EXHIBIT 13
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PROCEEDING INTO 2005, WE WILL CONTINUE TO SEEK OPPORTUNITIES TO ATTRACT NEW
BUSINESS, CULTIVATE EXISTING RELATIONSHIPS AND EXPAND OUR PORTFOLIO - ALL WITH
AN EYE ON SERVING LOCAL COMMUNITIES AND ENHANCING SHAREHOLDER VALUE.
- - WESTBANK CORPORATION
Dear Shareholders:
For Westbank, 2004 was truly a year of continual transformation, when our
careful planning of the past and solid decision making of the present combined
to position us well for the new year.
It was a year that saw our proven strategies for growth come together with
innovative approaches to expanding markets, reaching new customers and building
lasting relationships. As a result, we increased our assets by $31 million and
began 2005 as a $756.4 million corporation.
Throughout the year, our customer-focused approach to banking positioned us well
to compete against larger, merger-focused competitors in the area. In fact, our
local decision-making power and keen insight into the financial needs of the
community greatly contributed to an increase in commercial lending activity,
which grew by more than $19 million. Deposits increased by more than $53
million.
At Westbank, we believe that enhancing shareholder value is a journey, an
ongoing quest to develop opportunities, leverage our inherent strengths and find
new ways to grow assets for our shareholders. It is a journey we take willingly,
with equal amounts of preparation and excitement, as we lay a progressive path
for growth in 2005.
Sincerely,
Donald R. Chase, President and Ernest N. Laflamme, Jr., Chairman
Chief Executive Officer of the Board Westbank Corporation
Westbank Corporation
1
ENHANCING SHAREHOLDER VALUE:
AN ONGOING JOURNEY TOWARDS CONTINUAL GROWTH
Enhancing shareholder value is a journey - one paved by the past, marked by
change and guided by good decision making. Above all, it is continual, a
constant moving forward towards expanding our overall value to the local
communities we serve and increasing share value.
Westbank entered 2004 in a solid financial position and continued to fortify
that position as we grew our assets, market coverage and customer base
throughout the year. Eighteen branches strong, we leveraged our expanded
geographic presence, commercial lending power and financial product portfolio to
successfully and profitably grow the bank. Through each customer interaction, we
reaffirmed our "on your corner, in your corner" message as we worked to meet the
financial needs of both residential and commercial customers.
STRONG ROOTS ENABLE STRONG GROWTH
In an age when mergers and acquisitions are the hallmark of the banking
industry, Westbank's longevity is somewhat of an anomaly. With 43 years as a
local commercial bank, this longevity is matched only by the loyalty of our
executive team, with many members exceeding 25 years of service. In fact, many
were born and raised within the communities they serve.
Our rich local history lends a high level of stability amidst a banking era of
great change. Deep roots lead to an even deeper understanding of local needs - a
benefit that helped to differentiate us in 2004. With an established local
presence, we can quickly understand the needs of our customers, make decisions
locally and respond quickly with a swiftness our larger competitors simply
cannot muster.
We believe this local advantage will prove to be one of our key growth enablers
and competitive advantages, particularly in the commercial lending area where
fast decision making is so critical to enabling local businesses - large and
small - to quickly seize opportunities as they develop.
KNOWLEDGEABLE AND TRUSTWORTHY
"IT'S VERY IMPORTANT TO US THAT WE BANK WITH PEOPLE THAT WE KNOW AND TRUST AND
UNDERSTAND OUR BUSINESS. WESTBANK IS NOT LIKE ANY OTHER BANK. THEY'VE BEEN HERE
FOR US EVERY TIME WE'VE NEEDED THEM, WITHOUT HESITATION."
- - CARL SJOGREN, PRESIDENT,
SJOGREN MANUFACTURING, INC. AND SJOGREN INDUSTRIES
ROBUST COMMERCIAL LENDING ACTIVITY
Our commercial lending area enjoyed healthy growth during 2004. The commercial
real estate area alone grew by 11.8 percent, thanks to the work of experienced
loan officers who successfully continued to establish new connections and build
upon existing relationships with area businesses. This included working with
small businesses, as well as larger commercial enterprises with more complex
banking needs.
Our efforts during the year were greatly bolstered by our television advertising
campaign, which showcased our commercial lending capabilities and increased our
exposure to prospective business clients. Using testimonials from some of our
satisfied commercial customers, the TV spots highlighted our support for
businesses of all sizes, as well as our support of organizations that benefit
the community at large.
For instance, Sjogren Manufacturing and Sjogren Industries, the U.S. market
leader and major worldwide competitor in the steel wire tooling industry, spoke
about the importance of working with a bank they knew and trusted to understand
their needs during a recent merger. Sullivan Paper credited their 30-year
relationship with Westbank with helping them grow from 2 to over 300 people.
Pioneer Packaging said Westbank rose to a high level of service "beyond the call
of any bank." Additionally, the YMCA of Greater Springfield commented on the
value of our community support.
One thing rang true throughout each testimonial: Westbank is clearly considered
an ally to businesses in the communities we serve. We will continue to use
strategic marketing campaigns such as these to build business throughout 2005.
With a 76.3 percent increase, commercial leasing also enjoyed substantial
growth. Our in-house leasing department offers a range of financing choices to
the community, which helps to distinguish Westbank from competitors. Indirect
lending also saw a 7.43 percent increase as we continued to expand our auto
dealer network throughout New England and part of New York State, adding dealers
to bring our overall total to more than 100.
2
ADVANCING INTO NEW MARKETS
Geographic expansion proved to be a key growth instrument for Westbank in 2004,
as it has been over the last five years. It began in 1999 with the acquisition
of Cargill Bancorp, Inc., in Putnam, Connecticut and the New London Trust,
F.S.B., in Danielson, Connecticut. In 2001, we completed the merger between
Cargill and Westbank. Expansion continued in 2003 with the establishment of our
18th branch in Webster, Massachusetts.
Our decision to advance into Webster was a fortuitous one. In 2004, deposits
grew to $18.9 million, while commercial loans reached $12 million with a strong
pipeline going into 2005. This is an impressive achievement for a new bank
branch. In fact, since we "broke ground" with our expansion plans five years
ago, bank assets have grown from $574.6 million to $756.4 million (or by 31.7
percent).
In Spring 2005, we will begin building a new branch in Southwick, which will
replace a smaller office in the same town. We will continue to look for
opportunities to grow our assets by expanding our geographic footprint.
EXPANDING OUR PRODUCT AND SERVICES PORTFOLIO
Another chief objective for 2004 was to create and expand awareness for our
deposit and commercial loan products. In addition to TV commercials, we
leveraged strategic marketing campaigns to bring in new business and extend our
offerings to our existing customer base. Throughout the year, this proved to be
a very successful way to gain market share and increase deposits.
For example, a new 18-MONTH SUPERFLEX CD promotion generated more than $37
million in 2004 deposits. New customers represented more than 25 percent of
those deposits, which opened the door for us to attract even more of their
banking business.
The introduction of our new CAPITAL ACCESS ACCOUNT generated more than $10
million in business during 2004. Interest rates are tier-based, encouraging
customers to keep higher account balances to earn higher rates.
As a complement to our existing wealth management services, consultants from
Infinex Financial Group will soon be available by appointment at any Westbank
office. This will help customers choose from a wide variety of investment
services and products, extending the full-service capabilities of Westbank.
FULL SERVICE, FULL SUPPORT
"WESTBANK TAKES CARE OF ALL OUR BANKING NEEDS, FROM MORTGAGES TO OUR PENSION
PLAN. THEY'VE BEEN THERE FOR US FOR OVER 30 YEARS AND HAVE ALWAYS BEEN IN OUR
CORNER."
- - RICHARD SULLIVAN, CHAIRMAN, SULLIVAN PAPER CO.
OPTIMIZING OPERATIONS
A large part of increasing shareholder value lies in optimizing the operations
that drive bank business. Our ongoing initiatives to streamline operations and
increase productivity not only drive cost efficiency, they make it easier for
customers to bank with us.
For example, we are currently implementing the capability to accept residential
loan applications online, which will speed the process for customers and enable
us to reach a greater percentage of the market. We are also redesigning the
Westbank web site to be more dynamic, informative and user-friendly.
Internally, we underwent an extensive, year-long review of our current account
processing service provider to ensure we continue to receive the most current,
advanced services required to support banking operations.
In 2005, we will expand technology benefits to support all loan areas, as well
as the deposit account opening process and teller hardware/software platform
areas, to improve operational efficiency and enhance customer service at the
teller window.
All banking operations are guided by strong corporate governances and financial
control procedures, as well as by our extremely active board of directors who
are ever vigilant towards the welfare of our shareholders. At a time when the
U.S. Securities and Exchange Commission (SEC) is increasing requirements for all
public companies, we will continue to maintain and strengthen high standards of
accountability across everything we do.
A PART OF THE LOCAL COMMUNITY
"EVERY COMMUNITY NEEDS A CENTER LIKE THE YMCA, A PLACE WHERE KIDS AND FAMILIES
CAN GO TOGETHER. WESTBANK WAS ABLE TO PUT A LOAN PACKAGE TOGETHER THAT MADE IT
ALL HAPPEN. THEY REALLY ARE PART OF THE LOCAL COMMUNITY AND WE'RE VERY HAPPY TO
BE PARTNERS WITH THEM ON THIS PROJECT."
- - STEVE CLAY, PRESIDENT, YMCA OF GREATER SPRINGFIELD
3
THE JOURNEY CONTINUES
As 2005 unfolds, our increased commercial lending activity and strong asset
quality give us a firm foundation for growth. In an attempt to improve
profitability, Westbank Corporation sold $23.6 million in residential real
estate loans in anticipation of higher interest rates.
Further, by redeeming the outstanding principal balance of our Trust Preferred
Securities, which funded the 1999 purchase of New London Trust, we significantly
reduced interest expenses and positioned the bank for improved profits for many
years to come. In fact, based on the initial interest rates, we expect the
refinancing to save us $787,000 annually.
Proceeding into 2005, we will continue to seek opportunities to attract new
business, cultivate existing relationships and expand our portfolio - all with
an eye on enhancing shareholder value and serving our local communities.
However, it is the responsiveness and integrity of the people that drive these
activities that will continue to differentiate us on the journey ahead, as we
move towards long-term growth and lasting prosperity.
ABOVE AND BEYOND
"WESTBANK GOES ABOVE AND BEYOND THE CALL OF ANY BANK. THEY'VE BEEN VERY
INSTRUMENTAL TO OUR SUCCESS."
- - JEFF SHINNERS, PRESIDENT, PIONEER PACKAGING
4
SELECTED CONSOLIDATED FINANCIAL DATA
WESTBANK CORPORATION AND SUBSIDIARIES
Year Ended December 31,
(Dollars in thousands, except share amounts) 2004 2003(1) 2002(1)(2) 2001(1)(2) 2000(1)(2)
===========================================================================================================================
Interest and dividend income $ 36,809 $ 35,852 $ 40,576 $ 41,088 $ 42,645
Interest expense 14,274 14,085 18,055 20,691 23,228
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 22,535 21,767 22,521 20,397 19,417
Provision for (recovery of) loan losses 225 (354) 1,333 944 472
Non-interest income 3,441 4,536 4,090 3,489 2,652
Non-interest expense 19,149 17,439 16,412 16,841 15,841
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,602 9,218 8,866 6,101 5,756
Income taxes 1,991 3,164 2,857 2,028 1,968
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 4,611 $ 6,054 $ 6,009 $ 4,073 $ 3,788
===========================================================================================================================
Common share data:
Earnings per share:
Basic $ 1.00 $ 1.32 $ 1.30 $ .87 $ .81
Diluted .95 1.26 1.27 .86 .80
Cash dividends declared .56 .48 .44 .40 .40
Ending book value 10.06 9.78 9.30 8.30 7.49
AT DECEMBER 31:
Securities $ 267,829 $ 236,484 $ 128,473 $ 138,183 $ 95,726
Loans, net 435,013 436,339 474,498 440,430 429,781
Assets 756,441 725,442 684,166 630,155 575,672
Non-performing assets 2,765 3,308 1,558 2,034 2,737
Deposits 590,032 537,310 562,524 510,556 499,690
Borrowings 97,354 122,204 56,392 57,666 20,992
Mandatorily redeemable preferred stock:
Payable to Westbank Capital Trust I 17,526 17,526 17,526 17,526
Payable to Westbank Capital Trust II 8,763
Payable to Westbank Capital Trust III 8,763
Stockholders' equity 47,462 45,275 42,612 39,016 34,860
AVERAGE FOR YEAR:
Loans 432,864 459,765 463,488 440,454 445,846
Assets 738,878 658,002 666,120 595,592 581,328
Deposits 577,258 537,151 537,309 486,694 488,396
Stockholders' equity 45,824 43,272 40,380 36,920 32,096
Weighted shares outstanding - basic 4,606,094 4,597,930 4,626,909 4,688,306 4,662,588
Weighted shares outstanding - diluted 4,863,741 4,798,656 4,735,460 4,738,671 4,711,405
SELECTED RATIOS:
Return on average assets .62% .92% .90% .68% .65%
Return on average stockholders' equity 10.06 13.99 14.88 11.03 11.80
Average stockholders' equity to average assets 6.20 6.58 6.06 6.20 5.52
Dividend pay-out ratio 55.54 34.85 30.77 41.59 44.80
Allowance for loan losses to loans at year end .99 1.01 1.07 .94 .85
Non-performing loans as a percentage of total
loans at year end .49 .75 .33 .41 .51
Net charge-off's as a percentage of average loans .07 .07 .09 .10 .16
Non-performing assets as a percentage of assets .37 .46 .23 .32 .48
(1) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in May 2004.
(2) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in January 2003.
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. Competition in the Corporation's primary market area from other banks,
especially in light of continued consolidation in the New England banking
industry;
3. Any changes in federal and state bank regulatory requirements;
4. Changes in interest rates;
5. The cost and other effects of unanticipated legal and administrative cases
and proceedings, settlements and investigations;
6. Changes in laws and regulations, including federal and state banking laws
and regulations, to which the Corporation and its subsidiaries are subject;
7. 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
8. 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 accounting principles generally accepted in the United States of America
and conform to general practices within the banking industry. In reviewing and
understanding financial information for the Corporation, you are encouraged to
read and understand the significant accounting policies that are used in
preparing the Corporation's consolidated financial statements. These policies
are described in Note 1 to the consolidated financial statements. Of these
policies, management believes that the accounting for loans and the allowance
for loan losses is one of the most critical.
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis and more frequently when economic or market conditions warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. Securities that
have experienced an other than temporary decline in value are written down to
estimated fair value, establishing a new cost basis with the amount of the
write-down expensed as a realized loss.
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 by Creditors for Impairment of a Loan", as amended by Statement of
Financial Accounting Standards ("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. For these loans, 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. Income on impaired loans is recognized
based on the individual payment history of each loan.
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, 2004, the allowance for loan losses totaled $4,356,000,
representing .99% of total loans and 204.0% of non-performing loans.
