<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[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
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)
(413) 747-1400
(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- - ------------------- -------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $2.00 Par Value
Preferred stock, $5.00 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
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
WESTBANK CORPORATION IS SUBMITTING THIS FORM 10-K/A
AS A RESULT OF THE ACQUISITION OF CARGILL
BANCORP, INC., ON JANUARY 29, 1999.
ALL FINANCIAL INFORMATION HAS BEEN RESTATED AS
REQUIRED, ACCOUNTING FOR THE ACQUISITION OF
CARGILL BANCORP, INC., AS A POOLING OF
INTERESTS.
INDEX TO FORM 10-K
PART I
Item 1 Business I - 1
Item 2 Properties I - 2
Item 3 Legal Proceedings I - 3
Item 4 Submission of Matters to a vote of Security Holders I - 3
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 Accountant
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
<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:
Page of
Annual Report
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, 30, 31 and 38
III. Loan Portfolio 13, 28, 29, 31, 32 and 38
a. Types of Loans 13
b. Maturities and Sensitivities
to Changes in Interest Rates 7, 8, 9 and 13
c. Risk Elements 7, 8, 14, 15, 16, 28, 31 and 32
IV. Summary of Loan Loss Experience 14 and 15
V. Deposits 16, 33 and 42
VI. Return on Equity and Assets 17
VII. Short Term Borrowing 17, 34 and 43
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 throughout Western
Massachusetts, 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>
As a result of the acquisition of Cargill Bancorp, Inc., the Corporation's other
banking subsidiary, Cargill Bank, operates three Northern Connecticut branches,
located as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------
LOCATION OWNED LEASED TOTAL
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
Putnam 1 1
- - -----------------------------------------------------------------------
Quinebaug 1 1
- - -----------------------------------------------------------------------
Woodstock 1 1
- - -----------------------------------------------------------------------
TOTAL 2 1 3
- - -----------------------------------------------------------------------
</TABLE>
All general banking offices except the Park West Holyoke office 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
subsidiary banks 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, through a subsidiary, also owns one other property
adjacent to the main office consisting of land also used as a parking lot. 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.
I-2
<PAGE> 5
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-3
<PAGE> 6
PART II
ITEM 5 MARKET FOR CORPORATION'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Reference is made to Page 49 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.
The assumptions listed above, as they relate to Cargill Bank, are the same with
the exception of the market area, which is Northeast Connecticut.
While Westbank periodically reassesses material trends and uncertainties
affecting the Corporation's performance in connection with is 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> 7
PART III
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 21 through 45 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> 8
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
Page of
Annual
Report
------
Independent Auditors' Reports 46 - 47
Consolidated Balance Sheets at
December 31, 1998 and 1999 21
Consolidated Statements of Income
for the years ended December
31, 1998, 1997 and 1996 22
Consolidated Statement of Stockholders'
Equity from January 1, 1996, to
December 31, 1998 24
Consolidated Statements of Comprehensive
Income for the years ended December 31, 1998,
1997 and 1996 23
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 25
Notes to Consolidated Financial Statements 26 - 45
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> 9
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 August 18, 1999
Donald R. Chase
/s/ Ernest N. Laflamme, Jr.
_________________________ Chairman of the Board and Director August 18, 1999
Ernest N. Laflamme, Jr.
/s/ John M. Lilly
_________________________ Treasurer and Chief Financial Officer August 18, 1999
John M. Lilly
/s/ Roland O. Archambault
_________________________ Director August 18, 1999
Roland O. Archambault
/s/ Mark A. Beauregard
_________________________ Director August 18, 1999
Mark A. Beauregard
/s/ David R. Chamberland
_________________________ Director August 18, 1999
David R. Chamberland
/s/ Leroy F. Jarrett
_________________________ Director August 18, 1999
Leroy F. Jarrett
/s/ G. Wayne McCary
_________________________ Director August 18, 1999
G. Wayne McCary
/s/ Robert J. Perlak
_________________________ Corporate Clerk and Director August 18, 1999
Robert J. Perlak
/s/ George R. Sullivan
________________________ Director August 18, 1999
George R. Sullivan
/s/ James E. Tremble
________________________ Director August 18, 1999
James E. Tremble
</TABLE>
IV-2
<PAGE> 10
EXHIBIT INDEX
Page No.
--------
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
IV-3
<PAGE> 1
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.....6-21
Consolidated Balance Sheets....................................22
Consolidated Statements of Income..............................23
Consolidated Statements of Comprehensive Income................24
Consolidated Statements of Stockholders' Equity................25
Consolidated Statements of Cash Flows..........................26
Notes to Consolidated Financial Statements..................27-47
Independent Auditors' Report................................48-49
Corporate Directory............................................50
Corporate Information..........................................50
<PAGE> 2
FINANCIAL HIGHLIGHTS
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(Dollars in Thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 3,377 $ 3,384 $ 2,137
Net interest income 15,339 14,633 13,535
Non-interest income 2,427 2,529 2,340
Non-interest expense 12,200 11,066 11,278
Provision for loan losses 41 306 944
</TABLE>
<TABLE>
<CAPTION>
YEAR END DECEMBER 31
(Dollars in Thousands)
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment and
mortgage-backed securities $ 84,328 $ 60,213 $ 39,764
Loans, net 293,113 268,254 254,948
Allowance for loan losses 2,665 3,057 2,699
Total assets 402,623 355,567 331,803
Total deposits 342,266 314,679 298,014
Total stockholders' equity 30,490 26,918 22,717
COMMON SHARE INFORMATION
Basic weighted average
shares outstanding 4,143,009 3,845,698 3,643,270
Basic net earnings per share $.82 $.88 $.59
</TABLE>
1
<PAGE> 3
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. Customer's 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.
2
<PAGE> 4
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. 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.
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 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. We are optimistic that with your continued support
we will continue to focus on growth and earnings.
Sincerely,
Alfred C. Whitaker Donald R. Chase
Chairman of the Board President and
Chief Executive Officer
3
<PAGE> 5
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> 6
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 $28,631 $26,724 $24,059 $23,475 $19,647
Interest expense 13,292 12,091 10,524 10,145 7,481
- - -------------------------------------------------------------------------------------------------------------------------------
Net interest income 15,339 14,633 13,535 13,330 12,166
Provision for loan losses 41 306 944 2,907 1,528
Non-interest income 2,427 2,529 2,340 3,104 2,641
Non-interest expense 12,200 11,066 11,278 9,969 11,234
- - -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,525 5,790 3,653 3,558 2,045
Income taxes (benefit) 2,148 2,406 1,516 1,132 (307)
- - -------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of changes in accounting principle 3,377 3,384 2,137 2,426 2,352
Cumulative effect of changes in
accounting principle for income taxes (22)
- - -------------------------------------------------------------------------------------------------------------------------------
Net income $3,377 $3,384 $2,137 $2,426 $2,330
===============================================================================================================================
Common share data:
Earnings per share:
Basic $.82 $.88 $.59 $.69 $.67
Diluted $.79 $.85 $.57 $.67 $.65
Cash dividends declared $.40 $.30 $.24 $.20
Ending book value $7.26 $6.84 $6.19 $5.80 $5.25
AT DECEMBER 31:
Total loans -- net $293,113 $268,254 $254,948 $233,527 $225,193
Total assets 402,623 355,567 331,803 299,590 284,814
Total non-performing assets 1,494 2,025 3,791 8,655 8,313
Total deposits 342,266 314,679 298,014 269,478 256,668
Total borrowings 27,807 11,884 9,269 7,677 8,625
Total stockholders' equity 30,490 26,918 22,717 20,786 17,355
AVERAGE FOR YEAR:
Loans 284,629 270,066 246,366 232,422 214,846
Assets 382,924 348,561 313,063 297,676 273,214
Deposits 335,110 312,725 280,855 269,105 246,845
Stockholders' equity 29,229 24,638 21,777 19,741 17,655
Weighted shares outstanding - basic 4,143,009 3,845,698 3,643,270 3,539,919 3,491,111
- diluted 4,272,682 4,003,015 3,762,419 3,630,052 3,562,162
SELECTED RATIOS:
Rate of return on average total assets .88% .97% .68% .81% .86%
Rate of return on average stockholders' equity 11.55% 13.73% 9.81% 12.29% 13.20%
Stockholders' equity to total assets at year end 7.57% 7.57% 6.85% 6.93% 6.09%
Average total stockholders' equity
to average total assets 7.63% 7.07% 6.96% 6.63% 6.46%
Allowance for loan losses to total loans at year end .90% 1.13% 1.05% 1.65% 1.49%
Non-performing loans as a percentage
of total loans at year end .37% .68% 1.23% 2.89% 2.57%
Net charge-offs as a percentage
of average loans .15% .02% .88% 1.03% .76%
Other real estate owned as a percentage of total assets .12% .10% .19% .53% .61%
</TABLE>
5
<PAGE> 7
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. Effective January 29, 1999,
Cargill Bancorp, Inc., and its subsidiary ("Cargill") were merged with and into
Westbank Corporation ("Westbank"), pursuant to a plan of merger dated July 15,
1998. Each share of Cargill common stock was converted into 1.3655 shares of the
Corporation's common stock. Approximately 400,164 of Westbank common shares were
issued for the outstanding common stock of Cargill.
The transaction was accounted for using the pooling-of-interests method and,
accordingly, all historical financial data has been restated to include both
entities for all periods presented. Westbank's fiscal year ends December 31 and
Cargill's fiscal year ends September 30.
For 1998, the Corporation reported net income of $3,377,000, or $.82 per share
basic and $.79 diluted, after providing $41,000 for loan losses. This compares
to net income for 1997 of $3,384,000, or $.88 per share basic and $.85 diluted.
