EXHIBIT 99.2
------------
WESTBANK CORPORATION
2003 ANNUAL REPORT
In Memoriam
Dedicated to the memory of a banker
who provided leadership, vision
and guidance during critical times.
[PHOTO]
William A. Franks, Jr.
President and Chairman of the Board
President
from 1966-1984
Chairman of the Board of Directors
from 1979-1989
ON THE COVER
STANDING: JOHN WHITE, DONALD CHASE, JOSEPH YOUNG,
SENIOR VICE PRESIDENT PRESIDENT/CEO VICE PRESIDENT
GERARD DRAPEAU,
VICE PRESIDENT
SITTING: PAUL ACCORSI, DENISE BREWER, RICHARD HANCHETT,
SENIOR VICE PRESIDENT SENIOR VICE PRESIDENT VICE PRESIDENT
FINANCIAL HIGHLIGHTS
WESTBANK CORPORATION AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002(1) 2001(1)
- ----------------------------------------------------------------------------------------
Net income $ 6,054 $ 6,009 $ 4,073
Net interest income 21,767 22,521 20,397
Non-interest income 4,536 4,090 3,489
Non-interest expense 17,439 16,412 16,841
Provision for (recovery of) loan losses (354) 1,333 944
YEAR END DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002(1) 2001(1)
- ----------------------------------------------------------------------------------------
Securities $242,062 $132,732 $142,442
Loans, net 435,483 473,721 439,723
Allowance for loan losses 4,428 5,111 4,179
Assets 724,060 682,863 628,922
Deposits 536,454 561,747 509,849
Stockholders' equity 45,275 42,612 39,016
COMMON SHARE DATA
Average diluted shares 4,570,149 4,509,965 4,513,020
Earnings per diluted share $1.32 $1.33 $.90
BAR GRAPH: CHANGE IN COMMON STOCK PRICE, BOOK VALUE AND RETURN ON AVERAGE ASSETS
- ----------------------------------------------------------------------------------------
Closing Return on
Common Stock Price Book Value Average Assets
2001 $ 8.52 $ 8.71 0.68%
2002 12.56 9.76 0.90
2003 18.11 10.27 0.92
(1) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in January 2003.
1
PEOPLE YOU KNOW. EXPERIENCE YOU TRUST.
Dear Shareholder:
Community banking is many things to many people. In its simplest form, community
banking is meeting the financial needs of the people and businesses in the
communities a bank serves. But in reality, it is much more involved than that.
It is developing personal relationships that last a lifetime. It is seeing a
need in the community and stepping forward to lend a helping hand when needed.
It is doing business with people you know and trust.
At Westbank Corporation, we believe community banking is more than just having a
branch in the community. It is providing our customers with a level of comfort
and stability - an inherent feeling of trust that lets them know their money is
safe and in capable, experienced hands. It is the peace of mind they feel when
they walk into our main office and see our consumer lender sitting behind the
same desk he has manned for 42 years or hear our long-time receptionist say,
"Good afternoon, Westbank" every time they call the Bank. It is the feeling of
confidence they get after discussing their business finances with one of our
experienced commercial lenders or opening a checking account with one of our
branch managers. In short, Westbank is people you know and experience you can
trust.
Of course, community banking is also about financial performance. In 2003, the
Corporation enjoyed record-setting financial results for the second consecutive
year. For the year ended December 31, 2003, net income totaled a record
$6,054,000 or $1.32 per diluted share versus $6,009,000 for the year ended
December 31, 2002, which included $800,000 in life insurance proceeds. Excluding
the life insurance proceeds, earnings for 2003 increased by 16% over the prior
year.
As of December 31, 2003, assets totaled $724.1 million versus $682.9 million one
year ago, an increase of 6%. Investments totaled $242.1 million, a $109.3
million, or 82% increase over the prior year. As of year-end 2003, loans totaled
$435.5 million, deposits stood at $536.5 million and total borrowings increased
to $122.2 million.
Net interest income for the year ended December 31, 2003 totaled $21,767,000,
while the Corporation's net interest margin stood at 3.53% versus 3.63% for the
previous year.
At year-end, the allowance for loan losses totaled $4,428,000, representing
1.01% of total loans. As of December 31, 2003, non-performing loans totaled
$3,308,000 and the Corporation held no property in foreclosure. Total
non-performing assets at the end of 2003 represented .46% of total assets.
Stockholders' equity at December 31, 2003 totaled $45,275,000 compared to
$42,612,000 at December 31, 2002, representing a book value of $10.27 and a
tangible book value of $8.26. The results for the year ended December 31, 2003
represented a return on average equity of 14% and a return on average assets of
..92%.
In addition to our financial performance, the Corporation also achieved key
milestones in several of its business divisions.
Spurred by a continued low interest rate environment, our Residential Lending
Division originated a record $123.9 million in residential real estate loans in
2003. Refinancing continued to drive our residential loan activity for much of
the year, with home purchases picking up steadily toward the end of the year.
While interest rates remain relatively low, we expect home purchases to drive
residential loan demand in 2004, as most consumers who planned to refinance
their homes have likely done so at this stage.
Our Commercial Lending Division also enjoyed a banner year, underwriting $80.3
million in commercial loans, commercial mortgages and equipment leases. This
division has historically been a solid performer for the Corporation and was a
key contributor to our financial results in 2003. In 2004, we plan to place a
great deal of emphasis on this division by launching a multimedia advertising
campaign designed to communicate our business banking capabilities to potential
prospects in the markets we serve.
Our Indirect Lending Division, which underwrites automobile loans directly
through automobile dealers, booked over $20.6 million in new auto loans in 2003,
a 7 % increase versus the previous year. We currently have 92 dealer
affiliations in Massachusetts and Connecticut, with plans to add even more
dealers in 2004. In addition to bolstering our dealer affiliations, we also plan
to implement an online loan processing system in 2004. By doing this, we will
improve efficiency and provide auto dealers with the ability to extend financing
to qualified buyers during non-business hours.
Following a division-wide reorganization in 2003, our Wealth Management Division
is now comprised of four key areas: Trust and Investments, Qualified Plans,
Financial and Estate Planning, and Private Clients Group. With this new
alignment, our Wealth Management division is poised for solid growth in 2004.
2
In September 2003, we officially opened our eighteenth branch office in Webster,
Massachusetts. In addition to providing us with a geographic link between our
Massachusetts and Connecticut offices, the Webster office is providing the
Corporation with the opportunity to develop retail and commercial business
opportunities in the burgeoning Worcester County market. As of December 31,
2003, our Webster office had acquired $5 million in new deposits and we are
extremely pleased with the results to date.
As part of our expansion plans, we also made a sizable investment in our
technological capabilities, led by the decision to revamp our existing voice and
data network. Completed in October 2003, this new voice and data network has
allowed the Bank to route all voice, data and Internet traffic through one
converged network.
Perhaps the biggest news in 2003 was the appreciation in value of our common
stock and the improvements we have made to enhance shareholder value. As of
December 31, 2003, the Corporation's common stock stood at $18.25, a 40%
increase in market value versus year-end 2002. We believe the improvement in
value is the result of our continued financial growth and the strength of
community bank stocks as a whole. In addition to the increase in our stock
price, the Corporation increased the quarterly cash dividend by 9% in 2003 and
recently announced a 16% increase in the dividend for 2004.
In October 2003, we announced the completion of our most recent stock repurchase
plan and initiated a new repurchase plan of 5% of the Corporation's outstanding
shares, valued at approximately $3.8 million. The program was continued because
the Corporation believes it is a wise and valuable long-term investment that
will also add to shareholder value through improved earnings per share.
While 2003 was a year filled with many accomplishments, sadly it was also a year
marked by loss. In December, former President and Chairman of the Board William
A. Franks, Jr., passed away. Bill joined the former Western Bank and Trust in
1963, serving as President from 1966-1984 and Chairman of the Board of Directors
from 1979-1989. Bill was a true gentleman in every sense of the word and played
a significant role in building the foundation for the strong and vibrant
Corporation we enjoy today. We will be forever grateful for Bill's many
contributions and extend our thoughts, prayers and condolences to his family.
While we are understandably pleased with our financial performance in 2003, we
did not become a successful community bank overnight. We realize that our
success is a direct result of the hard work and dedication of our board of
directors, senior management team and employees. We also understand that the
road ahead may be lined with many obstacles. While the economy and the stock
market appear to have returned to pre-9/11 levels, there are still many external
factors that could potentially impact our business in 2004. The war in Iraq
continues to wage on. The 2004 presidential election could have major
implications from an economic perspective. And the constant threat of terrorism
worldwide has the potential to impact business right here at home.
As we move forward in 2004, we will continue to look for ways to enhance
shareholder value and reward our loyal investors for their confidence and
continued support. We will remain diligent in the execution of our strategic
plan by expanding our asset base, attracting and retaining core deposits, and
closely monitoring our net interest margin. We will work toward the betterment
of the communities we serve through continued service and financial assistance.
But perhaps most important, we will continue to provide our customers with the
familiarity and trust they have come to expect from us. For it is "people you
know and experience you trust" that has made us the successful community bank we
are today.
As always, thank you for your loyalty, confidence and continued support of
Westbank Corporation.
DONALD R. CHASE ERNEST N. LAFLAMME, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE BOARD
3
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 mandatorily redeemable preferred stock that was
issued on September 30, 1999.
The Corporation is headquartered in West Springfield, Massachusetts. As of
December 31, 2003, the Corporation has eighteen (18) 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.
A full range of retail banking services is furnished to individuals, businesses
and nonprofit organizations through eighteen (18) 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, mortgage loans and equipment leasing.
Park West Securities Corporation and PWB&T, Inc. are wholly owned subsidiaries
of the Bank.
The Bank also operates a Trust Department providing services normally associated
with holding property in a fiduciary or agency capacity. The value of the
property held by the Trust Department at December 31, 2003 amounted to
$172,881,000 and is not included in the accompanying financial statements since
such items are not assets of the Bank.
EMPLOYEES
As of December 31, 2003, the Corporation and its subsidiaries had the equivalent
of 173 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, central 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 efforts
continuing by those banks to solicit new business. The Trust Department prides
itself on being one of the few remaining corporate fiduciaries providing
personal services locally. Insurance companies, mutual savings banks, investment
counseling firms, and other business firms and individuals also offer active
competition for such business.
4
SELECTED CONSOLIDATED FINANCIAL DATA
WESTBANK CORPORATION AND SUBSIDIARIES
Year Ended December 31,
(Dollars in thousands, except share amounts) 2003 2002(1) 2001(1) 2000(1) 1999(1)
================================================================================================================================
Interest and dividend income $ 35,852 $ 40,576 $ 41,088 $ 42,645 $ 32,437
Interest expense 14,085 18,055 20,691 23,228 15,316
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 21,767 22,521 20,397 19,417 17,121
Provision for (recovery of) loan losses (354) 1,333 944 472 77
Non-interest income 4,536 4,090 3,489 2,652 2,330
Non-interest expense 17,439 16,412 16,841 15,841 12,598
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 9,218 8,866 6,101 5,756 6,776
Income taxes 3,164 2,857 2,028 1,968 2,609
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 6,054 $ 6,009 $ 4,073 $ 3,788 $ 4,167
================================================================================================================================
Common share data:
Earnings per share:
Basic $ 1.38 $ 1.36 $ .91 $ .85 $ .94
Diluted 1.32 1.33 .90 .84 .92
Cash dividends declared .48 .44 .40 .40 .40
Ending book value 10.27 9.76 8.71 7.86 7.01
AT DECEMBER 31:
Loans, net $ 435,483 $ 473,721 $ 439,723 $ 429,231 $ 438,567
Assets 724,060 682,863 628,922 574,596 576,150
Non-performing assets 3,308 1,558 2,034 2,737 2,881
Deposits 536,454 561,747 509,849 499,140 478,896
Borrowings 122,204 56,392 57,666 20,992 46,546
Mandatorily redeemable preferred stock 17,000 17,000 17,000 17,000 17,000
Stockholders' equity 45,275 42,612 39,016 34,860 31,543
AVERAGE FOR YEAR:
Loans 459,765 463,488 440,454 445,846 349,614
Assets 658,002 666,120 595,592 581,328 450,691
Deposits 537,151 537,309 486,694 488,396 384,410
Stockholders' equity 43,272 40,380 36,920 32,096 31,187
Weighted shares outstanding - basic 4,378,981 4,406,583 4,465,054 4,440,560 4,456,622
Weighted shares outstanding - diluted 4,570,149 4,509,965 4,513,020 4,487,053 4,549,992
SELECTED RATIOS:
Return on average assets .92% .90% .68% .65% .92%
Return on average stockholders' equity 13.99 14.88 11.03 11.80 13.36
Allowance for loan losses to loans at year end 1.01 1.07 .94 .85 .88
Non-performing loans as a percentage
of total loans at year end .75 .33 .41 .51 .55
Net charge-off's (recoveries) as a
percentage of average loans .07 .09 .10 .16 .14
Non-performing assets as a percentage of assets .46 .23 .32 .48 .50
(1) Share amounts and earnings per share are adjusted for a 5 percent stock
dividend declared and distributed in January 2003.
5
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, central Massachusetts and
northeastern Connecticut;
2. The real estate market in western Massachusetts, central Massachusetts and
northeastern Connecticut;
3. Competition in the Corporation's primary market area from other banks,
especially in light of continued consolidation in the New England banking
industry;
4. Any changes in federal and state bank regulatory requirements;
5. Changes in interest rates;
6. The cost and other effects of unanticipated legal and administrative cases
and proceedings, settlements and investigations;
7. 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/or
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.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of Westbank Corporation are in accordance
with generally accepted accounting policies in the United States of America and
conform to general practices within the banking industry. In reviewing and
understanding financial information for the Corporation, you are encouraged to
read and understand the significant accounting policies that are used in
preparing the Corporation's consolidated financial statements. These policies
are described in Note 1 to the consolidated financial statements. Of these
policies, management believes that the accounting for loans and the allowance
for loan losses is one of the most critical.