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 (the "Corporation") is a one-bank holding company with its
headquarters located in West Springfield, Massachusetts. The Corporation
operates eighteen branch offices and twenty-three ATM's, serving communities in
western and central Massachusetts and northeastern Connecticut. The
Corporation's affiliates include: Westbank, a commercial bank and trust company
(the "Bank"), Park West Securities Corporation and PWB&T, Inc.
The 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,
deposits and fee income. Balance sheet growth during 2004 was strong with
respect to investments and deposits, while overall loan growth was level with
year-end 2003. While the Corporation experienced strong commercial, leasing and
commercial real estate growth during the past year, this growth was offset by a
decrease in refinancing and the sale of 1-4 family residential real estate
loans. Residential real estate refinancing and the significant turnover in the
Corporation's investment portfolio were the result of continued low interest
rates during most of the year. The Corporation's sale of approximately $23
million in 1-4 family residential real estate loans and the growth of other time
deposits was the result of a strategy to prepare the balance sheet for
anticipated higher interest rates.
The Corporation took advantage of lower interest rates to refinance its $17
million 9.6% fixed rate Trust Preferred securities at a much more favorable
rate. The refinancing consisted of the issuance of two (2) new notes, each with
final maturities of thirty (30) years and each callable after five (5) years.
The new notes were split between a quarterly floating rate and a five(5)-year
fixed rate. The initial rates were set at 4.06% and 5.98% respectfully.
Management anticipates another year of strong commercial loan, commercial
mortgage and commercial leasing growth during 2005, while 1-4 family residential
real estate volume is expected to remain light as a result of anticipated higher
interest rates.
The Bank expects to break ground during the spring of 2005 for its newest
full-service office, which will be located on College Highway in Southwick,
Massachusetts. The location of this office is expected to expand our market
penetration in Southwick and the surrounding areas. It is anticipated on our
smaller existing office in Southwick will be consolidated into this new
location. The Corporation continues to look at new areas for expansion and
increased market share.
The results of operations also may be affected by economic and competitive
pressures in the local and regional markets, including changes in market
interest rates. Future results in operations also may be materially impacted by
changes in applicable laws and regulations. In addition, because Westbank
Corporation's lending activity is concentrated within its general market areas
of western and central Massachusetts and northeast Connecticut, a downturn in
these regional economies could have a negative impact on the Corporation's
earnings.
SUMMARY OF RESULTS
For 2004, the Corporation reported net income of $4,611,000 or $0.95 per diluted
share after recording a provision for loan losses of $225,000. This compares to
net income of $6,054,000 or $1.26 per diluted share for 2003. The Corporation's
2003 earnings reflected a recovery of loan losses of $354,000.
During 2004, the Corporation originated approximately $35.7 million in
residential real estate loans as compared to $123.9 million in 2003. The high
origination volume was a direct result of the low interest rate environment
during 2003. In conjunction with the low interest rate and the volume of loan
originations, the Corporation sold approximately $23.6 million in residential
real estate loans during 2004.
Net interest income increased by $768,000 from 2003 to 2004 and by $14,000
versus 2002. Non-interest income decreased by $1,095,000 from the prior year and
by $649,000 versus 2002. Non-interest income for 2004, as compared to 2003,
reflects an increase in Trust Department earnings of $8,000, a decrease in
service charges on deposit accounts and loan servicing income of $106,000,
decrease in gains recognized from the sale of investments of $1,259,000, an
increase from gains on sale of mortgages of $145,000, and an increase in other
non-interest income of $117,000. The decrease in gain on sale of investments was
the result of the Corporation's recording a write-down on equity securities of
$628,000 deemed to be other than temporarily impaired. Included in other
non-interest income during 2004 was $206,000 of non-taxable life insurance
proceeds.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
Non-interest expense amounted to $19,149,000 in 2004, an increase of $1,710,000
or 9.81%. The increase in operating expenses for 2004 as compared to 2003 is due
to a combination of the following: salaries and benefits increased $652,000,
occupancy expense decreased $29,000 and all other non-interest expense accounts
increased $1,087,000. The increase in operating expenses is a direct result of
the overall growth of the Corporation and the write-down of the origination
costs from the Corporation's initial trust preferred financing in 1999 totaling
$807,000, which was required when these trust preferred securities were redeemed
in the quarter ended September 30, 2004 and replaced with trust preferred
securities bearing a lower interest rate. Non-interest expense increased during
2003 by $1,027,000 versus 2002. During 2003, as compared to 2002, salaries and
benefits increased $657,000, occupancy expense increased $93,000 and all other
non-interest expense accounts increased $277,000 as a direct result of the
overall growth of the corporation, general additions to staff, and the opening
of the Corporation's newest office in Webster, Massachusetts.
At December 31, 2004, the Corporation's total assets were $756,441,000, an
increase of $30,999,000 or 4.3% compared to year-end 2003.
Non-performing assets amounted to $2,765,000 or .37% of total assets at December
31, 2004, compared with $3,308,000 or .46% at the end of 2003.
COMPONENTS OF CAPITAL
As of December 31, 2004, stockholders' equity increased to $47.5 million, a 4.8%
increase compared to December 31, 2003. Stockholders' equity increased as a
result of the Corporation's net income of $4.6 million and a decrease in the
unrealized gain on securities available for sale of $780,000, net of taxes, less
$2.6 million of common stock dividends declared to shareholders and the
repurchase of $854,000 of the Corporation's stock. In addition, the Corporation
reissued 126,923 shares of Treasury stock totaling $1,445,000, primarily for the
purpose of the Corporation's stock option plans and dividend reinvestment
program and recorded tax benefits from the exercise of stock options and stock
option and restricted stock option compensation of $182,000 and $144,000
respectively.
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:
2004 2003 2002
---- ---- ----
Tier 1 leverage capital (to average assets) 7.35% 7.65% 6.60%
Tier 1 risk-based capital (minimum required 4%) 11.82 11.71 10.56
Total risk-based capital (minimum required 8%) 13.04 13.24 12.63
Regulatory risk-based capital requirements take into account the different risk
categories of banking organizations by assigning risk weights to assets and the
credit equivalent amounts of off-balance sheet exposures. In addition, capital
is divided into two tiers. In this Corporation, Tier 1 includes the common
stockholders' equity and a portion of the mandatorily redeemable preferred
stock; total risk-based or supplementary capital includes not only the equity
but also a portion of the allowance for loan losses and a portion of the
mandatory redeemable preferred stock.
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.
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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
On a quarterly basis, an interest rate risk exposure compliance report is
prepared and presented to the 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, 2004 and 2003:
Percentage Change in
Change in Interest Rates Net Interest Income
(In Basis Points) 2004 2003
- --------------------------------------------------------------------------------
+200 (1.00)% (1.00)%
Level 0 0
-200 (1.00) (9.00)
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,
2004, 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
Marketable securities and other investments $ 9,082 $ 33,230 $ 232,493 $ 274,805
Interest-bearing cash 34 34
Loans 95,244 $ 47,449 170,056 126,620 439,369
Federal funds sold 669 669
- ---------------------------------------------------------------------------------------------------------------------------
105,029 47,449 203,286 359,113 714,877
INTEREST-BEARING LIABILITIES
Savings deposits 9,331 83,977 93,308
NOW accounts 4,282 38,542 42,824
Money market accounts 30,153 30,153
Other time deposits 85,426 126,273 127,110 180 338,989
Borrowed funds and trust preferred securities 46,194 20,436 38,250 10,000 114,880
- ---------------------------------------------------------------------------------------------------------------------------
$ 161,773 $ 160,322 $ 287,879 $ 10,180 $ 620,154
===========================================================================================================================
Interest Rate
Sensitivity Gap $ (56,744) $(112,873) $ (84,593) $ 348,933 $ 94,723
Cumulative Interest Rate
Sensitivity Gap (56,744) (169,617) (254,210) 94,723
Interest Rate
Sensitivity Gap Ratio (7.94)% (15.79)% (11.83)% 48.81% 13.25%
Cumulative Interest Rate
Sensitivity Gap Ratio (7.94) (23.73) (35.56) 13.25
The presentation of a run-off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $9,331,000 and
$4,282,000, 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
DISTRIBUTION OF ASSETS, LIABILITIES AND
STOCKHOLDERS' EQUITY - INTEREST RATES AND INTEREST DIFFERENTIAL
The following table presents the condensed consolidated average balance sheets
for 2004, 2003 and 2002. 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.
2004 2003 2002
-------------------------------- -------------------------------- -------------------------------
Average Average Average
Interest Yield/ Interest Yield/ Interest Yield/
Average Income/ Rate Average Income/ Rate Average Income/ Rate
(Dollars in Thousands) Balance Expense Paid Balance Expense Paid Balance Expense Paid
===================================================================================================================================
ASSETS
Securities:
U.S. Treasury $ 411 $ 1 0.24% $ 107 $ 63 $ 1 1.59%
Federal agencies 247,332 11,672 4.72 132,227 $ 6,855 5.18% 131,908 7,989 6.06
Tax exempt federal (a) 1,933 80 4.14 1,514 77 5.09 626 44 7.03
Other securities 8,524 291 3.41 7,979 235 2.95 7,979 329 4.12
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 258,200 12,044 4.66 141,827 7,167 5.05 140,576 8,363 5.95
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing cash and
temporary investments 35 1 2.86 117 1 .85 622 28 4.50
- -----------------------------------------------------------------------------------------------------------------------------------
Loans: (b)
Commercial 62,492 3,406 5.45 62,300 3,406 5.47 56,810 3,539 6.23
Leases 9,904 624 6.30 7,133 538 7.54 6,161 522 8.47
Tax exempt federal (a) 11,332 616 5.44 9,364 554 5.92 6,658 561 8.43
Real estate 275,455 16,579 6.02 315,256 20,552 6.52 332,215 23,531 7.08
Home equities 29,819 1,394 4.67 26,471 1,289 4.87 22,988 1,297 5.64
Consumer 43,862 2,175 4.96 39,241 2,293 5.84 38,656 2,646 6.84
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 432,864 24,794 5.73 459,765 28,632 6.23 463,488 32,096 6.92
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 6,962 100 1.44 18,312 168 .92 20,992 295 1.41
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 698,061 $ 36,939 5.29% 620,021 $ 35,968 5.80% 625,678 $ 40,782 6.52%
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (4,357) (5,033) (4,603)
Cash and due from banks 12,904 13,823 15,787
Other assets 32,270 29,191 29,258
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 738,878 $ 658,002 $ 666,120
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings $ 128,216 $ 560 0.44% $ 129,559 $ 735 .57% $ 129,604 $ 1,561 1.20%
Money market 36,507 402 1.10 38,174 453 1.19 34,403 736 2.14
Negotiated rate certificates 66,272 1,988 3.00 54,446 1,785 3.28 59,104 2,014 3.41
Other time deposits 262,258 7,615 2.90 240,355 7,794 3.24 242,242 9,866 4.07
- -----------------------------------------------------------------------------------------------------------------------------------
Total time deposits 493,253 10,565 2.14 462,534 10,767 2.33 465,353 14,177 3.05
Borrowed funds/trust
preferred secuties 113,887 3,709 3.26 74,169 3,318 4.47 83,068 3,878 4.67
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 607,140 $ 14,274 2.35% 536,703 $ 14,085 2.62% 548,421 $ 18,055 3.29%
Demand deposits 84,005 74,617 71,956
Other liabilities 1,909 3,410 5,363
Stockholders' equity 45,824 43,272 40,380
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 738,878 $ 658,002 $ 666,120
===================================================================================================================================
Net interest income $ 22,665 $ 21,883 $ 22,727
Yield spread 2.94% 3.18% 3.23%
Net yield on earning assets/net interest margin 3.25 3.53 3.63
Deduct tax equivalent adjustment 130 116 206
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 22,535 $ 21,767 $ 22,521
===================================================================================================================================
(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 2004, the yield spread decreased to 2.94% versus 3.18% in 2003. The
Corporation's net interest margin decreased during 2004 to 3.25% from 3.53% in
2003, a decrease of 28 basis points. The section titled Rate/Volume Analysis
further describes the change in yields. 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.
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 2004 as compared with 2003 and 2003 as
compared with 2002.
2004 Compared with 2003 2003 Compared with 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Increase Due to* Increase Due to*
(Dollars in Thousands) 2004 2003 (Decrease) Volume Rate 2003 2002 (Decrease) Volume Rate
=================================================================================================================================
Interest earned:
Securities:
U.S. Treasury $ 1 $ 1 $ 1 $ 1 $ (1) $ (1)
Federal agencies 11,672 $ 6,855 4,817 $ 5,482 (665) $ 6,855 7,989 (1,134) 21 $(1,155)
Tax exempt federal 80 77 3 19 (16) 77 44 33 47 (14)
Other securities 291 235 56 17 39 235 329 (94) (94)
Interest-bearing cash 1 1 (1) 1 1 28 (27) (14) (13)
Loans:
Commercial 3,406 3,406 10 (10) 3,406 3,539 (133) 319 (452)
Leases 624 538 86 185 (99) 538 522 16 77 (61)
Tax exempt federal 616 554 62 110 (48) 554 561 (7) 189 (196)
Real estate 16,579 20,552 (3,973) (2,471) (1,502) 20,552 23,531 (2,979) (1,169) (1,810)
Home equity 1,394 1,289 105 158 (53) 1,289 1,297 (8) 182 (190)
Consumer 2,175 2,293 (118) 252 (370) 2,293 2,646 (353) 41 (394)
Federal funds sold 100 168 (68) (135) 67 168 295 (127) (34) (93)
- ---------------------------------------------------------------------------------------------------------------------------------
36,939 35,968 971 3,626 (2,655) 35,968 40,782 (4,814) (342) (4,472)
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings 560 735 (175) (8) (167) 735 1,561 (826) (1) (825)
Money market 402 453 (51) (19) (32) 453 736 (283) 73 (356)
Negotiated rate certificates 1,988 1,785 203 364 (161) 1,785 2,014 (229) (155) (74)
Other time deposits 7,615 7,794 (179) 676 (855) 7,794 9,866 (2,072) (76) (1,996)
Borrowed funds 3,709 3,318 391 1,456 (1,065) 3,318 3,878 (560) (401) (159)
- ---------------------------------------------------------------------------------------------------------------------------------
14,274 14,085 189 2,469 (2,280) 14,085 18,055 (3,970) (560) (3,410)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $22,665 $21,883 $ 782 $ 1,157 $ (375) $21,883 $22,727 $ (844) $ 218 $(1,062)
=================================================================================================================================
* 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 2004 increased to $22,665,000, up 3.57% from $21,883,000
in 2003. A 12.59% increase in average earning assets and a 51 basis point
decrease in average rate of return resulted in an increase in volume of
$3,626,000 and a decrease in rate of $2,655,000. An increase of 13.12% in
average interest-bearing liabilities and a 27 basis point decrease in average
rate of interest paid contributed to an increase in volume of $2,469,000 and a
decrease in rate of $2,280,000.
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.
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, 2004, the Corporation maintained cash balances and investments
available for sale totaling $169 million, representing 22% of total year-end
assets, versus $251 million or 35% of total assets at December 31, 2003.
