAXES
The income taxes (benefits) were as follows:
(Dollars in Thousands) 1998 1997 1996
=============================================================================================================================
Current tax:
Federal $1,943 $1,836 $921
State 312 408 328
Total current 2,255 2,244 1,249
- -----------------------------------------------------------------------------------------------------------------------------
Deferred tax:
Deferred taxes (107) 164 368
Change in valuation allowance for deferred tax assets (2) (101)
Total deferred (107) 162 267
- -----------------------------------------------------------------------------------------------------------------------------
Total income taxes $2,148 $2,406 $1,516
=============================================================================================================================
The differences between the effective tax rate and the federal statutory tax
rate on income before taxes are reconciled as follows:
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Federal statutory rate 34.0% 34.0% 34.0%
Change in valuation allowance for deferred tax asset 1.0
State income taxes, net of federal benefit 4.4 6.1 6.9
Other .5 .5 .6
- -----------------------------------------------------------------------------------------------------------------------------
38.9% 41.6% 41.5%
=============================================================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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) 1998 1997
=============================================================================================================================
Deferred tax assets:
Other real estate owned $ 84
Deferred loan fees $ 122 112
Reserve for loan losses 96 86
Deferred income 17 22
Accrued expenses not deducted for tax 176 52
State tax net operating loss carryforward 99
Non-accrual interest 11 48
Amortization 12
Other 95 39
- -----------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 529 542
Valuation allowance (99)
- -----------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 529 443
- -----------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Bond accretion 8 17
Unrealized gain on securities 151 44
Depreciation 345 314
Allowance for loan losses 193 249
Deferred FNMA premium 4 5
Prepaid pension 26
Earned income not yet taxed 141 112
Other 37 31
- -----------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 879 798
- -----------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $(350) $(355)
=============================================================================================================================
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, projected future
taxable income, 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, net of the recorded valuation
allowance.
9 - PENSION PLAN
The Corporation has a defined contribution pension plan (money purchase),
covering substantially all of its employees at Park West and a defined benefit
plan for its employees at Cargill Bank. Contributions to the money purchase plan
are a percentage of individual employees' salary. Total pension expense for
1998, 1997 and 1996 amounted to $212,000, $204,000 and $213,000, respectively.
At May 31, 1998, the most recent plan year end of the money purchase plan, total
plan assets were $3,671,379 and the vested balance was $3,568,546. The money
purchase plan assets are invested in money market funds, government bonds,
corporate and government agency bonds and marketable securities. The defined
benefit plan is a multi-employer plan.
10 - STOCK OPTIONS
The Corporation has four fixed-option plans which reserve shares of common stock
for issuance to executives, key employees and directors. During 1998, 1997 and
1996, no compensation cost was required to be recognized for the stock option
plans. Had compensation costs for the Corporation's four stock option plans been
determined based on the fair value at the grant date for awards in 1998, 1997
and 1996 consistent with the provisions of SFAS No. 123, the Corporation's net
earnings and earnings per share would have been as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
(Dollars in Thousands, except per share data) 1998 1997 1996
==============================================================================================================================
Net earnings - as reported $3,377 $3,384 $2,137
Net earnings - pro forma 2,709 3,003 1,649
Earnings per share - as reported - Basic .82 .88 .59
- Diluted .79 .85 .57
Earnings per share - pro forma - Basic .65 .78 .45
- Diluted .63 .75 .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, 1998, all
options granted are exercisable. The following is a summary of the changes in
options outstanding:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
at the beginning of the year 191,466 277,122 307,706
Options exercised:
at $2.00 (27,741) (16,268)
at $2.50 (350) (27,450) (9,200)
at $3.50 (20,302) (5,116)
at $6.00 (146,832) (10,163)
- ------------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
at the end of the year 44,284 191,466 277,122
==============================================================================================================================
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:
1998 1997 1996
==============================================================================================================================
Options granted and exercisable
at the beginning of the year 113,657 124,113 133,685
Options exercised or expired (9,572)
Options exercised at $4.02 31,617 10,456
- -----------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
at the end of the year 82,040 113,657 124,113
==============================================================================================================================
Unless exercised the options will expire twenty years after granting. No options
are available for future grants.
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:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
at the beginning of the year 53,000 44,000 33,000
Options granted and exercisable:
at $7.125 11,000
at $9.375 11,000
at $12.875 9,000
at $14.75 3,000
Options exercised at $6.00 (15,000) (2,000)
at $7.125 (2,000)
at $9.375 (2,000)
- -----------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
at the end of the year 46,000 53,000 44,000
- -----------------------------------------------------------------------------------------------------------------------------
Options available for future grants 58,000 70,000 81,000
- -----------------------------------------------------------------------------------------------------------------------------
Unless exercised, the options will expire twenty years after granting.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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:
1998 1997 1996
=============================================================================================================================
Options outstanding at the beginning of the year 36,500 45,500
Options authorized 200,000 178,500
=============================================================================================================================
Options granted and exercisable at the beginning of the year 141,500 133,000
- -----------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable to directors at $8.00 11,000
Options granted and exercisable to employees at $8.125 122,500
Options granted and exercisable to directors at $9.00 9,000
Options granted and exercisable to directors at $15.25 10,000
Options granted and exercisable to employees at $13.375 107,000
Options exercised at $8.125 (500)
Options exercised at $8.00 (2,000)
Options terminated (500)
Options granted and exercisable at the end of the year 256,500 141,500 133,000
- -----------------------------------------------------------------------------------------------------------------------------
Options available for future grants 119,500 36,500 45,500
=============================================================================================================================
11 - 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:
1998 4,143,009 $.82
1997 3,845,698 .88
1996 3,643,270 .59
Effect of Dilutive Option Shares:
1998 129,673 .03
1997 157,317 .03
1996 119,149 .02
Diluted Earnings Per Share:
1998 4,272,682 .79
1997 4,003,015 .85
1996 3,762,419 .57
12 - 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, 1998:
(Dollars in Thousands)
=========================================================================================
1999 $ 298
2000 297
2001 196
2002 183
2003 117
After 2003 438
- -----------------------------------------------------------------------------------------
Total minimum lease payments $1,529
=========================================================================================
Rent expense for 1998, 1997 and 1996 amounted to $274,000, $273,000 and
$261,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
13 - COMMITMENTS, CONTINGENT LIABILITIES
AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
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. Financial instruments with off-
balance-sheet risk involve elements of credit risk, interest rate risk,
liquidity risk and market risk. Management does not anticipate any significant
losses as a result of these transactions.
The following table summarizes the contractual value of financial instruments
and other commitments at December 31:
(Dollars in Thousands) 1998 1997
===========================================================================================================
Commitments to grant loans $ 9,281 $10,257
Stand-by letters of credit and financial guarantees 1,012 1,022
Commitments to advance funds under existing loan agreements 31,457 29,533
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.
14 - OTHER NON-INTEREST EXPENSE
The components of other non-interest expense, which are in excess of 1% of the
aggregate of total non-interest expense and not shown separately on the
consolidated statements of income, are as follows:
Years Ended December 31,
(Dollars in Thousands) 1998 1997 1996
======================================================================================
Merger related expenses $595
Professional fees $322
Advertising 385 $350 358
Supplies 324 277 40
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 Banks 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
subsidiaries' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective 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 I capital to risk-weighted assets and of Tier I
capital to average assets. Management believes, as of December 31, 1998, that
the Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized both Park West and Cargill 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.
