<PAGE> 1
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-12784
WESTBANK CORPORATION
<TABLE>
<S> <C>
Massachusetts 04-2830731
(State of Incorporation) (I.R.S. Employer Identification Number)
225 Park Avenue, West Springfield Massachusetts 01090-0149
(Address of principal executive office) (Zip Code)
</TABLE>
(413) 747-1400
(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
- - ------------------- -------------------
<S> <C>
NONE NONE
</TABLE>
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 March 1, 1999 the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$47,936,445.
The number of shares outstanding of the registrants common stock, $2.00
par value was 4,214,193 on March 1, 1999.
Portions of the Annual Report to Stockholders for the year ended December
31, 1998 are incorporated by reference into Parts I and II.
Portions of the Proxy Statement issued by the Corporation in connection
with the Annual Meeting to be held on April 21, 1999 are incorporated by
reference into Part III.
<PAGE> 2
WESTBANK CORPORATION
INDEX TO FORM 10-K
<TABLE>
<CAPTION>
PART I
<S> <C>
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
PART III
Item 8 Financial Statements and Supplementary Data III - 1
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure III - 1
Item 10 Directors and Executive Officers of the Registrant III - 1
Item 11 Executive Compensation III - 1
Item 12 Security Ownership of Certain Beneficial Owners and
Management III - 1
Item 13 Certain Relationships and Related Transactions III - 1
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV - 1
Signatures IV - 2
Exhibit Index IV - 3
</TABLE>
<PAGE> 3
WESTBANK CORPORATION, WEST SPRINGFIELD, MASSACHUSETTS
PART I
ITEM 1 - BUSINESS
Reference is made to Page 4 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1998, wherein this subject is
covered.
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
The following statistical tables and accompanying text provide required
financial data about the Corporation and should be read in conjunction with the
consolidated financial statements and related notes, appearing in the 1998
Annual Report to Stockholders and is incorporated herein by reference thereto:
<TABLE>
<CAPTION>
Page of
Annual Report
<S> <C>
I. Distribution of Assets, Liabilities and Stockholders' Equity:
Interest Rates and Interest Differential 10
Rate/Volume Analysis of Interest Margin on Earning Assets 11
II. Investment Portfolio 12, 27, 28 and 38
III. Loan Portfolio 13, 29, 30 and 38
a. Types of Loans 13
b. Maturities and Sensitivities to Changes in Interest Rates 8, 9 and 13
c. Risk Elements 8, 14, 15, 16, 29 and 30
IV. Summary of Loan Loss Experience 14 and 15
V. Deposits 16, 31, 38 and 39
VI. Return on Equity and Assets 17
VII. Short Term Borrowing 17, 31, 32, 37 and 38
</TABLE>
I - 1
<PAGE> 4
ITEM 2 - PROPERTIES
The Corporation's principal banking subsidiary, Park West Bank and Trust
Company ("Park West") operates thirteen banking offices located as follows:
<TABLE>
<CAPTION>
LOCATION OWNED LEASED TOTAL
- - -------- ----- ------ -----
<S> <C> <C> <C>
Agawam (Feeding Hills) 1 1
Chicopee 1 1
Chicopee - Supermarket 1 1
East Longmeadow 1 1
East Longmeadow -
Supermarket 1 1
Holyoke 1 1
Ludlow 1 1
Southwick 1 1
West Springfield 2 1 3
Westfield 1 1
Westfield Supermarket 1 1
TOTAL 6 7 13
</TABLE>
All general 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 the Bank with warranty deed with no material encumbrances. Park West owns,
with no material encumbrances, land adjacent to the main office which is
available for parking, and also through a subsidiary, owns one other property
consisting of land, also used as a parking lot adjacent to the main office. The
Corporation also owns the property on which its former Operations Center was
located and is presently leased. In addition, the Bank holds other real estate
as a result of foreclosure proceedings.
All of the property described as leased in the foregoing table is leased
directly from independent parties. Management considers the terms and conditions
of each of the existing leases to be in the aggregate favorable to the Bank.
ITEM 3 - LEGAL PROCEEDINGS
Certain litigation is pending against the Corporation and the Bank.
Management, after consultation with legal counsel, does not anticipate that any
liability arising out of such litigation will have a material effect on the
Corporation's Financial Statements.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
I - 2
<PAGE> 5
PART II
ITEM 5 - MARKET FOR CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Reference is made to page 44 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1998, wherein this subject is
covered.
ITEM 6 - SELECTED FINANCIAL DATA
Reference is made to page 5 of the Corporation's Annual Report to
Stockholders for the year ended December 31, 1998, wherein this subject is
covered.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to pages 6 through 19 of the Corporation's Annual Report
to Stockholders for the year ended December 31, 1998, wherein this subject is
covered.
Information Concerning Forward-Looking Statements.
Westbank has made and may make in the future forward looking statements
concerning future performance, including but not limited to future earnings, and
events or conditions which may affect such future performance. These forward
looking statements are based upon management's expectations and belief
concerning possible future developments and the potential effect of such future
developments on Westbank. There is no assurance that such future developments
will be in accordance with management's expectations and belief or that the
effect of any future developments on Westbank will be those anticipated by
Westbank management.
All assumptions that form the basis of any forward looking statements
regarding future performance, as well as events or conditions which may affect
such future performance, are based on factors that are beyond Westbank's ability
to control or predict with precision, including future market conditions and the
behavior of other market participants. Among the factors that could cause actual
results to differ materially from such forward looking statements are the
following:
1. The status of the economy in general, as well as
in Westbank's primary market area, Western
Massachusetts;
2. The real estate market in Western Massachusetts;
3. Competition in Westbank's primary market area from other banks,
especially in light of continued consolidation in the New England
banking industry.
4. Any changes in federal and state bank regulatory requirements;
5. Changes in interest rates; and
6. The cost and other effects of unanticipated legal and administrative
cases and proceedings, settlements and investigations.
While Westbank periodically reassesses material trends and uncertainties
affecting the Corporation's performance in connection with its preparation of
management's discussion and analysis of results of operations and financial
condition contained in its quarterly and annual reports, Westbank does not
intend to review or revise any particular forward looking statement in light of
future events.
II - 1
<PAGE> 6
PART III
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 20 through 41 of the Corporation's Annual
Report to Stockholders for the year ended December 31, 1998, wherein this
subject is covered.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to pages 4 through 7 of the Corporation's Proxy
Statement to Stockholders for the 1999 Annual Meeting scheduled for April 21,
1999, wherein this subject is covered.
ITEM 11 - EXECUTIVE COMPENSATION
References is made to pages 8 through 12, of the Corporation's Proxy
Statement to Stockholders for the 1999 Annual Meeting scheduled for April 21,
1999, wherein this subject is covered.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to pages 6 and 7, of the Corporation's Proxy Statement
to Stockholders for the 1999 Annual Meeting scheduled for April 21, 1999,
wherein this subject is covered.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to pages 6 through 15, of the Corporation's Proxy
Statement to Stockholders for the 1999 Annual Meeting scheduled for April 21,
1999, wherein this subject is covered under the caption "Beneficial Ownership of
Stock and Executive Compensation - Miscellaneous".
III - 1
<PAGE> 7
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
1. Financial Statements
The following financial statements are incorporated in this Annual Report
on Form 10-K by reference to the Corporation's Annual Report to Stockholders for
the year ended December 31, 1998:
WESTBANK CORPORATION
<TABLE>
<CAPTION>
Page of
Annual
Report
<S> <C>
Independent Auditors' Report 42
Consolidated Balance Sheets at December 31, 1998 and 1997 20
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 21
Consolidated Statement of Stockholders' Equity from January 1, 1996,
to December 31, 1998 22
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996
22
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 23
Notes to Consolidated Financial Statements 24 - 41
</TABLE>
Current reports on Form 8-K Reporting other Events were filed by the Registrant
on:
NONE
2. Financial Statement Schedules
Financial Statement Schedules are omitted because they are inapplicable
or not required.
3. Exhibits
See accompanying Exhibit Index.
IV - 1
<PAGE> 8
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.
<TABLE>
<CAPTION>
Signature Title Date
- - --------------------------------------------------------------------------------
<S> <C> <C>
/s/ Donald R. Chase President and Chief
- - --------------------------- Executive Officer and Director March 17, 1999
Donald R. Chase
/s/ Alfred C. Whitaker Chairman of the Board
- - --------------------------- and Director March 17, 1999
Alfred C. Whitaker
/s/ John M. Lilly Treasurer and Chief Financial
- - --------------------------- Officer March 17, 1999
John M. Lilly
/s/ Roland O. Archambault
- - --------------------------- Director March 17, 1999
Roland O. Archambault
/s/ Mark A. Beauregard
- - --------------------------- Director March 17, 1999
Mark A. Beauregard
/s/ David R. Chamberland
- - --------------------------- Director March 17, 1999
David R. Chamberland
/s/ Leroy F. Jarrett
- - --------------------------- Director March 17, 1999
Leroy F. Jarrett
/s/ Ernest N. Laflamme, Jr Vice Chairman of the Board
- - --------------------------- and Director March 17, 1999
Ernest N. Laflamme, Jr
/s/ G. Wayne McCary
- - --------------------------- Director March 17, 1999
G. Wayne McCary
/s/ Paul J. McKenna
- - --------------------------- Director March 17, 1999
Paul J. McKenna
/s/ Robert J. Perlak
- - --------------------------- Corporate Clerk and Director March 17, 1999
Robert J. Perlak
/s/ George R. Sullivan
- - --------------------------- Director March 17, 1999
George R. Sullivan
/s/ James E. Tremble
- - --------------------------- Director March 17, 1999
James E. Tremble
</TABLE>
IV - 2
<PAGE> 9
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
3. Articles of Organization, as amended **
(a) Articles of Organization, as amended *
(b) By-Laws, as amended *
10.1 Employment Contract dated October 1, 1986, between
William A. Franks, Jr. and Westbank Corporation ***
10.12 Termination Agreement dated February 20, 1987, between
Donald R. Chase and Park West Bank and Trust Company ***
10.14 Termination Agreement dated February 20, 1987, between
Stanley F. Osowski and CCB, Inc. ***
10.15 1985 Incentive Stock Option Plan for Key Employees *
10.16 1995 Directors Stock Option Plan ****
10.17 1996 Stock Incentive Plan *****
13. 1995 Annual Report to Stockholders ARS (IFC 1-36 IBC)
21. Subsidiaries of Registrant TO BE INCLUDED
27. Financial Data Schedule TO BE INCLUDED
* Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1988
** Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1987
*** Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1986
**** Incorporated by reference to identically numbered exhibits contained in
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995
***** Incorporated by reference to identically numbered exhibits
contained in Registrant's 1996 Proxy Statement
</TABLE>
IV - 3
<PAGE> 1
WESTBANK CORPORATION 1998 ANNUAL REPORT
A FOCUS ON GROWTH
[PHOTO OF PRISM]
<PAGE> 2
TABLE OF CONTENTS
Financial Highlights ................................................... 1
Letter to Stockholders ................................................. 2 - 3
Business - Westbank Corporation and Subsidiaries ....................... 4
Selected Consolidated Financial Data ................................... 5
Management's Discussion and Analysis - Financial Results ............... 6 - 19
Consolidated Balance Sheets ............................................ 20
Consolidated Statements of Income ...................................... 21
Consolidated Statements of Stockholders' Equity ........................ 22
Consolidated Statements of Comprehensive Income ........................ 22
Consolidated Statements of Cash Flows .................................. 23
Notes to Consolidated Financial Statements ............................. 24 - 41
Independent Auditors' Report ........................................... 42
Corporate Directory .................................................... 43
Corporate Information .................................................. 44
<PAGE> 3
FINANCIAL HIGHLIGHTS
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
FOR THE YEAR
(Dollars in Thousands) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income $ 3,256 $ 3,231 $ 2,248
Net interest income 13,442 12,784 11,842
Non-interest income 2,244 2,261 2,140
Non-interest expense 10,371 9,313 9,272
Provision for loan losses 19 190 868
YEAR END
(Dollars in Thousands)
---------- ---------- ----------
Investment and
mortgage-backed securities $ 76,417 $ 54,591 $ 35,682
Loans, net 259,306 232,415 218,192
Allowance for loan losses 2,379 2,848 2,481
Total assets 354,973 308,265 284,909
Total deposits 299,123 271,560 255,491
Total stockholders' equity 27,301 23,751 19,745
COMMON SHARE INFORMATION
Basic weighted average
shares outstanding 3,767,605 3,487,160 3,285,093
Basic net income per share $ .86 $ .93 $ .68
</TABLE>
[ASSETS/DEPOSITS/NET LOAN GROWTH LINE GRAPH]
<TABLE>
<CAPTION>
ASSETS DEPOSITS LOANS
-------- -------- -------
(in Thousands)
<S> <C> <C> <C>
1998 $354,793 $299,123 $259,306
1997 308,265 271,560 232,415
1996 284,909 255,491 218,192
1995 253,777 227,962 197,264
1994 243,313 218,563 192,677
</TABLE>
1
<PAGE> 4
CHAIRMAN'S AND PRESIDENT'S LETTER
Westbank Corporation and Subsidiaries
Dear Shareholder:
The past year was especially rewarding because we have achieved our topmost
objectives, record earnings and measured growth. Our growth strategy is based on
the premise: Succeeding today and investing for tomorrow. We seek to grow at a
measured, orderly pace by nurturing our core banking operations, deepening our
market penetration by providing more banking services to our present customers,
by acquisitions of other banks and opening new offices in selected areas.
We are proud to report that net income for the year ended December 31, 1998
totaled $3.3 million or $0.84 per diluted share, compared to $3.2 million or
$0.89 per diluted share for the same period a year ago. Included in the results
of operations during the fourth quarter of 1998 were $400 thousand of merger
costs associated with the acquisition of Cargill Bancorp, Inc., of Putnam,
Connecticut, which was consummated on January 29, 1999.
We look forward to the opportunity to work with the Cargill shareholders, staff
and customers. The affiliation will allow Cargill to offer a wider range of
products and services, while at the same time Westbank will achieve its
corporate objective of expanding its market into Connecticut.
Westbank is presently positioned and has sufficient resources and infrastructure
to expand through acquisition. We will pursue opportunities for growth in our
defined market area as well as in markets that are contiguous to our present
market area, which include Connecticut, Rhode Island and Central Massachusetts.
Consistent with our corporate strategies of building market share, we have
expanded our geographical reach into Ludlow and Southwick, Massachusetts. These
new full-service banking offices have exceeded all expectations by generating a
combined total of $11 million in new deposits last year.
At year-end assets totaled $355 million, an increase of $46.7 million or 15%
compared to the same period in 1997. Deposits increased by $27.5 million or 10%
and totaled $299.1 million.
The Corporation's capital was $27.3 million at year end, representing a capital
ratio of 7.69% while the Corporation's book value totaled $7.19 versus $6.63 for
the same period in the prior year.
Particularly gratifying was the fact that we were able to expand our loan
portfolio last year while continuing to maintain our disciplined loan criteria,
ample evidence that loans can be increased substantially while maintaining high
credit standards. During 1998 loans increased by $26.9 million or 12% and
totaled $259.3 million.