The following tables summarize the Corporation's contractual obligations, as
well as commitments to fund loans.
December 31, 2004
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
Investment securities held to maturity $ 5,000 $ 5,000
Total borrowings 41,774 $16,783 $30,797 $ 8,000 97,354
Payable to Westbank
Capital Trusts II and III 17,526 17,526
Annual rental commitments
under non-cancellable
operating leases (Note 12) 349 400 143 155 1,047
- ---------------------------------------------------------------------------------------------------------------------------
$47,123 $17,183 $30,940 $25,681 $120,927
===========================================================================================================================
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 $19,050 $ 200 $ 70 $ 19,320
Undisbursed portion of loans in
process and unused portions
of lines of credit 42,168 4,259 $ 1,086 22,207 69,720
- ---------------------------------------------------------------------------------------------------------------------------
$61,218 $ 4,459 $ 1,086 $22,277 $ 89,040
===========================================================================================================================
At December 31, 2004, the Corporation had certificates of deposit maturing
within the next 12 months amounting to $211,575,000. 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 2004, 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 2004 and 2003 were $96,360,000 and $57,170,000 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.
On September 20, 2004, the Corporation completed a private placement of an
aggregate of $17.0 million of trust preferred securities through two
newly-formed Delaware trust affiliates, Westbank Capital Trust II ("Trust II")
and Westbank Capital Trust III ("Trust III") (collectively, "the Trusts"), as
part of a pooled transaction with several other financial institutions. As part
of this transaction, the Corporation issued an aggregate principal amount of
$8,763,000 of floating rate junior subordinated deferrable interest debentures
to Trust II, which debentures bore an initial interest rate of 4.06% until
December 2004, after which time they were and will continue to be reset
quarterly at 3-month LIBOR plus 2.19% and an aggregate principal amount of
$8,763,000 of fixed/floating rate junior subordinated deferrable interest to
Trust III, which debentures bear an initial interest rate of 5.98% until
December 2009, at which time they will be reset quarterly at 3-month LIBOR plus
2.19%. These debentures were each issued pursuant to the terms on an Indenture
dated September 20, 2004 between the Corporation and Wilmington Trust
Corporation as Trustee. The debentures obligate the Corporation to pay interest
on their principal sum quarterly in arrears on March 20, June 20, September 20
and December 20 of each year. As long as the Corporation is current in its
interest payments, it has the right to defer payments of interest on the
debentures by extending the interest payment period on the debentures for up to
20 consecutive quarterly periods. The debentures mature on September 20, 2034
but may be redeemed by the Corporation, in whole or in part, beginning on
September 20, 2009, or in whole within 120 days of the occurrence of certain
special redemption events. Special redemption events relate to the regulatory
capital treatment of the issuances, the Trust not being deemed investment
companies and the non-occurrence of certain tax events. The proceeds were used
to redeem the security issued by Westbank Capital Trust I, as discussed in Note
7 of the Consolidated Financial Statements.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
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, 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.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND 2003
Total assets were $756.4 million at December 31, 2004, an increase of $31
million or 4% from $725.4 million at December 31, 2003. The Corporation's
investment portfolio increased 13% to $267.8 million at the end of 2004 from
$236.5 million at the end of 2003. Net loans totaled $435 million at December
31, 2004, a decrease of $1.3 million from year-end December 31, 2003.
The Corporation experienced strong commercial, leasing and commercial mortgage
loan growth during 2004, which was offset by the sale of $23 million in 1-4
family residential real estate loans, as well as prepayments as a result of
refinancing. Commercial loans and leases totaled $78 million at year-end 2004,
an increase of 9% or $6.2 million from December 31, 2003. Commercial mortgages
and construction loans increased by $13.1 million and totaled $123.6 million as
of December 31, 2004, compared to December 31, 2003, representing an increase of
12%. Residential real estate and home equity loans declined to $194 million at
year-end 2004 and included the sale of $23 million of residential real estate
loans referred to above. As of December 31, 2004, consumer loans totaled $42.6
million versus $40.8 million at December 31, 2003 and consist primarily of
indirect automobile loans.
Deposits increased during 2004 by $53 million or 10% versus December 31, 2003
and totaled $590 million. During the twelve-month period, demand deposits grew
to $84.8 million, an increase of $7.9 million or 10% versus December 31, 2003.
Savings, NOW and Money Market accounts declined by $1.7 million from December
31, 2003 to December 31, 2004 and totaled $93.3 million, $42.8 million and $30.2
million respectively at year-end December 31, 2004. Time deposits totaled $339
million at December 31, 2004, an increase of $46.5 million versus December 31,
2003 when time deposits totaled $292.5 million.
Borrowing declined by $24.9 million during 2004 and totaled $97.4 million at
December 31, 2004 compared to $122.2 million at December 31, 2003. In addition,
in 2004 the Corporation refinanced the entire $17.5 million mandatorily
redeemable preferred stock at a much more favorable rate.
Stockholders' equity totaled $47.5 million at December 31, 2004, an increase of
$2.2 million from December 31, 2003. This increase was primarily due to net
income of $4.6 million, which was partially offset by the repurchase of 41,395
shares, the exercise of 92,847 shares of stock options and the payment of cash
dividends of $0.56 per share amounting to $2.6 million.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
COMPARISON OF OPERATING RESULTS
In the following sections of Management's Discussion and Analysis of the
Statements of Income, the comparative results of 2004, 2003 and 2002 will be
covered in greater detail. As of December 31, 2004, 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,
2004. The significant changes are discussed in the analysis that follows the
summary.
Percentage of
Increase (decrease)
2004 2003
Over Over
(Dollars in Thousands) 2004 2003 2002 2003 2002
=================================================================================================
Net interest income $ 22,535 $ 21,767 $ 22,521 3.53% (3.35)%
Provision for (recovery of) loan losses 225 (354) 1,333 163.56 (126.56)
Non-interest income 3,441 4,536 4,090 (24.14) 10.90
Non-interest expense 19,149 17,439 16,412 9.81 6.26
Income taxes 1,991 3,164 2,857 (37.07) 10.75
- -------------------------------------------------------------------------------------------------
Net Income $ 4,611 $ 6,054 $ 6,009 (23.84)% 0.75%
=================================================================================================
NET INCOME
The net income for 2004 of $4,611,000, or $1.00 per share basic and $0.95 per
share diluted, is based on a weighted average of 4,606,094 basic and 4,863,741
diluted shares outstanding, compared with a net income for 2003 of $6,054,000 or
$1.32 per share basic and $1.26 per share diluted based on a weighted average of
4,597,930 basic and 4,798,656 diluted shares outstanding. Net income in 2002 was
$6,009,000 or $1.30 per share basic and $1.27 per share diluted based on
weighted average shares of 4,626,909 basic and 4,735,460 diluted shares
outstanding.
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 2004 amounted to $36,809,000 as compared to
$35,852,000 for 2003 and $40,576,000 for 2002. For 2004, this represents an
increase of $957,000 or 2.7% versus 2003, while interest income decreased by
$4,724,000 or 11.6% in 2003 over 2002. The increase in 2004 is the result of an
increase in average earning assets of $78,040,000 or 12.57%, and a decrease of
51 basis points in average earning interest rate. The decrease in 2003 from 2002
is the result of an increase in average earning assets of $5,657,000 or .90%,
offset by a decrease of 72 basis points in average earning interest rate.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
INTEREST EXPENSE
Interest expense for 2004 on deposits and borrowings amounted to $14,274,000 as
compared to $14,085,000 in 2003 and $18,055,000 in 2002. Interest expense
increased by $189,000 or 1.3% during 2004 compared to 2003. During 2003,
interest expense decreased by $3,970,000 or 21.99% versus 2002. The 2004
increase is the result of an increase in average interest-bearing liabilities of
$70,437,000 and a 27 basis point decrease in the average rate of interest paid
compared to 2003. The decrease in interest expense during 2003 versus 2002 is
the result of a decrease in average interest-bearing liabilities of $11,718,000,
or 2.14%, combined with a 67 basis point decrease in the average rate of
interest paid compared to 2002.
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) 2004 2003 2002
=========================================================================
Total interest income $ 36,809 $ 35,852 $ 40,576
Total interest expense 14,274 14,085 18,055
- -------------------------------------------------------------------------
Net interest income $ 22,535 $ 21,767 $ 22,521
=========================================================================
Please see the RATE/VOLUME ANALYSIS OF INTEREST MARGIN ON EARNING ASSETS section
above on Page 13 for a breakdown of interest-earning assets and interest-bearing
liabilities that result in net interest income.
PROVISION FOR (RECOVERY OF) LOAN LOSSES
For 2004, the Corporation recorded a provision for loan losses of $225,000
compared with the recovery of a provision of $354,000 in 2003, an increase of
$579,000. The increase in the provision for loan losses during 2004 is
attributable to the overall mix and asset quality of the overall loan portfolio.
During 2003, the Corporation recorded a recovery of a provision of $354,000
versus a provision of $1,333,000 for 2002. The decrease in 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. Based on these facts,
management determined that a decrease in the provision was warranted for 2003.
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 $3,441,000 in 2004, a decrease of
$1,095,000 from the prior year and a decrease of $649,000 versus 2002.
Non-interest income for 2004 as compared to 2003 reflects an increase in Trust
Department earnings of $8,000, a decrease in service charges on deposit accounts
and loan servicing income of $106,000, a decrease in gains recognized from the
sale of investments of $1,259,000, an increase from gain on sale of mortgages of
$145,000 and an increase in other non-interest income of $136,000. The decline
of gain on sale of investments is partly the result of the write-down of
investments as other than temporarily impaired, previously discussed in the
Summary of Results. Non-interest income for 2003, as compared to 2002, 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.
17
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) 2004 2003 2002
=========================================================================
Salaries and benefits $ 10,393 $ 9,741 $ 9,084
Occupancy 1,192 1,221 1,128
Other non-interest expense 7,365 6,464 6,174
Other real estate owned expense 199 13 26
- -------------------------------------------------------------------------
$ 19,149 $ 17,439 $ 16,412
=========================================================================
Non-interest expense amounted to $19,149,000 in 2004, an increase of $1,710,000
or 9.81% versus 2003. The increase in operating expenses for 2004 is due to a
combination of the following: salaries and benefits increased by $652,000,
occupancy expense declined $29,000 and all other non-interest expense accounts
increased $1,087,000. The increase is a direct result of general additions to
staff, the overall growth of the Corporation, additions to staff and general
operating costs related to the opening of the Corporation's newest office in
Webster, Massachusetts, and the write-down of the origination costs from the
Corporation's initial trust preferred financing in 1999 totaling $807,000.
Overall non-interest expense increased during 2003 by $1,027,000 versus 2002.
During 2003, salaries and benefits increased by $657,000, occupancy expense
increased $93,000 and all other non-interest expense accounts increased
$277,000.
INCOME TAXES
For the year ended December 31, 2004, the Corporation recorded a tax expense of
$1,991,000 compared to 2003, when the Corporation recorded a tax expense of
$3,164,000 and a 2002 tax expense of $2,857,000. The decrease in tax expense for
2004 represents a lower level of income before taxes compared to 2003 and 2002,
in which a higher level of income was reported before taxes, and the settlement
of tax liability with the Commonwealth of Massachusetts during 2003 described
below.
During 2003, the Commonwealth of Massachusetts enacted legislation that
clarified the real estate investment trust ("REIT") dividend-received deduction
(the "Deduction") between a bank and its subsidiary operating as a REIT for
years ending on or after December 31, 1999. On February 4, 2003, 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 dissolved Park West REIT and distributed its assets
to its shareholders, which process was completed as of February 9, 2004.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
RECENT 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 required 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, 2004 were immaterial. The maximum potential
undiscounted amount of future payments of letters of credit under FIN 45 as of
December 31, 2004 are approximately $462,000, of which $10,000 expired on
January 9, 2005, $450,000 will expire on September 17, 2005 and $2,000 will
expire on September 28, 2005. 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 December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment", ("SFAS No. 123(R)"), which is an Amendment of FASB Statements Nos. 123
and 95. SFAS No. 123(R) will be effective as of July 1, 2005. The
fair-value-based method of expense recognition in SFAS No. 123(R) is similar to
the fair-value-based method described in SFAS No. 123 in most respects.
Management is currently evaluating the effect of the adoption of SFAS No. 123(R)
but does not expect its adoption to have a material effect on the Corporation's
financial condition or results of operations because the service periods for all
options granted prior to 2002 have been rendered.
At its March 2004 meeting, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 03-1, "Meaning of Other-than-Temporary Impairment
and Its Application to Certain Investments" ("EITF 03-1"), that prescribes
guidance to be used to determine when an investment in debt and equity
securities is considered impaired, whether the impairment is other than
temporary and the measurement of an impaired loss. The guidance also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment. The effective date for the impairment
measurement and recognition guidance of EITF 03-1 has been delayed until the
issuance of an FASB Staff Position expected to provide additional implementation
guidance. In compliance with its current policies in reference to impairment of
investments, the Corporation did take a write-down totaling $628,000 in the
current year as a result of the impairment of certain investments as described
in Note 2.
In December 2003, the FASB issued a revised interpretation, FIN 46(R),
"Consolidation of Variable Interest Entities", the provisions of which were
applicable to certain variable interest entities by March 31, 2004. FIN 46(R)
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(R) if the investors 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(R) 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.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The Corporation adopted the provisions under the revised interpretation in the
first quarter of 2004. Pursuant to the provisions of FIN 46(R), the Corporation
deconsolidated Westbank Capital Trust 1 at the end of the first quarter, which
resulted in eliminating the mandatorily redeemable preferred stock of $17
million previously reported and recognizing $17.5 million as a payable to
Westbank Capital Trust 1. Previously reported amounts as of December 31, 2004
have been restated to conform to this presentation. There was no change in total
outstanding debt. Amounts due to Westbank Capital Trust I were subsequently
repaid, as described in Note 7. The banking regulatory agencies have not issued
any guidance that would change the regulatory capital treatment for the trust
preferred securities based on the adoption of FIN 46(R). However, as additional
interpretations from the banking regulators become available, management will
reevaluate its potential impact on its Tier I capital calculation under such
interpretations. Similarly, Westbank Capital Trusts II and III are accounted for
as unconsolidated subsidiaries.
In March 2004, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 105, "Application of Accounting Principles to Loan
Commitments" ("SAB 105"). SAB 105 requires that a lender not consider the
expected future cash flows related to loan servicing or include internally
developed intangible assets, such as expected customer-related intangible
assets, in determining the fair value of loan commitments accounted for as
derivatives. SAB 105 was effective for commitments entered into after March 31,
2004. The requirements of SAB 105 apply to the Corporation's mortgage loan
interest rate lock commitments to the extent it originates loans held for sale.
The adoption of SAB 105 as of April 1, 2004 did not have a material effect on
the Corporation's financial condition or results of operations.