The Corporation's, Park West's and Cargill's actual capital amounts and ratios
are also presented in the following table:
Minimum Capital
to be considered
well capitalized
under Prompt
Minimum Capital Corrective Action
Actual Adequacy Purposes Provisions
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
=============================================================================================================================
December 31, 1998
Total Capital
(To risk-weighted assets):
Park West $27,890 12.20% $18,291 8.00% $22,864 10.00%
Cargill 3,475 14.93 1,862 8.00 2,327 10.00
Holding Company 32,946 13.00 20,281 8.00 N/A N/A
Tier I Capital (To risk-weighted assets):
Park West 25,510 11.16 9,146 4.00 13,718 6.00
Cargill 3,189 13.70 931 4.00 1,396 6.00
Holding Company 30,281 11.94 10,141 4.00 N/A N/A
Tier I Capital (To average assets):
Park West 25,510 7.24 14,102 4.00 17,628 5.00
Cargill 3,189 6.69 1,907 4.00 2,364 5.00
Holding Company 30,281 7.53 16,092 4.00 N/A N/A
December 31, 1997
Total Capital
(To risk weighted-assets):
Park West 24,535 11.97 16,397 8.00 20,496 10.00
Cargill 3,317 13.10 2,022 8.00 2,528 10.00
Holding Company 29,654 12.77 18,570 8.00 N/A N/A
Tier I Capital
(To risk weighted-assets)
Park West 21,969 10.70 8,198 4.00 12,298 6.00
Cargill 3,108 12.70 1,011 4.00 1,517 6.00
Holding Company 26,858 11.57 9,285 4.00 N/A N/A
Tier I Capital (To average assets):
Park West 21,969 7.04 12,493 4.00 15,617 5.00
Cargill 3,108 6.60 1,880 4.00 2,350 5.00
Holding Company 26,858 7.44 16,092 4.00 N/A N/A
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, (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.
Retained earnings at September 30, 1998, include $458,000 which 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 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 of Cargill (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 September 30, 1998, was $85,000.
Cargill may not declare or pay a cash dividend on or purchase any of its stock
if the effect would be to reduce the net worth of Cargill below either the
amount of the liquidation account or the capital requirements of its regulators.
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, 1998 and 1997, 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:
1998 1997
=========================================================================================================================
Carrying Estimated Carrying Estimated
(Dollars in Thousands) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 13,171 $ 13,171 $ 12,848 $ 12,848
Federal funds sold 1,069 1,069 3,678 3,678
Investment securities held to maturity 30,616 30,817 39,602 39,771
Investment securities available for sale 53,712 53,712 20,710 20,710
Loans 293,113 301,442 268,254 269,665
Liabilities:
Deposits 342,267 343,814 314,679 315,577
Borrowed funds 27,807 27,807 11,884 11,884
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
BORROWED FUNDS
The fair value of such borrowings 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 value of commitments to extend credit approximates fair value, as the
current fees charged for similar commitments does not differ significantly from
quoted fees. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
Such differences are not considered significant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
18 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands, except per share amounts)
1998
----
Q1 (1) Q2 (1)
----------------------------------------- -----------------------------------------
Westbank Cargill Restated Westbank Cargill Restated
-------- ------- -------- -------- ------- --------
Interest income $5,842 $880 $6,722 $6,264 $892 $7,156
Interest expense 2,579 419 2,998 2,982 401 3,383
--------------------------------------------------------------------------------------------
Net interest income 3,263 461 3,724 3,282 491 3,773
Provision for losses 19 9 28 12 12
Non-interest income 608 8 616 598 43 641
Non-interest expense 2,455 381 2,836 2,458 399 2,857
--------------------------------------------------------------------------------------------
Income before income taxes 1,397 79 1,476 1,422 123 1,545
Income taxes 558 35 593 537 52 589
Net income $ 839 $ 44 $ 883 $ 885 $ 71 $ 956
============================================================================================
Earnings per share
- Basic $ .22 $ .21 $ .24 $ .23
- Diluted .22 .21 .23 .22
============================================================================================
1998
----
Q3 (1) Q4 (1)
------------------------------------------- -------------------------------------------
Westbank Cargill Restated Westbank Cargill Restated
-------- ------- -------- -------- ------- --------
Interest income $6,561 $889 $7,450 $6,418 $ 885 $7,303
Interest expense 3,161 416 3,577 2,921 413 3,334
--------------------------------------------------------------------------------------------
Net interest income 3,400 473 3,873 3,497 472 3,969
Provision for losses 1 1 1
Non-interest income 542 47 589 496 85 581
Non-interest expense 2,483 355 2,838 2,975 694 3,669
--------------------------------------------------------------------------------------------
Income before income taxes 1,459 165 1,624 1,018 (138) 880
Income taxes 549 70 619 396 (49) 347
--------------------------------------------------------------------------------------------
Net income $ 910 $ 95 $1,005 $ 622 $ (89) $ 533
============================================================================================
Earnings per share
- Basic $ .24 $ .24 $ .16 $ .13
- Diluted .24 .24 .16 .12
============================================================================================
1997
----
Q1 (1) Q2 (1)
----------------------------------------- -----------------------------------------
Westbank Cargill Restated Westbank Cargill Restated
-------- ------- -------- -------- ------- --------
Interest income $5,428 $854 $6,282 $5,698 $891 $6,589
Interest expense 2,411 424 2,835 2,534 436 2,970
--------------------------------------------------------------------------------------------
Net interest income 3,017 430 3,447 3,164 455 3,619
Provision for losses 150 31 181 40 10 50
Non-interest income 506 109 615 485 53 538
Non-interest expense 2,293 407 2,700 2,323 437 2,760
--------------------------------------------------------------------------------------------
Income before income taxes 1,080 101 1,181 1,286 61 1,347
Income taxes 443 30 473 549 20 569
--------------------------------------------------------------------------------------------
Net income $ 637 $ 71 $ 708 $ 737 $ 41 $ 778
============================================================================================
Earnings per share
- Basic $ .19 $ .19 $ .22 $ .21
- Diluted .18 .18 .21 .20
============================================================================================
1997
----
Q3 (1) Q4 (1)
------------------------------------------- -------------------------------------------
Westbank Cargill Restated Westbank Cargill Restated
-------- ------- -------- -------- ------- --------
Interest income $5,979 $916 $6,895 $6,051 $ 907 $6,958
Interest expense 2,740 429 3,169 2,687 430 3,117
--------------------------------------------------------------------------------------------
Net interest income 3,239 487 3,726 3,364 477 3,841
Provision for losses 75 75
Non-interest income 565 54 619 705 52 757
Non-interest expense 2,397 461 2,858 2,300 448 2,748
--------------------------------------------------------------------------------------------
Income before income taxes 1,407 5 1,412 1,769 81 1,850
Income taxes 589 5 594 730 40 770
============================================================================================
Net income $ 818 $ 818 $1,039 41 $1,080
Earnings per share
- Basic $ .23 $ .21 $ .29 $ .27
- Diluted .24 .20 .28 .26
============================================================================================
(1) Previously reported balances of the merged companies have been reclassified
to conform to the Corporation's presentation and restated to give effect to
