-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DDowbD9q1swRfvdYC2pue4vavXgvhbYAm8TNKd2FPHdf8f6NX9cIlrusfkzQgZB2 EqrTgMq5BGuEqSedveiRNQ== 0001072613-03-000467.txt : 20030319 0001072613-03-000467.hdr.sgml : 20030319 20030319170509 ACCESSION NUMBER: 0001072613-03-000467 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTBANK CORP CENTRAL INDEX KEY: 0000742070 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042830731 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12784 FILM NUMBER: 03609524 BUSINESS ADDRESS: STREET 1: 225 PARK AVE STREET 2: PO BOX 149 CITY: WEST SPRINGFIELD STATE: MA ZIP: 01090-0149 BUSINESS PHONE: 4137471400 MAIL ADDRESS: STREET 1: 225 PARK AVE P O BOX 149 STREET 2: 225 PARK AVE P O BOX 149 CITY: WEST SPRINGFIELD STATE: MA ZIP: 01090-0149 10-K 1 form10-k_11807.txt FORM 10-K FOR YEAR ENDED DECEMBER 31, 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [mark one] [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-12784 WESTBANK CORPORATION - -------------------------------------------------------------------------------- Massachusetts 04-2830731 - -------------------------------------------------------------------------------- (State of (I.R.S. Employer Incorporation) Identification Number) 225 Park Avenue, West Springfield, Massachusetts 01090-0149 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) (413) 747-1400 - -------------------------------------------------------------------------------- (Telephone Number) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common stock, $2.00 Par Value Preferred stock, $5.00 Par Value -------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Based on the closing sales price on June 28, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $56,493,857. The number of shares outstanding of the registrants common stock, $2.00 par value, was 4,378,206 on March 1, 2003. Portions of the Annual Report to Stockholders for the year ended December 31, 2002 are incorporated by reference into Parts I and II. Portions of the Proxy Statement issued by the Corporation in connection with the Annual Meeting to be held on April 16, 2003 are incorporated by reference into Part III. ================================================================================ WESTBANK CORPORATION INDEX TO FORM 10-K PART I - ------ Item 1 Business I-1 Item 2 Properties I-2 Item 3 Legal Proceedings I-2 Item 4 Submission of Matters to a Vote of Security Holders I-2 PART II - ------- Item 5 Market for the Corporation's Common Stock and Related Stockholder Matters II-1 Item 6 Selected Financial Data II-1 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations II-1,2 Item 7-A Quantitative and Qualitative Disclosures About Market Risk II-1,2 Item 8 Financial Statements and Supplementary Data II-2 Item 9 Changes in and Disagreements with Accountant on Accounting and Financial Disclosure II-2 PART III - -------- Item 10 Directors and Executive Officers of the Registrant III-1 Item 11 Executive Compensation III-1 Item 12 Security Ownership of Certain Beneficial Owners and Management III-1 Item 13 Certain Relationships and Related Transactions III-1 Item 14 Controls and Procedures III-1 PART IV - ------- Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K IV-1 Signatures IV-2 Section 302 Certifications IV-3,4 Exhibit Index IV-5 WESTBANK CORPORATION, WEST SPRINGFIELD, MASSACHUSETTS PART I ------ ITEM 1. BUSINESS - ------ -------- Reference is made to Page 4 of the Corporation's Annual Report to Stockholders for the year ended December 31, 2002, wherein this subject is covered. Statistical Disclosure by Bank Holding Companies - ------------------------------------------------ The following statistical tables and accompanying text provide required financial data about the Corporation and should be read in conjunction with the Consolidated financial statements and related notes, appearing in the 2002 Annual Report to Stockholders and is incorporated herein by reference thereto: Page of Annual Report ------------- I. Distribution of Assets, Liabilities and Stockholders' Equity: Interest Rates and Interest Differential 10 and 11 Rate/Volume Analysis of Interest Margin on Earning Assets 12 II. Investment Portfolio 13, 30, 31 and 41 III. Loan Portfolio 14,31,32 and 41 a. Types of Loans 14 and 31 b. Maturities and Sensitivities to Changes in Interest Rates 9,10 and 14 c. Risk Elements 9, 15, 16, 17, 31 and 32 IV. Summary of Loan Loss Experience 15 and 16 V. Deposits 17, 33 and 41 VI. Return on Equity and Assets 18 VII. Short Term Borrowings 18, 33, 34 and 41 I-1 ITEM 2. PROPERTIES - ------ ---------- The Corporation had one principal banking subsidiary, Westbank, which operates seventeen banking offices located in Massachusetts and Connecticut, as follows: ================================== =========== =========== =========== LOCATION OWNED LEASED TOTAL (MASSACHUSETTS) ---------------------------------- ----------- ----------- ----------- Agawam (Feeding Hills) 1 1 ---------------------------------- ----------- ----------- ----------- Chicopee 1 1 ---------------------------------- ----------- ----------- ----------- Chicopee - Supemarket 1 1 ---------------------------------- ----------- ----------- ----------- East Longmeadow 1 1 ---------------------------------- ----------- ----------- ----------- East Longmeadow - Supemarket 1 1 ---------------------------------- ----------- ----------- ----------- Holyoke 1 1 ---------------------------------- ----------- ----------- ----------- Ludlow 1 1 ---------------------------------- ----------- ----------- ----------- Southwick 1 1 ---------------------------------- ----------- ----------- ----------- West Springfield 2 1 3 ---------------------------------- ----------- ----------- ----------- Westfield 1 1 ---------------------------------- ----------- ----------- ----------- Westfield - Supermarket 1 1 ---------------------------------- ----------- ----------- ----------- (CONNECTICUT) ---------------------------------- ----------- ----------- ----------- Putnam 1 1 2 ---------------------------------- ----------- ----------- ----------- Woodstock 1 1 ---------------------------------- ----------- ----------- ----------- Danielson 1 1 ---------------------------------- ----------- ----------- ----------- TOTAL 9 8 17 ================================== =========== =========== =========== All banking offices except the one in Holyoke have drive-in facilities and twenty-four hour automated teller machines. Title to the properties described as owned in the foregoing table is held by Westbank with warranty deed with no material encumbrances. Westbank owns, with no material encumbrances, land adjacent to the main office which is available for parking and, through a subsidiary, also owns one other property adjacent to the main office consisting of land also used as a parking lot. ITEM 3. LEGAL PROCEEDINGS - ------ ----------------- Certain litigation is pending against the Corporation and the its subsidiaries. Management, after consultation with legal counsel, does not anticipate that any liability arising out of such litigation will have a material effect on the Corporation's Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- NONE I-2 PART II ------- ITEM 5. MARKET FOR CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - ------ --------------------------------------------------------------------- Reference is made to the inside back cover of the Corporation's Annual Report to Stockholders for the year ended December 31, 2002, wherein this subject is covered. ITEM 6. SELECTED FINANCIAL DATA - ------ ----------------------- Reference is made to Page 5 of the Corporation's Annual Report to Stockholders for the year ended December 31, 2002, wherein this subject is covered. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------ ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- Reference is made to Pages 6 through 21 of the Corporation's Annual Report to Stockholders for the year ended December 31, 2002, wherein this subject is covered. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- Reference is made to Pages 9 and 10 of the Corporation's Annual Report to Stockholders for the year ended December 31, 2002, wherein the subject matter is covered. Information Concerning Forward-Looking Statements; Safe Harbor - -------------------------------------------------------------- The following forward-looking statements are made in accordance with the Private Securities Litigation Reform Act of 1995. The Corporation has made, and may make in the future, forward-looking statements concerning future performance, including, but not limited to, future earnings and events or conditions that may affect such future performance. These forward-looking statements are based upon management's expectations and belief concerning possible future developments and the potential effect of such future developments on the Corporation. There is no assurance that such future developments will be in accordance with management's expectations and belief or that the effect of any future developments on the Corporation will be those anticipated by management. All assumptions that form the basis of any forward-looking statements regarding future performance, as well as events or conditions that may affect such future performance, are based on factors that are beyond the Corporation's ability to control or predict with precision, including future market conditions and the behavior of other market participants. Among the factors that could cause actual results to differ materially from such forward-looking statements are the following: 1. The status of the economy in general, as well as in the Corporation's primary market areas of western Massachusetts and northeastern Connecticut; 2. The real estate market in western Massachusetts and northeastern Connecticut; 3. Competition in the Corporation's primary market area from other banks, especially in light of continued consolidation in the New England banking industry; 4. Any changes in federal and state bank regulatory requirements; 5. Changes in interest rates; 6. The cost and other effects of unanticipated legal and administrative cases and proceedings, settlements and investigations; 7. Unanticipated changes in laws and regulations, including federal and state banking laws and regulations, to which the Corporation and its subsidiaries are subject; II-1 PART II (CONTINUED) ------------------- 8. Changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board or any regulatory agency having authority over the Corporation and/or its subsidiaries; and 9. Disruption in general economic conditions due to military or terrorist activity. Forward-looking statements speak only as of the date they were made. While the Corporation periodically reassesses material trends and uncertainties affecting the Corporation's performance in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its quarterly and annual reports, the Corporation does not intend to review or revise any particular forward-looking statement. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ ------------------------------------------- Reference is made to Pages 22 through 45 of the Corporation's Annual Report to Stockholders for the year ended December 31, 2002, wherein this subject is covered. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------ --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- NONE II-2 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- Reference is made to Pages 4 through 9 of the Corporation's Proxy Statement to Stockholders for the 2003 Annual Meeting scheduled for April 16, 2003, wherein this subject is covered. ITEM 11. EXECUTIVE COMPENSATION - ------- ---------------------- References is made to Pages 10 through 13 of the Corporation's Proxy Statement to Stockholders for the 2003 Annual Meeting scheduled for April 16, 2003, wherein this subject is covered. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- -------------------------------------------------------------- Reference is made to Pages 8 and 9 of the Corporation's Proxy Statement to Stockholders for the 2003 Annual Meeting scheduled for April 16, 2003, wherein this subject is covered. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ---------------------------------------------- Reference is made to Pages 8 through 16, of the Corporation's Proxy Statement to Stockholders for the 2003 Annual Meeting scheduled for April 16, 2003, wherein this subject is covered under the caption "Beneficial Ownership of Stock and Executive Compensation - Miscellaneous". ITEM 14. CONTROLS AND PROCEDURES - ------- ----------------------- Within 90 days prior to the filing date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluations. III-1 PART IV ------- ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------- --------------------------------------------------------------- The following documents are filed as a part of this report: 1. Financial Statements The following financial statements are incorporated in this Annual Report on Form 10-K by reference to the Corporation's Annual Report to Stockholders for the year ended December 31, 2002: WESTBANK CORPORATION -------------------- Page of Annual Report ------ Independent Auditors' Reports 51 Consolidated Balance Sheets at December 31, 2002 and 2001 23 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 24 Consolidated Statement of Stockholders' Equity from January 1, 2000, to December 31, 2002 25 Consolidated Statements of Comprehensive Income for the years ended December 31, 2002, 2001 and 2000 25 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 26 Notes to Consolidated Financial Statements 27-50 Current reports on Form 8-K Reporting other Events were filed by the Registrant during the year ended December 31, 2002: NONE 2. Financial Statement Schedules Financial Statement Schedules are omitted because they are inapplicable or not required. 3. Exhibits See accompanying Exhibit Index. IV-1 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTBANK CORPORATION By: /s/ Donald R. Chase ----------------------------------- Donald R. Chase PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - -------------------------------------------------------------------------------- /s/ Donald R. Chase PRESIDENT AND CHIEF EXECUTIVE - ----------------------------- OFFICER AND DIRECTOR 3/19/03 Donald R. Chase /s/ Ernest N. Laflamme, Jr. CHAIRMAN OF THE BOARD - ----------------------------- AND DIRECTOR 3/19/03 Ernest N. Laflamme, Jr. /s/ John M. Lilly TREASURER AND CHIEF - ----------------------------- FINANCIAL OFFICER 3/19/03 John M. Lilly /s/ Roland O. Archambault - ----------------------------- DIRECTOR 3/19/03 Roland O. Archambault /s/ Mark A. Beauregard - ----------------------------- DIRECTOR 3/19/03 Mark A. Beauregard /s/ David R. Chamberland - ----------------------------- DIRECTOR 3/19/03 David R. Chamberland /s/ G. Wayne McCary - ----------------------------- DIRECTOR 3/19/03 G. Wayne McCary /s/ Robert J. Perlak - ----------------------------- CORPORATE CLERK AND DIRECTOR 3/19/03 Robert J. Perlak /s/ George R. Sullivan - ----------------------------- DIRECTOR 3/19/03 George R. Sullivan /s/ James E. Tremble - ----------------------------- DIRECTOR 3/19/03 James E. Tremble IV-2 SECTION 302 CERTIFICATIONS SARBANES-OXLEY ACT OF 2002 I, Donald R. Chase, certify that: 1. I have reviewed this annual report on Form 10-K of Westbank Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining the disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls that could adversely affect the registrant's ability to record, process, summarize and report financial data, and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 3/19/03 /s/ Donald R. Chase ----------- ------------------------------------ Donald R. Chase President and Chief Executive Officer IV-3 SECTION 302 CERTIFICATIONS SARBANES-OXLEY ACT OF 2002 I, John M. Lilly, certify that: 1. I have reviewed this annual report on Form 10-K of Westbank Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining the disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls that could adversely affect the registrant's ability to record, process, summarize and report financial data, and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 3/19/03 /s/ John M. Lilly ----------- ------------------------------------ John M. Lilly Treasurer and Chief Financial Officer IV-4 EXHIBIT INDEX Page No. -------- 3. Articles of Organization and By-Laws, as amended ** (a) Articles of Organization, as amended * (b) By-Laws, as amended * 21. Subsidiaries of Registrant TO BE INCLUDED 99.1 Certification of Periodic Report 99.2 Portions of the Corporation's Annual Report to Stockholders for year-end 2002 incorporated by reference into this annual report on Form 10-K - --------------- * Incorporated by reference to identically numbered exhibits contained in Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. ** Incorporated by reference to identically numbered exhibits contained in Registrant's Annual Report on Form 10-K for the year ended December 31, 1987. IV-5 EX-21 3 exhibit21_11807.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ---------- SUBSIDIARIES OF THE REGISTRANT ------------------------------ 1. Westbank - Massachusetts a. P W B & T, Inc. - Massachusetts b. Park West Securities Corporation - Massachusetts c. Park West Real Estate Investment Trust, Inc. - Delaware d. New London Trust Financial Services Corporation - New Hampshire 2. Westbank Capital Trust I - Delaware 225 Park Avenue West Springfield, Massachusetts 01089 EX-99.1 4 exhibit99-1_11807.txt CERTIFICATION OF PERIODIC REPORT EXHIBIT 99.1 ------------ SECTION 906 CERTIFICATIONS SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Westbank Corporation (the "Corporation") does hereby certify to such officer's knowledge that: The Annual Report on Form 10-K for the year ended December 31, 2002 of the Corporation fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Date: 3/19/03 /s/ Donald R. Chase ----------- ------------------------------------- Donald R. Chase President and Chief Executive Officer Date: 3/19/03 /s/ John M. Lilly ----------- ------------------------------------- John M. Lilly Treasurer and Chief Executive Officer EX-99.2 5 exhibit99-2_11807.txt ANNUAL REPORT - YEAR END 2002 EXHIBIT 99.2 ------------ WESTBANK CORPORATION 2002 ANNUAL REPORT CRAFTING A STRATEGY FOR SUCCESS TABLE OF CONTENTS FINANCIAL HIGHLIGHTS.................................................... LETTER TO STOCKHOLDERS.................................................. BUSINESS - WESTBANK CORPORATION AND SUBSIDIARIES........................ SELECTED CONSOLIDATED FINANCIAL DATA.................................... MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS................ CONSOLIDATED BALANCE SHEETS............................................. CONSOLIDATED STATEMENTS OF INCOME....................................... CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY......................... CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME......................... CONSOLIDATED STATEMENTS OF CASH FLOWS................................... NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................. INDEPENDENT AUDITORS' REPORT............................................ CORPORATE DIRECTORY..................................................... CORPORATE INFORMATION................................................IBC FINANCIAL HIGHLIGHTS WESTBANK CORPORATION AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) 2002 2001 2000 ================================================================================ Net income $ 6,009 $ 4,073 $ 3,788 Net interest income 22,521 20,397 19,417 Non-interest income 4,090 3,489 2,652 Non-interest expense 16,412 16,841 15,841 Provision for loan losses 1,333 944 472 YEAR END DECEMBER 31 (DOLLARS IN THOUSANDS) ================================================================================ Securities $132,732 $142,442 $ 97,676 Loans, net 473,721 439,723 429,231 Allowance for loan losses 5,111 4,179 3,670 Assets 682,863 628,922 574,596 Deposits 561,747 509,849 499,140 Stockholders' equity 42,612 39,016 34,860 COMMON SHARE DATA (1) Average diluted shares 4,509,965 4,513,020 4,487,053 Earnings per diluted share $1.33 $.90 $.84 (1) Share amounts and common stock prices are adjusted for the 5 percent stock dividend declared and distributed in January 2003. CHANGE IN COMMON STOCK PRICE, EARNINGS PER SHARE (DILUTED) AND BOOK VALUE (BAR GRAPH) ================================================================================ Closing Earnings per Share Common Stock Price (Diluted) Book Value - -------------------------------------------------------------------------------- 2000 $ 6.67 $ .84 $7.86 2001 9.19 .90 8.71 2002 13.05 1.33 9.76 1 BUSINESS WESTBANK CORPORATION AND SUBSIDIARIES CORPORATE ORGANIZATION Westbank Corporation (hereinafter sometimes referred to as "the Corporation") is a registered Bank Holding Company organized to facilitate the expansion and diversification of the business of Westbank (hereinafter sometimes referred to as "the Bank"). Westbank Corporation is also the owner of a wholly owned subsidiary, Westbank Capital Trust 1, which was organized for the purpose of facilitating the issuance of the mandatory redeemable preferred stock that was issued on September 30, 1999. The Corporation is headquartered in West Springfield, Massachusetts. As of December 31, 2002, the Corporation has seventeen (17) offices located in Massachusetts and Connecticut. WESTBANK The Bank is a Massachusetts chartered commercial bank and trust company, is a member of the Federal Deposit Insurance Corporation ("FDIC"), and is subject to regulation by the Massachusetts Commissioner of Banks and the FDIC. Westbank is the resultant financial institution formed from the merger of the Corporation's two (2) wholly owned subsidiaries, Park West Bank and Trust Company ("Park West") and Cargill Bank ("Cargill') on September 7, 2001. A full range of retail banking services is furnished to individuals, businesses and nonprofit organizations through seventeen (17) banking offices located in Massachusetts and Connecticut. Such services include a wide range of checking and savings accounts, loans, safe deposit facilities, and automated teller machines at selected branch locations and three (3) off-site locations. The Bank also provides lending, depository and related financial services to commercial, industrial, financial and governmental customers. In the lending area, these include short- and long-term loans and revolving credit arrangements, letters of credit, inventory and accounts receivable financing, real estate construction lending, and mortgage loans. Lorac Leasing Corporation, Park West Securities Corporation, Park West Real Estate Investment Trust, Inc., and PWB&T, Inc., are all wholly owned subsidiaries of the Bank. During 2002, the Bank dissolved Lorac Leasing Corporation, which had been inactive for years. The Bank also operates a Trust Department providing services normally associated with holding property in a fiduciary or agency capacity. The value of the property held by the Trust Department at December 31, 2002 amounted to $149,921,000 and is not included in the accompanying financial statements since such items are not assets of the Bank. EMPLOYEES As of December 31, 2002, the Corporation and its subsidiaries had the equivalent of 156 full-time officers and staff. COMPETITION The Corporation's banking, real estate activity and trust services are competitive with other financial institutions. Its service area is in western Massachusetts and northeastern Connecticut. Competitors include other commercial banks, mutual savings banks, savings and loan associations, credit unions, consumer finance companies, loan offices, money market funds, and other financing organizations. Competition for trust services from major commercial banks is high, with continuing efforts by those banks to solicit new business. The Trust Department prides itself as one of the few remaining corporate fiduciaries providing personal services locally. Insurance companies, mutual savings banks, investment counseling firms, and other business firms and individuals also offer active competition for such business. 2 SELECTED CONSOLIDATED FINANCIAL DATA WESTBANK CORPORATION AND SUBSIDIARIES
Year ended December 31, (Dollars in Thousands Except Share Amounts) 2002 2001 2000 1999 1998 ===================================================================================================================== Interest and dividend income $40,576 $41,088 $42,645 $32,437 $28,631 Interest expense 18,055 20,691 23,228 15,316 13,292 - --------------------------------------------------------------------------------------------------------------------- Net interest income 22,521 20,397 19,417 17,121 15,339 Provision for loan losses 1,333 944 472 77 41 Non-interest income 4,090 3,489 2,652 2,330 2,427 Non-interest expense 16,412 16,841 15,841 12,598 12,200 - --------------------------------------------------------------------------------------------------------------------- Income before income taxes 8,866 6,101 5,756 6,776 5,525 Income taxes 2,857 2,028 1,968 2,609 2,148 - --------------------------------------------------------------------------------------------------------------------- Net income $ 6,009 $ 4,073 $ 3,788 $ 4,167 $ 3,377 ===================================================================================================================== Common share data: (1) Earnings per share: Basic $ 1.36 $ .91 $ .85 $ .94 $ .75 Diluted 1.33 .90 .84 .92 .73 Cash dividends declared .44 .40 .40 .40 .40 Ending book value 9.76 8.71 7.86 7.01 6.14 AT DECEMBER 31: Loans, net $473,721 $439,723 $429,231 $438,567 $293,113 Assets 682,863 628,922 574,596 576,150 402,623 Non-performing assets 1,558 2,034 2,737 2,881 1,494 Deposits 561,747 509,849 499,140 478,896 342,267 Borrowings 56,392 57,666 20,992 46,546 27,807 Mandatory redeemable preferred stock 17,000 17,000 17,000 17,000 Stockholders' equity 42,612 39,016 34,860 31,543 30,490 AVERAGE FOR YEAR: Loans 463,488 440,454 445,846 349,614 284,629 Assets 666,120 595,592 581,328 450,691 382,924 Deposits 537,309 486,694 488,396 384,410 335,110 Stockholders' equity 40,380 36,920 32,096 31,187 29,229 Weighted shares outstanding - basic 4,406,583 4,465,054 4,440,560 4,456,622 4,350,159 Weighted shares outstanding - diluted 4,509,965 4,513,020 4,487,053 4,549,992 4,486,316 SELECTED RATIOS: Return on average assets .90% .68% .65% .92% .88% Return on average stockholders' equity 14.88 11.03 11.80 13.36 11.55 Allowance for loan losses to loans at year end 1.07 .94 .85 .88 .90 Non-performing loans as a percentage of total loans at year end .33 .41 .51 .55 .35 Net charge-offs (recoveries) as a percentage of average loans .09 .10 .16 .14 .15 Non-performing assets as a percentage of assets .23 .32 .48 .50 .37
(1) Share amounts are adjusted for the 5 percent stock dividend declared and distributed in January 2003. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS WESTBANK CORPORATION AND SUBSIDIARIES INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS The following forward-looking statements are made in accordance with the Private Securities Litigation Reform Act of 1995. The Corporation has made, and may make in the future, forward-looking statements concerning future performance, including, but not limited to, future earnings and events or conditions that may affect such future performance. These forward-looking statements are based upon management's expectations and belief concerning possible future developments and the potential effect of such future developments on the Corporation. There is no assurance that such future developments will be in accordance with management's expectations and belief or that the effect of any future developments on the Corporation will be those anticipated by management. All assumptions that form the basis of any forward-looking statements regarding future performance, as well as events or conditions that may affect such future performance, are based on factors that are beyond the Corporation's ability to control or predict with precision, including future market conditions and the behavior of other market participants. Among the factors that could cause actual results to differ materially from such forward-looking statements are the following: 1. The status of the economy in general, as well as in the Corporation's primary market areas of western Massachusetts and northeastern Connecticut; 2. The real estate market in western Massachusetts and northeastern Connecticut; 3. Competition in the Corporation's primary market area from other banks, especially in light of continued consolidation in the New England banking industry; 4. Any changes in federal and state bank regulatory requirements; 5. Changes in interest rates; 6. The cost and other effects of unanticipated legal and administrative cases and proceedings, settlements and investigations; 7. Unanticipated changes in laws and regulations, including federal and state banking laws and regulations, to which the Corporation and its subsidiaries are subject; 8. Changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board or any regulatory agency having authority over the Corporation and/or its subsidiaries; and 9. Disruption in general economic conditions due to military or terrorist activity. Forward-looking statements speak only as of the date they were made. While the Corporation periodically reassesses material trends and uncertainties affecting the Corporation's performance in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its quarterly and annual reports, the Corporation does not intend to review or revise any particular forward-looking statement. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES CRITICAL ACCOUNTING POLICIES Management believes that the Corporation's critical accounting policies are accounting for securities and loans, including revenue recognition, the allowance for loan losses and the classification of securities. The Corporation's accounting policy for each of these items is described below. SECURITIES Securities that management has the positive intent and ability to hold until maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Those securities that have been identified as assets for which there is not a positive intent to hold to maturity, including all marketable equity securities, are classified as available for sale with unrealized gains (losses), net of income taxes, reported as a separate component of stockholders' equity. The Corporation determines if securities will be classified as held-to-maturity or available-for-sale at the time of purchase. In addition, any mortgage-backed securities created out of the Corporation's own inventory of residential real estate loans are also considered available for sale. Gains and losses on sales of available-for-sale securities are recognized in non-interest income at the time of sale on a specific identification basis. Securities that have experienced an other-than-temporary decline in value are written down to estimated fair value, establishing a new cost basis with the amount of the write-down expensed as a realized loss. The Corporation does not engage in trading activities. LOANS Loans have been reduced by deferred loan fees and the allowance for loan losses. Interest Income on loans is recorded on an accrual basis. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as income over the life of the related loan as an adjustment to the loan's yield. Non-accrual loans are loans on which the accrual of interest ceases when the collection of principal or interest payments is determined to be doubtful by management. It is the general policy of the Corporation to discontinue the accrual of interest when principal or interest payments are delinquent ninety (90) days, unless the loan principal and interest are determined by management to be fully collectible. Any unpaid amounts previously accrued on these loans are reversed from income. Interest received on a loan in non-accrual status is applied to reduce principal or, if management determines that the principal is collectible, applied to interest on a cash basis. A loan is returned to accrual status after the borrower has brought the loan current and has demonstrated compliance with the loan terms for a sufficient period, and management's doubts concerning collectibility have been removed. The Corporation measures impairment of loans in accordance with SFAS No. 114, "Accounting for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (collectively, SFAS No. 114). A loan is recognized as impaired when it is probable that either principal or interest are not collectible in accordance with the terms of the loan agreement. Measurement of impairment for commercial loans is generally based on the present value of expected future cash flows discounted at the loan's effective interest rate. Commercial real estate loans are generally measured based on the fair value of the underlying collateral. If the estimated fair value of the impaired loan is less than the related recorded amount, a specific valuation allowance is established or a write-down is charged against the allowance for loan losses. Smaller balance homogenous loans, including residential real estate and consumer loans, are excluded from the provisions of SFAS No. 114. Generally, income is recorded only on a cash basis for impaired loans. The appropriateness of the allowance for loan losses is evaluated quarterly by management. Factors considered in evaluating the appropriateness of the allowance include the size and concentration of the portfolio, previous loss experience, current economic conditions and their effect on borrowers, the financial condition of individual borrowers and the related performance of individual loans in relation to contract terms. The provision for loan losses charged to operating expense is based upon management's judgment of the amount necessary to maintain the allowance at an appropriate level to absorb losses. Management also retains an independent loan review consultant to provide advice on the appropriateness of the loan loss allowance. Loan losses are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance charged to income. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES SUMMARY OF RESULTS This section presents discussion and analysis of the Corporation's consolidated financial condition at December 31, 2002 and 2001 and consolidated results of operations for each of the three (3) years in the period ended December 31, 2002. The Corporation is consolidated with its wholly owned subsidiary, Westbank. This discussion and analysis should be read in conjunction with the financial statements contained elsewhere in this Annual Report on Form 10-K. Effective January 29, 1999, Cargill Bank was merged with and into Westbank Corporation, pursuant to a plan of merger dated July 15, 1998. Each share of Cargill common stock was converted into 1.365 shares of the Corporation's common stock. Approximately 400,164 of the Corporation's common shares were issued for the outstanding common stock of Cargill. The transaction was accounted for using the pooling-of-interests method of accounting and, accordingly, all historical financial data has been restated to include both entities for all periods presented. The restatement of the historical data is based on the Corporation's fiscal year-end December 31 and Cargill's fiscal year-end September 30 for all periods prior to 1999. On October 29, 1999, Cargill Bank completed its acquisition of the Connecticut division of New London Trust. The two New London Trust offices became offices of Cargill Bank. The acquisition resulted in $106 million of assets (loans of $84 million) and $106 million of liabilities being acquired as of October 29, 1999. The Corporation has accounted for this acquisition on the purchase accounting method. On September 7, 2001, Cargill was merged with and into Park West, operating under the name Westbank. For 2002, the Corporation reported net income of $6,009,000 or $1.33 per diluted share after providing $1,333,000 for loan losses. This compares to net income of $4,073,000 or $.90 per diluted share for 2001. The Corporation's 2001 earnings reflected a provision for loan losses of $944,000. Net interest income increased by $2,124,000 from 2001 to 2002. Non-interest income increased by $601,000 from the prior year and by $1,438,000 versus 2000. Non-interest income for 2002 reflects an increase in Trust Department earnings of $17,000, a decrease in service charges on deposit accounts and loan servicing income of $69,000, a decrease from gain on sale of investments, other real estate owned, mortgages and equipment totaling $394,000 and an increase in other non-interest income of $1,047,000. Included in other non-interest income is $800,000 in life insurance proceeds and an increase of $193,000 in cash surrender value of bank-owned life insurance. Non-interest expense amounted to $16,412,000 in 2002, a decline of $429,000 or 2.55%. The decline in operating expenses for 2002 is due in part to the Corporation adopting SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), effective January 1, 2002, and the adoption of SFAS No. 147, "Acquisition of Certain Financial Institutions" ("SFAS No. 147"), effective September 30, 2002. In accordance with these statements, the Corporation has ceased amortization of goodwill and has performed a transitional goodwill impairment test. The adoption of SFAS No. 142 and SFAS No. 147 eliminated intangible amortization of goodwill in the amount of $684,000 for 2002. In addition to the above, salaries and benefits increased $703,000, occupancy expense increased $66,000 and other non-interest expense declined $514,000 as a result of efficiencies achieved through the merger of the Connecticut and Massachusetts bank subsidiaries. At December 31, 2002, the Corporation's total assets were $682,863,000, an increase of $53,941,000 or 8.58% compared to year-end 2001. Non-performing assets amounted to $1,558,000 or .23% of total assets at December 31, 2002, compared with $2,034,000 or .32% at the end of 2001. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") imposes significant regulatory restrictions and requirements on banking institutions insured by the FDIC and their holding companies. FDICIA established capital categories into which financial institutions are placed based on capital level. Each capital category establishes different degrees of regulatory restrictions that can apply to a financial institution. As of December 31, 2002, the Bank's capital was at a level that placed the Bank in the "well capitalized" category as defined by FDICIA. FDICIA imposes a variety of other restrictions and requirements on insured banks. These include significant regulatory reporting requirements such as insuring that a system of risk-based deposit insurance premiums and civil money penalties for inaccurate deposit reporting exists. In addition, FDICIA imposes a system of regulatory standards for bank and bank holding company operations, detailed truth in savings disclosure requirements, and restrictions on activities authorized by state law but not authorized for national banks. COMPONENTS OF CAPITAL As of December 31, 2002, stockholders' equity increased to $42.6 million, a 9.22% increase compared to December 31, 2001. Stockholders' equity increased as a result of the Corporation's net income of $6 million and an improvement in the unrealized gain on securities available for sale of $1.1 million, net of taxes less $1.8 million paid in dividends to shareholders and the repurchase of $2,615,000 in the Corporation's stock. In addition, the Corporation reissued 96,365 shares of Treasury stock totaling $834,000, primarily for the purpose of the Corporation's dividend reinvestment program. Capital guidelines issued by the Federal Reserve Board require the Corporation to maintain certain capital ratios. As of December 31, the Corporation's regulatory capital ratios were as follows: 2002 2001 2000 ---- ---- ---- Tier 1 leverage capital (to average assets) 6.60% 6.96% 6.45% Tier 1 risk-based capital (minimum required 4%) 10.56 10.79 10.34 Total risk-based capital (minimum required 8%) 12.63 13.03 12.84 Regulatory risk-based capital requirements take into account the different risk categories of banking organizations by assigning risk weights to assets and the credit equivalent amounts of off-balance sheet exposures. In addition, capital is divided into two tiers. In this Corporation, Tier 1 includes the common stockholders' equity and a portion of the mandatory redeemable preferred stock; total risk-based, or supplementary capital includes not only the equity but also a portion of the allowance for loan losses and a portion of the mandatory redeemable preferred stock. DISCUSSION OF MARKET RISK Market risk is the risk of loss due to adverse changes in market prices and rates. The management of this risk, coupled with directives to build shareholder value and profitability, is an integral part of the Corporation's overall operating strategy. The Corporation's approach to risk management, primarily interest rate risk management, concentrates on fundamental strategies to structure the balance sheet and the composition of assets and liabilities. The Corporation does not utilize interest rate futures, swaps or options transactions. It's approach reflects managing risk through the use of fixed and adjustable rate loans and investments, rate-insensitive checking accounts as well as a combination of fixed and variable rate deposit products and borrowed funds. Corporate policy includes required limits on the sensitivity of net interest income under various interest rate scenarios. The Corporation seeks to control its interest rate risk exposure in a manner that allows for adequate levels of earnings and capital over a range of possible interest rate environments. The Corporation has adopted formal policies and practices to monitor and manage interest rate risk exposure. As part of this effort, the Corporation actively manages interest rate risk through the use of a simulation model that measures the sensitivity of future net interest income to changes in interest rates. In addition, the Corporation regularly monitors interest rate sensitivity through gap analysis, which measures the terms to maturity or next repricing date of interest-earning assets and interest-bearing liabilities. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES On a quarterly basis, an interest rate risk exposure compliance report is prepared and presented to the Corporation's Board of Directors. This report presents an analysis of the change in net interest income resulting from an increase or decrease in the level of interest rates. All changes are measured as percentage changes from the projected net interest income in the flat rate scenario. The calculated estimates of change in net interest income are compared to current limits established by management and approved by the Board of Directors. The following is a summary of the interest rate exposure report as of December 31, 2002 and 2001: Percentage Change in Change in Interest Rates Net Interest Income (In Basis Points) 2002 2001 ================================================================================ +200 4.00% 0% Level 0 0 -200 (6.00) (1.00) The model utilized to create the results presented above makes various estimates at each level of interest rate change regarding cash flows from principal repayments on loans and mortgage-backed securities and/or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In order to reduce the exposure to interest rate fluctuations, the Corporation has developed strategies to manage its liquidity, shorten the effective maturities of certain interest-earning assets and increase the effective maturities of certain interest-bearing liabilities. The Bank has focused its residential lending on a combination of fixed and adjustable rate mortgages. Commercial loans, commercial mortgages and consumer lending focus on adjustable and short term loans. The Bank also attempts to maintain and/or increase its savings and transaction accounts, which are considered relatively insensitive to changes in interest rates. The Corporation also measures sensitivity to changes in interest rates using interest rate sensitivity gap analysis which is the difference between the cash flow amounts of interest-sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset-sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the institution is in a liability-sensitive position. Accordingly, net interest income would decline when rates rise and increase when rates fall. Also, these examples assume that interest-rate changes for assets and liabilities are of the same magnitude, whereas actual interest-rate changes generally differ in magnitude for assets and liabilities. The following table sets forth the distribution of the repricing of the Corporation's earning assets and interest-bearing liabilities as of December 31, 2002, the interest rate sensitivity gap, (i.e., interest rate sensitive assets less interest rate sensitive liabilities), the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio and the cumulative interest rate sensitivity gap ratio. The table also sets forth the time periods in which earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of the Bank's customers. In addition, various assets and liabilities indicated as repricing within the same period may, in fact, reprice at different times within such period and at different rates. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES
THREE OVER THREE OVER ONE OVER MONTHS MONTHS TO YEAR TO FIVE (DOLLARS IN THOUSANDS) OR LESS A YEAR FIVE YEARS YEARS TOTAL ============================================================================================================= EARNING ASSETS Investments $ 7,854 $ 58 $ 1,595 $ 123,225 $ 132,732 Interest bearing cash 98 98 Loans 85,565 58,786 159,055 175,426 478,832 Federal funds sold 28,185 28,185 - ------------------------------------------------------------------------------------------------------------- 121,702 58,844 160,650 298,651 639,847 INTEREST BEARING LIABILITIES Savings deposits 10,039 90,352 100,391 NOW accounts 3,367 30,298 33,665 Money market accounts 40,775 40,775 Other time deposits 76,980 108,333 127,392 42 312,747 Borrowed funds and preferred stock 23,602 10,000 22,790 17,000 73,392 - ------------------------------------------------------------------------------------------------------------- $ 141,357 $ 131,739 $ 270,832 $ 17,042 $ 560,970 ============================================================================================================= Interest Rate Sensitivity Gap $ (19,655) $ (72,895) $ (110,182) $ 281,609 $ 78,877 Cumulative Interest Rate Sensitivity Gap (19,655) (92,550) (202,732) 78,877 Interest Rate Sensitivity Gap Ratio (3.07)% (11.39)% (17.22)% 44.01% Cumulative Interest Rate Sensitivity Gap Ratio (3.07) (14.46) (31.68) 12.33
The presentation of a run off and repricing of savings accounts and NOW accounts is based on the Corporation's historical experience with $10,039,000 and $3,367,000, respectively, included in the three-month to one-year category and the remainder placed in the one- to five-year category of the interest-bearing liabilities. Westbank seeks to manage the mix of asset and liability maturities to control the effect of changes in the general level of interest rates on net interest income. Except for its effect on the general level of interest rates, inflation does not have a material impact on Westbank's earnings due to the rate of variability and short-term maturities of its earning assets. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY - INTEREST RATES AND INTEREST DIFFERENTIAL The following table presents the condensed consolidated average balance sheets for 2002, 2001 and 2000. The total dollar amount of interest income from earning assets and the resultant yields are calculated on a taxable equivalent basis. The interest paid on interest-bearing liabilities, expressed both in dollars and rates, is shown in the table: 9 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES
2002 2001 2000 --------------------------- --------------------------- --------------------------- AVERAGE AVERAGE AVERAGE INTEREST YIELD/ INTEREST YIELD/ INTEREST YIELD/ AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE (DOLLARS IN THOUSANDS) BALANCE EXPENSE PAID BALANCE EXPENSE PAID BALANCE EXPENSE PAID ============================================================================================================================= ASSETS Securities: U.S. Treasury $ 63 $ 1 1.59% $ 450 $ 27 6.00% $ 534 $ 32 6.00% Federal agencies 131,908 7,989 6.06 105,260 6,926 6.58 90,018 6,422 7.13 Tax exempt federal (a) 626 44 7.03 614 42 7.00 616 42 6.82 Other securities 7,979 329 4.12 6,988 408 5.84 4,007 292 7.29 - ----------------------------------------------------------------------------------------------------------------------------- Total securities 140,576 8,363 5.95 113,312 7,403 6.53 95,175 6,788 7.13 - ----------------------------------------------------------------------------------------------------------------------------- Interest-bearing cash and temporary investments 622 28 4.50 351 15 4.27 765 41 5.36 - ----------------------------------------------------------------------------------------------------------------------------- Loans: (b) Commercial 62,971 4,061 6.45 58,689 4,524 7.71 60,064 5,608 9.34 Tax exempt federal (a) 6,658 561 8.43 4,534 423 9.33 4,653 413 8.88 Real estate 332,215 23,531 7.08 324,139 24,513 7.56 333,757 26,008 7.79 Consumer 61,644 3,943 6.40 53,092 4,210 7.93 47,372 3,708 7.83 - ----------------------------------------------------------------------------------------------------------------------------- Total loans 463,488 32,096 6.92 440,454 33,670 7.64 445,846 35,737 8.02 - ----------------------------------------------------------------------------------------------------------------------------- Federal funds sold 20,992 295 1.41 5,013 158 3.15 3,793 234 6.17 - ----------------------------------------------------------------------------------------------------------------------------- Total earning assets 625,678 $40,782 6.52% 559,130 $41,246 7.38% 545,579 $42,800 7.84% - ----------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (4,603) (4,039) (3,937) Cash and due from banks 15,787 13,435 14,054 Other assets 29,258 27,066 25,632 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $666,120 $595,592 $581,328 ============================================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings $129,604 $ 1,561 1.20% $133,742 $ 2,665 1.99% $127,764 $ 3,365 2.63% Money market 34,403 736 2.14 18,258 387 2.12 24,021 765 3.18 Negotiated rate certificates 59,104 2,014 3.41 48,817 2,325 4.76 50,391 2,899 5.75 Other time deposits 242,242 9,866 4.07 221,311 11,731 5.30 225,609 12,464 5.52 - ----------------------------------------------------------------------------------------------------------------------------- Total time deposits 465,353 14,177 3.05 422,128 17,108 4.05 427,785 19,493 4.56 Borrowed funds/preferred stock 83,068 3,878 4.67 68,032 3,583 5.27 57,717 3,735 6.47 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 548,421 $18,055 3.29% 490,160 $20,691 4.22% 485,502 $23,228 4.78% Demand deposits 71,956 64,566 60,610 Other liabilities 5,363 3,946 3,120 Stockholders' equity 40,380 36,920 32,096 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $666,120 $595,592 $581,328 ============================================================================================================================= Net interest income $22,727 $20,555 $19,572 Yield spread 3.23% 3.16% 3.06% Net yield on earning assets/net interest margin 3.63% 3.68% 3.59% Deduct tax equivalent adjustment 206 158 155 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $22,521 $20,397 $19,417 =============================================================================================================================
(A) TAX EQUIVALENT BASIS. INTEREST INCOME ON NON-TAXABLE INVESTMENT SECURITIES AND LOANS INCLUDES THE EFFECTS OF THE TAX EQUIVALENT ADJUSTMENTS USING THE MARGINAL FEDERAL TAX RATE OF 34% IN ADJUSTING TAX EXEMPT INTEREST INCOME TO A FULLY TAXABLE BASIS. (B) AVERAGE LOAN BALANCES ABOVE INCLUDE NON-ACCRUAL LOANS. WHEN A LOAN IS PLACED IN NON-ACCRUAL STATUS, INTEREST INCOME IS RECORDED TO THE EXTENT ACTUALLY RECEIVED IN CASH OR IS APPLIED TO REDUCE PRINCIPAL. During 2002, the yield spread increased to 3.23% versus 3.16% in 2001. The Corporation's net interest margin decreased during 2002 to 3.63% from 3.68% in 2001, a decrease of 5 basis points. The section titled Rate/Volume Analysis further describes the change in yields. During 2001, the yield spread increased to 3.16% versus 3.06% in 2000. The Corporation's net interest margin increased during 2001 to 3.68% from 3.59% in 2000, an increase of 9 basis points. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES RATE/VOLUME ANALYSIS OF INTEREST MARGIN ON EARNING ASSETS The following table sets forth, for each major category of interest-earning assets and interest-bearing liabilities, the dollar amounts of interest income (calculated on a taxable equivalent basis at 34%), interest expense and net interest income and changes therein for 2002 as compared with 2001 and 2001 compared with 2000.
2002 COMPARED WITH 2001 2001 COMPARED WITH 2000 - ----------------------------------------------------------------------------------------------------------------------------------- INCREASE DUE TO * INCREASE DUE TO * (DOLLARS IN THOUSANDS) 2002 2001 (DECREASE) VOLUME RATE 2001 2000 (DECREASE) VOLUME RATE =================================================================================================================================== Interest earned: Securities: U.S. Treasury $ 1 $ 27 $ (26) $ (14) $ (12) $ 27 $ 32 $ (5) $ (5) Federal agencies 7,989 6,926 1,063 1,645 (582) 6,926 6,422 504 1,029 $ (525) Tax exempt federal 44 42 2 1 1 42 42 Other securities 329 408 (79) 52 (131) 408 292 116 183 (67) Interest-bearing cash 28 15 13 12 1 15 41 (26) (19) (7) Loans: Commercial 4,061 4,524 (463) 313 (776) 4,524 5,608 (1,084) (126) (958) Tax exempt federal 561 423 138 182 (44) 423 413 10 (10) 20 Real estate 23,531 24,513 (982) 602 (1,584) 24,513 26,008 (1,495) (738) (757) Consumer 3,943 4,210 (267) 618 (885) 4,210 3,708 502 453 49 Federal funds sold 295 158 137 246 (109) 158 234 (76) 61 (137) - ----------------------------------------------------------------------------------------------------------------------------------- 40,782 41,246 (464) 3,657 (4,121) 41,246 42,800 (1,554) 828 (2,382) - ----------------------------------------------------------------------------------------------------------------------------------- Interest expense: Savings 1,561 2,665 (1,104) (80) (1,024) 2,665 3,365 (700) 151 (851) Money market 736 387 349 345 4 387 765 (378) (158) (220) Negotiated rate certificates 2,014 2,325 (311) 430 (741) 2,325 2,899 (574) (88) (486) Other time deposits 9,866 11,731 (1,865) 1,038 (2,903) 11,731 12,464 (733) (237) (496) Borrowed funds 3,878 3,583 295 732 (437) 3,583 3,735 (152) 607 (759) - ----------------------------------------------------------------------------------------------------------------------------------- 18,055 20,691 (2,636) 2,465 (5,101) 20,691 23,228 (2,537) 275 (2,812) - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 22,727 $ 20,555 $ 2,172 $ 1,442 $ 730 $ 20,555 $ 19,572 $ 983 $ 553 $ 430 ===================================================================================================================================
* The dollar amount of changes in interest income and interest expense attributable to changes in rate and volume has been allocated between rate and volume based on changes in rates times the prior year's volume and the changes in volume times the prior year's rate. Net interest income for 2002 increased to $22,727,000, up 10.57% from $20,555,000 in 2001. An 11.94% increase in average earning assets and an 86 basis point decrease in average rate of return resulted in an increase in volume of $3,657,000 and a decrease in rate of $4,121,000. An increase of 11.89% in average interest-bearing liabilities and a 93 basis point decrease in average rate of interest paid contributed to an increase in volume of $2,465,000 and a decrease in rate of $5,101,000. Net interest income for 2001 increased to $20,555,000, up 5.0% from $19,572,000 in 2000. A 2.48% increase in average earning assets and a 46 basis point decrease in average rate of return resulted in an increase in volume of $828,000 and a decrease in rate of $2,382,000. A decrease of .96% in average interest-bearing liabilities and a 56 basis point decrease in average rate of interest paid contributed to an increase in volume of $275,000 and a decrease in rate of $2,812,000. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES LIQUIDITY Liquidity refers to the Corporation's ability to generate adequate amounts of cash to fund loan originations, security purchases, deposit withdrawals, and fund dividends on the Corporation's common stock and Mandatory Redeemable Preferred Stock. The Corporation's liquidity position is monitored by the Asset/Liability Committee, based on policies approved by the Board of Directors. The Committee meets regularly to review and direct the Bank's investment, lending and deposit-gathering activities. At December 31, 2002, the Corporation maintained cash balances, short-term investments and investments available for sale totaling $180 million, representing 26% of total year-end assets, versus $160 million or 25% of total assets at December 31, 2001. Liquidity management requires close scrutiny of the mix and maturity of deposits and borrowings and short-term investments. Cash and due from banks, federal funds sold, investment securities and mortgage-backed securities available for sale, as compared to deposits and borrowings, are used by the Corporation to compute its liquidity on a daily basis. The primary source of funds for the payment of dividends by the Corporation is dividends paid to the Corporation by the Bank. Bank regulatory authorities generally restrict the amounts available for payment of dividends, if the effect thereof would cause the capital of the Bank to be reduced below applicable capital requirements. These restrictions indirectly affect the Corporation's ability to pay dividends. Management of the Corporation believes that its current liquidity is sufficient to meet current and anticipated funding needs. Refer to Note 6 in the Notes to Consolidated Financial Statements for a discussion of the Corporation's external sources of liquidity. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES SECURITIES PORTFOLIO Refer to Note 2 in the Notes to Consolidated Financial Statements of this report for further discussion. The following table shows the amortized cost (in thousands) of the Corporation's securities held to maturity at December 31:
2002 2001 2000 ============================================================================================================================= U. S. Government obligations $ $ $ 499 Federal agency obligations 9,448 Mortgage-backed securities 436 757 1,462 - ----------------------------------------------------------------------------------------------------------------------------- Amortized cost $ 436 $ 757 $ 11,409 =============================================================================================================================
The following table shows the estimated fair value (in thousands) of the Corporation's securities available for sale at December 31:
2002 2001 2000 ============================================================================================================================= U. S. Government obligations $ 26 $ 66 $ 38 Federal agency obligations 49,531 72,659 61,465 Mortgage-backed securities 73,938 60,359 18,929 Municipal bonds 984 633 624 Equity securities 7,817 7,968 5,211 - ----------------------------------------------------------------------------------------------------------------------------- Estimated fair value 132,296 141,685 86,267 Gross unrealized (gain) loss on securities available for sale (3,762) (2,075) 295 - ----------------------------------------------------------------------------------------------------------------------------- Amortized cost $128,534 $139,610 $ 86,562 =============================================================================================================================
