UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2002
Commission file number 0 - 12784
WESTBANK CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2830731
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer I.D. No.)
225 PARK AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0149
(Address of principal executive offices) (Zip Code)
(413) 747-1400
(Registrant's telephone number, including area code)
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 90 days.
YES /X/ NO / /
Common stock, par value $2 per share: 4,227,210 shares outstanding as
of April 30, 2002.
WESTBANK CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Stockholders' Equity 5
Condensed Consolidated Statements of Comprehensive Income 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7-8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Rights of Securities Holders 18
ITEM 3. Defaults by Company on its Senior Securities 18
ITEM 4. Results of Votes on Matters Submitted to a Vote of Security Holders 18
ITEM 5. Other Events 18
ITEM 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
ITEM 1. FINANCIAL STATEMENTS
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands, except per share data) March 31, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks:
Non-interest bearing $ 14,772 $ 16,800
Interest bearing 1,999 332
Federal funds sold 211 319
- ------------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 16,982 17,451
- ------------------------------------------------------------------------------------------------------------------------------------
Securities available for sale 148,224 141,685
Securities held to maturity 664 757
(approximate market value of
$682 in 2002 and $779 in 2001)
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 148,888 142,442
- ------------------------------------------------------------------------------------------------------------------------------------
Loans 446,037 443,902
Allowance for loan losses 4,288 4,179
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 441,749 439,723
Premises and equipment, net 6,342 6,516
Other real estate owned 130 204
Accrued interest receivable 3,469 3,285
Intangible assets 8,666 8,837
Other assets 10,945 10,464
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 637,171 $ 628,922
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 69,612 $ 70,960
Interest bearing 444,329 438,889
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 513,941 509,849
Borrowed funds 62,454 57,666
Accrued interest payable 707 659
Other liabilities 4,631 4,732
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 581,783 572,906
- ------------------------------------------------------------------------------------------------------------------------------------
Mandatory redeemable preferred stock 17,000 17,000
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock - $2 par value
Authorized - 9,000,000 shares
Issued - 4,315,795 shares in 2002 and
- 4,315,795 shares in 2001 8,632 8,632
Additional paid in capital 11,803 11,782
Retained earnings 18,633 17,787
Treasury stock (755) (431)
Accumulated other comprehensive income 125 1,246
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 38,438 39,016
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $637,171 $628,922
====================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollar amounts in thousands, except per share data)
Three months ended March 31, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Income:
Interest and fees on loans $ 8,069 $ 8,507
Interest and dividend income on securities 2,371 1,588
Interest on federal funds sold 3 52
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 10,443 10,147
Interest expense 4,544 5,298
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 5,899 4,849
Provision for loan losses 300 227
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,599 4,622
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Gain/(Loss) on sale of securities (277) 31
Gain on sale of loans 127 0
Other non-interest income 883 729
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 733 760
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Salaries and benefits 2,244 2,043
Other non-interest expense 1,743 1,559
Occupancy - net 374 389
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 4,361 3,991
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,971 1,391
Income taxes 656 471
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,315 $ 920
====================================================================================================================================
Net income per share
- Basic $ 0.31 $ 0.22
- Diluted $ 0.30 $ 0.22
Weighted average shares outstanding
- Basic 4,263,720 4,234,848
- Dilutive Option Shares 84,289 37,269
- ------------------------------------------------------------------------------------------------------------------------------------
- Diluted 4,348,009 4,272,117
====================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
4
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001 AND THREE MONTHS ENDED MARCH 31, 2002
(Unaudited)
(Dollar amounts in thousands, except per share data)
COMMON STOCK ACCUMULATED
------------- ADDITIONAL OTHER
NUMBER PAR PAID-IN RETAINED TREASURY COMPREHENSIVE
OF SHARES VALUE CAPITAL EARNINGS STOCK INCOME/(LOSS) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE-JANUARY 1, 2001 4,222,520 $ 8,567 $ 11,608 $15,408 $ (526) $ (197) $ 34,860
====================================================================================================================================
Net income 4,073 4,073
Cash dividends declared
($.40 per share) (1,694) (1,694)
Shares issued:
Stock option plan 4,400 9 9 18
Dividend reinvestment
and stock purchase plan 27,676 56 209 265
Shares issued from treasury stock:
Stock option plan 1,500 (6) 8 2
Dividend reinvestment
and stock purchase plan 33,287 (38) 302 264
Changes in unrealized gain/(loss)
on securities available for sale 1,443 1,443