the combination.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
December 31,
(Dollars in Thousands) 1998 1997
====================================================================================
BALANCE SHEETS
Assets
Cash $ 66 $ 87
Investment in subsidiaries 28,912 25,136
Other investments 922 1,372
Other assets 762 344
- ------------------------------------------------------------------------------------
Total assets $30,662 $26,939
====================================================================================
Liabilities $ 172 $ 21
- ------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock - none
Common stock, par value $2 per share 8,397 7,865
Additional paid-in capital 11,076 9,711
Retained earnings 10,803 9,282
Accumulated other comprehensive income 214 60
- ------------------------------------------------------------------------------------
Stockholders' equity 30,490 26,918
- ------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $30,662 $26,939
1998 1997 1996
==========================================================================================================================
STATEMENTS OF INCOME
Dividend from subsidiary $ 100 $ 550 $ 550
Interest income 85 38 19
Other income (expense) - net (735) (144) (143)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and
undistributed income of subsidiaries (550) 444 426
Income tax benefit 215 2 26
Undistributed income of subsidiaries 3,712 2,938 1,685
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 3,377 $ 3,384 $ 2,137
==========================================================================================================================
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 3,377 $ 3,384 $ 2,137
Cargill interim loss for quarter ended 12/31/98 (224)
Operating activities:
Equity in income of subsidiaries (3,622) (2,938) (1,685)
Increase in other assets (418) (33) (302)
Increase in other liabilities 151 2 19
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (736) 415 169
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities (purchases) maturities 450 (1,039) (88)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock options exercised 1,141 314 86
Proceeds from dividend reinvestment and optional
stock purchases 628 1,385 657
Dividends paid (1,504) (1,041) (786)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 265 658 (43)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (21) 34 38
Cash and cash equivalents at the beginning of the year 87 53 15
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 66 $ 87 $ 53
==========================================================================================================================
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, 1998 and 1997 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, 1998. 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 did not audit the consolidated balance
sheets of Cargill Bancorp, Inc., as of September 30, 1998 and 1997, or the
related statements of income, comprehensive income, stockholders' equity and
cash flows of Cargill Bancorp, Inc., for each of the three years in the period
ended September 30, 1998, which statements reflect total assets of $48,241,000
and $47,302,000 as of September 30, 1998 and 1997, and net interest income of
$1,897,000, 1,849,000 and $1,693,000 for the years ended September 30, 1998,
1997 and 1996, respectively. Those statements were audited by other auditors
whose report dated October 30, 1998 has been furnished to us and our opinion,
insofar as it relates to the amounts included for Cargill Bancorp, Inc., and
subsidiary for 1998, 1997 and 1996 is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Westbank Corporation and subsidiaries at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
January 29, 1999
(July 30, 1999 as to effects of
the merger described in Note 1)
INDEPENDENT AUDITORS' REPORT
Westbank Corporation and Subsidiaries
Shareholders and Board of Directors,
Cargill Bancorp, Inc.
We have audited the consolidated statements of financial condition of Cargill
Bancorp, Inc., and subsidiary as of September 30, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity and cash flows for the years ended September 3, 1998, 1997
and 1996. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements, based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used, and significant estimates made, by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cargill Bancorp,
Inc., and subsidiary as of September 30, 1998 and 1997, and the results of its
operations and its cash flows for the years ended September 30, 1998, 1997 and
1996, in conformity with generally accepted accounting principles.
SNYDER & HALLER
Hartford, Connecticut
October 30, 1998
CORPORATE DIRECTORY AND INFORMATION
Westbank Corporation and Subsidiaries
DIRECTORS
WESTBANK CORPORATION AND
PARK WEST BANK AND TRUST COMPANY
ERNEST N. LAFLAMME, JR.
Chairman of the Board
Westbank Corporation
Treasurer
City of Chicopee
ROLAND O. ARCHAMBAULT
Owner
Park Supply Company
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
Park West Bank and Trust Company
LEROY F. JARRETT
President and Treasurer (Retired)
New England Church Interiors
G. WAYNE MCCARY
President & CEO
Eastern States Exposition
ROBERT J. PERLAK
Private Investor
GEORGE R. SULLIVAN
Executive Vice President
Sullivan Paper Company, Inc.
JAMES E. TREMBLE
President
Valley Cinema, Inc.
OFFICERS
WESTBANK CORPORATION
ERNEST N. LAFLAMME, JR.
Chairman of the Board
DONALD R. CHASE
President and Chief Executive Officer
JOHN M. LILLY
Treasurer and Chief Financial Officer
ROBERT J. PERLAK
Corporate Clerk
PARK WEST BANK AND TRUST COMPANY
DONALD R. CHASE
President and Chief Executive Officer
ROBERT J. PERLAK
Corporate Clerk
FINANCE DIVISION
JOHN M. LILLY
Executive Vice President and Treasurer
IRVING M. WALKER, JR., CMA
Accounting Officer
LOAN DIVISION
GARY L. BRIGGS
Executive Vice President
PAUL M. ACCORSI
Senior Vice President
DAVID M. BARSZCZ
Vice President
CLIFFORD R. BORDEAUX
Assistant Vice President
GERARD E. DRAPEAU
VICE President
RICHARD N. HANCHETT
Vice President
MICHAEL M. LEFEBVRE
Vice President
JOSEPH S. LEMAY
Assistant Vice President
JOHN E. O'BRIEN
Loan Operations Officer
RESIDENTIAL REAL ESTATE
STANLEY F. OSOWSKI
Senior Vice President
WOLFGANG A. ADAMETZ
Vice President
LOAN CREDIT & COLLECTION
TRENTON E. TAYLOR
Senior Vice President
PATRICIA A. NABOSKY
Assistant Vice President
EDP/OPERATIONS
S. STEVE KONIECKI
Senior Vice President
MARKETING
JOSEPH L. ROLAK
Director of Marketing and Vice President
COMPLIANCE
JANE M. KNAPP
Vice President
BRANCH ADMINISTRATION/
HUMAN RESOURCES
KATHLEEN A. JALBERT
Senior Vice President
DEBORAH A. KUMIEGA
Assistant Vice President
GARY B. SZYMANIAK
COMMUNITY BANKING OFFICER
AUDITING DIVISION
LLOYD S. HALL, CBA
Director of Auditing
TRUST DIVISION
ROBERT A. GIBOWICZ
Senior Trust Officer
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 21, 1999 at nine o'clock in the morning at the Carriage House
at Storrowton Tavern, 1305 Memorial Avenue, West Springfield, Massachusetts.
TRANSFER AGENT AND REGISTRAR
Park West Bank and Trust Company -- Trust Department
INDEPENDENT AUDITORS
Deloitte & Touche, LLP
Hartford, 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 NASD regional market quotations:
1998 1997
Bid Bid
High Low Dividend High Low Dividend
- ------------------------------------------------------------------------------------
First $17 1/4 $12 $0.10 $10 $8 3/4 $0.075
Second 16 5/8 13 7/8 0.10 9 1/2 8 -1/2 0.075
Third 14 3/4 10 3/8 0.10 11 8 5/8 0.075
Fourth 13 9 3/8 0.10 13 5/8 10 5/8 0.075
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, 1999 the Corporation had 1,202 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: Park West Bank and Trust Company, Trust Department
(413) 747-1482. The following firms make a market in Westbank Corporation's
Common Stock:
Advest, Inc.
First Albany Corporation
McConnell, Budd & Downes, Inc.
Keefe, Bruyette & Woods, Inc.
CORPORATE COUNSEL
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.