At Westbank, profitability is achieved through hard work and a clear focus on
what we do well. We reinvest in growth businesses and emphasize our core
competencies, which include credit and service quality, both of which are
absolutely essential to compete effectively. Banks cannot consistently generate
exceptional profits without being top-flight credit underwriters. Westbank is
recognized industry-wide for our relentless focus on maintaining superior credit
quality. Customers needs seldom fall into neat categories, and usually cross
from one type of banking product to another. A clear competitive advantage for
Westbank is the fact that we organize around our customers and their needs, not
around products. To be focused on the customer, we have to know what the
customer wants, therefore, we listen to them and hear what they really need.
Through our local decision-making process in our banking offices our employees
are empowered to deliver customer solutions.
We've helped many businesses grow from the spare bedroom to the oak boardroom.
Technology helps us offer services in a more timely manner. However, sometimes
customers want the personal touch. Westbank offers both. This is the essence of
Westbank and the basis of the Westbank Advantage: Our products; our people; our
entire company is focused on meeting the needs of the customer.
Large bank mergers have negatively impacted small and medium sized businesses,
which indicates that there is and will be a growing need for a community bank
that offers not only a broad range of products both to businesses and consumers
but also provides exceptional service. The Residential Mortgage Department
continued its strong record of growth and significantly exceeded 1998 goals.
Westbank assisted six hundred families in terms of purchasing a home, building
their dream home or lowering their existing payments by closing on $61,000,000
in residential loans. Park West Bank and Trust Company also added an additional
satellite mortgage correspondent bank, which has an excellent reputation in the
Franklin County area of Western Massachusetts.
We converted a portion of our mortgages into mortgage-backed securities for sale
on Wall Street, providing the Bank with excellent investment grade securities
and immediate liquidity. This enables Westbank to realize additional income
without relinquishing its relationship with the borrower. With activity
remaining strong at the end of 1998, we anticipate another strong year in 1999.
Westbank's relatively new Indirect Lending Program has had a very positive
impact on loan originations. Through this program Westbank receives consumer
loan applications from Bank-approved automobile and recreational vehicle
dealerships whose customers wish to finance their purchases. These applications
are then processed according to the Bank's normal consumer loan underwriting
criteria. In 1998, indirect consumer loans accounted for approximately 28.5% of
the Bank's total consumer loan originations excluding mortgages.
As wealth grows, so do the opportunities for those of us who manage and invest
that wealth. Customer needs change as they marry, purchase homes, have children
or retire. These lifestyle changes coupled with changing market conditions, make
understanding all the more difficult.
2
<PAGE> 5
Our Trust Department has a well-diversified line of services that is able to
meet the changing needs of our customers throughout each phase of their life
cycle. Their "job" is building long-term relationships with customers through
all market conditions. That means consistently providing the capabilities and
capacity to serve customers as their needs and situations change. During 1998,
the Trust Department made significant strides. They have built high quality
customer relationships based on the trust their customers place in them. At
year-end, fiduciary accounts totaled in excess of $119 million.
There is, of course, a lot of work that goes on behind the scenes that improves
our ability to compete effectively. For example, we are testing and changing
systems to be certain that we will cross the threshold into the next millennium.
Work on Year 2000 compliance is well advanced. Credit for this accomplishment
can be placed squarely on the shoulders of our Y2K committee that is comprised
of executive officers in charge of each functional area of the bank. The
committee is responsible for implementing our Year 2000 plan, and reporting its
progress monthly to the board of directors.
Our success is attributable to an exceptional team of employees, many of whom
are shareholders. They work hard every day to meet and exceed the expectations
of their customers and are determined that Westbank be recognized as a leader in
the financial services industry. The critical link between customer satisfaction
and shareholder value has always been the quality of our employees.
Westbank is focused on a growth momentum. However, size is not a strategy. It is
a statistic; i.e. growth only for the sake of getting bigger cannot be an
objective. Westbank will grow but only in ways that lead to a stronger and more
profitable company.
Corporate vision is nothing without focus. Our focus will be on three strategic
initiatives: Revenue Growth, Cost Control and Asset Management. Westbank will
continue to emphasize the growth of its core business this year. We expect to
build lending and deposit relationships with local customers in a very
competitive market. Westbank has the advantage of being a reliable community
bank that has a well-earned reputation for knowledgeable service by its
experienced staff.
Nineteen Hundred and Ninety-Nine will be a challenging year for us as we strive
to enhance the environment necessary to support and expand a diversified and
profitable financial services company. We will remain intently focused not only
on growth, but also on operational integrity and the effectiveness required to
achieve a predictable, sustainable financial performance. We are confident in
the strategic direction we have chosen and where we expect it to take us
throughout 1999 and beyond.
[PHOTO]
Donald R. Chase
Westbank Corporation and its shareholders have been fortunate over the years to
be well served by a strong management team and Board of Directors. After
thirty-eight years of dedicated service to the Company, Alfred C. Whitaker and
Paul J. McKenna, DMD will retire from the Board of Directors in April of 1999.
Their dedication to Westbank and its shareholders is as strong today as it was
when they, along with a small group of other businessmen founded the Bank in
1961. We would like to take this opportunity to thank them for their leadership
and loyalty. We wish them well in their retirement. We welcome to the Board of
Directors G. Wayne McCary, President and Chief Executive Officer of the Eastern
States Exposition, the sixth largest fair in North America located in West
Springfield, Massachusetts.
We appreciate your loyalty, confidence and support of Westbank Corporation. Your
investment in our Company is foremost in our minds as we plan for the future. We
look forward to the ever-present challenges and the accompanying opportunities
of the twenty-first century.
Sincerely,
/s/ Alfred C. Whitaker /s/ Donald R. Chase
Alfred C. Whitaker Donald R. Chase
Chairman of the Board President and
Chief Executive Officer
3
<PAGE> 6
BUSINESS
Westbank Corporation and Subsidiaries
CORPORATE ORGANIZATION
Westbank Corporation (hereinafter sometimes referred to as "Westbank" or the
"Corporation") is a registered Bank Holding Company organized to facilitate the
expansion and diversification of the business of Park West Bank and Trust
Company (hereinafter sometimes referred to as "Park West" or the "Bank") into
additional financial services related to banking.
PARK WEST BANK AND TRUST COMPANY
As of December 31, 1998, substantially all operating income and net income of
the Corporation are presently accounted for by Park West. Park West is chartered
as a state bank and trust company by the Commonwealth of Massachusetts, is a
member of the Federal Deposit Insurance Corporation ("FDIC"), and is subject to
regulation by the Massachusetts Commissioner of Banks and the FDIC. A full range
of retail banking services is furnished to individuals, businesses, and
nonprofit organizations through thirteen banking offices located in Hampden
County. Such services include a wide range of checking and savings accounts,
loans, safe deposit facilities, and automated teller machines at selected branch
locations.
Park West also provides lending, depository and related financial services to
commercial, industrial, financial, and governmental customers. In the lending
area, these include short and long term loans and revolving credit arrangements,
letters of credit, inventory and accounts receivable financing, real estate
construction lending, and mortgage loans.
Park West also operates a Trust Department providing services normally
associated with holding property in a fiduciary or agency capacity. The value of
the property held by the Trust Department at December 31, 1998 amounted to
$119,797,000 and is not included in the accompanying financial statements since
such items are not assets of the Bank.
EMPLOYEES
As of December 31, 1998 the Corporation and its subsidiaries had the equivalent
of 125 full time officers and staff.
COMPETITION
Westbank's banking, real estate activity and trust services are competitive with
other Massachusetts financial institutions. Its service area is in Western
Massachusetts, primarily Hampden County. Westbank's competitors include other
commercial banks, mutual savings banks, savings and loan associations, credit
unions, consumer finance companies, loan offices, money market funds, and other
financing organizations.
Competition for trust services by major commercial banks is high, with
continuing efforts by those banks to solicit new business. The Trust Department
prides itself as one of the few remaining corporate fiduciaries providing
personal services locally. Insurance companies, mutual savings banks, investment
counseling firms, and other business firms and individuals also offer active
competition for such business.
ACQUISITION OF CARGILL BANCORP, INC.
On July 15, 1998, the Corporation entered into an agreement to acquire Cargill
Bancorp, Inc., which is a Delaware corporation and the holding company for
Cargill Bank, a $47.0 million asset Connecticut chartered stock savings and loan
association headquartered in Putnam, Connecticut.
Under the terms of the agreement, Cargill Bancorp will be merged into Westbank
Corporation. Cargill Bank will retain its local identity and remain a separate
subsidiary of Westbank Corporation. Each share of Cargill Bancorp common stock
will be exchanged for 1.3655 shares of Westbank common stock.
On November 3, 1998, the Corporation filed a registration statement to register
approximately 565,096 shares of common stock in order to facilitate this merger.
Cargill shareholders approved the merger at a shareholders meeting held on
December 16, 1998 and final regulatory approval was received on January 14,
1999.
4
<PAGE> 7
SELECTED CONSOLIDATED FINANCIAL DATA
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
(Dollars in Thousands Except Share Amounts) 1998 1997 1996 1995 1994
---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 25,085 $ 23,156 $ 20,600 $ 20,261 $ 17,046
Interest expense 11,643 10,372 8,758 8,540 6,199
---------- ----------- ---------- ---------- -----------
Net interest income 13,442 12,784 11,842 11,721 10,847
Provision for loan losses 19 190 868 2,690 1,473
Non-interest income 2,244 2,261 2,140 2,917 2,459
Non-interest expense 10,371 9,313 9,272 8,515 10,088
---------- ----------- ---------- ---------- -----------
Income before income taxes 5,296 5,542 3,842 3,433 1,745
Income taxes (benefit) 2,040 2,311 1,594 1,080 (430)
---------- ----------- ---------- ---------- -----------
Net income $ 3,256 $ 3,231 $ 2,248 $ 2,353 $ 2,175
========== =========== ========== ========== ===========
Common share data:
Earnings per share:
Basic $ .86 $ .93 $ .68 $ .74 $ .69
Diluted $ .84 $ .89 $ .66 $ .72 $ .68
Cash dividends declared $ .40 $ .30 $ .24 $ .20
Ending book value $ 7.19 $ 6.63 $ 5.90 $ 5.50 $ 4.89
AT DECEMBER 31:
Total loans -- net $ 259,306 $ 232,415 $ 218,192 $ 197,264 $ 192,677
Total assets 354,973 308,265 284,909 253,777 243,313
Total non-performing assets 928 1,375 2,698 7,904 7,435
Total deposits 299,123 271,560 255,491 227,962 218,563
Total stockholders' equity 27,301 23,751 19,745 17,703 15,344
AVERAGE FOR YEAR:
Loans 250,247 232,529 209,141 197,562 182,676
Assets 335,251 300,996 266,134 253,024 232,922
Deposits 291,852 268,960 237,848 227,952 210,659
Stockholders' equity 25,974 21,491 18,561 16,755 14,722
Weighted shares outstanding - basic 3,767,605 3,487,160 3,285,093 3,181,742 3,132,934
- diluted 3,861,590 3,612,919 3,404,242 3,271,875 3,203,985
SELECTED RATIOS:
Rate of return on average total assets .97% 1.07% .84% .93% .93%
Rate of return on average stockholders equity 12.54% 15.03% 12.11% 14.04% 14.77%
Stockholders' equity to total assets at year end 7.69% 7.70% 6.93% 6.98% 6.31%
Average total stockholders' equity
to average total assets 7.75% 7.14% 6.97% 6.62% 6.32%
Allowance for loan losses to total loans at year end .91% 1.21% 1.12% 1.84% 1.70%
Non-performing loans as a percentage
of total loans at year end .27% .58% 1.07% 3.43% 3.00%
Net charge-offs (recoveries) as a percentage
of average loans .20% (.08)% 1.00% 1.17% .89%
Other real estate owned as a percentage of total assets .06% .05% .12% .51% .64%
</TABLE>
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS
Westbank Corporation and Subsidiaries
Management's discussion of operations and financial position is based on the
selected consolidated financial data and should be read in conjunction with the
consolidated financial statements and notes thereto.
For 1998, the Corporation reported net income of $3,256,000, or $.86 per share
basic and $.84 diluted, after providing $19,000 for loan losses. This compares
to net income for 1997 of $3,231,000, or $.93 per share basic and $.89 diluted.
The Corporation's 1997 earnings reflected a provision for loan losses of
$190,000. Net interest income increased $658,000 from 1997 to 1998.
Non-interest expense amounted to $10,371,000 in 1998 compared to $9,313,000 in
1997, an increase of $1,058,000, or 11%. The increase in operating expenses for
1998 is a direct result of reflecting $400,000 during the fourth quarter of
1998, for merger costs related to the acquisition of Cargill Bancorp, Inc. and
the remaining increase is a result of the overall growth of the Corporation.
Non-interest income was level compared to 1997. During 1998, Trust Department
earnings increased by $33,000 over 1997. Gains on sale of investments and other
real estate declined by $102,000, gains on sale of mortgages totaled $119,000,
while service charges on deposit accounts and other non-interest income declined
by $65,000 compared to 1997. Income taxes in 1998 totaled $2,040,000, a decrease
of $271,000 over 1997.
At December 31, 1998, the Corporation's total assets were $354,973,000, an
increase of $46,708,000 or 15%, from $308,265,000 at year end 1997. The higher
level of assets resulted primarily through an increase in net loans, investments
and federal funds totaling $45,087,000 funded by the growth in deposits.
Non-performing assets amounted to $928,000 or .26% of total assets at December
31, 1998, compared with $1,375,000 or .45% at the end of 1997.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
imposes significant regulatory restrictions and requirements on banking
institutions insured by the FDIC and their holding companies. FDICIA established
capital categories into which financial institutions are placed based on capital
level. Each capital category establishes different degrees of regulatory
restrictions which can apply to a financial institution. As of December 31,
1998, Park West's 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.
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
COMPONENTS OF CAPITAL
The following table presents the Corporation's components of capital as of
December 31. The table also presents the ratio of capital to total assets.
(Dollars in Thousands) 1998 1997 1996
------- ------- --------
Stockholders' Equity
Common stock $ 7,597 $ 7,163 $ 6,694
Additional paid-in-capital 10,034 8,819 7,633
Retained earnings 9,461 7,708 5,517
Accumulated other
comprehensive income 209 61 (99)
------- ------- --------
Total Capital $27,301 $23,751 $ 19,745
Ratio of capital
to average total assets 7.64% 7.55% 7.17%
Regulatory risk-based capital requirements take into account the different risk
categories of banking organizations by assigning risk weights to assets and the
credit equivalent amounts of off-balance sheet exposures. In addition, capital
is divided into two tiers. In this Corporation, Tier 1 includes the common
stockholders' equity; total risk-based, or supplementary capital, includes not
only the equity, but also a portion of the allowance for loan losses.