Repurchase of common stock (23,000) (215) (215)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE-DECEMBER 31, 2001 4,266,383 $ 8,632 $ 11,782 $17,787 $ (431) $ 1,246 $ 39,016
====================================================================================================================================
Net income 1,315 1,315
Cash dividends declared
($.11 per share) (469) (469)
Shares issued from treasury stock:
Dividend reinvestment
and stock purchase plan 10,154 21 84 105
Changes in unrealized gain/(loss)
on securities available for sale (1,121) (1,121)
Repurchase of common stock (37,300) (408) (408)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE - MARCH 31, 2002 4,239,237 $ 8,632 $ 11,803 $18,633 $ (755) $ 125 $ 38,438
====================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
Three months ended March 31, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $1,315 $ 920
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale,
net of income taxes (benefit) of $(605) in 2002
and $342 in 2001 (1,304) 683
Reclassification adjustment for gains (losses)
included in net income, net of income taxes
(benefit) of $94 in 2002 and $(11) in 2001 183 (20)
- ------------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) (1,121) 663
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 194 $1,583
====================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
5
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollar amounts in thousands)
Three months ended March 31 2002 2001
=======================================================================================================
Operating activities:
Net income $ 1,315 $ 920
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 300 227
Realized investment accretion income (18) 0
Depreciation and amortization 185 239
Intangible amortization 171 171
Realized loss/(gain) on sale of securities 277 (31)
Gain on sale of mortgages (127) 0
Gain on sale of other real estate owned (22) (22)
(Increase)/Decrease in accrued interest receivable (184) 769
(Increase)/Decrease in other assets (481) 197
Increase in accrued interest payable on deposits 48 329
Decrease in other liabilities (101) (643)
=======================================================================================================
Net cash provided by operating activities 1,363 2,156
=======================================================================================================
Investing activities:
Investments and mortgage-backed securities:
Held to maturity:
Proceeds from maturities and principal payments 93 5,451
Available for sale:
Purchases (21,640) (27,798)
Proceeds from sales 21,260 5,530
Proceeds from maturities and principal payments 15,512 17,726
Purchases of premises and equipment (11) (7)
Net (increase)/decrease in loans (25,240) 511
Proceeds from sale of other real estate owned 86 428
=======================================================================================================
Net cash provided by (used in) investing activities (9,940) 1,841
=======================================================================================================
Financing activities:
Net increase in borrowings 4,788 12,998
Net increase (decrease) in deposits 4,092 (23,076)
Treasury stock (purchased)/issued, net (303) 126
Dividends paid (469) (424)
=======================================================================================================
Net cash (used in)/provided by financing activities 8,108 (10,376)
=======================================================================================================
Decrease in cash and cash equivalents (469) (6,379)
Cash and cash equivalents at beginning of period 17,451 23,519
=======================================================================================================
Cash and cash equivalents at end of period $ 16,982 $ 17,140
=======================================================================================================
Cash paid:
Interest on deposits and other borrowings $ 4,496 $ 4,969
Income taxes 312 200
Supplemental disclosure of cash flow information:
Securitization of loans into mortgage-backed securities 23,495 0
Unrealized gain/(loss) on securities available for sale, net of taxes (1,121) 663
See accompanying notes to condensed consolidated financial statements.
6
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
NOTE A - GENERAL INFORMATION
Westbank Corporation (hereinafter sometimes referred to as the "Corporation") is
a registered Bank Holding Company organized to facilitate the expansion and
diversification of the business of its banking subsidiary, Westbank (hereinafter
sometimes referred to as "the Bank"), into additional financial services related
to banking. Substantially all operating income and net income of the Corporation
are presently accounted for by the Bank.
NOTE B - CURRENT OPERATING ENVIRONMENT
Westbank operates seventeen banking offices located in Hampden County,
Massachusetts, and Windham County, Connecticut, and also operates a Trust
Department providing services normally associated with holding property in a
fiduciary or agency capacity. A full range of retail banking services is
furnished to individuals, businesses and non-profit organizations. The primary
source of revenue for Westbank is derived from providing loans to customers who
are predominantly located in its service areas.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
imposes significant regulatory restrictions and requirements on banking
institutions insured by the FDIC and their holding companies. FDICIA established
capital categories into which financial institutions are placed based on capital
level. Each capital category establishes different degrees of regulatory
restrictions that can apply to a financial institution. As of March 31, 2002,
the Bank's capital was at a level that placed the Bank in the "well capitalized"
category as defined by FDICIA.