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 is not collectible in accordance with
the terms of the loan agreement. Measurement of impairment for commercial loans
is generally based on the present value of expected future cash flows discounted
at the loan's effective interest rate. Commercial real estate loans are
generally measured based on the fair value of the underlying collateral. If the
estimated fair value of the impaired loan is less than the related recorded
amount, a specific valuation allowance is established or a write-down is charged
against the allowance for loan losses. Smaller balance homogenous loans,
including residential real estate and consumer loans, are excluded from the
provisions of SFAS No. 114. Generally, income 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.
At December 31, 2003, the allowance for loan losses totaled $4,428,000,
representing 1.01% of total loans and 133.9% of non-performing loans. Please see
"Allowance for Loan Losses" for a further discussion of the Corporation's
methodology in determining the allowance.
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.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
BUSINESS SUMMARY
Westbank Corporation is a one-bank holding company with its headquarters located
in West Springfield, Massachusetts. Westbank operates eighteen branch offices
and twenty-three ATM's, serving communities in western and central Massachusetts
and northeastern Connecticut. Westbank's affiliates include: Westbank, a
commercial bank and trust company, Park West Securities Corporation and PWB&T,
Inc.
Westbank Corporation has a growth-oriented strategy focused on (1) shareholder
value, (2) expanding its banking franchise, (3) unparalleled service and (4)
effective capital management.
The primary source of Westbank's revenue is net interest income from loans and
deposits, and fee income. Balance sheet growth was moderate during 2003, as the
Corporation sought to maintain its interest margin. In addition, a lower
interest rate environment in 2003 generated record mortgage originations for the
Corporation. Mortgage and investment activity contributed significantly to its
earnings. A rise in interest rates in the latter part of 2003 slowed mortgage
volume; as such, Westbank does not anticipate similar mortgage volume levels in
2004.
SUMMARY OF RESULTS
For 2003, the Corporation reported net income of $6,054,000 or $1.32 per diluted
share after recording a recovery of $354,000 for loan losses. This compares to
net income of $6,009,000 or $1.33 per diluted share for 2002. The Corporation's
2002 earnings reflected a provision for loan losses of $1,333,000.
Net interest income decreased by $754,000 from 2002 to 2003. Non-interest income
increased by $446,000 from the prior year and by $1,047,000 versus 2001.
Non-interest income for 2003 reflects a decrease in Trust Department earnings of
$11,000, a decrease in service charges on deposit accounts and loan servicing
income of $191,000, an increase from gain on sale of investments of $1,356,000,
a decrease from gain on sale of real estate owned of $45,000, an increase from
gains on sale of mortgages of $215,000, and a decrease in other non-interest
income of $878,000. Included in other non-interest income during 2002 was
$800,000 of non-taxable life insurance proceeds.
During 2003, the Corporation originated approximately $123,874,000 in
residential real estate loans, securitizing $26,079,000 of loan originations.
The origination volume was a direct result of the low interest rate environment.
In conjunction with the low interest rate and the volume of loan originations,
the Corporation sold approximately $39,579,000 in residential real estate loans.
Non-interest expense amounted to $17,439,000 in 2003, an increase of $1,027,000
or 6.26%. The increase in operating expenses for 2003 is due to a combination of
the following: salaries and benefits increased $657,000, occupancy expense
increased $93,000 and all other non-interest expense accounts increased
$277,000. The increase is a direct result of the overall growth of the
Corporation, general additions to staff, and additions to staff and general
operating costs related to the opening of the Corporation's newest office in
Webster, Massachusetts. The Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"), effective January 1, 2002 and SFAS No. 147, "Acquisitions of
Certain Financial Institutions" ("SFAS No. 147"), effective September 30, 2002.
The adoption of SFAS No. 142 and SFAS No. 147 eliminated intangible amortization
of goodwill in the amount of $684,000 for 2002. In accordance with these
statements, the Corporation ceased amortization of goodwill and has performed a
transitional goodwill impairment test. Overall non-interest expense decreased
during 2002 by $429,000 versus 2001. During 2002, salaries and benefits
increased $703,000, occupancy expense increased $66,000 and all other
non-interest expense accounts declined $514,000 as a result of efficiencies
through the merger of the Connecticut and Massachusetts banking divisions.
At December 31, 2003, the Corporation's total assets were $724,060,000, an
increase of $41,197,000 or 6% compared to year-end 2002.
Non-performing assets amounted to $3,308,000 or .46% of total assets at December
31, 2003, compared with $1,558,000 or .23% at the end of 2002.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
imposes significant regulatory restrictions and requirements on banking
institutions insured by the FDIC and their holding companies. FDICIA established
capital categories into which financial institutions are placed based on capital
level. Each capital category establishes different degrees of regulatory
restrictions that can apply to a financial institution. As of December 31, 2003,
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 depositing 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.
BAR CHART: TOTAL ASSETS (DOLLARS IN THOUSANDS)
================================================================================
2001: $629,000 2002: $683,000 2003: $724,000
COMPONENTS OF CAPITAL
As of December 31, 2003, stockholders' equity increased to $45.3 million, a 6.2%
increase compared to December 31, 2002. Stockholders' equity increased as a
result of the Corporation's net income of $6 million and a decline in the
unrealized gain on securities available for sale of $1.7 million, net of taxes,
less $2.1 million paid in dividends to shareholders and the repurchase of
$904,000 of the Corporation's stock. In addition, the Corporation reissued
97,155 shares of Treasury stock totaling $1,130,000, 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:
2003 2002 2001
---- ---- ----
Tier 1 leverage capital (to average assets) 7.65% 6.60% 6.96%
Tier 1 risk-based capital (minimum required 4%) 11.71 10.56 10.79
Total risk-based capital (minimum required 8%) 13.24 12.63 13.03
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. Its 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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
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 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.
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, 2003 and 2002:
Percentage Change in
Change in Interest Rates Net Interest Income
(In Basis Points) 2003 2002
================================================================================
+200 (1.00)% 4.00%
Level 0 0
-200 (9.00) (6.00)
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,
2003, the interest rate sensitivity gap (i.e. interest rate sensitive assets
less interest rate sensitive liabilities), the cumulative interest rate
sensitivity gap, the interest rate sensitivity gap ratio and the cumulative
interest rate sensitivity gap ratio. The table also sets forth the time periods
in which earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. However, the table does not
necessarily indicate the impact of general interest rate movements on the net
interest margin since the repricing of various categories of assets and
liabilities is subject to competitive pressures and the needs of the Bank's
customers. In addition, various assets and liabilities indicated as repricing
within the same period may, in fact, reprice at different times within such
period and at different rates.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
Three Over Three Over One Over
Months Months to Year to Five
(Dollars in Thousands) or Less a Year Five Years Years Total
==========================================================================================================================
EARNING ASSETS
Investments $ 16,123 $ 1 $ 21,304 $ 204,634 $ 242,062
Interest-bearing cash 40 40
Loans 86,188 53,085 154,930 145,708 439,911
Federal funds sold 39 39
- --------------------------------------------------------------------------------------------------------------------------
102,390 53,086 176,234 350,342 682,052
INTEREST-BEARING LIABILITIES
Savings deposits 9,708 87,374 97,082
NOW accounts 3,301 29,710 33,011
Money market accounts 37,871 37,871
Other time deposits 64,607 109,950 117,786 133 292,476
Borrowed funds and preferred stock 46,946 40,292 43,965 8,000 139,203
- --------------------------------------------------------------------------------------------------------------------------
$ 149,424 $ 163,251 $ 278,835 $ 8,133 $ 599,643
==========================================================================================================================
Interest Rate
Sensitivity Gap $ (47,034) $ (110,165) $ (102,601) $ 342,209 $ 82,409
Cumulative Interest Rate
Sensitivity Gap (47,034) (157,199) (259,800) 82,409
Interest Rate
Sensitivity Gap Ratio (6.90)% (16.15)% (15.04)% 50.17%
Cumulative Interest Rate
Sensitivity Gap Ratio (6.90) (23.05) (38.09) 12.08
The presentation of a run-off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $9,708,000 and
$3,301,000, 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 2003, 2002 and 2001. The total dollar amount of interest income from earning
assets and the resultant yields are calculated on a taxable equivalent basis.
The interest paid on interest-bearing liabilities, expressed both in dollars and
rates, is shown in the table.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
2003 2002 2001
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 $ 107 $ 63 $ 1 1.59% $ 450 $ 27 6.00%
Federal agencies 132,227 $ 6,855 5.18% 131,908 7,989 6.06 105,260 6,926 6.58
Tax exempt federal (a) 1,514 77 5.09 626 44 7.03 614 42 7.00
Other securities 7,979 235 2.95 7,979 329 4.12 6,988 408 5.84
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 141,827 7,167 5.05 140,576 8,363 5.95 113,312 7,403 6.53
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing cash and
temporary investments 117 1 .85 622 28 4.50 351 15 4.27
- -----------------------------------------------------------------------------------------------------------------------------------
Loans: (b)
Commercial 62,300 3,406 5.47 56,810 3,539 6.23 56,355 4,278 7.59
Leases 7,133 538 7.54 6,161 522 8.47 2,334 246 10.54
Tax exempt federal (a) 9,364 554 5.92 6,658 561 8.43 4,534 423 9.33
Real estate 315,256 20,552 6.52 332,215 23,531 7.08 324,139 24,513 7.56
Home equities 26,471 1,289 4.87 22,988 1,297 5.64 16,629 1,190 7.16
Consumer 39,241 2,293 5.84 38,656 2,646 6.84 36,463 3,020 8.28
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 459,765 28,632 6.23 463,488 32,096 6.92 440,454 33,670 7.64
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 18,312 168 .92 20,992 295 1.41 5,013 158 3.15
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 620,021 $ 35,968 5.80% 625,678 $ 40,782 6.52% 559,130 $ 41,246 7.38%
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (5,033) (4,603) (4,039)
Cash and due from banks 13,823 15,787 13,435
Other assets 29,191 29,258 27,066
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 658,002 $666,120 $ 595,592
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings $ 129,559 $ 735 .57% $ 129,604 $ 1,561 1.20% $ 133,742 $ 2,665 1.99%
Money market 38,174 453 1.19 34,403 736 2.14 18,258 387 2.12
Negotiated rate certificates 54,446 1,785 3.28 59,104 2,014 3.41 48,817 2,325 4.76
Other time deposits 240,355 7,794 3.24 242,242 9,866 4.07 221,311 11,731 5.30
- -----------------------------------------------------------------------------------------------------------------------------------
Total time deposits 462,534 10,767 2.33 465,353 14,177 3.05 422,128 17,108 4.05
Borrowed funds/preferred stock 74,169 3,318 4.47 83,068 3,878 4.67 68,032 3,583 5.27
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 536,703 $ 14,085 2.62% 548,421 $ 18,055 3.29% 490,160 $ 20,691 4.22%
Demand deposits 74,617 71,956 64,566
Other liabilities 3,410 5,363 3,946
Stockholders' equity 43,272 40,380 36,920
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 658,002 $666,120 $ 595,592
===================================================================================================================================
Net interest income $ 21,883 $ 22,727 $ 20,555
Yield spread 3.18% 3.23% 3.16%
Net yield on earning assets/net interest margin 3.53 3.63 3.68
Deduct tax equivalent adjustment 116 206 158
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 21,767 $ 22,521 $ 20,397
===================================================================================================================================
(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 2003, the yield spread decreased to 3.18% versus 3.23% in 2002. The
Corporation's net interest margin decreased during 2003 to 3.53% from 3.63% in
2002, a decrease of 10 basis points. The section titled Rate/Volume Analysis
further describes the change in yields. 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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
RATE/VOLUME ANALYSIS OF INTEREST MARGIN ON EARNING ASSETS
The following table sets forth, for each major category of interest-earning
assets and interest-bearing liabilities, the dollar amounts of interest income
(calculated on a taxable equivalent basis at 34%), interest expense and net
interest income and changes therein for 2003 as compared with 2002 and 2002 as
compared with 2001.
2003 Compared with 2002 2002 Compared with 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Increase Due to* Increase Due to*
(Dollars in Thousands) 2003 2002 (Decrease) Volume Rate 2002 2001 (Decrease) Volume Rate
===================================================================================================================================
Interest earned:
Securities:
U.S. Treasury $ 1 $ (1) $ (1) $ 1 $ 27 $ (26) $ (14) $ (12)
Federal agencies $ 6,855 7,989 (1,134) 21 $ (1,155) 7,989 6,926 1,063 1,645 (582)
Tax exempt federal 77 44 33 47 (14) 44 42 2 1 1
Other securities 235 329 (94) (94) 329 408 (79) 52 (131)
Interest-bearing cash 1 28 (27) (14) (13) 28 15 13 12 1
Loans:
Commercial 3,406 3,539 (133) 319 (452) 3,539 4,278 (739) 39 (778)
Leases 538 522 16 77 (61) 522 246 276 333 (57)
Tax exempt federal 554 561 (7) 189 (196) 561 423 138 182 (44)
Real estate 20,552 23,531 (2,979) (1,169) (1,810) 23,531 24,513 (982) 602 (1,584)
Home equity 1,289 1,297 (8) 182 (190) 1,297 1,190 107 394 (287)
Consumer 2,293 2,646 (353) 41 (394) 2,646 3,020 (374) 191 (565)
Federal funds sold 168 295 (127) (34) (93) 295 158 137 246 (109)
- -----------------------------------------------------------------------------------------------------------------------------------
35,968 40,782 (4,814) (342) (4,472) 40,782 41,246 (464) 3,683 (4,147)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings 735 1,561 (826) (1) (825) 1,561 2,665 (1,104) (80) (1,024)
Money market 453 736 (283) 73 (356) 736 387 349 345 4
Negotiated rate
certificates 1,785 2,014 (229) (155) (74) 2,014 2,325 (311) 430 (741)
Other time deposits 7,794 9,866 (2,072) (76) (1,996) 9,866 11,731 (1,865) 1,038 (2,903)
Borrowed funds 3,318 3,878 (560) (401) (159) 3,878 3,583 295 732 (437)
- -----------------------------------------------------------------------------------------------------------------------------------
14,085 18,055 (3,970) (560) (3,410) 18,055 20,691 (2,636) 2,465 (5,101)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 21,883 $ 22,727 $ (844) $ 218 $ (1,062) $ 22,727 $ 20,555 $ 2,172 $ 1,218 $ 954
===================================================================================================================================
* 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 2003 decreased to $21,883,000, down 3.71% from
$22,727,000 in 2002. A .90% decrease in average earning assets and a 72 basis
point decrease in average rate of return resulted in a decrease in volume of
$342,000 and a decrease in rate of $4,472,000. A decrease of 2.14% in average
interest-bearing liabilities and a 67 basis point decrease in average rate of
interest paid contributed to a decrease in volume of $560,000 and a decrease in
rate of $3,410,000.