The following are the Corporation's risk-based capital ratios at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tier 1 risk-based capital (minimum required 4%) 11.77% 11.44% 10.43%
Total risk-based capital (minimum required 8%) 12.80% 12.71% 11.69%
</TABLE>
[STOCKHOLDERS' EQUITY BAR GRAPH]
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Stockholders' Equity $27,301 $23,751 $19,745
</TABLE>
DISCUSSION OF MARKET RISK
Market risk is the risk of loss due to adverse changes in market prices and
rates. The management of this risk, coupled with directives to build shareholder
value and profitability, is an integral part of the Corporation's overall
operating strategy. The Corporation's approach to risk management, primarily
interest rate risk management, is quite basic and concentrates on fundamental
strategies to restructure the balance sheet and composition of assets and
liabilities. Since the Corporation does not utilize interest rate futures, swaps
or options transactions, its asset/liability profile is not complex. It reflects
a simple approach to managing risk through the use of fixed and adjustable rate
loans, rate insensitive checking accounts as well as a combination of fixed and
variable rate deposit products. Bank policy includes required limits on the
sensitivity of net interest income under various interest rate scenarios.
The Bank seeks to control its interest rate risk exposure in a manner that will
allow for adequate levels of earnings and capital over a range of possible
interest rate environments. The Bank has adopted formal policies and practices
to monitor and manage interest rate risk exposure. As part of this effort the
Bank actively manages interest rate risk through the use of a simulation model
which measures the sensitivity of future net interest income to changes in
interest rates. In addition, the Bank regularly monitors interest rate
sensitivity through gap analysis, which measures the terms to maturity or next
repricing date of interest earning assets and interest bearing liabilities.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
On a quarterly basis, an interest rate risk exposure compliance report is
prepared and presented to the Bank's Board of Directors. This report presents an
analysis of the change in net interest income resulting from an increase or
decrease in the level of interest rates. All changes are measured as percentage
changes from the projected net interest income in the flat rate scenario. The
calculated estimates of change in net interest income are compared to current
limits established by management and approved by the Board of Directors. The
following is a summary of the interest rate exposure report as of December 31,
1998 and 1997:
<TABLE>
Change in Interest Rates Percentage Change in
(In Basis Points) Net Interest Income
- - ------------------------ ----------------------
1998 1997
------- ------
<S> <C> <C>
+200 (3.81)% (3.2)%
Level 0% 0%
-200 (3.63)% 3.7%
</TABLE>
The change in net interest income between 1998 and 1997 when rates declined 200
basis points is primarily the result of the current low interest rate
environment. In the current year many deposit rates were not able to be
decreased by the full 200 basis points. The inability to reduce deposit rates
would cause net interest income to decline during a falling interest rate
environment despite the Corporation being liability sensitive.
The model utilized to create the results presented above makes various estimates
at each level of interest rate change regarding cash flows from principal
repayments on loans and mortgage-backed securities and/or call activity on
investment securities. Actual results could differ significantly from these
estimates which would result in significant differences in the calculated
projected change.
In order to reduce the exposure to interest rate fluctuations, the Corporation
has developed strategies to manage its liquidity, shorten the effective
maturities of certain interest-earning assets and increase the effective
maturities of certain interest bearing liabilities. The Bank has focused its
residential lending on a combination of fixed and adjustable rate mortgages.
Commercial loans, commercial mortgages and consumer lending focus on adjustable
and short term loans. The Bank also attempts to maintain and/or increase its
savings and transaction accounts which are considered relatively insensitive to
changes in interest rates.
The Corporation also measures sensitivity to changes in interest rates using
interest rate sensitivity gap analysis which is the difference between the cash
flow amounts of interest-sensitive assets and liabilities that will be
refinanced (or repriced) during a given period. For example, if the asset amount
to be repriced exceeds the corresponding liability amount for a certain day,
month, year, or longer period, the institution is in an asset-sensitive gap
position. In this situation, net interest income would increase if market
interest rates rose or decrease if market interest rates fell. If,
alternatively, more liabilities than assets will reprice, the institution is in
a liability-sensitive position. Accordingly, net interest income would decline
when rates rise and increase when rates fall. Also, these examples assume that
interest-rate changes for assets and liabilities are of the same magnitude,
whereas actual interest-rate changes generally differ in magnitude for assets
and liabilities.
The following table sets forth the distribution of the repricing of the
Corporation's earning assets and interest bearing liabilities as of December 31,
1998, the interest rate sensitivity gap, (i.e., interest rate sensitive assets
less interest rate sensitive liabilities), the cumulative interest rate
sensitivity gap, the interest rate sensitivity gap ratio and the cumulative
interest rate sensitivity gap ratio. The table also sets forth the time periods
in which earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. However, the table does not
necessarily indicate the impact of general interest rate movements on the net
interest margin since the repricing of various categories of assets and
liabilities is subject to competitive pressures and the needs of the Bank's
customers. In addition, various assets and liabilities indicated as repricing
within the same period may in fact reprice at different times within such period
and at different rates.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Over Three Over One Over
Months Months to Year to Five
(Dollars in Thousands) or Less A Year Five Years Years Total
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Securities including
mortgage-backed securities $ 2,835 $ 1,493 $ 3,692 $ 68,397 $ 76,417
Interest bearing cash 292 292
Loans 47,025 32,454 96,251 85,955 261,685
Federal funds sold 48 48
-------- -------- --------- -------- --------
50,200 33,947 99,943 154,352 338,442
INTEREST BEARING LIABILITIES
Savings deposits 4,291 38,618 42,909
NOW Accounts 1,846 16,609 18,455
Money market accounts 29,045 29,045
Negotiated rate certificates 12,777 8,439 3,373 24,589
Other time deposits 36,521 68,022 30,302 134,845
Borrowed funds 20,307 7,000 27,307
-------- -------- --------- -------- --------
$ 98,650 $ 82,598 $ 95,902 $ $277,150
======== ======== ========= ======== ========
Interest Rate
Sensitivity Gap $(48,450) $(48,651) $ 4,041 $154,352 $ 61,292
Cumulative Interest Rate
Sensitivity Gap $(48,450) $(97,101) $ (93,060) $ 61,292
Interest Rate
Sensitivity Gap Ratio (14.32)% (14.37)% 1.19% 45.61% 18.11%
Cumulative Interest Rate
Sensitivity Gap Ratio (14.32)% (28.69)% (27.50)% 18.11%
</TABLE>
The presentation of a run off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $4,291,000 and
$1,846,000, respectively, included in the three month to one year category and
the remainder placed in the one to five year category of the interest bearing
liabilities.
Westbank seeks to manage the mix of asset and liability maturities to control
the effect of changes in the general level of interest rates on net interest
income. In periods of rising interest rates, Westbank's negative interest rate
sensitivity gap as to earning assets and interest-bearing liabilities maturing
in less than one year may cause a diminution of Westbank's income;
correspondingly, in periods of declining interest rates, a negative interest
rate sensitivity gap may provide additional income. Except for its effect on the
general level of interest rates, inflation does not have a material impact on
Westbank's earnings due to the rate of variability and short-term maturities of
its earning assets.
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
DISTRIBUTION OF ASSETS, LIABILITIES AND
STOCKHOLDERS' EQUITY - INTEREST RATES AND INTEREST DIFFERENTIAL
The following table presents the condensed average balance sheets for 1998, 1997
and 1996. The total dollar amount of interest income from earning assets and the
resultant yields are calculated on a taxable equivalent basis. The interest paid
on interest-bearing liabilities, expressed both in dollars and rates, is shown
in the table:
<TABLE>
<CAPTION>
1998 1997
AVERAGE AVERAGE
INTEREST YIELD/ INTEREST YIELD/
AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE
(Dollars in Thousands) BALANCE EXPENSE PAID BALANCE EXPENSE PAID
----------- ----------- ------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury $ 3,663 $ 221 6.03% $ 6,873 $ 424 6.17%
Federal agencies 57,202 3,689 6.45 39,476 2,627 6.65
Other securities 1,348 87 6.45 1,807 108 5.98
----------- ----------- ------- ----------- ----------- --------
Total securities 62,213 3,997 6.42 48,156 3,159 6.56
----------- ----------- ------- ----------- ----------- --------
Interest-bearing cash and
temporary investments 122 6 4.92 88 7 7.95
----------- ----------- ------- ----------- ----------- --------
Loans: (a)
Commercial 40,652 3,751 9.23 37,375 3,586 9.59
Real estate 180,068 14,583 8.10 169,892 14,117 8.31
Consumer 29,527 2,382 8.07 25,262 2,032 8.04
----------- ----------- ------- ----------- ----------- --------
Total loans 250,247 20,716 8.28 232,529 19,735 8.33
----------- ----------- ------- ----------- ----------- --------
Federal funds sold 6,637 366 5.51 4,800 255 5.31
----------- ----------- ------- ----------- ----------- --------
Total earning assets 319,219 $ 25,085 7.86% 285,573 $ 23,156 8.11%
----------- ----------- ------- ----------- ----------- --------
Allowance for loan losses (2,686) (2,628)
Cash and due from banks 9,695 9,776
Other assets 9,023 8,275
----------- ----------- ------- ----------- ----------- --------
Total assets $ 335,251 $ 300,996
=========== =========== ======= =========== =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings $ 39,950 $ 1,144 2.86% $ 37,060 $ 936 2.53%
Money market 31,041 1,181 3.80 16,625 560 3.37
Negotiated rate certificates 22,397 1,086 4.85 18,032 894 4.96
Other time deposits 151,392 7,617 5.03 152,709 7,696 5.04
----------- ----------- ------- ----------- ----------- --------
Total time deposits 244,780 11,028 4.51 224,426 10,086 4.49
Borrowed funds 16,186 615 3.80 8,989 286 3.18
----------- ----------- ------- ----------- ----------- --------
Total interest-bearing liabilities 260,966 11,643 4.46 233,415 10,372 4.44
Demand deposits 47,071 44,534
Other liabilities 1,240 1,556
Stockholder's equity 25,974 21,491
----------- ----------- ------- ----------- ----------- --------
Total liabilities and
stockholders' equity $ 335,251 $ 300,996
=========== =========== ======= =========== =========== ========
Net interest income $ 13,442 $ 12,784
Yield spread 3.40% 3.67%
=========== =========== ======= =========== =========== ========
Net Yield on earning assets 4.21% 4.48%
=========== =========== ======= =========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
1996
AVERAGE
INTEREST YIELD/
AVERAGE INCOME/ RATE
(Dollars in Thousands) BALANCE EXPENSE PAID
----------- ----------- -------
<S> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury $ 8,360 $ 535 6.40%
Federal agencies 24,625 1,647 6.69
Other securities 2,465 159 6.45
----------- ----------- -------
Total securities 35,450 2,341 6.60
----------- ----------- -------
Interest-bearing cash and
temporary investments 853 70 8.20
----------- ----------- -------
Loans: (a)
Commercial 34,865 3,285 9.42
Real estate 154,501 12,941 8.38
Consumer 19,775 1,716 8.68
----------- ----------- -------
Total loans 209,141 17,942 8.58
----------- ----------- -------
Federal funds sold 4,845 247 5.10
----------- ----------- -------
Total earning assets 250,289 $ 20,600 8.23%
----------- ----------- -------
Allowance for loan losses (3,189)
Cash and due from banks 9,667
Other assets 9,367
----------- ----------- -------
Total assets $ 266,134
=========== =========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings $ 33,802 $ 749 2.21%
Money market 13,682 362 2.65
Negotiated rate certificates 16,117 802 4.98
Other time deposits 131,348 6,590 5.02
----------- ----------- -------
Total time deposits 194,949 8,503 4.36
Borrowed funds 8,603 255 2.96
----------- ----------- -------
Total interest-bearing liabilities 203,552 8,758 4.30
Demand deposits 42,898
Other liabilities 1,123
Stockholder's equity 18,561
----------- ----------- -------
Total liabilities and
stockholders' equity $ 266,134
=========== =========== =======
Net interest income $ 11,842
Yield spread 3.93%
=========== =========== =======
Net Yield on earning assets 4.73%
=========== =========== =======
</TABLE>
(a) Average loan balances above include non-accrual loans. When a loan is
placed in non-accrual status, interest income is recorded to the extent
actually received in cash or is applied to reduce principal.
During 1998, the yield spread declined to 3.40% from 3.67% in 1997, down 27
basis points. The Corporation's net interest margin decreased during 1998 to
4.21% from 4.48% in 1997, a decrease of 27 basis points.
During 1997, the yield spread declined to 3.67% from 3.93% in 1996, down 26
basis points. The Corporation's net interest margin decreased during 1997 to
4.48% from 4.73% in 1996, a decrease of 25 basis points. The section titled
Rate/Volume Analysis further describes the change in yields.
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
RATE/VOLUME ANALYSIS OF INTEREST MARGIN ON EARNING ASSETS
The following table sets forth, for each major category of interest earning
assets and interest bearing liabilities, the dollar amounts of interest income
(calculated on a taxable equivalent basis) and interest expense and changes
therein for 1998 as compared with 1997 and 1997 compared with 1996.
<TABLE>
<CAPTION>
1998 Compared With 1997
--------------------------------------------------
Increase Due to*
(Dollars in Thousands) 1998 1997 (Decrease) Volume Rate
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Interest earned:
Securities:
U.S. Treasury $ 221 $ 424 $ (203) $ (194) $ (9)
Federal agencies 3,689 2,627 1,062 1,145 (83)
Other securities 87 108 (21) (29) 8
Interest-bearing cash 6 7 (1) 2 (3)
Loans:
Commercial 3,751 3,586 165 305 (140)
Real estate 14,583 14,117 466 830 (364)
Consumer 2,382 2,032 350 343 7
Federal funds sold 366 255 111 100 11
------- ------- ------- ------- --------
25,085 23,156 1,929 2,502 (573)
------- ------- ------- ------- --------
Interest expense:
Savings 1,144 936 208 76 132
Money market 1,181 560 621 541 80
Negotiated rate certificates 1,086 894 192 213 (21)
Other time deposits 7,617 7,696 (79) (64) (15)
Borrowed funds 615 286 329 265 64
------- ------- ------- ------- --------
11,643 10,372 1,271 1,031 240
------- ------- ------- ------- --------
$13,442 $12,784 $ 658 $ 1,471 $ (813)
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
1997 Compared With 1996
-----------------------------------------------
Increase Due to*
(Dollars in Thousands) 1997 1996 (Decrease) Volume Rate
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest earned:
Securities:
U.S. Treasury $ 424 $ 535 $ (111) $ (93) $ (18)
Federal agencies 2,627 1,647 980 990 (10)
Other securities 108 159 (51) (40) (11)
Interest-bearing cash 7 70 (63) (60) (3)
Loans:
Commercial 3,586 3,285 301 240 61
Real estate 14,117 12,941 1,176 1,284 (108)
Consumer 2,032 1,716 316 450 (134)
Federal funds sold 255 247 8 (2) 10
------- ------- ------- ------- -------
23,156 20,600 2,556 2,769 (213)
------- ------- ------- ------- -------
Interest expense:
Savings 936 749 187 74 113
Money market 560 362 198 87 111
Negotiated rate certificates 894 802 92 95 (3)
Other time deposits 7,696 6,590 1,106 1,079 27
Borrowed funds 286 255 31 11 20
------- ------- ------- ------- -------
10,372 8,758 1,614 1,346 268
------- ------- ------- ------- -------
$12,784 $11,842 $ 942 $ 1,423 $(481)
======= ======= ======= ======= =======
</TABLE>
* The dollar amount of changes in interest income and interest expense
attributable to changes in rate and volume has been allocated between rate
and volume based on changes in rates times the prior year's volume and the
changes in volume times the prior year's rate.