20
CONSOLIDATED BALANCE SHEETS
WESTBANK CORPORATION AND SUBSIDIARIES
December 31,
(Dollars in Thousands, Except per Share Amounts) 2004 2003
===============================================================================
ASSETS Cash and due from banks:
Non-interest bearing $ 12,451 $ 14,599
Interest bearing 34 40
- -------------------------------------------------------------------------------
12,485 14,639
Federal funds sold 669 39
- -------------------------------------------------------------------------------
Total cash and cash equivalents 13,154 14,678
- -------------------------------------------------------------------------------
Securities:
Investment securities available for sale,
at fair value 155,405 236,234
Investment securities held to maturity,
at amortized cost (fair value of $112,158
in 2004 and $262 in 2003) 112,424 250
- -------------------------------------------------------------------------------
Total securities 267,829 236,484
- -------------------------------------------------------------------------------
Investment in Federal Home Loan Bank stock 6,450 5,578
Loans, net of allowance for loan losses of
$4,356 in 2004 and $4,428 in 2003 435,013 436,339
Property and equipment, net 6,885 6,749
Other real estate owned held for sale, net 630
Accrued interest receivable 3,655 3,180
Goodwill 8,837 8,837
Bank-owned life insurance 9,204 9,205
Investment in unconsolidated investee 526 526
Net deferred tax asset 1,477 700
Other assets 2,781 3,166
- -------------------------------------------------------------------------------
Total assets $ 756,441 $ 725,442
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 84,758 $ 76,871
Interest-bearing 505,274 460,439
- -------------------------------------------------------------------------------
Total Deposits 590,032 537,310
Borrowed funds 97,354 122,204
Interest payable on deposits and borrowings 550 575
Other liabilities 3,517 2,552
Payable to Westbank Capital Trust I 17,526
Payable to Westbank Capital Trust II 8,763
Payable to Westbank Capital Trust III 8,763
- -------------------------------------------------------------------------------
Total liabilities 708,979 680,167
- -------------------------------------------------------------------------------
Commitments and contingent liabilities
- -------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $5 per share,
authorized 100,000 shares; none issued
Common stock, par value $2 per share,
authorized 9,000,000 shares; issued
4,746,397 shares in 2004 and 4,523,480
shares in 2003 9,493 9,047
Unearned compensation - restricted stock award (1,652)
Additional paid-in capital 20,377 14,524
Retained earnings 19,958 22,724
Treasury stock at cost (28,818 shares in 2004
and 114,232 shares in 2003) (606) (1,692)
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on securities
available for sale, net of income tax (108) 672
- -------------------------------------------------------------------------------
Total stockholders' equity 47,462 45,275
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 756,441 $ 725,442
===============================================================================
See notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF INCOME
WESTBANK CORPORATION AND SUBSIDIARIES
Years ended December 31,
(Dollars in Thousands, Except Per-Share Amounts) 2004 2003 2002
=========================================================================================================
Interest and dividend income:
Interest and fees on loans $ 24,679 $ 28,529 $ 31,905
Interest and dividend income from securities 12,029 7,154 8,348
Interest from interest-bearing cash equivalents
and federal funds sold 101 169 323
- ---------------------------------------------------------------------------------------------------------
Total interest and dividend income 36,809 35,852 40,576
- ---------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 10,565 10,767 14,177
Interest on borrowed funds 3,709 3,318 3,878
- ---------------------------------------------------------------------------------------------------------
Total interest expense 14,274 14,085 18,055
- ---------------------------------------------------------------------------------------------------------
Net interest income 22,535 21,767 22,521
Provision for (recovery of) loan losses 225 (354) 1,333
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision for (recovery of) loan losses 22,310 22,121 21,188
- ---------------------------------------------------------------------------------------------------------
Non-interest income:
Trust 649 641 652
Service charges on deposits 1,012 1,137 1,186
Loan servicing 31 12 154
Write-down of securities other than temporarily impaired (628)
Gain (loss) on sale of securities available for sale 507 1,138 (218)
Gain on sale of other real estate owned 45
Gain on sale of loans 478 333 118
Other 1,392 1,275 2,153
- ---------------------------------------------------------------------------------------------------------
Total non-interest income 3,441 4,536 4,090
- ---------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and benefits 10,393 9,741 9,084
Depreciation and amortization 724 734 789
Data processing 1,762 1,771 1,625
Marketing 573 628 388
Supplies 339 312 353
Occupancy 1,192 1,221 1,128
Other real estate owned 199 13 26
Other 3,967 3,019 3,019
- ---------------------------------------------------------------------------------------------------------
Total non-interest expense 19,149 17,439 16,412
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 6,602 9,218 8,866
Income taxes 1,991 3,164 2,857
- ---------------------------------------------------------------------------------------------------------
Net income $ 4,611 $ 6,054 $ 6,009
=========================================================================================================
Earnings per share:
- Basic $ 1.00 $ 1.32 $ 1.30
- Diluted 0.95 1.26 1.27
=========================================================================================================
Weighted average shares outstanding:
- Basic 4,606,094 4,597,930 4,626,909
- Diluted 4,863,741 4,798,656 4,735,460
=========================================================================================================
See notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
WESTBANK CORPORATION AND SUBSIDIARIES
Unearned Accumulated
Common Stock Compensation Additional Other
(Dollars in Thousands, Outstanding Par Restricted paid-in Retained Treasury Comprehensive
Except Per-Share Amounts) Shares value Stock Award capital earnings Stock Income/(Loss) Total
=================================================================================================================================
Balance, January 1, 2002 4,266,383 $ 8,632 $ 11,782 $ 17,787 $ (431) $ 1,246 $ 39,016
Net income 6,009 6,009
Cash dividends declared ($.44 per share) (1,849) (1,849)
Shares reissued from treasury stock:
Stock option plan 54,055 (243) 547 304
Dividend reinvestment and
stock purchase plan 42,310 122 408 530
Changes in unrealized gain (loss)
on securities available for sale 1,133 1,133
Repurchase of common stock (202,658) (2,615) (2,615)
Income tax benefit for exercise of
non-qualified stock options 84 84
5% Common stock dividend 207,690 415 2,752 (3,167) 0
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 4,367,780 9,047 14,497 18,780 (2,091) 2,379 42,612
Net income 6,054 6,054
Cash dividends declared ($.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)
Repurchase of common stock (55,687) (904) (904)
Income tax benefit for exercise of
non-qualified stock options 105 105
Stock option compensation 95 95
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 4,409,248 9,047 14,524 22,724 (1,692) 672 45,275
Net income 4,611 4,611
Cash dividends declared
($.56 per share) (2,561) (2,561)
Shares reissued from treasury stock:
Stock option plan 92,847 (611) 1,369 758
Dividend reinvestment and
stock purchase plan 34,076 126 561 687
Changes in unrealized gain (loss)
on securities available for sale (780) (780)
Repurchase of common stock (41,395) (842) (842)
Income tax benefit for exercise of
non-qualified stock options 182 182
Stock option compensation 11 11
Issuance of restricted stock award (1,785) 1,785
Change in unearned compensation 133 133
5% common stock dividend 222,803 446 4,360 (4,816) (2) (12)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2004 4,717,579 $ 9,493 $(1,652) $ 20,377 $ 19,958 $ (606) $ (108) $ 47,462
=================================================================================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
(Dollars in Thousands) 2004 2003 2002
=================================================================================================
Net income $ 4,611 $ 6,054 $ 6,009
- -------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale,
net of income taxes (benefit) of $(479) in 2004,
$(495) in 2003 and $509 in 2002 (858) (960) 989
Less: reclassification adjustment for (gains)/losses
included in net income, net of income taxes (benefit)
of $(43) in 2004, $391 in 2003 and $(74) in 2002 78 (747) 144
- -------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (780) (1,707) 1,133
- -------------------------------------------------------------------------------------------------
Comprehensive income $ 3,831 $ 4,347 $ 7,142
=================================================================================================
See notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
Westbank Corporation and Subsidiaries
Years ended December 31,
(Dollars in Thousands) 2004 2003 2002
=========================================================================================================
Operating activities:
Net income $ 4,611 $ 6,054 $ 6,009
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for (recovery of) loan losses 225 (354) 1,333
Write-down of other real estate owned held for sale 76 11
Depreciation and amortization 724 734 789
Accretion of investment discounts (117) (94) (20)
Loan originations - held-for-sale (6,630) (827)
Proceeds from sale of held-for-sale loans 6,707 838
Realized (gain) loss on sale of securities (507) (1,138) 218
Write-down of securities other than temporarily impaired 628
Realized gain on sale of other real estate owned (45)
Realized gain on sale of loans (478) (333) (118)
Realized gain on sale of property and equipment (4)
Excess bank owned life insurance proceeds over book value (215)
Deferred income taxes prepaid (341) (1,719) (623)
Exercise of non-qualified stock options 182 200
Stock compensation 144
Change in assets and liabilities
(Increase) Decrease in accrued interest receivable (475) (143) 248
(Increase) Decrease in Bank-owned life insurance (322) (370) 193
(Increase) Decrease in other assets 455 (2,001) (320)
Increase (Decrease) in accrued interest payable (25) (90) 6
Increase (Decrease) in other liabilities 965 (176) 338
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,603 581 8,019
=========================================================================================================
Investing activities:
Securities:
Held to maturity:
Purchases (127,205)
Proceeds from maturities and principal payments 15,068 186 321
Available for sale:
Purchases (82,607) (217,627) (62,503)
Proceeds from sales 42,220 50,885 21,260
Proceeds from maturities and principal payments 119,957 83,141 75,833
Purchases of Federal Home Loan Bank stock (872) (1,319)
Purchases of property and equipment, net (860) (897) (859)
Proceeds from sale of property and equipment 4
Proceeds from bank owned life insurance 538
Net increase in loans (16,366) (24,666) (59,662)
Proceeds from loan sales 17,094 38,509
Proceeds from sale of other real estate owned 312
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (33,029) (71,788) (25,298)
=========================================================================================================
Financing activities:
Net increase (decrease) in deposits 52,722 (25,293) 51,898
Net increase (decrease) in short-term borrowings (9,517) 31,645 (10,113)
Proceeds from long-term borrowings 12,500 50,000 17,500
Repayment of long-term borrowings (27,833) (15,833) (8,661)
Proceeds from exercise of stock options and stock purchase plan 1,445 1,130 834
Proceeds from issuance of mandatorily redeemable preferred stock 17,526
Proceeds used to redeem mandatorily redeemable preferred stock (17,526)
Treasury stock repurchases (854) (904) (2,531)
Dividends paid (2,561) (2,110) (1,849)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 25,902 38,635 47,078
=========================================================================================================
(Decrease) Increase in cash and cash equivalents (1,524) (32,572) 29,799
Cash and cash equivalents at beginning of year 14,678 47,250 17,451
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 13,154 $ 14,678 $ 47,250
=========================================================================================================
Cash paid during the year:
Interest on deposits and other borrowings $ 14,299 $ 13,995 $ 18,049
Income taxes - net of refunds 1,803 5,882 4,170
Supplemental disclosure of cash flow information:
Securitization of loans into mortgage-backed securities 26,079 23,495
Transfers of loans to other real estate owned 574 74
Unrealized (loss) gain on securities available for sale, net of taxes (780) (1,707) 1,133
See notes to consolidated financial statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WESTBANK CORPORATION AND SUBSIDIARIES
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Westbank Corporation (the
"Corporation") and its subsidiaries are in conformity with accounting principles
generally accepted in the United States of America and general practices within
the banking industry. The following is a description of the more significant
policies.
NATURE OF BUSINESS
As of December 31, 2004, the Corporation, a bank holding company, provides
financial services through its wholly-owned subsidiary, Westbank, a commercial
bank and trust company (the "Bank") with eighteen (18) offices located in
Massachusetts and Connecticut. A full range of retail banking services is
furnished to individuals, businesses and non-profit organizations. The
Corporation's primary source of revenue is derived from providing loans to
customers, predominantly located in western and central Massachusetts and
northeastern Connecticut.
The Corporation's banking, real estate activity and trust services are
competitive with other financial institutions. The Bank's primary competition
includes local, regional and super-regional commercial banks, mutual savings
banks, savings and loan associations, credit unions, consumer finance companies,
loan offices, money market funds and other financing organizations.
Additionally, competition for trust services from major commercial banks is
high, with efforts continuing by those banks to solicit new business. Insurance
companies, mutual savings banks, investment counseling firms, and other business
firms and individuals also offer active competition for such business. The
competitive landscape is also likely to become even more crowded with mergers,
acquisitions, expansions and new market entries planned in 2005.
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 2003 and 2002 financial statements have
been reclassified to conform to the 2004 presentation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and affect the reported amounts of income
and expenses for each year. Material estimates that are particularly susceptible
to significant change relate to the determination of the allowance for loan
losses, valuation of securities and impairment of goodwill and investment
securities. In addition, various regulatory agencies, as an integral part of the
examination process, periodically review the Corporation's allowance for losses
on loans, the valuation of securities and other real estate owned. Such agencies
may require the Corporation to recognize additions to the allowance or other
valuation adjustments based on their judgments about information available to
them at the time of their examination.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
CASH AND CASH EQUIVALENTS
The Corporation classifies cash and due from banks and federal funds sold on an
overnight basis to be cash and cash equivalents. At December 31, 2004, the
Corporation had $650,000 on deposit with the Federal Reserve Bank and other
financial institutions pursuant to compensatory balance arrangements or other
requirements.
SECURITIES
Securities that management has the positive intent and ability to hold until
maturity are stated at cost, adjusted for amortization of premiums and accretion
of discounts. Those securities that have been identified as assets for which
there is not a positive intent to hold to maturity, including all marketable
equity securities, are classified as available for sale with unrealized gains
(losses), net of income taxes, reported as a separate component of stockholders'
equity. The Corporation determines if securities will be classified as held to
maturity or available for sale at the time of purchase. In addition, any
mortgage-backed securities securitized from the Corporation's own inventory of
residential real estate loans are also considered available for sale. Gains and
losses on sales of securities are recognized in non-interest income at the time
of sale on a specific identification basis. The Corporation does not engage in
trading activities.
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis and more frequently when economic or market conditions warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. Securities that
have experienced an other-than-temporary decline in value are written down to
estimated fair value, establishing a new cost basis with the amount of the
write-down expensed as a realized loss.
LOANS
Interest income on loans is recorded on an accrual basis. Loan origination fees,
net of certain direct loan origination costs, are deferred and recognized as
income over the life of the related loan as an adjustment to the loan's yield.
Non-accrual loans are loans on which the accrual of interest is ceased when the
collection of principal or interest payments is determined to be doubtful by
management. It is the general policy of the Corporation to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days,
unless the loan principal and interest are determined by management to be fully
collectible and are in the process of collection. Any unpaid amounts previously
accrued on these loans are reversed from income. Interest received on a loan in
non-accrual status is applied to reduce principal or, if management determines
that the principal is collectible, applied to interest on a cash basis. A loan
is returned to accrual status after the borrower has brought the loan current
and has demonstrated compliance with the loan terms for a sufficient period, and
management's doubts concerning collectibility have been removed.