Net interest income for 2002 increased to $22,727,000, up 10.57% from
$20,555,000 in 2001. An 11.90% increase in average earning assets and an 86
basis point decrease in average rate of return resulted in an increase in volume
of $3,683,000 and a decrease in rate of $4,147,000. 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.
13
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, 2003, the Corporation maintained cash balances, short-term
investments and investments available for sale totaling $256 million,
representing 35% of total year-end assets, versus $180 million or 26% of total
assets at December 31, 2002.
The following tables summarize the Corporation's contractual obligations, as
well as commitments to fund loans:
Due in Over
(Dollars in Thousands) Due in 1 Year Due in 1-3 Years Due in 3-5 Years 5 Years Total
===================================================================================================================================
Contractual Obligations
Total borrowings $54,551 $ 28,987 $ 30,666 $ 8,000 $ 122,204
Mandatorily redeemable
preferred stock (Note 7) 17,000 17,000
Annual rental commitments
under non-cancellable
operating leases (Note 12) 282 435 237 18 972
- -----------------------------------------------------------------------------------------------------------------------------------
$54,833 $ 29,422 $ 30,903 $ 25,018 $ 140,176
===================================================================================================================================
Expires in Expires in Expires in Expires in
(Dollars in Thousands) 1 Year 1-3 Years 3-5 Years Over 5 Years Total
===================================================================================================================================
Commitments
Commitments to extend credit $ 12,299 $ 12,299
Undisbursed portion of loans in
process and unused portions
of lines of credit 35,490 $2,697 $ 973 $ 22,123 $ 61,283
- -----------------------------------------------------------------------------------------------------------------------------------
$ 47,789 $2,697 $ 973 $ 22,123 $ 73,582
===================================================================================================================================
At December 31, 2003, the Corporation had certificates of deposit maturing
within the next 12 months amounting to $171,000,000. Based on historical
experience, the Corporation anticipates that a significant portion of the
maturing certificates of deposit will be renewed with the Corporation.
In addition to cash flow from loan and securities payments and prepayments, as
well as from sales of available-for-sale securities and mortgage loans, the
Corporation has significant borrowing capacity available to fund liquidity
needs. During 2003, the Corporation increased its utilization of borrowings as a
cost efficient addition to deposits as a source of funds. The average balance of
borrowings for 2003 and 2002 were $60,800,000 and $63,800,000 respectively. The
Bank's borrowings to date have consisted primarily of advances from the Federal
Home Loan Bank of Boston, of which the Bank is a member. Under terms of the
Collateral Agreement with the Federal Home Loan Bank, the Bank pledges
residential mortgage loans and mortgage-backed securities, as well as the Bank's
stock in the Federal Home Loan Bank, as collateral for such transactions. The
Mandatorily Redeemable Preferred Stock is callable in whole or in part on or
after September 30, 2004.
The Corporation has not used any off-balance sheet financing arrangements for
liquidity purposes. Its primary financial instruments with off-balance sheet
risk are limited to loan servicing for others, obligations to fund loans to
customers pursuant to existing commitments and commitments to sell mortgage
loans.
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.
14
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.
2003 2002 2001
===========================================================================================================================
U.S. Government obligations Federal agency obligations
Mortgage-backed securities $ 250 $ 436 $ 757
- ---------------------------------------------------------------------------------------------------------------------------
Amortized cost $ 250 $ 436 $ 757
===========================================================================================================================
The following table shows the estimated fair value (in thousands) of the
Corporation's securities available for sale at December 31.
2003 2002 2001
===========================================================================================================================
U.S. Government obligations $ 7,611 $ 26 $ 66
Federal agency obligations 183,152 49,531 72,659
Mortgage-backed securities 40,901 73,938 60,359
Municipal bonds 1,638 984 633
Equity securities 8,510 7,817 7,968
- ---------------------------------------------------------------------------------------------------------------------------
Estimated fair value 241,812 132,296 141,685
Gross unrealized (gain) loss on
securities available for sale (1,050) (3,762) (2,075)
- ---------------------------------------------------------------------------------------------------------------------------
Amortized cost $240,762 $ 128,534 $139,610
===========================================================================================================================
The following table shows weighted average yields and maturity distribution (in
thousands) of debt securities at December 31, 2003.
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 .72% $7,611 .72% $ 7,611
Federal agency obligations 4.25% $ 55,068 5.03% $127,315 4.79 182,383
Mortgage-backed securities 5.23 4,753 5.04% $35,702 5.06 40,455
Municipal bonds 4.59 613 3.92 946 4.18 1,559
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt
Securities .72% $7,611 4.33% $ 60,434 5.03% $127,315 5.01% $36,648 4.70% $ 232,008
====================================================================================================================================
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.
15
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.
2003 2002 2001 2000 1999
============================================================================================================================
Commercial $ 64,974 $ 61,115 $ 53,756 $ 59,998 $ 56,136
Real Estate:
Construction 7,045 8,700 5,154 5,160 5,952
Residential (1-4 family) 188,100 242,297 238,809 232,611 251,518
Home equity 28,570 25,022 20,982 15,448 12,314
Commercial properties 103,508 94,637 83,443 84,833 85,385
- ----------------------------------------------------------------------------------------------------------------------------
Total Real Estate 327,223 370,656 348,388 338,052 355,169
- ----------------------------------------------------------------------------------------------------------------------------
Consumer 40,847 39,730 37,292 34,578 31,556
- ----------------------------------------------------------------------------------------------------------------------------
Leases 7,024 7,743 4,841 654 140
- ----------------------------------------------------------------------------------------------------------------------------
Gross Loans 440,068 479,244 444,277 433,282 443,001
Deferred loan origination
fees - net of costs (157) (412) (375) (381) (526)
- ----------------------------------------------------------------------------------------------------------------------------
Total Loans 439,911 478,832 443,902 432,901 442,475
Allowance for loan losses (4,428) (5,111) (4,179) (3,670) (3,908)
- ----------------------------------------------------------------------------------------------------------------------------
Net Loans $ 435,483 $ 473,721 $ 439,723 $ 429,231 $ 438,567
============================================================================================================================
PIE CHART: LOAN MIX (DOLLARS IN THOUSANDS)
================================================================================
Residential real estate $ 188,100
Home equity 28,570
Consumer 40,847
Commercial and industrial 64,974
Leases 7,024
Commercial mortgages 110,553
The Corporation's loan portfolio is not concentrated within a single industry or
a group of related industries; however, underlying collateral values are
dependent upon market fluctuations in the western and central Massachusetts and
northeastern Connecticut areas. The aggregate amount of loans to executive
officers, directors and organizations with which they are associated amounted to
$6,996,000 or 15.5% of stockholders' equity as of December 31, 2003, compared to
$7,991,000 or 18.8% as of December 31, 2002.
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, 2003:
16
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
12 months 1 - 5 After
(Dollars in Thousands) or Less Years 5 Years Total
============================================================================================================================
Commercial $ 45,616 $ 16,674 $ 2,684 $ 64,974
Real estate:
Construction 7,045 7,045
Commercial 29,012 60,294 14,202 103,508
- ----------------------------------------------------------------------------------------------------------------------------
Totals $ 81,673 $ 76,968 $ 16,886 $ 175,527
============================================================================================================================
Of the commercial loans that mature beyond one year, approximately $24,184,000
have fixed rates and the remaining $69,670,000 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 $12,299,000 and $60,088,000 respectively at December 31,
2003 and $13,677,000 and $60,600,000 respectively in 2002. See further
discussion in Note 13 to the Consolidated Financial Statements.
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-off's 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, 2003 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) 2003 2002 2001 2000 1999
==========================================================================================================================
Balance at beginning of year $ 5,111 $ 4,179 $ 3,670 $ 3,908 $ 2,665
Provision charged to (recovery of) expense (354) 1,333 944 472 77
Acquisition 1,669
- --------------------------------------------------------------------------------------------------------------------------
4,757 5,512 4,614 4,380 4,411
- --------------------------------------------------------------------------------------------------------------------------
Charge-off's:
Loans secured by real estate 11 134 52 163 78
Commercial and industrial loans 313 169 358 538 455
Consumer loans 124 186 117 88 90
- --------------------------------------------------------------------------------------------------------------------------
448 489 527 789 623
- --------------------------------------------------------------------------------------------------------------------------
Recoveries:
Loans secured by real estate 102 12 60 32 79
Construction/land development 14
Commercial and industrial loans 13 39 19 27 15
Consumer loans 4 37 13 20 12
- --------------------------------------------------------------------------------------------------------------------------
119 88 92 79 120
- --------------------------------------------------------------------------------------------------------------------------
Net charge-off's 329 401 435 710 503
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 4,428 $ 5,111 $ 4,179 $ 3,670 $ 3,908
==========================================================================================================================
Average loans outstanding $ 459,765 $ 463,488 $ 440,454 $ 445,846 $ 349,614
==========================================================================================================================
Net charge-off's as a percentage
of average loans 0.07% 0.09% 0.10% 0.16% 0.14%
Net charge-off's as a percentage
of the allowance at January 1 6.44 9.60 11.85 18.17 18.87
Allowance as a percentage of
total loans at December 31 1.01 1.07 0.94 0.85 0.88
Allowance as a percentage of
non-performing loans at December 31 133.86 328.05 228.36 167.12 160.23
17
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) 2003 2002 2001 2000 1999
==================================================================================================================================
% of % of % of % of % of
Total Total Total Total Total
Loan Category Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate $2,160 72.80% $2,965 75.53% $2,216 77.24% $2,212 76.83% $2,986 78.84%
Construction 38 1.60 49 1.82 15 1.16 17 1.19 64 1.34
Commercial 1,806 14.79 1,674 12.75 1,726 12.11 1,066 13.85 579 12.67
Leases 105 1.60 116 1.62 73 1.09 98 .15 2 .03
Consumer 319 9.21 307 8.28 149 8.40 277 7.98 277 7.12
- ----------------------------------------------------------------------------------------------------------------------------------
$4,428 100% $5,111 100% $4,179 100% $3,670 100% $3,908 100%
==================================================================================================================================
ALLOWANCE FOR LOAN LOSSES
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is an exposure method based on the Corporation's loan loss
history, among other factors. Quarterly, based on an internal review of the loan
portfolio, the Corporation identifies required reserve allocations targeted to
recognized problem loans that, in the opinion of management, have potential loss
exposure or uncertainties relative to the depth of the collateral on these same
loans. In addition, the Corporation maintains a formula-based reserve against
the remainder of the loan portfolio, based on the overall mix of the loan
portfolio and the loss history of each loan category. The formula-based reserve
methodology is based on a range of estimated loss percentages based on loan
type. The amount of the recorded reserve above the minimum of the formula range
is based on management's evaluation of relevant qualitative factors (e.g. local
area economic statistics) and the percentage of loan loss reserves to aggregate
loans.
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 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 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 2003, the Bank recorded a recovery to the allowance of $354,000, while
making additions to the allowances of $1,333,000 and $944,000 in 2002 and 2001
respectively. During 2003, 2002 and 2001, recoveries totaled $119,000, $88,000
and $92,000 respectively, and charge-off's totaled $449,000, $489,000 and
$527,000 respectively.
18
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) 2003 2002 2001 2000 1999
===============================================================================================================================
Loans on a non-accrual basis $ 3,111 $ 1,372 $ 1,040 $ 1,778 $ 2,001
===============================================================================================================================
Non-accrual loans as a percentage
of total net loans outstanding 0.71% 0.29% 0.24% 0.41% 0.46%
Non-accrual loans as a percentage
of total assets 0.43 0.20 0.17 0.31 0.35
Loans contractually past due 90 days
or more and still accruing $ 197 $ 186 $ 790 $ 418 $ 438
The gross amount of interest that would have been accrued at the original
contract rate on loans on a non-accrual basis was $106,000, $159,000, $148,000,
$159,000 and $77,000 for 2003, 2002, 2001, 2000 and 1999, 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 2003 and 2002 on
impaired loans was not significant. At December 31, 2003 and 2002, the recorded
investment in impaired loans was $2,052,000 and $411,000 respectively, for which
no additional specific allowance for loan losses was recorded. For the twelve
months ended December 31, 2003, the average recorded investment in impaired
loans was $767,000 compared to $632,000 for 2002 and $629,000 for 2001.
