EXHIBIT 99.2
------------
WESTBANK CORPORATION
2002 ANNUAL REPORT
CRAFTING A STRATEGY FOR SUCCESS
TABLE OF CONTENTS
FINANCIAL HIGHLIGHTS....................................................
LETTER TO STOCKHOLDERS..................................................
BUSINESS - WESTBANK CORPORATION AND SUBSIDIARIES........................
SELECTED CONSOLIDATED FINANCIAL DATA....................................
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS................
CONSOLIDATED BALANCE SHEETS.............................................
CONSOLIDATED STATEMENTS OF INCOME.......................................
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.........................
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME.........................
CONSOLIDATED STATEMENTS OF CASH FLOWS...................................
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..............................
INDEPENDENT AUDITORS' REPORT............................................
CORPORATE DIRECTORY.....................................................
CORPORATE INFORMATION................................................IBC
FINANCIAL HIGHLIGHTS
WESTBANK CORPORATION AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31
(DOLLARS IN THOUSANDS) 2002 2001 2000
================================================================================
Net income $ 6,009 $ 4,073 $ 3,788
Net interest income 22,521 20,397 19,417
Non-interest income 4,090 3,489 2,652
Non-interest expense 16,412 16,841 15,841
Provision for loan losses 1,333 944 472
YEAR END DECEMBER 31
(DOLLARS IN THOUSANDS)
================================================================================
Securities $132,732 $142,442 $ 97,676
Loans, net 473,721 439,723 429,231
Allowance for loan losses 5,111 4,179 3,670
Assets 682,863 628,922 574,596
Deposits 561,747 509,849 499,140
Stockholders' equity 42,612 39,016 34,860
COMMON SHARE DATA (1)
Average diluted shares 4,509,965 4,513,020 4,487,053
Earnings per diluted share $1.33 $.90 $.84
(1) Share amounts and common stock prices are adjusted for the 5 percent stock
dividend declared and distributed in January 2003.
CHANGE IN COMMON STOCK PRICE, EARNINGS PER SHARE (DILUTED)
AND BOOK VALUE (BAR GRAPH)
================================================================================
Closing Earnings per Share
Common Stock Price (Diluted) Book Value
- --------------------------------------------------------------------------------
2000 $ 6.67 $ .84 $7.86
2001 9.19 .90 8.71
2002 13.05 1.33 9.76
1
BUSINESS
WESTBANK CORPORATION AND SUBSIDIARIES
CORPORATE ORGANIZATION
Westbank Corporation (hereinafter sometimes referred to as "the Corporation") is
a registered Bank Holding Company organized to facilitate the expansion and
diversification of the business of Westbank (hereinafter sometimes referred to
as "the Bank"). Westbank Corporation is also the owner of a wholly owned
subsidiary, Westbank Capital Trust 1, which was organized for the purpose of
facilitating the issuance of the mandatory redeemable preferred stock that was
issued on September 30, 1999.
The Corporation is headquartered in West Springfield, Massachusetts. As of
December 31, 2002, the Corporation has seventeen (17) offices located in
Massachusetts and Connecticut.
WESTBANK
The Bank is a Massachusetts chartered commercial bank and trust company, is a
member of the Federal Deposit Insurance Corporation ("FDIC"), and is subject to
regulation by the Massachusetts Commissioner of Banks and the FDIC. Westbank is
the resultant financial institution formed from the merger of the Corporation's
two (2) wholly owned subsidiaries, Park West Bank and Trust Company ("Park
West") and Cargill Bank ("Cargill') on September 7, 2001.
A full range of retail banking services is furnished to individuals, businesses
and nonprofit organizations through seventeen (17) banking offices located in
Massachusetts and Connecticut. Such services include a wide range of checking
and savings accounts, loans, safe deposit facilities, and automated teller
machines at selected branch locations and three (3) off-site locations.
The Bank also provides lending, depository and related financial services to
commercial, industrial, financial and governmental customers. In the lending
area, these include short- and long-term loans and revolving credit
arrangements, letters of credit, inventory and accounts receivable financing,
real estate construction lending, and mortgage loans.
Lorac Leasing Corporation, Park West Securities Corporation, Park West Real
Estate Investment Trust, Inc., and PWB&T, Inc., are all wholly owned
subsidiaries of the Bank. During 2002, the Bank dissolved Lorac Leasing
Corporation, which had been inactive for years.
The Bank also operates a Trust Department providing services normally associated
with holding property in a fiduciary or agency capacity. The value of the
property held by the Trust Department at December 31, 2002 amounted to
$149,921,000 and is not included in the accompanying financial statements since
such items are not assets of the Bank.
EMPLOYEES
As of December 31, 2002, the Corporation and its subsidiaries had the equivalent
of 156 full-time officers and staff.
COMPETITION
The Corporation's banking, real estate activity and trust services are
competitive with other financial institutions. Its service area is in western
Massachusetts and northeastern Connecticut. Competitors include other commercial
banks, mutual savings banks, savings and loan associations, credit unions,
consumer finance companies, loan offices, money market funds, and other
financing organizations.
Competition for trust services from major commercial banks is high, with
continuing efforts by those banks to solicit new business. The Trust Department
prides itself as one of the few remaining corporate fiduciaries providing
personal services locally. Insurance companies, mutual savings banks, investment
counseling firms, and other business firms and individuals also offer active
competition for such business.
2
SELECTED CONSOLIDATED FINANCIAL DATA
WESTBANK CORPORATION AND SUBSIDIARIES
Year ended December 31,
(Dollars in Thousands Except Share Amounts) 2002 2001 2000 1999 1998
=====================================================================================================================
Interest and dividend income $40,576 $41,088 $42,645 $32,437 $28,631
Interest expense 18,055 20,691 23,228 15,316 13,292
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 22,521 20,397 19,417 17,121 15,339
Provision for loan losses 1,333 944 472 77 41
Non-interest income 4,090 3,489 2,652 2,330 2,427
Non-interest expense 16,412 16,841 15,841 12,598 12,200
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,866 6,101 5,756 6,776 5,525
Income taxes 2,857 2,028 1,968 2,609 2,148
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 6,009 $ 4,073 $ 3,788 $ 4,167 $ 3,377
=====================================================================================================================
Common share data: (1)
Earnings per share:
Basic $ 1.36 $ .91 $ .85 $ .94 $ .75
Diluted 1.33 .90 .84 .92 .73
Cash dividends declared .44 .40 .40 .40 .40
Ending book value 9.76 8.71 7.86 7.01 6.14
AT DECEMBER 31:
Loans, net $473,721 $439,723 $429,231 $438,567 $293,113
Assets 682,863 628,922 574,596 576,150 402,623
Non-performing assets 1,558 2,034 2,737 2,881 1,494
Deposits 561,747 509,849 499,140 478,896 342,267
Borrowings 56,392 57,666 20,992 46,546 27,807
Mandatory redeemable preferred stock 17,000 17,000 17,000 17,000
Stockholders' equity 42,612 39,016 34,860 31,543 30,490
AVERAGE FOR YEAR:
Loans 463,488 440,454 445,846 349,614 284,629
Assets 666,120 595,592 581,328 450,691 382,924
Deposits 537,309 486,694 488,396 384,410 335,110
Stockholders' equity 40,380 36,920 32,096 31,187 29,229
Weighted shares outstanding - basic 4,406,583 4,465,054 4,440,560 4,456,622 4,350,159
Weighted shares outstanding - diluted 4,509,965 4,513,020 4,487,053 4,549,992 4,486,316
SELECTED RATIOS:
Return on average assets .90% .68% .65% .92% .88%
Return on average stockholders' equity 14.88 11.03 11.80 13.36 11.55
Allowance for loan losses to loans at year end 1.07 .94 .85 .88 .90
Non-performing loans as a percentage
of total loans at year end .33 .41 .51 .55 .35
Net charge-offs (recoveries) as a
percentage of average loans .09 .10 .16 .14 .15
Non-performing assets as a percentage of assets .23 .32 .48 .50 .37
(1) Share amounts are adjusted for the 5 percent stock dividend declared and
distributed in January 2003.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS
WESTBANK CORPORATION AND SUBSIDIARIES
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
The following forward-looking statements are made in accordance with the Private
Securities Litigation Reform Act of 1995.
The Corporation has made, and may make in the future, forward-looking statements
concerning future performance, including, but not limited to, future earnings
and events or conditions that may affect such future performance. These
forward-looking statements are based upon management's expectations and belief
concerning possible future developments and the potential effect of such future
developments on the Corporation. There is no assurance that such future
developments will be in accordance with management's expectations and belief or
that the effect of any future developments on the Corporation will be those
anticipated by management.
All assumptions that form the basis of any forward-looking statements regarding
future performance, as well as events or conditions that may affect such future
performance, are based on factors that are beyond the Corporation's ability to
control or predict with precision, including future market conditions and the
behavior of other market participants. 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 the Corporation's
primary market areas of western Massachusetts and northeastern Connecticut;
2. The real estate market in western Massachusetts and northeastern
Connecticut;
3. Competition in the Corporation's primary market area from other banks,
especially in light of continued consolidation in the New England banking
industry;
4. Any changes in federal and state bank regulatory requirements;
5. Changes in interest rates;
6. The cost and other effects of unanticipated legal and administrative cases
and proceedings, settlements and investigations;
7. Unanticipated changes in laws and regulations, including federal and state
banking laws and regulations, to which the Corporation and its subsidiaries
are subject;
8. Changes in accounting policies and practices, as may be adopted by the
Financial Accounting Standards Board or any regulatory agency having
authority over the Corporation and/or its subsidiaries; and
9. Disruption in general economic conditions due to military or terrorist
activity.
Forward-looking statements speak only as of the date they were made. While the
Corporation periodically reassesses material trends and uncertainties affecting
the Corporation's performance in connection with its preparation of management's
discussion and analysis of results of operations and financial condition
contained in its quarterly and annual reports, the Corporation does not intend
to review or revise any particular forward-looking statement.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
Management believes that the Corporation's critical accounting policies are
accounting for securities and loans, including revenue recognition, the
allowance for loan losses and the classification of securities. The
Corporation's accounting policy for each of these items is described below.
SECURITIES
Securities that management has the positive intent and ability to hold until
maturity are stated at cost, adjusted for amortization of premiums and accretion
of discounts. Those securities that have been identified as assets for which
there is not a positive intent to hold to maturity, including all marketable
equity securities, are classified as available for sale with unrealized gains
(losses), net of income taxes, reported as a separate component of stockholders'
equity. The Corporation determines if securities will be classified as
held-to-maturity or available-for-sale at the time of purchase. In addition, any
mortgage-backed securities 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 available-for-sale securities are recognized in non-interest
income at the time of sale on a specific identification basis. Securities that
have experienced an other-than-temporary decline in value are written down to
estimated fair value, establishing a new cost basis with the amount of the
write-down expensed as a realized loss. The Corporation does not engage in
trading activities.
LOANS
Loans have been reduced by deferred loan fees and the allowance for loan losses.
Interest Income on loans is recorded on an accrual basis. Loan origination fees,
net of certain direct loan origination costs, are deferred and recognized as
income over the life of the related loan as an adjustment to the loan's yield.
Non-accrual loans are loans on which the accrual of interest ceases when the
collection of principal or interest payments is determined to be doubtful by
management. It is the general policy of the Corporation to discontinue the
accrual of interest when principal or interest payments are delinquent ninety
(90) days, unless the loan principal and interest are determined by management
to be fully collectible. Any unpaid amounts previously accrued on these loans
are reversed from income. Interest received on a loan in non-accrual status is
applied to reduce principal or, if management determines that the principal is
collectible, applied to interest on a cash basis. A loan is returned to accrual
status after the borrower has brought the loan current and has demonstrated
compliance with the loan terms for a sufficient period, and management's doubts
concerning collectibility have been removed.
The Corporation measures impairment of loans in accordance with SFAS No. 114,
"Accounting for Impairment of a Loan", as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(collectively, SFAS No. 114). A loan is recognized as impaired when it is
probable that either principal or interest are not collectible in accordance
with the terms of the loan agreement. Measurement of impairment for commercial
loans is generally based on the present value of expected future cash flows
discounted at the loan's effective interest rate. Commercial real estate loans
are generally measured based on the fair value of the underlying collateral. If
the estimated fair value of the impaired loan is less than the related recorded
amount, a specific valuation allowance is established or a write-down is charged
against the allowance for loan losses. Smaller balance homogenous loans,
including residential real estate and consumer loans, are excluded from the
provisions of SFAS No. 114. Generally, income is recorded only on a cash basis
for impaired loans.
The appropriateness of the allowance for loan losses is evaluated quarterly by
management. Factors considered in evaluating the appropriateness of the
allowance include the size and concentration of the portfolio, previous loss
experience, current economic conditions and their effect on borrowers, the
financial condition of individual borrowers and the related performance of
individual loans in relation to contract terms. The provision for loan losses
charged to operating expense is based upon management's judgment of the amount
necessary to maintain the allowance at an appropriate level to absorb losses.
Management also retains an independent loan review consultant to provide advice
on the appropriateness of the loan loss allowance. Loan losses are charged
against the allowance for loan losses when management believes the
collectibility of the principal is unlikely.
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.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
SUMMARY OF RESULTS
This section presents discussion and analysis of the Corporation's consolidated
financial condition at December 31, 2002 and 2001 and consolidated results of
operations for each of the three (3) years in the period ended December 31,
2002. The Corporation is consolidated with its wholly owned subsidiary,
Westbank. This discussion and analysis should be read in conjunction with the
financial statements contained elsewhere in this Annual Report on Form 10-K.
Effective January 29, 1999, Cargill Bank was merged with and into Westbank
Corporation, pursuant to a plan of merger dated July 15, 1998. Each share of
Cargill common stock was converted into 1.365 shares of the Corporation's common
stock. Approximately 400,164 of the Corporation's common shares were issued for
the outstanding common stock of Cargill.
The transaction was accounted for using the pooling-of-interests method of
accounting and, accordingly, all historical financial data has been restated to
include both entities for all periods presented. The restatement of the
historical data is based on the Corporation's fiscal year-end December 31 and
Cargill's fiscal year-end September 30 for all periods prior to 1999.
On October 29, 1999, Cargill Bank completed its acquisition of the Connecticut
division of New London Trust. The two New London Trust offices became offices of
Cargill Bank. The acquisition resulted in $106 million of assets (loans of $84
million) and $106 million of liabilities being acquired as of October 29, 1999.
The Corporation has accounted for this acquisition on the purchase accounting
method. On September 7, 2001, Cargill was merged with and into Park West,
operating under the name Westbank.