FDICIA imposes a variety of other restrictions and requirements on insured
banks. These include significant regulatory reporting requirements such as
insuring that a system of risk-based deposit insurance premiums and civil money
penalties for inaccurate deposit assessment reports 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.
NOTE C - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for the
quarters ended March 31, 2002 and 2001 have been prepared in accordance with
accounting principles generally accepted in the United States of America
("generally accepted accounting principles") for interim information and with
instructions for Form 10-Q. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2002, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. In preparing such financial
statements, management is required to make estimates and assumptions that affect
the reported amounts. Actual results could differ significantly from these
estimates.
For further information, please refer to the Consolidated Financial Statements
and footnotes thereto included in the Westbank Corporation's Annual Report on
Form 10-K for the year ended December 31, 2001.
7
NOTE D - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as standby letters of credit and commitments to
extend credit. As of March 31, 2002, standby letters of credit amounted to
$201,700, loan commitments were $46,900,000 and unused balances available on
home equity lines of credit were $16,642,000.
Trust Assets - Property with a book value of $125,680,000 at March 31, 2002,
held for customers in a fiduciary or agency capacity, is not included in the
accompanying balance sheet since such items are not assets of the Bank.
NOTE E - STOCKHOLDERS' EQUITY
The FDIC imposes leverage capital ratio requirements for state non-member Banks.
In addition, the FDIC has established risk-based capital requirements for
insured institutions for Tier 1 risk-based capital of 4.00% and total risk-based
capital of 8.00%.
The capital ratios of the Bank were as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Leverage Capital Ratio 7.05% 7.56%
Tier 1 Risk-Based Capital 11.55% 11.62%
Total Risk-Based Capital 12.65% 12.71%
As of March 31, 2002 and December 31, 2001, the Bank met the criteria that
classified it as a well-capitalized financial institution. Capital guidelines
issued by the Federal Reserve Board require the Corporation to maintain certain
capital ratios.
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 (2) tiers. In this Corporation, Tier 1 includes the common
stockholders' equity and a portion of the mandatory redeemable preferred stock;
total risk-based, or supplementary, capital includes not only the equity but
also a portion of the allowance for loan losses and a portion of the mandatory
redeemable preferred stock.
The Corporation's "Tier 1" leverage and risk-based capital ratios are as
follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Leverage Capital 6.61% 6.71%
Tier 1 Capital (minimum required 4.00%) 10.85% 10.79%
Total Risk-Based Capital (minimum required 8.00%) 13.05% 13.03%
NOTE F - RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Corporation adopted Statement of Financial
Accounting No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The
adoption of SFAS 142 did not have a significant effect on the Corporation's
consolidated financial statements.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS -
The following forward looking statements are made in accordance with the Private
Securities Litigation Reform Act of 1995.
The Corporation has made and may make in the future forward-looking statements
concerning future performance, including but not limited to future earnings and
events or conditions that may affect such future performance. These
forward-looking statements are based upon management's expectations and belief
concerning possible future developments and the potential effect of such future
developments on the Corporation. There is no assurance that such future
developments will be in accordance with management's expectations and belief or
that the effect of any future developments on the Corporation will be those
anticipated by the Corporation's 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 the Corporation's ability to
control or predict with precision, including future market conditions and the
behavior of other market participants. Among the factors that could cause actual
results to differ materially from such forward-looking statements are the
following:
1. The status of the economy in general, as well as in the Corporation's
primary market areas of Western Massachusetts and Northeastern
Connecticut;
2. The real estate market in Western Massachusetts and Northeastern
Connecticut;
3. Competition in the Corporation's primary market area from other banks,
especially in light of continued consolidation in the New England banking
industry;
4. Any changes in federal and state bank regulatory requirements;
5. Changes in interest rates; and
6. The cost and other effects of unanticipated legal and administrative cases
and proceedings, settlements and investigations.