The Corporation's 1997 earnings reflected a provision for loan losses of
$306,000. Net interest income increased $706,000 from 1997 to 1998.
Non-interest expense amounted to $12,200,000 in 1998 compared to $11,066,000 in
1997, an increase of $1,134,000, or 10%. The increase in operating expenses for
1998 is a direct result of reflecting $595,000 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 declined by $102,000
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
$142,000, gains on sale of mortgages totaled $120,000, while service charges on
deposit accounts and other non-interest income declined by $108,000 compared to
1997. Income taxes in 1998 totaled $2,148,000, a decrease of $258,000 versus
1997.
At December 31, 1998, the Corporation's total assets were $402,623,000, an
increase of $47,056,000 or 13%, from $355,567,000 at year-end 1997. The higher
level of assets resulted primarily from an increase in net loans and investments
totaling $48,875,000 funded by the growth in deposits.
Non-performing assets amounted to $1,494,000 or .37% of total assets at December
31, 1998, compared with $2,025,000 or .68% 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 and Cargill's capital was at a level that placed each Bank in
the "well capitalized" category as defined by FDICIA.
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
FDICIA imposes a variety of other restrictions and requirements on insured
banks. These include significant regulatory reporting requirements such as
insuring that a system of risk-based deposit insurance premiums and civil money
penalties for inaccurate deposit reporting exists. In addition, FDICIA imposes a
system of regulatory standards for bank and bank holding company operations,
detailed truth in savings disclosure requirements, and restrictions on
activities authorized by state law but not authorized for national banks.
COMPONENTS OF CAPITAL
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.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stockholders' Equity
Common stock $8,397 $7,865 $7,343
Additional paid-in-capital 11,076 9,711 8,386
Retained earnings 10,803 9,282 7,087
Accumulated other
comprehensive income (loss) 214 60 (99)
- - ----------------------------------------------------------------------------------------------------------------
Total Capital $30,490 $26,918 $22,717
================================================================================================================
Ratio of capital
to average total assets 7.53% 7.44% 7.00%
</TABLE>
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%) 11.94% 11.57% 10.58%
Total risk-based capital (minimum required 8%) 13.00% 12.77% 11.76%
================================================================================================================
</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 and investments, rate-insensitive checking accounts as well as a
combination of fixed and variable rate deposit products and borrowed funds. 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
that 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> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
On a quarterly basis, an interest rate risk exposure compliance report is
prepared and presented to the 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>
<CAPTION>
Percentage Change in
Change in Interest Rates Net Interest Income
(In Basis Points) 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
+200 (5.21)% (1.41)%
Level 0% 0%
-200 (0.71)% 1.40%
</TABLE>
The change in net interest income between 1998 and 1997 when rates decline 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> 10
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 $3,174 $1,549 $6,380 $ 73,225 $84,328
Interest bearing cash 391 595 894 1,880
Loans 50,916 45,162 97,771 101,929 295,778
Federal funds sold 1,069 1,069
- - ------------------------------------------------------------------------------------------------------------------------------
55,550 47,306 105,045 175,154 383,055
INTEREST BEARING LIABILITIES
Savings deposits 5,369 48,320 53,689
NOW Accounts 2,600 23,393 25,993
Money market accounts 29,659 29,659
Negotiated rate certificates 13,299 8,439 3,373 25,111
Other time deposits 39,198 78,436 38,786 156,420
Borrowed funds 20,309 510 6,988 27,807
- - ------------------------------------------------------------------------------------------------------------------------------
$102,465 $95,354 $ 120,860 $318,679
==============================================================================================================================
Interest Rate
Sensitivity Gap $(46,915) $(48,048) $(15,815) $175,154 $64,376
Cumulative Interest Rate
Sensitivity Gap $(46,915) $(94,963) $(110,778) $64,376
Interest Rate
Sensitivity Gap Ratio (12.24%) (12.54%) (4.15%) 45.68% 16.75%
Cumulative Interest Rate
Sensitivity Gap Ratio (12.24%) (24.79%) (28.93%) 16.75%
</TABLE>
The presentation of a run off and repricing of savings accounts and NOW accounts
is based on the Corporation's historical experience with $5,369,000 and
$2,600,000, 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.
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:
9
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
1998 1997 1996
Average Average Average
Interest Yield/ Interest Yield/ Interest Yield/
Average Income/ Rate Average Income/ Rate Average Income/ Rate
(Dollars in Thousands) Balance Expense Paid Balance Expense Paid Balance Expense Paid
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
U.S. Treasury $3,663 $221 6.03% $6,978 $430 6.16% $9,150 $591 6.46%
Federal agencies 61,856 3,994 6.46 42,072 2,833 6.73 26,044 1,768 6.79
Other securities 4,969 304 6.12 3,835 240 6.26 4,158 279 6.71
- - -----------------------------------------------------------------------------------------------------------------------------------
Total securities 70,488 4,519 6.41 52,885 3,503 6.62 39,352 2,638 6.70
- - -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing cash and
temporary investments 792 29 3.66 1,340 73 5.45 2,592 163 6.29
- - -----------------------------------------------------------------------------------------------------------------------------------
Loans: (a)
Commercial 41,129 3,810 9.26 38,058 3,640 9.56 35,558 3,351 9.42
Real estate 213,377 17,400 8.15 205,984 17,153 8.33 190,235 15,871 8.34
Consumer 30,123 2,435 8.08 26,024 2,100 8.07 20,573 1,789 8.70
- - -----------------------------------------------------------------------------------------------------------------------------------
Total loans 284,629 23,645 8.31 270,066 22,893 8.48 246,366 21,011 8.53
Federal funds sold 7,761 438 5.64 4,800 255 5.31 4,845 247 5.10
- - -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 363,670 $28,631 7.87% 329,091 $26,724 8.12% 293,155 $24,059 8.21%
- - -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (2,920) (2,840) (3,383)
Cash and due from banks 11,120 10,888 10,704
Other assets 11,054 11,422 12,587
- - -----------------------------------------------------------------------------------------------------------------------------------
Total assets $382,924 $348,561 $313,063
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing deposits:
Savings $50,588 $1,382 2.73% $47,020 $1,160 2.47% $43,932 $978 2.23%
Money market 31,663 1,195 3.77 17,132 572 3.34 14,172 373 2.63
Negotiated rate certificates 22,977 1,118 4.87 18,528 922 4.98 16,621 829 4.99
Other time deposits 181,085 8,967 4.95 184,165 9,146 4.97 162,154 8,083 4.98
- - -----------------------------------------------------------------------------------------------------------------------------------
Total time deposits 286,313 12,662 4.42 266,845 11,800 4.42 236,879 10,263 4.33
Borrowed funds 16,906 630 3.73 9,065 291 3.21 8,714 261 3.00
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 303,219 13,292 4.38 275,910 12,091 4.38 245,593 10,524 4.29
Demand deposits 48,797 45,880 43,976
Other liabilities 1,679 2,133 1,717
Stockholders' equity 29,229 24,638 21,777
- - -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $382,924 $348,561 $313,063
===================================================================================================================================
Net interest income $15,339 $14,633 $13,535
Yield spread 3.49% 3.74% 3.92%
Net Yield on earning assets 4.22% 4.45% 4.62%
===================================================================================================================================
</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 3.49% from 3.74% in 1997, down 25
basis points. The Corporation's net interest margin decreased during 1998 to
4.22% from 4.45% in 1997, a decrease of 23 basis points
During 1997, the yield spread declined to 3.74% from 3.92% in 1996, down 18
basis points. The Corporation's net interest margin decreased during 1997 to
4.45% from 4.62% in 1996, a decrease of 17 basis points. The section titled
Rate/Volume Analysis further describes the change in yields.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
RATE/VOLUME ANALYSIS OF INTEREST MARGIN ON EARNING ASSETS
The following table sets forth, for each major category of interest-earning
assets and interest-bearing liabilities, the dollar amounts of interest income
(calculated on a taxable equivalent basis) and interest expense and changes
therein for 1998 as compared with 1997 and 1997 compared with 1996.
<TABLE>
<CAPTION>
1998 Compared With 1997 1997 Compared With 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
Increase Due to* Increase Due to*
(Dollars in Thousands) 1998 1997 (Decrease) Volume Rate 1997 1996 (Decrease) Volume Rate
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earned:
Securities:
U.S. Treasury $221 $430 $(209) $(200) $(9) $430 $591 $(161) $(140) $(21)
Federal agencies 3,994 2,833 1,161 1,281 (120) 2,833 1,768 1,065 1,058 7
Other securities 304 240 64 69 (5) 240 279 (39) (18) (21)
Interest-bearing cash 29 73 (44) (24) (20) 73 163 (90) (86) (4)
Loans:
Commercial 3,810 3,640 170 286 (116) 3,640 3,351 289 239 50
Real estate 17,400 17,153 247 600 (353) 17,153 15,871 1,282 1,314 (32)
Consumer 2,435 2,100 335 332 3 2,100 1,789 311 446 (135)
Federal funds sold 438 255 183 166 17 255 247 8 (2) 10
- - -----------------------------------------------------------------------------------------------------------------------------------
28,631 26,724 1,907 2,510 (603) 26,724 24,059 2,665 2,811 (146)
- - -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings 1,382 1,160 222 93 129 1,160 978 182 73 109
Money market 1,195 572 623 540 83 572 373 199 87 112
Negotiated rate certificates 1,118 922 196 218 (22) 922 829 93 96 (3)
` Other time deposits 8,967 9,146 (179) (142) (37) 9,146 8,083 1,063 1,109 (46)
Borrowed funds 630 291 339 285 54 291 261 30 11 19
- - -----------------------------------------------------------------------------------------------------------------------------------
13,292 12,091 1,201 994 207 12,091 10,524 1,567 1,376 191
- - -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $15,339 $14,633 $706 $1,516 $(810) $14,633 $13,535 $1,098 $1,435 $(337)
===================================================================================================================================
</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 $15,339,000, up 5% from $14,633,000 in
1997. An 11% increase in average earning assets and a 25 basis point decline in
average rate of return resulted in an increase in volume of $2,510,000 and a
decrease in rate of $603,000. An increase of 10% in average interest-bearing
liabilities and a 1 basis point increase in average rate of interest paid
contributed to an increase in volume of $994,000 and an increase in rate of
$207,000.