For 2002, the Corporation reported net income of $6,009,000 or $1.33 per diluted
share after providing $1,333,000 for loan losses. This compares to net income of
$4,073,000 or $.90 per diluted share for 2001. The Corporation's 2001 earnings
reflected a provision for loan losses of $944,000.
Net interest income increased by $2,124,000 from 2001 to 2002. Non-interest
income increased by $601,000 from the prior year and by $1,438,000 versus 2000.
Non-interest income for 2002 reflects an increase in Trust Department earnings
of $17,000, a decrease in service charges on deposit accounts and loan servicing
income of $69,000, a decrease from gain on sale of investments, other real
estate owned, mortgages and equipment totaling $394,000 and an increase in other
non-interest income of $1,047,000. Included in other non-interest income is
$800,000 in life insurance proceeds and an increase of $193,000 in cash
surrender value of bank-owned life insurance.
Non-interest expense amounted to $16,412,000 in 2002, a decline of $429,000 or
2.55%. The decline in operating expenses for 2002 is due in part to the
Corporation adopting SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 142"), effective January 1, 2002, and the adoption of SFAS No. 147,
"Acquisition of Certain Financial Institutions" ("SFAS No. 147"), effective
September 30, 2002. In accordance with these statements, the Corporation has
ceased amortization of goodwill and has performed a transitional goodwill
impairment test. The adoption of SFAS No. 142 and SFAS No. 147 eliminated
intangible amortization of goodwill in the amount of $684,000 for 2002. In
addition to the above, salaries and benefits increased $703,000, occupancy
expense increased $66,000 and other non-interest expense declined $514,000 as a
result of efficiencies achieved through the merger of the Connecticut and
Massachusetts bank subsidiaries.
At December 31, 2002, the Corporation's total assets were $682,863,000, an
increase of $53,941,000 or 8.58% compared to year-end 2001.
Non-performing assets amounted to $1,558,000 or .23% of total assets at December
31, 2002, compared with $2,034,000 or .32% at the end of 2001.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
imposes significant regulatory restrictions and requirements on banking
institutions insured by the FDIC and their holding companies. FDICIA established
capital categories into which financial institutions are placed based on capital
level. Each capital category establishes different degrees of regulatory
restrictions that can apply to a financial institution. As of December 31, 2002,
the Bank's capital was at a level that placed the Bank in the "well capitalized"
category as defined by FDICIA.
FDICIA imposes a variety of other restrictions and requirements on insured
banks. These include significant regulatory reporting requirements such as
insuring that a system of risk-based deposit insurance premiums and civil money
penalties for inaccurate deposit reporting exists. In addition, FDICIA imposes a
system of regulatory standards for bank and bank holding company operations,
detailed truth in savings disclosure requirements, and restrictions on
activities authorized by state law but not authorized for national banks.
COMPONENTS OF CAPITAL
As of December 31, 2002, stockholders' equity increased to $42.6 million, a
9.22% increase compared to December 31, 2001. Stockholders' equity increased as
a result of the Corporation's net income of $6 million and an improvement in the
unrealized gain on securities available for sale of $1.1 million, net of taxes
less $1.8 million paid in dividends to shareholders and the repurchase of
$2,615,000 in the Corporation's stock. In addition, the Corporation reissued
96,365 shares of Treasury stock totaling $834,000, primarily for the purpose of
the Corporation's dividend reinvestment program.
Capital guidelines issued by the Federal Reserve Board require the Corporation
to maintain certain capital ratios. As of December 31, the Corporation's
regulatory capital ratios were as follows:
2002 2001 2000
---- ---- ----
Tier 1 leverage capital (to average assets) 6.60% 6.96% 6.45%
Tier 1 risk-based capital (minimum required 4%) 10.56 10.79 10.34
Total risk-based capital (minimum required 8%) 12.63 13.03 12.84
Regulatory risk-based capital requirements take into account the different risk
categories of banking organizations by assigning risk weights to assets and the
credit equivalent amounts of off-balance sheet exposures. In addition, capital
is divided into two tiers. In this Corporation, Tier 1 includes the common
stockholders' equity and a portion of the mandatory redeemable preferred stock;
total risk-based, or supplementary capital includes not only the equity but also
a portion of the allowance for loan losses and a portion of the mandatory
redeemable preferred stock.
DISCUSSION OF MARKET RISK
Market risk is the risk of loss due to adverse changes in market prices and
rates. The management of this risk, coupled with directives to build shareholder
value and profitability, is an integral part of the Corporation's overall
operating strategy. The Corporation's approach to risk management, primarily
interest rate risk management, concentrates on fundamental strategies to
structure the balance sheet and the composition of assets and liabilities. The
Corporation does not utilize interest rate futures, swaps or options
transactions. It's approach reflects 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. Corporate policy includes required limits on the sensitivity of net
interest income under various interest rate scenarios.
The Corporation seeks to control its interest rate risk exposure in a manner
that allows for adequate levels of earnings and capital over a range of possible
interest rate environments. The Corporation has adopted formal policies and
practices to monitor and manage interest rate risk exposure. As part of this
effort, the Corporation 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 Corporation 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.
7
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 Corporation'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, 2002 and 2001:
Percentage Change in
Change in Interest Rates Net Interest Income
(In Basis Points) 2002 2001
================================================================================
+200 4.00% 0%
Level 0 0
-200 (6.00) (1.00)
The model utilized to create the results presented above makes various estimates
at each level of interest rate change regarding cash flows from principal
repayments on loans and mortgage-backed securities and/or call activity on
investment securities. Actual results could differ significantly from these
estimates which would result in significant differences in the calculated
projected change.
In order to reduce the exposure to interest rate fluctuations, the Corporation
has developed strategies to manage its liquidity, shorten the effective
maturities of certain interest-earning assets and increase the effective
maturities of certain interest-bearing liabilities. The Bank has focused its
residential lending on a combination of fixed and adjustable rate mortgages.
Commercial loans, commercial mortgages and consumer lending focus on adjustable
and short term loans. The Bank also attempts to maintain and/or increase its
savings and transaction accounts, which are considered relatively insensitive to
changes in interest rates.
The Corporation also measures sensitivity to changes in interest rates using
interest rate sensitivity gap analysis which is the difference between the cash
flow amounts of interest-sensitive assets and liabilities that will be
refinanced (or repriced) during a given period. For example, if the asset amount
to be repriced exceeds the corresponding liability amount for a certain day,
month, year, or longer period, the institution is in an asset-sensitive gap
position. In this situation, net interest income would increase if market
interest rates rose or decrease if market interest rates fell. If,
alternatively, more liabilities than assets will reprice, the institution is in
a liability-sensitive position. Accordingly, net interest income would decline
when rates rise and increase when rates fall. Also, these examples assume that
interest-rate changes for assets and liabilities are of the same magnitude,
whereas actual interest-rate changes generally differ in magnitude for assets
and liabilities.
The following table sets forth the distribution of the repricing of the
Corporation's earning assets and interest-bearing liabilities as of December 31,
2002, 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.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
THREE OVER THREE OVER ONE OVER
MONTHS MONTHS TO YEAR TO FIVE
(DOLLARS IN THOUSANDS) OR LESS A YEAR FIVE YEARS YEARS TOTAL
=============================================================================================================
EARNING ASSETS
Investments $ 7,854 $ 58 $ 1,595 $ 123,225 $ 132,732
Interest bearing cash 98 98
Loans 85,565 58,786 159,055 175,426 478,832
Federal funds sold 28,185 28,185
- -------------------------------------------------------------------------------------------------------------
121,702 58,844 160,650 298,651 639,847
INTEREST BEARING LIABILITIES
Savings deposits 10,039 90,352 100,391
NOW accounts 3,367 30,298 33,665
Money market accounts 40,775 40,775
Other time deposits 76,980 108,333 127,392 42 312,747
Borrowed funds and preferred stock 23,602 10,000 22,790 17,000 73,392
- -------------------------------------------------------------------------------------------------------------
$ 141,357 $ 131,739 $ 270,832 $ 17,042 $ 560,970
=============================================================================================================
Interest Rate
Sensitivity Gap $ (19,655) $ (72,895) $ (110,182) $ 281,609 $ 78,877
Cumulative Interest Rate
Sensitivity Gap (19,655) (92,550) (202,732) 78,877
Interest Rate
Sensitivity Gap Ratio (3.07)% (11.39)% (17.22)% 44.01%
Cumulative Interest Rate
Sensitivity Gap Ratio (3.07) (14.46) (31.68) 12.33
The presentation of a run off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $10,039,000 and
$3,367,000, respectively, included in the three-month to one-year category and
the remainder placed in the one- to five-year category of the interest-bearing
liabilities.
Westbank seeks to manage the mix of asset and liability maturities to control
the effect of changes in the general level of interest rates on net interest
income. Except for its effect on the general level of interest rates, inflation
does not have a material impact on Westbank's earnings due to the rate of
variability and short-term maturities of its earning assets.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY -
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table presents the condensed consolidated average balance sheets
for 2002, 2001 and 2000. 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:
9
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
2002 2001 2000
--------------------------- --------------------------- ---------------------------
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 $ 63 $ 1 1.59% $ 450 $ 27 6.00% $ 534 $ 32 6.00%
Federal agencies 131,908 7,989 6.06 105,260 6,926 6.58 90,018 6,422 7.13
Tax exempt federal (a) 626 44 7.03 614 42 7.00 616 42 6.82
Other securities 7,979 329 4.12 6,988 408 5.84 4,007 292 7.29
- -----------------------------------------------------------------------------------------------------------------------------
Total securities 140,576 8,363 5.95 113,312 7,403 6.53 95,175 6,788 7.13
- -----------------------------------------------------------------------------------------------------------------------------
Interest-bearing cash and
temporary investments 622 28 4.50 351 15 4.27 765 41 5.36
- -----------------------------------------------------------------------------------------------------------------------------
Loans: (b)
Commercial 62,971 4,061 6.45 58,689 4,524 7.71 60,064 5,608 9.34
Tax exempt federal (a) 6,658 561 8.43 4,534 423 9.33 4,653 413 8.88
Real estate 332,215 23,531 7.08 324,139 24,513 7.56 333,757 26,008 7.79
Consumer 61,644 3,943 6.40 53,092 4,210 7.93 47,372 3,708 7.83
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 463,488 32,096 6.92 440,454 33,670 7.64 445,846 35,737 8.02
- -----------------------------------------------------------------------------------------------------------------------------
Federal funds sold 20,992 295 1.41 5,013 158 3.15 3,793 234 6.17
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets 625,678 $40,782 6.52% 559,130 $41,246 7.38% 545,579 $42,800 7.84%
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (4,603) (4,039) (3,937)
Cash and due from banks 15,787 13,435 14,054
Other assets 29,258 27,066 25,632
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $666,120 $595,592 $581,328
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings $129,604 $ 1,561 1.20% $133,742 $ 2,665 1.99% $127,764 $ 3,365 2.63%
Money market 34,403 736 2.14 18,258 387 2.12 24,021 765 3.18
Negotiated rate certificates 59,104 2,014 3.41 48,817 2,325 4.76 50,391 2,899 5.75
Other time deposits 242,242 9,866 4.07 221,311 11,731 5.30 225,609 12,464 5.52
- -----------------------------------------------------------------------------------------------------------------------------
Total time deposits 465,353 14,177 3.05 422,128 17,108 4.05 427,785 19,493 4.56
Borrowed funds/preferred stock 83,068 3,878 4.67 68,032 3,583 5.27 57,717 3,735 6.47
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 548,421 $18,055 3.29% 490,160 $20,691 4.22% 485,502 $23,228 4.78%
Demand deposits 71,956 64,566 60,610
Other liabilities 5,363 3,946 3,120
Stockholders' equity 40,380 36,920 32,096
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $666,120 $595,592 $581,328
=============================================================================================================================
Net interest income $22,727 $20,555 $19,572
Yield spread 3.23% 3.16% 3.06%
Net yield on earning assets/net
interest margin 3.63% 3.68% 3.59%
Deduct tax equivalent adjustment 206 158 155
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $22,521 $20,397 $19,417
=============================================================================================================================
(A) TAX EQUIVALENT BASIS. INTEREST INCOME ON NON-TAXABLE INVESTMENT SECURITIES
AND LOANS INCLUDES THE EFFECTS OF THE TAX EQUIVALENT ADJUSTMENTS USING THE
MARGINAL FEDERAL TAX RATE OF 34% IN ADJUSTING TAX EXEMPT INTEREST INCOME TO
A FULLY TAXABLE BASIS.
(B) AVERAGE LOAN BALANCES ABOVE INCLUDE NON-ACCRUAL LOANS. WHEN A LOAN IS
PLACED IN NON-ACCRUAL STATUS, INTEREST INCOME IS RECORDED TO THE EXTENT
ACTUALLY RECEIVED IN CASH OR IS APPLIED TO REDUCE PRINCIPAL.
During 2002, the yield spread increased to 3.23% versus 3.16% in 2001. The
Corporation's net interest margin decreased during 2002 to 3.63% from 3.68% in
2001, a decrease of 5 basis points. The section titled Rate/Volume Analysis
further describes the change in yields. During 2001, the yield spread increased
to 3.16% versus 3.06% in 2000. The Corporation's net interest margin increased
during 2001 to 3.68% from 3.59% in 2000, an increase of 9 basis points.
10
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 at 34%), interest expense and net
interest income and changes therein for 2002 as compared with 2001 and 2001
compared with 2000.