21. SUBSIDIARIES OF THE REGISTRANT
1. Park West Bank and Trust Company - Massachusetts
a. Lorac Leasing Corp. - Massachusetts
Appendix B
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 0 - 12784
WESTBANK CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2830731
(State or other jurisdiction (I.R.S. Employer I.D. No.)
of incorporation or organization)
225 PARK AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0149
(Address of principal executive offices) (Zip Code)
(413) 747-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Common stock, par value $2 per share: 4,263,838 shares outstanding as of July
31, 1999
WESTBANK CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Comprehensive Income 5
Condensed Consolidated Statements of Stockholders' Equity 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Rights of Securities Holders 20
ITEM 3. Defaults by Company on its Senior Securities 20
ITEM 4. Results of Votes on Matters Submitted
to a Vote of Security Holders 20
ITEM 5. Other Events 20
ITEM 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 1999 December 31, 1998
(Dollar amounts in thousands) _____________ -----------------
- ----------------------------
ASSETS
Cash and due from banks:
Non-interest bearing $ 12,310 $ 11,291
Interest bearing 1,506 1,880
Federal funds sold 866 1,069
-------- --------
Total cash and cash equivalents 14,682 14,240
-------- --------
Investment securities available for sale 57,635 53,712
Investment securities held to maturity
(fair value of $12,370 in 1999 and $30,817 in 1998) 12,560 30,616
-------- --------
Total securities 70,195 84,328
-------- --------
Loans 338,701 293,432
Mortgage loans held-for-sale 2,184 2,346
Allowance for loan losses (2,721) (2,665)
-------- --------
Net loans 338,164 293,113
Bank premises and equipment 6,910 6,851
Accrued interest receivable 2,601 2,457
Other assets 1,871 1,634
-------- --------
TOTAL ASSETS $434,423 $402,623
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 51,223 $ 51,395
Interest bearing 318,861 290,872
-------- --------
Total Deposits 370,084 342,267
Borrowed funds 25,057 20,807
Federal Home Loan borrowing 7,000 7,000
Accrued interest payable 470 429
Other liabilities 846 1,630
-------- --------
Total Liabilities 403,457 372,133
-------- --------
Stockholders' Equity:
Common stock - $2 par value
Authorized - 9,000,000 shares
Issued - 4,229,931 shares in 1999 and
4,198,838 shares in 1998 8,460 8,397
Additional paid in capital 11,337 11,076
Retained earnings 12,094 10,803
Accumulated other comprehensive income (loss) (925) 214
-------- --------
Total Stockholders' Equity 30,966 30,490
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $434,423 $402,623
======== ========
See accompanying notes to condensed consolidated financial statements.
3
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollar amounts in thousands)
QUARTER ENDED SIX MONTHS ENDED
06-30-99 06-30-98 06-30-99 06-30-98
---------- ---------- ---------- ----------
Income:
Interest and fees on loans $ 6,504 $ 5,904 $ 12,533 $ 11,637
Interest on federal funds sold 35 130 73 183
Interest on securities 1,114 1,122 2,390 2,058
---------- ---------- ---------- ----------
7,653 7,156 14,996 13,878
Interest expense 3,481 3,383 6,806 6,381
---------- ---------- ---------- ----------
Net interest income 4,172 3,773 8,190 7,497
Provision for loan losses 2 12 77 40
---------- ---------- ---------- ----------
Net interest income after provision 4,170 3,761 8,113 7,457
---------- ---------- ---------- ----------
Investment security gains 0 142 92 139
Other non-interest income 492 499 1,018 1,118
---------- ---------- ---------- ----------
Total non-interest income 492 641 1,110 1,257
---------- ---------- ---------- ----------
Operating expense:
Salaries and benefits 1,470 1,417 2,967 2,838
Other operating expenses 1,163 1,204 2,273 2,357
Occupancy - net 306 236 614 498
---------- ---------- ---------- ----------
Total operating expenses 2,939 2,857 5,854 5,693
---------- ---------- ---------- ----------
Income before income taxes 1,723 1,545 3,369 3,021
Income taxes 652 589 1,277 1,182
---------- ---------- ---------- ----------
Net Income $ 1,071 $ 956 $ 2,092 $ 1,839
========== ========== ========== ==========
Earnings per share
- Basic $ 0.25 $ 0.23 $ 0.50 $ 0.45
- Diluted $ 0.25 $ 0.22 $ 0.48 $ 0.43
Weighted average shares outstanding
- Basic 4,225,943 4,139,880 4,218,407 4,108,567
- Dilutive option shares 94,132 169,808 118,172 163,590
- Diluted 4,320,075 4,309,688 4,336,579 4,272,157
See accompanying notes to condensed consolidated financial statements.
4
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollar amounts in thousands)
QUARTER ENDED SIX MONTHS ENDED
06-30-99 06-30-98 06-30-99 06-30-98
--------- ---------- ---------- ---------
Net Income $ 1,071 $ 956 $ 2,092 $ 1,839
--------- ---------- ---------- ---------
Other comprehensive income:
Unrealized gain/(loss) on securities available for sale, net of income
taxes (benefits) of $(481) and $(145) for the quarter and $(733) and
$(134) for the six-month periods ended June 30, 1999
and 1998, respectively (785) (236) (1,196) (221)
Reclassification adjustment for gains included in net income, net of
income taxes of $35 for the six-month period ended June 30, 1999 and $54
and $53 for the three- and six-month
periods ended June 30, 1998 88 57 86
--------- ---------- ---------- ---------
Other comprehensive income (loss) (785) (148) (1,139) (135)
--------- ---------- ---------- ---------
Comprehensive Income $ 286 $ 808 $ 953 $ 1,704
========= ========== ========== =========
See accompanying notes to condensed consolidated financial statements.
5
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998 AND SIX MONTHS ENDED JUNE 30, 1999
(1999 unaudited)
(Dollar amounts in thousands)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
NUMBER PAR PAID IN RETAINED INCOME/
OF SHARES VALUE CAPITAL EARNINGS (LOSS) TOTAL
--------- -------- ---------- ---------- ----------- ---------
BALANCE - DECEMBER 31, 1997 3,932,535 $ 7,865 $ 9,711 $ 9,282 $ 60 $ 26,918
Net income 3,377 3,377
Cash dividend declared
($.30 per share) (1,503) (1,503)
Stock dividend
(1% on Cargill Bancorp shares) 17,389 35 93 (129) (1)
Shares issued:
Stock Option Plan 199,799 399 742 1,141
Dividend Reinvestment
and Stock Purchase Plan 49,115 98 530 628
Cargill interim loss for the
quarter ended December 31, 1998 (224) (224)
Changes in unrealized gain on
securities available for sale 154 154
--------- -------- ---------- ---------- ----------- ---------
BALANCE - DECEMBER 31, 1998 4,198,838 8,397 11,076 10,803 214 30,490
Net income 2,092 2,092
Cash dividend declared
($.20 per share) (801) (801)
Shares issued:
Stock Option Plan 5,301 11 23 34
Dividend Reinvestment
and Stock Purchase Plan 25,792 52 238 290
Changes in unrealized gain on
securities available for sale (1,139) (1,139)
--------- -------- ---------- ---------- ----------- ---------
BALANCE - JUNE 30, 1999 4,229,931 $ 8,460 $ 11,337 $ 12,094 $ (925) $ 30,966
========= ======== ========== ========== =========== =========
See accompanying notes to condensed consolidated financial statements.
