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 JUNE 30, 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: 4,178,151 shares outstanding as of July 25, 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 7-9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-19 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 19 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 20 ITEM 2. Changes in Rights of Securities Holders 20 ITEM 3. Defaults by Company on its Senior Securities 20 ITEM 4. Results of Votes on Matters Submitted to a Vote of Security Holders 20 ITEM 5. Other Events 20 ITEM 6. Exhibits and Reports on Form 8-K 20-21 Signatures 22 2 ITEM 1. FINANCIAL STATEMENTS WESTBANK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollar amounts in thousands, except per share data) June 30, 2002 December 31, 2001 ------------- ----------------- ASSETS Cash and due from banks: Non-interest bearing $ 18,120 $ 16,800 Interest bearing 863 332 Federal funds sold 18,787 319 --------- --------- Total cash and cash equivalents 37,770 17,451 --------- --------- Securities available for sale 131,967 141,685 Securities held to maturity 564 757 (approximate market value of $586 in 2002 and $779 in 2001) --------- --------- Total securities 132,531 142,442 --------- --------- Loans 466,573 443,902 Allowance for loan losses 4,683 4,179 --------- --------- Net loans 461,890 439,723 --------- --------- Premises and equipment, net 6,163 6,516 Other real estate owned 204 Accrued interest receivable 3,497 3,285 Intangible assets 8,495 8,837 Other assets 10,854 10,464 --------- --------- TOTAL ASSETS $ 661,200 $ 628,922 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 76,107 $ 70,960 Interest bearing 461,522 438,889 --------- --------- Total deposits 537,629 509,849 Borrowed funds 61,001 57,666 Accrued interest payable 1,095 659 Other liabilities 3,997 4,732 --------- --------- Total liabilities 603,722 572,906 --------- --------- 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 11,759 11,782 Retained earnings 20,006 17,787 Treasury stock (1,737) (431) Accumulated other comprehensive income 1,818 1,246 --------- --------- Total Stockholders' Equity 40,478 39,016 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 661,200 $ 628,922 ========= ========= See accompanying notes to condensed consolidated financial statements. 3 WESTBANK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Quarter Ended June 30, Six-Months Ended June 30, (Dollar amounts in thousands, except per share data) 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Income: Interest and fees on loans $ 7,988 $ 8,436 $ 16,057 $ 16,943 Interest and dividend income on securities 2,189 1,661 4,560 3,249 Interest on federal funds sold 29 18 32 70 ----------- ----------- ----------- ----------- Total interest and dividend income 10,206 10,115 20,649 20,262 Interest expense 4,449 4,996 8,993 10,294 ----------- ----------- ----------- ----------- Net interest income 5,757 5,119 11,656 9,968 Provision for loan losses 433 159 733 386 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 5,324 4,960 10,923 9,582 ----------- ----------- ----------- ----------- Non-interest income: Gain/(Loss) on sale of securities (277) 31 Gain/(Loss) on sale of loans (54) 243 73 243 Other non-interest income 1,391 744 2,274 1,473 ----------- ----------- ----------- ----------- Total non-interest income 1,337 987 2,070 1,747 ----------- ----------- ----------- ----------- Non-interest expenses: Salaries and benefits 2,277 2,122 4,521 4,165 Other non-interest expense 1,664 1,762 3,407 3,321 Occupancy - net 396 365 770 754 ----------- ----------- ----------- ----------- Total non-interest expense 4,337 4,249 8,698 8,240 ----------- ----------- ----------- ----------- Income before income taxes 2,324 1,698 4,295 3,089 Income taxes 486 580 1,142 1,051 ----------- ----------- ----------- ----------- NET INCOME $ 1,838 $ 1,118 $ 3,153 $ 2,038 ----------- ----------- ----------- ----------- Net income per share - Basic $ 0.44 $ 0.26 $ 0.74 $ 0.48 - Diluted $ 0.42 $ 0.26 $ 0.73 $ 0.48 Weighted average shares outstanding - Basic 4,205,618 4,250,461 4,234,669 4,242,706 - Dilutive Option Shares 122,819 44,013 99,796 38,749 ----------- ----------- ----------- ----------- - Diluted 4,328,437 4,294,474 4,334,465 4,281,455 =========== =========== =========== =========== 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 SIX MONTHS ENDED JUNE 30, 2002 (Unaudited) (Dollar amounts in thousands, except per share data) ACCUMULATED COMMON STOCK 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 $39,016 ========= ====== ======= ======= ======= ====== ======= Net income 3,153 3,153 Cash dividends declared ($.11 per share) (934) (934) Shares issued from treasury stock: Stock option plan 28,590 (83) 258 175 Dividend reinvestment and stock purchase plan 19,131 60 159 219 Changes in unrealized gain/(loss) on securities available for sale 572 572 Repurchase of common stock (136,800) (1,723) (1,723) --------- ------ ------- ------- ------- ------ ------- BALANCE - JUNE 30, 2002 4,177,304 $8,632 $11,759 $20,006 $(1,737) $1,818 $40,478 ========= ====== ======= ======= ======= ====== ======= See accompanying notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) Quarter Ended June 30, Six-Months Ended June 30, 2002 2001 2002 2001 ------- ------- ------- ------- Net Income $ 1,838 $ 1,118 $ 3,153 $ 2,038 ------- ------- ------- ------- Unrealized gain (loss) on securities available for sale, net of income taxes (benefit) of $872 and $(264) for the quarter and $200 and $(67) for the six-month periods ended June 30, 2002 and 2001 respectively 1,693 (512) 389 171 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) 1,693 (512) 572 151 ------- ------- ------- ------- COMPREHENSIVE INCOME $ 3,531 $ 606 $ 3,725 $ 2,189 ======= ======= ======= ======= See accompanying notes to condensed consolidated financial statements. 5 WESTBANK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) (Dollar amounts in thousands) Six Months Ended June 30, 2002 2001 -------- -------- Operating activities: Net income $ 3,153 $ 2,038 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 733 386 Provision for other real estate owned 11 25 Realized investment accretion income (27) Depreciation and amortization 380 478 Intangible amortization 342 342 Realized loss/(gain) on sale of securities 277 (31) Gain on sale of mortgages (73) (243) Gain on sale of other real estate owned (55) (28) (Increase)/Decrease in accrued interest receivable (212) 542 (Increase)/Decrease in other assets (390) 155 Increase in accrued interest payable on deposits 436 321 (Increase)/Decrease in other liabilities 735 (22) ======== ======== Net cash provided by operating activities 5,310 3,963 ======== ======== Investing activities: Investments and mortgage-backed securities: Held to maturity: Proceeds from maturities and principal payments 193 6,122 Available for sale: Purchases (35,127) (67,370) Proceeds from sales 21,260 5,350 Proceeds from maturities and principal payments 47,958 32,645 Purchases of premises and equipment (27) (47) Net (increase) in loans (49,656) (4,365) Proceeds from sale of other real estate owned 250 428 ======== ======== Net cash (used in) investing activities (15,149) (27,237) ======== ======== Financing activities: Net increase in deposits 27,780 45,918 Net increase (decrease) in borrowings 3,335 (27,224) Treasury stock (purchased)/issued, net (23) 238 Dividends paid (934) (838) ======== ======== Net cash provided by financing activities 30,158 18,094 ======== ======== Decrease in cash and cash equivalents 20,319 (5,180) Cash and cash equivalents at beginning of period 17,451 23,519 ======== ======== Cash and cash equivalents at end of period $ 37,770 $ 18,339 ======== ======== Cash paid: Interest on deposits and other borrowings $ 8,965 $ 10,316 Income taxes 2,293 350 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 572 151 Transfers of loans to other real estate owned 0 27 See accompanying notes to condensed consolidated financial statements. 