Net interest income for 1997 increased to $14,633,000, up 8% from $13,535,000 in
1996. A 16% increase in average earning assets and a 9 basis point decline in
average rate of return resulted in an increase in volume of $2,811,000 and a
decrease in rate of $146,000. An increase of 12% in average interest-bearing
liabilities and a 9 basis point increase in average rate of interest paid
contributed to an increase in volume of $1,376,000 and an increase in rate of
$191,000.
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. 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> 13
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 $ 7,296
Federal agency obligations 26,890 32,927 13,827
Mortgage-backed securities 2,728 2,330 1,814
Other debt securities 99 2,440
- - ----------------------------------------------------------------------
Amortized cost $30,616 $39,602 $25,377
======================================================================
</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 26,667 3,486 2,465
Mortgage-backed securities 24,372 13,502 8,807
Equity securities 1,745 1,664 1,125
- - --------------------------------------------------------------------------------
53,712 20,710 14,387
Gross unrealized (gain) loss on
securities available for sale (352) (104) 170
- - --------------------------------------------------------------------------------
Amortized cost $ 53,360 $ 20,606 $ 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 5.78% $ 1,926
Federal agency
obligations 5.19 1,499 6.43 4,442 6.21% $44,477 6.49% $ 3,400 6.22% 53,818
Mortgage-backed
securities 5.50 56 6.26 1,440 6.48 1,004 6.58 23,987 6.56 26,487
- - ------------------------------------------------------------------------------------------------------------------------------
Total debt
Securities 5.40% $ 2,983 6.37% $ 6,380 6.22% $45,481 6.57% $27,387 6.32% $82,231
==============================================================================================================================
</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> 14
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 $ 41,760 $ 41,661 $ 36,153 $ 36,080 $ 35,156
- - -------------------------------------------------------------------------------------------
Real Estate:
Construction 5,998 5,302 6,662 8,526 8,900
Residential (1-4 family) 168,744 152,896 153,781 132,530 113,327
Commercial properties 60,348 55,127 45,506 51,059 61,311
- - -------------------------------------------------------------------------------------------
Total Real Estate 235,090 213,325 205,949 192,115 183,538
- - -------------------------------------------------------------------------------------------
Consumer 19,277 16,648 15,943 9,701 10,240
- - -------------------------------------------------------------------------------------------
Gross loans 296,127 271,634 258,045 237,896 228,934
Deferred loan origination
fees-net of costs (349) (323) (398) (445) (339)
- - -------------------------------------------------------------------------------------------
Total Loans 295,778 271,311 257,647 237,451 228,595
Allowance for loan
losses (2,665) (3,057) (2,699) (3,924)
(3,402)
- - -------------------------------------------------------------------------------------------
Net loans $ 293,113 $ 268,254 $ 254,948 $ 233,527 $ 225,193
===========================================================================================
</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 and Northeastern
Connecticut areas. The aggregate amount of loans to executive officers,
directors and organizations with which they are associated amounted to
$3,041,000 or 7.8% of stockholders' equity as of December 31, 1998, compared to
$2,386,000 or 8.9% 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:
<TABLE>
<CAPTION>
12 Months 1 - 5 After
(Dollars in Thousands) or Less Years 5 Years Total
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $32,576 $ 7,457 $ 1,727 $41,760
Commercial real estate-construction 5,998 5,998
- - -------------------------------------------------------------------------------
Totals $38,574 $ 7,457 $ 1,727 $47,758
===============================================================================
</TABLE>
Of the commercial loans which mature beyond one year, approximately $4,291,000
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 $9,281,000 and $31,457,000, respectively, at December 31,
1998 and $10,257,000 and $29,533,000, respectively, in 1997. See further
discussion in Note 13 to the Consolidated Financial Statements.
13
<PAGE> 15
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 of the collectibility of the loan portfolio, taking
into consideration such factors as the financial condition of individual
borrowers, historical loss experience with respect to various portfolio
segments, current and near-term economic conditions, and the size of the
portfolio. Based on 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 $ 3,057 $ 2,699 $ 3,924 $ 3,402 $ 3,511
Provision charged to expense 41 306 944 2,907 1,528
- - --------------------------------------------------------------------------------------------------------------------------
3,098 3,005 4,868 6,309 5,039
- - --------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Loans secured by real estate 318 394 1,745 2,180 1,305
Construction/land development 190 12
Commercial and
industrial loans 153 250 510 246 487
Consumer loans 47 116 94 122 96
- - --------------------------------------------------------------------------------------------------------------------------
518 760 2,539 2,560 1,888
- - --------------------------------------------------------------------------------------------------------------------------
Recoveries:
Loans secured by real estate 42 354 324 24 25
Construction/land developing 14 75
Commercial and
industrial loans 30 445 12 51 210
Consumer loans 13 13 20 25 16
- - --------------------------------------------------------------------------------------------------------------------------
85 812 370 175 251
- - --------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 433 (52) 2,169 2,385 1,637
- - --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 2,665 $ 3,057 $ 2,699 $ 3,924 $ 3,402
Average loans outstanding $ 284,629 $ 270,066 $ 246,366 $ 232,423 $ 214,846
==========================================================================================================================
Net charge-offs (recoveries) as a percentage
of average loans 0.15% (0.02)% 0.88% 1.03% 0.76%
Net charge-offs (recoveries) as a percentage of
the allowance at January 1 14.16 (1.93) 55.28 70.11 46.62
Allowance as a percentage of total
loans at December 31 0.90 1.13 1.05 1.65 1.49
Allowance as a percentage of
non-performing loans
at December 31 259.24 166.87 85.41 55.42 51.70
</TABLE>
14
<PAGE> 16
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 $1,764 77.38% $2,083 76.55% $1,763 77.23% $2,898 77.17% $2,626 76.28%
Construction/land
development 70 2.03 83 1.97 94 2.58 156 3.58 127 3.89
Commercial and industrial
loans 628 14.10 697 15.35 685 14.01 776 15.17 522 15.36
Consumer loans 203 6.49 194 6.13 157 6.18 94 4.08 127 4.47
- - -----------------------------------------------------------------------------------------------------------------------------------
$2,665 100% $3,057 100% $2,699 100% $3,924 100% $3,402 100%
===================================================================================================================================
</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. The decline in the allowance for loan losses from 1997 to
1998 is a result of the improved credit quality of the loan portfolio, in
combination with the continued improvement in the local economy.
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 $ 797 $ 1,648 $ 2,878 $ 6,578 $ 5,378
- - ------------------------------------------------------------------------------------------------------
Non-accrual loans as a percentage
of total net loans outstanding 0.27% 0.61% 1.13% 2.82% 2.39%
Non-accrual loans as a percentage
of total assets 0.20% 0.46% 0.87% 2.20% 1.89%
Loans contractually past due 90
days or more and still accruing $ 231 $ 184 $ 282 $ 503 $ 1,202
</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 $35,000,
$79,000, $240,000, $331,000 and $408,000 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> 17
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 $1,419,000 and $1,809,000 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 $1,366,000 compared to $2,080,000 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 $773,000 in 1995 and
$681,000 in 1994. Interest income reduction because of restructuring was not
significant for 1995 and 1994.
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 $ 466 $ 353 $ 631 $ 1,574 $ 1,733
Other real estate owned as a
percentage of total assets .12% .10% .19% .53% .61%
</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 $50,588 2.73% $47,020 2.47% $43,932 2.23%
Money market 31,663 3.77 17,132 3.34 14,172 2.63
Negotiated rate certificates 22,977 4.87 18,528 4.98 16,621 4.99
Other time deposits 181,085 4.95 184,165 4.97 162,154 4.98
- - ------------------------------------------------------------------------------------------------------------------------------
286,313 4.42% 266,845 4.42% 236,879 4.33%
Demand deposits 48,797 45,880 43,976
- - ------------------------------------------------------------------------------------------------------------------------------
$335,110 $312,725 $280,855
==============================================================================================================================
</TABLE>
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 $13,298 $4,349 $4,090 $3,374 $26,880
=============================================================================================================================
</TABLE>
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 .88% .97% .68%
Return on average stockholders' equity 11.55 13.73 9.81
Average stockholders' equity to average total assets 7.57 7.07 6.96
Dividend payout ratio 44.54 30.76 36.78
</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 $27,807 $11,884 $ 9,269
Average amount outstanding 16,442 9,065 8,714
Maximum amount outstanding at any month-end 28,307 14,036 12,794
Average interest rate for the year 3.83% 3.20% 2.99%
Average interest rate on
year-end balance 3.85 3.15 3.03
</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, and a Connecticut state-chartered savings bank, Cargill Bank.