6
WESTBANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(Dollar amounts in thousands)
1999 1998
-------- --------
Operating activities:
Net income $ 2,092 $ 1,839
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 77 40
Depreciation and amortization 471 499
Provision for other real estate owned 27
Changes in assets and liabilities:
(Increase)/Decrease in accrued interest receivable (144) (257)
Realized gain on sale of securities (92) (139)
Realized (gain)/loss on sale of other real estate owned 19 10
Increase/(Decrease) in interest payable on deposits 41 115
(Increase)/Decrease in other assets (618) (505)
Increase/(Decrease) in other liabilities (784) (95)
-------- --------
Net cash provided by operating activities 1,062 1,534
-------- --------
Investing activities:
Investments and mortgage-backed securities:
Held to maturity:
Purchases (1,050) (20,103)
Proceeds from maturities and principal payments 19,106 20,741
Available for sale:
Purchases (20,686) (22,531)
Proceeds from sales 4,679 8,607
Proceeds from maturities 10,307 4,405
Purchases of premises and equipment (530) (989)
Net (increase)/decrease in loans (44,417) (19,339)
Proceeds from sale of other real estate owned 381 62
-------- --------
Net cash used in investing activities (32,210) (29,147)
-------- --------
Financing activities:
New increase/(decrease) in other borrowed funds 4,250 6,913
Net increase/(decrease) in deposits 27,817 32,957
Proceeds from exercise of stock options and stock purchase plan 324 1,367
Dividends paid (801) (749)
-------- --------
Net cash used in financing activities 31,590 40,488
-------- --------
Increase/(Decrease) in cash and cash equivalents 442 12,875
Cash and cash equivalents at beginning of period 14,240 16,526
-------- --------
Cash and cash equivalents at end of period $ 14,682 $ 29,401
======== ========
Cash paid during the period:
Interest on deposits and other borrowings $ 6,765 $ 6,266
Income taxes 1,191 1,172
Transfers of loans to other real estate owned 374
Sales of other real estate owned financed by the bank 135
See accompanying notes to condensed consolidated financial statements.
7
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(Unaudited)
NOTE A - GENERAL INFORMATION
Westbank Corporation (hereinafter sometimes referred to as "Westbank" or the
"Corporation") is a registered Bank Holding Company organized to facilitate the
expansion and diversification of the business of Park West Bank and Trust
Company and Cargill Bank (hereinafter sometimes referred to as "Park West" and
"Cargill") into additional financial services related to banking. Substantially
all operating income and net income of the Corporation are presently accounted
for by Park West and Cargill.
NOTE B - ACQUISITION OF CARGILL BANCORP, INC.
The Corporation completed the acquisition of Cargill Bancorp, Inc. ("Cargill")
on January 29, 1999. Cargill served as the holding company for Cargill Bank,
which will continue to operate its three banking offices in Northeastern
Connecticut and will retain its name and Connecticut charter as a separate
subsidiary of the Corporation. Under the terms of the merger agreement, each
share of Cargill was exchanged for 1.3655 shares of the Corporation. Westbank
issued a total of 400,164 shares. The transaction was accounted for using the
pooling-of-interests method and, accordingly, all historical financial data has
been restated to include both entities for all periods presented. Direct costs
of the merger accounted for by the pooling-of-interests method are expensed as
incurred. Merger-related costs expensed for the year ended December 31, 1998,
aggregate $595,000. These merger expenses included legal, accounting, regulatory
and severance costs, as well as integration costs.
Westbank's fiscal year ends December 31 and Cargill's fiscal year ends September
30. The financial statements combine the financial information of Westbank at
and for the quarters ended June 30, 1998 and 1999, and the year ended December
31, 1998, with financial information of Cargill for the quarters ended June 30,
1999 and March 31, 1998, and the year ended September 30, 1998. The Cargill loss
of $224,000 for the quarter ended December 31, 1998, has been included directly
in stockholders' equity in order to conform Cargill's reporting periods to the
Corporation's as of December 31, 1998. For the quarter ended December 31, 1998,
Cargill had net interest income of $456,000 and a net loss of $224,000. Included
in operating expenses were $346,000 of merger and related costs that were
primarily the cause of their loss.
The following table sets forth the unaudited results of operations of the
combined entities for the periods prior to this acquisition:
(In thousands, except per-share data)
Westbank Cargill Combined
-------- ------- --------
Month ended January 31, 1999
Net interest income $1,192 $138 $1,330
Net income 355 21 376
Quarter ended June 30, 1998
Net interest income $3,282 $491 $3,773
Net income 885 71 956
Six months ended June 30, 1998
Net interest income $6,545 $952 $7,497
Net income 1,724 115 1,839
8
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(Unaudited)
NOTE C - CURRENT OPERATING ENVIRONMENT
Park West operates thirteen banking offices located in Hampden County,
Massachusetts, and also operated a Trust Department providing services normally
associated with holding property in a fiduciary or agency capacity. A full range
of retail banking services is furnished to individuals, businesses and
non-profit organizations. Cargill Bank operates three offices in Windham County,
Connecticut. A full range of retail banking services is furnished to
individuals, businesses and non-profit organizations. The primary source of
revenue for Park West and Cargill is derived from providing loans to customers
who are predominantly located in Park West's and Cargill's service areas.
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 June 30, 1999,
Park West and Cargill's capital was at a level that placed the Banks 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 assessment reports 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.
NOTE D - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for the
quarter and six months ended June 30, 1999 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim information
and with instructions for Form 10-Q. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting or normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the quarter and six-month
period ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
For further information, please refer to the Consolidated Financial Statements
and footnotes thereto included in the Westbank Corporation's Annual Report on
Form 10-K for the year ended December 31, 1998.
NOTE E - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as standby letters of credit and commitments to
extend credit. As of June 30, 1999, standby letters of credit amounted to
$715,000 and loan commitments were $36,060,000 and unused balances available on
home equity lines of credit were $7,434,000.
Trust Assets - Property with a book value of $114,374,000 at June 30, 1999 held
for customers in a fiduciary or agency capacity is not included in the
accompanying balance sheet since such items are not assets of the Bank.
9
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(Unaudited)
NOTE F - STOCKHOLDERS' EQUITY
The FDIC imposes leverage capital ratio requirements for state non-member banks.
In addition, the FDIC has established risk-based capital requirements for
insured institutions for Tier 1 risk-based capital of 4.00% and total risk-based
capital of 8.0%.
The capital ratios of Park West and Cargill as of June 30, 1999 were as follows:
Park West Bank
and Trust Company Cargill Bank
----------------- ------------
Leverage Capital Ratio 7.11% 6.89%
Tier 1 Risk-Based Capital 10.59% 12.74%
Total Risk-Based Capital 11.53% 13.84%
As of June 30, 1999, both Park West and Cargill met the criteria which
classified them as well capitalized financial institutions.
NOTE G - BRANCH PURCHASE AGREEMENT
As part of its strategy of regional expansion through acquisition, on April 13,
1999 the Corporation announced the signing of a Branch Purchase Agreement with
Phoenix Home Life Mutual Insurance to acquire the Connecticut banking division
of New London Trust, F.S.B., New London, New Hampshire.
The Connecticut division of New London Trust operates offices in Danielson and
Putnam, Connecticut, with assets totaling $110 million. The acquisition, which
is subject to regulatory approval, is expected to be completed in the fourth
quarter of this year and the Corporation will use the purchase method of
accounting for this acquisition. Upon completion, the New London Trust offices
in Danielson and Putnam, Connecticut, will become offices of Cargill Bank, which
will operate a total of five banking offices.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
Total consolidated assets amounted to $434,423,000 on June 30, 1999, compared to
$402,623,000 on December 31, 1998. As of June 30, 1999 and June 30, 1998,
earning assets amounted to, respectively, $413,452,000 or 95% of total assets
and $383,071,000 or 95% of total assets. Earning assets increased during the
first six months of 1999 as a result of an increase in loans. Deposits
originated throughout the Corporation's branch system and short-term borrowings
with the Federal Home Loan Bank, provided the funds to support the increase in
earning assets.