While the Corporation periodically reassesses material trends and uncertainties
affecting the Corporation's performance in connection with its preparation of
management's discussion and analysis of results of operations and financial
condition contained in its quarterly and annual reports, the Corporation does
not intend to review or revise any particular forward-looking statement.
CRITICAL ACCOUNTING POLICIES -
Management believes that Westbank's "Critical Accounting Policies" are
accounting for Securities and Loans, including revenue recognition.
9
SECURITIES
Securities that management has the positive intent and ability to hold until
maturity are stated at cost, adjusted for amortization of premiums and accretion
of discounts. Those securities which have been identified as assets for which
there is not a positive intent to hold to maturity, including all marketable
equity securities, are classified as available for sale with unrealized gains
(losses), net of income taxes, reported as a separate component of stockholders'
equity. The Corporation determines if securities will be classified as held to
maturity or available for sale at the time of purchase. In addition, any
mortgage-backed securities created out of the Corporation's own inventory of
residential real estate loans are also considered available for sale. Gains and
losses on sales of securities are recognized in non-interest income at the time
of sale on a specific identification basis. Securities which have experienced an
other than temporary decline in value are written down to estimated fair value,
establishing a new cost basis with the amount of the write-down expensed as a
realized loss. The Corporation does not engage in trading activities.
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.
LOANS
Loans have been reduced by deferred loan fees and the allowance for loan losses.
Interest income on loans is recorded on an accrual basis. Loan origination fees,
net of certain direct loan origination costs, are deferred and recognized as
income over the life of the related loan as an adjustment to the loan's yield.
Non-accrual loans are loans on which the accrual of interest ceases when the
collection of principal or interest payments is determined to be doubtful by
management. It is the general policy of the Corporation to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days,
unless the loan principal and interest are determined by management to be fully
collectible. Any unpaid amounts previously accrued on these loans are reversed
from income. Interest received on a loan in non-accrual status is applied to
reduce principal or, if management determines that the principal is collectible,
applied to interest on a cash basis. A loan is returned to accrual status after
the borrower has brought the loan current and has demonstrated compliance with
the loan terms for a sufficient period, and management's doubts concerning
collectibility have been removed.
The Corporation measures impairment of loans in accordance with SFAS No. 114,
"Accounting for Impairment of a Loan as Amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(collectively SFAS No. 114). A loan is recognized as impaired when it is
probable that either principal or interest are not collectable in accordance
with the terms of the loan agreement. Measurement of impairment for commercial
loans is generally based on the present value of expected future cash flows
discounted at the loan's effective interest rate. Commercial real estate loans
are generally measured based on the fair value of the underlying collateral. If
the estimated fair value of the impaired loan is less than the related recorded
amount, a specific valuation allowance is established or a write-down is charged
against the allowance for loan losses. Smaller balance homogenous loans,
including residential real estate and consumer loans, are excluded from the
provisions of SFAS No. 114. Generally, income is recorded only on a cash basis
for impaired loans.
The adequacy of the allowance for loan losses is evaluated quarterly by
management. Factors considered in evaluating the adequacy of the allowance
include the size and concentration of the portfolio, previous loss experience,
current economic conditions and their effect on borrowers, the financial
condition of individual borrowers and the related performance of individual
loans in relation to contract terms. The provision for loan losses charged to
operating expense is based upon management's judgment of the amount necessary to
maintain the allowance at 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.
10
CHANGES IN FINANCIAL CONDITION -
Total consolidated assets amounted to $637,171,000 on March 31, 2002 compared to
$628,922,000 on December 31, 2001. As of March 31, 2002, and December 31, 2001,
earning assets amounted to, respectively, $597,135,000 or 94% of total assets,
and $586,995,000 or 93% of total assets. Earning assets increased during the
first three months of 2002 as a result of an increase in loans and securities.
An increase in deposits and an increase in borrowed funds offset the increase in
earning assets.
CHANGES IN RESULTS OF OPERATIONS -
For the quarter ended March 31, 2002, net income totaled $1,315,000 compared to
$920,000 for the three-month period ended March 31, 2001.
Non-interest income decreased by $27,000 during the first quarter of 2002
compared to the first quarter of 2001. During the first quarter of 2002, the
Corporation recognized a loss on sale of securities available for sale totaling
$277,000 and a gain on the sale of mortgages totaling $127,000, while other
non-interest income totaled $883,000. Non-interest expense totaled $4,361,000
for the quarter ended March 31, 2002, an increase of $370,000 versus the first
quarter of 2001.