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 $15,339 $14,633 $13,535 4.82% 8.11%
Provision for loan losses 41 306 944 (86.60) (67.58)
Non-interest income 2,427 2,529 2,340 (4.03) 8.08
Non-interest expense 12,200 11,066 11,278 10.25 (1.88)
Income taxes 2,148 2,406 1,516 (10.72) 58.71
- - ------------------------------------------------------------------------------------------------------
Net Income $ 3,377 $ 3,384 $ 2,137 (0.21%) 58.35%
======================================================================================================
</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 $28,631,000 as compared to
$26,724,000 for 1997 and $24,059,000 for 1996. For 1998 this represents an
increase of $1,907,000 or 7% over 1997, while interest income increased by
$2,665,000 or 11% in 1997 versus 1996. The increase in 1998 is the result of an
increase in average earning assets of $34,579,000 or 11%, 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 $35,936,000
offset by a 9 basis point decrease in average earning interest rate.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
INTEREST EXPENSE
Interest expense for 1998 on deposits and borrowings amounted to $13,292,000 as
compared to $12,091,000 in 1997 and $10,524,000 for 1996. Interest expense
increased by $1,201,000 or 10% during 1998 compared to 1997 and 1997 interest
expense increased by $1,567,000 or 15% versus 1996. The 1998 increase is the
result of an increase in average interest-bearing liabilities of $27,309,000 and
a 1 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 $30,614,000 combined with a
9 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 $28,631 $26,724 $24,059
Total interest expense 13,292 12,091 10,524
- - ----------------------------------------------------------------------------------------------------------------
Net interest income $15,339 $14,633 $13,535
================================================================================================================
</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.
PROVISION FOR LOAN LOSSES
The 1998 provision for loan losses totaled $41,000 compared with $306,000 in
1997, a decrease of 87%. During 1997, the provision decreased by $638,000 versus
1996, representing a decrease of 68%. 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 $2,427,000 in 1998, a decrease of
$102,000 from the prior year and an increase of $189,000 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 $42,000 and decreases from the gain on sale of
investments, other real estate and mortgages totaling $27,000 compared to 1997.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 $ 5,797 $ 5,461 $ 5,091
Occupancy 855 780 792
Other non-interest expense 5,444 4,604 4,781
Other real estate
owned expenses and provision 104 221 614
- - ----------------------------------------------------------------------------
$12,200 $11,066 $11,278
============================================================================
</TABLE>
Overall non-interest expense increased during 1998 by $1,058,000 versus 1997 and
by $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 $595,000 of merger expense related to the acquisition of Cargill
Bancorp, Inc., combined with overall corporate growth during 1998.
INCOME TAXES
For the year ended December 31, 1998 Westbank Corporation recorded a tax expense
of $2,148,000 compared to 1997, when the Corporation recorded a tax expense of
$2,406,000. The lower tax expense for 1998 was the result of a lower tax rate
during 1998.
NET INCOME
The net income for 1998 of $3,377,000, or $.82 per share basic and $.79 per
share diluted, is based on a weighted average of 4,143,009 basic and 4,272,682
diluted shares outstanding, compared with a net income for 1997 of $3,384,000,
or $.88 per share basic and $.85 per share diluted based on a weighted average
of 3,845,698 basic and 4,003,015 diluted. Net income in 1996 was $2,137,000, or
$.59 per share basic and $.57 per share diluted and based on weighted average
shares of 3,643,270 basic and 3,762,419 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.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED)
Westbank Corporation and Subsidiaries
YEAR 2000
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 $141,000 in
Year 2000-related expenses and has estimated that capital expenditures related
to the Year 2000 issue will total approximately $510,000.
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.
20
<PAGE> 22
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Westbank Corporation and Subsidiaries
December 31,
(Dollars in Thousands, except share amounts) 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest bearing $11,291 $10,783
Interest bearing 1,880 2,065
- - -----------------------------------------------------------------------------------------------------------------------------
13,171 12,848
Federal funds sold 1,069 3,678
Total cash and cash equivalents 14,240 16,526
- - -----------------------------------------------------------------------------------------------------------------------------
Securities (Note 2):
Investment securities available for sale 53,712 20,710
Investment securities held to maturity
(fair value of $30,817 in 1998 and $39,771 in 1997) 30,616 39,602
- - -----------------------------------------------------------------------------------------------------------------------------
Total securities 84,328 60,312
- - -----------------------------------------------------------------------------------------------------------------------------
Loans, net of allowance for loan losses
of $2,665 in 1998 and $3,057 in 1997 (Note 3) 290,767 263,808
Mortgage loans held for sale (Note 3) 2,346 4,446
- - -----------------------------------------------------------------------------------------------------------------------------
Total loans 293,113 268,254
- - -----------------------------------------------------------------------------------------------------------------------------
Property and equipment (Note 4) 6,851 5,901
Other real estate owned, net of allowance for losses
$200 in 1997 (Note 5) 466 353
Accrued interest receivable 2,457 2,240
Other assets 1,168 1,981
- - -----------------------------------------------------------------------------------------------------------------------------
Total assets $402,623 $355,567
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 6):
Non-interest bearing $51,395 $50,443
Interest bearing 290,872 264,236
- - -----------------------------------------------------------------------------------------------------------------------------
Total deposits 342,267 314,679
Borrowed funds (Note 7) 27,807 11,884
Interest payable on deposits 429 385
Other liabilities 1,630 1,701
- - -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 372,133 328,649
- - -----------------------------------------------------------------------------------------------------------------------------
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
4,198,838 shares in 1998 and 3,932,535 shares in 1997 8,397 7,865
Additional paid-in capital 11,076 9,711
Retained earnings 10,803 9,282
Accumulated other comprehensive income 214 60
- - -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 30,490 26,918
- - -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $402,623 $355,567
=============================================================================================================================
</TABLE>
21
<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 $23,645 $22,893 $21,011
Interest and dividend income from securities 4,614 3,569 2,773
Interest from interest bearing cash
and federal funds sold 372 262 275
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 28,631 26,724 24,059
- - -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 12,662 11,800 10,263
Interest on borrowed funds 630 291 261
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 13,292 12,091 10,524
- - -----------------------------------------------------------------------------------------------------------------------------
Net interest income 15,339 14,633 13,535
Provision for loan losses (Note 3) 41 306 944
- - -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 15,298 14,327 12,591
- - -----------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Trust department income 498 465 425
Service charges on deposits 766 808 867
Loan servicing 470 494 505
Gain on sale of securities available for sale 141 259 112
Gain on sale of other real estate owned (Note 5) 43 67 3
Gain on sale of mortgages 120 5 9
Other non-interest income 389 431 419
- - -----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2,427 2,529 2,340
- - -----------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and benefits (Note 9) 5,797 5,461 5,091
Depreciation and amortization 851 772 743
Data processing 808 751 652
Occupancy expense 802 794 802
Other real estate owned expenses (Note 5) 104 221 614
Other non-interest expense (Note 14) 3,838 3,067 3,376
- - -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 12,200 11,066 11,278
- - -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,525 5,790 3,653
Income taxes (Note 8) 2,148 2,406 1,516
- - -----------------------------------------------------------------------------------------------------------------------------
Net income $ 3,377 $ 3,384 $ 2,137
=============================================================================================================================
Earnings per share (Note 11):
- Basic $ .82 $ .88 $ .59
- Diluted .79 .85 .57
=============================================================================================================================
Weighted average shares outstanding (Note 11):
- Basic 4,143,009 3,845,698 3,643,270
- Diluted 4,272,682 4,003,015 3,762,419
=============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 24
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in Thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $3,377 $3,384 $2,137
- - -------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale, net of income taxes
(benefit) of $150 in 1998, $271 in 1997, and ($71) in 1996. 249 327 (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. 92 168 66
- - -------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 157 159 (165)
- - -------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $3,534 $3,543 $1,972
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
Par paid-in Retained Comprehensive
(Dollars in Thousands, except share amounts) Shares Value capital earnings Income/(Loss) Total
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 3,530,981 $7,062 $7,816 $5,842 $66 $20,786
Net income 2,137 2,137
Cash dividends declared
($.24 per share) (784) (784)
Stock dividend
(1% on Cargill Bancorp shares) 15,248 30 78 (108)
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 3,671,428 7,343 8,386 7,087 (99) 22,717
Net income 3,384 3,384
Cash dividends declared
($.30 per share) (1,040) (1,040)
Stock dividend
(1% on Cargill Bancorp shares) 16,076 32 117 (149)
Shares issued:
Stock option plan 98,612 197 116 313
Dividend reinvestment
and stock purchase plan 146,419 293 1,092 1,385
Changes in unrealized gain (loss) on
securities available for sale 159 159
- - ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,932,535 7,865 9,711 9,282 60 26,918
Net income 3,377 3,377
Cash dividends declared
($.40 per share) (1,503) (1,503)
Stock dividend
(1% on Cargill Bancorp shares) 17,389 35 93 (129) (1)
Shares issued:
Stock option plan 199,799 399 742 1,141
Dividend reinvestment
and stock purchase plan 49,115 98 530 628
Cargill interim loss for the quarter
ended December 31, 1998 (Note 1) (224) (224)
Changes in unrealized gain (loss) on
securities available for sale 154 154
- - ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 4,198,838 $8,397 $11,076 $10,803 $214 $30,490
==============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 26
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 $ 3,377 $ 3,384 $ 2,137
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Cargill interim loss for period ended December 31, 1998 (224)
Provision for loan losses 41 306 944
Provision for other real estate owned 22 109 501
Depreciation and amortization 851 772 743
Realized gain on sale of securities (141) (259) (112)
Realized gain on sale of other real estate owned (43) (67) (3)
Realized gain on miscellaneous assets (83)
Realized gain on sale of mortgages (120) (5) (9)
Deferred income taxes (107) 164 368
Change in:
(Increase)/Decrease in loans held for sale 2,100 (8,099) 1,313
(Increase)/Decrease in accrued interest receivable (217) (314) 13
Other assets 814 90 431
Interest payable on deposits 44 51 19
Increase/(Decrease)Other liabilities 36 147 272
- - ------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 6,433 (3,721) 6,534
==============================================================================================================================
Investing activities:
Securities:
Held to maturity:
Purchases (21,473) (28,920) (14,373)
Proceeds from maturities 30,459 15,557 10,467
Available for sale:
Purchases (41,210) (8,748) (3,013)
Proceeds from sales 8,607 10,019 2,857
Proceeds from maturities 5,164 2,484 6,858
Proceeds on sale of miscellaneous assets 296
Purchases of premises and equipment (1,801) (835) (1,099)
Net increase in loans (32,987) (15,210) (29,076)
Proceeds from sale of other real estate owned 618 791 1,182
- - ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (52,623) (24,862) (25,901)
==============================================================================================================================
Financing activities:
Net increase in deposits 27,588 16,660 28,493
Net increase in short-term borrowings 8,923 2,615 1,592
Increase in long-term borrowings 7,000
Proceeds from exercise of stock options
and stock purchase plan 1,897 1,699 743
Dividends paid (1,504) (1,041) (785)
- - ------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities 43,904 19,933 30,043
- - ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,286) (8,650) 10,676
Cash and cash equivalents at beginning of year 16,526 25,176 14,500
- - ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $14,240 $16,526 $25,176
==============================================================================================================================
Cash paid during the year:
Interest on deposits and other borrowings $13,075 $11,754 $10,506
Income taxes 2,103 1,990 1,287
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 701 806 1,280
Transfer of miscellaneous asset from other real estate owned
to premises and equipment 291
Loans to facilitate the sale of other real estate owned 618 120 667
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Westbank Corporation and Subsidiaries
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 two banking subsidiaries (the
"Banks"), Park West Bank and Trust Company ("Park West") with thirteen banking
offices and a trust department located in Hampden County, Massachusetts, and
Cargill Bank ("Cargill") with three offices in Windham County, Connecticut. A
full range of retail banking services are furnished to individuals, businesses
and non-profit organizations. The Corporation's primary source of revenue is
derived from providing loans to customers, predominately located in Western
Massachusetts and Northeast Connecticut.