Net interest income for 1998 increased to $13,442,000, up 5% from $12,784,000 in
1997. A 12% increase in average earning assets and a 25 basis point decline in
average rate of return resulted in an increase in volume of $2,502,000 and a
decrease in rate of $573,000. An increase of 12% in average interest bearing
liabilities and a 12 basis point increase in average rate of interest paid
contributed to an increase in volume of $1,031,000 and an increase in rate of
$240,000.
Net interest income for 1997 increased to $12,784,000, up 8% from $11,842,000 in
1996. A 14% increase in average earning assets and a 12 basis point decline in
average rate of return resulted in an increase in volume of $2,769,000 and a
decrease in rate of $213,000. An increase of 15% in average interest bearing
liabilities and a 14 basis point increase in average rate of interest paid
contributed to an increase in volume of $1,346,000 and an increase in rate of
$268,000.
LIQUIDITY
Liquidity management requires close scrutiny of the mix and maturity of deposits
and borrowings and short-term investments. Cash and due from banks, federal
funds sold, investment securities and mortgage-backed securities, as compared to
deposits, are used by Westbank to compute its liquidity on a daily basis as
adjusted for regulatory purposes. Westbank's ratio of such assets to total
deposits was 21.35% for 1998 compared to 20.74% for 1997. In addition, Westbank
is subject to Regulation D of the Federal Reserve Bank (FRB), which requires
depository institutions to maintain reserve balances on deposit with the FRB
based on certain average depositor balances. Westbank is in compliance with
Regulation D. Management of Westbank believes that its current liquidity is
sufficient to meet current and anticipated funding needs. Refer to Note 7 in the
Notes To Consolidated Financial Statements for a discussion of the Corporation's
external sources of liquidity.
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
INVESTMENT PORTFOLIO
Refer to Note 2 in the Notes To Consolidated Financial Statements of this report
which covers the maturity distribution and market values at December 31, 1998 of
the securities portfolio. The following table shows the amortized cost (in
thousands) of the Corporation's securities held to maturity at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U. S. Government obligations $ 998 $ 4,246 $ 5,998
Federal agency obligations 24,692 30,081 13,827
Mortgage-backed securities 130 176 216
Other debt securities 1,254
------- ------- -------
Amortized cost $25,820 $34,503 $21,295
======= ======= =======
</TABLE>
The following table shows the fair value (in thousands) of the Corporation's
securities available for sale at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
U. S. Government obligations $ 928 $ 2,058 $ 1,990
Federal agency obligations 25,611 3,486 2,465
Mortgage-backed securities 22,652 13,219 8,807
Equity securities 1,406 1,325 1,125
-------- -------- -------
50,597 20,088 14,387
Gross unrealized (gain) loss on
securities available for sale (355) (105) 170
-------- -------- -------
Amortized cost $ 50,242 $ 19,983 $14,557
======== ======== =======
</TABLE>
The following table shows weighted average yields and maturity distribution of
debt securities at December 31, 1998:
<TABLE>
<CAPTION>
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
------- -------- ------- ---------- -------- --------- -------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government
obligations 5.61% $1,428 6.25% $ 498 5.76% $ 1,926
Federal agency
obligations 5.19 1,499 6.52 3,194 6.19% $42,578 6.41% $ 3,000 6.45 50,271
Mortgage-backed
securities 8.24 130 6.57 22,358 6.58 22,488
------- -------- ------- ---------- -------- --------- -------- ------ ------- ---------
Total debt
Securities 5.40% $2,927 6.50% $3,692 6.20% $42,708 6.58% $25,358 6.47% $74,685
======= ======== ======= ========== ======== ========= ======== ====== ======= =========
</TABLE>
The weighted average yield has been computed by dividing annualized interest
income, including the accretion of discount and the amortization of premiums, by
the book value of securities outstanding.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
LOAN PORTFOLIO
The following table sets forth the classification (in thousands) of the
Corporation's loans by major category at December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial $ 41,348 $ 41,031 $ 35,523 $ 35,116 $ 34,306
--------- --------- --------- --------- ---------
Real Estate:
Construction 5,596 5,249 6,071 7,550 8,517
Residential (1-4 family) 138,618 120,504 121,132 99,321 81,333
Residential (5 or more) 856 1,828 1,908 2,632 4,034
Commercial properties 56,942 50,931 41,261 47,566 58,310
--------- --------- --------- --------- ---------
Total Real Estate 202,012 178,512 170,372 157,069 152,194
--------- --------- --------- --------- ---------
Consumer 18,632 15,991 15,093 8,896 9,383
--------- --------- --------- --------- ---------
Lease financing 230 352
--------- --------- --------- --------- ---------
Gross loans 261,992 235,534 220,988 201,311 196,235
Deferred loan origination
fees-net of costs (307) (271) (315) (340) (233)
--------- --------- --------- --------- ---------
Total Loans 261,685 235,263 220,673 200,971 196,002
Allowance for loan
losses (2,379) (2,848) (2,481) (3,707) (3,325)
--------- --------- --------- --------- ---------
Net loans $ 259,306 $ 232,415 $ 218,192 $ 197,264 $ 192,677
========= ========= ========= ========= =========
</TABLE>
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 area. The
aggregate amount of loans to executive officers, directors and organizations
with which they are associated amounted to $2,660,000 or 9.7% of stockholders'
equity as of December 31, 1998 compared to $2,043,000 or 8.6% as of December 31,
1997.
The following table provides the maturity distribution and sensitivity to
changes in interest rates of commercial loans and commercial real estate
construction loans at December 31, 1998:
[LOAN MIX PIE CHART]
(IN THOUSANDS)
<TABLE>
<CAPTION>
LOAN TYPE AMOUNT
<S> <C>
Commercial Real Estate $ 63,394
Residential Real Estate 138,618
Commercial Loans 41,348
Consumer Loans 18,832
</TABLE>
<TABLE>
<CAPTION>
12 Months 1 - 5 After
(Dollars in Thousands) or Less Years 5 Years Total
------- ------ ------ -------
<S> <C> <C> <C> <C>
Commercial $32,308 $7,322 $1,718 $41,348
Commercial real estate-construction 5,596 5,596
------- ------ ------ -------
Totals $37,904 $7,322 $1,718 $46,944
======= ====== ====== =======
</TABLE>
Of the commercial loans which mature beyond one year approximately $4,147,000
have fixed rates and the remaining $4,893,000 are floating rate loans.
In the normal course of business, various commitments and contingent liabilities
are outstanding, such as guarantees, standby letters of credit, commitments to
extend credit and various financial instruments with off-balance-sheet risk that
are not reflected in the financial statements. The most significant of these are
commitments to grant loans and commitments to advance funds under existing loan
agreements which were $8,740,000 and $31,055,000, respectively, at December 31,
1998 and $9,629,000 and $29,210,000, respectively, in 1997. See further
discussion in Note 13 to the Consolidated Financial Statements.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
LOAN LOSS EXPERIENCE
The provision for loan losses is an amount added to the allowance against which
loan losses are charged. The provision for losses is dependent on actual net
write-offs and an evaluation as to the collectibility of the loan portfolio
taking into consideration such factors as the financial condition of individual
borrowers, historical loss experience with respect to various portfolio
segments, current and near term economic conditions, and the size of the
portfolio. Based on these reviews, the allowance for loan losses at December 31,
1998, is deemed to be adequate by management. In the determination of the
allowance for loan losses management obtains independent appraisals for a
significant number of properties. Management has also retained an independent
loan review consultant to provide advice on the adequacy of the loan loss
allowance.
The following table sets forth the historical relationship among the average
amount of loans outstanding, the allowance for loan losses, provision for loan
losses charged to operating expenses, losses charged off, recoveries and
selected ratios:
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in Thousands) 1998 1997 1996 1995 1994
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,848 $ 2,481 $ 3,707 $ 3,325 $ 3,472
Provision charged to expense 19 190 868 2,690 1,473
-------- --------- -------- -------- --------
2,867 2,671 4,575 6,015 4,945
-------- --------- -------- -------- --------
Charge-offs:
Loans secured by real estate 368 337 1,688 2,129 1,291
Construction/land development 190
Commercial and
industrial loans 153 190 503 230 480
Consumer loans 43 106 82 119 91
Lease financing receivables 5 7
-------- --------- -------- -------- --------
564 633 2,463 2,483 1,869
-------- --------- -------- -------- --------
Recoveries:
Loans secured by real estate 37 354 324 24 25
Construction/land developing 14 75
Commercial and
industrial loans 30 444 10 45 204
Consumer loans 9 11 19 25 14
Lease financing receivables 1 2 6 6
-------- --------- -------- -------- --------
76 810 369 175 249
-------- --------- -------- -------- --------
Net charge-offs (recoveries) 488 (177) 2,094 2,308 1,620
-------- --------- -------- -------- --------
Balance at end of year $ 2,379 $ 2,848 $ 2,481 $ 3,707 $ 3,325
======== ========= ======== ======== ========
Average loans outstanding $250,247 $ 232,529 $209,141 $197,562 $182,676
======== ========= ======== ======== ========
Net charge-offs (recoveries) as a percentage
of average loans .20% (.08)% 1.00% 1.17% .89%
Net charge-offs (recoveries) as a percentage of
the allowance at January 1 17.13% (7.13)% 56.49% 69.41% 46.66%
Allowance as a percentage of total
loans at December 31 .91% 1.21% 1.12% 1.84% 1.70%
Allowance as a percentage of
non-performing loans
at December 31 337.93% 232.30% 105.08% 53.76% 56.52%
</TABLE>
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
Allocation of the balance as of December 31 of the allowance for loan losses
applicable to:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996 1995 1994
==== ==== ==== ==== ====
% OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by
real estate $1,307 74.97% $1,595 73.53% $1,582 74.31% $2,717 74.23% $2,496 73.18%
Construction/land
development 70 2.14 79 2.23 91 2.75 150 3.76 127 4.35
Commercial and industrial
loans 554 15.78 615 17.44 656 16.10 687 17.47 514 17.50
Consumer loans 198 7.11 189 6.80 152 6.84 89 4.43 125 4.79
Lease financing receivables 64 .11 63 .18
Unallocated 250 370
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$2,379 100% $2,848 100% $2,481 100% $3,707 100% $3,325 100%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is the combination of a target reserve and general reserve
allocation. Quarterly, based on an internal review of the loan portfolio, the
Corporation identifies required reserve allocations targeted to recognized
problem loans that, in the opinion of management, have potential loss exposure
or questions relative to the adequacy of the collateral on these same loans. In
addition, the Corporation allocates a general reserve against the remainder of
the loan portfolio.
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:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Loans on a non-accrual basis $ 473 $ 1,042 $ 2,079 $ 6,180 $ 4,890
========= ========= ========= ========= =========
Non-accrual loans as a percentage
of total net loans outstanding .18% .45% .95% 3.13% 2.54%
Non-accrual loans as a percentage
of total assets .13% .34% .73% 2.44% 2.01%
Loans contractually past due 90
days or more and still accruing $ 231 $ 184 $ 282 $ 277 $ 492
</TABLE>
The gross amount of interest that would have been accrued at the original
contract rate on loans on a non-accrual basis (in thousands) was $22, $59, $178,
$296, and $399, for 1998, 1997, 1996, 1995, and 1994, respectively. Interest
income included in the results of operations relating to these loans was $20,000
in 1994. The decrease in non-accrual loans from 1997 is attributable to the
continued resolution of non-performing loans throughout 1998. During the second
quarter of 1998 the Corporation sold a pool of non-performing loans. The
decrease in the allowance for loan losses is attributable to charging-off
previously reserved amounts directly related to the sale of non-performing loans
referred to above.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
The Bank evaluates each impaired loan to determine the appropriate income
recognition practice. Generally, income is recorded only on a cash basis for
impaired loans. Interest income recognized during 1998 and 1997 on impaired
loans was not significant. At December 31, 1998 and 1997, the recorded
investment in impaired loans was $473,000 and $960,000 respectively, for which
no additional specific allowance for loan losses was recorded. For the twelve
months ended December 31, 1998, the average recorded investment in impaired
loans was $487,000 compared to $1,272,000 for 1997.
RESTRUCTURED LOANS
A restructured loan is one for which the Corporation has modified the
contractual terms to provide a reduction in the rate of interest and, in most
instances, an extension of payments of principal or interest or both because of
a deterioration in the financial position of the borrower. Restructured loans
modified prior to January 1, 1995 which are performing in accordance with their
new terms are not included in non-accrual loans unless concern exists as to the
ultimate collection of principal or interest and are not considered to be
impaired. Those entered into after January 1, 1995 are considered to be impaired
as described in Note 1 to the financial statements. Restructured loans, which
are classified as accruing loans, amounted to $439,000 in 1995 and $501,000 in
1994. Interest income reduction because of restructuring was not significant for
1995 and 1994.
[NON-PERFORMING ASSETS BAR CHART]
<TABLE>
<CAPTION>
NON-PERFORMING
ASSETS
--------------
(In Thousands)
<S> <C>
1998 $ 928
1997 1,375
1996 2,698
1995 7,904
1994 7,435
</TABLE>
OTHER REAL ESTATE OWNED
The following table sets forth information regarding other real estate owned at
December 31:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Other real estate owned - net $ 224 $ 149 $ 337 $ 1,300 $ 1,552
Other real estate owned as a
percentage of total assets .06% .05% .12% .51% .64%
</TABLE>
DEPOSITS
The following table sets forth the average amounts of various classifications of
deposits:
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars in Thousands) AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- ----- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Savings $ 39,950 2.86% $ 37,060 2.53% $ 33,802 2.21%
Money market 31,041 3.80 16,625 3.37 13,682 2.65
Negotiated rate certificates 22,397 4.85 18,032 4.96 16,117 4.98
Other time deposits 151,392 5.03 152,709 5.04 131,348 5.02
--------- ----- --------- ------ --------- ------
244,780 4.51% 224,426 4.49% 194,949 4.36%
Demand deposits 47,071 44,534 42,898
--------- --------- --------
$291,851 $268,960 $237,847
========= ========= ========
</TABLE>
Certificates of deposits of $100,000 and over at December 31, 1998 had the
following maturities:
<TABLE>
<CAPTION>
3 MONTHS 3 TO 6 6 TO 12 1 YEAR TO
(Dollars in Thousands) OR LESS MONTHS MONTHS 5 YEARS TOTAL
<S> <C> <C> <C> <C> <C>
Totals $12,776 $4,349 $4,090 $3,374 $24,589
</TABLE>
16
<PAGE> 19
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:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ --------
<S> <C> <C> <C>
Return on average total assets .97% 1.07% .84%
Return on average stockholders' equity 12.54 15.03 12.11
Average stockholders' equity to average total assets 7.75 7.14 6.97
Dividend payout ratio 46.16 32.19 34.88
</TABLE>
BORROWINGS
The following table summarizes borrowings. Average interest rates during each
year were computed by dividing total interest expense by the average amount
borrowed:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at year end $27,307 $11,884 $ 8,769
Average amount outstanding 16,186 8,989 8,603
Maximum amount outstanding at any month-end 27,307 13,536 12,294
Average interest rate for the year 3.80% 3.18% 2.95%
Average interest rate on year-end balance 3.79 3.15 2.89
</TABLE>
[RETURN ON ASSETS BAR GRAPH]
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
RETURN ON ASSETS 0.97% 1.07% 0.84%
</TABLE>
STATEMENTS OF INCOME
In the following sections of Management's Discussion and Analysis of the
Statements of Income, the comparative results of 1998, 1997 and 1996 will be
covered in greater detail. As of December 31, 1998, the principal earning assets
of the holding company consist of a commercial bank, Park West Bank and Trust
Company. Noteworthy are the effects of sources of income from earning assets and
expense of interest-bearing liabilities. Presented below is a comparative
summary of percentages of increases and decreases for the three years ended
December 31, 1998. The significant changes are discussed in the analysis that
follow the summary.