6 WESTBANK CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 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 June 30, 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 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 six-month period ended June 30, 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 June 30, 2002, standby letters of credit amounted to $201,700, loan commitments were $50,164,000 and unused balances available on home equity lines of credit were $18,390,000. Trust Assets - Property with a book value of $155,722,000 at June 30, 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. The Massachusetts Department of Revenue ("DOR") has sent notices of intent to assess taxes to several banks in the Commonwealth of Massachusetts. The notices relate to DOR's intent to disallow the dividend-received deduction between a bank and its subsidiary operating as a real estate investment trust (REIT). While the Corporation's subsidiary Westbank ("the Bank") has not received a notice from the DOR, the Bank does operate a REIT similar to banks receiving notices of assessment from the DOR. Westbank believes that its tax treatment of the dividend-received deduction for its REIT subsidiary is valid under Massachusetts law. Accordingly, the Bank intends to continue its current accounting practice of calculating its tax provision under the assumption that the dividend-received deduction is valid. In the event that dividend-received deduction from its REIT subsidiary is disallowed the Corporation would be required to record additional taxes of approximately $350,000 for the years 2001 and 2000, exclusive of any interest charge. 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: June 30, 2002 December 31, 2001 ------------- ----------------- Leverage Capital Ratio 7.19% 7.56% Tier 1 Risk-Based Capital 11.26% 11.62% Total Risk-Based Capital 12.41% 12.71% As of June 30, 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. For the 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: June 30, 2002 December 31, 2001 ------------- ----------------- Leverage Capital 6.67% 6.71% Tier 1 Capital (minimum required 4.00%) 10.47% 10.79% Total Risk-Based Capital (minimum required 8.00%) 12.63% 13.03% 8 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. In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS No. 145"). The adoption of SFAS No. 145 is not expected to have a material effect on the Corporation's consolidated financial statements. In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associates with Exit or Disposal Activities" ("SFAS No. 146"). The adoption of SFAS No. 146 is not expected to have a material effect on the Corporation's consolidated financial statements. NOTE G - INTANGIBLE ASSET The following table shows the Company's acquired intangible asset that continues to be subject to amortization and aggregate amortization expense. The Company has no intangible assets with indefinite useful lives. (Dollar amounts in thousands AS OF JUNE 30, 2002 ------------------- GROSS CARRYING ACCUMULATED AMORTIZED INTANGIBLE ASSET AMOUNT AMORTIZATION -------- ------------ Core deposits $10,404 $1,909 Amortization expense for the quarter and six months ended June 30, 2002 was $171 and $342 respectively. Estimated future amortization expense for the succeeding five years is as follows: For the year ending December 31, - -------------------------------- 2002 $ 684 2003 $ 684 2004 $ 684 2005 $ 684 2006 $ 684 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 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" relate to accounting for Securities and Loans, including revenue recognition. 10 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. 