19
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) 2003 2002 2001 2000 1999
===============================================================================================================================
Other real estate owned - net $ 0 $ 0 $ 204 $ 541 $ 442
Other real estate owned as a
percentage of total assets 0% 0% .03% .09% .08%
DEPOSITS
The following table sets forth the average amounts of, and average rates paid
on, various classifications of deposits:
2003 2002 2001
(Dollars in Thousands) Amount Rate Amount Rate Amount Rate
==============================================================================================================================
Savings $129,559 .57% $129,604 1.20% $133,742 1.99%
Money market 38,174 1.19 34,403 2.14 18,258 2.12
Certificates of deposit 54,446 3.28 59,104 3.41 48,817 4.76
Other time deposits 240,355 3.24 242,242 4.07 221,311 5.30
- ------------------------------------------------------------------------------------------------------------------------------
462,534 2.33% 465,353 3.05% 422,128 4.05%
Demand deposits 74,617 71,956 64,566
- ------------------------------------------------------------------------------------------------------------------------------
$537,151 $537,309 $486,694
==============================================================================================================================
Certificates of deposit of $100,000 and over at December 31, 2003 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 $14,021 $9,615 $9,578 $23,500 $56,714
==============================================================================================================================
================================================================================
PIE CHART: DEPOSIT MIX (DOLLARS IN THOUSANDS)
Savings certificates $235,761
Certificates over $100,000 56,714
Demand deposits 76,015
Savings deposits 97,084
NOW accounts 33,009
Money Market accounts 37,871
20
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 was as follows:
2003 2002 2001
=============================================================================================================
Return on average total assets .92% .90% .68%
Return on average stockholders' equity 13.99 14.88 11.03
Average stockholders' equity to average total assets 6.58 6.06 6.20
Dividend payout ratio 34.85 30.77 41.59
BORROWINGS
The following table summarizes short-term borrowings generally maturing daily.
Average interest rates during each year were computed by dividing total interest
expense by the average amount borrowed.
(Dollars in Thousands) 2003 2002 2001
=============================================================================================================
Balance at year-end $ 46,947 $ 15,302 $ 25,415
Average amount outstanding 17,984 21,279 28,582
Maximum amount outstanding at any month-end 46,947 49,009 51,149
Average interest rate for the year 2.95% 1.43% 2.88%
Average interest rate on year-end balance 0.86 0.76 1.36
COMPARISON OF OPERATING RESULTS
In the following sections of Management's Discussion and Analysis of the
Statements of Income, the comparative results of 2003, 2002 and 2001 will be
covered in greater detail. As of December 31, 2003, 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,
2003. The significant changes are discussed in the analysis that follow the
summary.
Percentage of
Increase (decrease)
2003 2002
Over Over
(Dollars in Thousands) 2003 2002 2001 2002 2001
======================================================================================================================
Net interest income $21,767 $22,521 $20,397 (3.35)% 10.41%
Provision for (recovery of) loan losses (354) 1,333 944 (126.56) 41.21
Non-interest income 4,536 4,090 3,489 10.90 17.23
Non-interest expense 17,439 16,412 16,841 6.26 (2.55)
Income taxes 3,164 2,857 2,028 10.75 40.88
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 6,054 $ 6,009 $ 4,073 0.75% 47.53%
======================================================================================================================
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 2003 amounted to $35,852,000 as compared to
$40,576,000 for 2002 and $41,088,000 for 2002. For 2003, this represents a
decrease of $4,724,000 or 11.6% versus 2002, while interest income decreased by
$512,000 or 1.25% in 2002 over 2001. The decrease in 2003 is the result of a
decrease in average earning assets of $5,657,000 or .90%, and a decrease of 72
basis points in average earning interest rate. The decrease in 2002 from 2001 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.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
INTEREST EXPENSE
Interest expense for 2003 on deposits and borrowings amounted to $14,085,000 as
compared to $18,055,000 in 2002 and $20,691,000 in 2001. Interest expense
decreased by $3,970,000 or 21.99% during 2003 compared to 2002; during 2002,
interest expense decreased by $2,636,000 or 12.74% versus 2001. The 2003
decrease is the result of a decrease in average interest-bearing liabilities of
$11,718,000 and a 67 basis point decrease in the average rate of interest paid
compared to 2002. The decrease in interest expense during 2002 versus 2001 is
the result of an increase in average interest-bearing liabilities of
$58,261,000, or 11.89% combined with a 93 basis point decrease in the average
rate of interest paid compared to 2001.
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 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) 2003 2002 2001
==========================================================================================================
Total interest income $35,852 $40,576 $41,088
Total interest expense 14,085 18,055 20,691
- ----------------------------------------------------------------------------------------------------------
Net interest income $21,767 $22,521 $20,397
==========================================================================================================
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 that result in net interest income.
PROVISION FOR (RECOVERY OF) LOAN LOSSES
For 2003, the Corporation recorded the recovery of a provision of $354,000
compared with a provision of $1,333,000 in 2002, down $1,687,000 or 126.6%. The
recovery of the provision for loan losses during 2003 is attributable to the
overall mix, asset quality and a decline in the size of the overall loan
portfolio. During 2002, the provision increased by $389,000 versus 2001. The
increase in the provision for loan losses during 2002 is attributable to an
increase in the size of the overall loan portfolio. Based on this and the
weakened economy, management determined that an increase in the provision was
warranted for 2002. 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 $4,536,000 in 2003, an increase of
$446,000 from the prior year and an increase of $1,047,000 versus 2001.
Non-interest income for 2003 reflects a decline in Trust Department earnings of
$11,000, a decrease in service charges on deposit accounts and loan servicing
income of $191,000, an increase from gain on sale of investments of $1,356,000,
a decrease from gain on sale of other real estate owned of $45,000, an increase
from gain on sale of mortgages of $215,000 and a decrease in other non-interest
income of $878,000. 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 of non-taxable life insurance proceeds and an
increase of $193,000 in cash surrender value of bank-owned life insurance.
22
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) 2003 2002 2001
==========================================================================================================
Salaries and benefits $ 9,741 $ 9,084 $ 8,381
Occupancy 1,221 1,128 1,062
Other non-interest expense 6,464 6,174 6,630
Intangible amortization 684
Other real estate owned expense 13 26 84
- ----------------------------------------------------------------------------------------------------------
$17,439 $16,412 $16,841
==========================================================================================================
Non-interest expense amounted to $17,439,000 in 2003, an increase of $1,027,000
or 6.26%. The increase in operating expenses for 2003 is due to a combination of
the following: salaries and benefits increased by $657,000, occupancy expense
increased $93,000 and all other non-interest expense accounts increased
$277,000. The increase is a direct result of general additions to staff, the
overall growth of the Corporation, and additions to staff and general operating
costs related to the opening of the Corporation's newest office in Webster,
Massachusetts. 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 ceased amortization of goodwill and has performed a
transitional goodwill impairment test. Overall non-interest expense decreased
during 2002 by $429,000 versus 2001. During 2002, salaries and benefits
increased by $703,000, occupancy expense increased $66,000 and all other
non-interest expense accounts declined $514,000 as a result of efficiencies
through the merger of the Connecticut and Massachusetts banking subsidiaries.
INCOME TAXES
For the year ended December 31, 2003, Westbank Corporation recorded a tax
expense of $3,164,000 compared to 2002, when the Corporation recorded a tax
expense of $2,857,000 and a 2001 tax expense of $2,028,000. The increase in tax
expense for each year represents a higher level of income before taxes.
The Commonwealth of Massachusetts enacted legislation that clarified the real
estate investment trust ("REIT") dividend-received deduction (the "Deduction")
between a bank and its subsidiary operating as a REIT for years ending on or
after December 31, 1999. On February 4, 2003, the Corporation's subsidiary
Westbank (the "Bank") received a Notice of Assessment (the "Notice") from the
Commonwealth of Massachusetts' Department of Revenue ("DOR"), notifying the Bank
of the DOR's intent to disallow the Deduction for the Bank and its subsidiary,
Park West REIT.
As of December 31, 2002, the Corporation included a reserve on its financial
statements in the amount of $706,000, the estimated liability for tax years
2000, 2001 and 2002 if the Deduction was actually disallowed. On June 19, 2003,
however, as part of a collective settlement with the DOR involving other
Massachusetts banks, the Bank reached an agreement with the DOR pursuant to
which the Bank agreed to pay all sums due in settlement of all claims regarding
the Deduction, including interest and penalties. The settlement was reached on
June 23, 2003 in the amount of $500,175, including interest.
In light of the Commonwealth of Massachusetts' legislation repealing the
Deduction, the Corporation determined to dissolve Park West REIT and distribute
its assets to its shareholders, which process was completed as of February 9,
2004.
NET INCOME
The net income for 2003 of $6,054,000, or $1.38 per share basic and $1.32 per
share diluted, is based on a weighted average of 4,378,981 basis and 4,570,149
diluted shares outstanding, compared with a net income for 2002 of $6,009,000 or
$1.36 per share basic and $1.33 per share diluted based on a weighted average of
4,406,583 basic and 4,509,965 diluted. Net income in 2001 was $4,073,000 or $.91
per share basic and $.90 per share diluted and based on weighted average shares
of 4,465,054 basic and 4,513,020 diluted.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, the Corporation adopted Financial Accounting Standards Board
("FASB") Interpretation 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires a guarantor entity, at the inception of a guarantee
covered by the measurement provisions of the interpretation, to record a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Corporation has financial and performance letters of credit.
Financial letters of credit require the Corporation to make payment if the
customer's financial condition deteriorates, as defined in the agreements.
Performance letters of credit require the Corporation to make payments if the
customer fails to perform certain non-financial contractual obligations. The
Corporation previously did not record a liability when guaranteeing obligations,
unless it became probable that the Corporation would have to perform under the
guarantee. FIN 45 applies prospectively to guarantees the Corporation issues or
modifies subsequent to December 31, 2002. The Corporation defines the initial
fair value of the letters of credit as the fee received from the customer. The
fees collected as of December 31, 2003 were immaterial. The maximum potential
undiscounted amount of future payments of letters of credit under FIN 45 as of
December 31, 2003 are approximately $683,000, of which $193,000 expired on
January 15, 2004, $30,000 expired on February 12, 2004, $10,000 expired on
February 13, 2004 and $450,000 will expire on September 17, 2004. Amounts due
under these letters of credit would be reduced by any proceeds that the
Corporation would be able to obtain in liquidating the collateral for the loans,
which varies depending on the customer. The Corporation has not recorded any
contingent liabilities related to these letters of credit.
Prior to January 1, 2003, the Corporation accounted for stock-based employee
compensation under the intrinsic value method consistent with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations, as permitted by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). Effective January 1, 2003, the Corporation adopted the fair value
recognition provisions of SFAS No. 123 prospectively to all employee awards
granted, modified or settled after January 1, 2003. In accordance with this
Statement, the Corporation began expensing the fair value of the stock-based
employee compensation for all new employee awards granted.
On May 15, 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 requires the
reclassification of certain financial instruments from either equity or
mezzanine presentation to liabilities and requires an issuer of those financial
statements to recognize changes in fair value of the redemption amount, as
applicable, in earnings. On July 1, 2003, the Corporation adopted SFAS No. 150,
requiring the Corporation to change the classification of mandatorily redeemable
preferred stock in the statement of financial position from the mezzanine to
liabilities. The change did not have a material impact on the Corporation's
results of operations.
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, to certain
entities in which voting rights are not effective in identifying the investor
with the controlling financial interest. An entity is subject to consolidation
under FIN 46 if the investors either do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support, are unable to direct the entity's activities, or are not exposed to the
entity's losses or entitled to its residual returns ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both.
Management has determined that Westbank Capital Trust 1 qualifies as a variable
interest entity under FIN 46. Westbank Capital Trust 1 issued mandatorily
redeemable preferred stock to investors and loaned the proceeds to the
Corporation. Westbank Capital Trust 1 holds, as its sole asset, subordinated
debentures issued by the Corporation in 1999. Westbank Capital Trust 1 is
currently included in the Corporation's consolidated balance sheet and
statements of income. The Corporation has evaluated the impact of FIN 46 and
concluded it should continue to consolidate Westbank Capital Trust 1 as of
December 31, 2003, in part due to its ability to call the preferred stock prior
to the mandatory redemption date and thereby benefit from a decline in required
dividend yields.
Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation,
FIN 46(R), the provisions of which must be applied to certain variable interest
entities by March 31, 2004. The Corporation plans to adopt the provisions under
the revised interpretation in the first quarter of 2004. FIN 46(R) will require
the Corporation to deconsolidate Westbank Capital Trust 1 as of March 31, 2004.
FIN 46(R) precludes consideration of the call option embedded in the preferred
stock when determining if the Corporation has the right to a majority of
Westbank Capital Trust 1's expected residual returns. Accordingly, the
Corporation will deconsolidate Westbank Capital Trust 1 at the end of the first
quarter, which will result in describing the mandatorily redeemable preferred
stock of $17 million currently reported in other liabilities as a payable to
Westbank Capital Trust 1. There will be no change in total outstanding debt. The
banking regulatory agencies have not issued any guidance that would change the
regulatory capital treatment for the trust preferred securities issued by
Westbank Capital Trust 1 based on the adoption of FIN 46(R). However, as
additional interpretations from the banking regulators related to entities such
as Westbank Capital Trust 1 become available, management will reevaluate its
potential impact on its Tier I capital calculation under such interpretations.