<TABLE>
<CAPTION>
Percentage of
increase (decrease)
-------------------
1998 1997
Over Over
(Dollars in Thousands) 1998 1997 1996 1997 1996
-------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Net interest income $13,442 $12,784 $11,842 5.15% 7.95%
Provision for loan losses 19 190 868 (90.00) (78.11)
Non-interest income 2,244 2,261 2,140 (.75) 5.65
Non-interest expense 10,371 9,313 9,272 11.36 .44
Income taxes 2,040 2,311 1,594 (11.73) 44.98
-------- -------- -------- ------- -----
Net Income $ 3,256 $ 3,231 $ 2,248 .77% 43.73%
======== ======== ======== ====== ======
</TABLE>
INTEREST INCOME
Westbank's earning assets include a diverse portfolio of interest earning
instruments ranging from Westbank's core business of loan extensions to
interest-bearing securities issued by federal, state and municipal authorities.
These earning assets are financed through a combination of interest-bearing and
interest-free sources.
Total interest income for 1998 amounted to $25,085,000 as compared to
$23,156,000 for 1997 and $20,600,000 for 1996. For 1998 this represents an
increase of $1,929,000 or 8% over 1997, while interest income increased by
$2,556,000 or 12% in 1997 versus 1996. The increase in 1998 is the result of an
increase in average earning assets of $33,646,000 or 12% offset by a decrease of
25 basis points in average earning interest rate. The increase in 1997 over 1996
is the result of an increase in average earning assets of $35,284,000 offset by
a 12 basis point decrease in average earning interest rate.
INTEREST EXPENSE
Interest expense for 1998 on deposits and borrowings amounted to $11,643,000 as
compared to $10,372,000 in 1997 and $8,758,000 for 1996. Interest expense
increased by $1,271,000 or 12% during 1998 compared to 1997 and 1997 interest
expense increased by $1,614,000 or 18% versus 1996. The 1998 increase is the
result of an increase in average interest bearing
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
liabilities of $27,551,000 and a 2 basis point increase in the average rate of
interest paid compared to 1997. The increase in interest expense during 1997
versus 1996 is the result of an increase of average interest bearing liabilities
of $29,863,000 combined with a 14 basis point increase in average interest rate
paid.
NET INTEREST INCOME
Net interest income, the most significant component of earnings, is the amount
by which the interest generated by assets exceeds the interest expense on
liabilities. Westbank's management analyzes its performance by utilizing the
concepts of interest rate spread and net yield on earning assets. The interest
rate spread represents the difference between the yield on earning assets and
interest paid on interest-bearing liabilities. The net yield on earning assets
is the difference between the rate of interest on earning assets and the
effective rate paid on all funds, interest-bearing liabilities, as well as
interest-free sources (primarily demand deposits and stockholders' equity).
The following table sets forth Westbank's net interest income:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Total interest income $25,085 $23,156 $20,600
Total interest expense 11,643 10,372 8,758
------- ------- -------
Net interest income $13,442 $12,784 $11,842
======= ======= =======
</TABLE>
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.
[NET INTEREST INCOME BAR GRAPH]
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net interest income $13,442 $12,784 $11,842
</TABLE>
PROVISION FOR LOAN LOSSES
The 1998 provision for loan losses totaled $19,000 compared with $190,000 in
1997, a decrease of 90%. During 1997, the provision decreased by $678,000 versus
1996 representing a decrease of 78%. The decrease in the provision for loan
losses during 1998 is directly attributable to the decrease in non-performing
loans and the overall credit quality of the Bank's loan portfolio. A full
discussion appears previously under the headings of LOAN LOSS EXPERIENCE and
NON-PERFORMING ASSETS.
NON-INTEREST INCOME
Income from sources other than interest was $2,244,000 in 1998, a decrease of
$17,000 from the prior year and an increase of $104,000 versus 1996.
Non-interest income for 1998 reflects an increase in Trust Department earnings
of $33,000, a decrease in service charges on deposit accounts and other
non-interest income of $65,000 and increases from the gain on sale of
investments, other real estate and mortgages totaling $15,000 compared to 1997.
NON-INTEREST EXPENSE
The components of other operating expenses at December 31 are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Salaries and benefits $ 5,115 $4,730 $4,376
Occupancy 643 633 648
Other real estate
owned expenses and provision 58 63 484
Other non-interest expense 4,555 3,887 3,764
------- ------ ------
$10,371 $9,313 $9,272
======= ====== ======
</TABLE>
Overall non-interest expense increased during 1998 by $1,058,000 versus 1997 and
$1,099,000 compared to 1996. During 1998, salaries and benefits increased by
$385,000 attributable to overall corporate growth and the staff requirements for
the addition of two new branch offices during 1998. Occupancy remained level
with 1997. Finally, other non-interest expense and depreciation and amortization
expense increased in 1998 by $668,000, the result of the recognition of
approximately $400,000 of merger expense related to the acquisition of Cargill
Bancorp, Inc. combined with overall corporate growth during 1998.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
INCOME TAXES
For the year ended December 31, 1998 Westbank Corporation recorded a tax expense
of $2,040,000 compared to 1997, when the Corporation recorded a tax expense of
$2,311,000. The lower tax expense for 1998 was the result of a lower tax rate
during 1998.
NET INCOME
The net income for 1998 of $3,256,000, or $.86 per share basic and $.84 per
share diluted, is based on a weighted average of 3,767,605 basic and 3,861,590
diluted shares outstanding, compared with a net income for 1997 of $3,231,000,
or $.93 per share basic and $.89 per share diluted based on a weighted average
of 3,487,160 basic and 3,612,919 diluted. Net income in 1996 was $2,248,000, or
$.68 per share basic and $.66 per share diluted and based on weighted average
shares of 3,285,093 basic and 3,404,242 diluted.
NEW ACCOUNTING STANDARDS
The Corporation adopted two new accounting standards in 1998, Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income,
and No. 131, Disclosures about Segments of an Enterprise and Related
Information. During 1998 the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS
No. 134, Accounting for Mortgage-Backed Securities retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.
For further discussion see the Summary of Significant Accounting Policies in the
Notes to the Financial Statements.
YEAR 2000
The Corporation has taken steps to ensure that all of its computer systems (the
"Systems") are ready to operate accurately on and beyond January 1, 2000. In the
event that the Corporation's Systems are not Year 2000 compliant as of January
1, 2000, the Corporation would face significant operational difficulties. The
Corporation fully understands the need to prevent disruption of computer and
technical systems, and the Corporation is committed to providing its customers
with high quality services without interruption.
While the Corporation has determined that many of the Systems are Year 2000
compliant, the Corporation has prepared an action plan (the "year 2000 Project")
to ensure the continued integrity of its Systems. The Year 2000 Project includes
five phases: (1) the awareness phase; (2) the assessment phase; (3) the
renovation phase; (4) the validation phase; and (5) the implementation phase.
The Corporation is currently in the implementation phase.
The Corporation relies on outside providers for the core banking software and
data processing portions of the Systems. The Year 2000 Project applies to such
vendors.
The Year 2000 Project also includes a contingency plan to be implemented in the
event that the Year 2000 Project reveals that any of the Systems are not Year
2000 compliant. In addition, in the event that, despite the Year 2000 Project,
the Corporation experiences disruption due to Year 2000 problems, the
Corporation is developing a business resumption plan, which should be complete
by June 30, 1999.
As of December 31, 1998, the Corporation has incurred approximately $113,000 in
year 2000 related expenses, and has estimated that capital expenditures related
to the year 2000 issue will total approximately $300,000.
The Corporation has designed the Year 2000 Project based upon guidance from the
Federal Financial Institutions Examining Council. In addition, the FDIC monitors
the Corporation's preparation for the Year 2000 on a periodic basis.
The information set forth above is designed to be a "year 2000 Readiness
Disclosure", as that term is defined in the Year 2000 Information Readiness and
Disclosure Act. This information is forward looking information, and, as such,
it is subject to risks and uncertainties that would cause actual results to
differ materially from the projected results discussed in this report.
19
<PAGE> 22
CONSOLIDATED BALANCE SHEETS
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
December 31,
(Dollars in Thousands, except share amounts) 1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest bearing $ 9,941 $ 9,603
Interest bearing 292 79
-------- --------
10,233 9,682
Federal funds sold 48 3,678
-------- --------
Total cash and cash equivalents 10,281 13,360
-------- --------
Securities (Note 2):
Investment securities available for sale 50,597 20,088
Investment securities held to maturity
(fair value of $25,985 in 1998 and $34,655 in 1997) 25,820 34,503
-------- --------
Total securities 76,417 54,591
-------- --------
Loans, net of allowance for loan losses
of $2,379 in 1998 and $2,848 in 1997 (Note 3) 257,045 228,164
Mortgage loans held for sale (Note 3) 2,261 4,251
Property and equipment (Note 4) 5,582 4,474
Other real estate owned, net of allowance for losses
$200 in 1997 (Note 5) 224 149
Accrued interest receivable 2,173 1,968
Other assets 990 1,308
-------- --------
Total assets $354,973 $308,265
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 6):
Non-interest bearing $ 49,280 $ 48,638
Interest bearing 249,843 222,922
-------- --------
Total deposits 299,123 271,560
Borrowed funds (Note 7) 27,307 11,884
Interest payable on deposits 424 379
Other liabilities 818 691
-------- --------
Total liabilities 327,672 284,514
-------- --------
Commitments and contingent liabilities (Notes 12 and 13)
Stockholders' equity (Notes 10, 11 and 15):
Preferred stock, par value $5 per share, authorized
100,000 shares; none issued
Common stock, par value $2 per share,
authorized 9,000,000 shares; issued and outstanding
3,798,674 shares in 1998 and 3,581,377 shares in 1997 7,597 7,163
Additional paid-in capital 10,034 8,819
Retained earnings 9,461 7,708
Accumulated other comprehensive income (Note 2) 209 61
-------- --------
Total stockholders' equity 27,301 23,751
-------- --------
Total liabilities and stockholders' equity $354,973 $308,265
======== ========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 23
CONSOLIDATED STATEMENTS OF INCOME
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in Thousands, except share amounts) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 20,716 $ 19,735 $ 17,942
Interest and dividend income from securities 3,997 3,159 2,383
Interest from interest bearing cash
and federal funds sold 372 262 275
---------- ---------- ----------
Total interest and dividend income 25,085 23,156 20,600
---------- ---------- ----------
Interest expense:
Interest on deposits 9,942 9,227 7,701
Interest on certificates of deposit - $100,000
or more 1,086 859 802
Interest on borrowed funds 615 286 255
---------- ---------- ----------
Total interest expense 11,643 10,372 8,758
---------- ---------- ----------
Net interest income 13,442 12,784 11,842
Provision for loan losses (Note 3) 19 190 868
---------- ---------- ----------
Net interest income after provision for
loan losses 13,423 12,594 10,974
---------- ---------- ----------
Non-interest income:
Trust department income 498 465 425
Service charges on deposits 621 669 716
Gain on sale of securities available for sale 141 219 112
Gain on sale of other real estate owned (Notes 5) 43 67 3
Gain on sale of mortgages 119 2 4
Other non-interest income (Note 14) 822 839 880
---------- ---------- ----------
Total non-interest income 2,244 2,261 2,140
---------- ---------- ----------
Non-interest expense:
Salaries and wages 4,309 3,927 3,647
Pension and employee benefits (Note 9) 806 803 729
Occupancy expense 643 633 648
Depreciation and amortization expense 733 653 618
Other real estate owned expenses (Note 5) 58 63 484
Other non-interest expense (Note 14) 3,822 3,234 3,146
---------- ---------- ----------
Total non-interest expense 10,371 9,313 9,272
---------- ---------- ----------
Income before income taxes 5,296 5,542 3,842
Income taxes (Note 8) 2,040 2,311 1,594
---------- ---------- ----------
Net income $ 3,256 $ 3,231 $ 2,248
========== ========== ==========
Earnings per share (Note 11):
- Basic $ .86 $ .93 $ .68
- Diluted $ .84 $ .89 $ .66
========== ========== ==========
Weighted average shares outstanding:
- Basic 3,767,605 3,487,160 3,285,093
- Diluted 3,861,590 3,612,919 3,404,242
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 24
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
(Dollars in Thousands, Par paid-in Retained Comprehensive
except share amounts) Shares Value capital earnings Income Total
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 3,221,603 $ 6,443 $ 7,141 $ 4,053 $ 66 $ 17,703
Net income 2,248 2,248
Cash dividends declared
($.24 per share) (784) (784)
Shares issued:
Stock option plan 30,584 61 25 86
Dividend reinvestment
and stock purchase plan 94,615 190 467 657
Change in unrealized gain (loss)
on securities available for sale (165) (165)
--------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 3,346,802 6,694 7,633 5,517 (99) 19,745
Net income 3,231 3,231
Cash dividends declared
($.30 per share) (1,040) (1,040)
Shares issued:
Stock option plan 88,156 176 94 270
Dividend reinvestment
and stock purchase plan 146,419 293 1,092 1,385
Changes in unrealized gain (loss) on
securities available for sale 160 160
--------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 3,581,377 7,163 8,819 7,708 61 23,751
Net income 3,256 3,256
Cash dividends declared
($.40 per share) (1,503) (1,503)
Shares issued:
Stock option plan 168,182 336 685 1,021
Dividend reinvestment
and stock purchase plan 49,115 98 530 628
Changes in unrealized gain (loss) on
securities available for sale 148 148
--------- ---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 3,798,674 $ 7,597 $ 10,034 $ 9,461 $ 209 $ 27,301
========= ========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
------ ------ --------
<S> <C> <C> <C>
Net Income $3,256 $3,231 $ 2,248
------ ------ --------
Unrealized gain (loss) on securities available for sale,
net of income taxes (benefit) of $150 in 1998, $271 in 1997,
and ($71) in 1996 240 303 (99)
Less: reclassification adjustment for gains
included in net income, net of income taxes of
$49 in 1998, $76 in 1997, and $46 in 1996 92 143 66
------ ------ --------
Other Comprehensive Income 148 160 (165)
------ ------ --------
Comprehensive Income $3,404 $3,391 $ 2,083
====== ====== ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 25
CONSOLIDATED STATEMENTS OF CASH FLOWS
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in Thousands) 1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Operating activities:
Net income $ 3,256 $ 3,231 $ 2,248
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Provision for loan losses 19 190 868
Provision for other real estate owned 22 29 390
Depreciation and amortization 735 653 618
Realized gain on sale of securities (141) (219) (112)
Realized gain on sale of other real estate owned (43) (67) (3)
Realized gain on miscellaneous assets (83)
Deferred income taxes (20) 74 461
Change in:
Loans held for sale 1,990 (8,099) (279)
Accrued interest receivable (205) (332) 22
Other assets 318 14 503
Interest payable on deposits 45 51 19
Other liabilities 127 115 (50)
--------- -------- ---------
Net cash provided (used) by operating activities 6,103 (4,360) 4,602
========= ======== =========
Investing activities:
Securities:
Held to maturity:
Purchases (18,485) (26,912) (11,329)
Proceeds from maturities 27,168 13,704 8,243
Available for sale:
Purchases (46,222) (8,155) (2,988)
Proceeds from sales 8,607 10,019 2,857
Proceeds from maturities 4,024 2,160 6,858
Proceeds on sale of miscellaneous assets 296
Purchases of premises and equipment (1,843) (788) (1,030)
Net increase in loans (25,858) (15,674) (26,484)
Proceeds from sale of other real estate owned 295 166 1,145
--------- -------- ---------
Net cash used in investing activities (52,314) (25,480) (22,432)
========= ======== =========
Financing activities:
Net increase in deposits 27,563 16,069 27,529
Net increase in short-term borrowings 8,423 3,115 1,592
Increase in long-term borrowings 7,000
Proceeds from exercise of stock options
and stock purchase plan 1,649 1,655 743
Dividends paid (1,503) (1,040) (784)
--------- -------- ---------
Net cash used by financing activities 43,132 19,799 29,08
--------- -------- ---------
Increase (decrease) in cash and cash equivalents (3,079) (10,041) 11,250
Cash and cash equivalents at beginning of year 13,360 23,401 12,151
--------- -------- ---------
Cash and cash equivalents at end of year $ 10,281 $ 13,360 $ 23,401
========= ======== =========
Cash paid during the year:
Interest on deposits and other borrowings $ 11,598 $ 10,035 $ 8,739
Income taxes 2,097 1,988 1,243
Supplemental disclosure of cash flow information:
Securitization of loans into mortgage-backed securities 5,067 9,314 3,639
Transfers of loans to other real estate owned 392 134 1,115
Transfer of miscellaneous asset from other real estate owned
to premises and equipment 291
Loans to facilitate the sale of other real estate owned 120 667
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 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, 1998, the Corporation operates thirteen banking offices
located in Hampden County, Massachusetts and also operates a Trust Department
providing services normally associated with holding property in a fiduciary or
agency capacity. A full range of retail banking services are furnished to
individuals, businesses and non-profit organizations. The Corporation's primary
source of revenue is derived from providing loans to customers, predominately
located in Western Massachusetts.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, Park West Bank and Trust Company ("Park West"
or the "Bank"), its subsidiaries, Lorac Leasing Corp., Park West Securities
Corporation and PWB&T Inc. All material intercompany balances and transactions
have been eliminated upon consolidation. Certain amounts in the 1997 and 1996
financial statements have been reclassified to conform to the 1998 presentation.