The overall increase in interest income reflects an increase in volume and a
decline in interest rates on earning assets, while the decrease in interest
expense reflects an increase in interest-bearing liabilities more than offset by
the decrease in rates reduced the interest expense level as compared to the
first quarter of 2001. Further analysis is provided in sections on net interest
revenue and supporting schedules.
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS -
An increase of $73,000 has been reflected in the provision for loan losses in
the quarter, with $300,000 being provided compared to $227,000 in 2001. Loans
written off against the allowance for loan losses after recoveries amounted to
net charge-off's of $191,000 for the first three months of 2002 versus net
recoveries of $39,000 for the same period of 2001.
After giving effect to the actions described above, the allowance for loan
losses at March 31, 2002, totaled $4,288,000 or 0.96% of total loans, as
compared to $4,179,000 or 0.94% at December 31, 2001.
Non-performing past due loans at March 31, 2002, aggregated $1,549,000 or 0.35%
of total loans compared to $1,830,000 or 0.41% at December 31, 2001. The
percentage of non-performing and past due loans compared to total assets on
those same dates, respectively, amounted to 0.26% and 0.32%.
Other real estate owned decreased during the most recent quarter by $74,000
compared to 2001 and totals $130,000. The percentage of other real estate owned
to total assets as of March 31, 2002 and December 31, 2001 amounted to 0.02% and
0.03% respectively.
Management has made every effort to recognize all circumstances known at this
time which could affect the collectibility of loans and has reflected these in
deciding as to the provision for loan losses, the writing down of other real
estate owned and impaired loans to fair value and other loans (watch list)
monitored by management, the charge-off of loans and the balance in the
allowance for loan losses. Management believes that the provision for the
quarter, and the balance in the allowance for loan losses, are adequate based on
results provided by the loan grading system and circumstances known at this
time.
11
NET INTEREST INCOME
The Corporation's earning assets include a diverse portfolio of earning
instruments ranging from the Corporation'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.
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. For analytical purposes, the interest earned on tax exempt assets
is adjusted to a "tax equivalent" basis to recognize the income tax savings
which facilitates comparison between taxable and tax exempt assets.
The Corporation 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 balances and rates derived for the analysis of net interest income presented
on the following pages reflect the consolidated assets and liabilities of the
Corporation's principal earning subsidiary, Westbank.
(Dollar amounts in thousands)
Quarter ended March 31, 2002 2001
- ------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 10,443 $10,147
Interest expense 4,544 5,298
- ------------------------------------------------------------------------------------------------------------
Net interest income 5,899 4,849
Tax equivalent adjustment 38 46
============================================================================================================
NET INTEREST INCOME (TAXABLE EQUIVALENT) $ 5,937 $ 4,895
============================================================================================================
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
(Dollar amounts in thousands)
Quarter ended March 31, 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Average Average
Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------------------------------
Earning Assets $605,288 6.93% $527,486 7.73%
- ---------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 536,932 3.39 460,937 4.60%
- ---------------------------------------------------------------------------------------------------------------
Interest rate spread 3.54 3.13
- ---------------------------------------------------------------------------------------------------------------
Interest-free resources used
to fund earning assets 68,356 66,549
- ---------------------------------------------------------------------------------------------------------------
Total Sources of Funds $605,288 3.00 $527,486 4.02
==============================================================================================================
NET YIELD ON EARNING ASSETS 3.93% 3.71%
==============================================================================================================
12
CHANGES IN NET INTEREST INCOME
(Dollar amounts in thousands)
QUARTER ENDED MARCH 31, 2002
OVER
QUARTER ENDED MARCH 31, 2001
- ----------------------------------------------------------------------------------------------------------
CHANGE DUE TO
VOLUME RATE TOTAL
- ----------------------------------------------------------------------------------------------------------
Interest Income:
Loans $ 402 $ (848) $ (446)
Securities 933 (150) 783
Federal Funds (18) (31) (49)
- -----------------------------------------------------------------------------------------------------------
Total Interest Earned 1,317 (1,029) 288
Interest Expense:
Interest-bearing deposits 224 (1,302) (1,078)
Other borrowed funds 616 (292) 324
- -----------------------------------------------------------------------------------------------------------
Total Interest Expense 840 (1,594) (754)
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 477 $ 565 $ 1,042
===========================================================================================================
Net interest earned on a taxable equivalent basis increased to $5,937,000 in the
first quarter of 2002, up $1,042,000 as compared with the comparable period of
2001.