11 CHANGES IN FINANCIAL CONDITION - Total consolidated assets amounted to $661,200,000 on June 30, 2002 compared to $628,922,000 on December 31, 2001. As of June 30, 2002, and December 31, 2001, earning assets amounted to, respectively, $618,754,000 or 94% of total assets, and $586,995,000 or 93% of total assets. Earning assets increased during the first six months of 2002 as a result of an increase in loans and securities. An increase in deposits and an increase in borrowed funds partially offset the impact of the increase in earning assets. CHANGES IN RESULTS OF OPERATIONS - For the quarter ended June 30, 2002, net income totaled $1,838,000 compared to $1,118,000 for the quarter ended June 30, 2001. For the six months ended June 30, 2002, net income was $3,153,000 compared to $2,038,000 for the same period during 2001. Non-interest income increased by $350,000 during the second quarter of 2002 compared to the second quarter of 2001. During the second quarter of 2002, the Corporation recognized a loss on the sale of mortgages totaling $54,000, while other non-interest income totaled $1,391,000. Included in other non-interest income is $575,000 in life insurance proceeds. The bank expects to receive additional insurance proceeds totaling $225,000 to be reflected in earnings during the third quarter of 2002. Non-interest expense totaled $4,337,000 for the quarter ended June 30, 2002, an increase of $88,000 versus the second quarter of 2001. An overall increase in interest income reflects an increase in volume and a decline in interest rates on earning assets, while a decrease in interest expense as compared to the second quarter of 2001 reflects an increase in interest-bearing liabilities more than offset by the decrease in rates. Further analysis is provided in sections on net interest revenue and supporting schedules. ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS - An increase of $274,000 has been reflected in the provision for loan losses in the quarter, with $433,000 being provided compared to $159,000 in 2001. Loans written off against the allowance for loan losses after recoveries amounted to net charge-off's of $38,000 for the quarter ended June 30, 2002 versus $21,000 for the same period of 2001. After giving effect to the actions described above, the allowance for loan losses at June 30, 2002, totaled $4,683,000 or 1.00% of total loans, as compared to $4,179,000 or 0.94% at December 31, 2001. Non-performing past due loans at June 30, 2002, aggregated $1,719,000 or 0.37% 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 $137,000 compared to 2001. As of June 30, 2002, the Corporation had no other real estate owned The percentage of other real estate owned to total assets as of June 30, 2002 and December 31, 2001 amounted to 0% 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. 12 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 June 30, Six Months Ended June 30, 2002 2001 2002 2001 ------- ------- ------- ------- Interest and dividend income $10,206 $10,115 $20,649 $20,262 Interest expense 4,449 4,996 8,993 10,294 ------- ------- ------- ------- Net interest income 5,757 5,119 11,656 9,968 Tax equivalent adjustment 51 39 89 84 ======= ======= ======= ======= NET INTEREST INCOME (TAXABLE EQUIVALENT) $ 5,808 $ 5,158 $11,745 $10,052 ======= ======= ======= ======= INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS (Dollar amounts in thousands) Quarter Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Average Average Average Average Balance Rate Balance Rate Balance Rate Balance Rate Earning Assets $609,753 6.72% $540,148 7.52% $607,521 6.82% $533,938 7.62% -------- ---- -------- ---- -------- ---- -------- ---- Interest-bearing liabilities 532,410 3.35 469,932 4.25 534,671 3.36 465,554 4.42 -------- ---- -------- ---- -------- ---- -------- ---- Interest rate spread 3.37 3.27 3.46 3.20 -------- ---- -------- ---- -------- ---- -------- ---- Interest-free resources used to fund earning assets 77,343 70,216 72,850 68,384 ======== ==== ======== ==== ======== ==== ======== ==== Total Sources of Funds $609,753 $540,148 $607,521 $533,938 NET YIELD ON EARNING ASSETS 3.81% 3.82% 3.87% 3.77% ======== ==== ======== ==== ======== ==== ======== ==== 13 CHANGES IN NET INTEREST INCOME (Dollar amounts in thousands) QUARTER ENDED JUNE 30, 2002 OVER QUARTER ENDED JUNE 30, 2001 --------------------------- CHANGE DUE TO VOLUME RATE TOTAL ------ ---- ----- Interest Income: Loans $ 470 $ (919) $ (449) Securities 650 (109) 541 Federal Funds 18 (7) 11 ------- ------- ------- Total Interest Earned 1,138 (1,035) 103 ------- ------- ------- Interest Expense: Interest-bearing deposits 471 (1,086) (615) Other borrowed funds 149 (81) 68 ------- ------- ------- Total Interest Expense 620 (1,167) (547) ------- ------- ------- NET INTEREST INCOME $ 518 $ 132 $ 650 ======= ======= ======= Net interest earned on a taxable equivalent basis increased to $5,808,000 in the second quarter of 2002, up $650,000 as compared with the quarter ended June 30, 2001. An increase in average earning assets of $69,605,000 or 13% and an 80 basis point decrease in average rate of return resulted in an increase in volume of $1,138,000 and a decrease in rate of $1,035,000. An increase in average interest-bearing liabilities of $62,478,000 or 13.30% and a 90 basis point decrease in average rate of interest paid contributed to an increase in volume of $620,000 and a decrease in rate of $1,167,000. SIX MONTHS ENDED JUNE 30, 2002 OVER SIX MONTHS ENDED JUNE 30, 2001 ------------------------------ CHANGE DUE TO VOLUME RATE TOTAL ------ ---- ----- Interest Income: Loans $ 873 $(1,768) $ (895) Securities 1,637 (312) 1,325 Federal Funds 2 (40) (38) ------- ------- ------- Total Interest Earned 2,512 (2,120) 392 ------- ------- ------- Interest Expense: Interest-bearing deposits 709 (2,402) (1,693) Other borrowed funds 788 (396) 392 ------- ------- ------- Total Interest Expense 1,497 (2,798) (1,301) ------- ------- ------- NET INTEREST INCOME $ 1,015 $ 678 $ 1,693 ======= ======= ======= Net interest earned on a taxable equivalent basis increased to $11,745,000 through June 30, 2002, up $1,693,000 versus the same period of 2001. An increase in average earning assets of $73,583,000 or 14% and an 80 basis point decrease in average rate of return resulted in an increase in volume of $2,512,000 and a decrease in rate of $2,120,000. An increase in average interest-bearing liabilities of $69,117,000 or 14.85% and a 106 basis point decrease in average rate of interest paid contributed to an increase in volume of $1,497,000 and a decrease in rate of $2,798,000. 14 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 June 30, Six Months Ended June 30, 2002 2001 2002 2002 ---- ---- ---- ---- Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- Salaries and benefits $2,277 19.73% $2,122 19.11% $4,521 19.90% $4,165 18.92% Other non-interest expense 1,664 14.42 1,762 15.87 3,407 15.00 3,321 15.09 Occupancy - net 396 3.43 365 3.29 770 3.39 754 3.43 ------ ----- ------ ----- ------ ----- ------ ----- TOTAL OPERATING EXPENSES $4,337 37.58% $4,249 38.27% $8,698 38.29% $8,240 37.44% ====== ===== ====== ===== ====== ===== ====== ===== For the six-month period ended June 30, 2002, operating expenses increased by approximately $458,000 versus the 2001 period. Salaries and benefits increased by $356,000, while other non-interest expense increased by $86,000 and occupancy increased by $16,000. The increase is a direct result of the overall increased volume and growth of the Corporation. INCOME TAXES The effective tax rates for the Corporation for the quarter and six-months ended June 30, 2002 were 21% and 27% respectively. This compares to an effective rate of 34% for the quarter and year-to-date period ended June 30, 2001. The primary reason for the change in the effective tax rate during 2002 was the recognition of life insurance proceeds totaling $575,000 recorded during the second quarter of 2002, which were non-taxable to the Corporation. 