MERGER
Effective January 29, 1999, Cargill Bancorp, Inc., and its subsidiary
("Cargill") were merged with and into Westbank Corporation ("Westbank"),
pursuant to a plan of merger dated July 15, 1998. Each share of Cargill common
stock was converted into 1.3655 shares of the Corporation's common stock. A
total of 400,164 Westbank common shares were issued for the outstanding common
stock of Cargill.
The transaction was accounted for using the pooling-of-interests method and,
accordingly, all historical financial data has been restated to include both
entities for all periods presented. Directs costs of mergers accounted for by
the pooling-of-interests method are expensed as incurred. Merger-related costs
expensed in 1998 aggregated $595,000. These merger expenses included legal,
accounting, regulatory and severance costs, as well as integration costs such as
conversions, abandonments and relocations, etc. The restatement of the
historical financial data is based on Westbank's fiscal year end December 31 and
Cargill's fiscal year end September 30. The Cargill loss of $224,000 for the
quarter ended December 31, 1998, has been included directly in stockholders'
equity in order to conform Cargill's reporting periods to the Corporation's as
of December 31, 1998. For the quarter ended December 31, 1998, Cargill had net
interest income of $456,000 and a net loss of $224,000. Included in operating
expenses were $346,000 of merger and related costs that were primarily the cause
of their loss.
The following table presents summary results of operations for the companies for
the immediate years prior to the merger:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Westbank Cargill Combined
-------- ------- --------
<S> <C> <C> <C>
1998: Net interest income $13,442 $1,897 $15,339
Net income 3,256 121 3,377
1997: Net interest income $12,784 $1,849 $14,633
Net income 3,231 153 3,384
1996: Net interest income $11,842 $1,693 $13,535
Net income (loss) 2,248 (111) 2,137
</TABLE>
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiaries, Park West Bank and Trust Company, its
subsidiaries, Lorac Leasing Corp., Park West Securities Corporation and PWB&T
Inc., and Cargill Bank. 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 two community banks offering different products and
services. Since the Corporation derives a significant portion of its revenue and
expense from the Banks, no meaningful allocation of its resources is possible.
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 Corporation's
allowances for losses on loans and other real estate owned. Such agencies may
require the Corporation to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
NEW ACCOUNTING STANDARDS
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 2001 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.
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 $3,049,000 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 Corporation's own inventory of
residential real estate loans are also considered available for sale. Gains and
losses on sales of securities are recognized in 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. The Corporation does not engage in trading activities.
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.
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 Corporation 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 Corporation evaluates each impaired loan to
determine the appropriate income recognition practice. Generally, income is
recorded only on a cash basis for impaired loans.
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 Corporation has
acquired through foreclosure. OREO is recorded at the lower of cost or fair
value at the date of acquisition, less estimated selling costs. At the time of
foreclosure, the excess, if any, of the loan amount over the fair value of the
asset acquired is charged off against the allowance for loan losses. Operating
expenses to administer OREO properties are charged directly to operating
expenses. Valuation allowances are established subsequent to acquisition, as
necessary, based upon management's continuing assessment of the fair values of
the properties. Loans granted in conjunction with sales of OREO are required to
comply with the Corporation's standard underwriting criteria, including receipt
of an adequate down payment.
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
LOAN SALES AND SERVICING RIGHTS
The Corporation sells loans in the secondary market and retains the related
servicing rights. Mortgage servicing rights are recognized as an asset when
loans are sold with servicing retained, by allocating the cost of an originated
mortgage loan between the loan and the servicing right based on estimated
relative fair values. The cost allocated to the servicing right is capitalized
as a separate asset and amortized in proportion to, and over the period of,
estimated net servicing income.
Capitalized mortgage servicing rights are evaluated for impairment by comparing
the asset's unamortized cost to its current estimated fair value. Fair values
are estimated using a discounted cash flow approach, which considers future
servicing income and costs, current market interest rates, and anticipated
prepayment and default rates. In making impairment evaluations, mortgage
servicing rights are stratified based on one or more of the predominant risk
characteristics of the underlying loans. The Corporation has stratified its
servicing portfolio for this purpose between fixed and adjustable rate loans.
Impairment losses, if any, are recognized through a valuation allowance for each
impaired stratum. Adjustments to the valuation allowance are charged or credited
to income.
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.
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 at the date of grant.
Because stock options are granted with fixed terms and with an exercise price
equal to the market price of the common stock at the date of grant, there is no
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.
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 26,890 145 27,035 145
Mortgage-backed securities 2,728 30 $2 2,756 28
- - ------------------------------------------------------------------------------------------------------------------------------
$30,616 $203 $2 $30,817 $201
=============================================================================================================================
</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 32,927 121 20 33,028 101
Mortgage-backed securities 2,330 43 9 2,364 34
Certificates of deposit 99 99
- - -----------------------------------------------------------------------------------------------------------------------------
$39,602 $199 $30 $39,771 $169
=============================================================================================================================
</TABLE>
During 1998 and 1997 there were no sales of investment securities classified as
held to maturity. 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 26,629 $124 $ 86 26,667 $ 38
Equity securities 1,716 29 1,745 29
Mortgage-backed securities 24,087 299 14 24,372 285
- - -----------------------------------------------------------------------------------------------------------------------------
$53,360 $452 $100 $ 53,712 $ 352
=============================================================================================================================
</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 1,642 22 1,664 22
Mortgage-backed securities 13,406 97 1 13,502 96
- - ------------------------------------------------------------------------------------------------------------------------------
$20,606 $122 $18 $20,710 $104
==============================================================================================================================
</TABLE>
During 1998 and 1997, the Corporation recognized gross gains on securities
available for sale totaling $141,000 and $259,000, respectively.
The contractual maturities of held-to-maturity and available-for-sale
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.
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
Amortized Fair
(Dollars in Thousands) cost value
- - -----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
<S> <C> <C>
Within 1 year $ 499 $ 505
Over 1 year to 5 years 5,821 5,901
Over 5 years to 10 years 23,346 23,458
Over 10 years 950 953
- - -----------------------------------------------------------------------------------------------------------------------------
Total bond and debt obligations $30,616 $ 30,817
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Amortized Fair
(Dollars in Thousands) cost value
- - -----------------------------------------------------------------------------------------------------------------------------
Available for Sale:
<S> <C> <C>
Within 1 year $ 2,484 $ 2,479
Over 1 year to 5 years 558 565
Over 5 years to 10 years 22,475 22,226
Over 10 years 26,454 26,696
- - -----------------------------------------------------------------------------------------------------------------------------
Total bond and debt obligations $51,971 $ 51,966
=============================================================================================================================
</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.
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 $ 41,760 $ 41,661
Real estate construction 5,998 5,302
Real estate 229,092 208,023
Consumer 19,277 16,648
- - ----------------------------------------------------------------------------------------------------------------------------
296,127 271,634
Allowance for loan losses (2,665) (3,057)
Deferred loan origination fees (349) (323)
- - ----------------------------------------------------------------------------------------------------------------------------
$293,113 $268,254
=============================================================================================================================
</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 $ 3,057 $2,699 $3,924
Provision for loan losses 41 306 944
Loans charged off (518) (760) (2,539)
Recoveries 85 812 370
- - -----------------------------------------------------------------------------------------------------------------------------
$ 2,665 $3,057 $2,699
=============================================================================================================================
</TABLE>
The aggregate principal balance of non-accrual loans was $797,000 and $1,648,000
at December 31, 1998 and 1997 respectively. Contractual interest income that was
not recognized on such non-accrual loans was $35,000, $79,000 and $240,000 for
1998, 1997 and 1996, respectively.