The Corporation operates in one segment - a community bank offering different
products and services. Since the Corporation derives a significant portion of
its revenue and expense from the Bank, no meaningful allocation of its resources
is possible.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and affect the reported amounts of income and expenses for each year.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan losses
and other real estate owned, management obtains independent appraisals for
significant properties. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowances for
losses on loans and other real estate owned. Such agencies may require the Bank
to recognize additions to the allowances based on their judgments about
information available to them at the time of their examination.
NEW ACCOUNTING STANDARDS
As of January 1, 1998, the Corporation adopted a Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and displaying of comprehensive income and
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which establishes standards for the way public companies report
information about operating segments in both interim and annual financial
statements and related disclosures. Adoption of these statements did not impact
the Corporation's consolidated balance sheets, statements of income or cash
flows and was limited to the form and content of its disclosures. Both
statements were effective for fiscal years beginning after December 31, 1997 and
required restatement of all prior periods presented to conform to the provisions
of these statements.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement established accounting and reporting standards for derivative
instruments including derivative activities. This statement will be effective
for the Corporation's fiscal 2000 financial statements.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. This statement further amends SFAS No. 65 to
require that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold these investments. This statement will be effective for the
Corporation's 1999 financial statements. Management is currently evaluating the
future impact of these standards.
24
<PAGE> 27
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 average reserve balances with the Federal
Reserve Bank. These balances can be in the form of either vault cash or funds
left on deposit with the Federal Reserve Bank. The average amount of these
balances was $2,380,000 for 1998.
SECURITIES
Securities that management has the positive intent and ability to hold until
maturity are stated at cost, adjusted for amortization of premiums and accretion
of discounts. Those securities which have been identified as assets for which
there is not a positive intent to hold to maturity, including all marketable
equity securities, are classified as available for sale with unrealized gains
(losses), net of income taxes, reported as a separate component of stockholders'
equity. The Corporation determines if securities will be classified as held to
maturity or available for sale at the time of purchase. In addition, any
mortgage-backed securities created out of the Bank's own inventory of
residential real estate loans are also considered available for sale. Gains and
losses on sales of securities are recognized in other income at the time of sale
on a specific identification basis. Securities which have experienced an other
than temporary decline in value are written down to estimated fair value,
establishing a new cost basis with the amount of the write-down expensed as a
realized loss.
Mortgage-backed securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts determined by a method that
approximates the level-yield method. Management has the positive ability and the
intent to hold these assets until maturity.
The Corporation does not engage in trading activities.
LOANS
Loans have been reduced by deferred loan fees and the allowance for loan losses.
Interest on commercial and real estate loans is accrued on the principal amount
of loans outstanding. Interest on installment and other loans is calculated by
using the simple interest method on daily balances of the principal amount
outstanding. Loan origination fees, net of certain direct loan origination
costs, are deferred and recognized as income over the life of the related loan
as an adjustment to the loan's yield.
Non-accrual loans are loans on which the accrual of interest ceases when the
collection of principal or interest payments is determined to be doubtful by
management. It is the general policy of the Corporation to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days
unless the loan principal and interest are determined by management to be fully
collectible. Any unpaid amounts previously accrued on these loans are reversed
from income. Interest received on a loan in non-accrual status is applied to
reduce principal or, if management determines that the principal is collectible,
applied to interest on a cash basis. A loan is returned to accrual status after
the borrower has brought the loan current and has demonstrated compliance with
the loan terms for a sufficient period and management's doubts concerning
collectibility have been removed.
The Bank measures impairment of commercial loans by using the present value of
expected future cash flows discounted at the loan's effective interest rate.
Commercial real estate loans are generally measured based on the fair value of
the underlying collateral. Smaller balance homogenous loans, including
residential real estate and consumer loans, are collectively evaluated for
impairment based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. The Bank evaluates each impaired loan to determine the
appropriate income recognition practice. Generally, income is recorded only on a
cash basis for impaired loans.
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The adequacy of the allowance for loan losses is evaluated regularly by
management. Factors considered in evaluating the adequacy of the allowance
include the size of the portfolio, previous loss experience, current economic
conditions and their effect on borrowers, the financial condition of individual
borrowers and the related performance of individual loans in relation to
contract terms. The provision for loan losses charged to operating expense is
based upon management's judgment of the amount necessary to maintain the
allowance at a level adequate to absorb losses. Loan losses are charged against
the allowance for loan losses when management believes the collectibility of the
principal is unlikely.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or fair value in the aggregate. Net unrealized
losses are recognized through a valuation allowance charged to income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method.
Amortization of leasehold improvements is charged over the terms of the
respective leases, including option periods or the estimated useful lives of the
improvements, whichever is shorter. Gains and losses are recognized upon
disposal of assets. The cost of maintenance and repairs is charged to income as
incurred, whereas significant renewals are capitalized.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") includes properties the Bank 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 Bank's
standard underwriting criteria, including receipt of an adequate down payment.
LOAN SALES AND SERVICING RIGHTS
The Bank 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 Bank has stratified its servicing
portfolio for this purpose between fixed and adjustable rate loans. Impairment
losses, if any, are recognized through a valuation allowance for each impaired
stratum. Adjustments to the valuation allowance are charged or credited to
income.
INCOME TAXES
The asset and liability method of accounting for income taxes is utilized.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance will
be established. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
26
<PAGE> 29
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.
STOCK OPTIONS
The Corporation measures compensation cost of stock options on the intrinsic
value of the common stock options granted. Intrinsic value is the excess of the
market value of the common stock over the exercise price. Because stock options
are granted with fixed terms and with an exercise price equal to the market
price of the common stock at the date of grant, there is no measured
compensation cost of stock options. The pro forma disclosures for net income and
earnings per share as if a fair value based method of accounting had been
applied are contained in these notes to the consolidated financial statements.
TRUST DEPARTMENT
Assets held by the Corporation for customers in a fiduciary or agency capacity
are not included in the consolidated financial statements, as such items are not
assets of the Corporation. Such assets totaled approximately $119,797,000 and
$117,234,000 at December 31, 1998 and 1997, respectively. Trust income is
recognized on a cash basis. The amounts recognized under this method are not
materially different from amounts that would be recognized on the accrual basis.
EARNINGS PER SHARE
Basic earnings per share is the result of dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the year. Diluted earnings per share gives effect to all potentially dilutive
common shares that were outstanding during the year.
2 - SECURITIES
Investment securities held to maturity at December 31 are as follows:
<TABLE>
<CAPTION>
1998
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED
(Dollars in Thousands) COST GAINS LOSSES VALUE GAIN
- - ---------------------- --------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Government obligations $ 998 $ 28 $ 1,026 $ 28
Federal agency obligations 24,692 131 24,823 131
Mortgage-backed securities 130 6 136 6
--------- ---------- ---------- ------- ----------
$25,820 $ 165 $25,985 $165
========= ========== ========== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1997
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED
(Dollars in Thousands) COST GAINS LOSSES VALUE GAIN
- - ---------------------- --------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Government obligations $ 4,246 $ 35 $1 $ 4,280 $ 34
Federal agency obligations 30,081 117 8 30,190 109
Mortgage-backed securities 176 9 185 9
--------- ---------- ---------- -------- ----------
$34,503 $161 $9 $34,655 $152
========= ========== ========== ======== ==========
</TABLE>
During 1998 and 1997 there were no sales of investment securities classified as
held to maturity.
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
Investment securities available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
1998
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED
(Dollars in Thousands) COST GAINS LOSSES VALUE GAIN/(LOSS)
--------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Government obligations $ 928 $ 928
Federal agency obligations 25,579 $118 $86 25,611 $ 32
Equity securities 1,377 29 1,406 29
Mortgage-backed securities 22,358 297 3 22,652 294
--------- ---------- ---------- -------- ----------
$50,242 $444 $89 $50,597 $355
========= ========== ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
1997
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED
(Dollars in Thousands) COST GAINS LOSSES VALUE GAIN/(LOSS)
--------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Government obligations $ 2,058 $ 2,058
Federal agency obligations 3,500 $ 3 $17 3,486 $ (14)
Equity securities 1,303 22 1,325 22
Mortgage-backed securities 13,122 97 13,219 97
--------- ---------- ---------- -------- ----------
$19,983 $122 $17 $20,088 $105
========= ========== ========== ======== ==========
</TABLE>
During 1998 and 1997, the Corporation recognized gross gains on securities
available for sale totaling $141,000 and $219,000, respectively.
The contractual maturities of securities, other than equity securities, as of
December 31, 1998 are summarized in the following tables. Actual maturities may
differ from contractual maturities because certain issuers have the right to
call or prepay obligations.
For the purposes of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their contractual maturities
because of principal repayments.
<TABLE>
<CAPTION>
AMORTIZED FAIR
(Dollars in Thousands) COST VALUE
- - --------------------- --------- ---------
<S> <C> <C>
Held to Maturity:
Within 1 year $ 499 $ 505
Over 1 year to 5 years 3,692 3,762
Over 5 years to 10 years 21,629 21,718
--------- ---------
Total bond and debt obligations $25,820 $25,985
========= =========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED FAIR
(Dollars in Thousands) COST VALUE
- - --------------------- --------- ---------
<S> <C> <C>
Available for Sale:
Within 1 year $ 2,428 $ 2,423
Over 1 year to 5 years
Over 5 years to 10 years 21,079 21,161
Over 10 years 25,358 25,607
--------- ---------
Total bond and debt obligations $48,865 $49,191
========= =========
</TABLE>
At December 31, 1998 securities with a book value and fair value of $17,998,000
and $18,092,000, respectively, were pledged to secure public deposits,
repurchase agreements and for other purposes as required by law.
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
--------- ---------
<S> <C> <C>
Commercial $ 41,348 $ 41,031
Real estate construction 5,596 5,249
Real estate 196,416 173,263
Consumer 18,632 15,991
--------- ---------
261,992 235,534
Allowance for loan losses (2,379) (2,848)
Deferred loan origination fees (307) (271)
--------- ---------
$ 259,306 $ 232,415
========= =========
</TABLE>
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Balance, beginning of year $2,848 $2,481 $ 3,707
Provision for loan losses 19 190 868
Loans charged off (564) (633) (2,463)
Recoveries 76 810 369
------ ------ -------
$2,379 $2,848 $ 2,481
====== ====== =======
</TABLE>
The aggregate principal balance of non-accrual loans was $473,000, $1,042,000
and $2,079,000 at December 31, 1998, 1997 and 1996, respectively. Contractual
interest income which was not recognized on such non-accrual loans was $22,000,
$59,000 and $178,000 for 1998, 1997 and 1996, respectively.
The Corporation did not sell any loans with recourse during 1998 or 1997. The
remaining recourse exposure on prior sales was $2,007,000 at December 31, 1998.
Management does not believe that its recourse obligations subject the
Corporation to any material risk of loss in the future. The Corporation has
suffered no losses as a result of these recourse obligations.
Of the $202,012,000 in real estate loans at December 31, 1998, $138,618,000 are
collateralized by 1-4 family dwellings. The majority of the collateral for these
loans is located in the Bank's direct market area of Western Massachusetts.
Commercial real estate and real estate construction loans represented
$62,538,000 in outstanding principal at December 31, 1998. These loans encompass
a wider region extending throughout Massachusetts and Southern New England. Most
are collateralized by commercial real estate developments. Commercial loans both
collateralized and uncollateralized of $41,348,000 at December 31, 1998
represent loans made to businesses in Western Massachusetts.
The Bank 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:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
------- --------
<S> <C> <C>
Balance at beginning of year $2,043 $ 1,162
New loans granted 735 2,880
Repayments of principal (118) (1,999)
------- --------
Balance at end of year $2,660 $ 2,043
======= ========
</TABLE>
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
At December 31, 1998 and 1997, the recorded investment in impaired loans was
$473,000, and $960,000, respectively, for which no additional specific allowance
for loan losses was recorded. For the twelve months ended December 31, 1998,
1997 and 1996, the average recorded investment in impaired loans was $487,000,
$1,272,000 and $3,267,000, respectively. Interest income recognized during 1998,
1997 and 1996 on impaired loans was not significant.