The Corporation measures impairment of loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" (collectively "SFAS
No. 114"). A loan is recognized as impaired when it is probable that either
principal or interest is not collectible in accordance with the terms of the
loan agreement. Measurement of impairment for commercial loans is generally
based on the present value of expected future cash flows discounted at the
loan's effective interest rate. Commercial real estate loans are generally
measured based on the fair value of the underlying collateral. If the estimated
fair value of the impaired loan is less than the related recorded amount, a
specific valuation allowance is established or a write-down is charged against
the allowance for loan losses. Smaller balance homogenous loans, including
residential real estate and consumer loans, are excluded from the provisions of
SFAS No. 114. Income on impaired loans is recognized based on the payment
history of each loan.
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is based on the SFAS No. 114 analysis and a formula-based
reserve that incorporates the Corporation's loan loss history, among other
factors. For the SFAS No. 114 analysis, on a quarterly basis the Corporation
performs an internal review of the loan portfolio and identifies required
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 within the formula range is based
on management's evaluation of relevant qualitative factors (e.g. local area
economic statistics) and the percentage of loan loss reserves to aggregate
loans. Loan losses are charged against the allowance for loan losses when
management believes the collectibility of the principal is unlikely.
The formula reserve allocation is calculated by applying loss factors to
outstanding loans by loan category. Loss factors are based on various factors,
including historical loss experience. The reserve allocation also incorporates
general business and economic conditions, credit quality trends, loan
concentrations, industry conditions within portfolio segments and overall
delinquency levels.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method.
Amortization of leasehold improvements is charged over the terms of the
respective leases, including option periods, or the estimated lives of the
improvements, whichever is shorter. Gains and losses are recognized upon
disposal of assets. The cost of maintenance and repairs is charged to income as
incurred, whereas significant repairs are capitalized.
OTHER REAL ESTATE OWNED HELD FOR SALE
Other real estate owned ("OREO") includes properties the Corporation has
acquired through foreclosure and are held for sale. OREO is recorded at the
lower of cost or fair value at the date of acquisition, less estimated selling
costs. At the time of foreclosure, the excess, if any, of the loan amount over
the fair value of the asset acquired is charged off against the allowance for
loan losses. Operating expenses to administer OREO properties are charged
directly to operating expenses. Valuation allowances are established subsequent
to acquisition, as necessary, based upon management's continuing assessment of
the fair values of the properties. Loans granted in conjunction with sales of
OREO are required to comply with the Corporation's standard underwriting
criteria, including receipt of an adequate down payment.
LOAN SALES AND SERVICING RIGHTS
The Corporation periodically sells loans in the secondary market and retains the
related servicing rights. Mortgage servicing rights are recognized as an asset
when loans are sold with servicing retained, by allocating the cost of an
originated mortgage loan between the loan and the servicing right based on
relative estimated fair values. The value allocated to servicing rights is
capitalized as a separate asset and is amortized over the estimated net
servicing income period.
Capitalized mortgage servicing rights are evaluated for impairment by comparing
the asset's unamortized cost to its current estimated fair value. Fair values
are estimated using a discounted cash flow approach, which considers future
servicing income and costs, current market interest rates, and anticipated
prepayment and default rates. In making impairment evaluations, mortgage
servicing rights are stratified based on one or more of the predominant risk
characteristics of the underlying loans. The Corporation has stratified its
servicing portfolio for this purpose between fixed and adjustable rate loans.
Impairment losses, if any, are recognized through a valuation allowance for each
impaired stratum. Adjustments to the valuation allowance are charged or credited
to income. At December 31, 2004 and 2003, the mortgage servicing asset totaled
$755,000 and $849,000 respectively, for which there was no valuation allowance.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Corporation follows the provision of SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
140"), which provides for a financial-components approach that recognizes the
financial and servicing assets it controls and the liabilities it has occurred,
derecognizes assets when control has been surrendered and derecognizes
liabilities when extinguished.
INCOME TAXES
The Corporation uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. A valuation allowance is provided on deferred tax assets when it is more
likely than not that some portion of the assets will not be realized. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
PENSION PLAN
The Corporation has a defined contribution pension and a 401K plan covering
substantially all employees. The Corporation'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."
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
STOCK DIVIDEND
On April 12, 2004, the Corporation announced a five percent (5%) stock dividend,
payable to shareholders of record May 12, 2004. As a result of the stock
dividend, all earnings-per-share data have been adjusted retroactively for the
three-year period (2004-2002) presented in accordance with SFAS No. 128,
"Earnings per Share." Shares outstanding for the periods presented also have
been restated to reflect the May 18, 2004 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) 2004 2003 2002
==========================================================================================================================
Net income:
Reported net income $ 4,611 $ 6,054 $ 6,009
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects 95 63
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards net of related taxes
effects (1) 95 63 875
- --------------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 4,611 $ 6,054 $ 5,134
==========================================================================================================================
Earnings per share:
Basic - as reported $1.00 $1.32 $1.30
==========================================================================================================================
Basic - pro forma $1.00 $1.32 $1.11
==========================================================================================================================
Diluted - as reported $0.95 $1.26 $1.27
==========================================================================================================================
Diluted - pro forma $0.95 $1.26 $1.08
==========================================================================================================================
(1) All previously awarded grants were fully vested prior to January 2, 2003.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
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. Options to purchase 8,400
shares of common stock issued in February 2004 were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares. These options
expire in 2014. There were no antidilutive common stock equivalents excluded
from the weighted average number of common shares outstanding in 2003. For 2002,
options to purchase 125,500 shares of common stock issued in 1998 were not
included in the computation of diluted earnings per share because the option
exercise price was greater than the average price of the common shares.
GOODWILL
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 ceased amortization of goodwill and 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 annual impairment tests as of December 31, 2004, 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.
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 $165,501,000 and
$172,881,000 at December 31, 2004 and 2003, 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.
RECENT 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, 2004 were immaterial. The maximum potential
undiscounted amount of future payments of letters of credit under FIN 45 as of
December 31, 2004 are approximately $462,000, of which $10,000 expired on
January 9, 2005, $450,000 will expire on September 17, 2005 and $2,000 will
expire on September 28, 2005. 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.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment", ("SFAS No. 123(R)"), which is an Amendment of FASB Statements Nos. 123
and 95. SFAS No. 123(R) will be effective as of July 1, 2005. The
fair-value-based method of expense recognition in SFAS No. 123(R) is similar to
the fair-value-based method described in SFAS No. 123 in most respects.
Management is currently evaluating the effect of the adoption of SFAS No. 123(R)
but does not expect its adoption to have a material effect on the Corporation's
financial condition or results of operations because the service periods for all
options granted prior to 2002 have been rendered.
At its March 2004 meeting, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 03-1, "Meaning of Other-than-Temporary Impairment
and Its Application to Certain Investments" ("EITF 03-1"), that prescribes
guidance to be used to determine when an investment in debt and equity
securities is considered impaired, whether the impairment is other than
temporary and the measurement of an impairment loss. The guidance also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment. The effective date for the impairment
measurement and recognition guidance of EITF 03-1 has been delayed until the
issuance of an FASB Staff Position expected to provide additional implementation
guidance. In compliance with its current policies in reference to impairment of
investments, the Corporation did take a write-down in the current year as a
result of the impairment of certain investments as described in Note 2.
In December 2003, the FASB issued a revised interpretation, FIN 46(R),
"Consolidation of Variable Interest Entities", the provisions of which were
applicable to certain variable interest entities as of March 31, 2004. FIN 46(R)
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(R) if the investors 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(R) 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.
The Corporation adopted the provisions of FIN 46(R) under the revised
interpretation in the first quarter of 2004. Pursuant to the provisions of FIN
46(R), the Corporation deconsolidated Westbank Capital Trust 1 at the end of the
first quarter, which resulted in eliminating the mandatorily redeemable
preferred stock of $17 million previously reported and recognizing $17.5 million
as a payable to Westbank Capital Trust 1. Previously reported amounts as of
December 31, 2003 have been restated to conform to this presentation. Amounts
due to Westbank Capital Trust I were subsequently refinanced, as described in
Note 7. The banking regulatory agencies have not issued any guidance that would
change the regulatory capital treatment for trust preferred securities, which
continue to be treated as Tier 1 capital. However, as additional interpretations
from the banking regulators become available, management will reevaluate its
potential impact on its Tier I capital calculation under such interpretations.
Similarly, Westbank Capital Trusts II and III are accounted for as
unconsolidated subsidiaries.
In March 2004, the Securities and Exchange Commission released Staff Accounting
Bulletin No. 105, "Application of Accounting Principles to Loan Commitments"
("SAB 105"). SAB 105 requires that a lender not consider the expected future
cash flows related to loan servicing or include internally developed intangible
assets, such as expected customer-related intangible assets, in determining the
fair value of loan commitments accounted for as derivatives. SAB 105 is
effective for commitments entered into after March 31, 2004. The requirements of
SAB 105 apply to the Corporation's mortgage loan interest rate locked
commitments to the extent it originates loans held for sale. The adoption of SAB
105 as of April 1, 2004 did not have a material effect on the Corporation's
financial condition or results of operations.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
2 - SECURITIES
Investment securities held to maturity at December 31 are as follows:
2004
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value loss
=================================================================================================================================
Federal agency obligations $ 69,400 $ 119 $ 164 $ 69,355 $ (45)
Mortgage-backed securities 43,024 135 356 42,803 (221)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 112,424 $ 254 $ 520 $ 112,158 $ (266)
=================================================================================================================================
2003
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain
=================================================================================================================================
Mortgage-backed securities $ 250 $ 12 $ 262 $ 12
=================================================================================================================================
During 2004, 2003 and 2002, there were no sales of investment securities
classified as held to maturity.
Investment securities available for sale at December 31 are as follows:
2004
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain (loss)
=================================================================================================================================
Federal agency obligations $ 114,113 $ 181 $ 68 $ 114,226 $ 113
Mortgage-backed securities 37,579 48 432 37,195 (384)
Municipal bonds 1,556 64 1,620 64
Equity securities 2,324 47 7 2,364 40
- ---------------------------------------------------------------------------------------------------------------------------------
$ 155,572 $ 340 $ 507 $ 155,405 $ (167)
=================================================================================================================================
2003
Gross Gross Net
Amortized unrealized unrealized Fair unrealized
(Dollars in Thousands) cost gains losses value gain (loss)
=================================================================================================================================
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 3,176 80 324 2,932 (244)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 235,184 $ 1,718 $ 668 $ 236,234 $ 1,050
=================================================================================================================================
The Corporation recorded gross gains (losses) for 2004, 2003 and 2002 on
securities available for sale totaling $595,000 and $(88,000), $1,233,000 and
($95,000), and $58,000 and ($276,000) respectively.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 2004 are as follows (actual maturities may differ from contractual
maturities because certain issuers have the right to call or prepay
obligations):
Amortized Fair
(Dollars in Thousands) cost value
==========================================================================================================================
Held to Maturity:
Within 1 year
Over 1 year to 5 years $ 4,998 $ 5,011
Over 5 years to 10 years 64,402 64,344
Over 10 years
- --------------------------------------------------------------------------------------------------------------------------
69,400 69,355
Mortgage-backed securities 43,024 42,803
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities $ 112,424 $ 112,158
==========================================================================================================================
Amortized Fair
(Dollars in Thousands) cost value
==========================================================================================================================
Available for sale:
Within 1 year $ 268 $ 268
Over 1 year to 5 years 27,566 27,626
Over 5 years to 10 years 87,500 87,609
Over 10 years 335 343
- --------------------------------------------------------------------------------------------------------------------------
115,669 115,846
Mortgage-backed securities 37,579 37,195
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities $ 153,248 $ 153,041
==========================================================================================================================
At December 31, 2004, securities with a carrying amount and fair value of
$40,341,000 and $40,658,000, respectively, were pledged to secure public
deposits, repurchase agreements and for other purposes as required by law.
Information pertaining to securities with gross unrealized losses at December
31, 2004, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows.
Less than Twelve (12) Months Over Twelve (12) Months
---------------------------- -----------------------
Gross Gross
Unrealized Fair Unrealized Fair
(Dollars in Thousands) Losses Value Losses Value
=============================================================================================================
Held to maturity
U.S. government and federal agency $ 164 $ 29,834
Mortgage-backed 356 25,487
- -------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 520 $ 55,321
=============================================================================================================
Securities available for sale
Debt securities
U.S. government and federal agency $ 68 $ 28,432
Mortgage-backed 401 31,636 $ 31 $ 1,707
- -------------------------------------------------------------------------------------------------------------
Total debt securities 469 60,068 31 1,707
Marketable equity securities 7 493
- -------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 476 $ 60,561 $ 31 $ 1,707
=============================================================================================================
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
Information pertaining to securities with gross unrealized losses at December
31, 2003, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows.
Less than Twelve (12) Months Over Twelve (12) Months
---------------------------- -----------------------
Gross Gross
Unrealized Fair Unrealized Fair
(Dollars in Thousands) Losses Value Losses Value
=============================================================================================================
Held to maturity
U.S. government and federal agency
Mortgage-backed $ 7
- -------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 0 $ 7 $ 0 $ 0
=============================================================================================================
Securities available for sale
Debt securities
U.S. government and federal agency $ (127) $ 32,679
Mortgage-backed (217) 16,397
- -------------------------------------------------------------------------------------------------------------
Total debt securities (344) 49,076
Marketable equity securities $ (324) $ 2,626
- -------------------------------------------------------------------------------------------------------------
Total securities available for sale $ (344) $ 49,076 $ (324) $ 2,626
=============================================================================================================
The Corporation's investment portfolio does include a high degree of
concentration. However, the concentrations are limited to federal agency debt
securities and mortgage-backed securities issued by government sponsored
agencies. The Corporation's mortgage-backed securities are directly or
indirectly insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae.
Market risk from changes in interest rates also may have a significant impact on
the market value of the Corporation's investment portfolio. The Corporation
takes these factors into account when evaluating securities for other than
temporary impairment.
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis and more frequently when economic or market conditions warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
At December 31, 2004, 33 debt securities totaling $62.3 million have unrealized
losses with depreciation of .86% from the Corporation's amortized cost basis.
These unrealized losses relate principally to the increase in interest rates
during 2004. In analyzing an issuer's financial condition, management considers
whether the securities are issued by the federal government or its agencies,
whether downgrades by bond rating agencies have occurred and industry analysts'
reports. As the credit quality of the securities remains unchanged and
management has the ability to hold debt securities until maturity or for the
foreseeable future, no declines are deemed to be other than temporary.