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 $229,077,000 in real estate loans at December 31, 1998, $168,744,000 are
collateralized by 1-4 family dwellings. The majority of the collateral for these
loans is located in the Corporation's market area of Western Massachusetts and
Northeast Connecticut. Commercial real estate and real estate construction loans
represented $60,348,000 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 $41,760,000 at
December 31, 1998, represent loans made to businesses primarily in Western
Massachusetts.
The Corporation has had, and expects to have in the future, banking transactions
in the ordinary course of business with its directors and officers. Such loans,
in the opinion of management, do not include more than the normal risk of
collectibility nor other unfavorable features. The following summarizes the
activity with respect to indebtedness, both direct and indirect, for directors,
policy-making officers and major stockholders during the years ended December
31:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $2,386 $1,552
New loans granted 886 2,936
Repayments of principal (231) (2,102)
- - -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $3,041 $2,386
=============================================================================================================================
</TABLE>
At December 31, 1998 and 1997, the recorded investment in impaired loans was
$1,419,000 and $1,809,000, respectively, for which no additional specific
allowance for loan losses was recorded. For the years ended December 31, 1998,
1997 and 1996, the average recorded investment in impaired loans was $1,366,000,
$2,080,000 and $3,890,000, 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 that are on non-accrual status, impaired or restructured.
The Corporation services loans for others which are not included in the
consolidated balance sheets. The unpaid balances of these loans totaled
$115,391,000 and $133,359,000 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 $1,546 in 1998 and $1,187 in 1997) $5,214 $4,305 15-40 years
Capital lease building 263 263 15 years
Furniture and equipment 4,167 3,181 3-10 years
Leasehold and building
improvements 2,825 3,246 5-15 years
Motor vehicles 114 105 3 years
- - -----------------------------------------------------------------------------------------------------------------------------
12,583 11,100
Accumulated depreciation 5,732 5,199
- - -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment $6,851 $5,901
=============================================================================================================================
</TABLE>
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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
Real estate acquired through foreclosure - net of OREO provision 466 353
=============================================================================================================================
Changes in the allowance for other real estate owned losses are summarized as
follows:
(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>
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 51,395 50,443
Savings 53,689 45,902
N.O.W. 25,993 23,027
Money market deposits 29,659 25,677
Other time deposits 181,531 169,630
=============================================================================================================================
342,267 314,679
=============================================================================================================================
</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 130,174
2000 27,394
2001 10,219
2002 3,359
2003 and after 1,172
- - -----------------------------------------------------------------------------------------------------------
172,318
</TABLE>
Certificates of deposit with balances greater than or equal to $100,000 amounted
to $26,880,000 and $22,621,000 as of December 31, 1998 and 1997, respectively.
Interest paid on these deposits totaled approximately $1,250,000 and $1,046,000,
respectively.
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 7,310
Treasury tax and loan notes 1,274 3,594
- - -----------------------------------------------------------------------------------------------------------------------------
Total short term borrowings $20,807 $11,884
=============================================================================================================================
</TABLE>
The above short-term borrowings generally 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 May 12, 2003 $7,000
</TABLE>
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 $27,807 $11,884 $ 9,269
Average amount outstanding 16,442 9,065 8,714
Maximum amount outstanding at any month-end 28,307 14,036 12,794
Average interest rate for the year 3.83% 3.20% 2.99%
Average interest rate on year-end balance 3.85% 3.15% 3.03%
</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 that are renewed on an annual basis. There were no amounts outstanding
against either line as of December 31, 1998 or 1997. The Corporation had
additional short term borrowing capacity through the Federal Home Loan Bank of
$7,244,000 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.
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
8 - INCOME TAXES
The income taxes (benefits) were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
=============================================================================================================================
Current tax:
<S> <C> <C> <C>
Federal $1,943 $1,836 $921
State 312 408 328
Total current 2,255 2,244 1,249
- - -----------------------------------------------------------------------------------------------------------------------------
Deferred tax:
Deferred taxes (107) 164 368
Change in valuation allowance for deferred tax assets (2) (101)
Total deferred (107) 162 267
- - -----------------------------------------------------------------------------------------------------------------------------
Total income taxes $2,148 $2,406 $1,516
=============================================================================================================================
</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 4.4 6.1 6.9
Other .5 .5 .6
- - -----------------------------------------------------------------------------------------------------------------------------
38.9% 41.6% 41.5%
=============================================================================================================================
</TABLE>
35
<PAGE> 37
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
=============================================================================================================================
Deferred tax assets:
<S> <C> <C>
Other real estate owned $ 84
Deferred loan fees $ 122 112
Reserve for loan losses 96 86
Deferred income 17 22
Accrued expenses not deducted for tax 176 52
State tax net operating loss carryforward 99
Non-accrual interest 11 48
Amortization 12
Other 95 39
- - -----------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 529 542
Valuation allowance (99)
- - -----------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 529 443
- - -----------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Bond accretion 8 17
Unrealized gain on securities 151 44
Depreciation 345 314
Allowance for loan losses 193 249
Deferred FNMA premium 4 5
Prepaid pension 26
Earned income not yet taxed 141 112
Other 37 31
- - -----------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 879 798
- - -----------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $(350) $(355)
=============================================================================================================================
</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 in which the deferred tax assets are deductible,
management believes it is more likely than not that the Corporation will realize
the benefits of these deductible differences, net of the recorded valuation
allowance.
9 - PENSION PLAN
The Corporation has a defined contribution pension plan (money purchase),
covering substantially all of its employees at Park West and a defined benefit
plan for its employees at Cargill Bank. Contributions to the money purchase plan
are a percentage of individual employees' salary. Total pension expense for
1998, 1997 and 1996 amounted to $212,000, $204,000 and $213,000, respectively.
At May 31, 1998, the most recent plan year end of the money purchase plan, total
plan assets were $3,671,379 and the vested balance was $3,568,546. The money
purchase plan assets are invested in money market funds, government bonds,
corporate and government agency bonds and marketable securities. The defined
benefit plan is a multi-employer plan.
10 - STOCK OPTIONS
The Corporation has four 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 four 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:
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in Thousands, except per share data) 1998 1997 1996
==============================================================================================================================
<S> <C> <C> <C>
Net earnings - as reported $3,377 $3,384 $2,137
Net earnings - pro forma 2,709 3,003 1,649
Earnings per share - as reported - Basic .82 .88 .59
- Diluted .79 .85 .57
Earnings per share - pro forma - Basic .65 .78 .45
- Diluted .63 .75 .44
</TABLE>
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 Cargill Directors and
Officers Stock Option Plan during 1992.
The following is a summary of the changes in options outstanding under the
Cargill Directors and Officers Stock Option Plan:
<TABLE>
<CAPTION>
1998 1997 1996
==============================================================================================================================
<S> <C> <C> <C>
Options granted and exercisable
at the beginning of the year 113,657 124,113 133,685
Options exercised or expired (9,572)
Options exercised at $4.02 31,617 10,456
- - -----------------------------------------------------------------------------------------------------------------------------
Options granted and exercisable
at the end of the year 82,040 113,657 124,113
==============================================================================================================================
</TABLE>
Unless exercised the options will expire twenty 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 1996
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
<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 $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.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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>
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 4,143,009 $.82
1997 3,845,698 .88
1996 3,643,270 .59
Effect of Dilutive Option Shares:
1998 129,673 .03
1997 157,317 .03
1996 119,149 .02
Diluted Earnings Per Share:
1998 4,272,682 .79
1997 4,003,015 .85
1996 3,762,419 .57
</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 $ 298
2000 297
2001 196
2002 183
2003 117
After 2003 438
- - -----------------------------------------------------------------------------------------
Total minimum lease payments $1,529
=========================================================================================
</TABLE>
Rent expense for 1998, 1997 and 1996 amounted to $274,000, $273,000 and
$261,000, respectively.
38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 $ 9,281 $10,257
Stand-by letters of credit and financial guarantees 1,012 1,022
Commitments to advance funds under existing loan agreements 31,457 29,533
</TABLE>
The Corporation uses the same credit policies in making commitment and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since commitments may be expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
In the normal course of business, certain litigation is pending against the
Corporation. Management, after consultation with legal counsel, does not
anticipate that any ultimate liability arising out of such litigation will have
a material effect on the Corporation's financial condition or results of
operations.