24
CONSOLIDATED BALANCE SHEETS
WESTBANK CORPORATION AND SUBSIDIARIES
December 31,
(Dollars in Thousands, Except Share Amounts) 2003 2002
==============================================================================================================
ASSETS
Cash and due from banks:
Non-interest bearing $ 14,599 $ 18,967
Interest bearing 40 98
- --------------------------------------------------------------------------------------------------------------
14,639 19,065
Federal funds sold 39 28,185
- --------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 14,678 47,250
- --------------------------------------------------------------------------------------------------------------
Securities:
Investment securities available for sale, at fair value 241,812 132,296
Investment securities held to maturity, at amortized cost
(fair value of $262 in 2003 and $459 in 2002) 250 436
- --------------------------------------------------------------------------------------------------------------
Total securities 242,062 132,732
- --------------------------------------------------------------------------------------------------------------
Loans, net of allowance for loan losses
of $4,428 in 2003 and $5,111 in 2002 435,483 473,721
Property and equipment, net 6,749 6,586
Accrued interest receivable 3,180 3,037
Intangible asset 8,837 8,837
Bank-owned life insurance 8,703 8,333
Other assets 4,368 2,367
- --------------------------------------------------------------------------------------------------------------
Total assets $ 724,060 $ 682,863
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 76,015 $ 74,169
Interest-bearing 460,439 487,578
- --------------------------------------------------------------------------------------------------------------
Total Deposits 536,454 561,747
Borrowed funds 122,204 56,392
Interest payable on deposits 575 665
Other liabilities 2,552 4,447
Mandatorily redeemable preferred stock (Note 7) 17,000 17,000
- --------------------------------------------------------------------------------------------------------------
Total liabilities 678,785 640,251
- --------------------------------------------------------------------------------------------------------------
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 4,523,480
shares in 2003 and 4,523,485 in 2002 9,047 9,047
Additional paid-in capital 14,524 14,497
Retained earnings 22,724 18,780
Treasury stock at cost
(114,232 shares in 2003 and 155,705 shares in 2002) (1,692) (2,091)
Accumulated other comprehensive income 672 2,379
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 45,275 42,612
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 724,060 $ 682,863
==============================================================================================================
See notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF INCOME
WESTBANK CORPORATION AND SUBSIDIARIES
Years ended December 31,
(Dollars in Thousands, Except Per-Share Amounts) 2003 2002 2001
===================================================================================================================================
Interest and dividend income:
Interest and fees on loans $ 28,529 $ 31,905 $ 33,526
Interest and dividend income from securities 7,154 8,348 7,389
Interest from interest-bearing cash equivalents
and federal funds sold 169 323 173
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 35,852 40,576 41,088
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 10,767 14,177 17,108
Interest on borrowed funds 3,318 3,878 3,583
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 14,085 18,055 20,691
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 21,767 22,521 20,397
Provision for (recovery of) loan losses (354) 1,333 944
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for (recovery of) loan losses 22,121 21,188 19,453
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Trust 641 652 635
Service charges on deposits 1,137 1,186 1,238
Loan servicing 12 154 171
Gain (loss) on sale of securities available for sale 1,138 (218) 36
Gain on sale of other real estate owned 45 43
Gain on sale of loans 333 118 233
Gain on sale of equipment 27
Other 1,275 2,153 1,106
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 4,536 4,090 3,489
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and benefits 9,741 9,084 8,381
Depreciation and amortization 734 789 892
Data processing 1,771 1,625 1,803
Advertising 628 388 610
Supplies 312 353 505
Occupancy 1,221 1,128 1,062
Other real estate owned 13 26 84
Other 3,019 3,019 2,820
Intangible amortization (Note 1) 684
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 17,439 16,412 16,841
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 9,218 8,866 6,101
Income taxes 3,164 2,857 2,028
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 6,054 $ 6,009 $ 4,073
===================================================================================================================================
Earnings per share: (Note 1)
- Basic $ 1.38 $ 1.36 $ .91
- Diluted 1.32 1.33 .90
===================================================================================================================================
Weighted average shares outstanding: (Notes 1 and 11)
- Basic 4,378,981 4,406,583 4,465,054
- Diluted 4,570,149 4,509,965 4,513,020
===================================================================================================================================
See notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
WESTBANK CORPORATION AND SUBSIDIARIES
Accumulated
Common Stock Additional Other
Par paid-in Retained Treasury Comprehensive
(Dollars in Thousands, Except Per-Share Amounts) Shares value capital earnings Stock Income/(Loss) Total
===================================================================================================================================
Balance, January 1, 2001 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 ($.44 per share) (1,849) (1,849)
Shares reissued from Treasury Stock:
Stock option plan 54,055 (243) 547 304
Dividend reinvestment and
stock purchase plan 42,310 122 408 530
Changes in unrealized gain (loss)
on securities available for sale 1,133 1,133
Repurchase of common stock (202,658) (2,615) (2,615)
Income tax benefit for exercise of
non-qualified stock options 84 84
Five percent common stock dividend 207,690 415 2,752 (3,167)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 4,367,780 9,047 14,497 18,780 (2,091) 2,379 42,612
Net income 6,054 6,054
Cash dividends declared ($.48 per share) (2,110) (2,110)
Shares reissued from treasury stock:
Stock option plan 54,850 (278) 744 466
Dividend reinvestment and
stock purchase plan 42,305 105 559 664
Changes in unrealized gain (loss)
on securities available for sale (1,707) (1,707)
Income tax benefit for exercise of
non-qualified stock options 105 105
Stock option compensation (Note 10) 95 95
Repurchase of common stock (55,687) (904) (904)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2003 4,409,248 $9,047 $14,524 $22,724 $(1,692) $ 672 $45,275
===================================================================================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
(Dollars in Thousands) 2003 2002 2001
===================================================================================================================
Net Income $6,054 $6,009 $4,073
- -------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale,
net of income taxes of $(495) in 2003,
$509 in 2002 and $756 in 2001 (960) 989 1,467
Less: reclassification adjustment for (gains)/losses
included in net income, net of income taxes (benefit)
of $385 in 2003, $(74) in 2002 and $12 in 2001 (747) 144 (24)
- -------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) (1,707) 1,133 1,443
- -------------------------------------------------------------------------------------------------------------------
Comprehensive Income $4,347 $7,142 $5,516
===================================================================================================================
See notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Westbank Corporation and Subsidiaries
Years ended December 31,
(Dollars in Thousands) 2003 2002 2001
=================================================================================================================================
Operating activities:
Net income $ 6,054 $ 6,009 $ 4,073
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for (recovery of) loan losses (354) 1,333 944
Provision for other real estate owned 11
Depreciation and amortization 734 789 892
Accretion of investment discounts (94) (20)
Intangible amortization 684
Proceeds from loan sales 39,347
Realized (gain) loss on sale of securities (1,138) 218 (36)
Realized gain on sale of other real estate owned (45) (43)
Realized gain on sale of loans (333) (118) (233)
Realized gain on sale of property and equipment (27)
Deferred (prepaid) income taxes (1,719) (623) 923
Exercise of non-qualified stock options 200
Change in assets and liabilities
(Increase) Decrease in accrued interest receivable (143) 248 692
(Increase) Decrease in Bank-owned life insurance (370) 193
(Increase) Decrease in other assets (2,001) (320) (7,625)
Increase (Decrease) in accrued interest payable on deposits (90) 6 (68)
Increase (Decrease) in other liabilities (176) 338 1,928
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 39,917 8,019 2,104
=================================================================================================================================
Investing activities:
Securities:
Held to maturity:
Proceeds from maturities and principal payments 186 321 10,652
Available for sale:
Purchases (218,946) (62,503) (105,572)
Proceeds from sales 50,885 21,260 7,828
Proceeds from maturities and principal payments 83,141 75,833 64,755
Purchases of property and equipment (897) (859) (116)
Net decrease (increase) in loans (25,493) (59,662) (32,239)
Proceeds from sale of other real estate owned 312 497
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (111,124) (25,298) (54,195)
=================================================================================================================================
Financing activities:
Net increase (decrease) in deposits (25,293) 51,898 10,709
Net increase (decrease) in short-term borrowings 21,645 (10,113) 11,423
Net increase in long-term borrowings 44,167 8,839 25,251
Proceeds from exercise of stock options
and stock purchase plan 1,130 834 549
Treasury stock repurchases (904) (2,531) (215)
Dividends paid (2,110) (1,849) (1,694)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 38,635 47,078 46,023
=================================================================================================================================
Increase (Decrease) in cash and cash equivalents (32,572) 29,799 (6,068)
Cash and cash equivalents at beginning of year 47,250 17,451 23,519
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 14,678 $ 47,250 $ 17,451
=================================================================================================================================
Cash paid during the year:
Interest on deposits and other borrowings $ 13,995 $ 18,049 $ 20,759
Income taxes 5,882 4,170 360
Supplemental disclosure of cash flow information:
Securitization of loans into mortgage-backed securities 26,079 23,495 20,079
Transfers of loans to other real estate owned 74 233
Loans to facilitate the sale of other real estate owned 57
See notes to consolidated financial statements.
28
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 in the United States of America and general practices
within the banking industry. The following is a description of the more
significant policies.
NATURE OF BUSINESS
As of December 31, 2003, the Corporation, a bank holding company, provides
financial services through its wholly-owned subsidiary, Westbank, a commercial
bank and trust company with eighteen (18) offices located in Massachusetts and
Connecticut. 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 non-profit organizations. The Corporation's primary source of
revenue is derived from providing loans to customers, predominantly located in
western and central Massachusetts and northeastern Connecticut.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, Westbank, and its subsidiaries, Park West
Securities Corporation, Park West Real Estate Investment Trust, Inc., and PWB&T
Inc. All material intercompany balances and transactions have been eliminated in
consolidation. Certain amounts in the 2002 and 2001 financial statements have
been reclassified to conform to the 2003 presentation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and affect the reported amounts of income
and expenses for each year. Material estimates that are particularly susceptible
to significant change relate to the determination of the allowance for loan
losses and impairment of intangible assets. In addition, various regulatory
agencies, as an integral part of the examination process, periodically review
the Corporation's allowance for losses on loans and other real estate owned.
Such agencies may require the Corporation to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
29
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.
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 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
Interest income on loans is recorded on an accrual basis. Loan origination fees,
net of certain direct loan origination costs, are deferred and recognized as
income over the life of the related loan as an adjustment to the loan's yield.
Non-accrual loans are loans on which the accrual of interest is ceased when the
collection of principal or interest payments is determined to be doubtful by
management. It is the general policy of the Corporation to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days,
unless the loan principal and interest are determined by management to be fully
collectible and are in the process of collection. Any unpaid amounts previously
accrued on these loans are reversed from income. Interest received on a loan in
non-accrual status is applied to reduce principal or, if management determines
that the principal is collectible, applied to interest on a cash basis. A loan
is returned to accrual status after the borrower has brought the loan current
and has demonstrated compliance with the loan terms for a sufficient period, and
management's doubts concerning collectibility have been removed.
The Corporation measures impairment of loans in accordance with Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting 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 probably that either principal or interest
is not collectible in accordance with the terms of the loan agreement.
Measurement of impairment for commercial loans is generally based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. Commercial real estate loans are generally measured based on the fair
value of the underlying collateral. If the estimated fair value of the impaired
loan is less than the related recorded amount, a specific valuation allowance is
established or a write-down is charged against the allowance for loan losses.
Smaller balance homogenous loans, including residential real estate and consumer
loans, are excluded from the provisions of SFAS No. 114. Generally, income is
recorded only on a cash basis for impaired loans.
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is based on the SFAS No. 114 analysis, a formula-based reserve
and the Corporation's loan loss history, among other factors. For the SFAS No.
114 analysis, on a quarterly basis the Corporation performs an internal review
of the loan portfolio and identifies required reserve allocations targeted to
recognized problem loans that, in the opinion of management, have potential loss
exposure or uncertainties relative to the depth of the collateral on these same
loans. In addition, the Corporation maintains a formula-based reserve that is
computed from the overall mix of the remainder of the loan portfolio and the
loss history of each loan category. The formula-based reserve methodology is
based on a range of estimated loss percentages based on loan type. The amount of
the recorded reserve above the minimum of the formula range is based on
management's evaluation of relevant qualitative factors (e.g. local area
economic statistics) and the percentage of loan loss reserves to aggregate
loans.
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 reserve allocation also incorporates general business and
economic conditions, credit quality trends, loan concentrations, industry
conditions within portfolio segments and overall delinquency levels.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method.
Amortization of leasehold improvements is charged over the terms of the
respective leases, including option periods, or the estimated lives of the
improvements, whichever is shorter. Gains and losses are recognized upon
disposal of assets. The cost of maintenance and repairs is charged to income as
incurred, whereas significant repairs are capitalized.
OTHER REAL ESTATE OWNED
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 relative
estimated fair values. The cost allocated to servicing rights 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, 2003 and 2002, the mortgage servicing asset totaled
$849,000 and $571,000 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 occurred, derecognizes assets when control has been surrendered and
derecognizes liabilities when extinguished.
INCOME TAXES
The Corporation uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. A valuation allowance would be provided on deferred tax assets when it is
more likely than not that some portion of the assets will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
PENSION PLAN
The Corporation has a 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 that is accounted for in
accordance with SFAS No. 87, "Employers' Accounting for Pensions."
STOCK DIVIDEND
On January 2, 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 adjusted retroactively for the
three-year period (2003-2001) presented in accordance with SFAS No. 128,
"Earnings per Share." Shares outstanding for the periods presented also have
been restated to reflect the January 14, 2003 stock dividend distribution.
STOCK-BASED COMPENSATION
Prior to January 1, 2003, the Corporation accounted for stock-based compensation
under the intrinsic value method consistent with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related Interpretations, as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). Effective January 1, 2003, the
Corporation adopted the fair value recognition provisions of SFAS No. 123
prospectively for all employee awards granted, modified or settled after January
1, 2003, as permitted by SFAS No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure". In accordance with these Statements, the
Corporation began expensing the cost of the stock-based employee compensation
for all new employee awards granted.
The following table shows net income and earnings per share as if the fair value
method had been applied for all outstanding and unvested awards in each period.