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 June 30, 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 $101,122 $64,225 $153,854 $299,553 $618,754 Interest-Bearing Liabilities 144,567 135,534 242,164 17,258 539,523 -------- =------- -------- -------- -------- Interest Rate Sensitivity Gap $(43,445) $(71,309) $(88,310) $282,295 $ 79,231 ======== ======== ======== ======== ======== Cumulative Interest Rate Sensitivity Gap $(43,445) $(114,754) $(203,064) $ 79,231 Interest Rate Sensitivity Gap Ratio (7.02)% (11.52)% (14.27)% 45.62% 12.81% Cumulative Interest Rate Sensitivity Gap Ratio (7.02) (18.54) (32.81) 12.81 15 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. PROVISION AND ALLOWANCE FOR LOAN LOSSES (Dollar amounts in thousands) Quarter Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 ------- ------- ------- ------- Balance at beginning of period $ 4,288 $ 3,936 $ 4,179 $ 3,670 Provision for loan losses 433 159 733 386 ------- ------- ------- ------- 4,721 4,095 4,912 4,056 ------- ------- ------- ------- Less charge-offs: Loans secured by real estate 20 7 124 7 Commercial and industrial loans 4 0 36 0 Consumer loans 43 32 142 59 ------- ------- ------- ------- 67 39 302 66 ------- ------- ------- ------- Add-recoveries: Loans secured by real estate 15 2 16 59 Commercial and industrial loans 8 12 28 18 Consumer loans 6 4 29 7 ------- ------- ------- ------- 29 18 73 84 ------- ------- ------- ------- Net charge-offs (recoveries) 38 21 229 (18) ------- ------- ------- ------- BALANCE AT END OF PERIOD $ 4,683 $ 4,074 $ 4,683 $ 4,074 ======= ======= ======= ======= Net charge-offs (recoveries) to: Average loans .01% .01% .05% .00% Loans at end of period .01% .01% .05% .00% Allowance for loan losses at January 1 .89% .53% 5.50% (.49%) Allowance for loan losses at June 30 as a percentage of: Average loans 1.02% .93% 1.02% .94% Loans at end of period 1.00% .93% 1.00% .93% 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. 16 NON-ACCRUAL, PAST DUE AND NON-PERFORMING LOANS (Dollar amounts in thousands) 6-30-02 3-31-02 12-31-01 09-30-01 06-30-01 ------- ------- -------- -------- -------- Non-accrual loans $1,412 $1,160 $1,040 $1,570 $1,926 ------ ------ ------ ------ ------ Loans contractually past due 90 days or more still accruing 307 195 790 98 165 ------ ------ ------ ------ ------ Total non-accrual, past due and restructured loans 1,719 1,355 1,830 1,668 2,091 ------ ------ ------ ------ ------ Non-accrual, past due and restructured loans as a percentage of total loans 0.37% 0.30% 0.41% 0.37% 0.48% ------ ------ ------ ------ ------ Allowance for loan losses as a percentage of non-accrual, past due and restructured loans 272.43% 316.46% 228.36% 245.20% 198.84% ====== ====== ====== ====== ====== Other real estate owned - net 130 204 117 137 --- --- --- --- --- Total non-performing assets $1,719 $1,485 $2,034 $1,785 $2,228 Non-performing assets as a percentage of total assets 0.26% 0.23% 0.32% 0.29% 0.37% ---- ---- ---- ---- ---- 17 QUARTER-TO-DATE AVERAGE BALANCES INTEREST EARNED - INTEREST EXPENSE (Dollar amounts in thousands) Quarter ended June 30, 2002 2001 ---- ---- Balance Interest(1) Rate Balance Interest(1) Rate ------- ----------- ---- ------- ----------- ---- Federal funds sold and temporary investments $ 3,794 $ 29 3.06% $ 1,553 $ 18 4.64% Securities 144,680 2,206 6.10 102,457 1,665 6.50 Loans 461,279 8,022 6.96 436,138 8,471 7.77 --------- --------- ---- --------- --------- ---- Total earning assets 609,753 $ 10,257 6.72% $ 540,148 $ 10,154 7.52% --------- --------- ---- --------- --------- ---- Loan loss allowance (4,405) (4,068) All other assets 44,583 37,264 --------- --------- ---- --------- --------- ---- TOTAL ASSETS $649,931 $ 