At December 31, 2004, the Corporation held eight (8) equity securities with a
book value of $2,324,000 and an aggregate unrealized gain of $30,000. Management
evaluated four (4) adjustable rate securities for other than temporary
impairment and determined that the impairment was other than temporary and that
the decline in fair value reflected changes in short-term interest rates and the
length and timing of the adjustment feature. The securities were in an
unrealized loss position for more than twelve (12) months. For the year ended
December 31, 2004, management recognized impairment write-downs on these four
(4) securities totaling $628,000.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
3 - LOANS, ALLOWANCE FOR LOAN LOSSES AND MORTGAGE SERVICING RIGHTS
Loans consisted of the following at December 31:
(Dollars in Thousands) 2004 2003
======================================================================================================================
Commercial $ 65,849 $ 64,974
Real estate construction 11,009 7,045
Real estate 306,580 320,178
Consumer 42,562 40,847
Leases 12,384 7,024
Deferred loan origination costs - net 985 699
- ----------------------------------------------------------------------------------------------------------------------
439,369 440,767
Allowance for loan losses (4,356) (4,428)
- ----------------------------------------------------------------------------------------------------------------------
$ 435,013 $ 436,339
======================================================================================================================
Changes in the allowance for loan losses are summarized as follows:
(Dollars in Thousands) 2004 2003 2002
======================================================================================================================
Balance, beginning of year $ 4,428 $ 5,111 $ 4,179
Provision for (recovery of) loan losses 225 (354) 1,333
Loans charged off (321) (448) (489)
Recoveries 24 119 88
- ----------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 4,356 $ 4,428 $ 5,111
======================================================================================================================
The aggregate principal balance of non-accrual loans was $1,614,000 and
$3,111,000 at December 31, 2004 and 2003 respectively. Contractual interest
income that would have been accrued on such non-accrual loans was $36,000,
$106,000 and $159,000 for 2004, 2003 and 2002 respectively. No income was
recognized on non-accrual loans during this period.
The Corporation did not sell any loans with recourse during 2004 or 2003. The
remaining recourse exposure on prior sales was $213,000 at December 31, 2004.
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.
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. Of the $306,580,000 in real estate loans at
December 31, 2004, $193,947,000 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 $123,642,000 in
outstanding principal at December 31, 2004. 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 $65,849,000 at December 31, 2004 represent loans made to
businesses primarily in western Massachusetts and northeastern Connecticut. At
December 31, 2003, real estate loans totaled $327,223,000, of which $216,670,000
was collateralized by 1-4 family dwellings, while commercial real estate and
real estate construction loans totaled $110,553,000 at December 31, 2003.
There were no loans held for sale at December 31, 2004 and 2003.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
The value of loans pledged as collateral on borrowings at December 31, 2004 and
2003 was $116,219,000 and $116,845,000 respectively.
The Corporation has had, and expects to have in the future, banking transactions
in the ordinary course of business with its directors and officers. Such loans,
in the opinion of management, do not include more than the normal risk of
collectibility nor other unfavorable factors. The following summarizes the
activity with respect to indebtedness, both direct and indirect, for directors,
policy-making officers and major stockholders during the years ended December
31:
(Dollars in Thousands) 2004 2003
======================================================================================================================
Balance at beginning of year $ 9,598 $ 10,876
New loans granted 4,149 2,473
Repayments of principal and loans sold (2,930) (3,751)
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 10,817 $ 9,598
======================================================================================================================
Included in the aggregate loans to insiders listed above is a loan relationship
with the Eastern States Exposition, a not-for-profit company. The Corporation
and Bank's President and Chief Executive Officer, Donald R. Chase, is the
Chairman of the Board of this not-for-profit, and the Corporation and Bank's
Director G. Wayne McCary is its President and Chief Executive Officer. As of
December 31, 2004, the Eastern States Exposition had indebtedness from the Bank
in the principal amount of $2,859,000. This loan is secured primarily by real
estate and was granted under the same terms, including interest rates and
collateral, as similar commercial real estate loans. The loan was made in the
ordinary course of the Bank's business and does not involve more than the normal
risk of collectability or present other unfavorable features.
At December 31, 2004 and 2003, the recorded investment in impaired loans was
$2,762,000 and $2,052,000 respectively, of which $-0- and $2,052,000,
respectively, were in non-accrual status. For the years ended December 31, 2004,
2003 and 2002, the average recorded investment in impaired loans was $690,000,
$767,000 and $632,000, 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 $2,762,000 and $2,052,000 at December 31, 2004 and 2003. The total
allowance for loan losses allocated to these impaired loans was $385,000 and
$349,000 at December 31, 2004 and 2003. Interest income recognized during 2004,
2003 and 2002 on impaired loans was not significant. At December 31, 2004, the
investment in impaired loans comprised real estate loans, for which the
allowance for loan losses was determined based on the fair value of the
underlying collateral.
The Corporation had no commitments to lend additional funds to borrowers having
loans that are on non-accrual status, impaired or restructured.
The Corporation services loans for others that are not included in the
consolidated balance sheets. The unpaid balances of these loans totaled
$108,276,000, $130,852,000 and $113,686,000 at December 31, 2004, 2003 and 2002
respectively.
The fair value of the servicing rights were $788,000, $849,000 and $571,000
respectively at December 31, 2004, 2004 and 2002. The fair value of servicing
rights was determined using discount rates ranging from 9% to 10% and prepayment
speeds ranging from 12.7% to 42.9%, depending upon the stratification of the
specific right.
The Corporation is required to carry mortgage servicing rights at the lower of
amortized cost or fair value. At December 31, 2004, the amortized cost was lower
than the estimated fair value. At December 31, 2003 and 2002, servicing rights
were written down to fair value.
(Dollars in Thousands) 2004 2003 2002
======================================================================================================================
Mortgage servicing rights:
Balance at beginning of year $ 849 $ 571 $ 457
Mortgage servicing rights capitalized 200 570 293
Mortgage servicing rights amortized (294) (207) (159)
Provision for loss in fair value (85) (20)
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 755 $ 849 $ 571
======================================================================================================================
Valuation allowances:
Balance at beginning of year
Additions $ 0 $ 85 $ 20
Reductions 0 (85) (20)
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 0 $ 0 $ 0
======================================================================================================================
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
4 - PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31 are summarized as
follows:
Estimated
(Dollars in Thousands) 2004 2003 Lives
======================================================================================================================
Land and buildings (including land of
$2,001 in 2004 and $1,743 in 2003) $ 7,244 $ 6,986 15-40 years
Capital lease building 264 264 15 years
Furniture and equipment 4,873 4,358 3-10 years
Leasehold and building improvements 2,707 2,620 5-15 years
Motor vehicles 122 138 3 years
- ----------------------------------------------------------------------------------------------------------------------
15,210 14,366
Accumulated depreciation 8,325 7,617
- ----------------------------------------------------------------------------------------------------------------------
Property and equipment, net $ 6,885 $ 6,749
======================================================================================================================
The Corporation uses the straight line depreciation method.
5 - DEPOSITS
Deposit accounts, by type, and the related average interest rates as of December
31 are summarized as follows:
(Dollars in Thousands) 2004 Rate 2003 Rate
======================================================================================================================
Demand deposit $ 84,758 $ 76,871
Savings 93,308 0.40% 97,084 0.50%
NOW 42,824 0.56 33,009 0.13
Money market 30,153 1.05 37,871 1.14
Time deposits 338,989 2.91 292,475 2.99
- ----------------------------------------------------------------------------------------------------------------------
$ 590,032 $ 537,310
======================================================================================================================
As of December 31, 2004 and December 31, 2003, $116,211 and $51,943 in overdrawn
demand deposit balances were reclassified as loans.
At December 31, 2004, the scheduled maturities of time deposits with a fixed
maturity are as follows:
(Dollars in Thousands)
======================================================================================================================
Year ending December 31,
2005 $ 211,575
2006 81,986
2007 22,477
2008 8,659
2009 and after 14,292
- ----------------------------------------------------------------------------------------------------------------------
$ 338,989
======================================================================================================================
Certificates of deposit with balances greater than or equal to $100,000 amount
to $75,446,000 and $56,714,000 as of December 31, 2004 and 2003 respectively.
Interest paid on these deposits totaled approximately $1,988,000 and $1,785,000
during 2004 and 2003 respectively.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
6 - BORROWED FUNDS
Short-term borrowings as of December 31 are as follows:
(Dollars in Thousands) 2004 2003
======================================================================================================================
Securities sold under agreements to repurchase $ 14,085 $ 10,261
Purchased federal funds 21,330 35,670
Treasury tax and loan notes 2,016 1,016
- ----------------------------------------------------------------------------------------------------------------------
Total short-term borrowings $ 37,431 $ 46,947
======================================================================================================================
The above short-term borrowings generally mature daily. Interest expense on
short-term borrowings totals $222,000, $84,000 and $254,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
Long-term borrowings as of December 31 are as follows:
(Dollars in Thousands) 2004 2003
======================================================================================================================
Principal Principal
Maturity Payments Payments
Dates Due Rate Due Rate
======================================================================================================================
2004 $ 7,604 3.95%
2005 $ 4,343 4.00% 3,869 4.07
2006 15,609 2.91 25,118 2.37
2007 1,174 3.70 666 3.85
2008 20,527 2.58 30,000 2.22
2009 10,270 2.89 8,000 4.59
After 2009 8,000 4.59
- ----------------------------------------------------------------------------------------------------------------------
$ 59,923 3.11% $ 75,257 2.81%
======================================================================================================================
The Bank's long-term debt includes $50,000,000 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, October 2008, December 2008,
December 2009, February 2011 and March 2011. The amounts due, with respect to
their final maturities, are $2,000,000, $10,000,000, $10,000,000, $10,000,000,
$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 2005 and
2006. During the years 2005 and 2006, the Bank has $40,000,000 and $10,000,000
in Option advances. Interest expense on long-term borrowings totaled $1,975,000,
$1,602,000 and $1,941,000 for the years ended December 31, 2004, 2003 and 2002,
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) 2004 2003
======================================================================================================================
Balance at year-end $ 37,431 $ 46,947
Average amount outstanding 26,468 14,864
Maximum amount outstanding at any month-end 48,559 46,947
Average interest rate for the year 0.84% 0.57%
Average interest rate on year-end balance 1.58 0.86
The Corporation maintains a revolving line of credit with Bankers' Bank
Northeast of $2,000,000 and a Federal Funds agreement with Bank of America to
purchase up to $6,000,000 of Federal Funds that are renewed annually. There were
no amounts oustanding against either agreement as of December 31, 2004 or 2003.
The Corporation has short-term borrowing capacity of $6,301,000 with the FHLB
through its Ideal Way program that was unused at year-end 2004 and 2003.
Advances from the FHLB are collateralized by the Corporation's holdings of FHLB
stock and residential real estate loans.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
7 - MANDATORILY REDEEMABLE PREFERRED STOCK
On September 30, 2004, the Corporation redeemed the outstanding principal
balance of the $17,526,000 of 9.50% junior subordinated deferrable interest
debentures it issued on September 30, 1999 to Westbank Capital Trust I ("Trust
I"), a Delaware statutory business trust formed by the Corporation to facilitate
the Trust's mandatorily redeemable preferred stock offering. Concurrently with
the Corporation's redemption of the debentures, Trust I redeemed all of its
issued and outstanding preferred and common securities.
The Corporation raised capital to redeem the 9.60% debentures issued to Trust I
by engaging in two new pooled private placements of trust preferred securities
at a more advantageous interest rate.
On September 20, 2004, Westbank Capital Trust II ("Trust II"), a Delaware
statutory trust formed by the Corporation, completed the sale of $8,763,000 of
4.06% floating rate capital securities, adjustable every three months at LIBOR
plus 219 basis points ("Capital Securities II"). Trust II also issued common
securities to the Corporation and used the net proceeds from the offering to
purchase a like amount of 4.06% floating rate junior subordinated deferrable
interest debentures ("Debentures II") of the Corporation. Debentures II are the
sole assets of Trust II. The Corporation used the proceeds to redeem the
securities issued by Trust I, which were callable on September 30, 2004.
Capital Securities II accrues and pays distributions quarterly at a floating
annual rate initially set at 4.06% of the stated liquidation amount of
$8,763,000 per capital security. The Corporation has fully and unconditionally
guaranteed all of the obligations of Trust II. The guarantee covers the
quarterly distributions and payments on liquidation or redemption of Capital
Securities II, but only to the extent that Trust II has funds necessary to make
these payments.
Capital Securities II are mandatorily redeemable upon the maturing of Debentures
II on September 20, 2034 or upon earlier redemption, as provided in the
Indenture. The Corporation has the right to redeem Debentures II, in whole or in
part, on or after September 20, 2009 at the liquidation amount plus any accrued
but unpaid interest to the redemption date.
On September 20, 2004, Westbank Capital Trust III ("Trust III"), a Delaware
statutory trust formed by the Corporation, completed the sale of $8,763,000 of
5.98% fixed-floating rate capital securities ("Capital Securities III"). Trust
III also issued common securities to the Corporation and deferrable interest
debentures ("Debentures III") of the Corporation. Debentures III are the sole
assets of Trust III. The Corporation used the proceeds to redeem the securities
issued by Trust I, which were callable on September 30, 2004.
Capital Securities III accrues and pays distributions quarterly at an annual
rate of 5.98% of the stated liquidation amount of $8,763,000 per capital
security through September 20, 2009, at which time the interest rate will become
the three-month LIBOR plus 219 basis points and will be adjustable every three
(3) months. The Corporation has fully and unconditionally guaranteed all of the
obligations of Trust III. The guarantee covers the quarterly distributions and
payments on liquidation or redemption of Capital Securities III, but only to the
extent that Trust III has funds necessary to make these payments.
Capital Securities III are mandatorily redeemable upon the maturing of
Debentures III on September 20, 2009 or upon earlier redemption, as provided in
the Indenture. The Corporation has the right to redeem Debentures III, in whole
or in part, on or after September 20, 2009 at the liquidation amount plus any
accrued but unpaid interest to the redemption date.
Based on the initial interest rates, the Corporation has reduced its interest
expense associated with the trust preferred securities by $787,000 annually as a
result of the redemption and the new placements of securities. The Corporation
also recorded an $807,000 pre-tax charge to its earnings in the third quarter of
2004. The expenses of the Trust I refinancing were amortized over the original
life of the debentures and, as a result of the early redemption, the Corporation
was required to take a charge for the rest of the unamortized expenses in the
third quarter.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
8 - INCOME TAXES
The provision for income taxes was as follows:
(Dollars in Thousands) 2004 2003 2002
======================================================================================================================
Current provision:
Federal $ 2,145 $ 3,905 $ 3,646
State 187 978 (166)
- ----------------------------------------------------------------------------------------------------------------------
Total current 2,332 4,883 3,480
- ----------------------------------------------------------------------------------------------------------------------
Deferred taxes prepaid (341) (1,719) (623)
- ----------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 1,991 $ 3,164 $ 2,857
======================================================================================================================
The difference between the effective tax rate and the federal statutory tax rate
on income before taxes is reconciled as follows:
2004 2003 2002
======================================================================================================================
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit .8 2.4 (.1)
Bank-owned life insurance (2.8) (1.4) 0.7
Other (1.8) (0.7) (2.4)
- ----------------------------------------------------------------------------------------------------------------------
30.2% 34.3% 32.2%
======================================================================================================================
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) 2004 2003
======================================================================================================================
Deferred tax assets:
Investment write-down $ 257
Unrealized loss on securities 59
Deferred loan fees $ 64
Allowance for loan losses 1,121 1,407
Non-accrual interest 15 43
Employee benefit plans 895 207
Other 77 17
- ----------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 2,424 1,738
======================================================================================================================
Deferred tax liabilities:
Unrealized gain on securities 377
Depreciation 601 551
Deferred loan fees 37
Mortgage servicing rights 309 110
- ----------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 947 1,038
- ----------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 1,477 $ 700
======================================================================================================================
A summary of the change in the net deferred tax asset is as follows:
(Dollars in thousands)
======================================================================================================================
Balance at beginning of year $ 700 $ (1,920)
Deferred taxes prepaid 341 1,719
Net unrealized loss/gain on securities available for sale 436 999
Other (98)
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,477 $ 700
======================================================================================================================
39
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 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 paid 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 dissolved Park West REIT and distributed its assets to its
shareholders in 2004, which process was completed as of February 9, 2004.