(Dollars in Thousands, Except Per-Share Amounts) 2003 2002 2002
=====================================================================================================
Net Income:
Reported net income $ 6,054 $ 6,009 $ 4,073
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects 63
Deduct: Total stock-based employee compensation expense
determined under fair value based method for
all awards net of related taxes effects (1) 63 875 21
- -----------------------------------------------------------------------------------------------------
Pro forma net income $ 6,054 $ 5,134 $ 4,052
=====================================================================================================
Earnings per share:
Basic - as reported $ 1.38 $ 1.36 $ 0.91
=====================================================================================================
Basic - pro forma $ 1.38 $ 1.17 $ 0.91
=====================================================================================================
Diluted - as reported $ 1.32 $ 1.33 $ 0.90
=====================================================================================================
Diluted - pro forma $ 1.32 $ 1.14 $ 0.90
=====================================================================================================
(1) All previously awarded grants were fully amortized prior to January 2, 2003.
EARNINGS PER SHARE
Basic earnings per share is the result of dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the year. Diluted earnings per share gives effect to all potentially dilutive
common shares that were outstanding during the year. There were no antidilutive
common stock equivalents excluded from the weighted average number of common
shares outstanding in 2003, 2002 or 2001.
32
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 Corporation performed the required annual impairment tests as of December
31, 2003 and 2002, and determined that no impairment existed as of the valuation
date, as the fair value of the Corporation's net assets exceeded the carrying
value. If, for any future period, the Corporation determines that there has been
an impairment in the carrying value of goodwill, the Corporation will record a
charge to earnings, which could have a material effect on net income.
The following table shows net income and earnings per share for the three years
ended December 31, 2003, 2002 and 2001, 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, Except Per-Share Amounts) 2003 2002 2001
=====================================================================================================
Net income:
Reported net income $ 6,054 $ 6,009 $ 4,073
Goodwill amortization, net of tax 457
- -----------------------------------------------------------------------------------------------------
$ 6,054 $ 6,009 $ 4,530
=====================================================================================================
Basic earnings per share:
Reported earnings per share $ 1.38 $ 1.36 $ .91
Goodwill amortization, net of tax .10
- -----------------------------------------------------------------------------------------------------
Adjusted basis earnings per share $ 1.38 $ 1.36 $ 1.01
=====================================================================================================
Diluted earnings per share:
Reported earnings per share $ 1.32 $ 1.33 $ .90
Goodwill amortization, net of tax .10
- -----------------------------------------------------------------------------------------------------
Adjusted diluted earnings per share $ 1.32 $ 1.33 $ 1.00
=====================================================================================================
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 $172,881,000 and
$149,921,000 at December 31, 2003 and 2002, 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.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, the Corporation adopted Financial Accounting Standards Board
("FASB") Interpretation 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
45"). FIN 45 requires a guarantor entity, at the inception of a guarantee
covered by the measurement provisions of the interpretation, to record a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Corporation has financial and performance letters of credit.
Financial letters of credit require the Corporation to make payment if the
customer's financial condition deteriorates, as defined in the agreements.
Performance letters of credit require the Corporation to make payments if the
customer fails to perform certain non-financial contractual obligations. The
Corporation previously did not record a liability when guaranteeing obligations,
unless it became probable that the Corporation would have to perform under the
guarantee. FIN 45 applies prospectively to guarantees the Corporation issues or
modifies subsequent to December 31, 2002. The Corporation defines the initial
fair value of the letters of credit as the fee received from the customer. The
fees collected as of December 31, 2003 were immaterial. The maximum potential
undiscounted amount of future payments of letters of credit under FIN 45 as of
December 31, 2003 are approximately $683,000, of which $193,000 expired on
January 15, 2004, $30,000 expired on February 12, 2004, $10,000 expired on
February 13, 2004 and $450,000 will expire on September 17, 2004. Amounts due
under these letters of credit would be reduced by any proceeds that the
Corporation would be able to obtain in liquidating the collateral for the loans,
which varies depending on the customer. The Corporation has not recorded any
contingent liabilities related to these letters of credit.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Prior to January 1, 2003, the Corporation accounted for stock-based employee
compensation under the intrinsic value method consistent with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations, as permitted by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). Effective January 1, 2003, the Corporation adopted the fair value
recognition provisions of SFAS No. 123 prospectively to all employee awards
granted, modified or settled after January 1, 2003. In accordance with this
Statement, the Corporation began expensing the cost of the stock-based employee
compensation for all new employee awards granted.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires the reclassification of certain financial instruments from either
equity or mezzanine presentation to liabilities and requires an issuer of those
financial statements to recognize changes in the fair value of the redemption
amount, as applicable, in earnings. On July 1, 2003, the Corporation adopted
SFAS No. 150, requiring the Corporation to change the classification of
mandatorily redeemable preferred stock in the statement of financial position
from the mezzanine to liabilities. The change did not have a material impact on
the Corporation's results of operations.
In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin 51, Consolidated Financial Statements, to
certain entities in which voting rights are not effective in identifying the
investor with the controlling financial interest. An entity is subject to
consolidation under FIN 46 if the investors either do not have sufficient equity
at risk for the entity to finance its activities without additional subordinated
financial support, are unable to direct the entity's activities, or are not
exposed to the entity's losses or entitled to its residual returns ("variable
interest entities"). Variable interest entities within the scope of FIN 46 will
be required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both.
Management has determined that Westbank Capital Trust 1 qualifies as a variable
interest entity under FIN 46. Westbank Capital Trust 1 issued mandatorily
redeemable preferred stock to investors and loaned the proceeds to the
Corporation. Westbank Capital Trust 1 holds, as its sole asset, subordinated
debentures issued by the Corporation in 1999. Westbank Capital Trust 1 is
currently included in the Corporation's consolidated balance sheet and
statements of income. The Corporation has evaluated the impact of FIN 46 and
concluded it should continue to consolidate Westbank Capital Trust 1 as of
December 31, 2003, in part due to its ability to call the preferred stock prior
to the mandatory redemption date and thereby benefit from a decline in required
dividend yields.
Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation,
FIN 46(R), the provisions of which must be applied to certain variable interest
entities by March 31, 2004. The Corporation plans to adopt the provisions under
the revised interpretation in the first quarter of 2004. FIN 46(R) will require
the Corporation to deconsolidate Westbank Capital Trust 1 as of March 31, 2004.
FIN 46(R) precludes consideration of the call option embedded in the preferred
stock when determining if the Corporation has the right to a majority of
Westbank Capital Trust 1's expected residual returns. Accordingly, the
Corporation will deconsolidate Westbank Capital Trust 1 at the end of the first
quarter, which will result in eliminating the mandatorily redeemable preferred
stock of $17 million currently reported in other liabilities and recognizing a
$17 million payable to Westbank Capital Trust 1. There will be no change in
total outstanding debt. The banking regulatory agencies have not issued any
guidance that would change the regulatory capital treatment for the trust
preferred securities issued by Westbank Capital Trust 1 based on the adoption of
FIN 46(R). However, as additional interpretations from the banking regulators
related to entities such as Westbank Capital Trust 1 become available,
management will reevaluate the potential impact on Tier I capital calculation
under such interpretations.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
2 - SECURITIES
Investment securities held to maturity at December 31 are as follows:
2003
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain
================================================================================================================================
Mortgage-backed securities $250 $12 $262 $12
================================================================================================================================
2002
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain
================================================================================================================================
Mortgage-backed securities $436 $23 $459 $23
================================================================================================================================
During 2003, 2002 and 2001, there were no sales of investment securities
classified as held to maturity.
Investment securities available for sale at December 31 were as follows:
2003
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain
================================================================================================================================
U.S. government obligations $ 7,611 $ 7,611
Federal agency obligations 182,383 $ 896 $ 127 183,152 $ 769
Mortgage-backed securities 40,455 663 217 40,901 446
Municipal bonds 1,559 79 1,638 79
Equity securities 8,754 80 324 8,510 (244)
- --------------------------------------------------------------------------------------------------------------------------------
$ 240,762 $ 1,718 $ 668 $ 241,812 $ 1,050
================================================================================================================================
2002
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain
================================================================================================================================
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
================================================================================================================================
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
During 2003, 2002 and 2001, the Corporation recognized realized gains (losses)
on securities available for sale totaling $1,138,000, $(218,000) and $36,000,
respectively. The Corporation recorded gross gains and (losses) for 2003, 2002
and 2001 on securities available for sale totaling $1,233,000 and ($95,000),
$58,000 and ($276,000), and $42,000 and ($6,000) respectively.
At December 31, 2003, the Corporation held 5 equity securities with a book value
of $2,950,000 and an aggregate unrealized loss of $324,000. These securities
have been in an unrealized loss position for more than 12 months and are
adjustable rate securities, indexed to short-term interest rates. At December
31, 2003, management evaluated the impairment of these securities for other than
temporary impairment and determined that the impairment was not other than
temporary because the decline in fair value principally reflects changes in
short-term interest rates and the length and timing of the adjustment feature.
The contractual maturities of held-to-maturity and available-for-sale
securities, other than equity securities, as of December 31, 2003 are summarized
in the following tables. Actual maturities may differ from contractual
maturities because certain issuers have the right to call or prepay obligations.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
For the purposes of the following December 31, 2003 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.
Amortized Fair
(Dollars in Thousands) cost value
=============================================================================
Held to Maturity:
Within 1 year $ 1 $ 1
Over 1 year to 5 years 105 112
Over 5 years to 10 years
Over 10 years 144 149
- -----------------------------------------------------------------------------
Total debt obligations $ 250 $ 262
=============================================================================
Amortized Fair
(Dollars in Thousands) cost value
=============================================================================
Available for sale:
Within 1 year $ 7,611 $ 7,622
Over 1 year to 5 years 60,434 60,654
Over 5 years to 10 years 127,315 127,945
Over 10 years 36,648 37,090
- -----------------------------------------------------------------------------
Total debt obligations $ 232,008 $ 233,311
=============================================================================
At December 31, 2003, securities with a carrying amount and fair value of
$42,283,000 and $42,426,000, 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) 2003 2002
=============================================================================
Commercial $ 64,974 $ 61,115
Real estate construction 7,045 8,700
Real estate 320,178 361,956
Consumer 40,847 39,730
Leases 7,024 7,743
- -----------------------------------------------------------------------------
440,068 479,244
Allowance for loan losses (4,428) (5,111)
Deferred loan origination fees (157) (412)
- -----------------------------------------------------------------------------
$ 435,483 $ 473,721
=============================================================================
Changes in the allowance for loan losses are summarized as follows:
(Dollars in Thousands) 2003 2002 2001
=============================================================================
Balance, beginning of year $ 5,111 $ 4,179 $ 3,670
Provision for (recovery of) loan losses (354) 1,333 944
Loans charged off (448) (489) (527)
Recoveries 119 88 92
- -----------------------------------------------------------------------------
Balance, end of year $ 4,428 $ 5,111 $ 4,179
=============================================================================
The aggregate principal balance of non-accrual loans was $3,111,000 and
$1,372,000 at December 31, 2003 and 2002, respectively. Contractual interest
income that would have been accrued on such non-accrual loans was $106,000,
$159,000 and $148,000 for 2003, 2002 and 2001 respectively. No income was
recognized on non-accrual loans during this period.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
The Corporation did not sell any loans with recourse during 2003 or 2002. The
remaining recourse exposure on prior sales was $334,000 at December 31, 2003.
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 $320,178,000 in real estate loans at December 31, 2003, $216,670,000 is
collateralized by 1-4 family dwellings. The majority of the collateral for these
loans is located in the Corporation's market areas of western Massachusetts and
northeastern Connecticut. Commercial real estate and real estate construction
loans represented $110,553,000 in outstanding principal at December 31, 2003.
These loans encompass a wider region, extending throughout Massachusetts and
southern New England. Most are collateralized by commercial real estate.
Commercial loans both collateralized and uncollateralized of $64,974,000 at
December 31, 2003 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 factors. The following summarizes the
activity with respect to indebtedness, both direct and indirect, for directors,
policy-making officers and major stockholders during the years ended December
31:
(Dollars in Thousands) 2003 2002
=============================================================================
Balance at beginning of year $ 7,991 $ 3,744
New loans granted 2,473 6,603
Repayments of principal and loans sold (3,468) (2,356)
- -----------------------------------------------------------------------------
Balance at end of year $ 6,996 $ 7,991
=============================================================================
At December 31, 2003 and 2002, the recorded investment in impaired loans was
$2,052,000 and $411,000, respectively, of which $2,052,000 and $411,000,
respectively, were in non-accrual status. For the years ended December 31, 2003,
2002 and 2001, the average recorded investment in impaired loans was $767,000,
$632,000 and $629,000, 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 $2,052,000 and $254,000 at December 31, 2003 and 2002. The total
allowance for loan losses allocated to these impaired loans was $349,000 and
$127,000 at December 31, 2003 and 2002. Interest income recognized during 2003,
2002 and 2001 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 that are not included in the
consolidated balance sheets. The unpaid balances of these loans totaled
$130,852,000, $113,686,000 and $114,044,000 at December 31, 2003, 2002 and 2001
respectively.
The value of loans pledged as collateral on borrowings at December 31, 2003 and
2002 was $116,845,000 and $47,391,000 respectively.
4 - PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31 are summarized as
follows:
Estimated
(Dollars in Thousands) 2003 2002 Lives
==============================================================================
Property (including land of $1,743
in 2003 and $1,713 in 2002 $ 6,986 $ 6,835 15-40 years
Capital lease building 264 264 15 years
Furniture and equipment 4,358 3,733 3-10 years
Leasehold and building improvements 2,620 2,503 5-15 years
Motor vehicles 138 135 3 years
- ------------------------------------------------------------------------------
14,366 13,470
Accumulated depreciation 7,617 6,884
- ------------------------------------------------------------------------------
Property and equipment, net $ 6,749 $ 6,586
==============================================================================
38
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) 2003 Rate 2002 Rate
==============================================================================
Demand deposit $ 76,015 $ 74,169
Savings 97,084 0.50% 100,391 1.16%
NOW 33,009 0.13 33,665 0.23
Money market 37,871 1.14 40,775 1.27
Other time deposits 292,475 2.99 312,747 3.62
- ------------------------------------------------------------------------------
$ 536,454 $ 561,747
==============================================================================
As of December 31, 2003 and December 31, 2002, $51,943 and $56,711 in demand
deposit balances were reclassified as loans.