The Corporation had no commitments to lend additional funds to borrowers having
loans which are on non-accrual status, are 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
$111,250,000 and $128,442,000 at December 31, 1998 and 1997, respectively.
4 - PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31 are summarized as
follows:
<TABLE>
<CAPTION>
ESTIMATED
(Dollars in Thousands) 1998 1997 LIVES
-------- ------ -----------
<S> <C> <C> <C>
Property (including
land of $1,388 in 1998 and $1,029 in 1997) $ 4,159 $3,163 30-40 years
Furniture and equipment 3,403 3,063 3-10 years
Leasehold and building
improvements 2,707 2,516 5-15 years
Motor vehicles 100 105 3 years
-------- ------ -----------
10,369 8,847
-------- ------ -----------
Accumulated depreciation 4,787 4,373
-------- ------ -----------
Property and Equipment $ 5,582 $4,474
======== ====== ===========
</TABLE>
5 - OTHER REAL ESTATE OWNED
At December 31, other real estate owned consisted of properties acquired through
foreclosure as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
- - ---------------------- ---- ----
<S> <C> <C>
Real estate acquired through foreclosure - net of OREO provision $224 $149
- - ---------------------- ---- ----
</TABLE>
Changes in the allowance for other real estate owned losses are summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
------ ----- -------
<S> <C> <C> <C>
Balance, beginning of year $ 200 $195 $ 65
Provision for other real estate owned charged to operations 22 29 390
Write-downs (net of payments) (222) (24) (260)
------ ----- -------
Balance, end of year $ $200 $ 195
====== ===== =======
</TABLE>
30
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
6 - DEPOSITS
Deposit accounts by type as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
-------- --------
<S> <C> <C>
Demand deposit $ 49,280 $ 48,638
Savings 42,909 35,151
N.O.W. 18,455 15,853
Money market deposits 29,045 25,167
IRA'S 30,339 28,582
Other time deposits 129,095 118,169
-------- --------
$299,123 $271,560
======== ========
</TABLE>
At December 31, 1998, the scheduled maturities of other time deposits and IRA
deposits with a fixed maturity are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
- - -------------------------------
<S> <C>
1999 $116,547
2000 22,049
2001 9,291
2002 2,323
2003 and after 12
- - -------------- --------
$150,222
========
</TABLE>
Certificates of deposit with balances greater than or equal to $100,000 amounted
to $24,589,000 and $17,682,000 as of December 31, 1998 and 1997, respectively.
Interest paid on these deposits totaled approximately $1,086,000 and $894,000,
respectively.
7 - BORROWED FUNDS
Short term borrowings as of December 31 are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
------- -------
<S> <C> <C>
Securities sold under agreements
to repurchase $11,953 $ 8,020
Purchased federal funds 270 270
FHLB Advance, 5.18% 6,810
Treasury tax and loan notes 1,274 3,594
------- -------
Total short term borrowings $20,307 $11,884
======= =======
</TABLE>
The above short term borrowings mature daily.
The following information relates to long-term debt as of December 31, 1998:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
------
FHLB Term advance 5.87% due 5/12/03 $7,000
======
</TABLE>
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The following table summarizes borrowings. Average interest rates during each
year were computed by dividing total interest expense by the average amount
borrowed:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
------- ------- ---------
<S> <C> <C> <C>
Balance at year end $27,307 $11,884 $ 8,769
Average amount outstanding 16,186 8,989 8,603
Maximum amount outstanding at any month-end 27,307 13,536 12,294
Average interest rate for the year 3.80% 3.18% 2.95%
Average interest rate on year-end balance 3.79% 3.15% 2.89%
</TABLE>
The Corporation maintains lines of credit with the Fleet Bank of Massachusetts
for $3,000,000 and the Bank of Boston for $1,500,000. Both are revolving lines
of credit with no set expiration date. There were no amounts outstanding against
either line as of December 31, 1998 or 1997. The Bank had additional short term
borrowing capacity through the Federal Home Loan Bank of $6,301,000 through its
Ideal Way program that was unused at year end 1998. Advances from the Federal
Home Loan Bank of Boston (FHLB) are collateralized by the Company's holdings of
FHLB stock and residential real estate loans.
8 - INCOME TAXES
The income taxes (benefits) were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Current tax:
Federal $1,796 $1,836 $ 917
State 264 403 317
------ ------ ------
Total current 2,060 2,239 1,234
------ ------ ------
Deferred tax:
Deferred taxes (20) 74 461
Change in valuation allowance for deferred tax assets (2) (101
------ ------ ------
Total deferred (20) 72 360
------ ------ ------
Total income taxes $2,040 $2,311 $1,594
====== ====== ======
</TABLE>
The differences between the effective tax rate and the federal statutory tax
rate on income before taxes are reconciled as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
Change in valuation allowance for deferred tax asset 1.0
State income taxes, net of federal benefit 4.0 6.0 7.0
Other .5 .7
---- ---- ----
38.5% 41.7% 41.0%
==== ==== ====
</TABLE>
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
----- -----
<S> <C> <C>
Deferred tax assets:
Other real estate owned $ 84
Deferred loan fees $ 122 112
State tax net operating loss carryforward 99
Non-accrual interest 11 48
Amortization 12
Other 95 39
----- -----
Total gross deferred tax assets 240 382
Valuation allowance (99)
----- -----
Net deferred tax assets 240 283
----- -----
Deferred tax liabilities:
Bond accretion 8 17
Unrealized gain on securities 146 44
Depreciation 179 150
Allowance for loan losses 193 249
Deferred FNMA premium 4 5
Prepaid pension 26
----- -----
Total gross deferred tax liabilities 530 491
----- -----
Net deferred tax liability $(290) $(208)
===== =====
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax assets and liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Corporation will realize the benefits of
these deductible differences, net of the recorded valuation allowance.
9 - PENSION PLAN
The Bank has a defined contribution pension plan (money purchase), covering
substantially all of its employees. Contributions to the pension plan are a
percentage of individual employees' salary. Total pension expense for 1998, 1997
and 1996 amounted to $212,000, $201,000 and $213,000, respectively. At May 31,
1998, the most recent plan year end, total plan assets were $3,671,379 and the
vested balance was $3,568,546. The pension plan assets are invested in money
market funds, government bonds, corporate and government agency bonds and
marketable securities.
10 - STOCK OPTIONS
The Corporation has three fixed option plans which reserve shares of common
stock for issuance to executives, key employees and directors. During 1998, 1997
and 1996 no compensation cost was required to be recognized for the stock option
plans. Had compensation costs for the Corporation's three stock option plans
been determined based on the fair value at the grant date for awards in 1998,
1997 and 1996 consistent with the provisions of SFAS No. 123, the Corporation's
net earnings and earnings per share would have been as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands, except per share data) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net earnings -- as reported $ 3,256 $ 3,231 $ 2,248
Net earnings -- pro forma $ 2,708 $ 3,136 $ 1,966
Earnings per share -- as reported - Basic $ .86 $ .93 $ .68
- Diluted $ .84 $ .89 $ .66
Earnings per share -- pro forma - Basic $ .72 $ .90 $ .60
- Diluted $ .70 $ .87 $ .58
</TABLE>
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
The Corporation offers shares of common stock to officers and key employees
pursuant to the 1985 Incentive Stock Option Plan. As of December 31, 1998, all
options granted are exercisable. The following is a summary of the changes in
options outstanding:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Options granted and exercisable
at the beginning of the year 191,466 277,122 307,706
Options exercised:
at $2.00 (27,741) (16,268)
at $2.50 (350) (27,450) (9,200)
at $3.50 (20,302) (5,116)
at $6.00 (146,832) (10,163)
--------- -------- --------
Options granted and exercisable
at the end of the year 44,284 191,466 277,122
========= ======== ========
</TABLE>
Unless exercised the options will expire ten years after granting. No options
are available for future grants.
The Corporation adopted a Directors Stock Option Plan during 1995. The following
is a summary of the changes in options outstanding under the Directors Stock
Option Plan:
<TABLE>
<CAPTION>
1998 1997 199
-------- -------- ------
<S> <C> <C> <C>
Options granted and exercisable
at the beginning of the year 53,000 44,000 33,000
Options granted and exercisable:
at $6.00
at $7.125 11,000
at $9.375 11,000
at $12.875 9,000
at $14.75 3,000
Options exercised at $6.00 (15,000) (2,000)
at $7.125 (2,000)
at $9.375 (2,000
-------- -------- ------
Options granted and exercisable
at the end of the year 46,000 53,000 44,000
====== ====== ======
Options available for future grants 58,000 70,000 81,000
====== ====== ======
</TABLE>
Unless exercised, the options will expire twenty years after granting.
The Corporation adopted an incentive stock option plan during 1996 for directors
and employees. At the 1998 Annual Meeting of Shareholders the 1996 Incentive
Stock Option Plan was amended to increase the number of shares reserved for
issuance by 200,000 shares. The following is a summary of the changes in the
1996 Incentive Stock Option Plan:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Options outstanding at the beginning of the year 36,500 45,500
Options authorized 200,000 178,500
======== ======== ========
Options granted and exercisable at the beginning of the year 141,500 133,000
-------- -------- --------
Options granted and exercisable to directors at $8.00 11,000
Options granted and exercisable to employees at $8.125 122,500
Options granted and exercisable to directors at $9.00 9,000
Options granted and exercisable to directors at $15.25 10,000
Options granted and exercisable to employees at $13.375 107,000
Options exercised at $8.125 (500)
Options exercised at $8.00 (2,000)
Options terminated (500)
======== ======== ========
Options granted and exercisable at the end of the year 256,500 141,500 133,000
======== ======== ========
Options available for future grants 119,500 36,500 45,500
======== ======== ========
</TABLE>
34
<PAGE> 37
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:
<TABLE>
<CAPTION>
Shares Per Share
--------- ---------
<S> <C> <C>
Basic Earnings Per Share:
1998 3,767,605 $.86
1997 3,487,160 .93
1996 3,285,093 .68
Effect of Dilutive Option Shares:
1998 93,985 $.02
1997 125,759 .04
1996 119,149 .02
Diluted Earnings Per Share:
1998 3,861,590 $.84
1997 3,612,919 .89
1996 3,404,242 .66
</TABLE>
12 - LEASES
The Corporation leases certain facilities under long-term operating lease
agreements. The following is a schedule of future minimum lease payments for
such operating leases as of December 31, 1998:
<TABLE>
<CAPTION>
(Dollars in Thousands)
- - ----------------------
<S> <C>
1999 $ 256
2000 255
2001 154
2002 141
2003 75
After 2003 169
------
Total minimum lease payments $1,050
======
</TABLE>
Rent expense for 1998, 1997 and 1996 amounted to $237, $236 and $223,
respectively.
13 - COMMITMENTS, CONTINGENT LIABILITIES
AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, various commitments and contingent liabilities
are outstanding, such as guarantees, standby letters of credit, commitments to
extend credit and various financial instruments with off-balance-sheet risk that
are not reflected in the financial statements. Financial instruments with
off-balance-sheet risk involve elements of credit risk, interest rate risk,
liquidity risk and market risk. Management does not anticipate any significant
losses as a result of these transactions.
The following table summarizes the contractual value of financial instruments
and other commitments at December 31:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
-------- --------
<S> <C> <C>
Commitments to grant loans $ 8,740 $ 9,629
Stand-by letters of credit and financial guarantees 1,012 1,022
Commitments to advance funds under existing loan agreements 31,055 29,210
</TABLE>
The Bank uses the same credit policies in making commitment and conditional
obligations as it does for on-balance-sheet instruments.
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank 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.
Certain litigation is pending against the Corporation. Management, after
consultation with legal counsel, does not anticipate that any ultimate liability
arising out of such litigation will have a material effect on the Corporation's
financial condition or results of operations.
14 - OTHER NON-INTEREST INCOME AND EXPENSE
The components of other non-interest income and expense, which are in excess of
1% of the aggregate of total interest income and non-interest expense and not
shown separately on the consolidated statements of income, are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in Thousands) 1998 1997 1996
- - ---------------------- ---- ---- ----
<S> <C> <C> <C>
Income:
Loan servicing fees $451 $472 $484
Expenses:
Service bureau expense 707 654 556
Merger related expenses 396
Professional fees 322
Advertising 349 314 321
Supplies 292 242
</TABLE>
15 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
addresses the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions, and new regulations concerning
internal controls, accounting, and operations.
Both the Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's or Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (as defined in the
regulations) of total and Tier I capital to risk-weighted assets and of Tier I
capital to average assets. Management believes, as of December 31, 1998, that
the Bank meets all capital adequacy requirements to which it is subject.
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
As of December 31, 1998, 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 the Bank must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Corporation's and the Bank's actual capital amounts and ratios are also
presented in the following table:
<TABLE>
<CAPTION>
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
- - ---------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
TOTAL CAPITAL
(TO RISK WEIGHTED ASSETS):
BANK $27,890 12.20% $18,291 8.00% $22,864 10.00%
HOLDING COMPANY 29,471 12.80 18,415 8.00 N/A N/A
TIER I CAPITAL (TO RISK WEIGHTED ASSETS):
BANK 25,510 11.16 9,146 4.00 13,718 6.00
HOLDING COMPANY 27,092 11.77 9,207 4.00 N/A N/A
TIER I CAPITAL
(TO AVERAGE ASSETS):
BANK 25,510 7.24 14,102 4.00 17,628 5.00
HOLDING COMPANY 27,092 7.64 14,176 4.00 N/A N/A
December 31, 1997
Total Capital
(To risk weighted assets):
Bank $ 24,535 11.97% $ 16,397 8.00% $ 20,496 10.00%
Holding Company 26,277 12.71 16,535 8.00 N/A N/A
Tier I Capital (To risk weighted assets):
Bank 21,969 10.70 8,198 4.00 12,298 6.00
Holding Company 23,690 11.44 8,268 4.00 N/A N/A
Tier I Capital (To average assets):
Bank 21,969 7.04 12,493 4.00 15,617 5.00
Holding Company 23,690 7.55 12,544 4.00 N/A N/A
</TABLE>
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.
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
Currently, the Rights are not exercisable and are attached to and trade with the
outstanding shares of Common Stock. The Rights will separate from the Common
Stock and become exercisable upon the earliest to occur of (i) the close of
business on the tenth calendar day following the first public announcement that
a person or group of affiliated or associated persons has acquired beneficial
ownership of 15% or more of the outstanding shares of the Corporation's Common
Stock (an "Acquiring Person"), (ii) the close of business on the tenth business
day (or such date as the Board of Directors may determine) following the
commencement of a tender offer or exchange offer that would result upon its
consummation in a person or a group becoming the beneficial owner of 15% of the
outstanding shares of the Corporation's Common Stock, (iii) the determination by
the Board of Directors that any person is an "Adverse Person."
Upon the occurrence of any one of the above events, each holder of a Right
(other than the Acquiring Person or the Adverse Person, as the case may be) is
entitled to acquire such number of Units of the Preferred Stock of the
Corporation which 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 companies 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.