9 - EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Corporation has a defined contribution pension plan (money purchase),
covering substantially all of its employees. Contributions to the money purchase
plan are based on a percentage of the respective employee's salary. Total
expense for the years ended 2004, 2003 and 2002 amounted to $443,000, $453,000
and $416,000 respectively.
In addition, the Corporation sponsors a 401K plan. Each employee reaching the
age of twenty-one (21) automatically becomes a participant of the plan. The plan
provides for voluntary contributions by participants, up to 15% of compensation,
subject to certain limits based on federal tax laws. The Corporation makes
matching contributions up to 50% of the first 6% of compensation. The total 401K
plan expense for the years ended December 31, 2004, 2003 and 2002 amounted to
$141,000, $130,000 and $118,000 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
$77,000, $75,000 and $42,000 for the years ended December 31, 2004, 2003 and
2002 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 after age sixty-five (65). The retirement benefit is in the amount of
seventy-five percent (75%) of the Director's or executive's final compensation
at retirement and is payable for the life of the retiree. For the executives,
this amount is reduced by fifty percent (50%) of the primary insurance amount
from Social Security and any employer-provided qualified retirement plan
benefit. The Corporation uses a December 31 measurement date for the plan.
The combined cost for the defined benefit portion of the Directors and
Executives Supplemental Retirement Plan includes the following components:
For the year ended December 31,
2004 2003
======================================================================================================================
Service cost $ 121,275 $ 105,386
Interest cost 172,128 155,964
Net amortization of prior service cost 124,938 124,934
- ----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 418,341 $ 386,284
======================================================================================================================
40
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, 2004 2003
======================================================================================================
PROJECTED BENEFIT OBLIGATION:
Balance at beginning of period $2,732,198 $2,270,883
Service cost 121,275 105,386
Interest cost 172,128 155,964
Benefit payments
Prior service costs
Actuarial loss 368,623 199,965
- ------------------------------------------------------------------------------------------------------
Balance at end of period $3,394,224 $2,732,198
======================================================================================================
PLAN ASSETS AT FAIR VALUE:
Balance at beginning of period
Contributions
Benefit payments
- ------------------------------------------------------------------------------------------------------
Balance at end of period
======================================================================================================
FUNDED STATUS:
Deficiency of plan assets less than projected benefit obligation $(3,394,224) $(2,732,198)
Unrecognized loss from experience different from that assumed 568,588 199,965
Unrecognized prior service costs 1,499,265 1,624,203
- ------------------------------------------------------------------------------------------------------
Accrued expense (1,326,371) (908,030)
- ------------------------------------------------------------------------------------------------------
Amounts recognized in the balance sheet consist of:
Accumulated benefit obligation (2,187,947) (1,837,078)
Intangible asset 861,576 929,048
- ------------------------------------------------------------------------------------------------------
Net amount recognized as accrued expenses $(1,326,371) $ (908,030)
======================================================================================================
The amortization of the prior service cost is determined using a straight-line
amortization over the average remaining service period of employees and
Directors expected to receive benefits under the plan.
The weighted average assumptions utilized to determine the benefit obligation
and net benefit cost were as follows:
At December 31, 2004 2003
======================================================================================================
Discount rate 5.75% 6.30%
Rate of increase in compensation levels 5.00 5.00
The Corporation does not expect to contribute to the Directors and Executives
Retirement Plan in 2005. The expected benefit payments for the Directors and
Executives Supplemental Retirement Plan through 2014 are as follows:
Annual Payments
---------------
2005 $ 10,800
2006 10,800
2007 25,300
2008 41,500
2009 41,000
2010 - 2014 1,376,508
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
10 - STOCK-BASED INCENTIVE PLANS
The Corporation has four (4) fixed stock option plans that reserve shares of
common stock for executives, key employees and Directors. The 1985 Incentive
Stock Option Plan offers shares of common stock to officers and key employees.
All remaining options were exercised during 2004. No options are available for
future grants under the 1985 Incentive Stock Option Plan.
The Cargill Directors and Officers Plan was adopted by Cargill Bank in 1992.
Unless exercised, options expire on September 7, 2006. No options are available
for future grants.
The 1995 Directors Stock Option Plan grants options totaling 1,000 shares on
February 15th of each year to qualified Directors, as determined prior to grant.
Unless exercised, options expire ten (10) years after granting.
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 the Board of Directors. Directors are granted options
totaling 1,000 shares immediately following the Corporation's Annual Meeting
each year only if the Corporation achieved a return on average equity of 12% or
higher. Directors' options expire twenty (20) years after the grant date, if
unexercised, while employee options expire ten (10) years after the grant date.
A total of 20,948 options are available for future grants at December 31, 2004.
The following is a summary of the status of the Corporation's four (4) fixed
option plans as of December 31, 2004, 2003 and 2002, and changes during the
years ended on those dates. The exercise prices are equal to the market price on
the date of the grant.
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2004 Price 2003 Price 2002 Price
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 627,080 $ 10.78 638,489 $ 11.05 490,359 $ 9.55
5% stock dividend 27,787 10.27 31,772 10.52
Granted 8,000 22.90 16,000 13.92 207,900 13.13
Exercised (92,847) 8.16 (54,850) 8.51 (54,055) 5.58
Terminated/cancelled (8,000) 13.92 (4,331) 11.34 (5,715) 10.09
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 562,020 $ 10.81 627,080 $ 10.78 638,489 $ 11.05
=======================================================================================================================
Options exercisable at year-end 562,020 556,815 508,889
Weighted average fair value of
options granted during the year $ 7.34 $ 5.93 $ 6.21
=======================================================================================================================
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
The following table summarizes information about fixed options outstanding at
December 31, 2004.
Weighted Weighted Weighted
Options Average Average Options Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/04 Contractual Life Price at 12/31/04 Price
====================================================================================================
$ 3.65 6,091 1.1 years $ 3.65 6,091 $ 3.65
6.47 to 7.94 90,125 2.4 years 7.33 90,125 7.33
8.17 to 9.53 108,577 7.5 years 9.08 108,577 9.08
10.89 to 12.13 329,406 6.4 years 12.02 329,406 12.02
13.25 to 13.84 19,421 9.8 years 13.51 19,421 13.51
21.81 8,400 9.1 years 21.81 8,400 21.81
- ----------------------------------------------------------------------------------------------------
$ 3.65 to $21.81 562,020 6.1 years $10.80 562,020 $10.80
====================================================================================================
The fair value of each option grant is estimated on the date of grant, using the
binomial option-pricing model with the following weighted-average assumptions:
Years ended December 31, 2004 2003 2002
====================================================================================================
Dividend yield 2.45% 3.12% 3.21%
Expected life 10 years 10 years 10 years
Expected volatility 28% 48% 48%
Risk-free interest rate 3.97% 3.35% 4.83%
====================================================================================================
RESTRICTED STOCK AWARD
Under the Corporation's Stock-Based Incentive Plan, the Corporation may grant
stock awards to its Directors, officers and employees for up to 92,505 shares of
common stock. In 2004, the Board of Directors established and awarded 92,505
shares of restricted stock pursuant to this plan. These awards vest at 12.5% per
year. Accelerated vesting occurs in the case of death or disability, and upon
retirement or change of control. Dividends attributed to such awards are
distributed to participants from the trust account holding such plan shares. The
fair value of the stock awards of $1,785,000 has been recorded as unearned
compensation and was determined based on the market price of the stock on the
grant date. Unearned compensation is amortized over the periods to be benefited.
The Corporation recorded compensation cost related to the stock awards of
approximately $133,091 in 2004.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
11 - EARNINGS PER SHARE
The following table 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:
2004 4,606,094 $1.00
2003 (1) 4,597,930 1.32
2002 (1) (2) 4,626,909 1.30
Effect of Dilutive Option Shares:
2004 257,647 .05
2003 (1) 200,726 .06
2002 (1) (2) 108,551 .03
Diluted Earnings per Share:
2004 4,863,741 .95
2003 (1) 4,798,656 1.26
2002 (1) (2) 4,735,460 1.27
(1) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in May 2004.
(2) Share amounts and earnings per share are adjusted for the 5% stock dividend
declared and distributed in January 2003.
12 - LEASES
The Corporation leases certain facilities under non-cancelable operating lease
agreements. The following is a schedule of future minimum lease payments for
such non-cancelable leases as of December 31, 2004.
(Dollars in Thousands) Operating
====================================================================================================
2005 $ 349
2006 218
2007 182
2008 85
2009 58
After 2009 155
- ----------------------------------------------------------------------------------------------------
Total minimum lease payments $ 1,047
====================================================================================================
Rent expense for 2004, 2003 and 2002 amounted to $388,000, $359,000 and $312,000
respectively.
44
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) 2004 2003
====================================================================================================
Commitments to grant loans $ 19,320 $ 12,299
Stand-by letters of credit and financial guarantees 697 1,195
Commitments to advance funds under existing loan agreements 69,023 60,088
The Corporation uses the same credit policies in making commitment and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since commitments may be expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing properties.
In the normal course of business, certain litigation is pending against the
Corporation. Management, after consultation with legal counsel, does not
anticipate that any ultimate liability arising out of such litigation will have
a material effect on the Corporation's financial condition or results of
operations.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Bank has entered into a three-year employment agreement with its President
and Chief Executive Officer. The agreement generally provides for a base salary
and the continuation of certain benefits currently received. The employment
agreement renews on an annual basis. Under certain specified circumstances, the
employment agreement requires specified payments to be made for certain reasons
other than termination for cause, including a "change in control" as defined in
the agreement. However, such employment may be terminated for cause, as defined,
without incurring any continuing obligations.
The Bank has also entered into three-year change in control agreements with
certain officers, none of whom are covered by an employment agreement. The
change in control agreements are renewable on an annual basis and generally
provide a severance payment and the continuation of certain benefits currently
received following a "change in control" as defined in the agreements.
14 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
addresses the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions, and regulations concerning
internal controls, accounting and operations.
Both the Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's or Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of the Corporation's and the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Corporation's and the Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
45
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,
2004, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
Regulatory risk-based capital requirements take into account the different risk
categories by assigning risk weights to assets and the credit equivalent amounts
of off-balance sheet exposures. In addition, capital is divided into two tiers.
Tier 1 includes common stockholders' equity and a portion of the mandatorily
redeemable preferred stock reduced by goodwill and other intangible assets;
total risk-based, or supplementary, capital includes not only the equity but
also a portion of the allowance for loan losses and the portion of the
mandatorily redeemable preferred stock not included in Tier 1 capital.
As of December 31, 2004, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Corporation's and the Bank's actual capital amounts and ratios are presented
in the following table.
Minimum Capital
To Be Considered
Well Capitalized
Under Prompt
Minimum Capital Corrective Action
Actual Adequacy Purposes Provisions
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
=======================================================================================================================
December 31, 2004
Total Capital
(To risk-weighted assets):
Westbank $ 57,859 12.79% $ 36,177 8.00% $ 45,221 10.00%
Corporation - Consolidated 59,165 13.04 36,293 8.00 N/A N/A
Tier 1 Capital (To risk-weighted assets):
Westbank 53,489 11.83 18,088 4.00 27,132 6.00
Corporation - Consolidated 53,616 11.82 18,147 4.00 N/A N/A
Tier 1 Capital
(To average assets):
Westbank 53,489 7.36 29,056 4.00 36,320 5.00
Corporation - Consolidated 53,616 7.35 29,164 4.00 N/A N/A
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
46
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 unit of preferred stock, subject to adjustment. The Corporation has reserved
12,000 shares of Preferred Stock for issuance upon exercise of the Rights.
Currently, the Rights are not exercisable and are attached to and trade with the
outstanding shares of common stock. The Rights will separate from the common
stock and become exercisable upon the earliest to occur of (i) the close of
business on the tenth calendar day following the first public announcement that
a person or group of affiliated or associated persons has acquired beneficial
ownership of 15% or more of the outstanding shares of the Corporation's common
stock (an "Acquiring Person"), (ii) the close of business on the tenth business
day (or such date as the Board of Directors may determine) following the
commencement of a tender offer or exchange offer that would result, upon its
consummation, in a person or a group becoming the beneficial owner of 15% of the
outstanding shares of the Corporation's common stock, or (iii) the determination
by the Board of Directors that any person is an "Adverse Person."
Upon the occurrence of any one of the above events, each holder of a Right
(other than the Acquiring Person or the Adverse Person, as the case may be) is
entitled to acquire such number of Units of the Preferred Stock of the
Corporation as are equivalent to such number of shares of common stock having a
value twice the current exercise price of the Right. If the Corporation is
acquired in a merger or other business combination transaction, after any such
event each holder of a Right is then entitled to purchase, at the then current
exercise price, shares of the acquiring company's common stock having a value of
twice the exercise price of the Right.
Until a Right is exercised, the holder has no rights as a stockholder of the
Corporation (beyond those rights as an existing stockholder), including the
right to vote or to receive dividends. While the distribution of the Rights is
not taxable to stockholders or to the Corporation, stockholders may, depending
upon the circumstances, recognize taxable income in the event the Rights become
exercisable for Units, other securities of the Corporation, other consideration
or for shares of common stock of an acquiring company.
The Rights may be redeemed in whole by the Corporation, under certain
circumstances, at a price of $.001 per Right. The Rights and the Rights Plan
expire on November 19, 2007.
The Bank's retained earnings at December 31, 2004 include $458,000 that is set
aside in accordance with existing provisions of the Internal Revenue Code to
absorb losses on loans. If, in the future, this amount were used for any other
purposes, a tax liability could be incurred. It is not anticipated that such
amount will be made available for dividends or that a tax thereon will be
imposed.
The Corporation purchased 41,395, 55,687 and 202,658 common shares at fair value
for treasury stock at an aggregate cost of $842,000, $904,000 and $2,615,000 in
2004, 2003 and 2002 respectively. Treasury stock repurchases were made in
connection with the previously announced stock repurchase program.
47
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, 2004 and 2003, 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.