Changes in Results of Operations
For the quarter ended June 30, 1999, net income totaled $1,071,000, compared to
$956,000 for the quarter ended June 30, 1998. For the six months ended June 30,
1999, net income was $2,092,000, compared to $1,839,000 for the same period
during 1998. Included in the results for the six months ended June 30, 1999 is a
gain on the sale of securities available for sale totaling $92,000.
An overall increase in interest income and interest expense reflects an increase
in volume and decrease in interest rates on earning assets and an increase in
volume and decrease on rates on interest-bearing deposits. Further analysis is
provided in sections on net interest revenue and supporting schedules.
Allowance for Loan Losses and Non-Performing Assets
The Corporation's provision for loan losses in the current quarter was $2,000,
compared to $12,000 for the same period in 1998. Loans written off against the
allowance for loan losses after recoveries amounted to $21,000 for the six
months ended June 30, 1999.
After giving effect to the actions described above, the allowance for loan
losses at June 30, 1999, totaled $2,721,000 or 0.80% of total loans, as compared
to $2,665,000 or 0.90% at December 31, 1998.
Non-performing past due loans at June 30, 1999, aggregated $840,000 or 0.25% of
total loans, compared to $1,099,000 or 0.37% at December 31, 1998. The
percentage of non-performing and past due loans compared to total assets on
those same dates, respectively, amounted to 0.19% and 0.27%.
Other real estate owned at June 30, 1999, totaled $85,000 and stands at 0.02% of
total assets at the end of the current quarter.
Management has made every effort to recognize all circumstances known at this
time that could affect the collectibility of loans and has reflected these in
the provision for loan losses, the write-down of other real estate owned and
impaired loans to fair value and other loans (watch list) monitored by
management, the charge-off of loans and the balance in the allowance for loan
losses. Management deems that the provision for the quarter and the balance in
the allowance for loan losses are adequate, based on results provided by the
loan grading system and circumstances known at this time.
11
Year 2000
The Corporation has taken steps to ensure that all of its computer systems (the
"systems") are ready to operate accurately on and beyond January 1, 2000. In the
event that the Corporation's systems are not Year 2000 compliant as of January
1, 2000, the Corporation would face significant operational difficulties. The
Corporation fully understands the need to prevent disruption of computer and
technical systems, and the Corporation is committed to providing its customers
with high quality services without interruption.
While the Corporation has determined that many of the Systems are Year 2000
compliant, the Corporation has prepared an action plan (the "Year 2000 Project")
to ensure the continued integrity of its systems. The Year 2000 Project includes
five phases: (1) the awareness phase; (2) the assessment phase; (3) the
renovation phase; (4) the validation phase; and (5) the implementation phase.
The Corporation is currently in the implementation phase.
The Corporation relies on outside providers for the core banking software and
data processing portions of the Systems. The Year 2000 Project applies to such
vendors with whom the Corporation has had continuous contact and updates as to
their Year 2000 readiness.
The Year 2000 Project also includes a contingency plan to be implemented in the
event the Year 2000 Project reveals that any of the systems are not Year 2000
compliant. In addition, in the event that, despite the Year 2000 Project, the
Corporation experiences disruption due to Year 2000 problems, the Corporation
has developed a business resumption plan that would be implemented in this
event.
As of June 30, 1999, the Corporation has incurred approximately $218,000 in Year
2000-related expenses and has estimated that capital expenditures related to the
Year 2000 issue will total approximately $510,000.
As of June 30, 1999, the Corporation has completed testing of all critical
systems and believes that these systems are ready to operate without disruption
of service on January 1, 2000 and thereafter.
The Corporation has designed the Year 2000 Project based on guidance from the
Federal Financial Institutions Examining Council. In addition, the FDIC monitors
the Corporation's preparation for the Year 2000 on a periodic basis.
The information set forth above is designed to be a "Year 2000 Readiness
Disclosure" as that term is defined in the Year 2000 Information Readiness and
Disclosure Act. This information is forward-looking information and, as such, it
is subject to risks and uncertainties that would cause actual results to differ
materially from the projected results discussed in this report.
12
WESTBANK CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
NET INTEREST INCOME
The Corporation's earning assets include a diverse portfolio of earning
instruments, ranging from the Corporation's core business of loan extensions to
interest-bearing securities issued by federal, state and municipal authorities.
These earning assets are financed through a combination of interest-bearing and
interest-free sources.
Net interest income, the most significant component of earnings, is the amount
by which the interest generated by assets exceeds the interest expense on
liabilities.
The Corporation analyzes its performance by utilizing the concepts of interest
rate spread and net yield on earning assets. The interest rate spread represents
the difference between the yield on earning assets and interest paid on
interest-bearing liabilities. The net yield on earning assets is the difference
between the rate of interest on earning assets and the effective rate paid on
all funds -interest-bearing liabilities as well as interest-free sources
(primarily demand deposits and shareholders' equity).
The balances and rates derived for the analysis of net interest income presented
on the following pages reflect the consolidated assets and liabilities of the
Corporation's principal earning subsidiaries, Park West Bank and Trust Company
and Cargill Bank.
(Dollar amounts in thousands)
QUARTER ENDED SIX MONTHS ENDED
06-30-99 06-30-98 06-30-99 06-30-98
-------- -------- -------- --------
Interest and dividend income $7,653 $7,156 $14,996 $13,878
Interest expense 3,481 3,383 6,806 6,381
-------- -------- -------- --------
Net interest income $4,172 $3,773 $8,190 $7,497
======== ======== ======== ========
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
(Dollar amounts in thousands)
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
-------- ---- -------- ---- -------- ---- -------- ----
Earning Assets $403,316 7.59% $361,667 7.91% $394,995 7.59% $348,268 7.97%
-------- ---- -------- ---- -------- ---- -------- ----
Interest-bearing liabilities 338,717 4.11 303,717 4.46 331,640 4.10 290,001 4.40
-------- ---- -------- ---- -------- ---- -------- ----
Interest rate spread 3.48 3.45 3.49 3.57
-------- ---- -------- ---- -------- ---- -------- ----
Interest-free resources
used to fund earning assets 64,599 57,950 63,355 58,267
-------- ---- -------- ---- -------- ---- -------- ----
Total Sources of Funds $403,316 $361,667 $394,995 $348,268
======== ==== ======== ==== ======== ==== ======== ====
Net Yield on Earning Assets 4.14% 4.17% 4.15% 4.31%
======== ==== ======== ==== ======== ==== ======== ====
13
WESTBANK CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
CHANGES IN NET INTEREST INCOME
(Dollar amounts in thousands)
QUARTER ENDED 06-30-99 SIX MONTHS ENDED 06-30-99
OVER OVER
QUARTER ENDED 06-30-98 SIX MONTHS ENDED 06-30-98
----------------------------- -----------------------------
CHANGE DUE TO CHANGE DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
Interest Income:
Loans $ 1,000 $ (400) $ 600 $ 1,668 $ (772) $ 896
Securities (52) 44 (8) 265 67 332
Federal funds (70) (25) (95) (75) (35) (110)
------- ------- ------- ------- ------- -------
Total Interest Earned 878 (381) 497 1,858 (740) 1,118
------- ------- ------- ------- ------- -------
Interest Expense:
Interest-bearing deposits 287 (265) 22 641 (457) 184
Other borrowed funds 80 (4) 76 218 23 241
------- ------- ------- ------- ------- -------
Total Interest Expense 367 (269) 98 859 (434) 425
------- ------- ------- ------- ------- -------
Net Interest Income $ 511 $ (112) $ 399 $ 999 $ (306) $ 693
======= ======= ======= ======= ======= =======
Net interest earned increased by $399,000 during the second quarter of 1999
compared to the second quarter of 1998. For the six-month period ended June 30,
1999, net interest income increased by $693,000 versus the same period of 1998.