At December 31, 2003, the scheduled maturities of time deposits and IRA deposits
with a fixed maturity are as follows:
(Dollars in Thousands)
==============================================================================
Year ending December 31,
2004 $ 171,072
2005 91,277
2006 15,657
2007 7,427
2008 and after 7,042
- ------------------------------------------------------------------------------
$ 292,475
==============================================================================
Certificates of deposit with balances greater than or equal to $100,000 amount
to $56,714,000 and $60,726,000 as of December 31, 2003 and 2002 respectively.
Interest paid on these deposits totaled approximately $1,785,000 and $2,014,000
respectively.
39
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) 2003 2002
===============================================================================
Securities sold under agreements to repurchase $ 10,261 $ 10,801
Purchased federal funds 35,670 500
Treasury tax and loan notes 1,016 4,001
- -------------------------------------------------------------------------------
Total short-term borrowings $ 46,947 $ 15,302
===============================================================================
The above short-term borrowings generally mature daily. Interest expense on
short-term borrowings totals $84,000, $254,000 and $825,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
Long-term borrowings as of December 31 are as follows:
(Dollars in Thousands) 2003 2002
===============================================================================
Principal Principal
Maturity Payments Payments
Dates Due Rate Due Rate
===============================================================================
2003 $ 15,833 4.90%
2004 $ 7,604 3.95% 7,604 3.95
2005 3,869 4.07 3,869 4.07
2006 25,118 2.37 5,118 4.20
2007 666 3.85 666 3.85
2008 30,000 2.22 8,000 4.59
After 2008 8,000 4.59
- -------------------------------------------------------------------------------
$ 75,257 2.81% $ 41,090 4.48%
===============================================================================
The Bank's long-term debt includes $60,000,000 of Federal Home Loan Bank (FHLB)
Option advances. The maturities of the Bank's Option advances from the Federal
Home Loan Bank are March 2006, October 2006, December 2008, February 2011 and
March 2011. The amounts due, with respect to their final maturities, are
$2,000,000, $20,000,000, $20,000,000, $10,000,000, $6,000,000 and $2,000,000. If
interest rates were to rise, the Federal Home Loan Bank would have the option of
calling the advances in 2004, 2005 and 2006. During the years 2004, 2005 and
2006, the Bank has $30,000,000, $20,000,000 and $10,000,000 in Option advances.
Interest expense on long-term borrowings totaled $1,602,000, $1,941,000 and
$1,126,000 for the years ended December 31, 2003, 2002 and 2001, 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) 2003 2002 2001
=============================================================================
Balance at year-end $122,204 $ 56,392 $ 57,666
Average amount outstanding 60,803 66,067 51,032
Maximum amount outstanding at any month-end 122,204 88,972 85,091
Average interest rate for the year 2.95% 3.40% 3.82%
Average interest rate on year-end balance 2.04 3.42 3.26
The Corporation maintains a revolving line of credit with Fleet Bank of
Massachusetts for $6,000,000 that is renewed on an annual basis. There were no
amounts outstanding against this line as of December 31, 2003 or 2002. 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 2003 and 2002.
Advances from the FHLB are collateralized by the Company's holdings of FHLB
stock and residential real estate loans.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
7 - MANDATORILY REDEEMABLE PREFERRED STOCK
On September 30, 1999, the Corporation completed an offering of 1,700,000 shares
of 9.6% trust preferred stock, each with a liquidation amount of $10 through
Westbank Capital Trust 1. The Corporation has the right to call the trust
preferred stock in whole or in part at any time 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 currently qualifies as Tier 1 capital under the Federal Reserve Board and
risk-based capital guidelines. 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. Refer to Note
1 regarding classification of the Mandatorily Redeemable Preferred Stock at
December 31, 2003 and recent accounting guidance with respect to the
consolidation of Westbank Capital Trust 1.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
8 - INCOME TAXES
The income taxes were as follows:
(Dollars in Thousands) 2003 2002 2001
=============================================================================
Current tax:
Federal $ 3,905 $ 3,646 $ 1,039
State 978 (166) 66
- -----------------------------------------------------------------------------
Total current 4,883 3,480 1,105
- -----------------------------------------------------------------------------
Taxes (prepaid) deferred (1,719) (623) 923
- -----------------------------------------------------------------------------
Total income taxes $ 3,164 $ 2,857 $ 2,028
=============================================================================
The difference between the effective tax rate and the federal statutory tax rate
on income before taxes is reconciled as follows:
2003 2002 2001
=============================================================================
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 2.4 (.1) 1.8
Other (2.1) (1.7) (2.6)
- -----------------------------------------------------------------------------
34.3% 32.2% 33.2%
=============================================================================
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) 2003 2002
=============================================================================
Deferred tax assets:
Deferred loan fees $ 64 $ 33
Reserve for loan losses 1,407 1,416
Non-accrual interest 43 45
Amortization 11 56
Other 310 90
- -----------------------------------------------------------------------------
Total gross deferred tax assets 1,835 1,640
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Bond accretion 15
Unrealized gain on securities 377 1,376
Depreciation 551 322
Allowance for loan losses 570
REIT dividend 1,132
Other 207 145
- -----------------------------------------------------------------------------
Total gross deferred tax liabilities 1,135 3,560
- -----------------------------------------------------------------------------
Net deferred tax asset (liability) $ 700 $ (1,920)
=============================================================================
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
generally dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax assets and liabilities and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not that the Corporation will realize the benefits of these
deductible differences.
The Commonwealth of Massachusetts enacted legislation that clarified the real
estate investment trust ("REIT") dividend-received deduction (the "Deduction")
between a bank and its subsidiary operating as a REIT for years ending on or
after December 31, 1999. On February 4, 2003, the Corporation's subsidiary
Westbank (the "Bank") received a Notice of Assessment (the "Notice") from the
Commonwealth of Massachusetts' Department of Revenue ("DOR"), notifying the Bank
of the DOR's intent to disallow the Deduction for the Bank and its subsidiary,
Park West REIT. On June 19, 2003, however, as part of a collective settlement
with the DOR involving other Massachusetts banks, the Bank reached an agreement
with the DOR pursuant to which the Bank agreed to pay all sums due in settlement
of all claims regarding the Deduction, including interest and penalties. The
settlement was reached on June 23, 2003 in the amount of $500,175, including
interest. In light of the Commonwealth of Massachusetts' legislation repealing
the Deduction, the Corporation determined to dissolve Park West REIT and
distribute its assets to its shareholders in 2004.
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 based on a percentage of the respective employee's salary. Total
pension expense for 2003, 2002 and 2001 amounted to $528,000, $416,000 and
$314,000 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 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, 2003, 2002 and 2001 amounted to
$130,000, $118,000 and $107,000 respectively. In addition, the Corporation has a
supplemental defined contribution plan for certain executive officers. The
defined contribution cost incurred by the Corporation related to this plan was
$75,000, $42,000 and $45,000 for the years ended December 31, 2003, 2002 and
2001 respectively.
DIRECTORS AND EXECUTIVES SUPPLEMENTAL RETIREMENT PLAN
The Westbank Directors and Executives Supplemental Retirement Plan was
established during 2001. Under the Supplemental Retirement Plan, the Bank
provides post-retirement benefits for non-employee Directors who retire from the
Board after reaching age seventy-two (72) and certain executive officers who
retire 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
Corporation uses a December 31 measurement date for the plan.
The combined cost for the defined benefit portion of the Directors and
Executives Supplemental Retirement Plan includes the following components:
FOR THE YEAR ENDED DECEMBER 31, 2003 2002
=============================================================================
Service cost $105,386 $258,442
Interest cost 155,964 138,366
Net amortization of prior service cost 124,934 124,938
- -----------------------------------------------------------------------------
Net periodic benefit cost $386,284 $521,746
=============================================================================
43
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, 2003 2002
===============================================================================
PROJECTED BENEFIT OBLIGATION:
Balance at beginning of period $2,270,883 $ 160,743
Service cost 105,386 97,699
Interest cost 155,964 138,366
Benefit payments
Prior service costs 1,874,075
Actuarial loss 199,965
- -------------------------------------------------------------------------------
Balance at end of period $2,732,198 $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 $(2,732,198) $(2,270,883)
Unrecognized loss from experience different
from that assumed 199,965
Unrecognized prior service costs 1,624,203 1,749,137
- -------------------------------------------------------------------------------
Accrued expense included in other liabilities (908,030) (521,746)
- -------------------------------------------------------------------------------
Amount recognized in statement of financial condition consists of:
Accrued liability (1,837,078) (1,454,260)
Intangible asset 929,048 932,514
- -------------------------------------------------------------------------------
Net amount recognized $ (908,030) $ (521,746)
===============================================================================
The accumulated benefit obligation was $1,837,078 and $1,454,260 at December 31,
2003 and 2002 respectively.
The weighted average assumptions utilized to determine the benefit obligation
and net benefit cost were as follows:
AT DECEMBER 31, 2003 2002
=============================================================================
Discount rate 6.30% 6.80%
Rate of increase in compensation levels 5.00 4.00
The Corporation does not expect to contribute to the Directors and Executives
Retirement Plan in 2004.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
10 - STOCK OPTIONS
The Corporation has four (4) fixed stock option plans that reserve shares of
common stock for executives, key employees and directors. The 1985 Incentive
Stock Option Plan 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 1995 Directors Stock Option Plan grants options totaling 1,000 shares on
February 15th of each year to qualified directors, as determined prior to grant.
Unless exercised, options expire ten (10) years after granting. A total of
14,050 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 11,950
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, 2003, 2002 and 2001, and changes during the
years ended on those dates.
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2003 Price 2002 Price 2001 Price
- ---------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 638,489 $11.05 490,359 $ 9.55 499,236 $ 9.38
5% stock dividend 31,772 10.52
Granted 16,000 13.92 207,900 13.13 8,000 7.94
Exercised (54,850) 8.51 (54,055) 5.58 (16,877) 3.87
Terminated (4,331) 11.34 (5,715) 10.09
- ---------------------------------------------------------------------------------------------------------------
Outstanding at end of year 627,080 $10.78 638,489 $11.05 490,359 $ 9.55
- ---------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 556,815 508,889 490,359
===============================================================================================================
Weighted average fair value of
options granted during the year $13.92 $13.13 $ 7.94
===============================================================================================================
The following table summarizes information about fixed options outstanding at
December 31, 2003.
Weighted Weighted Weighted
Options Average Average Options Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/03 Contractual Life Price at 12/31/03 Price
================================================================================
$ 3.83 to $ 6.00 18,160 1.70 years $ 4.76 18,160 $ 4.76
6.01 to 9.00 161,575 4.39 years 7.86 161,575 7.86
9.01 to 13.50 420,845 7.56 years 11.96 358,580 11.84
13.51 to 15.25 26,500 13.36 years 14.10 18,500 8.16
- ---------------- ----------- ---------------- -------- ----------- --------
$ 3.83 to $15.25 627,080 6.82 years $ 10.79 556,815 $ 10.33
================================================================================
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, 2003 2002 2001
=============================================================================
Dividend yield 3.12% 3.21% 4.55%
Expected life 10 years 10 years 10 years
Expected volatility 48% 48% 46%
Risk-free interest rate 3.35% 4.83% 5.20%
=============================================================================
45
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:
2003 4,378,981 $1.38
2002 (1) 4,406,583 1.36
2001 (1) 4,465,054 .91
Effect of Dilutive Option Shares:
2003 191,168 .06
2002 (1) 103,382 .03
2001 (1) 47,966 .01
Diluted Earnings per Share:
2003 4,570,149 1.32
2002 (1) 4,509,965 1.33
2001 (1) 4,513,020 .90
(1) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in January 2003.
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, 2003.
(Dollars in Thousands)
==============================================================================
2004 $ 282
2005 236
2006 199
2007 182
2008 55
After 2008 18
- ------------------------------------------------------------------------------
Total minimum lease payments $ 972
==============================================================================
Rent expense for 2003, 2002 and 2001 amounted to $359,000, $312,000 and $324,000
respectively.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
13 - COMMITMENTS AND CONTINGENT LIABILITIES
LOANS
In the normal course of business, various commitments and contingent liabilities
are outstanding, such as guarantees, standby letters of credit and commitments
to extend credit, that are not reflected in the consolidated financial
statements. Management does not anticipate any significant losses as a result of
these transactions.
The following table summarizes the contractual value of commitments at December
31:
(Dollars in Thousands) 2003 2002
================================================================================
Commitments to grant loans $ 12,299 $ 13,677
Stand-by letters of credit and financial guarantees 1,195 587
Commitments to advance funds under existing loan agreements 60,088 60,600
The Corporation uses the same credit policies in making commitment and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since commitments may be expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing properties.
In the normal course of business, certain litigation is pending against the
Corporation. Management, after consultation with legal counsel, does not
anticipate that any ultimate liability arising out of such litigation will have
a material effect on the Corporation's financial condition or results of
operations.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Bank has entered into a three-year employment agreement with its President
and Chief Executive Officer. The agreement generally provides for a base salary
and the continuation of certain benefits currently received. The employment
agreement renews on an annual basis. Under certain specified circumstances, the
employment agreement requires certain payments to be made for certain reasons
other than cause, including a "change in control" as defined in the agreement.
However, such employment may be terminated for cause, as defined, without
incurring any continuing obligations.