2004 2003
=======================================================================================================
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 12,485 $ 12,485 $ 14,639 $ 14,639
Federal funds sold 669 669 39 39
Investment securities held to maturity 112,424 112,158 250 262
Investment securities available for sale 155,405 155,405 236,234 236,234
Federal Home Loan Bank stock 6,450 6,450 5,578 5,578
Loans 435,013 438,876 436,339 451,883
Accrued interest receivable 3,655 3,655 3,180 3,180
Liabilities:
Deposits 590,032 588,209 537,310 541,117
Borrowed funds 97,354 98,341 122,204 123,491
Mandatorily redeemable preferred stock 17,526 16,956 17,526 18,033
Accrued interest payable 550 550 575 575
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.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE
The carrying amounts of these items approximate fair value due to their
short-term nature.
DEPOSITS
The fair value of deposits with no stated maturity, such as non-interest-bearing
demand deposits, regular savings, NOW accounts and money market accounts, is
equal to the amount payable on demand. The fair value of time deposits is based
on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
BORROWED FUNDS AND MANDATORILY REDEEMABLE PREFERRED STOCK
The fair value of borrowings and mandatorily 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.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
18 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands, except per share amounts)
2004
---------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- -------------- ------------- ---------------
Interest income $9,060 $9,361 $9,375 $9,013
Interest expense 3,529 3,628 3,693 3,424
- ----------------------------------------------------------------------------------------------------------
Net interest income 5,531 5,733 5,682 5,589
Provision for (recovery to) losses 150 75
Non-interest income 1,316 895 489 741
Non-interest expense 4,586 4,503 5,457 4,603
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 2,261 2,125 564 1,652
Income taxes 676 680 112 523
- ----------------------------------------------------------------------------------------------------------
Net income $1,585 $1,445 $ 452 $1,129
==========================================================================================================
Earnings per share - Basic $ .34 $ .32 $ .10 $ .24
- Diluted $ .32 $ .30 $ .09 $ .23
==========================================================================================================
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 to) 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 (1) $ .33 $ .33 $ .31 $ .35
- Diluted (1) $ .32 $ .32 $ .29 $ .33
==========================================================================================================
(1) Earnings per share are adjusted for the 5% stock dividend declared and
distributed in May 2004.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
December 31,
(Dollars in Thousands) 2004 2003
- ----------------------------------------------------------------------------------------------
BALANCE SHEETS
Assets
Cash $ 416 $ 495
Investment in subsidiaries 63,150 60,382
Other investments 280 123
Investment in unconsolidated investee 526 526
Other assets 664 1,481
- ----------------------------------------------------------------------------------------------
Total assets $ 65,036 $ 63,007
==============================================================================================
Liabilities
Note payable to Westbank Capital Trust I $ 17,526
Note payable to Westbank Capital Trust II $ 8,763
Note payable to Westbank Capital Trust III 8,763
Other liabilities 48 206
- ----------------------------------------------------------------------------------------------
Total liabilities 17,574 17,732
Stockholders' equity
Preferred stock - none
Common stock, par value $2 per share 9,493 9,047
Unearned compensation - restricted stock award (1,652)
Additional paid-in capital 20,377 14,524
Retained earnings 19,958 22,724
Treasury stock (606) (1,692)
Accumulated other comprehensive income (loss) (108) 672
- ----------------------------------------------------------------------------------------------
Stockholders' equity 47,462 45,275
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 65,036 $ 63,007
==============================================================================================
(Dollars in Thousands) 2004 2003 2002
==============================================================================================
STATEMENTS OF INCOME
Dividend from subsidiary $ 2,998 $ 3,161 $ 5,163
Interest expense (1,511) (1,682) (1,680)
Other expense - net (1,093) (364) (121)
- ----------------------------------------------------------------------------------------------
Income before taxes and
undistributed income of subsidiaries 394 1,115 3,362
Income tax benefit 669 678 595
Undistributed income of subsidiaries 3,548 4,261 2,052
- ----------------------------------------------------------------------------------------------
Net Income $ 4,611 $ 6,054 $ 6,009
==============================================================================================
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WESTBANK CORPORATION AND SUBSIDIARIES
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
December 31,
(Dollars in Thousands) 2004 2003 2002
==============================================================================================
STATEMENTS OF CASH FLOWS
Cash Flows from operating activities:
Net income $ 4,611 $ 6,054 $ 6,009
Exercise of non-qualified stock options 182
Stock option compensation 144
Operating activities:
Equity in undistributed income of subsidiaries (3,548) (4,261) (2,052)
Decrease (Increase) in other assets 817 (48) (195)
Increase (Decrease) in other liabilities (158) 186 9
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,048 1,931 3,771
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities (purchased) matured (157) (89) 38
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (157) (89) 38
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options
and stock purchase plan 1,445 1,330 834
Proceeds from issuance of Westbank
Capital Trusts II and III 17,526
Redemption of Westbank Capital Trust I (17,526)
Treasury stock repurchases (854) (904) (2,530)
Dividends paid (2,561) (2,110) (1,849)
- ----------------------------------------------------------------------------------------------
Net cash used in financing activities (1,970) (1,684) (3,545)
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (79) 158 264
Cash and cash equivalents at the beginning of the year 495 337 73
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 416 $ 495 $ 337
==============================================================================================
Cash paid during the year:
Interest paid to Westbank Capital Trust I $ 1,262 $ 1,632 $ 1,632
Interest paid to Westbank Capital Trust II 134
Interest paid to Westbank Capital Trust III 86
Income taxes paid 1,803 5,882 4,170
52
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Westbank Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting. Westbank
Corporation's internal control over financial reporting is a process designed
under the supervision of the Corporation's Chief Executive Officer and Chief
Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Corporation's financial
statements for external reporting purposes in accordance with accounting
principles generally accepted in the United States of America.
Westbank Corporation's management assessed the effectiveness of the
Corporation's internal control over financial reporting as of December 31, 2004
based on the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO") in "Internal Control-Integrated Framework."
Based on the assessment, management determined that, as of December 31, 2004,
the Corporation's internal control over financial reporting is effective, based
on those criteria.
Grant Thornton LLP, an independent registered public accounting firm who has
audited the Corporation's financial statement included in this 2004 Annual
Report, has issued an attestation report on management's assessment of the
effectiveness of the Corporation's internal control over financial reporting as
of December 31, 2004, which attestation report appears on Page 54.
Donald R. Chase John M. Lilly
President and Chief Executive Officer Treasurer and Chief Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
WESTBANK CORPORATION AND SUBSIDIARIES
Stockholders and Board of Directors,
Westbank Corporation
We have audited the accompanying consolidated balance sheet of Westbank
Corporation (the "Corporation") and subsidiaries as of December 31, 2004 and
2003, and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Westbank Corporation and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America.
GRANT THORNTON LLP
Boston, Massachusetts
March 10, 2005
53
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
WESTBANK CORPORATION AND SUBSIDIARIES
Stockholders and Board of Directors,
Westbank Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, the Westbank
Corporation maintained effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Westbank Corporation's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Westbank Corporation maintained
effective internal control over financial reporting as of December 31, 2004 is
fairly stated, in all material respects, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, Westbank
Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Westbank Corporation and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the two years in the period ended December 31, 2004, and our report
dated March 2, 2005 expressed an unqualified opinion on those financial
statements.
GRANT THORNTON LLP
Boston, Massachusetts
March 10, 2005
54
INDEPENDENT AUDITORS' REPORT
WESTBANK CORPORATION AND SUBSIDIARIES
Shareholders and Board of Directors,
Westbank Corporation
We have audited the consolidated statements of income, comprehensive income,
stockholders' equity and cash flows of Westbank Corporation and subsidiaries
(the "Corporation") for the year 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 audit.
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, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Westbank
Corporation and subsidiaries for the year 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
55
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, CBA
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 ELLEN E. TORRES, CPA JOHN E. O'BRIEN
DIRECTOR OF AUDITING ACCOUNTING OFFICER ASSISTANT VICE PRESIDENT
BRANCH ADMINISTRATION/ LOAN DIVISION MARKETING
HUMAN RESOURCES/SECURITY GARY L. BRIGGS TAMMY L. BISCHOF
KATHLEEN A. JALBERT EXECUTIVE VICE PRESIDENT VICE PRESIDENT, DIRECTOR OF MARKETING
SENIOR VICE PRESIDENT PAUL M. ACCORSI
DEBORAH A. KUMIEGA SENIOR VICE PRESIDENT
VICE PRESIDENT DENISE M. BREWER RESIDENTIAL REAL ESTATE
SUSAN M. ALDRICH SENIOR VICE PRESIDENT ANTONIO FILIPE
HUMAN RESOURCES OFFICER JOHN F. WHITE SENIOR VICE PRESIDENT
SENIOR VICE PRESIDENT WOLFGANG A. ADAMETZ
CLIFFORD R. BORDEAUX VICE PRESIDENT
COMPLIANCE VICE PRESIDENT
AMY B. SHEEHAN GERARD E. DRAPEAU
SENIOR VICE PRESIDENT VICE PRESIDENT WEALTH MANAGEMENT DIVISION
ROBERT D. FLUHARTY ROBERT A. GIBOWICZ
VICE PRESIDENT SENIOR TRUST OFFICER
EDP/OPERATIONS RICHARD N. HANCHETT WILLIAM M. VARANKA
S. STEVE KONIECKI VICE PRESIDENT VICE PRESIDENT
SENIOR VICE PRESIDENT JOSEPH S. LEMAY
TAMMY L. HOWE VICE PRESIDENT
ASSISTANT VICE PRESIDENT JOSEPH P. YOUNG
VICE PRESIDENT
MICHAEL J. HARRINGTON
COMMERCIAL LOAN OFFICER
J. KEVIN HOURIHAN
DEALER ACCOUNT OFFICER
56
CORPORATE INFORMATION
WESTBANK CORPORATION AND SUBSIDIARIES
WESTBANK CORPORATION
Westbank Tower, 225 Park Avenue
West Springfield, MA 01089-3310
(413) 747-1400
ANNUAL MEETING
The Annual Meeting of Stockholders of Westbank Corporation will be held on
Wednesday, April 20, 2005 at nine o'clock in the morning at Storrowton Tavern,
1305 Memorial Avenue, West Springfield, Massachusetts.
TRANSFER AGENT AND REGISTRAR
Westbank-Trust Department
INDEPENDENT AUDITORS
Grant Thornton LLP
Boston, Massachusetts
CORPORATE COUNSEL
Thacher, Proffitt & Wood LLP
Washington, DC
Doherty, Wallace, Pillsbury and Murphy, P.C.
Springfield, Massachusetts
INFORMATION SERVICE
Westbank Corporation welcomes stockholder and public interest in our services
and activities. Questions pertaining to material presented in this Report and
requests for a copy of the Annual Report (Form 10-K) filed with the Securities
and Exchange Commission should be directed to John M. Lilly, Treasurer and Chief
Financial Officer, at the above address.
EQUAL OPPORTUNITY EMPLOYER
The Corporation has maintained its commitment to equal opportunity and
affirmative action in employment and personnel policies and pledges to recruit,
hire, train and promote persons in all job classifications without regard to
race, color, religion, sex, national origin, physical or mental disability,
veterans status or age.
COMMON STOCK - MARKET INFORMATION
The table below shows cash dividend data and the range of bid prices by quarter
for the Corporation's common stock. The source of the bid ranges is the NASDAQ
regional market quotations.
================================================================================
2004 2003
Bid Bid
High Low Dividend High Low Dividend
================================================================================
First $23.48 $18.08 $.12 $15.25 $13.21 $.12
Second 23.39 17.80 .12 16.05 13.38 .12
Third 21.54 17.75 .12 18.73 15.89 .12
Fourth 21.50 18.31 .12 18.79 17.44 .12
All stock prices have been adjusted for the 5% stock dividend declared and
distributed May 2004.
The above quotations of the Corporation's common stock represent prices between
dealers. They do not include retail markup, markdown or commissions. At January
31, 2005, the Corporation had 2,573 stockholders. Westbank Corporation's common
stock is traded on the NASDAQ National Market Exchange; the trading symbol is
"WBKC." For information on the Westbank Corporation Dividend Reinvestment and
Stock Purchase Plan, call Westbank's Trust Department at (413) 747-1400. The
following firms make a market in Westbank Corporation's common stock.
Advest Inc.
Keefe, Bruyette & Woods, Inc.
McConnell, Budd & Downes, Inc.
Ryan, Beck & Co., Inc.
Schwab Capital Markets
Susquehanna Capital Group
PASSINGS
We extend our deepest sympathy to the family and friends of Irving M. Walker,
Jr., who was Vice President of Risk Management for Westbank. A resident of
Longmeadow, Massachusetts, Mr. Walker passed away in January 2005 after working
in the banking industry for thirty years. As a valued colleague in the bank's
Auditing Department and an important member of the local community, his presence
will truly be missed.
[PHOTO OF IRVING M. WALKER, JR.]
We also extend our condolences to the families and friends of:
John J. Majer, Esq., of Putnam, CT, Chairman of the Board, Cargill Bank, which
merged with Westbank in 2001. (NOVEMBER 2004)
Frederick J. Witkowski of Thompson, CT, Board of Directors of Cargill Bank. Also
served on Westbank's Northeast Connecticut Advisory Board. (SEPTEMBER 2004)
MASSACHUSETTS CONNECTICUT
CHICOPEE OFFICE DANIELSON OFFICE
637 Front Street 203 Main Street
Chicopee, MA 01013 P.O. Box 270
(413) 747-1330 Danielson, CT 06239
(860) 774-8501
EAST LONGMEADOW OFFICE
6 Somers Road PUTNAM OFFICE
East Longmeadow, MA 01028 163 Providence Street
(413) 747-1351 Putnam, CT 06260
(860) 963-2265
FEEDING HILLS OFFICE
1340 Springfield Street STONEWALL COMMONS OFFICE
Feeding Hills, MA 01030 7 Providence Pike, Route 44
(413) 747-1320 Putnam, CT 06260
(860) 928-0855
HOLYOKE OFFICE
378 High Street WOODSTOCK OFFICE
Holyoke, MA 01040 Route 171
(413) 747-1340 P.O. Box 332
Woodstock, CT 06267
LUDLOW OFFICE (860) 963-4663
314 Center Street
Ludlow, MA 01056
(413) 747-1326 SUPERMARKETS
MAIN OFFICE CHICOPEE BIG Y
Westbank Tower 650 Memorial Drive
225 Park Avenue Chicopee, MA 01020
West Springfield, MA 01089 (413) 74701337
(413) 747-1400
EAST LONGMEADOW
MITTINEAGUE OFFICE STOP & SHOP
1440 Westfield Street Heritage Plaza
West Springfield, MA 01089 470 North Main Street
(413) 747-1310 East Longmeadow, MA 01028
(413) 747-1357
RIVERDALE OFFICE
1063 Riverdale Street WESTFIELD BIG Y
West Springfield, MA 01089 1 East Silver Street
(413) 747-1300 Westfield, MA 01085
(413) 747-1367
SOUTHWICK OFFICE
515 College Highway
P.O. Box 1081
Southwick, MA 01077
(413) 747-1425
WEBSTER OFFICE
115 East Main Street
Webster, MA 01570
(508) 949-2221
WESTFIELD OFFICE
10 Broad Street
Westfield, MA 01085
(413) 747-1360