573,344 ========= ========= ==== ========= ========= ==== LIABILITIES AND EQUITY Interest bearing deposits $ 451,420 $ 3,460 3.07% $ 400,796 $ 4,075 4.07% Borrowed funds 80,990 989 4.89 69,136 921 5.33 --------- --------- ---- --------- --------- ---- Total interest bearing liabilities 532,410 4,449 3.35 469,932 4,996 4.25 --------- --------- ---- --------- --------- ---- Interest rate spread 3.35% 3.27% Demand deposits 72,708 63,426 Other liabilities 5,265 3,722 Shareholders' equity 39,548 36,264 --------- --------- ---- --------- --------- ---- TOTAL LIABILITIES AND EQUITY $ 649,931 $ 573,344 ========= ========= ==== ========= ========= ==== Net Interest Income(tax equivalent basis) $ 5,808 $ 5,158 Interest Earned/Earning Assets 6.72% 7.52% Interest Expense/Earning Assets 2.91 3.70 --------- --------- ---- --------- --------- ---- Net Yield on Earning Assets 3.81% 3.82% Deduct tax equivalent adjustment 51 39 --------- --------- ---- --------- --------- ---- NET INTEREST INCOME $ 5,757 $ 5,119 ========= ========= ==== ========= ========= ==== (1) Amounts shown are adjusted to a "tax equivalent" basis. 18 YEAR-TO-DATE AVERAGE BALANCES INTEREST EARNED - INTEREST EXPENSE (Dollar amounts in thousands) Six months ended June 30, 2002 2001 ---- ---- Balance Interest(1) Rate Balance Interest(1) Rate ------- ----------- ---- ------- ----------- ---- Federal funds sold and temporary investments $ 2,714 $ 32 2.36% $ 2,631 $ 70 5.32% Securities 148,080 4,581 6.19 97,595 3,256 6.67 Loans 456,727 16,125 7.06 433,712 17,020 7.85 -------- ------- ---- -------- ------- ---- Total earning assets 607,521 $20,738 6.82% 533,938 $20,346 7.62% -------- ------- ---- -------- ------- ---- Loan loss allowance (4,305) (3,935) All other assets 45,256 37,214 -------- ------- ---- -------- ------- ---- TOTAL ASSETS $648,471 $567,217 ======== ======= ==== ======== ======= ==== LIABILITIES AND EQUITY Interest bearing deposits $444,016 $6,986 3.15% $408,069 $ 8,679 4.25% Borrowed funds 90,655 2,007 4.43 57,485 1,615 5.62 -------- ------- ---- -------- ------- ---- Total interest bearing liabilities 534,671 $8,993 3.36 465,554 $10,294 4.42 -------- ------- ---- -------- ------- ---- Interest rate spread 3.45% 3.20% Demand deposits 69,183 61,933 Other liabilities 5,421 3,887 Shareholders' equity 39,196 35,843 -------- ------- ---- -------- ------- ---- TOTAL LIABILITIES AND EQUITY $648,471 $567,217 ======== ======= ==== ======== ======= ==== Net Interest Income(tax equivalent basis) $11,745 $10,052 Interest Earned/Earning Assets 6.82% 7.62% Interest Expense/Earning Assets 2.95 3.85 -------- ------- ---- -------- ------- ---- Net Yield on Earning Assets 3.87% 3.77% Deduct tax equivalent adjustment 89 84 -------- ------- ---- -------- ------- ---- NET INTEREST INCOME $11,656 $ 9,968 ======== ======= ==== ======== ======= ==== (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. 19 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 ITEM 6. Exhibits and Reports on Form 8-K a. Exhibits b. Reports on Form 8-K - None 20 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. 21 In accordance with Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Chief Financial Officer of Westbank Corporation, hereby certify that this Quarterly Report of Westbank Corporation on Form 10-Q for the period ending June 30, 2002 fully complies with the requirements of Sections 13(a) of the Securities and Exchange Act of 1934, and that the information contained in this periodic report fairly presents, in all material respects, the financial conditions and results and operations of Westbank Corporation. 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: August 7, 2002 /s/ -------------- ------------------------------------------ Donald R. Chase President and Chief Executive Officer Date: August 7, 2002 /s/ -------------- ------------------------------------------ John M. Lilly Treasurer and Chief Financial Officer 22