The Bank has also entered into three-year change in control agreements with
certain officers, none of whom are covered by an employment agreement. The
change in control agreements are renewable on an annual basis and generally
provide a severance payment and the continuation of certain benefits currently
received following a "change in control" as defined in the agreements.
14 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
addresses the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions, and regulations concerning
internal controls, accounting and operations.
Both the Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's or 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.
47
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,
2003, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
Regulatory risk-based capital requirements take into account the different risk
categories by assigning risk weights to assets and the credit equivalent amounts
of off-balance sheet exposures. In addition, capital is divided into two tiers.
Tier 1 includes common stockholders' equity and a portion of the 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, 2003, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a bank must maintain minimum total risk-based, Tier 1 risk-based,
Tier 1 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 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, 2003
Total Capital
(To risk-weighted assets):
Westbank $ 55,064 12.84% $ 34,321 8.00% $ 42,901 10.00%
Corporation - Consolidated 56,956 13.24 34,406 8.00 N/A N/A
Tier 1 Capital (To risk-weighted assets):
Westbank 50,636 11.80 17,160 4.00 25,741 6.00
Corporation - Consolidated 50,345 11.71 17,203 4.00 N/A N/A
Tier 1 Capital
(To average assets):
Westbank 50,636 7.71 26,268 4.00 32,835 5.00
Corporation - Consolidated 50,345 7.65 26,320 4.00 N/A N/A
December 31, 2002
Total Capital
(To risk-weighted assets):
Westbank 51,568 12.25 33,670 8.00 42,088 10.00
Corporation - Consolidated 53,350 12.63 33,787 8.00 N/A N/A
Tier 1 Capital (To risk-weighted assets):
Westbank 46,456 11.04 16,835 4.00 25,253 6.00
Corporation - Consolidated 44,616 10.56 16,894 4.00 N/A N/A
Tier 1 Capital
(To average assets):
Westbank 46,456 6.99 26,594 4.00 33,243 5.00
Corporation - Consolidated 44,616 6.60 26,632 4.00 N/A N/A
48
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, 2003 include $485,000 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.
The Corporation purchased 55,682, 202,658 and 23,000 common shares at fair value
for treasury stock at an aggregate cost of $904,000, $2,615,000 and $215,000 in
2003, 2002 and 2001 respectively. Treasury stock repurchases were made in
connection with the previously announced stock repurchase program.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
15 - EMPLOYEES' STOCK OWNERSHIP PLAN
The Corporation established an Employees' Stock Ownership Plan ("ESOP") in 1989.
The ESOP has been funded by a $100 contribution from the Corporation. At
December 31, 2003 and 2002, 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.
2003 2002
======================================================================================================
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 14,639 $ 14,639 $ 19,065 $ 19,065
Federal funds sold 39 39 28,185 28,185
Investment securities held to maturity 250 262 436 459
Investment securities available for sale 241,812 241,814 132,296 132,296
Loans 435,483 451,027 473,721 493,517
Accrued interest receivable 3,180 3,180 3,037 3,037
Liabilities:
Deposits 536,454 540,261 561,747 568,939
Borrowed funds 122,204 123,491 56,392 60,235
Mandatorily redeemable preferred stock 17,000 17,507 17,000 17,758
Accrued interest payable 575 575 665 665
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
The carrying amount for cash and due from banks and for federal funds sold
approximates fair value, as these instruments mature in 90 days or less.
INVESTMENT SECURITIES
The fair value of securities is estimated based on bid prices published in
financial sources 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.
50
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 MANDATORILY REDEEMABLE PREFERRED STOCK
The fair value of 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 is not material.
17 - SEGMENT INFORMATION
The Corporation has one reportable segment, "Community Banking." All of the
Corporation's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Corporation supports the
others. For example, commercial lending is dependent upon the ability of the
Bank to obtain funds through deposits and borrowings, and to manage interest
rate and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant operating decisions
are based upon analysis of the Corporation as one operating segment.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
18 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands, except per share amounts)
2003
------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Interest income $9,364 $8,933 $8,464 $9,091
Interest expense 3,848 3,584 3,293 3,360
- ------------------------------------------------------------------------------------------------------
Net interest income 5,516 5,349 5,171 5,731
Provision for (recovery of) losses (354)
Non-interest income 993 994 1,296 1,253
Non-interest expense 4,162 4,229 4,544 4,504
- ------------------------------------------------------------------------------------------------------
Income before income taxes 2,347 2,114 2,277 2,480
Income taxes 841 612 856 855
- ------------------------------------------------------------------------------------------------------
Net income $1,506 $1,502 $1,421 $1,625
======================================================================================================
Earnings per share - Basic $ .35 $ .34 $ .32 $ .37
- Diluted $ .33 $ .33 $ .31 $ .35
======================================================================================================
2002 (1)
------------------------------------------------------------------
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(2) 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
======================================================================================================
(1) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in January 2003.
(2) 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 of 2002.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
December 31,
(Dollars in Thousands) 2003 2002
===============================================================================
BALANCE SHEETS
Assets
Cash $ 495 $ 337
Investment in subsidiaries 60,382 57,830
Other investments 123 34
Other assets 1,481 1,433
- -------------------------------------------------------------------------------
Total assets $ 62,481 $ 59,634
===============================================================================
Note payable to Westbank Capital Trust 1 17,000 17,000
Other liabilities 206 22
- -------------------------------------------------------------------------------
Total liabilities 17,206 17,022
Stockholders' equity
Preferred stock - none
Common stock, par value $2 per share 9,047 9,047
Additional paid-in capital 14,524 14,497
Retained earnings 22,724 18,780
Treasury stock (1,692) (2,091)
Accumulated other comprehensive loss 672 2,379
- -------------------------------------------------------------------------------
Stockholders' equity 45,275 42,612
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 62,481 $ 59,634
===============================================================================
(Dollars in Thousands) 2003 2002 2001
===============================================================================
STATEMENTS OF INCOME
Dividend from subsidiary $ 3,161 $ 5,163 $ 2,230
Interest expense (1,682) (1,680) (1,627)
Other expense - net (364) (121) (108)
- -------------------------------------------------------------------------------
Income before taxes and
undistributed income of subsidiaries 1,115 3,362 495
Income tax benefit 678 595 590
Undistributed income of subsidiaries 4,261 2,052 2,988
- -------------------------------------------------------------------------------
Net Income $ 6,054 $ 6,009 $ 4,073
===============================================================================
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
December 31,
(Dollars in Thousands) 2003 2002 2001
==========================================================================================
STATEMENTS OF CASH FLOWS
Cash Flows from operating activities:
Net income $ 6,054 $ 6,009 $ 4,073
Operating activities:
Equity in income of subsidiaries (4,261) (2,052) (2,988)
Decrease (Increase) in other assets (48) (195) 303
Increase in other liabilities 186 9 6
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,931 3,771 1,394
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities (purchased) matured (89) 38 (30)
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (89) 38 (30)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock options exercised 27 (37) 20
Proceeds from dividend reinvestment and
optional stock purchases 1,303 956 529
Treasury shares redeemed (904) (2,615) (215)
Dividends paid (2,110) (1,849) (1,694)
- ------------------------------------------------------------------------------------------
Net cash used in financing activities (1,684) (3,545) (1,360)
- ------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 158 264 4
Cash and cash equivalents at the beginning of the year 337 73 69
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 495 $ 337 $ 73
==========================================================================================
Cash paid during the year:
Interest paid to Westbank Capital Trust 1 $ 1,632 $ 1,632 $ 1,632
Income taxes paid 5,882 4,170 360
54
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
WESTBANK CORPORATION AND SUBSIDIARIES
Shareholders and Board of Directors,
Westbank Corporation
We have audited the accompanying consolidated balance sheet of Westbank
Corporation (the "Corporation") and subsidiaries as of December 31, 2003 and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the year then ended. 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 audit. The
financial statements of Westbank Corporation as of and for the years ended
December 31, 2002 and 2001 were audited by other auditors. Those auditors
expressed an unqualified opinion on those financial statements in their report
dated January 29, 2003.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Westbank
Corporation and subsidiaries as of December 31, 2003, and the results of their
operations and the cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
GRANT THORNTON LLP
Boston, Massachusetts
January 29, 2004
55
INDEPENDENT AUDITORS' REPORT
WESTBANK CORPORATION AND SUBSIDIARIES
Shareholders and Board of Directors,
Westbank Corporation
We have audited the consolidated balance sheet of Westbank Corporation and
subsidiaries (the "Corporation") as of December 31, 2002, and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for each of the two years in the period ended December 31, 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 the results of their operations and their
cash flows for each of the two 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, "Acquisitions of Certain
Financial Institutions."
DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 29, 2003
56
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 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 COMMUNICATIONS SYSTEMS, INC.
RESNIC, BEAUREGARD, WAITE & DRISCOLL President and Chief Executive Officer,
EASTERN STATES EXPOSITION
OFFICERS
WESTBANK CORPORATION
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD R. CHASE GARY L. BRIGGS TRENTON E. TAYLOR
President and Chief Executive Officer Executive Vice President Senior Vice President
JOHN M. LILLY KATHLEEN A. JALBERT LLOYD S. HALL
Treasurer and Chief Financial Officer Senior Vice President Director of Auditing
WESTBANK
- ------------------------------------------------------------------------------------------------------------------------------------
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
HOWARD STANTON, III PATRICIA A. NEBOSKY
AUDITING DIVISION Vice President Vice President
LLOYD S. HALL, CBA IRVING M. WALKER, JR., CMA JOHN E. O'BRIEN
Director of Auditing Controller Assistant Vice President
BRANCH ADMINISTRATION/ LOAN DIVISION RESIDENTIAL REAL ESTATE
HUMAN RESOURCES GARY L. BRIGGS ANTONIO FILIPE
KATHLEEN A. JALBERT Executive Vice President Senior Vice President
Senior Vice President PAUL M. ACCORSI WOLFGANG A. ADAMETZ
DEBORAH A. KUMIEGA Senior Vice Pr VICE PRESIDENT
Vice President DENISE M. BREWER
KATHRYN J. SAUCIER Senior Vice President
Assistant Vice President JOHN F. WHITE TRUST DIVISION
ALMA D. MOREY Senior Vice President ROBERT A. GIBOWICZ
Branch Administration Officer CLIFFORD R. BORDEAUX Senior Trust Officer
SUSAN M. ALDRICH Vice President WILLIAM M. VARANKA
Human Resources Officer GERARD E. DRAPEAU Vice President
Vice President
ROBERT D. FLUHARTY
COMPLIANCE Vice President
AMY B. SHEEHAN RICHARD N. HANCHETT
Senior Vice President Vice President
JOSEPH S. LEMAY
Vice President
EDP/OPERATIONS STEPHEN J. ROBINSON
S. STEVE KONIECKI Vice President
Senior Vice President JOSEPH P. YOUNG
TAMMY L. HOWE Vice President
Assistant Vice President MICHAEL J. HARRINGTON
Commercial Loan Officer
J. KEVIN HOURIHAN
Dealer Account Officer
57
CORPORATE INFORMATION
WESTBANK CORPORATION AND SUBSIDIARIES
WESTBANK CORPORATION COMMON STOCK - MARKET INFORMATION
Westbank Tower, 225 Park Avenue The table below shows cash dividend data and
West Springfield, MA 01089-3310 the range of bid prices by quarter for the
(413) 747-1400 Corporation's common stock. The source of the
bid ranges is the NASDAQ regional market
quotations.
ANNUAL MEETING
The Annual Meeting of Stockholders of Westbank
Corporation will be held on Wednesday, April 21,
2004 at nine o'clock in the morning at the Best ---------------------------------------------------
Western Sovereign Hotel & Conference Center, 2003 2002
1080 Riverdale Road, West Springfield, Bid Bid
Massachusetts. High Low Dividend High Low Dividend
---------------------------------------------------
First $15.25 $13.21 $.12 $11.10 $ 9.10 $.11
TRANSFER AGENT AND REGISTRAR Second 16.05 13.38 .12 13.43 10.58 .11
Westbank-Trust Department Third 18.73 15.89 .12 13.53 11.19 .11
Fourth 18.79 17.44 .12 13.19 12.39 .11
INDEPENDENT AUDITORS
Grant Thornton LLP
Boston, Massachusetts
All stock prices have been adjusted for the 5% stock
dividend declared and distributed January 2003.
CORPORATE COUNSEL
Doherty, Wallace, Pillsbury and Murphy, P.C. The above quotations of the Corporation's common stock
Springfield, Massachusetts represent prices between dealers. They do not include retail
markup, markdown or commissions. At January 31, 2004, the
Corporation had 1,235 stockholders. Westbank Corporation's
INFORMATION SERVICE common stock is traded on the NASDAQ National Market
Westbank Corporation welcomes stockholder and Exchange; the trading symbol is "WBKC." For information on
public interest in our services and activities. the Westbank Corporation Dividend Reinvestment and Stock
Questions pertaining to material presented in Purchase Plan, call Westbank's Trust Department at (413)
this Report and requests for a copy of the 747-1400. The following firms make a market in Westbank
Annual Report (Form 10-K) filed with the Corporation's common stock.
Securities and Exchange Commission should be
directed to John M. Lilly, Treasurer and Chief
Financial Officer, at the above address.
Adams, Harkness & Hill, Inc.
Advest Inc.
Archipelago Exchange (The)
Boston Stock Exchange
EQUAL OPPORTUNITY EMPLOYER Keefe, Bruyette & Woods, Inc.
The Corporation has maintained its commitment Knight Securities L.P.
to equal opportunity and affirmative action in McConnell, Budd & Downes, Inc.
employment and personnel policies and pledges Moors & Cabot, Inc.
to recruit, hire, train and promote persons in National Stock Exchange
all job classifications without regard to race, Ryan, Beck & Co., Inc.
color, religion, sex, national origin, veterans Schwab Capital Markets
status, age or handicap. Susquehanna Capital Group
58