An increase in average earning assets of $77,802,000 or 14.75% and an 80 basis
point decrease in average rate of return resulted in an increase in volume of
$1,317,000 and a decrease in rate of $1,029,000. An increase in average
interest-bearing liabilities of $75,995,000 or 16.49% and a 121 basis point
decrease in average rate of interest paid contributed to an increase in volume
of $840,000 and a decrease in rate of $1,594,000.
OPERATING EXPENSES
The components of total operating expenses for the periods and their percentage
of gross income are as follows:
(Dollar amounts in thousands)
Quarter ended March 31, 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------
Salaries and benefits $2,244 20.08% $2,043 18.73%
Other non-interest expense 1,743 15.60 1,559 14.29
Occupancy - net 374 3.35 389 3.57
- ---------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $4,361 39.03% $3,991 36.59%
===============================================================================================================
For the three-month period ended March 31, 2002, operating expenses increased by
approximately $370,000 versus the 2001 period.
Salaries and benefits increased by $201,000, while other non-interest expense
increased by $184,000 and occupancy declined by $15,000. The increase is a
direct result of the overall growth of the Corporation.
13
INTEREST RATE SENSITIVITY
The following table sets forth the distribution of the repricing of the
Corporation's earning assets and interest-bearing liabilities as of March 31,
2002:
(Dollar amounts in thousands)
Three Over Three Over One
Months Months to Year to Over Five
or Less One Year Five Years Years Total
- -------------------------------------------------------------------------------------------------------------------
Earning Assets $ 78,639 $ 62,251 $146,443 $309,802 $597,135
Interest-Bearing
Liabilities 133,749 145,602 227,168 17,264 523,783
- -------------------------------------------------------------------------------------------------------------------
Interest Rate
Sensitivity Gap $ (55,110) $ (83,351) $ (80,725) $292,538 $ 73,352
===================================================================================================================
Cumulative Interest
Rate Sensitivity Gap $ (55,110) $(138,461) $(219,186) $ 73,352
Interest Rate
Sensitivity Gap Ratio (9.23)% (13.96)% (13.52)% 48.99%
Cumulative Interest
Rate Sensitivity Gap Ratio (9.23)% (23.19)% (36.71)% 12.28%
LIQUIDITY
The Corporation's liquidity represents the ability to meet loan commitments,
deposit withdrawals and any other cash needs as they arise. Funds to meet
liquidity needs are available by converting liquid assets or by generating new
deposits or through other funding sources. Factors affecting a bank's liquidity
needs include changes in interest rates, demand for loan products and general
economic conditions. The Corporation has alternative sources of liquidity,
including federal funds lines of credit, lines of credit available through the
Federal Home Loan Bank of Boston and repurchase agreements. Management believes
that the Corporation's level of liquidity is adequate to meet current and future
funding needs.
14
PROVISION AND ALLOWANCE FOR LOAN LOSSES
(Dollar amounts in thousands)
Quarter ended March 31, 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $4,179 $3,670
Provision for loan losses 300 227
- --------------------------------------------------------------------------------------------------------------------
4,479 3,897
- --------------------------------------------------------------------------------------------------------------------
Less charge-offs:
Loans secured by real estate 104
Commercial and industrial loans 32
Consumer loans 99 27
- --------------------------------------------------------------------------------------------------------------------
235 27
- --------------------------------------------------------------------------------------------------------------------
Add-recoveries:
Loans secured by real estate 1 57
Commercial and industrial loans 20 6
Consumer loans 23 3
- --------------------------------------------------------------------------------------------------------------------
44 66
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 191 (39)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $4,288 $3,936
====================================================================================================================
Net charge-offs (recoveries) to:
Average loans .04% (.01)%
Loans at end of period .04% (.01)%
Allowance for loan losses at January 1 4.57% (1.06)%
Allowance for loan losses at March 31 as a percentage of:
Average loans .95% .91%
Loans at end of period .96% .91%
The approach the Corporation uses in determining the adequacy of the allowance
for loan losses is an exposure method based on the Corporation's loan loss
history. 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 depth of the collateral on these same loans. In
addition, the Corporation allocates a reserve against the remainder of the loan
portfolio, based on the overall mix of the loan portfolio and the loss history
of each loan category.