2002 COMPARED WITH 2001 2001 COMPARED WITH 2000
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE DUE TO * INCREASE DUE TO *
(DOLLARS IN THOUSANDS) 2002 2001 (DECREASE) VOLUME RATE 2001 2000 (DECREASE) VOLUME RATE
===================================================================================================================================
Interest earned:
Securities:
U.S. Treasury $ 1 $ 27 $ (26) $ (14) $ (12) $ 27 $ 32 $ (5) $ (5)
Federal agencies 7,989 6,926 1,063 1,645 (582) 6,926 6,422 504 1,029 $ (525)
Tax exempt federal 44 42 2 1 1 42 42
Other securities 329 408 (79) 52 (131) 408 292 116 183 (67)
Interest-bearing cash 28 15 13 12 1 15 41 (26) (19) (7)
Loans:
Commercial 4,061 4,524 (463) 313 (776) 4,524 5,608 (1,084) (126) (958)
Tax exempt federal 561 423 138 182 (44) 423 413 10 (10) 20
Real estate 23,531 24,513 (982) 602 (1,584) 24,513 26,008 (1,495) (738) (757)
Consumer 3,943 4,210 (267) 618 (885) 4,210 3,708 502 453 49
Federal funds sold 295 158 137 246 (109) 158 234 (76) 61 (137)
- -----------------------------------------------------------------------------------------------------------------------------------
40,782 41,246 (464) 3,657 (4,121) 41,246 42,800 (1,554) 828 (2,382)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings 1,561 2,665 (1,104) (80) (1,024) 2,665 3,365 (700) 151 (851)
Money market 736 387 349 345 4 387 765 (378) (158) (220)
Negotiated rate
certificates 2,014 2,325 (311) 430 (741) 2,325 2,899 (574) (88) (486)
Other time deposits 9,866 11,731 (1,865) 1,038 (2,903) 11,731 12,464 (733) (237) (496)
Borrowed funds 3,878 3,583 295 732 (437) 3,583 3,735 (152) 607 (759)
- -----------------------------------------------------------------------------------------------------------------------------------
18,055 20,691 (2,636) 2,465 (5,101) 20,691 23,228 (2,537) 275 (2,812)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 22,727 $ 20,555 $ 2,172 $ 1,442 $ 730 $ 20,555 $ 19,572 $ 983 $ 553 $ 430
===================================================================================================================================
* 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 2002 increased to $22,727,000, up 10.57% from
$20,555,000 in 2001. An 11.94% increase in average earning assets and an 86
basis point decrease in average rate of return resulted in an increase in volume
of $3,657,000 and a decrease in rate of $4,121,000. An increase of 11.89% in
average interest-bearing liabilities and a 93 basis point decrease in average
rate of interest paid contributed to an increase in volume of $2,465,000 and a
decrease in rate of $5,101,000.
Net interest income for 2001 increased to $20,555,000, up 5.0% from $19,572,000
in 2000. A 2.48% increase in average earning assets and a 46 basis point
decrease in average rate of return resulted in an increase in volume of $828,000
and a decrease in rate of $2,382,000. A decrease of .96% in average
interest-bearing liabilities and a 56 basis point decrease in average rate of
interest paid contributed to an increase in volume of $275,000 and a decrease in
rate of $2,812,000.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
LIQUIDITY
Liquidity refers to the Corporation's ability to generate adequate amounts of
cash to fund loan originations, security purchases, deposit withdrawals, and
fund dividends on the Corporation's common stock and Mandatory Redeemable
Preferred Stock.
The Corporation's liquidity position is monitored by the Asset/Liability
Committee, based on policies approved by the Board of Directors. The Committee
meets regularly to review and direct the Bank's investment, lending and
deposit-gathering activities.
At December 31, 2002, the Corporation maintained cash balances, short-term
investments and investments available for sale totaling $180 million,
representing 26% of total year-end assets, versus $160 million or 25% of total
assets at December 31, 2001.
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 available for
sale, as compared to deposits and borrowings, are used by the Corporation to
compute its liquidity on a daily basis.
The primary source of funds for the payment of dividends by the Corporation is
dividends paid to the Corporation by the Bank. Bank regulatory authorities
generally restrict the amounts available for payment of dividends, if the effect
thereof would cause the capital of the Bank to be reduced below applicable
capital requirements. These restrictions indirectly affect the Corporation's
ability to pay dividends.
Management of the Corporation believes that its current liquidity is sufficient
to meet current and anticipated funding needs. Refer to Note 6 in the Notes to
Consolidated Financial Statements for a discussion of the Corporation's external
sources of liquidity.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
SECURITIES PORTFOLIO
Refer to Note 2 in the Notes to Consolidated Financial Statements of this report
for further discussion. The following table shows the amortized cost (in
thousands) of the Corporation's securities held to maturity at December 31:
2002 2001 2000
=============================================================================================================================
U. S. Government obligations $ $ $ 499
Federal agency obligations 9,448
Mortgage-backed securities 436 757 1,462
- -----------------------------------------------------------------------------------------------------------------------------
Amortized cost $ 436 $ 757 $ 11,409
=============================================================================================================================
The following table shows the estimated fair value (in thousands) of the
Corporation's securities available for sale at December 31:
2002 2001 2000
=============================================================================================================================
U. S. Government obligations $ 26 $ 66 $ 38
Federal agency obligations 49,531 72,659 61,465
Mortgage-backed securities 73,938 60,359 18,929
Municipal bonds 984 633 624
Equity securities 7,817 7,968 5,211
- -----------------------------------------------------------------------------------------------------------------------------
Estimated fair value 132,296 141,685 86,267
Gross unrealized (gain) loss on
securities available for sale (3,762) (2,075) 295
- -----------------------------------------------------------------------------------------------------------------------------
Amortized cost $128,534 $139,610 $ 86,562
=============================================================================================================================
The following table shows weighted average yields and maturity distribution (in
thousands) of debt securities at December 31, 2002:
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 1.23% $ 26 1.23% $ 26
Federal agency
obligations 7.69% $ 1,000 5.74% $47,639 5.78 48,639
Mortgage-backed
securities 5.91 45 5.92 65 5.35 11,647 6.16% $59,218 6.03 70,975
Municipal bonds 4.48 913 4.48 913
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt
Securities 4.20% $ 71 6.15% $ 1,978 5.66% $59,286 6.16% $59,218 5.91% $120,553
===================================================================================================================================
The weighted average yield for the above securities has been computed by
dividing annualized interest income, including the accretion of discount and the
amortization of premiums, by the book value of securities outstanding. For
purposes of the above table, mortgage-backed securities are distributed using
actual maturity dates.
13
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:
2002 2001 2000 1999 1998
======================================================================================================
Commercial $ 61,115 $ 53,756 $ 59,998 $ 56,136 $ 41,760
- ------------------------------------------------------------------------------------------------------
Real Estate:
Construction 8,700 5,154 5,160 5,952 5,998
Residential (1-4 family) 267,319 259,791 248,059 263,832 168,744
Commercial properties 94,637 83,443 84,833 85,385 60,348
- ------------------------------------------------------------------------------------------------------
Total Real Estate 370,656 348,388 338,052 355,169 235,090
- ------------------------------------------------------------------------------------------------------
Consumer 39,730 37,292 34,578 31,556 19,277
- ------------------------------------------------------------------------------------------------------
Leases 7,743 4,841 654 140
- ------------------------------------------------------------------------------------------------------
Gross loans 479,244 444,277 433,282 443,001 296,127
Deferred loan origination
fees-net of costs (412) (375) (381) (526) (349)
- ------------------------------------------------------------------------------------------------------
Total Loans 478,832 443,902 432,901 442,475 295,778
Allowance for loan
losses (5,111) (4,179) (3,670) (3,908) (2,665)
- ------------------------------------------------------------------------------------------------------
Net loans $ 473,721 $ 439,723 $ 429,231 $ 438,567 $ 293,113
======================================================================================================
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
$7,991,000 or 18.8% of stockholders' equity as of December 31, 2002, compared to
$3,744,000 or 9.6% as of December 31, 2001.
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, 2002:
12 MONTHS 1 - 5 AFTER
(DOLLARS IN THOUSANDS) OR LESS YEARS 5 YEARS TOTAL
======================================================================================================
Commercial $ 44,763 $ 15,333 $ 1,019 $ 61,115
Real estate:
Construction 8,700 8,700
Commercial 30,424 55,673 8,540 94,637
- ------------------------------------------------------------------------------------------------------
Totals $ 83,887 $ 71,006 $ 9,559 $ 164,452
======================================================================================================
Of the commercial loans which mature beyond one year, approximately $15,282,000
have fixed rates and the remaining $1,071,000 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 $13,677,000 and $60,600,000, respectively, at December 31,
2002 and $11,855,000 and $47,031,000, respectively, in 2001. See further
discussion in Note 13 to the Consolidated Financial Statements.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
LOAN LOSS EXPERIENCE
The provision for loan losses is an amount charged to income to bring the
allowance for loan losses to a level deemed appropriate by management. The
provision for losses is dependent on actual net write-offs and an evaluation of
the collectibility of the loan portfolio, taking into consideration such factors
as the financial condition of individual borrowers, historical loss experience
with respect to various portfolio segments, current and near-term economic
conditions, and the size of the portfolio. Based on a review of these factors
and the provision for loan losses recorded, the allowance for loan losses at
December 31, 2002 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.
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) 2002 2001 2000 1999 1998
======================================================================================================
Balance at beginning of year $ 4,179 $ 3,670 $ 3,908 $ 2,665 $ 3,057
Provision charged to expense 1,333 944 472 77 41
- ------------------------------------------------------------------------------------------------------
Acquisition 1,669
- ------------------------------------------------------------------------------------------------------
5,512 4,614 4,380 4,411 3,098
- ------------------------------------------------------------------------------------------------------
Charge-off's:
Loans secured by real estate 134 52 163 78 318
Commercial and industrial loans 169 358 538 455 153
Consumer loans 186 117 88 90 47
- ------------------------------------------------------------------------------------------------------
489 527 789 623 518
- ------------------------------------------------------------------------------------------------------
Recoveries:
Loans secured by real estate 12 60 32 79 42
Construction/land development 14
Commercial and industrial loans 39 19 27 15 30
Consumer loans 37 13 20 12 13
- ------------------------------------------------------------------------------------------------------
88 92 79 120 85
- ------------------------------------------------------------------------------------------------------
Net charge-off's 401 435 710 503 433
- ------------------------------------------------------------------------------------------------------
Balance at end of year $ 5,111 $ 4,179 $ 3,670 $ 3,908 $ 2,665
======================================================================================================
Average loans outstanding $ 463,488 $ 440,454 $ 445,846 $ 349,614 $ 284,629
======================================================================================================
Net charge-off's as a percentage
of average loans 0.09% 0.10% 0.16% 0.14% 0.15%
Net charge-off's as a percentage of
the allowance at January 1 9.60 11.85 18.17 18.87 14.16
Allowance as a percentage of total
loans at December 31 1.07 0.94 0.85 0.88 0.90
Allowance as a percentage of non-
performing loans at December 31 328.05 228.36 167.12 160.23 259.24
15
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) 2002 2001 2000 1999 1998
===================================================================================================================================
% OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
LOAN CATEGORY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- -----------------------------------------------------------------------------------------------------------------------------------
Real Estate $2,965 75.53% $2,216 77.24% $2,212 76.83% $2,986 78.84% $1,764 77.38%
Construction 49 1.82 15 1.16 17 1.19 64 1.34 70 2.03
Commercial 1,674 12.75 1,726 12.11 1,066 13.85 579 12.67 628 14.10
Leases 116 1.62 73 1.09 98 .15 2 .03
Consumer 307 8.28 149 8.40 277 7.98 277 7.12 203 6.49
- -----------------------------------------------------------------------------------------------------------------------------------
$5,111 100% $4,179 100% $3,670 100% $3,908 100% $2,665 100%
===================================================================================================================================
ALLOWANCE FOR LOAN LOSSES
The approach the Corporation uses in determining the appropriateness of the
allowance for loan losses and the required provision is the combination of a
target reserve for impaired and classified loans, a formula-calculated 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 probable
loss exposure.
The target reserve allocation incorporates the results of measuring impaired
loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." This accounting standard prescribes the measurement method and
disclosures related to impaired loans. A loan is recognized as impaired when it
is probable that principal and/or interest are not collectible in accordance
with the loan's contractual terms. A loan is not deemed to be impaired if there
is a short delay in receipt of payment or if, during a longer period of delay,
the Corporation expects to collect all amounts due, including interest accrued
at the contractual rate during the period of delay. Measurement of impairment
can be based on the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's observable market price or the
fair value of the collateral, if the loan is collateral-dependent. Smaller
balance homogenous loans, including residential real estate and consumer loans,
are excluded from the provisions of SFAS No. 114.
The formula reserve allocation is calculated by applying loss factors to
outstanding loans by loan category. Loss factors are based on historical loss
experience.
The general reserve allocation incorporates general business and economic
conditions, credit quality trends, loan concentrations, industry conditions
within portfolio segments and overall delinquency levels.
The allowance for loan losses is increased by provisions charged against current
earnings. Loan losses are charged against the allowance when management believes
that the collectibility of the loan principal is unlikely. Recoveries on loans
previously charged off are credited to the allowance. Management believes that
the allowance for loan losses is appropriate. While management uses available
information to assess possible losses on loans, future adjustments to the
allowance may be necessary based on changes in non-performing loans, changes in
economic conditions or for other reasons. Any future adjustments to the
allowance would be recognized in the period in which they were determined to be
necessary. In addition, various regulatory agencies periodically review the
Corporation's allowance for loan losses as an integral part of their examination
process. Such agencies may require the Corporation to recognize adjustments to
the allowance, based on judgements different from those of management.
Management also retains an independent loan review consultant to provide advice
on the appropriateness of the loan loss allowance.
During 2002, 2001 and 2000, the Bank made additions to the allowance of
$1,333,000, $944,000 and $472,000 respectively, while recoveries totaled
$88,000, $92,000 and $79,000 respectively, and charge-off's totaled $489,000,
$527,000 and $789,000 respectively.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
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) 2002 2001 2000 1999 1998
=============================================================================================================
Loans on a non-accrual basis $1,372 $1,040 $1,778 $2,001 $ 797
=============================================================================================================
Non-accrual loans as a percentage
of total net loans outstanding 0.29% 0.24% 0.41% 0.46% 0.27%
Non-accrual loans as a percentage
of total assets 0.20 0.17 0.31 0.35 0.20
Loans contractually past due 90
days or more and still accruing $ 186 $ 790 $ 418 $ 438 $ 231
The gross amount of interest that would have been accrued at the original
contract rate on loans on a non-accrual basis was $159,000, $148,000, $159,000,
$77,000 and $35,000 for 2002, 2001, 2000, 1999 and 1998, respectively. The
Corporation did not recognize any interest income related to non-accrual loans
during the five(5)-year period.
The Bank evaluates loans for impairment in accordance with SFAS No. 114
"Accounting for Impaired Loans." Generally, income is recorded only on a cash
basis for impaired loans. Interest income recognized during 2002 and 2001 on
impaired loans was not significant. At December 31, 2002 and 2001, the recorded
investment in impaired loans was $411,000 and $336,000 respectively, for which
no additional specific allowance for loan losses was recorded. For the twelve
months ended December 31, 2002, the average recorded investment in impaired
loans was $632,000 compared to $629,000 for 2001 and $441,000 for 2000.