16 - EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation established an Employees' Stock Ownership Plan ("ESOP"). The
ESOP has been funded by a $100 contribution from the Corporation. At December
31, 1998 and 1997, the ESOP held no shares of the Corporation's stock.
17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for the
Corporation's financial instruments. The following table represents the carrying
amount and estimated fair value of the Corporation's financial instruments at
December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
(Dollars in Thousands) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 10,233 $ 10,233 $ 9,682 $ 9,682
Federal funds sold 48 48 3,678 3,678
Investment securities held to maturity 25,820 25,985 34,503 34,655
Investment securities available for sale 50,597 50,597 20,088 20,088
Loans 259,306 265,971 232,415 233,841
Accrued interest receivable 2,173 2,173 1,968 1,968
Liabilities:
Deposits 299,123 300,286 271,560 272,097
Borrowed funds 27,307 27,471 11,884 11,884
Interest payable on deposits 424 424 379 379
</TABLE>
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 mature in 90 days or less.
INVESTMENT SECURITIES
The fair value of securities, except certain state and municipal securities, is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers.
38
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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.
ACCRUED INTEREST RECEIVABLE, INTEREST PAYABLE ON DEPOSITS
The carrying amount for these items approximate the 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
The fair value of such borrowings was estimated by utilizing future cash flows
discounted using the Bank's current borrowing rate for similar instruments. For
short-term borrowings the carrying amount approximates the fair value due to
their short-term nature.
COMMITMENTS TO EXTEND CREDIT
The stated value of commitments to extend credit approximates fair value as the
current fees charged for similar commitments does not differ significantly from
quoted fees. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
Such differences are not considered significant.
18 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- --------------------------------------------
(Dollars in Thousands,
except per share amounts) Q1 Q2 Q3 Q4 YEAR Q1 Q2 Q3 Q4 YEAR
------ ------ ------ ------ ------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $5,842 $6,264 $6,561 $6,418 $25,085 $5,428 $5,698 $5,979 $6,051 $23,156
Interest expense 2,579 2,982 3,161 2,921 11,643 2,411 2,534 2,740 2,687 10,372
------ ------ ------ ------ ------- ------ ------ ------ ------ -------
Net interest income 3,263 3,282 3,400 3,497 13,442 3,017 3,164 3,239 3,364 12,784
Provision for loan losses 19 19 150 40 190
Non-interest income 608 598 542 496 2,244 506 485 565 705 2,261
Non-interest expense 2,455 2,458 2,483 2,975 10,371 2,293 2,323 2,397 2,300 9,313
------ ------ ------ ------ ------- ------ ------ ------ ------ -------
Income before income taxes 1,397 1,422 1,459 1,018 5,296 1,080 1,286 1,407 1,769 5,542
Income taxes 558 537 549 396 2,040 443 549 589 730 2,311
------ ------ ------ ------ ------- ------ ------ ------ ------ -------
Net income $ 839 $ 885 $ 910 $ 622 $ 3,256 $ 637 $ 737 $ 818 $1,039 $ 3,231
====== ====== ====== ====== ======= ====== ====== ====== ====== =======
Earnings per share - Basic $ .22 $ .24 $ .24 $ .16 $ .86 $ .19 $ .22 $ .23 $ .29 $ .93
- Diluted $ .22 $ .23 $ .24 $ .16 $ .84 $ .18 $ .21 $ .22 $ .28 $ .89
====== ====== ====== ====== ======= ====== ====== ====== ====== =======
</TABLE>
39
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31,
(Dollars in Thousands) 1998 1997
<S> <C> <C>
BALANCE SHEETS
Assets
Cash $ 20 $ 31
Investment in subsidiaries 25,719 22,030
Other investments 922 1,372
Other assets 762 339
------- -------
Total assets 27,423 $ 23,772
======= =======
Liabilities $122 $ 21
------- -------
Stockholders' equity
Preferred stock - none
Common stock, par value $2 per share 7,597 7,163
Additional paid-in capital 10,034 8,819
Retained earnings 9,461 7,708
Accumulated other comprehensive income 209 61
------- -------
Stockholders' equity 27,301 23,751
------- -------
Total liabilities and stockholders' equity $27,423 $23,772
======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ --------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Dividend from subsidiary $ $ 520 $ 520
Interest income 85 38 19
Other income (expense) - net (510) (114) (117)
-------- ------ --------
Income (loss) before taxes and
undistributed income of subsidiaries (425) 444 422
Income tax benefit 140 24
Undistributed income of subsidiaries 3,541 2,787 1,802
-------- ------ --------
Net income $ 3,256 $3,231 $ 2,248
======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 3,256 $ 3,231 $ 2,248
Operating activities:
Equity in income of subsidiaries (3,541) (2,787) (1,802)
Increase in other assets (423) (32) (307)
Increase in other liabilities 101 13 8
-------- -------- --------
Net cash provided by (used in) operating activities (607) 425 147
-------- -------- --------
Cash flows from investing activities:
Investment securities (purchases) maturities 450 (1,039) (88)
-------- -------- --------
Cash flows from financing activities:
Proceeds from stock options exercised 1,119 270 86
Proceeds from dividend reinvestment and optional
stock purchases 530 1,385 657
Dividends paid (1,503) (1,040) (785)
-------- -------- --------
Net cash (used in) provided by financing activities 146 615 (42)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (11) 1 17
Cash and cash equivalents at the beginning of the year 31 30 13
-------- -------- --------
Cash and cash equivalents at the end of the year $ 20 $ 31 $ 30
======== ======== ========
</TABLE>
40
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
20 - ACQUISITION OF CARGILL BANCORP, INC.
The Corporation completed the acquisition of Cargill Bancorp, Inc. ("Cargill")
on January 29, 1999. Cargill served as the holding company for Cargill Bank,
which will continue to operate its three banking offices in Northeastern
Connecticut and will retain its name and Connecticut charter as a separate
subsidiary of the Corporation.
Under the terms of the merger agreement, each share of Cargill will be exchanged
for 1.3655 shares of the Corporation. Westbank will issue a total of 400,164
shares. The Corporation will account for the acquisition as a pooling of
interests, and as such, future consolidated financial statements will include
Cargill's financial data as if Cargill had been combined at the beginning of the
earliest period presented.
The pro forma combined accounts in the table below are presented for
informational purposes and are not necessarily indicative of the results of
operations of the combined company that would have actually occurred had the
merger been consummated as of the earliest period presented. The pro forma
combined amounts are not necessarily indicative of future results of the
combined company. No adjustments have been included in the pro forma combined
company financial statements for anticipated operating cost savings. Westbank's
fiscal year ends December 31 and Cargill's fiscal year ends September 30. The
unaudited pro forma financial data combines the financial information of
Westbank at and for the fiscal years ended December 31, 1998, 1997, and 1996
with financial information of Cargill for the fiscal years ended September 30,
1998, 1997, and 1996.
The following table sets forth the unaudited pro forma results of operations of
the combined entities:
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share data) WESTBANK CARGILL COMBINED
--------- ------- --------
<S> <C> <C> <C>
1998:
NET INTEREST INCOME $13,442 $1,897 $15,339
NET INCOME 3,256 121 3,377
DILUTED EARNINGS PER SHARE .84 .40 .79
1997:
Net interest income $ 12,784 $1,849 $ 14,633
Net income 3,231 153 3,384
Diluted earnings per share .89 .54 .85
1996:
Net interest income $ 11,842 $1,693 $ 13,535
Net income (loss) 2,248 (111) 2,137
Diluted earnings (loss) per share .66 (.42) .57
</TABLE>
41
<PAGE> 44
INDEPENDENT AUDITORS' REPORT
Westbank Corporation and Subsidiaries
The Stockholders and Board of Directors,
Westbank Corporation
We have audited the accompanying consolidated balance sheets of Westbank
Corporation and Subsidiaries (the "Corporation") as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Westbank Corporation and Subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
January 29, 1999
42
<PAGE> 45
CORPORATE DIRECTORY
Westbank Corporation and Subsidiaries
DIRECTORS
WESTBANK CORPORATION AND
PARK WEST BANK AND TRUST COMPANY
ALFRED C. WHITAKER
Chairman of the Board
WESTBANK CORPORATION
Sales Consultant
ROLAND O. ARCHAMBAULT
President
PINNACLE RACEWAY
MARK A. BEAUREGARD
Attorney at Law
RESNIC, BEAUREGARD, WAITE & DRISCOLL
DAVID R. CHAMBERLAND
President
CHICOPEE BUILDING SUPPLY, INC.
DONALD R. CHASE
President and Chief Executive Officer
WESTBANK CORPORATION
President and Chief Executive Officer
PARK WEST BANK AND TRUST COMPANY
LEROY F. JARRETT
President and Treasurer (Retired)
NEW ENGLAND CHURCH INTERIORS
ERNEST N. LAFLAMME, JR.
Treasurer
CITY OF CHICOPEE
G. WAYNE MCCARY
President and CEO
EASTERN STATES EXPOSITION
PAUL J. MCKENNA, D.M.D.
Orthodontist
ROBERT J. PERLAK
Private Investor
GEORGE R. SULLIVAN
Executive Vice President
SULLIVAN PAPER COMPANY, INC.
JAMES E. TREMBLE
President
VALLEY CINEMA, INC.
OFFICERS
WESTBANK CORPORATION
ALFRED C. WHITAKER
Chairman of the Board
Assistant Corporate Clerk
ERNEST N. LAFLAMME, JR.
Vice Chairman of the Board
DONALD R. CHASE
President and Chief Executive Officer
JOHN M. LILLY
Treasurer and Chief Financial Officer
ROBERT J. PERLAK
Corporate Clerk
OFFICERS
PARK WEST BANK AND TRUST COMPANY
DONALD R. CHASE
President and Chief Executive Officer
ROBERT J. PERLAK
Corporate Clerk
ALFRED C. WHITAKER
Assistant Clerk
FINANCE DIVISION
JOHN M. LILLY
Executive Vice President and Treasurer
IRVING M. WALKER, JR., CMA
Accounting Officer
LOAN DIVISION
GARY L. BRIGGS
Executive Vice President
PAUL M. ACCORSI
Senior Vice President
DAVID M. BARSZCZ
Vice President
CLIFFORD R. BORDEAUX
Assistant Vice President
GERARD E. DRAPEAU
Vice President
RICHARD N. HANCHETT
Vice President
MICHAEL M. LEFEBVRE
Vice President
JOSEPH S. LEMAY
Assistant Vice President
JOHN E. O'BRIEN
Loan Operations Officer
RESIDENTIAL REAL ESTATE
STANLEY F. OSOWSKI
Senior Vice President
WOLFGANG A. ADAMETZ
Vice President
LOAN CREDIT & COLLECTION
TRENTON E. TAYLOR
Senior Vice President
PATRICIA A. NEBOSKY
Assistant Vice President
EDP/OPERATIONS
S. STEVEN KONIECKI
Senior Vice President
MARKETING
JOSEPH L. ROLAK
Director of Marketing and Vice President
COMPLIANCE
JANE M. KNAPP
Vice President
BRANCH ADMINISTRATION/
HUMAN RESOURCES
KATHLEEN A. JALBERT
Senior Vice President
DEBORAH A. KUMIEGA
Assistant Vice President
H. ELLEN BELLOWS
Branch Manager
GARY B. SZYMANIAK
Community Banking Officer
AUDITING DIVISION
LLOYD S. HALL, CBA
Director of Auditing
TRUST DIVISION
ROBERT A. GIBOWICZ
Senior Trust Officer
43
<PAGE> 46
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 21, 1999 at nine o'clock in the morning at the Carriage House
at Storrowton Tavern, 1305 Memorial Avenue, West Springfield, Massachusetts.
TRANSFER AGENT AND REGISTRAR
Park West Bank and Trust Company -- Trust Department
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Hartford, Connecticut
CORPORATE COUNSEL
Doherty, Wallace, Pillsbury and Murphy, P.C.
Springfield, Massachusetts
INFORMATION SERVICE
Westbank Corporation welcomes stockholder and public interest in our services
and activities. Questions pertaining to material presented in this Report and
requests for a copy of the Annual Report (Form 10-K) filed with the Securities
and Exchange Commission should be directed to John M. Lilly, Treasurer and Chief
Financial Officer, at the above address
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 NASD regional market quotations:
<TABLE>
<CAPTION>
1998 1997
BID BID
--------------------------- --------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
First $17 1/4 $12 $ 0.10 $10 $ 8 3/4 $0.075
Second 16 5/8 13 7/8 0.10 9 1/2 8 1/2 0.075
Third 14 3/4 10 3/8 0.10 11 8 5/8 0.075
Fourth 13 9 3/8 0.10 13 5/8 10 5/8 0.075
</TABLE>
The above quotations of the Corporation's common stock represent prices between
dealers. They do not include retail markup, markdown or commissions. At January
31, 1999 the Corporation had 1,202 stockholders.
Westbank Corporation's common stock is traded on the NASDAQ National Market
Exchange, the trading symbol is "WBKC". For information on the Westbank
Corporation Dividend Reinvestment and Stock Purchase Plan, call:
Park West Bank and Trust Company,
Trust Department (413) 747-1482.
The following firms make a market in Westbank Corporation's Common Stock:
Advest, Inc.
First Albany Corporation
McConnell, Budd & Downes, Inc.
Keefe, Bruyette & Woods, Inc.
44
<PAGE> 47
Design: Robert Farrell Associates, Inc./Printing: Sterling Press
<PAGE> 48
[WESTBANK CORPORATION LOGO]
<PAGE> 1
21. SUBSIDIARIES OF THE REGISTRANT
1. Park West Bank and Trust Company - Massachusetts
a. Lorac Leasing Corp. - Massachusetts
b. P W B & T, Inc. - Massachusetts
c. Park West Securities Corporation - Massachusetts
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000742070
<NAME> WESTBANK CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,941
<INT-BEARING-DEPOSITS> 292
<FED-FUNDS-SOLD> 48
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,597
<INVESTMENTS-CARRYING> 25,820
<INVESTMENTS-MARKET> 25,985
<LOANS> 259,306
<ALLOWANCE> 2,379
<TOTAL-ASSETS> 354,973
<DEPOSITS> 299,123
<SHORT-TERM> 20,307
<LIABILITIES-OTHER> 1,242
<LONG-TERM> 7,000
0
0
<COMMON> 27,301
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 354,973
<INTEREST-LOAN> 20,716
<INTEREST-INVEST> 3,997
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<INTEREST-TOTAL> 25,085
<INTEREST-DEPOSIT> 11,028
<INTEREST-EXPENSE> 11,643
<INTEREST-INCOME-NET> 13,442
<LOAN-LOSSES> 19
<SECURITIES-GAINS> 141
<EXPENSE-OTHER> 10,371
<INCOME-PRETAX> 5,296
<INCOME-PRE-EXTRAORDINARY> 5,296
<EXTRAORDINARY> 0
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<NET-INCOME> 3,256
<EPS-PRIMARY> .86
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<YIELD-ACTUAL> 4.21
<LOANS-NON> 473
<LOANS-PAST> 231
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<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