Average earning assets increased by $46,724,000 during the first six months of
1999. The average earning base was $394,992,000 compared to $348,268,000 in the
same period last year.
OPERATING EXPENSES
The components of total operating expenses for the periods and their percentage
of gross income are as follows:
(Dollars amounts in thousands)
QUARTER ENDED SIX MONTHS ENDED
06-30-99 06-30-98 06-30-99 06-30-98
--------------- ---------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------- ------- ------ ------- ------ -------
Salaries and benefits $1,470 18.05% $1,417 18.17% $2,967 18.42% $2,838 18.75%
Other non-interest expense 1,163 14.28 1,204 15.44 2,273 14.11 2,357 15.57
Occupancy - net 306 3.75 236 3.03 614 3.82 498 3.29
------ ----- ------ ----- ------ ----- ------ -----
Total Operating Expenses $2,939 36.08% $2,857 36.64% $5,854 36.35% $5,693 37.61%
====== ===== ====== ===== ====== ===== ====== =====
For the six-month period ended June 30, 1999, operating expenses increased by
approximately $161,000 over the 1998 period. The increase was a result of
increases in salary and benefits totaling $129,000, occupancy expense totaling
$116,000 and a decrease in other non-interest expense of $84,000. The increases
are primarily the result of overall growth of the Corporation.
14
WESTBANK CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
CAPITAL RATIOS
06-30-99 06-30-98
-------- --------
Ratio of "Tier 1" leverage capital
to total assets at end of period 7.34% 6.90%
Regulatory risk-based capital requirements take into account the different risk
categories of banking organizations by assigning risk weight to assets and the
credit equivalent amounts of off-balance sheet exposures.
In addition, capital is divided into two tiers. For this Corporation, Tier 1
includes the common stockholders' equity. Tier 2, or supplementary capital,
includes not only the equity but, also, a portion of the allowance for loan
losses. Net unrealized gain/(losses) on securities available for sale are not
permitted to be included for regulatory capital purposes.
The following are the Corporation's risk-based capital ratios at June 30, 1999:
Tier 1 Capital (minimum required 4.00%) 11.44%
Tier 2 Capital (minimum required 8.00%) 12.41%
INTEREST RATE SENSITIVITY
The following table sets forth the distribution of the repricing of the
Corporation's earning assets and interest-bearing liabilities as of June 30,
(Dollar amounts in thousands)
Three Over Three Over One
Months Months to Year to Over
or Less One Year Five Years Five Years Total
------------ ----------- ----------- ---------- ----------
Earning Assets $ 56,457 $ 45,283 $ 115,516 $ 196,196 $ 413,452
Interest-Bearing
Liabilities 115,678 111,038 123,973 229 350,918
------------ ----------- ----------- ---------- ----------
Interest Rate
Sensitivity Gap $ (59,221) $ (65,755) $ (8,457) $ 195,967 $ 62,534
============ =========== =========== ========== ==========
Cumulative Interest
Rate
Sensitivity Gap $ (59,221) $ (124,976) $ (133,433) $ 62,534
Interest Rate
Sensitivity
Gap Ratio (14.32)% (15.90)% (2.05)% 47.40% 15.12%
Cumulative Interest
Rate Sensitivity
Gap Ratio (14.32)% (30.23)% (32.27)% 15.12%
15
WESTBANK CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY
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.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
(Dollar amounts in thousands)
QUARTER ENDED SIX MONTHS ENDED
06-30-99 06-30-98 06-30-99 06-30-98
--------- --------- --------- ---------
Balance at beginning of period $ 2,669 $ 3,077 $ 2,665 $ 3,057
Provision charged to expense 2 12 77 40
--------- --------- --------- ---------
2,671 3,089 2,742 3,097
--------- --------- --------- ---------
Charge-offs:
Loans secured by real estate 300 340
Commercial and industrial loans 40 87 47
Consumer loans 22 13 40 26
--------- --------- --------- ---------
22 353 127 413
--------- --------- --------- ---------
Recoveries:
Loans secured by real estate 70 2 86 33
Commercial and industrial loans 15 15
Consumer loans 2 4 5 10
--------- --------- --------- ---------
72 6 106 58
--------- --------- --------- ---------
Net charge-offs (recoveries) (50) 347 21 355
--------- --------- --------- ---------
Balance at end of period $ 2,721 $ 2,742 $ 2,721 $ 2,742
========= ========= ========= =========
Net charge-offs to:
Average loans (.02)% .12% .01% .13%
Loans at end of period (.01)% .12% .01% .12%
Allowance for loan losses (1.84)% 12.65% .77% 12.98%
Allowance for loan losses as a percentage of:
Average loans .82% .97% .85% .99%
Loans at end of period .80% .95% .80% .95%
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is the combination of a target reserve 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 depth of the collateral on these same loans. In
addition, the Corporation allocates a general reserve against the remainder of
the loan portfolio.