The following table shows weighted average yields and maturity distribution (in thousands) of debt securities at December 31, 2002:
WITHIN 1 YEAR 1 TO 5 YEARS 5 TO 10 YEARS AFTER 10 YEARS TOTAL AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED YIELD COST YIELD COST YIELD COST YIELD COST YIELD COST =================================================================================================================================== U. S. Government obligations 1.23% $ 26 1.23% $ 26 Federal agency obligations 7.69% $ 1,000 5.74% $47,639 5.78 48,639 Mortgage-backed securities 5.91 45 5.92 65 5.35 11,647 6.16% $59,218 6.03 70,975 Municipal bonds 4.48 913 4.48 913 - ----------------------------------------------------------------------------------------------------------------------------------- Total debt Securities 4.20% $ 71 6.15% $ 1,978 5.66% $59,286 6.16% $59,218 5.91% $120,553 ===================================================================================================================================
The weighted average yield for the above securities has been computed by dividing annualized interest income, including the accretion of discount and the amortization of premiums, by the book value of securities outstanding. For purposes of the above table, mortgage-backed securities are distributed using actual maturity dates. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES LOAN PORTFOLIO The following table sets forth the classification (in thousands) of the Corporation's loans by major category at December 31:
2002 2001 2000 1999 1998 ====================================================================================================== Commercial $ 61,115 $ 53,756 $ 59,998 $ 56,136 $ 41,760 - ------------------------------------------------------------------------------------------------------ Real Estate: Construction 8,700 5,154 5,160 5,952 5,998 Residential (1-4 family) 267,319 259,791 248,059 263,832 168,744 Commercial properties 94,637 83,443 84,833 85,385 60,348 - ------------------------------------------------------------------------------------------------------ Total Real Estate 370,656 348,388 338,052 355,169 235,090 - ------------------------------------------------------------------------------------------------------ Consumer 39,730 37,292 34,578 31,556 19,277 - ------------------------------------------------------------------------------------------------------ Leases 7,743 4,841 654 140 - ------------------------------------------------------------------------------------------------------ Gross loans 479,244 444,277 433,282 443,001 296,127 Deferred loan origination fees-net of costs (412) (375) (381) (526) (349) - ------------------------------------------------------------------------------------------------------ Total Loans 478,832 443,902 432,901 442,475 295,778 Allowance for loan losses (5,111) (4,179) (3,670) (3,908) (2,665) - ------------------------------------------------------------------------------------------------------ Net loans $ 473,721 $ 439,723 $ 429,231 $ 438,567 $ 293,113 ======================================================================================================
The Corporation's loan portfolio is not concentrated within a single industry or a group of related industries; however, underlying collateral values are dependent upon market fluctuations in the Western Massachusetts and Northeastern Connecticut areas. The aggregate amount of loans to executive officers, directors and organizations with which they are associated amounted to $7,991,000 or 18.8% of stockholders' equity as of December 31, 2002, compared to $3,744,000 or 9.6% as of December 31, 2001. The following table provides the maturity distribution and sensitivity to changes in interest rates of commercial loans and commercial real estate construction loans at December 31, 2002:
12 MONTHS 1 - 5 AFTER (DOLLARS IN THOUSANDS) OR LESS YEARS 5 YEARS TOTAL ====================================================================================================== Commercial $ 44,763 $ 15,333 $ 1,019 $ 61,115 Real estate: Construction 8,700 8,700 Commercial 30,424 55,673 8,540 94,637 - ------------------------------------------------------------------------------------------------------ Totals $ 83,887 $ 71,006 $ 9,559 $ 164,452 ======================================================================================================
Of the commercial loans which mature beyond one year, approximately $15,282,000 have fixed rates and the remaining $1,071,000 are floating rate loans. In the normal course of business, various commitments and contingent liabilities are outstanding, such as guarantees, standby letters of credit, commitments to extend credit and various financial instruments with off-balance-sheet risk that are not reflected in the financial statements. The most significant of these are commitments to grant loans and commitments to advance funds under existing loan agreements which were $13,677,000 and $60,600,000, respectively, at December 31, 2002 and $11,855,000 and $47,031,000, respectively, in 2001. See further discussion in Note 13 to the Consolidated Financial Statements. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES LOAN LOSS EXPERIENCE The provision for loan losses is an amount charged to income to bring the allowance for loan losses to a level deemed appropriate by management. The provision for losses is dependent on actual net write-offs and an evaluation of the collectibility of the loan portfolio, taking into consideration such factors as the financial condition of individual borrowers, historical loss experience with respect to various portfolio segments, current and near-term economic conditions, and the size of the portfolio. Based on a review of these factors and the provision for loan losses recorded, the allowance for loan losses at December 31, 2002 is deemed to be adequate by management. In the determination of the allowance for loan losses, management obtains independent appraisals for a significant number of properties. The following table sets forth the historical relationship among the average amount of loans outstanding, the allowance for loan losses, provision for loan losses charged to operating expenses, losses charged off, recoveries and selected ratios:
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 2002 2001 2000 1999 1998 ====================================================================================================== Balance at beginning of year $ 4,179 $ 3,670 $ 3,908 $ 2,665 $ 3,057 Provision charged to expense 1,333 944 472 77 41 - ------------------------------------------------------------------------------------------------------ Acquisition 1,669 - ------------------------------------------------------------------------------------------------------ 5,512 4,614 4,380 4,411 3,098 - ------------------------------------------------------------------------------------------------------ Charge-off's: Loans secured by real estate 134 52 163 78 318 Commercial and industrial loans 169 358 538 455 153 Consumer loans 186 117 88 90 47 - ------------------------------------------------------------------------------------------------------ 489 527 789 623 518 - ------------------------------------------------------------------------------------------------------ Recoveries: Loans secured by real estate 12 60 32 79 42 Construction/land development 14 Commercial and industrial loans 39 19 27 15 30 Consumer loans 37 13 20 12 13 - ------------------------------------------------------------------------------------------------------ 88 92 79 120 85 - ------------------------------------------------------------------------------------------------------ Net charge-off's 401 435 710 503 433 - ------------------------------------------------------------------------------------------------------ Balance at end of year $ 5,111 $ 4,179 $ 3,670 $ 3,908 $ 2,665 ====================================================================================================== Average loans outstanding $ 463,488 $ 440,454 $ 445,846 $ 349,614 $ 284,629 ====================================================================================================== Net charge-off's as a percentage of average loans 0.09% 0.10% 0.16% 0.14% 0.15% Net charge-off's as a percentage of the allowance at January 1 9.60 11.85 18.17 18.87 14.16 Allowance as a percentage of total loans at December 31 1.07 0.94 0.85 0.88 0.90 Allowance as a percentage of non- performing loans at December 31 328.05 228.36 167.12 160.23 259.24
15 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES Allocation of the balance as of December 31 of the allowance for loan losses applicable to:
(DOLLARS IN THOUSANDS) 2002 2001 2000 1999 1998 =================================================================================================================================== % OF % OF % OF % OF % OF TOTAL TOTAL TOTAL TOTAL TOTAL LOAN CATEGORY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS - ----------------------------------------------------------------------------------------------------------------------------------- Real Estate $2,965 75.53% $2,216 77.24% $2,212 76.83% $2,986 78.84% $1,764 77.38% Construction 49 1.82 15 1.16 17 1.19 64 1.34 70 2.03 Commercial 1,674 12.75 1,726 12.11 1,066 13.85 579 12.67 628 14.10 Leases 116 1.62 73 1.09 98 .15 2 .03 Consumer 307 8.28 149 8.40 277 7.98 277 7.12 203 6.49 - ----------------------------------------------------------------------------------------------------------------------------------- $5,111 100% $4,179 100% $3,670 100% $3,908 100% $2,665 100% ===================================================================================================================================
ALLOWANCE FOR LOAN LOSSES The approach the Corporation uses in determining the appropriateness of the allowance for loan losses and the required provision is the combination of a target reserve for impaired and classified loans, a formula-calculated reserve and a general reserve allocation. Quarterly, based on an internal review of the loan portfolio, the Corporation identifies required reserve allocations targeted to recognized problem loans that, in the opinion of management, have probable loss exposure. The target reserve allocation incorporates the results of measuring impaired loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This accounting standard prescribes the measurement method and disclosures related to impaired loans. A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan's contractual terms. A loan is not deemed to be impaired if there is a short delay in receipt of payment or if, during a longer period of delay, the Corporation expects to collect all amounts due, including interest accrued at the contractual rate during the period of delay. Measurement of impairment can be based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral, if the loan is collateral-dependent. Smaller balance homogenous loans, including residential real estate and consumer loans, are excluded from the provisions of SFAS No. 114. The formula reserve allocation is calculated by applying loss factors to outstanding loans by loan category. Loss factors are based on historical loss experience. The general reserve allocation incorporates general business and economic conditions, credit quality trends, loan concentrations, industry conditions within portfolio segments and overall delinquency levels. The allowance for loan losses is increased by provisions charged against current earnings. Loan losses are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. Management believes that the allowance for loan losses is appropriate. While management uses available information to assess possible losses on loans, future adjustments to the allowance may be necessary based on changes in non-performing loans, changes in economic conditions or for other reasons. Any future adjustments to the allowance would be recognized in the period in which they were determined to be necessary. In addition, various regulatory agencies periodically review the Corporation's allowance for loan losses as an integral part of their examination process. Such agencies may require the Corporation to recognize adjustments to the allowance, based on judgements different from those of management. Management also retains an independent loan review consultant to provide advice on the appropriateness of the loan loss allowance. During 2002, 2001 and 2000, the Bank made additions to the allowance of $1,333,000, $944,000 and $472,000 respectively, while recoveries totaled $88,000, $92,000 and $79,000 respectively, and charge-off's totaled $489,000, $527,000 and $789,000 respectively. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES NON-PERFORMING ASSETS LOANS Loans on which interest and principal payments are 90 days or more past due are placed on a non-accrual basis (earlier, if deemed appropriate) and interest is reversed unless management determines that the collectibility of principal and interest is not reasonably considered in doubt. The following table sets forth information with regard to non-performing loans as of the end of each year indicated:
(DOLLARS IN THOUSANDS) 2002 2001 2000 1999 1998 ============================================================================================================= Loans on a non-accrual basis $1,372 $1,040 $1,778 $2,001 $ 797 ============================================================================================================= Non-accrual loans as a percentage of total net loans outstanding 0.29% 0.24% 0.41% 0.46% 0.27% Non-accrual loans as a percentage of total assets 0.20 0.17 0.31 0.35 0.20 Loans contractually past due 90 days or more and still accruing $ 186 $ 790 $ 418 $ 438 $ 231
The gross amount of interest that would have been accrued at the original contract rate on loans on a non-accrual basis was $159,000, $148,000, $159,000, $77,000 and $35,000 for 2002, 2001, 2000, 1999 and 1998, respectively. The Corporation did not recognize any interest income related to non-accrual loans during the five(5)-year period. The Bank evaluates loans for impairment in accordance with SFAS No. 114 "Accounting for Impaired Loans." Generally, income is recorded only on a cash basis for impaired loans. Interest income recognized during 2002 and 2001 on impaired loans was not significant. At December 31, 2002 and 2001, the recorded investment in impaired loans was $411,000 and $336,000 respectively, for which no additional specific allowance for loan losses was recorded. For the twelve months ended December 31, 2002, the average recorded investment in impaired loans was $632,000 compared to $629,000 for 2001 and $441,000 for 2000.
NON-PERFORMING ASSETS (BAR GRAPH) (IN THOUSANDS) ============================================================================================================= 2000 $2,737 2001 2,034 2002 1,558
17 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES OTHER REAL ESTATE OWNED The following table sets forth information regarding other real estate owned at December 31:
(DOLLARS IN THOUSANDS) 2002 2001 2000 1999 1998 ============================================================================================================= Other real estate owned - net $ 0 $ 204 $ 541 $ 442 $ 466 Other real estate owned as a percentage of total assets 0% .03% .09% .08% .12%
DEPOSITS The following table sets forth the average amounts of, and average rates paid on, various classifications of deposits:
2002 2001 2000 (DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT RATE AMOUNT RATE ============================================================================================================= Savings $129,604 1.20% $133,742 1.99% $127,764 2.63% Money market 34,403 2.14 18,258 2.12 24,021 3.18 Certificates of deposit 59,104 3.41 48,817 4.76 50,391 5.75 Other time deposits 242,242 4.07 221,311 5.30 225,609 5.52 - ------------------------------------------------------------------------------------------------------------- 465,353 3.05% 422,128 4.05% 427,785 4.56% - ------------------------------------------------------------------------------------------------------------- Demand deposits 71,956 64,566 60,610 $537,309 $486,694 $488,395 =============================================================================================================
Certificates of deposit of $100,000 and over at December 31, 2002 had the following maturities:
3 MONTHS 3 TO 6 6 TO 12 1 YEAR TO (DOLLARS IN THOUSANDS) OR LESS MONTHS MONTHS 5 YEARS TOTAL ============================================================================================================= Totals $ 19,142 $ 8,450 $ 9,916 $ 23,218 $ 60,726 =============================================================================================================
18 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES RETURN ON EQUITY AND ASSETS The Corporation's return on average equity and assets for each of the years ended December 31 were as follows:
2002 2001 2000 ============================================================================================================= Return on average total assets .90% .68% .65% Return on average stockholders' equity 14.88 11.03 11.80 Average stockholders' equity to average total assets 6.06 6.20 5.52 Dividend payout ratio 30.77 41.59 44.80
BORROWINGS The following table summarizes short-term borrowings. Average interest rates during each year were computed by dividing total interest expense by the average amount borrowed:
(DOLLARS IN THOUSANDS) 2002 2001 2000 ============================================================================================================= Balance at year end $15,302 $25,415 $13,992 Average amount outstanding 21,279 28,582 33,144 Maximum amount outstanding at any month-end 49,009 51,149 43,535 Average interest rate for the year 1.43% 2.88% 4.98% Average interest rate on year-end balance 0.76 1.36 4.97
COMPARISON OF OPERATING RESULTS In the following sections of Management's Discussion and Analysis of the Statements of Income, the comparative results of 2002, 2001 and 2000 will be covered in greater detail. As of December 31, 2002, the principal earning assets of the holding company consist of a commercial bank, Westbank. Noteworthy are the effects of sources of income from earning assets and expense of interest-bearing liabilities. Presented below is a comparative summary of percentages of increases and decreases for the three years ended December 31, 2002. The significant changes are discussed in the analysis that follow the summary.
PERCENTAGE OF INCREASE (DECREASE) 2002 2001 OVER OVER (DOLLARS IN THOUSANDS) 2002 2001 2000 2001 2000 ============================================================================================================= Net interest income $ 22,521 $ 20,397 $ 19,417 10.41% 5.05% Provision for loan losses 1,333 944 472 41.21 100.00 Non-interest income 4,090 3,489 2,652 17.23 31.56 Non-interest expense 16,412 16,841 15,841 (2.55) 6.31 Income taxes 2,857 2,028 1,968 40.88 3.05 - ------------------------------------------------------------------------------------------------------------- Net Income $ 6,009 $ 4,073 $ 3,788 47.53% 7.52% =============================================================================================================
INTEREST INCOME Westbank's earning assets include a diverse portfolio of interest-earning instruments ranging from Westbank's core business of loan extensions to interest-bearing securities issued by federal, state and municipal authorities. These earning assets are financed through a combination of interest-bearing and interest-free sources. Total interest income for 2002 amounted to $40,576,000 as compared to $41,088,000 for 2001 and $42,645,000 for 2000. For 2002 this represents a decrease of $512,000 or 1.25% versus 2001, while interest income decreased by $1,557,000 or 3.7% in 2001 over 2000. The decrease in 2002 is the result of an increase in average earning assets of $66,548,000 or 11.90%, offset by a decrease of 86 basis points in average earning interest rate. The decrease in 2001 from 2000 is the result of an increase in average earning assets of $13,551,000 offset by a decrease of 46 basis points in average earning interest rate.