14 - OTHER NON-INTEREST EXPENSE
The components of other non-interest expense, which are in excess of 1% of the
aggregate of total 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>
Merger related expenses $595
Professional fees $322
Advertising 385 $350 358
Supplies 324 277 40
</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 Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's or banking
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
subsidiaries' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, a bank must meet specific
capital guidelines that involve quantitative measures of a bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. A 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 a 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 Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized both Park West and Cargill as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, a bank must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Corporation's, Park West's and Cargill'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):
Park West $27,890 12.20% $18,291 8.00% $22,864 10.00%
Cargill 3,475 14.93 1,862 8.00 2,327 10.00
Holding Company 32,946 13.00 20,281 8.00 N/A N/A
Tier I Capital (To risk-weighted assets):
Park West 25,510 11.16 9,146 4.00 13,718 6.00
Cargill 3,189 13.70 931 4.00 1,396 6.00
Holding Company 30,281 11.94 10,141 4.00 N/A N/A
Tier I Capital (To average assets):
Park West 25,510 7.24 14,102 4.00 17,628 5.00
Cargill 3,189 6.69 1,907 4.00 2,364 5.00
Holding Company 30,281 7.53 16,092 4.00 N/A N/A
December 31, 1997
Total Capital
(To risk weighted-assets):
Park West 24,535 11.97 16,397 8.00 20,496 10.00
Cargill 3,317 13.10 2,022 8.00 2,528 10.00
Holding Company 29,654 12.77 18,570 8.00 N/A N/A
Tier I Capital
(To risk weighted-assets)
Park West 21,969 10.70 8,198 4.00 12,298 6.00
Cargill 3,108 12.70 1,011 4.00 1,517 6.00
Holding Company 26,858 11.57 9,285 4.00 N/A N/A
Tier I Capital (To average assets):
Park West 21,969 7.04 12,493 4.00 15,617 5.00
Cargill 3,108 6.60 1,880 4.00 2,350 5.00
Holding Company 26,858 7.44 16,092 4.00 N/A N/A
</TABLE>
40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
On November 19, 1997, the Board of Directors of the Corporation adopted an
Amended and Restated Shareholder Rights Plan (the "Rights Plan"). Pursuant to
the terms of the Rights Plan, the Board of Directors declared a dividend
distribution to stockholders of record as of the close of business on December
4, 1997 (the "Record Date") of one Preferred Stock Purchase Right (a "Right")
for each outstanding share of Common Stock of the Corporation. In addition, one
Right automatically attaches to each share of Common Stock issued subsequent to
the Record Date, until November 19, 2007. Each Right entitles the registered
holder to purchase from the Corporation a unit of one ten-thousandths of a share
(a "Unit") of Series A Junior Participating Cumulative Preferred Stock, par
value $5.00 per share ("Preferred Stock"), at a cash exercise price of $60.00
per share of Common Stock, subject to adjustment. The Corporation has reserved
12,000 shares of Preferred Stock for issuance upon exercise of the Rights.
Currently, the Rights are not exercisable and are attached to and trade with the
outstanding shares of Common Stock. The Rights will separate from the Common
Stock and become exercisable upon the earliest to occur of (i) the close of
business on the tenth calendar day following the first public announcement that
a person or group of affiliated or associated persons has acquired beneficial
ownership of 15% or more of the outstanding shares of the Corporation's Common
Stock (an "Acquiring Person"), (ii) the close of business on the tenth business
day (or such date as the Board of Directors may determine) following the
commencement of a tender offer or exchange offer that would result upon its
consummation in a person or a group becoming the beneficial owner of 15% of the
outstanding shares of the Corporation's Common Stock, (iii) the determination by
the Board of Directors that any person is an "Adverse Person."
Upon the occurrence of any one of the above events, each holder of a Right
(other than the Acquiring Person or the Adverse Person, as the case may be) is
entitled to acquire such number of Units of the Preferred Stock of the
Corporation as are equivalent to such number of shares of Common Stock having a
value twice the current exercise price of the Right. If the Corporation is
acquired in a merger or other business combination transaction, after any such
event each holder of a Right is then entitled to purchase, at the then current
exercise price, shares of the acquiring company's common stock having a value of
twice the exercise price of the Right.
Until a Right is exercised, the holder has no rights as a stockholder of the
Corporation (beyond those rights as an existing stockholder), including the
right to vote or to receive dividends. While the distribution of the Rights is
not taxable to stockholders or to the Corporation, stockholders may, depending
upon the circumstances, recognize taxable income in the event the Rights become
exercisable for Units, other securities of the Corporation, other consideration
or for shares of common stock of an acquiring company.
The Rights may be redeemed in whole by the Corporation, under certain
circumstances, at a price of $.001 per Right. The Rights and the Rights Plan
expire on November 19, 2007.
Retained earnings at September 30, 1998, include $458,000 which is set aside in
accordance with existing provisions of the Internal Revenue Code to absorb
losses on loans. If, in the future, this amount were used for any other
purposes, a tax liability could be incurred. It is not anticipated that such
amount will be made available for dividends or that a tax thereon will be
imposed.
Cargill previously converted from a state chartered mutual savings and loan
association to a state chartered stock savings and loan association. At the time
of conversion, Cargill established a liquidation account in an amount equal to
Cargill's net worth. In the event of a complete liquidation of Cargill (and only
in such event), each eligible account holder will be entitled to receive a
liquidation distribution from the liquidation account before any liquidation
distribution may be made with respect to capital stock. The balance in the
liquidation account at September 30, 1998, was $85,000.
Cargill may not declare or pay a cash dividend on or purchase any of its stock
if the effect would be to reduce the net worth of Cargill below either the
amount of the liquidation account or the capital requirements of its regulators.
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
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 $ 13,171 $ 13,171 $ 12,848 $ 12,848
Federal funds sold 1,069 1,069 3,678 3,678
Investment securities held to maturity 30,616 30,817 39,602 39,771
Investment securities available for sale 53,712 53,712 20,710 20,710
Loans 293,113 301,442 268,254 269,665
Liabilities:
Deposits 342,267 343,814 314,679 315,577
Borrowed funds 27,807 27,807 11,884 11,884
</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 matures 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.
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.
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.
42
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
BORROWED FUNDS
The fair value of such borrowings was estimated by utilizing future cash flows
discounted using current borrowing rates for similar instruments. For short-term
borrowings, the carrying amount approximates the fair value due to their
short-term nature.
COMMITMENTS TO EXTEND CREDIT
The stated 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.
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
18 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998
----
Q1 (1) Q2 (1)
----------------------------------------- -----------------------------------------
Westbank Cargill Restated Westbank Cargill Restated
-------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $5,842 $880 $6,722 $6,264 $892 $7,156
Interest expense 2,579 419 2,998 2,982 401 3,383
--------------------------------------------------------------------------------------------
Net interest income 3,263 461 3,724 3,282 491 3,773
Provision for losses 19 9 28 12 12 1
Non-interest income 608 8 616 598 43 641
Non-interest expense 2,455 381 2,836 2,458 399 2,857
--------------------------------------------------------------------------------------------
Income before income taxes 1,397 79 1,476 1,422 123 1,545
Income taxes 558 35 593 537 52 589
Net income $ 839 $ 44 $ 883 $ 885 $ 71 $ 956
============================================================================================
Earnings per share
- Basic $ .22 $ .21 $ .24 $ .23
- Diluted .22 .21 .23 .22
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
----
Q3 (1) Q4 (1)
----------------------------------------- -------------------------------------------
Westbank Cargill Restated Westbank Cargill Restated
-------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $6,561 $889 $7,450 $6,418 $ 885 $7,303
Interest expense 3,161 416 3,577 2,921 413 3,334
--------------------------------------------------------------------------------------------
Net interest income 3,400 473 3,873 3,497 472 3,969
Provision for losses 1
Non-interest income 542 47 589 496 85 581
Non-interest expense 2,483 355 2,838 2,975 694 3,669
--------------------------------------------------------------------------------------------
Income before income taxes 1,459 165 1,624 1,018 (138) 880
Income taxes 549 70 619 396 (49) 347
--------------------------------------------------------------------------------------------
Net income $ 910 $ 95 $1,005 $ 622 $ (89) $ 533
============================================================================================
Earnings per share
- Basic $ .24 $ .24 $ .16 $ .13
- Diluted .24 .24 .16 .12
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
----
Q1 (1) Q2 (1)
----------------------------------------- -----------------------------------------
Westbank Cargill Restated Westbank Cargill Restated
-------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $5,428 $854 $6,282 $5,698 $891 $6,589
Interest expense 2,411 424 2,835 2,534 436 2,970
--------------------------------------------------------------------------------------------
Net interest income 3,017 430 3,447 3,164 455 3,619
Provision for losses 150 31 181 40 10 50
Non-interest income 506 109 615 485 53 538
Non-interest expense 2,293 407 2,700 2,323 437 2,760
--------------------------------------------------------------------------------------------
Income before income taxes 1,080 101 1,181 1,286 61 1,347
Income taxes 443 30 473 549 20 569
--------------------------------------------------------------------------------------------
Net income $ 637 $ 71 $ 708 $ 737 $ 41 $ 778
============================================================================================
Earnings per share
- Basic $ .19 $ .19 $ .22 $ .21
- Diluted .18 .18 .21 .20
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
----
Q3 (1) Q4 (1)
----------------------------------------- -------------------------------------------
Westbank Cargill Restated Westbank Cargill Restated
-------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $5,979 $916 $6,895 $6,051 $ 907 $6,958
Interest expense 2,740 429 3,169 2,687 430 3,117
--------------------------------------------------------------------------------------------
Net interest income 3,239 487 3,726 3,364 477 3,841
Provision for losses 75 75
Non-interest income 565 54 619 705 52 757
Non-interest expense 2,397 461 2,858 2,300 448 2,748
--------------------------------------------------------------------------------------------
Income before income taxes 1,407 5 1,412 1,769 81 1,850
Income taxes 589 5 594 730 40 770
============================================================================================
Net income $ 818 $818 $1,039 $ 41 $1,080
Earnings per share
- Basic $ .23 $ .21 $ .29 $ .27
- Diluted .24 .20 .28 .26
============================================================================================
</TABLE>
(1) Previously reported balances of the merged companies have been reclassified
to conform to the Corporation's presentation and restated to give effect to
the combination.