15
NON-ACCRUAL, PAST DUE AND NON-PERFORMING LOANS
(Dollar amounts in thousands)
03-31-02 12-31-01 09-30-01 06-30-01 03-31-01
- -----------------------------------------------------------------------------------------------------------------------
Non-accrual loans $1,160 $1,040 $1,570 $1,926 $2,441
- -----------------------------------------------------------------------------------------------------------------------
Loans contractually past
due 90 days or more
still accruing 195 790 98 165 355
- -----------------------------------------------------------------------------------------------------------------------
Total non-accrual, past due
and restructured loans 1,355 1,830 1,668 2,091 2,796
- -----------------------------------------------------------------------------------------------------------------------
Non-accrual, past due and
restructured loans as a
percentage of total loans 0.30% 0.41% 0.37% 0.48% 0.65%
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a
percentage of non-accrual, past
due and restructured loans 316.46% 228.36% 245.20% 198.84% 140.77%
- ----------------------------------------------------------------------------------------------------------------------
Other real estate owned - net 130 204 117 137 135
- -----------------------------------------------------------------------------------------------------------------------
Total non-performing assets $1,485 $2,034 $1,785 $2,228 $2,931
Non-performing assets as a
percentage of total assets 0.23% 0.32% 0.29% 0.37% 0.52%
- -----------------------------------------------------------------------------------------------------------------------
16
QUARTER-TO-DATE AVERAGE BALANCES
INTEREST EARNED - INTEREST EXPENSE
(Dollar amounts in thousands)
Three months ended March 31, 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Interest(1) Rate Balance Interest(1) Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
temporary investments $ 1,634 $ 3 0.74% $ 3,466 $ 52 6.00%
Securities 151,479 2,375 6.27 92,733 1,592 6.87
Loans 452,175 8,103 7.17 431,287 8,549 7.93
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 605,288 $10,481 6.93% 527,486 $10,193 7.73%
- -----------------------------------------------------------------------------------------------------------------------------------
Loan loss allowance (4,205) (3,802)
All other assets 45,928 37,166
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 647,011 $ 560,850
===================================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits $436,611 $ 3,526 3.23% $ 415,344 $ 4,604 4.43%
Borrowed funds 100,321 1,018 4.06 45,593 694 6.09
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 536,932 4,544 3.39 460,937 5,298 4.60
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.54% 3.13%
Demand deposits 65,658 60,439
Other liabilities 5,578 4,051
Shareholders' equity 38,843 35,423
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $ 647,011 $ 560,850
===================================================================================================================================
Net Interest Income(tax equivalent
basis) $ 5,937 $ 4,895
Interest Earned/Earning Assets 6.93% 7.73%
Interest Expense/Earning Assets 3.00 4.02
- -----------------------------------------------------------------------------------------------------------------------------------
Net Yield on Earning Assets 3.93% 3.71%
Deduct tax equivalent adjustment 38 46
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 5,899 $ 4,849
===================================================================================================================================
(1) Amounts shown are adjusted to a "tax equivalent" basis.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Corporation's assessment of its
sensitivity to market risk since its presentation in the 2001 Annual Report
filed with the Securities and Exchange Commission.
17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Certain litigation is pending against the Corporation and the its
subsidiaries. Management, after consultation with legal counsel, does
not anticipate that any liability arising out of such litigation will
have a material effect on the Corporation's Financial Statements.
ITEM 2. Changes in Rights of Securities Holders - NONE
ITEM 3. Defaults by Company on its Senior Securities - NONE
ITEM 4. Results of Votes on Matters Submitted to a Vote of Security Holders
- NONE
ITEM 5. Other Events - NONE
18
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
b. Reports on Form 8-K - None
EXHIBIT INDEX
Page No.
--------
3. Articles of Organization, as amended **
(a) Articles of Organization, as amended *
(b) By-Laws, as amended *
* 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.
19
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned thereunto duly authorized.
WESTBANK CORPORATION
Date: May 6, 2002 /s/
-------------------------------------
Donald R. Chase
President and Chief Executive Officer
Date: May 6, 2002 /s/
-------------------------------------
John M. Lilly
Treasurer and Chief Financial Officer
20