RETURN ON AVERAGE ASSETS (BAR GRAPH) ============================================================================================================= 2000 .65% 2001 .68 2002 .90
19 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES INTEREST EXPENSE Interest expense for 2002 on deposits and borrowings amounted to $18,055,000 as compared to $20,691,000 in 2001 and $23,228,000 for 2000. Interest expense decreased by $2,636,000 or 12.74% during 2002 compared to 2001; during 2001, interest expense decreased by $2,537,000 or 10.9% versus 2000. The 2002 decrease is the result of an increase in average interest-bearing liabilities of $58,261,000 and a 93 basis point decrease in the average rate of interest paid compared to 2001. The decrease in interest expense during 2001 versus 2000 is the result of a decrease in average interest-bearing liabilities of $4,658,000 combined with a 56 basis point decrease in the average interest rate paid. NET INTEREST INCOME Net interest income, the most significant component of earnings, is the amount by which the interest generated by assets exceeds the interest expense on liabilities. Westbank's management analyzes its performance by utilizing the concepts of interest rate spread and net yield on earning assets. The interest rate spread represents the difference between the yield on earning assets and interest paid on interest-bearing liabilities. The net yield on earning assets is the difference between the rate of interest on earning assets and the effective rate paid on all funds, interest-bearing liabilities, as well as interest-free sources (primarily demand deposits and stockholders' equity). The following table sets forth Westbank's net interest income: (DOLLARS IN THOUSANDS) 2002 2001 2000 ================================================================================ Total interest income $ 40,576 $ 41,088 $ 42,645 Total interest expense 18,055 20,691 23,228 - -------------------------------------------------------------------------------- Net interest income $ 22,521 $ 20,397 $ 19,417 ================================================================================ The RATE/VOLUME ANALYSIS OF INTEREST MARGIN ON EARNING ASSETS section includes and sets forth each major category of interest-earning assets and interest-bearing liabilities which result in net interest income. PROVISION FOR LOAN LOSSES The 2002 provision for loan losses totaled $1,333,000 compared with $944,000 in 2001, up $389,000 or 41%. The increase in the provision for loan losses during 2002 is attributable to an increase in the size of the overall loan portfolio. During 2001, the provision increased by $472,000 versus 2000. The increase in the provision for loan losses during 2001 is attributable to an increase in the percentage the Corporation utilizes in its analysis and risk assessment of the loan portfolio. Based on this and the weakened economy, management determined that an increase in the provision was warranted. A full discussion appears previously under the headings of LOAN LOSS EXPERIENCE and NON-PERFORMING ASSETS. When determining the provision for loan losses, management evaluates several factors including new loan originations, actual and projected charge-off's, and risk characteristics inherent in the loan portfolio. NON-INTEREST INCOME Income from sources other than interest was $4,090,000 in 2002, an increase of $601,000 from the prior year and an increase of $1,438,000 versus 2000. Non-interest income for 2002 reflects an increase in Trust Department earnings of $17,000, a decrease in service charges on deposit accounts and loan servicing income of $69,000, a decrease from gain on sale of investments, other real estate owned, mortgages and equipment totaling $394,000 and an increase in other non-interest income of $1,047,000. Included in other non-interest income is $800,000 in life insurance proceeds and an increase of $193,000 in cash surrender value of bank-owned life insurance. Non-interest income for 2001 reflects an increase in Trust Department earnings of $107,000, an increase in service charges on deposit accounts and other non-interest income of $948,000, a decrease in loan servicing income of $239,000 and a net increase from the gain on sale of investments, other real estate, mortgages and equipment totaling $21,000 compared to 2000. NET INTEREST INCOME (BAR GRAPH) (IN THOUSANDS) ================================================================================ 2000 $19,417 2001 20,397 2002 22,521 20 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES NON-INTEREST EXPENSE The components of other operating expenses are as follows:
(DOLLARS IN THOUSANDS) 2002 2001 2000 ============================================================================================================= Salaries and benefits $ 9,084 $ 8,381 $ 7,940 Occupancy 1,128 1,062 983 Other non-interest expense 6,174 6,630 6,120 Intangible amortization 684 683 Other real estate owned expense 26 84 115 - ------------------------------------------------------------------------------------------------------------- $ 16,412 $ 16,841 $ 15,841 =============================================================================================================
Non-interest expense amounted to $16,412,000 in 2002, a decline of $429,000 or 2.55%. The decline in operating expenses for 2002 is due to a combination of the following: the adoption of SFAS No. 142 and SFAS No. 147, which eliminated intangible amortization of goodwill in the amount of $684,000, salaries and benefits increased $703,000, occupancy expense increased $66,000 and other non-interest expense declined $514,000 as a result of efficiencies achieved through the merger of the Connecticut and Massachusetts bank subsidiaries. The Corporation adopted SFAS No. 142, effective January 1, 2002, and SFAS No. 147, effective September 30, 2002. In accordance with these statements, the Corporation has ceased amortization of goodwill and has performed a transitional goodwill impairment test. Overall non-interest expense increased during 2001 by $1,000,000 versus 2000. During 2001, salaries and benefits increased by $441,000, attributable to overall corporate growth. Occupancy increased by $79,000 versus 2000. Other non-interest expense increased in 2001 by $510,000, also the result of overall corporate growth and approximately $300,000 in expenses related to the merger of the banking subsidiaries. Intangible amortization during 2001 totaled $684,000, representing amortization of the unidentifiable intangible asset that resulted from the branch acquisition. INCOME TAXES For the year ended December 31, 2002, Westbank Corporation recorded a tax expense of $2,857,000 compared to 2001, when the Corporation recorded a tax expense of $2,028,000 and a 2000 income tax expense of $1,968,000. The increase in tax expense for each year represents a higher level of income before taxes. The Massachusetts Department of Revenue ("DOR") has sent notices of intent to assess taxes to several banks in the Commonwealth of Massachusetts. The notices relate to DOR's intent to disallow the dividend-received deduction between a bank and its subsidiary operating as a real estate investment trust ("REIT"). On February 4, 2003, the Corporation's subsidiary Westbank ("the Bank") received a Notice of Assessment from the DOR for the tax year ended 2001. The notice was based on DOR's intent to disallow the dividend-received deduction between the Bank's subsidiary, Park West REIT, and the Bank. The Commonwealth of Massachusetts has recently proposed legislation which would repeal the REIT benefit effective for the years ending on or after December 31, 1999. Westbank believes that its tax treatment of the dividend-received deduction for its REIT subsidiary is valid under Massachusetts law. In the event that the dividend-received deduction from its REIT subsidiary is disallowed, the Corporation would be required to record additional taxes of approximately $402,000 for the years 2000, 2001 and 2002, exclusive of any interest charge. NET INCOME The net income for 2002 of $6,009,000, or $1.36 per share basic and $1.33 per share diluted, is based on a weighted average of 4,406,583 basic and 4,509,965 diluted shares outstanding, compared with a net income for 2001 of $4,073,000 or $.91 per share basic and $.90 per share diluted based on a weighted average of 4,465,054 basic and 4,513,020 diluted. Net income in 2000 was $3,788,000, or $.85 per share basic and $.84 per share diluted and based on weighted average shares of 4,440,560 basic and 4,487,053 diluted. NET INCOME (BAR GRAPH) (IN THOUSANDS) ================================================================================ 2000 $ 3,788 2001 4,073 2002 6,009 21 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, the Corporation adopted SFAS No. 141, "Business Combinations" ("SFAS No. 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Initially, the adoption of SFAS No. 141 and SFAS No. 142 did not have an effect on the Corporation's consolidated financial statements. In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial Institutions" ("SFAS No. 147"). SFAS No. 147 removes acquisitions of financial institutions from the scope of SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions", and FASB Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or Similar Association is Acquired in a Business Combination Accounted for by the Purchase Method", and requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." In addition, SFAS No. 147 amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", to include in its scope long-term customer relationship intangible assets of financial institutions. SFAS No. 147 is effective for periods beginning after October 1, 2002, with early adoption permitted. The Corporation elected to adopt SFAS No. 147 as of September 30, 2002. Upon adoption of SFAS No. 147, the Corporation reclassified its unidentifiable intangible asset to goodwill and ceased amortization, retroactive to January 1, 2002. Additionally, the Corporation was required to perform a transitional impairment test in accordance with the provisions of SFAS No. 142. As a result of this testing, no impairment charges were recorded. See Note 1. In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). The adoption of SFAS No. 145 did not have a material effect on the Corporation's consolidated financial statements. In April 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). The adoption of SFAS No. 146 did not have a material effect on the Corporation's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Corporation did not elect to adopt the voluntary fair value-based method of accounting for stock-based employee compensation but has provided the required disclosures in Notes 1 and 10. 22 CONSOLIDATED BALANCE SHEETS WESTBANK CORPORATION AND SUBSIDIARIES
DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2002 2001 ==================================================================================================== ASSETS Cash and due from banks: Non-interest bearing $ 18,967 $ 16,800 Interest bearing 98 332 - ---------------------------------------------------------------------------------------------------- 19,065 17,132 Federal funds sold 28,185 319 - ---------------------------------------------------------------------------------------------------- Total cash and cash equivalents 47,250 17,451 - ---------------------------------------------------------------------------------------------------- Securities: Investment securities available for sale, estimated fair value 132,296 141,685 Investment securities held to maturity, amortized cost (estimated fair value of $459 in 2002 and $779 in 2001) 436 757 - ---------------------------------------------------------------------------------------------------- Total securities 132,732 142,442 - ---------------------------------------------------------------------------------------------------- Loans, net of allowance for loan losses of $5,111 in 2002 and $4,179 in 2001 473,721 439,723 Property and equipment, net 6,586 6,516 Other real estate owned 204 Accrued interest receivable 3,037 3,285 Intangible assets, net of amortization of $0 in 2002 and $684 in 2001 8,837 8,837 Bank-owned life insurance 8,333 8,224 Other assets 2,367 2,240 - ---------------------------------------------------------------------------------------------------- Total assets $ 682,863 $ 628,922 ==================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 74,169 $ 70,960 Interest bearing 487,578 438,889 - ---------------------------------------------------------------------------------------------------- Total deposits 561,747 509,849 Borrowed funds 56,392 57,666 Interest payable on deposits 665 659 Other liabilities 4,447 4,732 - ---------------------------------------------------------------------------------------------------- Total liabilities 623,251 572,906 - ---------------------------------------------------------------------------------------------------- Mandatory redeemable preferred stock 17,000 17,000 - ---------------------------------------------------------------------------------------------------- Commitments and contingent liabilities (Note 13) Stockholders' equity: (Note 1) Preferred stock, par value $5 per share, authorized 100,000 shares; none issued Common stock, par value $2 per share, authorized 9,000,000 shares; issued 4,523,485 shares in 2002 and 4,315,795 shares in 2001 9,047 8,632 Additional paid-in capital 14,497 11,782 Retained earnings 18,780 17,787 Treasury stock at cost (155,705 shares in 2002 and 49,412 shares in 2001) (2,091) (431) Accumulated other comprehensive income (loss) 2,379 1,246 - ---------------------------------------------------------------------------------------------------- Total stockholders' equity 42,612 39,016 - ---------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 682,863 $ 628,922 ====================================================================================================
See notes to consolidated financial statements. 23 CONSOLIDATED STATEMENTS OF INCOME WESTBANK CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2002 2001 2000 ==================================================================================================== Interest and dividend income: Interest and fees on loans $ 31,905 $ 33,526 $ 35,596 Interest and dividend income from securities 8,348 7,389 6,774 Interest from interest-bearing cash and federal funds sold 323 173 275 - ---------------------------------------------------------------------------------------------------- Total interest and dividend income 40,576 41,088 42,645 - ---------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 14,177 17,108 19,493 Interest on borrowed funds 3,878 3,583 3,735 - ---------------------------------------------------------------------------------------------------- Total interest expense 18,055 20,691 23,228 - ---------------------------------------------------------------------------------------------------- Net interest income 22,521 20,397 19,417 Provision for loan losses 1,333 944 472 - ---------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 21,188 19,453 18,945 - ---------------------------------------------------------------------------------------------------- Non-interest income: Trust 652 635 528 Service charges on deposits 1,186 1,238 1,070 Loan servicing 154 171 410 Gain/(loss) on sale of securities available for sale (218) 36 Gain on sale of other real estate owned 45 43 16 Gain on sale of loans 118 233 302 Gain on sale of equipment 27 Other 2,153 1,106 326 - ---------------------------------------------------------------------------------------------------- Total non-interest income 4,090 3,489 2,652 - ---------------------------------------------------------------------------------------------------- Non-interest expense: Salaries and benefits 9,084 8,381 7,940 Depreciation and amortization 789 892 992 Data processing 1,625 1,803 1,639 Advertising 388 610 612 Supplies 353 505 464 Occupancy 1,128 1,062 983 Other real estate owned 26 84 115 Other 3,019 2,820 2,413 Intangible amortization 684 683 - ---------------------------------------------------------------------------------------------------- Total non-interest expense 16,412 16,841 15,841 - ---------------------------------------------------------------------------------------------------- Income before income taxes 8,866 6,101 5,756 Income taxes 2,857 2,028 1,968 - ---------------------------------------------------------------------------------------------------- Net income $ 6,009 $ 4,073 $ 3,788 ==================================================================================================== Earnings per share: (Note 1) - Basic $ 1.36 $ .91 $ .85 - Diluted 1.33 .90 .84 ==================================================================================================== Weighted average shares outstanding: (Note 1) - Basic 4,406,583 4,465,054 4,440,560 - Diluted 4,509,965 4,513,020 4,487,053 ====================================================================================================
See notes to consolidated financial statements. 24 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY WESTBANK CORPORATION AND SUBSIDIARIES
ACCUMULATED COMMON STOCK ADDITIONAL OTHER (DOLLARS IN THOUSANDS, PAR PAID-IN RETAINED TREASURY COMPREHENSIVE EXCEPT SHARE AMOUNTS) SHARES VALUE CAPITAL EARNINGS STOCK INCOME/(LOSS) TOTAL ========================================================================================================================== Balance, January 1, 2000 4,283,719 $ 8,567 $11,633 $13,317 $(1,974) $31,543 Net income 3,788 3,788 Cash dividends declared ($.40 per share) (1,697) (1,697) Shares reissued from Treasury stock: Stock option plan 1,000 (3) $ 6 3 Dividend reinvestment and stock purchase plan 65,121 (22) 595 573 Changes in unrealized gain (loss) on securities available for sale 1,777 1,777 Repurchase of common stock (127,320) (1,127) (1,127) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 4,222,520 8,567 11,608 15,408 (526) (197) 34,860 Net income 4,073 4,073 Cash dividends declared ($.40 per share) (1,694) (1,694) Shares issued: Stock option plan 4,400 9 9 18 Dividend reinvestment and stock purchase plan 27,676 56 209 265 Shares reissued from treasury stock: Stock option plan 1,500 (6) 8 2 Dividend reinvestment and stock purchase plan 33,287 (38) 302 264 Changes in unrealized gain (loss) on securities available for sale 1,443 1,443 Repurchase of common stock (23,000) (215) (215) - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 4,266,383 8,632 11,782 17,787 (431) 1,246 39,016 Net income 6,009 6,009 Cash dividends declared ($.44 per share) (1,849) (1,849) Shares reissued from treasury stock: Stock option plan 54,055 (243) 547 304 Dividend reinvestment and stock purchase plan 42,310 122 408 530 Changes in unrealized gain (loss) on securities available for sale 1,133 1,133 Repurchase of common stock (202,658) (2,615) (2,615) Adjustment to recognize tax benefit on Directors' stock options 84 84 Five percent common stock dividend 207,690 415 2,752 (3,167) - -------------------------------------------------------------------------------------------------------------------------- Balance December 31, 2002 4,367,780 $ 9,047 $14,497 $18,780 $(2,091) $ 2,379 $42,612 ==========================================================================================================================
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 2002 2001 2000 ========================================================================================================================== Net Income $ 6,009 $ 4,073 $ 3,788 - -------------------------------------------------------------------------------------------------------------------------- Unrealized gain (loss) on securities available for sale, net of income taxes of $923 in 2002, $927 in 2001 and $915 in 2000. 989 1,467 1,777 Less: reclassification adjustment for (gains)/losses included in net income, net of income taxes (benefit) of $(74) in 2002 and $12 in 2001 144 (24) - -------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Losses) 1,133 1,443 1,777 - -------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 7,142 $ 5,516 $ 5,565 ==========================================================================================================================
See notes to consolidated financial statements. 25 CONSOLIDATED STATEMENTS OF CASH FLOWS WESTBANK CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 2002 2001 2000 ========================================================================================================================== Operating activities: Net income $ 6,009 $ 4,073 $ 3,788 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,333 944 472 Provision for other real estate owned 11 62 Depreciation and amortization 789 892 992 Investment accretion income (20) Intangible amortization 684 623 Realized gain/(loss) on sale of securities 218 (36) Realized gain on sale of other real estate owned (45) (43) (16) Realized gain on sale of loans (118) (233) (136) Realized gain on sale of property and equipment (27) Deferred income taxes (623) 923 282 Change in assets and liabilities Accrued interest receivable 248 692 (734) Other assets (127) (7,625) 417 Interest payable on deposits 6 (68) (5) Other liabilities 338 1,928 385 - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,019 2,104 6,130 ========================================================================================================================== Investing activities: Securities: Held to maturity: Proceeds from maturities 321 10,652 395 Available for sale: Purchases (62,503) (105,572) (22,773) Proceeds from sales 21,260 7,828 1,779 Proceeds from maturities 75,833 64,755 7,000 Purchases of property and equipment (859) (116) (475) Net (increase)/decrease in loans (59,662) (32,239) 7,617 Proceeds from sale of other real estate owned 312 497 258 Assumption of liabilities of New London Trust, net of cash acquired (173) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (25,298) (54,195) (6,372) ========================================================================================================================== Financing activities: Net increase in deposits 51,898 10,709 20,244 Net increase/(decrease) in short-term borrowings (10,113) 11,423 (25,777) Increase in long-term borrowings 8,839 25,251 Proceeds from exercise of stock options and stock purchase plan 918 549 576 Treasury stock repurchases (2,615) (215) (1,127) Dividends paid (1,849) (1,694) (1,697) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 47,078 46,023 (7,781) ========================================================================================================================== Increase (decrease) in cash and cash equivalents 29,799 (6,068) (8,023) Cash and cash equivalents at beginning of year 17,451 23,519 31,542 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 47,250 $ 17,451 $ 23,519 ========================================================================================================================== Cash paid during the year: Interest on deposits and other borrowings $ 18,049 $ 20,759 $ 23,233 Income taxes 4,170 360 1,717 Supplemental disclosure of cash flow information: Securitization of loans into mortgage-backed securities 23,495 20,079 Transfers of loans to other real estate owned 74 233 290 Loans to facilitate the sale of other real estate owned 57 Unrealized gain (loss) on securities available for sale, net of taxes 1,133 1,443 1,777