44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Westbank Corporation and Subsidiaries
19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
December 31,
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
====================================================================================
<S> <C> <C>
BALANCE SHEETS
Assets
Cash $ 66 $ 87
Investment in subsidiaries 28,912 25,136
Other investments 922 1,372
Other assets 762 344
- - ------------------------------------------------------------------------------------
Total assets $30,662 $26,939
====================================================================================
Liabilities $ 172 $ 21
- - ------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock - none
Common stock, par value $2 per share 8,397 7,865
Additional paid-in capital 11,076 9,711
Retained earnings 10,803 9,282
Accumulated other comprehensive income 214 60
- - ------------------------------------------------------------------------------------
Stockholders' equity 30,490 26,918
- - ------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $30,662 $26,939
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
==========================================================================================================================
<S> <C> <C> <C>
STATEMENTS OF INCOME
Dividend from subsidiary $ 100 $ 550 $ 550
Interest income 85 38 19
Other income (expense) - net (735) (144) (143)
- - --------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and
undistributed income of subsidiaries (550) 444 426
Income tax benefit 215 2 26
Undistributed income of subsidiaries 3,712 2,938 1,685
- - --------------------------------------------------------------------------------------------------------------------------
Net income $ 3,377 $ 3,384 $ 2,137
==========================================================================================================================
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 3,377 $ 3,384 $ 2,137
Cargill interim loss for quarter ended 12/31/98 (224)
Operating activities:
Equity in income of subsidiaries (3,622) (2,938) (1,685)
Increase in other assets (418) (33) (302)
Increase in other liabilities 151 2 19
- - --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (736) 415 169
- - --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities (purchases) maturities 450 (1,039) (88)
- - --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock options exercised 1,141 314 86
Proceeds from dividend reinvestment and optional
stock purchases 628 1,385 657
Dividends paid (1,504) (1,041) (786)
- - --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 265 658 (43)
- - --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (21) 34 38
Cash and cash equivalents at the beginning of the year 87 53 15
- - --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 66 $ 87 $ 53
==========================================================================================================================
</TABLE>
45
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
Westbank Corporation and Subsidiaries
Shareholders and Board of Directors,
Westbank Corporation
We have audited the consolidated balance sheets of Westbank Corporation and
subsidiaries (the "Corporation") as of December 31, 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 financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger on January 29, 1999 of Cargill Bancorp, Inc.,
and subsidiary and Westbank Corporation and subsidiaries, which has been
accounted for as a pooling of interests as described in Note 1 to the
consolidated financial statements. We did not audit the consolidated balance
sheets of Cargill Bancorp, Inc., as of September 30, 1998 and 1997, or the
related statements of income, comprehensive income, stockholders' equity and
cash flows of Cargill Bancorp, Inc., for each of the three years in the period
ended September 30, 1998, which statements reflect total assets of $48,241,000
and $47,302,000 as of September 30, 1998 and 1997, and net interest income of
$1,897,000, 1,849,000 and $1,693,000 for the years ended September 30, 1998,
1997 and 1996, respectively. Those statements were audited by other auditors
whose report dated October 30, 1998 has been furnished to us and our opinion,
insofar as it relates to the amounts included for Cargill Bancorp, Inc., and
subsidiary for 1998, 1997 and 1996 is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
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
(July 30, 1999 as to effects of
the merger described in Note 1)
46
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
Westbank Corporation and Subsidiaries
Shareholders and Board of Directors,
Cargill Bancorp, Inc.
We have audited the consolidated statements of financial condition of Cargill
Bancorp, Inc., and subsidiary as of September 30, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity and cash flows for the years ended September 3, 1998, 1997
and 1996. 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used, and significant estimates made, by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cargill Bancorp,
Inc., and subsidiary as of September 30, 1998 and 1997, and the results of its
operations and its cash flows for the years ended September 30, 1998, 1997 and
1996, in conformity with generally accepted accounting principles.
SNYDER & HALLER
Hartford, Connecticut
October 30, 1998
47
<PAGE> 49
CORPORATE DIRECTORY AND INFORMATION
Westbank Corporation and Subsidiaries
DIRECTORS
WESTBANK CORPORATION AND
PARK WEST BANK AND TRUST COMPANY
ERNEST N. LAFLAMME, JR.
Chairman of the Board
Westbank Corporation
Treasurer
City of Chicopee
ROLAND O. ARCHAMBAULT
Owner
Park Supply Company
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
G. WAYNE MCCARY
President & CEO
Eastern States Exposition
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
ERNEST N. LAFLAMME, JR.
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
PARK WEST BANK AND TRUST COMPANY
DONALD R. CHASE
President and Chief Executive Officer
ROBERT J. PERLAK
Corporate 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. NABOSKY
Assistant Vice President
EDP/OPERATIONS
S. STEVE 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
GARY B. SZYMANIAK
COMMUNITY BANKING OFFICER
AUDITING DIVISION
LLOYD S. HALL, CBA
Director of Auditing
TRUST DIVISION
ROBERT A. GIBOWICZ
Senior Trust Officer
Westbank Corporation
Westbank Tower, 225 Park Avenue
West Springfield, MA 01089-3310
(413) 747-1400
48
<PAGE> 50
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
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.
CORPORATE COUNSEL
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.
49
<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
2. Cargill Bank
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-1-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,619
<INT-BEARING-DEPOSITS> 667
<FED-FUNDS-SOLD> 12,890
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,387
<INVESTMENTS-CARRYING> 25,377
<INVESTMENTS-MARKET> 25,427
<LOANS> 254,948
<ALLOWANCE> 2,699
<TOTAL-ASSETS> 331,803
<DEPOSITS> 298,014
<SHORT-TERM> 9,269
<LIABILITIES-OTHER> 1,643
<LONG-TERM> 0
0
0
<COMMON> 22,717
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 331,803
<INTEREST-LOAN> 21,011
<INTEREST-INVEST> 2,733
<INTEREST-OTHER> 275
<INTEREST-TOTAL> 24,059
<INTEREST-DEPOSIT> 10,263
<INTEREST-EXPENSE> 10,524
<INTEREST-INCOME-NET> 13,535
<LOAN-LOSSES> 944
<SECURITIES-GAINS> 112
<EXPENSE-OTHER> 11,278
<INCOME-PRETAX> 3,653
<INCOME-PRE-EXTRAORDINARY> 3,653
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,137
<EPS-BASIC> .59
<EPS-DILUTED> .57
<YIELD-ACTUAL> 4.62
<LOANS-NON> 2,878
<LOANS-PAST> 282
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,160
<ALLOWANCE-OPEN> 3,924
<CHARGE-OFFS> 2,539
<RECOVERIES> 370
<ALLOWANCE-CLOSE> 2,699
<ALLOWANCE-DOMESTIC> 2,699
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,783
<INT-BEARING-DEPOSITS> 2,065
<FED-FUNDS-SOLD> 3,678
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,170
<INVESTMENTS-CARRYING> 39,602
<INVESTMENTS-MARKET> 39,771
<LOANS> 268,254
<ALLOWANCE> 3,057
<TOTAL-ASSETS> 355,567
<DEPOSITS> 314,679
<SHORT-TERM> 11,884
<LIABILITIES-OTHER> 2,086
<LONG-TERM> 0
0
0
<COMMON> 26,918
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 355,567
<INTEREST-LOAN> 22,893
<INTEREST-INVEST> 3,569
<INTEREST-OTHER> 262
<INTEREST-TOTAL> 26,724
<INTEREST-DEPOSIT> 11,800
<INTEREST-EXPENSE> 291
<INTEREST-INCOME-NET> 14,633
<LOAN-LOSSES> 306
<SECURITIES-GAINS> 259
<EXPENSE-OTHER> 11,066
<INCOME-PRETAX> 5,790
<INCOME-PRE-EXTRAORDINARY> 5,790
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,384
<EPS-BASIC> .88
<EPS-DILUTED> .85
<YIELD-ACTUAL> 4.45
<LOANS-NON> 1,648
<LOANS-PAST> 184
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,832
<ALLOWANCE-OPEN> 3,005
<CHARGE-OFFS> 760
<RECOVERIES> 812
<ALLOWANCE-CLOSE> 3,057
<ALLOWANCE-DOMESTIC> 3,057
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,291
<INT-BEARING-DEPOSITS> 1,880
<FED-FUNDS-SOLD> 1,069
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,712
<INVESTMENTS-CARRYING> 30,616
<INVESTMENTS-MARKET> 30,817
<LOANS> 293,113
<ALLOWANCE> 2,665
<TOTAL-ASSETS> 402,623
<DEPOSITS> 342,267
<SHORT-TERM> 20,807
<LIABILITIES-OTHER> 2,059
<LONG-TERM> 7,000
0
0
<COMMON> 30,490
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 402,623
<INTEREST-LOAN> 23,645
<INTEREST-INVEST> 4,614
<INTEREST-OTHER> 372
<INTEREST-TOTAL> 28,631
<INTEREST-DEPOSIT> 12,662
<INTEREST-EXPENSE> 13,292
<INTEREST-INCOME-NET> 15,339
<LOAN-LOSSES> 41
<SECURITIES-GAINS> 141
<EXPENSE-OTHER> 12,200
<INCOME-PRETAX> 5,525
<INCOME-PRE-EXTRAORDINARY> 5,525
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,377
<EPS-BASIC> .82
<EPS-DILUTED> .79
<YIELD-ACTUAL> 4.22
<LOANS-NON> 797
<LOANS-PAST> 231
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,028
<ALLOWANCE-OPEN> 3,057
<CHARGE-OFFS> 518
<RECOVERIES> 85
<ALLOWANCE-CLOSE> 2,665
<ALLOWANCE-DOMESTIC> 2,665
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