NON-PERFORMING ASSETS (BAR GRAPH)
(IN THOUSANDS)
=============================================================================================================
2000 $2,737
2001 2,034
2002 1,558
17
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
OTHER REAL ESTATE OWNED
The following table sets forth information regarding other real estate owned at
December 31:
(DOLLARS IN THOUSANDS) 2002 2001 2000 1999 1998
=============================================================================================================
Other real estate owned - net $ 0 $ 204 $ 541 $ 442 $ 466
Other real estate owned as a
percentage of total assets 0% .03% .09% .08% .12%
DEPOSITS
The following table sets forth the average amounts of, and average rates paid
on, various classifications of deposits:
2002 2001 2000
(DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT RATE AMOUNT RATE
=============================================================================================================
Savings $129,604 1.20% $133,742 1.99% $127,764 2.63%
Money market 34,403 2.14 18,258 2.12 24,021 3.18
Certificates of deposit 59,104 3.41 48,817 4.76 50,391 5.75
Other time deposits 242,242 4.07 221,311 5.30 225,609 5.52
- -------------------------------------------------------------------------------------------------------------
465,353 3.05% 422,128 4.05% 427,785 4.56%
- -------------------------------------------------------------------------------------------------------------
Demand deposits 71,956 64,566 60,610
$537,309 $486,694 $488,395
=============================================================================================================
Certificates of deposit of $100,000 and over at December 31, 2002 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 $ 19,142 $ 8,450 $ 9,916 $ 23,218 $ 60,726
=============================================================================================================
18
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
RETURN ON EQUITY AND ASSETS
The Corporation's return on average equity and assets for each of the years
ended December 31 were as follows:
2002 2001 2000
=============================================================================================================
Return on average total assets .90% .68% .65%
Return on average stockholders' equity 14.88 11.03 11.80
Average stockholders' equity to average total assets 6.06 6.20 5.52
Dividend payout ratio 30.77 41.59 44.80
BORROWINGS
The following table summarizes short-term borrowings. Average interest rates
during each year were computed by dividing total interest expense by the average
amount borrowed:
(DOLLARS IN THOUSANDS) 2002 2001 2000
=============================================================================================================
Balance at year end $15,302 $25,415 $13,992
Average amount outstanding 21,279 28,582 33,144
Maximum amount outstanding at any month-end 49,009 51,149 43,535
Average interest rate for the year 1.43% 2.88% 4.98%
Average interest rate on year-end balance 0.76 1.36 4.97
COMPARISON OF OPERATING RESULTS
In the following sections of Management's Discussion and Analysis of the
Statements of Income, the comparative results of 2002, 2001 and 2000 will be
covered in greater detail. As of December 31, 2002, the principal earning assets
of the holding company consist of a commercial bank, Westbank. Noteworthy are
the effects of sources of income from earning assets and expense of
interest-bearing liabilities. Presented below is a comparative summary of
percentages of increases and decreases for the three years ended December 31,
2002. The significant changes are discussed in the analysis that follow the
summary.
PERCENTAGE OF
INCREASE (DECREASE)
2002 2001
OVER OVER
(DOLLARS IN THOUSANDS) 2002 2001 2000 2001 2000
=============================================================================================================
Net interest income $ 22,521 $ 20,397 $ 19,417 10.41% 5.05%
Provision for loan losses 1,333 944 472 41.21 100.00
Non-interest income 4,090 3,489 2,652 17.23 31.56
Non-interest expense 16,412 16,841 15,841 (2.55) 6.31
Income taxes 2,857 2,028 1,968 40.88 3.05
- -------------------------------------------------------------------------------------------------------------
Net Income $ 6,009 $ 4,073 $ 3,788 47.53% 7.52%
=============================================================================================================
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 2002 amounted to $40,576,000 as compared to
$41,088,000 for 2001 and $42,645,000 for 2000. For 2002 this represents a
decrease of $512,000 or 1.25% versus 2001, while interest income decreased by
$1,557,000 or 3.7% in 2001 over 2000. The decrease in 2002 is the result of an
increase in average earning assets of $66,548,000 or 11.90%, offset by a
decrease of 86 basis points in average earning interest rate. The decrease in
2001 from 2000 is the result of an increase in average earning assets of
$13,551,000 offset by a decrease of 46 basis points in average earning interest
rate.
RETURN ON AVERAGE ASSETS (BAR GRAPH)
=============================================================================================================
2000 .65%
2001 .68
2002 .90
19
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
INTEREST EXPENSE
Interest expense for 2002 on deposits and borrowings amounted to $18,055,000 as
compared to $20,691,000 in 2001 and $23,228,000 for 2000. Interest expense
decreased by $2,636,000 or 12.74% during 2002 compared to 2001; during 2001,
interest expense decreased by $2,537,000 or 10.9% versus 2000. The 2002 decrease
is the result of an increase in average interest-bearing liabilities of
$58,261,000 and a 93 basis point decrease in the average rate of interest paid
compared to 2001. The decrease in interest expense during 2001 versus 2000 is
the result of a decrease in average interest-bearing liabilities of $4,658,000
combined with a 56 basis point decrease in the 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) 2002 2001 2000
================================================================================
Total interest income $ 40,576 $ 41,088 $ 42,645
Total interest expense 18,055 20,691 23,228
- --------------------------------------------------------------------------------
Net interest income $ 22,521 $ 20,397 $ 19,417
================================================================================
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 2002 provision for loan losses totaled $1,333,000 compared with $944,000 in
2001, up $389,000 or 41%. The increase in the provision for loan losses during
2002 is attributable to an increase in the size of the overall loan portfolio.
During 2001, the provision increased by $472,000 versus 2000. The increase in
the provision for loan losses during 2001 is attributable to an increase in the
percentage the Corporation utilizes in its analysis and risk assessment of the
loan portfolio. Based on this and the weakened economy, management determined
that an increase in the provision was warranted. A full discussion appears
previously under the headings of LOAN LOSS EXPERIENCE and NON-PERFORMING ASSETS.
When determining the provision for loan losses, management evaluates several
factors including new loan originations, actual and projected charge-off's, and
risk characteristics inherent in the loan portfolio.
NON-INTEREST INCOME
Income from sources other than interest was $4,090,000 in 2002, an increase of
$601,000 from the prior year and an increase of $1,438,000 versus 2000.
Non-interest income for 2002 reflects an increase in Trust Department earnings
of $17,000, a decrease in service charges on deposit accounts and loan servicing
income of $69,000, a decrease from gain on sale of investments, other real
estate owned, mortgages and equipment totaling $394,000 and an increase in other
non-interest income of $1,047,000. Included in other non-interest income is
$800,000 in life insurance proceeds and an increase of $193,000 in cash
surrender value of bank-owned life insurance. Non-interest income for 2001
reflects an increase in Trust Department earnings of $107,000, an increase in
service charges on deposit accounts and other non-interest income of $948,000, a
decrease in loan servicing income of $239,000 and a net increase from the gain
on sale of investments, other real estate, mortgages and equipment totaling
$21,000 compared to 2000.
NET INTEREST INCOME (BAR GRAPH)
(IN THOUSANDS)
================================================================================
2000 $19,417
2001 20,397
2002 22,521
20
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
NON-INTEREST EXPENSE
The components of other operating expenses are as follows:
(DOLLARS IN THOUSANDS) 2002 2001 2000
=============================================================================================================
Salaries and benefits $ 9,084 $ 8,381 $ 7,940
Occupancy 1,128 1,062 983
Other non-interest expense 6,174 6,630 6,120
Intangible amortization 684 683
Other real estate owned expense 26 84 115
- -------------------------------------------------------------------------------------------------------------
$ 16,412 $ 16,841 $ 15,841
=============================================================================================================
Non-interest expense amounted to $16,412,000 in 2002, a decline of $429,000 or
2.55%. The decline in operating expenses for 2002 is due to a combination of the
following: the adoption of SFAS No. 142 and SFAS No. 147, which eliminated
intangible amortization of goodwill in the amount of $684,000, salaries and
benefits increased $703,000, occupancy expense increased $66,000 and other
non-interest expense declined $514,000 as a result of efficiencies achieved
through the merger of the Connecticut and Massachusetts bank subsidiaries. The
Corporation adopted SFAS No. 142, effective January 1, 2002, and SFAS No. 147,
effective September 30, 2002. In accordance with these statements, the
Corporation has ceased amortization of goodwill and has performed a transitional
goodwill impairment test. Overall non-interest expense increased during 2001 by
$1,000,000 versus 2000. During 2001, salaries and benefits increased by
$441,000, attributable to overall corporate growth. Occupancy increased by
$79,000 versus 2000. Other non-interest expense increased in 2001 by $510,000,
also the result of overall corporate growth and approximately $300,000 in
expenses related to the merger of the banking subsidiaries. Intangible
amortization during 2001 totaled $684,000, representing amortization of the
unidentifiable intangible asset that resulted from the branch acquisition.
INCOME TAXES
For the year ended December 31, 2002, Westbank Corporation recorded a tax
expense of $2,857,000 compared to 2001, when the Corporation recorded a tax
expense of $2,028,000 and a 2000 income tax expense of $1,968,000. The increase
in tax expense for each year represents a higher level of income before taxes.
The Massachusetts Department of Revenue ("DOR") has sent notices of intent to
assess taxes to several banks in the Commonwealth of Massachusetts. The notices
relate to DOR's intent to disallow the dividend-received deduction between a
bank and its subsidiary operating as a real estate investment trust ("REIT"). On
February 4, 2003, the Corporation's subsidiary Westbank ("the Bank") received a
Notice of Assessment from the DOR for the tax year ended 2001. The notice was
based on DOR's intent to disallow the dividend-received deduction between the
Bank's subsidiary, Park West REIT, and the Bank. The Commonwealth of
Massachusetts has recently proposed legislation which would repeal the REIT
benefit effective for the years ending on or after December 31, 1999.
Westbank believes that its tax treatment of the dividend-received deduction for
its REIT subsidiary is valid under Massachusetts law. In the event that the
dividend-received deduction from its REIT subsidiary is disallowed, the
Corporation would be required to record additional taxes of approximately
$402,000 for the years 2000, 2001 and 2002, exclusive of any interest charge.
NET INCOME
The net income for 2002 of $6,009,000, or $1.36 per share basic and $1.33 per
share diluted, is based on a weighted average of 4,406,583 basic and 4,509,965
diluted shares outstanding, compared with a net income for 2001 of $4,073,000 or
$.91 per share basic and $.90 per share diluted based on a weighted average of
4,465,054 basic and 4,513,020 diluted. Net income in 2000 was $3,788,000, or
$.85 per share basic and $.84 per share diluted and based on weighted average
shares of 4,440,560 basic and 4,487,053 diluted.
NET INCOME (BAR GRAPH)
(IN THOUSANDS)
================================================================================
2000 $ 3,788
2001 4,073
2002 6,009
21
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Corporation adopted SFAS No. 141, "Business
Combinations" ("SFAS No. 141"), and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). Initially, the adoption of SFAS No. 141 and SFAS No.
142 did not have an effect on the Corporation's consolidated financial
statements. In October 2002, the FASB issued SFAS No. 147, "Acquisition of
Certain Financial Institutions" ("SFAS No. 147"). SFAS No. 147 removes
acquisitions of financial institutions from the scope of SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions", and
FASB Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or Similar Association is Acquired in a Business
Combination Accounted for by the Purchase Method", and requires that those
transactions be accounted for in accordance with SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." In
addition, SFAS No. 147 amends SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", to include in its scope long-term customer
relationship intangible assets of financial institutions. SFAS No. 147 is
effective for periods beginning after October 1, 2002, with early adoption
permitted. The Corporation elected to adopt SFAS No. 147 as of September 30,
2002. Upon adoption of SFAS No. 147, the Corporation reclassified its
unidentifiable intangible asset to goodwill and ceased amortization, retroactive
to January 1, 2002. Additionally, the Corporation was required to perform a
transitional impairment test in accordance with the provisions of SFAS No. 142.
As a result of this testing, no impairment charges were recorded. See Note 1.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). The adoption of SFAS No. 145 did not have a
material effect on the Corporation's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). The adoption of SFAS No. 146
did not have a material effect on the Corporation's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
to provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. SFAS No.
148 also amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Corporation did not elect to adopt the voluntary
fair value-based method of accounting for stock-based employee compensation but
has provided the required disclosures in Notes 1 and 10.