See notes to consolidated financial statements. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WESTBANK CORPORATION AND SUBSIDIARIES 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Westbank Corporation (the "Corporation") and its subsidiaries are in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a description of the more significant policies. NATURE OF BUSINESS As of December 31, 2002, the Corporation, a bank holding company, provides financial services through its wholly owned subsidiary, Westbank, a commercial bank and trust company with seventeen (17) offices located in Massachusetts and Connecticut. A full range of retail banking services are furnished to individuals, businesses and non-profit organizations. The Corporation's primary source of revenue is derived from providing loans to customers, predominantly located in western Massachusetts and northeastern Connecticut. MERGER WITH CARGILL BANCORP, INC. Effective January 29, 1999, Cargill Bancorp, Inc., and its subsidiary ("Cargill") were merged with and into Westbank Corporation pursuant to a plan of merger dated July 15, 1998. Each share of Cargill common stock was converted into 1.3655 shares of the Corporation's common stock. A total of 400,164 of the Corporation's common shares were issued for the outstanding common stock of Cargill. The transaction was accounted for using the pooling-of-interests method of accounting and, accordingly, all historical financial data has been restated to include both entities for all periods presented. ACQUISITION On October 29, 1999, the Corporation completed its acquisition of the Connecticut division of New London Trust, F.S.B, consisting of two branch offices that became part of Cargill Bank. This transaction was accounted for using the purchase accounting method. Prior to January 1, 2002, the resulting intangible asset totaling $10,071,000 was being amortized over fifteen years. Upon adoption of FASB No. 147 on September 30, 2002, the Corporation discontinued the amortization. The Corporation has performed a transitional impairment test as of July 1, 2002 and no impairment charge was required. At close of business September 7, 2001, Cargill Bank was merged with and into Park West Bank and Trust Company operating under the name Westbank. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary, Westbank, its subsidiaries, Lorac Leasing Corp., Park West Securities Corporation, Park West Real Estate Investment Trust, Inc. and PWB&T Inc. All material intercompany balances and transactions have been eliminated upon consolidation. Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform to the 2002 presentation. During 2002, the Bank dissolved Lorac Leasing Corporation, which was an inactive subsidiary of the Bank. STOCK DIVIDEND On January 32, 2003 the Corporation announced a five percent (5%) stock dividend, payable to shareholders of record January 14, 2003. As a result of the stock dividend, all earnings-per-share data have been restated for the five-year period (2002-1998) presented. Shares outstanding for the year ended December 31, 2002 also have been restated to reflect the January 14, 2003 stock dividend distribution. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES USE OF ESTIMATES The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of income and expenses for each year. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and intangible assets. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowances for losses on loans and other real estate owned. Such agencies may require the Corporation to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. NEW ACCOUNTING STANDARDS In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). The adoption of SFAS No. 145 did not have a material effect on the Corporation's consolidated financial statements. In April 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). The adoption of SFAS No. 146 did not have a material effect on the Corporation's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Corporation did not change to the voluntary fair value-based method of accounting for stock-based employee compensation, but has provided the required disclosures in Notes 1 and 10. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES CASH AND CASH EQUIVALENTS The Corporation defines cash and due from banks and federal funds sold to be cash and cash equivalents. The Bank is required to maintain reserve balances with the Federal Reserve Bank. These balances can be in the form of either vault cash or funds left on deposit with the Federal Reserve Bank. The amount of these balances that is included in cash and cash equivalents was $6,177,000 and $4,566,000 at December 31, 2002 and 2001, respectively. SECURITIES Securities that management has the positive intent and ability to hold until maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Those securities which have been identified as assets for which there is not a positive intent to hold to maturity, including all marketable equity securities, are classified as available for sale with unrealized gains (losses), net of income taxes, reported as a separate component of stockholders' equity. The Corporation determines if securities will be classified as held to maturity or available for sale at the time of purchase. In addition, any mortgage-backed securities created out of the Corporation's own inventory of residential real estate loans are also considered available for sale. Gains and losses on sales of securities are recognized in non-interest income at the time of sale on a specific identification basis. Securities which have experienced an other than temporary decline in value are written down to estimated fair value, establishing a new cost basis with the amount of the write-down expensed as a realized loss. The Corporation does not engage in trading activities. LOANS Loans have been reduced by deferred loan fees and the allowance for loan losses. Interest income on loans is recorded on an accrual basis. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as income over the life of the related loan as an adjustment to the loan's yield. Non-accrual loans are loans on which the accrual of interest ceases when the collection of principal or interest payments is determined to be doubtful by management. It is the general policy of the Corporation to discontinue the accrual of interest when principal or interest payments are delinquent 90 days, unless the loan principal and interest are determined by management to be fully collectible. Any unpaid amounts previously accrued on these loans are reversed from income. Interest received on a loan in non-accrual status is applied to reduce principal or, if management determines that the principal is collectible, applied to interest on a cash basis. A loan is returned to accrual status after the borrower has brought the loan current and has demonstrated compliance with the loan terms for a sufficient period, and management's doubts concerning collectibility have been removed. The Corporation measures impairment of loans in accordance with SFAS No. 114, "Accounting for Impairment of a Loan as Amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (collectively SFAS No. 114). A loan is recognized as impaired when it is probable that either principal or interest is not collectable in accordance with the terms of the loan agreement. Measurement of impairment for commercial loans is generally based on the present value of expected future cash flows discounted at the loan's effective interest rate. Commercial real estate loans are generally measured based on the fair value of the underlying collateral. If the estimated fair value of the impaired loan is less than the related recorded amount, a specific valuation allowance is established or a write-down is charged against the allowance for loan losses. Smaller balance homogenous loans, including residential real estate and consumer loans, are excluded from the provisions of SFAS No. 114. Generally, income is recorded only on a cash basis for impaired loans. The appropriateness of the allowance for loan losses is evaluated quarterly by management. Factors considered in evaluating the appropriateness of the allowance include the size and concentration of the portfolio, previous loss experience, current economic conditions and their effect on borrowers, the financial condition of individual borrowers and the related performance of individual loans in relation to contract terms. The provision for loan losses charged to operating expense is based upon management's judgment of the amount necessary to maintain the allowance at an appropriate level to absorb losses. Loan losses are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method. Amortization of leasehold improvements is charged over the terms of the respective leases, including option periods or the estimated useful lives of the improvements, whichever is shorter. Gains and losses are recognized upon disposal of assets. The cost of maintenance and repairs is charged to income as incurred, whereas significant repairs are capitalized. OTHER REAL ESTATE OWNED Other real estate owned ("OREO") includes properties the Corporation has acquired through foreclosure. OREO is recorded at the lower of cost or fair value at the date of acquisition, less estimated selling costs. At the time of foreclosure, the excess, if any, of the loan amount over the fair value of the asset acquired is charged off against the allowance for loan losses. Operating expenses to administer OREO properties are charged directly to operating expenses. Valuation allowances are established subsequent to acquisition, as necessary, based upon management's continuing assessment of the fair values of the properties. Loans granted in conjunction with sales of OREO are required to comply with the Corporation's standard underwriting criteria, including receipt of an adequate down payment. LOAN SALES AND SERVICING RIGHTS The Corporation sells loans in the secondary market and retains the related servicing rights. Mortgage servicing rights are recognized as an asset when loans are sold with servicing retained, by allocating the cost of an originated mortgage loan between the loan and the servicing right based on estimated relative fair values. The cost allocated to the servicing right is capitalized as a separate asset and amortized in proportion to, and over the period of, estimated net servicing income. Capitalized mortgage servicing rights are evaluated for impairment by comparing the asset's unamortized cost to its current estimated fair value. Fair values are estimated using a discounted cash flow approach, which considers future servicing income and costs, current market interest rates, and anticipated prepayment and default rates. In making impairment evaluations, mortgage servicing rights are stratified based on one or more of the predominant risk characteristics of the underlying loans. The Corporation has stratified its servicing portfolio for this purpose between fixed and adjustable rate loans. Impairment losses, if any, are recognized through a valuation allowance for each impaired stratum. Adjustments to the valuation allowance are charged or credited to income. At December 31, 2002 and 2001, the mortgage servicing asset totaled $571,000 and $457,000 respectively, for which there was no valuation allowance. TRANSFERS AND SERVICING OF FINANCIAL ASSETS The Corporation follows the provision of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 140 provides consistent application of a financial-components approach that recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes assets when control has been surrendered and derecognizes liabilities when extinguished. INCOME TAXES The asset and liability method of accounting for income taxes is utilized. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance will be established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES PENSION PLAN The Corporation has a trusteed defined contribution pension plan covering substantially all employees. The Corporation's policy is to fund accrued pension cost. In addition, the Corporation has a supplemental retirement plan for certain executive officers and a directors' retirement plan. STOCK OPTIONS The Corporation measures compensation cost of stock options based on the intrinsic value of the common stock options granted. Intrinsic value is the excess of the market value of the common stock over the exercise price at the date of grant. Because stock options are granted with fixed terms and with an exercise price equal to the market price of the common stock at the date of grant, there is no compensation cost recorded on stock options. At December 31, 2002, the Corporation had four (4) stock-based employee/director compensation plans, which are described more fully in Note 10. The Corporation accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation. (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000 ================================================================================ Net earnings - as reported $ 6,009 $ 4,073 $ 3,788 Net earnings - pro forma 5,134 4,052 3,762 Earnings per share - as reported - Basic 1.36 .91 .85 - Diluted 1.33 .90 .84 Earnings per share - pro forma - Basic 1.17 .91 .85 - Diluted 1.14 .90 .84 ================================================================================ The fair value of each option grant is estimated on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions: YEARS ENDED DECEMBER 31, 2002 2001 2000 ================================================================================ Dividend yield 3.21% 4.55% 5.71% Expected life 10 years 10 years 10 years Expected volatility 48% 46% 48% Risk-free interest rate 4.83% 5.20% 5.14% ================================================================================ TRUST DEPARTMENT Assets held by the Corporation for customers in a fiduciary or agency capacity are not included in the consolidated financial statements, as such items are not assets of the Corporation. Such assets totaled approximately $149,921,000 and $106,438,000 at December 31, 2002 and 2001, respectively. Trust income is recognized on a cash basis. The amounts recognized under this method are not materially different from amounts that would be recognized on the accrual basis. EARNINGS PER SHARE Basic earnings per share is the result of dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all potentially dilutive common shares that were outstanding during the year. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES INTANGIBLE ASSET Effective January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") and, effective September 30, 2002, the Corporation adopted SFAS No. 147, "Acquisition of Certain Financial Institutions" ("SFAS No. 147"). In accordance with these Statements, the Corporation has ceased amortization of goodwill and has performed a transitional goodwill impairment test. As a result of the transitional impairment test, management has determined that no impairment existed as of January 1, 2002, the date of adoption of SFAS No. 142. The following table shows net income and earnings per share for the three years ended December 31, 2002, 2001 and 2000, as if the Corporation had been accounting for goodwill under SFAS No. 142 and SFAS No. 147 for all periods presented. YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 2002 2001 2000 ================================================================================ Net income: Reported net income $ 6,009 $ 4,073 $ 3,788 Goodwill amortization, net of tax 457 449 - -------------------------------------------------------------------------------- $ 6,009 $ 4,530 $ 4,237 ================================================================================ Basic earnings per share: Reported earnings per share $ 1.36 $ .91 $ .85 Goodwill amortization, net of tax .10 .10 - -------------------------------------------------------------------------------- Adjusted basis earnings per share $ 1.36 $ 1.01 $ .95 ================================================================================ Diluted earnings per share: Reported earnings per share $ 1.33 $ .90 $ .85 Goodwill amortization, net of tax .10 .10 - -------------------------------------------------------------------------------- Adjusted diluted earnings per share $ 1.33 $ 1.00 $ .95 ================================================================================ 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 2 - SECURITIES Investment securities held to maturity at December 31 are as follows:
2002 GROSS GROSS ESTIMATED NET AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE GAIN =================================================================================================== Mortgage-backed securities $436 $23 $459 $23 =================================================================================================== 2001 GROSS GROSS ESTIMATED NET AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE GAIN =================================================================================================== Mortgage-backed securities $757 $22 $779 $22 ===================================================================================================
During 2002, 2001 and 2000 there were no sales of investment securities classified as held to maturity. Investment securities available for sale at December 31 are as follows:
2002 GROSS GROSS ESTIMATED NET AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE GAIN/(LOSS) =================================================================================================== U.S. Government obligations $ 26 $ 26 Federal agency obligations 48,639 $ 892 49,531 $ 892 Mortgage-backed securities 70,975 2,963 73,938 2,963 Municipal bonds 913 71 984 71 Equity securities 7,981 74 $238 7,817 (164) - --------------------------------------------------------------------------------------------------- $128,534 $4,000 $238 $132,296 $3,762 =================================================================================================== 2001 GROSS GROSS ESTIMATED NET AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE GAIN/(LOSS) =================================================================================================== U.S. Government obligations $ 66 $ 66 Federal agency obligations 71,365 $1,294 72,659 $1,294 Mortgage-backed securities 59,588 833 $ 62 60,359 771 Municipal bonds 614 19 633 19 Equity securities 7,977 57 66 7,968 (9) - --------------------------------------------------------------------------------------------------- $139,610 $2,203 $128 $141,685 $2,075 ===================================================================================================
During 2002, 2001 and 2000, the Corporation recognized realized gains/(losses) on securities available for sale totaling $(218,000), $36,000 and $0, respectively. The contractual maturities of held-to-maturity and available-for-sale securities, other than equity securities, as of December 31, 2002 are summarized in the following tables. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations. For the purposes of the following December 31, 2002 maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the contractual maturities of the underlying collateral. The mortgage-backed securities may mature earlier than their contractual maturities because of principal repayments. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES
ESTIMATED AMORTIZED FAIR (DOLLARS IN THOUSANDS) COST VALUE =================================================================================================== Held to Maturity: Within 1 year $ 24 $ 24 Over 1 year to 5 years 197 210 Over 5 years to 10 years 3 3 Over 10 years 212 222 - --------------------------------------------------------------------------------------------------- Total debt obligations $ 436 $ 459 =================================================================================================== ESTIMATED AMORTIZED FAIR (DOLLARS IN THOUSANDS) COST VALUE =================================================================================================== Available for Sale: Within 1 year $ 71 $ 72 Over 1 year to 5 years 1,978 2,056 Over 5 years to 10 years 59,286 60,366 Over 10 years 59,218 61,985 - --------------------------------------------------------------------------------------------------- Total debt obligations $ 120,553 $ 124,479 ===================================================================================================
At December 31, 2002 securities with a carrying amount and estimated fair value of $33,325,000 and $34,231,000, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes as required by law. 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consisted of the following at December 31:
(DOLLARS IN THOUSANDS) 2002 2001 =================================================================================================== Commercial $ 61,115 $ 53,756 Real estate construction 8,700 5,154 Real estate 361,956 343,234 Consumer 39,730 37,292 Leases 7,743 4,841 - --------------------------------------------------------------------------------------------------- 479,244 444,277 Allowance for loan losses (5,111) (4,179) Deferred loan origination fees (412) (375) - --------------------------------------------------------------------------------------------------- $ 473,721 $ 439,723 ===================================================================================================
Changes in the allowance for loan losses are summarized as follows:
(DOLLARS IN THOUSANDS) 2002 2001 2000 =================================================================================================== Balance, beginning of year $ 4,179 $ 3,670 $ 3,908 Acquisition Provision for loan losses 1,333 944 472 Loans charged off (489) (527) (789) Recoveries 88 92 79 - --------------------------------------------------------------------------------------------------- Balance, end of year $ 5,111 $ 4,179 $ 3,670 ===================================================================================================