16
WESTBANK CORPORATION AND SUBSIDIARIES
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
(Dollar amounts in thousands)
06-30-99 03-31-99 12-31-98 09-30-98 06-30-98
--------- --------- --------- --------- ---------
Non-Accrual Loans $ 595 $ 952 $ 869 $ 817 $ 828
--------- --------- --------- --------- ---------
Loans contracturally past
due 90 days or more
and still accruing 245 147 231 218 175
--------- --------- --------- --------- ---------
Total non-accrual, past due
and restructured loans $ 840 $ 1,099 $ 1,100 $ 1,035 $ 1,003
--------- --------- --------- --------- ---------
Non-accrual, past due and
restructured loans as a
percentage of total loans .25% .34% .37% .36% .35%
--------- --------- --------- --------- ---------
Allowance for loan losses as a
percentage of non-accrual,
past due and restructured loans 323.93% 264.52% 242.27% 265.80% 273.38%
--------- --------- --------- --------- ---------
Other real estate owned - net $ 85 $ 347 $ 466 $ 304 $ 571
--------- --------- --------- --------- ---------
Total non-performing assets $ 925 $ 1,446 $ 1,566 $ 1,339 $ 1,574
--------- --------- --------- --------- ---------
Non-performing assets as a
percentage of total assets .21% .35% .39% .33% .40%
--------- --------- --------- --------- ---------
17
WESTBANK CORPORATION AND SUBSIDIARIES
QUARTER-TO-DATE AVERAGE BALANCES
INTEREST EARNED - INTEREST EXPENSE
(Dollar amounts in thousands)
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
JUNE 30, 1999 JUNE 30, 1998
Balance Interest Rate Balance Interest Rate
--------- -------- ------- --------- -------- -----
Federal funds sold and
temporary investments $ 2,849 $ 35 4.91% $ 8,235 $ 130 6.31%
Securities 67,374 1,114 6.61 70,619 1,122 6.35
Loans 333,093 6,504 7.81 282,813 5,904 8.35
-------- ------ ------ -------- -------- ------
Total earning assets 403,316 $7,653 7.59% 361,667 $7,156 7.91%
Loan loss allowance (2,746) (3,061)
All other assets 22,916 21,972
-------- ------ ------ -------- -------- ------
TOTAL ASSETS $ 423,486 $380,578
======== ======= ====== ======== ======== ======
LIABILITIES AND EQUITY
Interest-bearing deposits $313,686 $3,230 4.12% $286,688 $3,208 4.48%
Borrowed funds 25,031 251 4.01 17,029 175 4.11
-------- ------ ------ -------- -------- ------
Total interest-bearing liabilities 338,717 $3,481 4.11 303,717 $3,383 4.46
-------- ------ ------ -------- -------- ------
Interest rate spread 3.48% 3.45%
Demand deposits 52,032 46,893
Other liabilities 1,617 1,192
Shareholders' equity 31,120 28,776
-------- ------ ------ -------- -------- ------
TOTAL LIABILITIES
AND EQUITY $423,486 $380,578
======== ====== ====== ======== ======== ======
NET INTEREST INCOME $4,172 $3,773
======== ====== ====== ======== ======== ======
Interest Earned/Earning Assets 7.59% 7.91%
Interest Expense/Earning Assets 3.45 3.74
-------- ------ ------ -------- -------- ----
Net Yield on Earning Assets 4.14% 4.17%
======== ====== ====== ======== ======== ====
18
WESTBANK CORPORATION AND SUBSIDIARIES
YEAR-TO-DATE AVERAGE BALANCES
INTEREST EARNED - INTEREST EXPENSE
(Dollar amounts in thousands)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
Balance Interest Rate Balance Interest Rate
----------- -------- ------- --------- -------- -------
Federal funds sold and
temporary investments $ 3,374 $ 73 4.33% $ 6,276 $ 183 5.83%
Securities 72,321 2,390 6.61 64,373 2,058 6.39
Loans 319,300 12,533 7.85 277,619 11,637 8.38
-------- ------- ------ -------- -------- ------
Total earning assets 394,995 $14,996 7.59% 348,268 $13,878 7.97%
-------- ------- ------ -------- -------- ------
Loan loss allowance (2,714) (3,102)
All other assets 22,766 21,621
-------- ------- ------ -------- -------- ------
TOTAL ASSETS $415,047 $366,787
======== ======= ====== ======== ======== ======
LIABILITIES AND EQUITY
Interest-bearing deposits $306,696 $ 6,310 4.11% $276,348 $ 6,126 4.43%
Borrowed funds 24,944 496 3.98 13,653 255 3.74
-------- ------- ------ -------- -------- ------
Total interest-bearing
liabilities 331,640 $ 6,806 4.10 290,001 $ 6,381 4.40
-------- ------- ------ -------- -------- ------
Interest rate spread 3.49% 3.57%
Demand deposits 50,627 47,000
Other liabilities 1,782 1,410
Shareholders' equity 30,998 28,376
-------- ------- ------ -------- -------- ------
TOTAL LIABILITIES
AND EQUITY $415,047 $366,787
======== ======= ====== ======== ======== ======
NET INTEREST INCOME $ 8,190 $ 7,497
======== ======= ====== ======== ======== ======
Interest Earned/Earning Assets 7.59% 7.97%
Interest Expense/Earning Assets 3.44 3.66
-------- ------- ------ -------- -------- ------
Net Yield on Earning Assets 4.15% 4.31%
======== ======= ====== ======== ======== ======
19
WESTBANK CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - NONE
ITEM 2. Changes in Rights of Securities Holders - NONE
ITEM 3. Defaults by Company on its Senior Securities - NONE
ITEM 4. Results of Votes on Matters Submitted to a Vote of Security Holders
- NONE
ITEM 5. Other Events
a. Information Concerning Forward-Looking Statements
Westbank has made, and may make in the future, forward-looking
statements concerning future performance, including, but not limited
to, future earnings and events or conditions that may affect such
future performance. These forward-looking statements are based upon
management's expectations and belief concerning possible future
developments and the potential effect of such future developments on
Westbank. There is no assurance that such future developments will be
in accordance with management's expectations and belief or that the
effect of any future developments on Westbank will be those anticipated
by Westbank management.
All assumptions that form the basis of any forward-looking statements
regarding future performance, as well as events or conditions that may
affect such future performance, are based on factors that are beyond
Westbank's ability to control or predict with precision, including
future market conditions and the behavior of other market participants.
Among the factors that could cause actual results to differ materially
from such forward-looking statements are the following:
1. The status of the economy in general, as well as in Westbank's
prime market areas of Western Massachusetts and Northeastern
Connecticut;
2. The real estate market in Western Massachusetts and Northeastern
Connecticut;
3. Competition in Westbank's prime market area from other banks,
especially in light of continued consolidation in the New England
banking industry;
4. Any changes in federal and state bank regulatory requirements;
5. Changes in interest rates; and
6. The cost and other effects of unanticipated legal and
administrative cases and proceedings, settlements and
investigations.
While Westbank periodically reassesses material trends and
uncertainties affecting the Corporation's performance in connection
with its preparation of Management's Discussion and Analysis of Results
of Operations and Financial Condition contained in its quarterly and
annual reports, Westbank does not intend to review or revise any
particular forward-looking statements.
b. Registration on Form S-3
None.
c. Registration of Form S-8
None
20
ITEM 6. Exhibits and Reports on Form 8
a. Exhibits
EXHIBIT INDEX
3. Articles of Organization, as amended **
(a) Articles of Organization, as amended *
(b) By-Laws, as amended *
10. Material Contracts
(a) Stock Purchase Agreement dated April 12, 1999, among SunLife
Assurance Company of Canada (U.S.), New London Trust, F.S.B., and
PM Holdings, Inc., PM Trust Holding Company, Lake Sunapee Bank,
F.S.B., Mascoma Savings Bank and Cargill Bank.
(b) Purchase and Assumption Agreement dated April 12, 1999, among PM
Holdings, Inc., PM Trust Holding Company, Cargill Bank, Lake
Sunapee Bank, F.S.B., and Mascoma Savings Bank.
(c) Asset and Liability Allocation Agreement dated April 12, 1999,
among Lake Sunapee Bank, F.S.B., Mascoma Savings Bank and Cargill
Bank.
27. Financial Data Schedule To be included
* Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1988.
** Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1987.
b. Reports on Form 8-K - On February 3, 1999, the Registrant filed a
current report on Form 8-K regarding the acquisition of Cargill
Bancorp, Inc. Subsequent to March 31, 1999, the Registrant filed
the following reports on Form 8-K:
On April 22, 1999, the Registrant filed a report on Form 8-K
regarding the agreement to purchase the Connecticut branches of the
New London Trust, F.S.B.
On April 23, 1999, the Registrant filed a report on Form 8-K that
reported the Corporation's first quarter earnings for 1999.
21
WESTBANK CORPORATION AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned thereunto duly authorized.
WESTBANK CORPORATION
Date: August 11, 1999 /s/ Donald R. Chase
----------------------------------------
Donald R. Chase
President and Chief Executive Officer
Date: August 11, 1999 /s/ John M. Lilly
----------------------------------------
John M. Lilly
Treasurer and Chief Financial Officer
22
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Tucker Anthony Cleary Gull
Ryan, Beck & Co.
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