22
CONSOLIDATED BALANCE SHEETS
WESTBANK CORPORATION AND SUBSIDIARIES
DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2002 2001
====================================================================================================
ASSETS
Cash and due from banks:
Non-interest bearing $ 18,967 $ 16,800
Interest bearing 98 332
- ----------------------------------------------------------------------------------------------------
19,065 17,132
Federal funds sold 28,185 319
- ----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 47,250 17,451
- ----------------------------------------------------------------------------------------------------
Securities:
Investment securities available for sale, estimated fair value 132,296 141,685
Investment securities held to maturity, amortized cost
(estimated fair value of $459 in 2002 and $779 in 2001) 436 757
- ----------------------------------------------------------------------------------------------------
Total securities 132,732 142,442
- ----------------------------------------------------------------------------------------------------
Loans, net of allowance for loan losses of $5,111 in 2002 and
$4,179 in 2001 473,721 439,723
Property and equipment, net 6,586 6,516
Other real estate owned 204
Accrued interest receivable 3,037 3,285
Intangible assets, net of amortization of $0 in 2002 and $684 in 2001 8,837 8,837
Bank-owned life insurance 8,333 8,224
Other assets 2,367 2,240
- ----------------------------------------------------------------------------------------------------
Total assets $ 682,863 $ 628,922
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 74,169 $ 70,960
Interest bearing 487,578 438,889
- ----------------------------------------------------------------------------------------------------
Total deposits 561,747 509,849
Borrowed funds 56,392 57,666
Interest payable on deposits 665 659
Other liabilities 4,447 4,732
- ----------------------------------------------------------------------------------------------------
Total liabilities 623,251 572,906
- ----------------------------------------------------------------------------------------------------
Mandatory redeemable preferred stock 17,000 17,000
- ----------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 13)
Stockholders' equity: (Note 1)
Preferred stock, par value $5 per share, authorized
100,000 shares; none issued
Common stock, par value $2 per share, authorized
9,000,000 shares; issued 4,523,485 shares in 2002
and 4,315,795 shares in 2001 9,047 8,632
Additional paid-in capital 14,497 11,782
Retained earnings 18,780 17,787
Treasury stock at cost (155,705 shares in 2002 and
49,412 shares in 2001) (2,091) (431)
Accumulated other comprehensive income (loss) 2,379 1,246
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 42,612 39,016
- ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 682,863 $ 628,922
====================================================================================================
See notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF INCOME
WESTBANK CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2002 2001 2000
====================================================================================================
Interest and dividend income:
Interest and fees on loans $ 31,905 $ 33,526 $ 35,596
Interest and dividend income from securities 8,348 7,389 6,774
Interest from interest-bearing cash and
federal funds sold 323 173 275
- ----------------------------------------------------------------------------------------------------
Total interest and dividend income 40,576 41,088 42,645
- ----------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 14,177 17,108 19,493
Interest on borrowed funds 3,878 3,583 3,735
- ----------------------------------------------------------------------------------------------------
Total interest expense 18,055 20,691 23,228
- ----------------------------------------------------------------------------------------------------
Net interest income 22,521 20,397 19,417
Provision for loan losses 1,333 944 472
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 21,188 19,453 18,945
- ----------------------------------------------------------------------------------------------------
Non-interest income:
Trust 652 635 528
Service charges on deposits 1,186 1,238 1,070
Loan servicing 154 171 410
Gain/(loss) on sale of securities available for sale (218) 36
Gain on sale of other real estate owned 45 43 16
Gain on sale of loans 118 233 302
Gain on sale of equipment 27
Other 2,153 1,106 326
- ----------------------------------------------------------------------------------------------------
Total non-interest income 4,090 3,489 2,652
- ----------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and benefits 9,084 8,381 7,940
Depreciation and amortization 789 892 992
Data processing 1,625 1,803 1,639
Advertising 388 610 612
Supplies 353 505 464
Occupancy 1,128 1,062 983
Other real estate owned 26 84 115
Other 3,019 2,820 2,413
Intangible amortization 684 683
- ----------------------------------------------------------------------------------------------------
Total non-interest expense 16,412 16,841 15,841
- ----------------------------------------------------------------------------------------------------
Income before income taxes 8,866 6,101 5,756
Income taxes 2,857 2,028 1,968
- ----------------------------------------------------------------------------------------------------
Net income $ 6,009 $ 4,073 $ 3,788
====================================================================================================
Earnings per share: (Note 1)
- Basic $ 1.36 $ .91 $ .85
- Diluted 1.33 .90 .84
====================================================================================================
Weighted average shares outstanding: (Note 1)
- Basic 4,406,583 4,465,054 4,440,560
- Diluted 4,509,965 4,513,020 4,487,053
====================================================================================================
See notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
WESTBANK CORPORATION AND SUBSIDIARIES
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
(DOLLARS IN THOUSANDS, PAR PAID-IN RETAINED TREASURY COMPREHENSIVE
EXCEPT SHARE AMOUNTS) SHARES VALUE CAPITAL EARNINGS STOCK INCOME/(LOSS) TOTAL
==========================================================================================================================
Balance, January 1, 2000 4,283,719 $ 8,567 $11,633 $13,317 $(1,974) $31,543
Net income 3,788 3,788
Cash dividends declared
($.40 per share) (1,697) (1,697)
Shares reissued from Treasury stock:
Stock option plan 1,000 (3) $ 6 3
Dividend reinvestment and stock
purchase plan 65,121 (22) 595 573
Changes in unrealized gain (loss) on
securities available for sale 1,777 1,777
Repurchase of common stock (127,320) (1,127) (1,127)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 4,222,520 8,567 11,608 15,408 (526) (197) 34,860
Net income 4,073 4,073
Cash dividends declared
($.40 per share) (1,694) (1,694)
Shares issued:
Stock option plan 4,400 9 9 18
Dividend reinvestment and stock
purchase plan 27,676 56 209 265
Shares reissued from treasury stock:
Stock option plan 1,500 (6) 8 2
Dividend reinvestment and stock
purchase plan 33,287 (38) 302 264
Changes in unrealized gain (loss) on
securities available for sale 1,443 1,443
Repurchase of common stock (23,000) (215) (215)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 4,266,383 8,632 11,782 17,787 (431) 1,246 39,016
Net income 6,009 6,009
Cash dividends declared
($.44 per share) (1,849) (1,849)
Shares reissued from treasury stock:
Stock option plan 54,055 (243) 547 304
Dividend reinvestment and stock
purchase plan 42,310 122 408 530
Changes in unrealized gain (loss) on
securities available for sale 1,133 1,133
Repurchase of common stock (202,658) (2,615) (2,615)
Adjustment to recognize tax benefit
on Directors' stock options 84 84
Five percent common stock dividend 207,690 415 2,752 (3,167)
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 4,367,780 $ 9,047 $14,497 $18,780 $(2,091) $ 2,379 $42,612
==========================================================================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001 2000
==========================================================================================================================
Net Income $ 6,009 $ 4,073 $ 3,788
- --------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale, net of income
taxes of $923 in 2002, $927 in 2001 and $915 in 2000. 989 1,467 1,777
Less: reclassification adjustment for (gains)/losses included in net
income, net of income taxes (benefit) of $(74) in 2002 and $12 in 2001 144 (24)
- --------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Losses) 1,133 1,443 1,777
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 7,142 $ 5,516 $ 5,565
==========================================================================================================================
See notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
WESTBANK CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001 2000
==========================================================================================================================
Operating activities:
Net income $ 6,009 $ 4,073 $ 3,788
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,333 944 472
Provision for other real estate owned 11 62
Depreciation and amortization 789 892 992
Investment accretion income (20)
Intangible amortization 684 623
Realized gain/(loss) on sale of securities 218 (36)
Realized gain on sale of other real estate owned (45) (43) (16)
Realized gain on sale of loans (118) (233) (136)
Realized gain on sale of property and equipment (27)
Deferred income taxes (623) 923 282
Change in assets and liabilities
Accrued interest receivable 248 692 (734)
Other assets (127) (7,625) 417
Interest payable on deposits 6 (68) (5)
Other liabilities 338 1,928 385
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,019 2,104 6,130
==========================================================================================================================
Investing activities:
Securities:
Held to maturity:
Proceeds from maturities 321 10,652 395
Available for sale:
Purchases (62,503) (105,572) (22,773)
Proceeds from sales 21,260 7,828 1,779
Proceeds from maturities 75,833 64,755 7,000
Purchases of property and equipment (859) (116) (475)
Net (increase)/decrease in loans (59,662) (32,239) 7,617
Proceeds from sale of other real estate owned 312 497 258
Assumption of liabilities of New London
Trust, net of cash acquired (173)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,298) (54,195) (6,372)
==========================================================================================================================
Financing activities:
Net increase in deposits 51,898 10,709 20,244
Net increase/(decrease) in short-term borrowings (10,113) 11,423 (25,777)
Increase in long-term borrowings 8,839 25,251
Proceeds from exercise of stock options and stock
purchase plan 918 549 576
Treasury stock repurchases (2,615) (215) (1,127)
Dividends paid (1,849) (1,694) (1,697)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 47,078 46,023 (7,781)
==========================================================================================================================
Increase (decrease) in cash and cash equivalents 29,799 (6,068) (8,023)
Cash and cash equivalents at beginning of year 17,451 23,519 31,542
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 47,250 $ 17,451 $ 23,519
==========================================================================================================================
Cash paid during the year:
Interest on deposits and other borrowings $ 18,049 $ 20,759 $ 23,233
Income taxes 4,170 360 1,717
Supplemental disclosure of cash flow information:
Securitization of loans into mortgage-backed securities 23,495 20,079
Transfers of loans to other real estate owned 74 233 290
Loans to facilitate the sale of other real estate owned 57
Unrealized gain (loss) on securities available for sale, net of taxes 1,133 1,443 1,777
See notes to consolidated financial statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WESTBANK CORPORATION AND SUBSIDIARIES
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Westbank Corporation (the
"Corporation") and its subsidiaries are in conformity with generally accepted
accounting principles and general practices within the banking industry. The
following is a description of the more significant policies.
NATURE OF BUSINESS
As of December 31, 2002, the Corporation, a bank holding company, provides
financial services through its wholly owned subsidiary, Westbank, a commercial
bank and trust company with seventeen (17) offices located in Massachusetts and
Connecticut. A full range of retail banking services are furnished to
individuals, businesses and non-profit organizations. The Corporation's primary
source of revenue is derived from providing loans to customers, predominantly
located in western Massachusetts and northeastern Connecticut.
MERGER WITH CARGILL BANCORP, INC.
Effective January 29, 1999, Cargill Bancorp, Inc., and its subsidiary
("Cargill") were merged with and into Westbank Corporation pursuant to a plan of
merger dated July 15, 1998. Each share of Cargill common stock was converted
into 1.3655 shares of the Corporation's common stock. A total of 400,164 of the
Corporation's common shares were issued for the outstanding common stock of
Cargill. The transaction was accounted for using the pooling-of-interests method
of accounting and, accordingly, all historical financial data has been restated
to include both entities for all periods presented.
ACQUISITION
On October 29, 1999, the Corporation completed its acquisition of the
Connecticut division of New London Trust, F.S.B, consisting of two branch
offices that became part of Cargill Bank.
This transaction was accounted for using the purchase accounting method. Prior
to January 1, 2002, the resulting intangible asset totaling $10,071,000 was
being amortized over fifteen years. Upon adoption of FASB No. 147 on September
30, 2002, the Corporation discontinued the amortization. The Corporation has
performed a transitional impairment test as of July 1, 2002 and no impairment
charge was required.
At close of business September 7, 2001, Cargill Bank was merged with and into
Park West Bank and Trust Company operating under the name Westbank.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, Westbank, its subsidiaries, Lorac Leasing
Corp., Park West Securities Corporation, Park West Real Estate Investment Trust,
Inc. and PWB&T Inc. All material intercompany balances and transactions have
been eliminated upon consolidation. Certain amounts in the 2001 and 2000
financial statements have been reclassified to conform to the 2002 presentation.
During 2002, the Bank dissolved Lorac Leasing Corporation, which was an inactive
subsidiary of the Bank.
STOCK DIVIDEND
On January 32, 2003 the Corporation announced a five percent (5%) stock
dividend, payable to shareholders of record January 14, 2003. As a result of the
stock dividend, all earnings-per-share data have been restated for the five-year
period (2002-1998) presented. Shares outstanding for the year ended December 31,
2002 also have been restated to reflect the January 14, 2003 stock dividend
distribution.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and affect the reported amounts of income
and expenses for each year. Material estimates that are particularly susceptible
to significant change relate to the determination of the allowance for loan
losses and intangible assets. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Corporation's allowances for losses on loans and other real estate owned. Such
agencies may require the Corporation to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination.
NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). The adoption of SFAS No. 145 did not have a
material effect on the Corporation's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). The adoption of SFAS No. 146
did not have a material effect on the Corporation's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
to provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. SFAS No.
148 also amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Corporation did not change to the voluntary fair
value-based method of accounting for stock-based employee compensation, but has
provided the required disclosures in Notes 1 and 10.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
CASH AND CASH EQUIVALENTS
The Corporation defines cash and due from banks and federal funds sold to be
cash and cash equivalents. The Bank is required to maintain reserve balances
with the Federal Reserve Bank. These balances can be in the form of either vault
cash or funds left on deposit with the Federal Reserve Bank. The amount of these
balances that is included in cash and cash equivalents was $6,177,000 and
$4,566,000 at December 31, 2002 and 2001, respectively.
SECURITIES
Securities that management has the positive intent and ability to hold until
maturity are stated at cost, adjusted for amortization of premiums and accretion
of discounts. Those securities which have been identified as assets for which
there is not a positive intent to hold to maturity, including all marketable
equity securities, are classified as available for sale with unrealized gains
(losses), net of income taxes, reported as a separate component of stockholders'
equity. The Corporation determines if securities will be classified as held to
maturity or available for sale at the time of purchase. In addition, any
mortgage-backed securities created out of the Corporation's own inventory of
residential real estate loans are also considered available for sale. Gains and
losses on sales of securities are recognized in non-interest income at the time
of sale on a specific identification basis. Securities which have experienced an
other than temporary decline in value are written down to estimated fair value,
establishing a new cost basis with the amount of the write-down expensed as a
realized loss. The Corporation does not engage in trading activities.
LOANS
Loans have been reduced by deferred loan fees and the allowance for loan losses.
Interest income on loans is recorded on an accrual basis. Loan origination fees,
net of certain direct loan origination costs, are deferred and recognized as
income over the life of the related loan as an adjustment to the loan's yield.
Non-accrual loans are loans on which the accrual of interest ceases when the
collection of principal or interest payments is determined to be doubtful by
management. It is the general policy of the Corporation to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days,
unless the loan principal and interest are determined by management to be fully
collectible. Any unpaid amounts previously accrued on these loans are reversed
from income. Interest received on a loan in non-accrual status is applied to
reduce principal or, if management determines that the principal is collectible,
applied to interest on a cash basis. A loan is returned to accrual status after
the borrower has brought the loan current and has demonstrated compliance with
the loan terms for a sufficient period, and management's doubts concerning
collectibility have been removed.
The Corporation measures impairment of loans in accordance with SFAS No. 114,
"Accounting for Impairment of a Loan as Amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(collectively SFAS No. 114). A loan is recognized as impaired when it is
probable that either principal or interest is not collectable in accordance with
the terms of the loan agreement. Measurement of impairment for commercial loans
is generally based on the present value of expected future cash flows discounted
at the loan's effective interest rate. Commercial real estate loans are
generally measured based on the fair value of the underlying collateral. If the
estimated fair value of the impaired loan is less than the related recorded
amount, a specific valuation allowance is established or a write-down is charged
against the allowance for loan losses. Smaller balance homogenous loans,
including residential real estate and consumer loans, are excluded from the
provisions of SFAS No. 114. Generally, income is recorded only on a cash basis
for impaired loans.
The appropriateness of the allowance for loan losses is evaluated quarterly by
management. Factors considered in evaluating the appropriateness of the
allowance include the size and concentration of the portfolio, previous loss
experience, current economic conditions and their effect on borrowers, the
financial condition of individual borrowers and the related performance of
individual loans in relation to contract terms. The provision for loan losses
charged to operating expense is based upon management's judgment of the amount
necessary to maintain the allowance at an appropriate level to absorb losses.
Loan losses are charged against the allowance for loan losses when management
believes the collectibility of the principal is unlikely.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method.
Amortization of leasehold improvements is charged over the terms of the
respective leases, including option periods or the estimated useful lives of the
improvements, whichever is shorter. Gains and losses are recognized upon
disposal of assets. The cost of maintenance and repairs is charged to income as
incurred, whereas significant repairs are capitalized.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") includes properties the Corporation has
acquired through foreclosure. OREO is recorded at the lower of cost or fair
value at the date of acquisition, less estimated selling costs. At the time of
foreclosure, the excess, if any, of the loan amount over the fair value of the
asset acquired is charged off against the allowance for loan losses. Operating
expenses to administer OREO properties are charged directly to operating
expenses. Valuation allowances are established subsequent to acquisition, as
necessary, based upon management's continuing assessment of the fair values of
the properties. Loans granted in conjunction with sales of OREO are required to
comply with the Corporation's standard underwriting criteria, including receipt
of an adequate down payment.