The aggregate principal balance of non-accrual loans was $1,372,000 and $1,040,000 at December 31, 2002 and 2001, respectively. Contractual interest income that would have been accrued on such non-accrual loans was $159,000, $148,000 and $159,000 for 2002, 2001 and 2000 respectively. No income was recognized on non-accrual loans during this period. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES The Corporation did not sell any loans with recourse during 2002 or 2001. The remaining recourse exposure on prior sales was $574,000 at December 31, 2002. Management does not believe that the recourse obligations subject the Corporation to any material risk of loss in the future. No losses have been incurred as a result of these recourse obligations. Of the $361,956,000 in real estate loans at December 31, 2002, $267,319,000 is collateralized by 1-4 family dwellings. The majority of the collateral for these loans is located in the Corporation's market area of Western Massachusetts and Northeast Connecticut. Commercial real estate and real estate construction loans represented $103,337,000 in outstanding principal at December 31, 2002. These loans encompass a wider region extending throughout Massachusetts and Southern New England. Most are collateralized by commercial real estate. Commercial loans both collateralized and uncollateralized of $61,115,000 at December 31, 2002 represent loans made to businesses primarily in western Massachusetts and northeastern Connecticut. The Corporation has had, and expects to have in the future, banking transactions in the ordinary course of business with its directors and officers. Such loans, in the opinion of management, do not include more than the normal risk of collectibility nor other unfavorable features. The following summarizes the activity with respect to indebtedness, both direct and indirect, for directors, policy-making officers and major stockholders during the years ended December 31: (DOLLARS IN THOUSANDS) 2002 2001 ================================================================================ Balance at beginning of year $3,744 $3,810 New loans granted 6,603 770 Repayments of principal/(sold) 2,356 836 - -------------------------------------------------------------------------------- Balance at end of year $7,991 $3,744 ================================================================================ At December 31, 2002 and 2001, the recorded investment in impaired loans was $411,000 and $336,000, respectively, of which $411,000 and $336,000, respectively, were in non-accrual status. For the years ended December 31, 2002, 2001 and 2000, the average recorded investment in impaired loans was $632,000, $629,000, $441,000 respectively. As applicable, each impaired loan has a related allowance for loan losses determined in accordance with SFAS No. 114. The carrying amount of impaired loans for which there was an allowance for loan losses was $254,000 and $336,000 at December 31, 2002 and 2001. The total allowance for loan losses allocated to these impaired loans was $127,000 and $94,000 at December 31, 2002 and 2001. Interest income recognized during 2002, 2001 and 2000 on impaired loans was not significant. The Corporation had no commitments to lend additional funds to borrowers having loans that are on non-accrual status, impaired or restructured. The Corporation services loans for others which are not included in the consolidated balance sheets. The unpaid balances of these loans totaled $113,686,000, $114,044,000 and $84,966,000 at December 31, 2002, 2001 and 2000 respectively. 4 - PROPERTY AND EQUIPMENT Major classes of property and equipment at December 31 are summarized as follows: ESTIMATED (DOLLARS IN THOUSANDS) 2002 2001 LIVES ================================================================================ Property (including land of $1,713 in 2002 and $1,659 in 2001) $ 6,835 $ 6,134 15-40 years Capital lease building 264 264 15 years Furniture and equipment 3,733 3,637 3-10 years Leasehold and building improvements 2,503 2,465 5-15 years Motor vehicles 135 91 3 years - -------------------------------------------------------------------------------- 13,470 12,591 - -------------------------------------------------------------------------------- Accumulated depreciation 6,884 6,075 - -------------------------------------------------------------------------------- Property and equipment, net $ 6,586 $ 6,516 ================================================================================ 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 5 - DEPOSITS Deposit accounts by type as of December 31 are summarized as follows: (DOLLARS IN THOUSANDS) 2002 RATE 2001 RATE ================================================================================ Demand deposit $ 74,169 $ 70,960 Savings 100,391 1.16% 104,799 1.52% NOW 33,665 0.23 29,251 .27 Money market 40,775 1.27 19,544 1.69 Other time deposits 312,747 3.62 285,295 4.57 - -------------------------------------------------------------------------------- $561,747 $509,849 ================================================================================ At December 31, 2002, the scheduled maturities of time deposits and IRA deposits with a fixed maturity are as follows: (DOLLARS IN THOUSANDS) ================================================================================ Year ending December 31, 2003 $185,273 2004 46,506 2005 66,199 2006 7,911 2007 and after 6,858 - -------------------------------------------------------------------------------- $312,747 ================================================================================ Certificates of deposit with balances greater than or equal to $100,000 amounted to $60,726,000 and $54,383,000 as of December 31, 2002 and 2001 respectively. Interest paid on these deposits totaled approximately $2,014,000 and $2,325,000 respectively. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 6 - BORROWED FUNDS Short-term borrowings as of December 31 are as follows: (DOLLARS IN THOUSANDS) 2002 2001 ================================================================================ Securities sold under agreements to repurchase $10,801 $14,284 Purchased federal funds 500 9,244 Treasury tax and loan notes 4,001 1,887 - -------------------------------------------------------------------------------- Total short term borrowings $15,302 $25,415 ================================================================================ The above short-term borrowings generally mature daily. Interest expense on short-term borrowings totals $254,000, $825,000 and $1,327,000 for the years ended December 31, 2002, 2001 and 2002, respectively. Long-term borrowings as of December 31 are as follows: (DOLLARS IN THOUSANDS) 2002 2001 PRINCIPAL PRINCIPAL MATURITY PAYMENTS INTEREST PAYMENTS INTEREST DATES DUE RATE DUE RATE ================================================================================ 2002 $ 6,369 4.14% 2003 $ 15,833 4.90% 12,474 5.23 2004 7,604 3.95 2,114 4.42 2005 3,869 4.07 868 5.16 2006 5,118 4.20 2,426 4.65 2007 666 3.85 After 2007 8,000 4.59 8,000 4.59 - -------------------------------------------------------------------------------- $ 41,090 4.48% $ 32,251 4.75% ================================================================================ The Bank's long-term debt includes $10,000,000 of Federal Home Loan Bank (FHLB) Option advances. The maturities of the Bank's Option advances from the FHLB are March 2006, February 2011 and March 2011. The amounts due, respective to their final maturities, are $2,000,000, $6,000,000 and $2,000,000. If there were a change in interest rates, the FHLB would have the option of calling the advances in 2003 and 2004. During the years 2003 and 2004, respectively, the Bank has $8,300,000 and $1,700,000 in Option advances. Interest expense on long-term borrowings totals $3,624,000, $2,758,000 and $2,408,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The following table summarizes borrowings. Average interest rates during each year were computed by dividing total interest expense by the average amount borrowed: (DOLLARS IN THOUSANDS) 2002 2001 2000 ================================================================================ Balance at year end $56,392 $57,666 $20,992 Average amount outstanding 66,067 51,032 40,717 Maximum amount outstanding at any month-end 88,972 85,091 50,742 Average interest rate for the year 3.40% 3.82% 5.16% Average interest rate on year-end balance 3.42 3.26 4.02 The Corporation maintains a revolving line of credit with the Fleet Bank of Massachusetts for $3,000,000 that is renewed on an annual basis. There were no amounts outstanding against this line as of December 31, 2002 or 2001. The Corporation had short-term borrowing capacity through the FHLB of $6,301,000 through its Ideal Way program that was unused at year-end 2002. Advances from the FHLB are collateralized by the Company's holdings of FHLB stock and residential real estate loans. 7 - MANDATORY REDEEMABLE PREFERRED STOCK On September 30, 1999, the Corporation completed its offering of 1,700,000 shares, 9.6% trust preferred stock, each with a liquidation amount of $10. The Corporation has the right to prepay the trust preferred stock in whole or in part at anytime on or after September 30, 2004. The $17 million trust preferred debentures are due September 30, 2029. Quarterly cash distributions were paid beginning December 31, 1999. The trust preferred stock qualifies as Tier 1 capital under the Federal Reserve Board and risk-based capital guidelines. Of the $17 million in proceeds, the Corporation contributed $15.5 million of the net proceeds to Cargill Bank as equity capital to support the acquisition of two Connecticut branches of New London Trust, F.S.B. The trust preferred obligation is unsecured and ranks junior to all other borrowings, except those borrowings that, by their terms, are equal or junior to the trust preferred obligation. The trust preferred obligation is senior to the Corporation's common stock. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 8 - INCOME TAXES The income taxes were as follows:
(DOLLARS IN THOUSANDS) 2002 2001 2000 ============================================================================================== Current tax: Federal $ 3,646 $ 1,039 $ 1,569 State (166) 66 117 - ---------------------------------------------------------------------------------------------- Total current 3,480 1,105 1,686 - ---------------------------------------------------------------------------------------------- Deferred taxes (623) 923 282 - ---------------------------------------------------------------------------------------------- Total income taxes $ 2,857 $ 2,028 $ 1,968 ==============================================================================================
The differences between the effective tax rate and the federal statutory tax rate on income before taxes are reconciled as follows:
2002 2001 2000 ============================================================================================== Federal statutory rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit (.1) 1.8 .2 Other (1.7) (2.6) .1 - ---------------------------------------------------------------------------------------------- 32.2% 33.2% 34.3% ==============================================================================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31 are presented below:
(DOLLARS IN THOUSANDS) 2002 2001 ============================================================================================== Deferred tax assets: Deferred loan fees $ 33 $ 41 Reserve for loan losses 1,416 948 Non-accrual interest 45 71 Amortization 56 60 Other 90 76 - ---------------------------------------------------------------------------------------------- Total gross deferred tax assets 1,640 1,196 - ---------------------------------------------------------------------------------------------- Deferred tax liabilities: Bond accretion 15 12 Unrealized gain on securities 1,376 748 Depreciation 322 189 Allowance for loan losses 570 781 REIT dividend 1,132 1,339 Other 145 119 - ---------------------------------------------------------------------------------------------- Total gross deferred tax liabilities 3,560 3,188 - ---------------------------------------------------------------------------------------------- Net deferred tax liability $ (1,920) $ (1,992) ==============================================================================================
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets and liabilities and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Corporation will realize the benefits of these deductible differences. The Massachusetts Department of Revenue ("DOR") has sent notices of intent to assess taxes to several banks in the Commonwealth of Massachusetts. The notices relate to DOR's intent to disallow the dividend-received deduction between a bank and its subsidiary operating as a real estate investment trust ("REIT"). On February 4, 2003, the Corporation's subsidiary Westbank ("the Bank") received a Notice of Assessment from the DOR for the tax year ended 2001. The notice was based on DOR's intent to disallow the dividend-received deduction between the Bank's subsidiary, Park West REIT, and the Bank. The Commonwealth of Massachusetts has recently proposed legislation which would repeal the REIT benefit effective for the years ending on or after December 31, 1999. Westbank believes that its tax treatment of the dividend-received deduction for its REIT subsidiary is valid under Massachusetts law. In the event that the dividend-received deduction from its REIT subsidiary is disallowed, the Corporation would be required to record additional taxes of approximately $402,000 for the years 2000, 2001 and 2002, exclusive of any interest charge. 9 - EMPLOYEE BENEFIT PLANS DEFINED CONTRIBUTION PLAN The Corporation has a defined contribution pension plan (money purchase), covering substantially all of its employees. Contributions to the money purchase plan are a percentage of individual employees' salary. Total pension expense for 2002, 2001 and 2000 amounted to $416,000, $314,000 and $318,000 respectively. In addition, the corporation has a 401K plan. Each employee reaching the age of twenty-one (21) automatically becomes a participant of the plan. The plan provides for voluntary contributions by participants, up to 15% of their compensation, subject to certain limits based on federal tax laws. The Corporation makes matching contributions up to 50% of the first 6% of compensation. The total 401K plan expense for the years ended December 31, 2002, 2001 and 2000 amounted to $118,000, $107,000 and $107,000 respectively. In addition, the Corporation has a supplemental defined contribution plan for certain executive officers. The defined contribution costs incurred by the Corporation related to this plan were $42,000, $45,000 and $42,000 for the years ended December 31, 2002, 2001 and 2000, respectively. DIRECTORS AND EXECUTIVES RETIREMENT PLAN The Westbank Directors and Executives Supplemental Retirement Plans were established during 2001. Under the Supplemental Retirement Plan, the Bank provides post-retirement benefits for non-employee Directors who retire from the Board after reaching age seventy-two (72) and certain executive officers who retire at age sixty-five (65). The retirement benefit is in the amount of seventy-five percent (75%) of the Director's or executive's final compensation at retirement and is payable for the life of the retiree. For the executives, this amount is reduced by fifty percent (50%) of the primary insurance amount from Social Security and any employer-provided qualified retirement plans. The combined cost for the defined benefit portions of the Directors and Executives Retirement Plans include the following components: FOR THE YEAR ENDED DECEMBER 31, 2002 ================================================================================ Service cost $ 258,442 Interest cost 138,366 Net amortization of prior service cost 124,938 - -------------------------------------------------------------------------------- $ 521,746 ================================================================================ 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES The combined funded status of the defined benefit portion of the Directors and Executives Retirement Plan was as follows: DECEMBER 31, 2002 ================================================================================ PROJECTED BENEFIT OBLIGATION: Balance at beginning of period $ 160,743 Service cost 97,699 Interest cost 138,366 Benefit payments Prior service costs 1,874,075 - -------------------------------------------------------------------------------- Balance at end of period $ 2,270,883 ================================================================================ PLAN ASSETS AT FAIR VALUE: Balance at beginning of period $ Contributions Benefit payments - -------------------------------------------------------------------------------- Balance at end of period $ ================================================================================ FUNDED STATUS: Deficiency of plan assets over projected benefit obligation $(2,270,883) Unrecognized prior service costs 1,749,137 - -------------------------------------------------------------------------------- Accrued expense included in other liabilities (521,746) - -------------------------------------------------------------------------------- Amount recognized in statement of financial condition consists of: Accrued liability (521,746) Intangible asset - -------------------------------------------------------------------------------- Net amount recognized $ (521,746) ================================================================================ Major assumptions utilized were as follows: AT DECEMBER 31, 2002 ================================================================================ Discount rate 6.80% Rate of increase in compensation levels 4.00% 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 10 - STOCK OPTIONS The Corporation has four (4) fixed option plans that reserve shares of common stock for executives, key employees and directors. The 1985 Incentive Stock Option Plan offers shares of common stock to officers and key employees. Unless exercised, options expire ten (10) years after granting. No options are available for future grants under the 1985 Incentive Stock Option Plan. The Cargill Directors and Officers Plan was adopted by Cargill Bank in 1992. Unless exercised, options expire on September 7, 2006. No options are available for future grants. The 1995 Directors Stock Option Plan grants options totaling 1,000 shares on February 15th of each year to qualified directors. Unless exercised, options expire ten (10) years after granting. A total of 21,000 options are available for future grants. The 1996 Incentive Stock Option Plan for directors and employees was established in 1996 and amended at the 2002 Annual Meeting of Shareholders to increase the number of shares reserved for issuance by 200,000. Employee options are granted at the discretion of directors. Directors are granted options totaling 1,000 shares immediately following the Corporation's Annual Meeting each year only if the Corporation achieved a return on average equity of 12% or higher. Directors' options expire twenty (20) years after the grant date, if unexercised, while employee options expire ten (10) years after the grant date. A total of 19,100 options are available for future grants. The following is a summary of the status of the Corporation's four (4) fixed option plans as of December 31, 2002, 2001 and 2000, and changes during the years ended on those dates:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE 2002 PRICE 2001 PRICE 2000 PRICE ================================================================================================================ Outstanding at beginning of year 490,359 $ 9.55 499,236 $ 9.38 481,236 $ 9.40 Granted 207,900 13.13 8,000 7.9375 19,000 8.87 Exercised (54,055) 5.58 (16,877) 3.87 (1,000) 6.00 Terminated (5,715) 10.09 - ---------------------------------------------------------------------------------------------------------------- Outstanding at end of year 638,489 11.05 490,359 9.55 499,236 9.38 ================================================================================================================ Options exercisable at year-end 508,889 490,359 499,236 Weighted average fair value of options granted during the year $ 13.13 $ 7.9375 $ 8.87 ================================================================================================================
The following table summarizes information about fixed options outstanding at December 31, 2002:
WEIGHTED WEIGHTED WEIGHTED OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE PRICES AT 12/31/02 CONTRACTUAL LIFE PRICE AT 12/31/02 PRICE ================================================================================================================ $ 2.50 1,200 .5 years $ 2.50 1,200 $ 2.50 $ 4.02 to 6.00 31,764 2.2 years 5.25 31,764 5.25 6.01 to 9.00 161,125 5.7 years 8.19 161,125 8.19 9.01 to 13.50 433,400 8.5 years 12.45 303,800 12.11 13.51 to 15.25 11,000 13.4 years 15.11 11,000 15.11 - ---------------------------------------------------------------------------------------------------------------- $ 2.50 to $15.25 638,489 7.5 years $ 11.05 508,889 $ 10.49 ================================================================================================================
41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 11 - EARNINGS PER SHARE The following is a reconciliation of the shares and earnings per share utilized for the basic and diluted earnings per share computations: SHARES PER SHARE ================================================================================ Basic Earnings Per Share: 2002 4,406,583 $1.36 2001 4,465,054 .91 2000 4,440,560 .85 Effect of Dilutive Option Shares: 2002 103,382 .03 2001 47,966 .01 2000 46,493 .01 Diluted Earnings Per Share: 2002 4,509,965 1.33 2001 4,513,020 .90 2000 4,487,053 .84 12 - LEASES The Corporation leases certain facilities under long-term operating lease agreements. The following is a schedule of future minimum lease payments for such operating leases as of December 31, 2002: (DOLLARS IN THOUSANDS) ================================================================================ 2003 $ 293 2004 265 2005 240 2006 126 2007 92 After 2007 75 - -------------------------------------------------------------------------------- Total minimum lease payments $ 1,091 ================================================================================ Rent expense for 2002, 2001 and 2000 amounted to $401,000, $360,000 and $358,000 respectively. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 13 - COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, various commitments and contingent liabilities are outstanding, such as guarantees, standby letters of credit and commitments to extend credit, that are not reflected in the consolidated financial statements. Management does not anticipate any significant losses as a result of these transactions. The following table summarizes the contractual value of commitments at December 31: (DOLLARS IN THOUSANDS) 2002 2001 ================================================================================ Commitments to grant loans $13,677 $11,855 Stand-by letters of credit and financial guarantees 587 325 Commitments to advance funds under existing loan agreements 60,600 47,031 The Corporation uses the same credit policies in making commitment and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may be expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. In the normal course of business, certain litigation is pending against the Corporation. Management, after consultation with legal counsel, does not anticipate that any ultimate liability arising out of such litigation will have a material effect on the Corporation's financial condition or results of operations. 14 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") addresses the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning internal controls, accounting, and operations. Both the Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's or banking subsidiary's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the Corporation's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 2002, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. Regulatory risk-based capital requirements take into account the different risk categories by assigning risk weights to assets and the credit equivalent amounts of off-balance sheet exposures. In addition, capital is divided into two tiers. Tier 1 includes the common stockholders' equity and a portion of the mandatory redeemable preferred stock; total risk-based, or supplementary capital includes not only the equity but also a portion of the allowance for loan losses and a portion of the mandatory redeemable preferred stock. As of December 31, 2002, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a bank must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank's category. Included in the Bank's capital is approximately $15.5 million contributed in 1999 by the holding company in connection with the preferred trust offering. (Note 7) The Corporation's and the Bank's actual capital amounts and ratios are also presented in the following table:
MINIMUM CAPITAL TO BE CONSIDERED WELL CAPITALIZED UNDER PROMPT MINIMUM CAPITAL CORRECTIVE ACTION ACTUAL ADEQUACY PURPOSES PROVISIONS (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO =============================================================================================== December 31, 2002 Total Capital (To risk-weighted assets): Westbank $51,568 12.25% $33,670 8.00% $42,088 10.00% Holding Company 53,350 12.63 33,787 8.00 N/A N/A Tier I Capital (To risk-weighted assets): Westbank 46,456 11.04 16,835 4.00 25,253 6.00 Holding Company 44,616 10.56 16,894 4.00 N/A N/A Tier I Capital (To average assets): Westbank 46,456 6.99 26,594 4.00 33,243 5.00 Holding Company 44,616 6.60 26,632 4.00 N/A N/A December 31, 2001 Total Capital (To risk-weighted assets): Westbank $48,685 12.71% $30,633 8.00% $38,292 10.00% Holding Company 50,050 13.03 30,734 8.00 N/A N/A Tier I Capital (To risk-weighted assets): Westbank 44,506 11.62 15,317 4.00 22,975 6.00 Holding Company 41,440 10.79 15,367 4.00 N/A N/A Tier I Capital (To average assets): Westbank 44,506 7.56 23,542 4.00 29,428 5.00 Holding Company 41,440 6.96 23,824 4.00 N/A N/A
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES On November 19, 1997, the Board of Directors of the Corporation adopted an Amended and Restated Shareholder Rights Plan (the "Rights Plan"). Pursuant to the terms of the Rights Plan, the Board of Directors declared a dividend distribution to stockholders of record as of the close of business on December 4, 1997 (the "Record Date") of one Preferred Stock Purchase Right (a "Right") for each outstanding share of Common Stock of the Corporation. In addition, one Right automatically attaches to each share of Common Stock issued subsequent to the Record Date, until November 19, 2007. Each Right entitles the registered holder to purchase from the Corporation a unit of one ten-thousandths of a share (a "Unit") of Series A Junior Participating Cumulative Preferred Stock, par value $5.00 per share ("Preferred Stock"), at a cash exercise price of $60.00 per share of Common Stock, subject to adjustment. The Corporation has reserved 12,000 shares of Preferred Stock for issuance upon exercise of the Rights. Currently, the Rights are not exercisable and are attached to and trade with the outstanding shares of Common Stock. The Rights will separate from the Common Stock and become exercisable upon the earliest to occur of (i) the close of business on the tenth calendar day following the first public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% or more of the outstanding shares of the Corporation's Common Stock (an "Acquiring Person"), (ii) the close of business on the tenth business day (or such date as the Board of Directors may determine) following the commencement of a tender offer or exchange offer that would result upon its consummation in a person or a group becoming the beneficial owner of 15% of the outstanding shares of the Corporation's Common Stock, or (iii) the determination by the Board of Directors that any person is an "Adverse Person." Upon the occurrence of any one of the above events, each holder of a Right (other than the Acquiring Person or the Adverse Person, as the case may be) is entitled to acquire such number of Units of the Preferred Stock of the Corporation as are equivalent to such number of shares of Common Stock having a value twice the current exercise price of the Right. If the Corporation is acquired in a merger or other business combination transaction, after any such event each holder of a Right is then entitled to purchase, at the then current exercise price, shares of the acquiring company's common stock having a value of twice the exercise price of the Right. Until a Right is exercised, the holder has no rights as a stockholder of the Corporation (beyond those rights as an existing stockholder), including the right to vote or to receive dividends. While the distribution of the Rights is not taxable to stockholders or to the Corporation, stockholders may, depending upon the circumstances, recognize taxable income in the event the Rights become exercisable for Units, other securities of the Corporation, other consideration or for shares of common stock of an acquiring company. The Rights may be redeemed in whole by the Corporation, under certain circumstances, at a price of $.001 per Right. The Rights and the Rights Plan expire on November 19, 2007. The Bank's retained earnings at December 31, 2002 include $458,000 that is set aside in accordance with existing provisions of the Internal Revenue Code to absorb losses on loans. If, in the future, this amount were used for any other purposes, a tax liability could be incurred. It is not anticipated that such amount will be made available for dividends or that a tax thereon will be imposed. Cargill Bank ("Cargill") previously converted from a state chartered mutual savings and loan association to a state chartered stock savings and loan association. At the time of the conversion, Cargill established a liquidation account in an amount equal to Cargill's net worth. In the event of a complete liquidation (and only in such event), each eligible account holder will be entitled to receive a liquidation distribution from the liquidation account before any liquidation may be made with respect to capital stock. The balance in the liquidation account at December 31, 2002 was $85,000. The Corporation purchased 202,658, 23,000 and 127,320 common shares at fair value for treasury stock at an aggregate cost of $2,615,000, $215,000 and $1,127,000 in 2002, 2001 and 2000 respectively. Treasury stock repurchases were made in connection with the previously announced stock repurchase program. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 15 - EMPLOYEE STOCK OWNERSHIP PLAN The Corporation established an Employees' Stock Ownership Plan ("ESOP"). The ESOP has been funded by a $100 contribution from the Corporation. At December 31, 2002 and 2001, the ESOP held no shares of the Corporation's stock. 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments. The following table represents the carrying amount and estimated fair value of the Corporation's financial instruments at December 31:
2002 2001 ======================================================================================================= CARRYING ESTIMATED CARRYING ESTIMATED (DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE - ------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 19,065 $ 19,065 $ 17,132 $ 17,132 Federal funds sold 28,185 28,185 319 319 Investment securities held to maturity 436 459 757 779 Investment securities available for sale 132,296 132,296 141,685 141,685 Loans 473,721 493,517 439,723 451,682 Accrued interest receivable 3,037 3,037 3,285 3,285 Liabilities: Deposits 561,747 568,939 509,849 513,080 Borrowed funds 56,392 60,235 57,666 57,973 Mandatory redeemable preferred stock 17,000 17,758 17,000 17,425 Accrued interest payable 665 665 659 659
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD The carrying amount for cash and due from banks and for federal funds sold approximates fair value and matures in 90 days or less. INVESTMENT SECURITIES The fair value of securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. LOANS Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, such as commercial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms, and by performing and non-performing categories. The fair value of performing loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity, using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, including loans held for sale, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates, using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. Fair value for significant non-performing loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined, using available market information and specific borrower information. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE The carrying amounts of these items approximate fair value due to their short-term nature. DEPOSITS The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, regular savings, NOW accounts and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. BORROWED FUNDS AND MANDATORY REDEEMABLE PREFERRED STOCK The fair value of such borrowings and mandatory redeemable preferred stock was estimated by utilizing future cash flows discounted using current borrowing rates for similar instruments. For short-term borrowings, the carrying amount approximates the fair value due to their short-term nature. COMMITMENTS TO EXTEND CREDIT The stated fair value of commitments to extend credit is based on the current fees charged for similar commitments. The estimated fair value for commitments to extend credit are not material. 17 - SEGMENT INFORMATION The Corporation has one reportable segment, "Community Banking." All of the Corporation's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Corporation supports the others. For example, commercial lending is dependent upon the ability of the Bank to obtain funds through deposits and borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Corporation as one operating segment or unit. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 18 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 ---------------------------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- Interest income $10,443 $10,206 $10,037 $ 9,890 Interest expense 4,544 4,449 4,642 4,420 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income 5,899 5,757 5,395 5,470 Provision for losses 300 433 400 200 Non-interest income 733 1,337 966 1,054 Non-interest expense 4,361 4,337 3,956 (1) 3,758 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,971 2,324 2,005 2,566 Income taxes 656 486 671 1,044 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 1,315 $ 1,838 $ 1,334 $ 1,522 ================================================================================================================================ Earnings per share - Basic $ .29 $ .42 $ .31 $ .35 - Diluted $ .29 $ .40 $ .30 $ .34 ================================================================================================================================ 2001 ---------------------------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- Interest income $10,147 $10,115 $10,540 $10,286 Interest expense 5,298 4,996 5,349 5,048 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income 4,849 5,119 5,191 5,238 Provision for losses 227 159 279 279 Non-interest income 760 987 909 833 Non-interest expense 3,991 4,249 4,429 4,172 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,391 1,698 1,392 1,620 Income taxes 471 580 452 525 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 920 $ 1,118 $ 940 $ 1,095 ================================================================================================================================ Earnings per share - Basic $ .21 $ .25 $ .21 $ .24 - Diluted $ .20 $ .25 $ .21 $ .24 ================================================================================================================================
(1) On September 30, 2002, the Corporation adopted SFAS No. 147. In accordance with this statement, the Corporation ceased amortization of goodwill, retroactive to January 1, 2002. The result was a $513,000 decrease in amortization expense in the third quarter. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
DECEMBER 31, (DOLLARS IN THOUSANDS) 2002 2001 ============================================================================================================================== BALANCE SHEETS Assets Cash $ 337 $ 73 Investment in subsidiaries 57,830 54,646 Other investments 34 72 Other assets 1,433 1,238 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 59,634 $ 56,029 ============================================================================================================================== Liabilities $ 22 $ 13 - ------------------------------------------------------------------------------------------------------------------------------ Mandatory redeemable preferred stock 17,000 17,000 - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity Preferred stock - none Common stock, par value $2 per share 9,047 8,632 Additional paid-in capital 14,497 11,782 Retained earnings 18,780 17,787 Treasury stock (2,091) (431) Accumulated other comprehensive loss 2,379 1,246 - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity 42,612 39,016 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 59,634 $ 56,029 ============================================================================================================================== (DOLLARS IN THOUSANDS) 2002 2001 2000 ============================================================================================================================== STATEMENTS OF INCOME Dividend from subsidiary $ 5,163 $ 2,230 $ 2,598 Interest expense (1,680) (1,627) (1,617) Other expense - net (121) (108) (135) - ------------------------------------------------------------------------------------------------------------------------------ Income before taxes and undistributed income of subsidiaries 3,362 495 846 Income tax benefit 595 590 600 Undistributed income of subsidiaries 2,052 2,988 2,342 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 6,009 $ 4,073 $ 3,788 - ------------------------------------------------------------------------------------------------------------------------------
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) WESTBANK CORPORATION AND SUBSIDIARIES 19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, (DOLLARS IN THOUSANDS) 2002 2001 2000 ============================================================================================================================== STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income $ 6,009 $ 4,073 $ 3,788 Operating activities: Equity in income of subsidiaries (2,052) (2,988) (2,342) Decrease (increase) in other assets (195) 303 (184) Increase (decrease) in other liabilities 9 6 (9) - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 3,771 1,394 1,253 - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Investment securities (purchases) maturities 38 (30) (32) - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 38 (30) (32) - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from stock options exercised (37) 20 3 Proceeds from dividend reinvestment and optional stock purchases 956 529 573 Treasury shares redeemed (2,615) (215) (1,127) Dividends paid (1,849) (1,694) (1,697) - ------------------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (3,545) (1,360) (2,248) - ------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 264 4 (1,027) Cash and cash equivalents at the beginning of the year 73 69 1,096 - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at the end of the year $ 337 $ 73 $ 69 ==============================================================================================================================
50 INDEPENDENT AUDITORS' REPORT WESTBANK CORPORATION AND SUBSIDIARIES Shareholders and Board of Directors, Westbank Corporation We have audited the consolidated balance sheets of Westbank Corporation and subsidiaries (the "Corporation") as of December 31, 2002 and 2001 and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Westbank Corporation and subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the Consolidated Financial Statements, in 2002 the Corporation changed its method of accounting for goodwill and other intangible assets to conform to Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", and No. 147, "Acquisition of Certain Financial Institutions." DELOITTE & TOUCHE LLP Stamford, Connecticut January 29, 2003 51 CORPORATE DIRECTORY WESTBANK CORPORATION AND SUBSIDIARIES
DIRECTORS WESTBANK CORPORATION AND WESTBANK ============================================================================================================================= ERNEST N. LAFLAMME, JR. DAVID R. CHAMBERLAND ROBERT J. PERLAK Chairman of the Board, President, Corporate Clerk, Westbank Corporation Chicopee Building Supply, Inc. Westbank Corporation Treasurer, Private Investor City of Chicopee DONALD R. CHASE Vice Chairman of the Board, GEORGE R. SULLIVAN ROLAND O. ARCHAMBAULT President and Chief Executive Officer, Chief Executive Officer, President and Owner, Westbank Corporation Sullivan Paper Company, Inc. Pinnacle Raceway President and Chief Executive Officer, Westbank JAMES E. TREMBLE MARK A. BEAUREGARD President, Attorney at Law, G. WAYNE MCCARY Valley Commmunications Systems, Inc. Resnic, Beauregard, Waite & Driscoll President and Chief Executive Officer, Eastern States Exposition OFFICERS WESTBANK CORPORATION ============================================================================================================================= DONALD R. CHASE GARY L. BRIGGS TRENTON E. TAYLOR President and Chief Executive Officer Executive Vice President Senior Vice President JOHN M. LILLY KATHLEEN A. JALBERT LLOYD S. HALL Treasurer and Chief Financial Officer Senior Vice President Director of Auditing WESTBANK ============================================================================================================================= DONALD R. CHASE FINANCE DEPARTMENT LOAN CREDIT AND COLLECTION President and Chief Executive Officer JOHN M. LILLY TRENTON E. TAYLOR Executive Vice President and Treasurer Senior Vice President AUDITING DIVISION HOWARD STANTON, III PATRICIA A. NEBOSKY LLOYD S. HALL, CBA Vice President Vice President Director of Auditing IRVING M. WALKER, JR., CMA JOHN E. O'BRIEN Controller Assistant Vice President BRANCH ADMINISTRATION/ HUMAN RESOURCES LOAN DIVISION RESIDENTIAL REAL ESTATE KATHLEEN A. JALBERT GARY L. BRIGGS ANTONIO FILIPE Senior Vice President Executive Vice President Senior Vice President DEBORAH A. KUMIEGA PAUL M. ACCORSI WOLFGANG A. ADAMETZ Vice President Senior Vice President Vice President KATHRYN J. SAUCIER DENISE M. BREWER Assistant Vice President Senior Vice President TRUST DIVISION ALMA D. MOREY CLIFFORD R. BORDEAUX ROBERT A. GIBOWICZ Branch Administration Officer Vice President Senior Trust Officer SUSAN M. ALDRICH GERARD E. DRAPEAU WILLIAM M. VARANKA Human Resources Officer Vice President Vice President RICHARD N. HANCHETT EDP/OPERATIONS Vice President S. STEVE KONIECKI JOSEPH S. LEMAY Senior Vice President Vice President JOSEPH P. YOUNG Vice President MICHAEL A. HARRINGTON Commercial Loan Officer J. KEVIN HOURIHAN Dealer Account Officer
52 CORPORATE INFORMATION WESTBANK CORPORATION AND SUBSIDIARIES WESTBANK CORPORATION Westbank Tower, 225 Park Avenue West Springfield, MA 01089-3310 (413) 747-1400 ANNUAL MEETING The Annual Meeting of Stockholders of Westbank Corporation will be held on Wednesday, April 16, 2003 at nine o'clock in the morning at the Best Western Sovereign Hotel & Conference Center, 1080 Riverdale Street, West Springfield, Massachusetts. TRANSFER AGENT AND REGISTRAR Westbank-Trust Department INDEPENDENT AUDITORS Deloitte & Touche LLP Stamford, Connecticut CORPORATE COUNSEL Doherty, Wallace, Pillsbury and Murphy, P.C. Springfield, Massachusetts INFORMATION SERVICE Westbank Corporation welcomes stockholder and public interest in our services and activities. Questions pertaining to material presented in this Report and requests for a copy of the Annual Report (Form 10-K) filed with the Securities and Exchange Commission should be directed to John M. Lilly, Treasurer and Chief Financial Officer, at the above address. EQUAL OPPORTUNITY EMPLOYER The Corporation has maintained its commitment to equal opportunity and affirmative action in employment and personnel policies and pledges to recruit, hire, train and promote persons in all job classifications without regard to race, color, religion, sex, national origin, veterans status, age or handicap. COMMON STOCK - MARKET INFORMATION The table below shows cash dividend data and the range of bid prices by quarter for the Corporation's common stock. The source of the bid ranges is the local newspaper's listing of the NASDAQ regional market quotations. ================================================================================ 2002 2001 BID BID HIGH LOW DIVIDEND HIGH LOW DIVIDEND ================================================================================ First $11.10 $ 9.10 $.11 $ 7.86 $ 6.67 $.10 Second 13.43 10.58 .11 9.10 7.67 .10 Third 13.53 11.19 .11 9.48 8.84 .10 Fourth 13.19 12.39 .11 9.24 8.67 .10 All stock prices have been adjusted for the 5% stock dividend declared and distributed January 2003. The above quotations of the Corporation's common stock represent prices between dealers. They do not include retail markup, markdown or commissions. At January 31, 2003 the Corporation had 1,257 stockholders. Westbank Corporation's common stock is traded on the NASDAQ National Market Exchange, the trading symbol is "WBKC." For information on the Westbank Corporation Dividend Reinvestment and Stock Purchase Plan, call Westbank's Trust Department at (413) 747-1400. The following firms make a market in Westbank Corporation's common stock: Adams, Harkness & Hill, Inc. Advest Inc. Goldman, Sachs & Co. Keefe, Bruyette & Woods, Inc. Knight Securities L.P. McConnell, Budd & Downes, Inc. Moors & Cabot, Inc. Ryan, Beck & Co., Inc. 53 -----END PRIVACY-ENHANCED MESSAGE-----