LOAN SALES AND SERVICING RIGHTS
The Corporation sells loans in the secondary market and retains the related
servicing rights. Mortgage servicing rights are recognized as an asset when
loans are sold with servicing retained, by allocating the cost of an originated
mortgage loan between the loan and the servicing right based on estimated
relative fair values. The cost allocated to the servicing right is capitalized
as a separate asset and amortized in proportion to, and over the period of,
estimated net servicing income.
Capitalized mortgage servicing rights are evaluated for impairment by comparing
the asset's unamortized cost to its current estimated fair value. Fair values
are estimated using a discounted cash flow approach, which considers future
servicing income and costs, current market interest rates, and anticipated
prepayment and default rates. In making impairment evaluations, mortgage
servicing rights are stratified based on one or more of the predominant risk
characteristics of the underlying loans. The Corporation has stratified its
servicing portfolio for this purpose between fixed and adjustable rate loans.
Impairment losses, if any, are recognized through a valuation allowance for each
impaired stratum. Adjustments to the valuation allowance are charged or credited
to income. At December 31, 2002 and 2001, the mortgage servicing asset totaled
$571,000 and $457,000 respectively, for which there was no valuation allowance.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Corporation follows the provision of SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No.
140 provides consistent application of a financial-components approach that
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes assets when control has been surrendered and
derecognizes liabilities when extinguished.
INCOME TAXES
The asset and liability method of accounting for income taxes is utilized.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance will
be established. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
PENSION PLAN
The Corporation has a trusteed defined contribution pension plan covering
substantially all employees. The Corporation's policy is to fund accrued pension
cost. In addition, the Corporation has a supplemental retirement plan for
certain executive officers and a directors' retirement plan.
STOCK OPTIONS
The Corporation measures compensation cost of stock options based 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 compensation cost recorded on stock options.
At December 31, 2002, the Corporation had four (4) stock-based employee/director
compensation plans, which are described more fully in Note 10. The Corporation
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Corporation had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000
================================================================================
Net earnings - as reported $ 6,009 $ 4,073 $ 3,788
Net earnings - pro forma 5,134 4,052 3,762
Earnings per share - as reported - Basic 1.36 .91 .85
- Diluted 1.33 .90 .84
Earnings per share - pro forma - Basic 1.17 .91 .85
- Diluted 1.14 .90 .84
================================================================================
The fair value of each option grant is estimated on the date of grant, using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
YEARS ENDED DECEMBER 31, 2002 2001 2000
================================================================================
Dividend yield 3.21% 4.55% 5.71%
Expected life 10 years 10 years 10 years
Expected volatility 48% 46% 48%
Risk-free interest rate 4.83% 5.20% 5.14%
================================================================================
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 $149,921,000 and
$106,438,000 at December 31, 2002 and 2001, respectively. Trust income is
recognized on a cash basis. The amounts recognized under this method are not
materially different from amounts that would be recognized on the accrual basis.
EARNINGS PER SHARE
Basic earnings per share is the result of dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the year. Diluted earnings per share gives effect to all potentially dilutive
common shares that were outstanding during the year.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
INTANGIBLE ASSET
Effective January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142") and, effective September 30, 2002, the
Corporation adopted SFAS No. 147, "Acquisition of Certain Financial
Institutions" ("SFAS No. 147"). In accordance with these Statements, the
Corporation has ceased amortization of goodwill and has performed a transitional
goodwill impairment test. As a result of the transitional impairment test,
management has determined that no impairment existed as of January 1, 2002, the
date of adoption of SFAS No. 142. The following table shows net income and
earnings per share for the three years ended December 31, 2002, 2001 and 2000,
as if the Corporation had been accounting for goodwill under SFAS No. 142 and
SFAS No. 147 for all periods presented.
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001 2000
================================================================================
Net income:
Reported net income $ 6,009 $ 4,073 $ 3,788
Goodwill amortization, net of tax 457 449
- --------------------------------------------------------------------------------
$ 6,009 $ 4,530 $ 4,237
================================================================================
Basic earnings per share:
Reported earnings per share $ 1.36 $ .91 $ .85
Goodwill amortization, net of tax .10 .10
- --------------------------------------------------------------------------------
Adjusted basis earnings per share $ 1.36 $ 1.01 $ .95
================================================================================
Diluted earnings per share:
Reported earnings per share $ 1.33 $ .90 $ .85
Goodwill amortization, net of tax .10 .10
- --------------------------------------------------------------------------------
Adjusted diluted earnings per share $ 1.33 $ 1.00 $ .95
================================================================================
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
2 - SECURITIES
Investment securities held to maturity at December 31 are as follows:
2002
GROSS GROSS ESTIMATED NET
AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE GAIN
===================================================================================================
Mortgage-backed securities $436 $23 $459 $23
===================================================================================================
2001
GROSS GROSS ESTIMATED NET
AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE GAIN
===================================================================================================
Mortgage-backed securities $757 $22 $779 $22
===================================================================================================
During 2002, 2001 and 2000 there were no sales of investment securities
classified as held to maturity. Investment securities available for sale at
December 31 are as follows:
2002
GROSS GROSS ESTIMATED NET
AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE GAIN/(LOSS)
===================================================================================================
U.S. Government obligations $ 26 $ 26
Federal agency obligations 48,639 $ 892 49,531 $ 892
Mortgage-backed securities 70,975 2,963 73,938 2,963
Municipal bonds 913 71 984 71
Equity securities 7,981 74 $238 7,817 (164)
- ---------------------------------------------------------------------------------------------------
$128,534 $4,000 $238 $132,296 $3,762
===================================================================================================
2001
GROSS GROSS ESTIMATED NET
AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE GAIN/(LOSS)
===================================================================================================
U.S. Government obligations $ 66 $ 66
Federal agency obligations 71,365 $1,294 72,659 $1,294
Mortgage-backed securities 59,588 833 $ 62 60,359 771
Municipal bonds 614 19 633 19
Equity securities 7,977 57 66 7,968 (9)
- ---------------------------------------------------------------------------------------------------
$139,610 $2,203 $128 $141,685 $2,075
===================================================================================================
During 2002, 2001 and 2000, the Corporation recognized realized gains/(losses)
on securities available for sale totaling $(218,000), $36,000 and $0,
respectively. The contractual maturities of held-to-maturity and
available-for-sale securities, other than equity securities, as of December 31,
2002 are summarized in the following tables. Actual maturities may differ from
contractual maturities because certain issuers have the right to call or prepay
obligations.
For the purposes of the following December 31, 2002 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
the underlying collateral. The mortgage-backed securities may mature earlier
than their contractual maturities because of principal repayments.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
ESTIMATED
AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE
===================================================================================================
Held to Maturity:
Within 1 year $ 24 $ 24
Over 1 year to 5 years 197 210
Over 5 years to 10 years 3 3
Over 10 years 212 222
- ---------------------------------------------------------------------------------------------------
Total debt obligations $ 436 $ 459
===================================================================================================
ESTIMATED
AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE
===================================================================================================
Available for Sale:
Within 1 year $ 71 $ 72
Over 1 year to 5 years 1,978 2,056
Over 5 years to 10 years 59,286 60,366
Over 10 years 59,218 61,985
- ---------------------------------------------------------------------------------------------------
Total debt obligations $ 120,553 $ 124,479
===================================================================================================
At December 31, 2002 securities with a carrying amount and estimated fair value
of $33,325,000 and $34,231,000, 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) 2002 2001
===================================================================================================
Commercial $ 61,115 $ 53,756
Real estate construction 8,700 5,154
Real estate 361,956 343,234
Consumer 39,730 37,292
Leases 7,743 4,841
- ---------------------------------------------------------------------------------------------------
479,244 444,277
Allowance for loan losses (5,111) (4,179)
Deferred loan origination fees (412) (375)
- ---------------------------------------------------------------------------------------------------
$ 473,721 $ 439,723
===================================================================================================
Changes in the allowance for loan losses are summarized as follows:
(DOLLARS IN THOUSANDS) 2002 2001 2000
===================================================================================================
Balance, beginning of year $ 4,179 $ 3,670 $ 3,908
Acquisition
Provision for loan losses 1,333 944 472
Loans charged off (489) (527) (789)
Recoveries 88 92 79
- ---------------------------------------------------------------------------------------------------
Balance, end of year $ 5,111 $ 4,179 $ 3,670
===================================================================================================
The aggregate principal balance of non-accrual loans was $1,372,000 and
$1,040,000 at December 31, 2002 and 2001, respectively. Contractual interest
income that would have been accrued on such non-accrual loans was $159,000,
$148,000 and $159,000 for 2002, 2001 and 2000 respectively. No income was
recognized on non-accrual loans during this period.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
The Corporation did not sell any loans with recourse during 2002 or 2001. The
remaining recourse exposure on prior sales was $574,000 at December 31, 2002.
Management does not believe that the recourse obligations subject the
Corporation to any material risk of loss in the future. No losses have been
incurred as a result of these recourse obligations.
Of the $361,956,000 in real estate loans at December 31, 2002, $267,319,000 is
collateralized by 1-4 family dwellings. The majority of the collateral for these
loans is located in the Corporation's market area of Western Massachusetts and
Northeast Connecticut. Commercial real estate and real estate construction loans
represented $103,337,000 in outstanding principal at December 31, 2002. These
loans encompass a wider region extending throughout Massachusetts and Southern
New England. Most are collateralized by commercial real estate. Commercial loans
both collateralized and uncollateralized of $61,115,000 at December 31, 2002
represent loans made to businesses primarily in western Massachusetts and
northeastern Connecticut.
The Corporation has had, and expects to have in the future, banking transactions
in the ordinary course of business with its directors and officers. Such loans,
in the opinion of management, do not include more than the normal risk of
collectibility nor other unfavorable features. The following summarizes the
activity with respect to indebtedness, both direct and indirect, for directors,
policy-making officers and major stockholders during the years ended December
31:
(DOLLARS IN THOUSANDS) 2002 2001
================================================================================
Balance at beginning of year $3,744 $3,810
New loans granted 6,603 770
Repayments of principal/(sold) 2,356 836
- --------------------------------------------------------------------------------
Balance at end of year $7,991 $3,744
================================================================================
At December 31, 2002 and 2001, the recorded investment in impaired loans was
$411,000 and $336,000, respectively, of which $411,000 and $336,000,
respectively, were in non-accrual status. For the years ended December 31, 2002,
2001 and 2000, the average recorded investment in impaired loans was $632,000,
$629,000, $441,000 respectively. As applicable, each impaired loan has a related
allowance for loan losses determined in accordance with SFAS No. 114. The
carrying amount of impaired loans for which there was an allowance for loan
losses was $254,000 and $336,000 at December 31, 2002 and 2001. The total
allowance for loan losses allocated to these impaired loans was $127,000 and
$94,000 at December 31, 2002 and 2001. Interest income recognized during 2002,
2001 and 2000 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
$113,686,000, $114,044,000 and $84,966,000 at December 31, 2002, 2001 and 2000
respectively.
4 - PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31 are summarized as
follows:
ESTIMATED
(DOLLARS IN THOUSANDS) 2002 2001 LIVES
================================================================================
Property (including land of $1,713
in 2002 and $1,659 in 2001) $ 6,835 $ 6,134 15-40 years
Capital lease building 264 264 15 years
Furniture and equipment 3,733 3,637 3-10 years
Leasehold and building improvements 2,503 2,465 5-15 years
Motor vehicles 135 91 3 years
- --------------------------------------------------------------------------------
13,470 12,591
- --------------------------------------------------------------------------------
Accumulated depreciation 6,884 6,075
- --------------------------------------------------------------------------------
Property and equipment, net $ 6,586 $ 6,516
================================================================================
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
5 - DEPOSITS
Deposit accounts by type as of December 31 are summarized as follows:
(DOLLARS IN THOUSANDS) 2002 RATE 2001 RATE
================================================================================
Demand deposit $ 74,169 $ 70,960
Savings 100,391 1.16% 104,799 1.52%
NOW 33,665 0.23 29,251 .27
Money market 40,775 1.27 19,544 1.69
Other time deposits 312,747 3.62 285,295 4.57
- --------------------------------------------------------------------------------
$561,747 $509,849
================================================================================
At December 31, 2002, the scheduled maturities of time deposits and IRA deposits
with a fixed maturity are as follows:
(DOLLARS IN THOUSANDS)
================================================================================
Year ending December 31,
2003 $185,273
2004 46,506
2005 66,199
2006 7,911
2007 and after 6,858
- --------------------------------------------------------------------------------
$312,747
================================================================================
Certificates of deposit with balances greater than or equal to $100,000 amounted
to $60,726,000 and $54,383,000 as of December 31, 2002 and 2001 respectively.
Interest paid on these deposits totaled approximately $2,014,000 and $2,325,000
respectively.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
6 - BORROWED FUNDS
Short-term borrowings as of December 31 are as follows:
(DOLLARS IN THOUSANDS) 2002 2001
================================================================================
Securities sold under agreements to repurchase $10,801 $14,284
Purchased federal funds 500 9,244
Treasury tax and loan notes 4,001 1,887
- --------------------------------------------------------------------------------
Total short term borrowings $15,302 $25,415
================================================================================
The above short-term borrowings generally mature daily. Interest expense on
short-term borrowings totals $254,000, $825,000 and $1,327,000 for the years
ended December 31, 2002, 2001 and 2002, respectively. Long-term borrowings as of
December 31 are as follows:
(DOLLARS IN THOUSANDS)
2002 2001
PRINCIPAL PRINCIPAL
MATURITY PAYMENTS INTEREST PAYMENTS INTEREST
DATES DUE RATE DUE RATE
================================================================================
2002 $ 6,369 4.14%
2003 $ 15,833 4.90% 12,474 5.23
2004 7,604 3.95 2,114 4.42
2005 3,869 4.07 868 5.16
2006 5,118 4.20 2,426 4.65
2007 666 3.85
After 2007 8,000 4.59 8,000 4.59
- --------------------------------------------------------------------------------
$ 41,090 4.48% $ 32,251 4.75%
================================================================================
The Bank's long-term debt includes $10,000,000 of Federal Home Loan Bank (FHLB)
Option advances. The maturities of the Bank's Option advances from the FHLB are
March 2006, February 2011 and March 2011. The amounts due, respective to their
final maturities, are $2,000,000, $6,000,000 and $2,000,000. If there were a
change in interest rates, the FHLB would have the option of calling the advances
in 2003 and 2004. During the years 2003 and 2004, respectively, the Bank has
$8,300,000 and $1,700,000 in Option advances. Interest expense on long-term
borrowings totals $3,624,000, $2,758,000 and $2,408,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
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) 2002 2001 2000
================================================================================
Balance at year end $56,392 $57,666 $20,992
Average amount outstanding 66,067 51,032 40,717
Maximum amount outstanding at any month-end 88,972 85,091 50,742
Average interest rate for the year 3.40% 3.82% 5.16%
Average interest rate on year-end balance 3.42 3.26 4.02
The Corporation maintains a revolving line of credit with the Fleet Bank of
Massachusetts for $3,000,000 that is renewed on an annual basis. There were no
amounts outstanding against this line as of December 31, 2002 or 2001. The
Corporation had short-term borrowing capacity through the FHLB of $6,301,000
through its Ideal Way program that was unused at year-end 2002. Advances from
the FHLB are collateralized by the Company's holdings of FHLB stock and
residential real estate loans.
7 - MANDATORY REDEEMABLE PREFERRED STOCK
On September 30, 1999, the Corporation completed its offering of 1,700,000
shares, 9.6% trust preferred stock, each with a liquidation amount of $10. The
Corporation has the right to prepay the trust preferred stock in whole or in
part at anytime on or after September 30, 2004. The $17 million trust preferred
debentures are due September 30, 2029. Quarterly cash distributions were paid
beginning December 31, 1999. The trust preferred stock qualifies as Tier 1
capital under the Federal Reserve Board and risk-based capital guidelines. Of
the $17 million in proceeds, the Corporation contributed $15.5 million of the
net proceeds to Cargill Bank as equity capital to support the acquisition of two
Connecticut branches of New London Trust, F.S.B. The trust preferred obligation
is unsecured and ranks junior to all other borrowings, except those borrowings
that, by their terms, are equal or junior to the trust preferred obligation. The
trust preferred obligation is senior to the Corporation's common stock.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
8 - INCOME TAXES
The income taxes were as follows:
(DOLLARS IN THOUSANDS) 2002 2001 2000
==============================================================================================
Current tax:
Federal $ 3,646 $ 1,039 $ 1,569
State (166) 66 117
- ----------------------------------------------------------------------------------------------
Total current 3,480 1,105 1,686
- ----------------------------------------------------------------------------------------------
Deferred taxes (623) 923 282
- ----------------------------------------------------------------------------------------------
Total income taxes $ 2,857 $ 2,028 $ 1,968
==============================================================================================
The differences between the effective tax rate and the federal statutory tax
rate on income before taxes are reconciled as follows:
2002 2001 2000
==============================================================================================
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes,
net of federal benefit (.1) 1.8 .2
Other (1.7) (2.6) .1
- ----------------------------------------------------------------------------------------------
32.2% 33.2% 34.3%
==============================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31 are presented below:
(DOLLARS IN THOUSANDS) 2002 2001
==============================================================================================
Deferred tax assets:
Deferred loan fees $ 33 $ 41
Reserve for loan losses 1,416 948
Non-accrual interest 45 71
Amortization 56 60
Other 90 76
- ----------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,640 1,196
- ----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Bond accretion 15 12
Unrealized gain on securities 1,376 748
Depreciation 322 189
Allowance for loan losses 570 781
REIT dividend 1,132 1,339
Other 145 119
- ----------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 3,560 3,188
- ----------------------------------------------------------------------------------------------
Net deferred tax liability $ (1,920) $ (1,992)
==============================================================================================
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax assets and liabilities and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not that the Corporation will realize the benefits of these deductible
differences.
The Massachusetts Department of Revenue ("DOR") has sent notices of intent to
assess taxes to several banks in the Commonwealth of Massachusetts. The notices
relate to DOR's intent to disallow the dividend-received deduction between a
bank and its subsidiary operating as a real estate investment trust ("REIT"). On
February 4, 2003, the Corporation's subsidiary Westbank ("the Bank") received a
Notice of Assessment from the DOR for the tax year ended 2001. The notice was
based on DOR's intent to disallow the dividend-received deduction between the
Bank's subsidiary, Park West REIT, and the Bank. The Commonwealth of
Massachusetts has recently proposed legislation which would repeal the REIT
benefit effective for the years ending on or after December 31, 1999.
Westbank believes that its tax treatment of the dividend-received deduction for
its REIT subsidiary is valid under Massachusetts law. In the event that the
dividend-received deduction from its REIT subsidiary is disallowed, the
Corporation would be required to record additional taxes of approximately
$402,000 for the years 2000, 2001 and 2002, exclusive of any interest charge.
9 - EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
The Corporation has a defined contribution pension plan (money purchase),
covering substantially all of its employees. Contributions to the money purchase
plan are a percentage of individual employees' salary. Total pension expense for
2002, 2001 and 2000 amounted to $416,000, $314,000 and $318,000 respectively.
In addition, the corporation has a 401K plan. Each employee reaching the age of
twenty-one (21) automatically becomes a participant of the plan. The plan
provides for voluntary contributions by participants, up to 15% of their
compensation, subject to certain limits based on federal tax laws. The
Corporation makes matching contributions up to 50% of the first 6% of
compensation. The total 401K plan expense for the years ended December 31, 2002,
2001 and 2000 amounted to $118,000, $107,000 and $107,000 respectively. In
addition, the Corporation has a supplemental defined contribution plan for
certain executive officers. The defined contribution costs incurred by the
Corporation related to this plan were $42,000, $45,000 and $42,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.
DIRECTORS AND EXECUTIVES RETIREMENT PLAN
The Westbank Directors and Executives Supplemental Retirement Plans were
established during 2001. Under the Supplemental Retirement Plan, the Bank
provides post-retirement benefits for non-employee Directors who retire from the
Board after reaching age seventy-two (72) and certain executive officers who
retire at age sixty-five (65). The retirement benefit is in the amount of
seventy-five percent (75%) of the Director's or executive's final compensation
at retirement and is payable for the life of the retiree. For the executives,
this amount is reduced by fifty percent (50%) of the primary insurance amount
from Social Security and any employer-provided qualified retirement plans. The
combined cost for the defined benefit portions of the Directors and Executives
Retirement Plans include the following components:
FOR THE YEAR ENDED DECEMBER 31, 2002
================================================================================
Service cost $ 258,442
Interest cost 138,366
Net amortization of prior service cost 124,938
- --------------------------------------------------------------------------------
$ 521,746
================================================================================
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
The combined funded status of the defined benefit portion of the Directors and
Executives Retirement Plan was as follows:
DECEMBER 31, 2002
================================================================================
PROJECTED BENEFIT OBLIGATION:
Balance at beginning of period $ 160,743
Service cost 97,699
Interest cost 138,366
Benefit payments
Prior service costs 1,874,075
- --------------------------------------------------------------------------------
Balance at end of period $ 2,270,883
================================================================================
PLAN ASSETS AT FAIR VALUE:
Balance at beginning of period $
Contributions
Benefit payments
- --------------------------------------------------------------------------------
Balance at end of period $
================================================================================
FUNDED STATUS:
Deficiency of plan assets over projected benefit obligation $(2,270,883)
Unrecognized prior service costs 1,749,137
- --------------------------------------------------------------------------------
Accrued expense included in other liabilities (521,746)
- --------------------------------------------------------------------------------
Amount recognized in statement of financial condition consists of:
Accrued liability (521,746)
Intangible asset
- --------------------------------------------------------------------------------
Net amount recognized $ (521,746)
================================================================================
Major assumptions utilized were as follows:
AT DECEMBER 31, 2002
================================================================================
Discount rate 6.80%
Rate of increase in compensation levels 4.00%
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
10 - STOCK OPTIONS
The Corporation has four (4) fixed option plans that reserve shares of common
stock for executives, key employees and directors. The 1985 Incentive Stock
Option Plan offers shares of common stock to officers and key employees. Unless
exercised, options expire ten (10) years after granting. No options are
available for future grants under the 1985 Incentive Stock Option Plan.
The Cargill Directors and Officers Plan was adopted by Cargill Bank in 1992.
Unless exercised, options expire on September 7, 2006. No options are available
for future grants. The 1995 Directors Stock Option Plan grants options totaling
1,000 shares on February 15th of each year to qualified directors. Unless
exercised, options expire ten (10) years after granting. A total of 21,000
options are available for future grants.
The 1996 Incentive Stock Option Plan for directors and employees was established
in 1996 and amended at the 2002 Annual Meeting of Shareholders to increase the
number of shares reserved for issuance by 200,000. Employee options are granted
at the discretion of directors. Directors are granted options totaling 1,000
shares immediately following the Corporation's Annual Meeting each year only if
the Corporation achieved a return on average equity of 12% or higher. Directors'
options expire twenty (20) years after the grant date, if unexercised, while
employee options expire ten (10) years after the grant date. A total of 19,100
options are available for future grants. The following is a summary of the
status of the Corporation's four (4) fixed option plans as of December 31, 2002,
2001 and 2000, and changes during the years ended on those dates:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
2002 PRICE 2001 PRICE 2000 PRICE
================================================================================================================
Outstanding at beginning of year 490,359 $ 9.55 499,236 $ 9.38 481,236 $ 9.40
Granted 207,900 13.13 8,000 7.9375 19,000 8.87
Exercised (54,055) 5.58 (16,877) 3.87 (1,000) 6.00
Terminated (5,715) 10.09
- ----------------------------------------------------------------------------------------------------------------
Outstanding at end of year 638,489 11.05 490,359 9.55 499,236 9.38
================================================================================================================
Options exercisable at year-end 508,889 490,359 499,236
Weighted average fair value of
options granted during the year $ 13.13 $ 7.9375 $ 8.87
================================================================================================================
The following table summarizes information about fixed options outstanding at
December 31, 2002:
WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/02 CONTRACTUAL LIFE PRICE AT 12/31/02 PRICE
================================================================================================================
$ 2.50 1,200 .5 years $ 2.50 1,200 $ 2.50
$ 4.02 to 6.00 31,764 2.2 years 5.25 31,764 5.25
6.01 to 9.00 161,125 5.7 years 8.19 161,125 8.19
9.01 to 13.50 433,400 8.5 years 12.45 303,800 12.11
13.51 to 15.25 11,000 13.4 years 15.11 11,000 15.11
- ----------------------------------------------------------------------------------------------------------------
$ 2.50 to $15.25 638,489 7.5 years $ 11.05 508,889 $ 10.49
================================================================================================================
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
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:
2002 4,406,583 $1.36
2001 4,465,054 .91
2000 4,440,560 .85
Effect of Dilutive Option Shares:
2002 103,382 .03
2001 47,966 .01
2000 46,493 .01
Diluted Earnings Per Share:
2002 4,509,965 1.33
2001 4,513,020 .90
2000 4,487,053 .84
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, 2002:
(DOLLARS IN THOUSANDS)
================================================================================
2003 $ 293
2004 265
2005 240
2006 126
2007 92
After 2007 75
- --------------------------------------------------------------------------------
Total minimum lease payments $ 1,091
================================================================================
Rent expense for 2002, 2001 and 2000 amounted to $401,000, $360,000 and $358,000
respectively.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
13 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, various commitments and contingent liabilities
are outstanding, such as guarantees, standby letters of credit and commitments
to extend credit, that are not reflected in the consolidated financial
statements. Management does not anticipate any significant losses as a result of
these transactions. The following table summarizes the contractual value of
commitments at December 31:
(DOLLARS IN THOUSANDS) 2002 2001
================================================================================
Commitments to grant loans $13,677 $11,855
Stand-by letters of credit and financial guarantees 587 325
Commitments to advance funds under existing loan agreements 60,600 47,031
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 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
addresses the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions, and new regulations concerning
internal controls, accounting, and operations.
Both the Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's or banking subsidiary's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the Corporation's and
the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Corporation's and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (as
defined in the regulations) of total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets. Management believes, as of December 31,
2002, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
Regulatory risk-based capital requirements take into account the different risk
categories by assigning risk weights to assets and the credit equivalent amounts
of off-balance sheet exposures. In addition, capital is divided into two tiers.
Tier 1 includes the common stockholders' equity and a portion of the mandatory
redeemable preferred stock; total risk-based, or supplementary capital includes
not only the equity but also a portion of the allowance for loan losses and a
portion of the mandatory redeemable preferred stock.
As of December 31, 2002, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a bank must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios. There are no conditions or events since that
notification that management believes have changed the Bank's category. Included
in the Bank's capital is approximately $15.5 million contributed in 1999 by the
holding company in connection with the preferred trust offering. (Note 7)
The Corporation's and the Bank'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, 2002
Total Capital
(To risk-weighted assets):
Westbank $51,568 12.25% $33,670 8.00% $42,088 10.00%
Holding Company 53,350 12.63 33,787 8.00 N/A
N/A
Tier I Capital
(To risk-weighted assets):
Westbank 46,456 11.04 16,835 4.00 25,253 6.00
Holding Company 44,616 10.56 16,894 4.00 N/A
N/A
Tier I Capital
(To average assets):
Westbank 46,456 6.99 26,594 4.00 33,243 5.00
Holding Company 44,616 6.60 26,632 4.00 N/A
N/A
December 31, 2001
Total Capital
(To risk-weighted assets):
Westbank $48,685 12.71% $30,633 8.00% $38,292 10.00%
Holding Company 50,050 13.03 30,734 8.00 N/A
N/A
Tier I Capital
(To risk-weighted assets):
Westbank 44,506 11.62 15,317 4.00 22,975 6.00
Holding Company 41,440 10.79 15,367 4.00 N/A
N/A
Tier I Capital
(To average assets):
Westbank 44,506 7.56 23,542 4.00 29,428 5.00
Holding Company 41,440 6.96 23,824 4.00 N/A N/A
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
On November 19, 1997, the Board of Directors of the Corporation adopted an
Amended and Restated Shareholder Rights Plan (the "Rights Plan"). Pursuant to
the terms of the Rights Plan, the Board of Directors declared a dividend
distribution to stockholders of record as of the close of business on December
4, 1997 (the "Record Date") of one Preferred Stock Purchase Right (a "Right")
for each outstanding share of Common Stock of the Corporation. In addition, one
Right automatically attaches to each share of Common Stock issued subsequent to
the Record Date, until November 19, 2007. Each Right entitles the registered
holder to purchase from the Corporation a unit of one ten-thousandths of a share
(a "Unit") of Series A Junior Participating Cumulative Preferred Stock, par
value $5.00 per share ("Preferred Stock"), at a cash exercise price of $60.00
per share of Common Stock, subject to adjustment. The Corporation has reserved
12,000 shares of Preferred Stock for issuance upon exercise of the Rights.
Currently, the Rights are not exercisable and are attached to and trade with the
outstanding shares of Common Stock. The Rights will separate from the Common
Stock and become exercisable upon the earliest to occur of (i) the close of
business on the tenth calendar day following the first public announcement that
a person or group of affiliated or associated persons has acquired beneficial
ownership of 15% or more of the outstanding shares of the Corporation's Common
Stock (an "Acquiring Person"), (ii) the close of business on the tenth business
day (or such date as the Board of Directors may determine) following the
commencement of a tender offer or exchange offer that would result upon its
consummation in a person or a group becoming the beneficial owner of 15% of the
outstanding shares of the Corporation's Common Stock, or (iii) the determination
by the Board of Directors that any person is an "Adverse Person."
Upon the occurrence of any one of the above events, each holder of a Right
(other than the Acquiring Person or the Adverse Person, as the case may be) is
entitled to acquire such number of Units of the Preferred Stock of the
Corporation as are equivalent to such number of shares of Common Stock having a
value twice the current exercise price of the Right. If the Corporation is
acquired in a merger or other business combination transaction, after any such
event each holder of a Right is then entitled to purchase, at the then current
exercise price, shares of the acquiring company's common stock having a value of
twice the exercise price of the Right.
Until a Right is exercised, the holder has no rights as a stockholder of the
Corporation (beyond those rights as an existing stockholder), including the
right to vote or to receive dividends. While the distribution of the Rights is
not taxable to stockholders or to the Corporation, stockholders may, depending
upon the circumstances, recognize taxable income in the event the Rights become
exercisable for Units, other securities of the Corporation, other consideration
or for shares of common stock of an acquiring company.
The Rights may be redeemed in whole by the Corporation, under certain
circumstances, at a price of $.001 per Right. The Rights and the Rights Plan
expire on November 19, 2007.
The Bank's retained earnings at December 31, 2002 include $458,000 that is set
aside in accordance with existing provisions of the Internal Revenue Code to
absorb losses on loans. If, in the future, this amount were used for any other
purposes, a tax liability could be incurred. It is not anticipated that such
amount will be made available for dividends or that a tax thereon will be
imposed.
Cargill Bank ("Cargill") previously converted from a state chartered mutual
savings and loan association to a state chartered stock savings and loan
association. At the time of the conversion, Cargill established a liquidation
account in an amount equal to Cargill's net worth. In the event of a complete
liquidation (and only in such event), each eligible account holder will be
entitled to receive a liquidation distribution from the liquidation account
before any liquidation may be made with respect to capital stock. The balance in
the liquidation account at December 31, 2002 was $85,000.
The Corporation purchased 202,658, 23,000 and 127,320 common shares at fair
value for treasury stock at an aggregate cost of $2,615,000, $215,000 and
$1,127,000 in 2002, 2001 and 2000 respectively. Treasury stock repurchases were
made in connection with the previously announced stock repurchase program.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
15 - 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, 2002 and 2001, the ESOP held no shares of the Corporation's stock.
16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for the
Corporation's financial instruments. The following table represents the carrying
amount and estimated fair value of the Corporation's financial instruments at
December 31:
2002 2001
=======================================================================================================
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 19,065 $ 19,065 $ 17,132 $ 17,132
Federal funds sold 28,185 28,185 319 319
Investment securities held to maturity 436 459 757 779
Investment securities available for sale 132,296 132,296 141,685 141,685
Loans 473,721 493,517 439,723 451,682
Accrued interest receivable 3,037 3,037 3,285 3,285
Liabilities:
Deposits 561,747 568,939 509,849 513,080
Borrowed funds 56,392 60,235 57,666 57,973
Mandatory redeemable preferred stock 17,000 17,758 17,000 17,425
Accrued interest payable 665 665 659 659
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 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.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE
The carrying amounts of these items approximate fair value due to their
short-term nature.
DEPOSITS
The fair value of deposits with no stated maturity, such as non-interest bearing
demand deposits, regular savings, NOW accounts and money market accounts, is
equal to the amount payable on demand. The fair value of certificates of deposit
is based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
BORROWED FUNDS AND MANDATORY REDEEMABLE PREFERRED STOCK
The fair value of such borrowings and mandatory redeemable preferred stock was
estimated by utilizing future cash flows discounted using current borrowing
rates for similar instruments. For short-term borrowings, the carrying amount
approximates the fair value due to their short-term nature.
COMMITMENTS TO EXTEND CREDIT
The stated fair value of commitments to extend credit is based on the current
fees charged for similar commitments. The estimated fair value for commitments
to extend credit are not material.
17 - SEGMENT INFORMATION
The Corporation has one reportable segment, "Community Banking." All of the
Corporation's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Corporation supports the
others. For example, commercial lending is dependent upon the ability of the
Bank to obtain funds through deposits and borrowings and to manage interest rate
and credit risk. This situation is also similar for consumer and residential
mortgage lending. Accordingly, all significant operating decisions are based
upon analysis of the Corporation as one operating segment or unit.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
18 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002
----------------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
Interest income $10,443 $10,206 $10,037 $ 9,890
Interest expense 4,544 4,449 4,642 4,420
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 5,899 5,757 5,395 5,470
Provision for losses 300 433 400 200
Non-interest income 733 1,337 966 1,054
Non-interest expense 4,361 4,337 3,956 (1) 3,758
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,971 2,324 2,005 2,566
Income taxes 656 486 671 1,044
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,315 $ 1,838 $ 1,334 $ 1,522
================================================================================================================================
Earnings per share - Basic $ .29 $ .42 $ .31 $ .35
- Diluted $ .29 $ .40 $ .30 $ .34
================================================================================================================================
2001
----------------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
Interest income $10,147 $10,115 $10,540 $10,286
Interest expense 5,298 4,996 5,349 5,048
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,849 5,119 5,191 5,238
Provision for losses 227 159 279 279
Non-interest income 760 987 909 833
Non-interest expense 3,991 4,249 4,429 4,172
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,391 1,698 1,392 1,620
Income taxes 471 580 452 525
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 920 $ 1,118 $ 940 $ 1,095
================================================================================================================================
Earnings per share - Basic $ .21 $ .25 $ .21 $ .24
- Diluted $ .20 $ .25 $ .21 $ .24
================================================================================================================================
(1) On September 30, 2002, the Corporation adopted SFAS No. 147. In accordance
with this statement, the Corporation ceased amortization of goodwill,
retroactive to January 1, 2002. The result was a $513,000 decrease in
amortization expense in the third quarter.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001
==============================================================================================================================
BALANCE SHEETS
Assets
Cash $ 337 $ 73
Investment in subsidiaries 57,830 54,646
Other investments 34 72
Other assets 1,433 1,238
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 59,634 $ 56,029
==============================================================================================================================
Liabilities $ 22 $ 13
- ------------------------------------------------------------------------------------------------------------------------------
Mandatory redeemable preferred stock 17,000 17,000
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock - none
Common stock, par value $2 per share 9,047 8,632
Additional paid-in capital 14,497 11,782
Retained earnings 18,780 17,787
Treasury stock (2,091) (431)
Accumulated other comprehensive loss 2,379 1,246
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 42,612 39,016
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 59,634 $ 56,029
==============================================================================================================================
(DOLLARS IN THOUSANDS) 2002 2001 2000
==============================================================================================================================
STATEMENTS OF INCOME
Dividend from subsidiary $ 5,163 $ 2,230 $ 2,598
Interest expense (1,680) (1,627) (1,617)
Other expense - net (121) (108) (135)
- ------------------------------------------------------------------------------------------------------------------------------
Income before taxes and undistributed income
of subsidiaries 3,362 495 846
Income tax benefit 595 590 600
Undistributed income of subsidiaries 2,052 2,988 2,342
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 6,009 $ 4,073 $ 3,788
- ------------------------------------------------------------------------------------------------------------------------------
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001 2000
==============================================================================================================================
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 6,009 $ 4,073 $ 3,788
Operating activities:
Equity in income of subsidiaries (2,052) (2,988) (2,342)
Decrease (increase) in other assets (195) 303 (184)
Increase (decrease) in other liabilities 9 6 (9)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,771 1,394 1,253
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities (purchases) maturities 38 (30) (32)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 38 (30) (32)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock options exercised (37) 20 3
Proceeds from dividend reinvestment and optional
stock purchases 956 529 573
Treasury shares redeemed (2,615) (215) (1,127)
Dividends paid (1,849) (1,694) (1,697)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,545) (1,360) (2,248)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 264 4 (1,027)
Cash and cash equivalents at the beginning of the year 73 69 1,096
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 337 $ 73 $ 69
==============================================================================================================================
50
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, 2002 and 2001 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, 2002. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Westbank Corporation and
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the Consolidated Financial Statements, in 2002 the
Corporation changed its method of accounting for goodwill and other intangible
assets to conform to Statements of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", and No. 147, "Acquisition of Certain
Financial Institutions."
DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 29, 2003
51
CORPORATE DIRECTORY
WESTBANK CORPORATION AND SUBSIDIARIES
DIRECTORS
WESTBANK CORPORATION AND WESTBANK
=============================================================================================================================
ERNEST N. LAFLAMME, JR. DAVID R. CHAMBERLAND ROBERT J. PERLAK
Chairman of the Board, President, Corporate Clerk,
Westbank Corporation Chicopee Building Supply, Inc. Westbank Corporation
Treasurer, Private Investor
City of Chicopee DONALD R. CHASE
Vice Chairman of the Board, GEORGE R. SULLIVAN
ROLAND O. ARCHAMBAULT President and Chief Executive Officer, Chief Executive Officer,
President and Owner, Westbank Corporation Sullivan Paper Company, Inc.
Pinnacle Raceway President and Chief Executive Officer,
Westbank JAMES E. TREMBLE
MARK A. BEAUREGARD President,
Attorney at Law, G. WAYNE MCCARY Valley Commmunications Systems, Inc.
Resnic, Beauregard, Waite & Driscoll President and Chief Executive Officer,
Eastern States Exposition
OFFICERS
WESTBANK CORPORATION
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DONALD R. CHASE GARY L. BRIGGS TRENTON E. TAYLOR
President and Chief Executive Officer Executive Vice President Senior Vice President
JOHN M. LILLY KATHLEEN A. JALBERT LLOYD S. HALL
Treasurer and Chief Financial Officer Senior Vice President Director of Auditing
WESTBANK
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DONALD R. CHASE FINANCE DEPARTMENT LOAN CREDIT AND COLLECTION
President and Chief Executive Officer JOHN M. LILLY TRENTON E. TAYLOR
Executive Vice President and Treasurer Senior Vice President
AUDITING DIVISION HOWARD STANTON, III PATRICIA A. NEBOSKY
LLOYD S. HALL, CBA Vice President Vice President
Director of Auditing IRVING M. WALKER, JR., CMA JOHN E. O'BRIEN
Controller Assistant Vice President
BRANCH ADMINISTRATION/
HUMAN RESOURCES LOAN DIVISION RESIDENTIAL REAL ESTATE
KATHLEEN A. JALBERT GARY L. BRIGGS ANTONIO FILIPE
Senior Vice President Executive Vice President Senior Vice President
DEBORAH A. KUMIEGA PAUL M. ACCORSI WOLFGANG A. ADAMETZ
Vice President Senior Vice President Vice President
KATHRYN J. SAUCIER DENISE M. BREWER
Assistant Vice President Senior Vice President TRUST DIVISION
ALMA D. MOREY CLIFFORD R. BORDEAUX ROBERT A. GIBOWICZ
Branch Administration Officer Vice President Senior Trust Officer
SUSAN M. ALDRICH GERARD E. DRAPEAU WILLIAM M. VARANKA
Human Resources Officer Vice President Vice President
RICHARD N. HANCHETT
EDP/OPERATIONS Vice President
S. STEVE KONIECKI JOSEPH S. LEMAY
Senior Vice President Vice President
JOSEPH P. YOUNG
Vice President
MICHAEL A. HARRINGTON
Commercial Loan Officer
J. KEVIN HOURIHAN
Dealer Account Officer
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CORPORATE INFORMATION
WESTBANK CORPORATION AND SUBSIDIARIES
WESTBANK CORPORATION
Westbank Tower, 225 Park Avenue
West Springfield, MA 01089-3310
(413) 747-1400
ANNUAL MEETING
The Annual Meeting of Stockholders of Westbank Corporation will be held on
Wednesday, April 16, 2003 at nine o'clock in the morning at the Best Western
Sovereign Hotel & Conference Center, 1080 Riverdale Street, West Springfield,
Massachusetts.
TRANSFER AGENT AND REGISTRAR
Westbank-Trust Department
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Stamford, Connecticut
CORPORATE COUNSEL
Doherty, Wallace, Pillsbury and Murphy, P.C.
Springfield, Massachusetts
INFORMATION SERVICE
Westbank Corporation welcomes stockholder and public interest in our services
and activities. Questions pertaining to material presented in this Report and
requests for a copy of the Annual Report (Form 10-K) filed with the Securities
and Exchange Commission should be directed to John M. Lilly, Treasurer and Chief
Financial Officer, at the above address.
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.
COMMON STOCK - MARKET INFORMATION
The table below shows cash dividend data and the range of bid prices by quarter
for the Corporation's common stock. The source of the bid ranges is the local
newspaper's listing of the NASDAQ regional market quotations.
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2002 2001
BID BID
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
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First $11.10 $ 9.10 $.11 $ 7.86 $ 6.67 $.10
Second 13.43 10.58 .11 9.10 7.67 .10
Third 13.53 11.19 .11 9.48 8.84 .10
Fourth 13.19 12.39 .11 9.24 8.67 .10
All stock prices have been adjusted for the 5% stock dividend declared and
distributed January 2003.
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, 2003 the Corporation had 1,257 stockholders. Westbank Corporation's common
stock is traded on the NASDAQ National Market Exchange, the trading symbol is
"WBKC." For information on the Westbank Corporation Dividend Reinvestment and
Stock Purchase Plan, call Westbank's Trust Department at (413) 747-1400. The
following firms make a market in Westbank Corporation's common stock:
Adams, Harkness & Hill, Inc.
Advest Inc.
Goldman, Sachs & Co.
Keefe, Bruyette & Woods, Inc.
Knight Securities L.P.
McConnell, Budd & Downes, Inc.
Moors & Cabot, Inc.
Ryan, Beck & Co., Inc.
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