================================================================================ 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, 2003 Commission file number 0 - 12784 WESTBANK CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2830731 (State of other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 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 $2.00 per share: 4,389,431 shares outstanding as of July 31, 2003 ================================================================================ WESTBANK CORPORATION AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Page ---- 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 10-20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 21 ITEM 4. Controls and Procedures 21 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 21 ITEM 2. Changes in Rights of Securities Holders 21 ITEM 3. Defaults by Company on its Senior Securities 21 ITEM 4. Results of Votes on Matters Submitted to a Vote of Security Holders 21 ITEM 5. Other Events 21 ITEM 6. Exhibits and Reports on Form 8-K 21 Exhibit Index 22 Signatures 23 2 ITEM 1. FINANCIAL STATEMENTS WESTBANK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2003 (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (Unaudited) December 31, 2002 - ------------------------------------------------------------------------------------------ ASSETS Cash and due from banks: Non-interest bearing $ 20,036 $ 18,967 Interest bearing 83 98 Federal funds sold 24,922 28,185 - ------------------------------------------------------------------------------------------ Total cash and cash equivalents 45,041 47,250 - ------------------------------------------------------------------------------------------ Securities available for sale 122,254 132,296 Securities held to maturity (approximate fair value of $334 in 2003 and $586 in 2002) 317 436 - ------------------------------------------------------------------------------------------ Total securities 122,571 132,732 - ------------------------------------------------------------------------------------------ Loans 456,593 478,832 Allowance for loan losses 5,122 5,111 - ------------------------------------------------------------------------------------------ Net loans 451,471 473,721 Premises and equipment, net 6,351 6,586 Bank-owned life insurance 8,529 8,333 Accrued interest receivable 2,634 3,037 Intangible assets 8,837 8,837 Other assets 4,404 2,367 - ------------------------------------------------------------------------------------------ TOTAL ASSETS $ 649,838 $ 682,863 ========================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 72,493 $ 74,169 Interest bearing 464,790 487,578 - ------------------------------------------------------------------------------------------ Total deposits 537,283 561,747 Borrowed funds 46,403 56,392 Accrued interest payable 526 665 Other liabilities 4,419 4,447 - ------------------------------------------------------------------------------------------ Total liabilities 588,631 623,251 - ------------------------------------------------------------------------------------------ Mandatorily redeemable preferred stock 17,000 17,000 - ------------------------------------------------------------------------------------------ Stockholders' Equity: Common stock - $2 par value Authorized - 9,000,000 shares Issued - 4,523,485 shares in 2003 and 2002 9,047 9,047 Additional paid in capital 14,516 14,497 Retained earnings 20,731 18,780 Treasury stock (1,917) (2,091) Accumulated other comprehensive income 1,830 2,379 - ------------------------------------------------------------------------------------------ Total Stockholders' Equity 44,207 42,612 - ------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 649,838 $ 682,863 ========================================================================================== 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) Quarter Ended June 30, Six Months Ended June 30, 2003 2002 2003 2002 - --------------------------------------------------------------------------------------------------------------------------- Income: Interest and fees on loans $ 7,281 $ 7,988 $ 14,914 $ 16,057 Interest and dividend income on securities 1,598 2,189 3,267 4,560 Interest on federal funds sold 54 29 116 32 - --------------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 8,933 10,206 18,297 20,649 Interest expense 3,584 4,449 7,432 8,993 - --------------------------------------------------------------------------------------------------------------------------- Net interest income 5,349 5,757 10,865 11,656 Provision for loan losses 0 433 0 733 - --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 5,349 5,324 10,865 10,923 - --------------------------------------------------------------------------------------------------------------------------- Non-interest income: Gain/(Loss) on sale of securities 4 263 (277) Gain/(Loss) on sale of loans 246 (54) 246 73 Other non-interest income 744 1,391 1,478 2,274 - --------------------------------------------------------------------------------------------------------------------------- Total non-interest income 994 1,337 1,987 2,070 - --------------------------------------------------------------------------------------------------------------------------- Non-interest expenses: Salaries and benefits 2,443 2,277 4,813 4,521 Other non-interest expense 1,421 1,493 2,768 3,065 Occupancy - net 365 396 810 770 - --------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 4,229 4,166(1) 8,391 8,356(2) - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 2,114 2,495 4,461 4,637 Income taxes 612 555 1,453 1,279 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,502 $ 1,940(1) $ 3,008 $ 3,358(2) - --------------------------------------------------------------------------------------------------------------------------- Net income per share - Basic $0.34 $0.46(1) $0.69 $0.79(2) - Diluted $0.33 $0.45(1) $0.67 $0.78(2) Weighted average shares outstanding - Basic 4,381,490 4,205,618 4,363,070 4,234,669 - Dilutive Option Shares 155,566 122,819 151,515 99,796 - --------------------------------------------------------------------------------------------------------------------------- - Diluted 4,537,056 4,328,437 4,514,585 4,334,465 - --------------------------------------------------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. (1) Net income for the quarter ended June 30, 2002 has been restated to reflect the September 30, 2002 adoption of SFAS No. 147 ("Acquisition of Certain Financial Institutions"). Accordingly, for the quarter ended June 30, 2002, non-interest expense has been reduced by $171,000, net income has been increased by $102,000, and basic and diluted net income per share were increased by $0.02 and $0.03 respectively for the removal of amortization expenses related to goodwill. (2) Net income for the six-month period ended June 30, 2002 has been restated to reflect the September 30, 2002 adoption of SFAS No. 147 ("Acquisition of Certain Financial Institutions"). Accordingly, for the six months ended June 30, 2002, non-interest expense has been reduced by $342,000, net income has been increased by $205,000, and basic and diluted net income per share both were increased by $0.05 for the removal of amortization expenses related to goodwill. 4 WESTBANK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 2002 AND SIX MONTHS ENDED JUNE 30, 2003 (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, 2002 4,266,383 $8,632 $11,782 $ 17,787 $ (431) $ 1,246 $39,016 =========================================================================================================================== Net income 6,009 6,009 Cash dividends declared ($.40 per share) (1,849) (1,849) Shares issued from treasury stock: Stock option plan 54,055 (243) 547 304 Dividend reinvestment and stock purchase plan 42,310 122 408 530 Changes in unrealized gain/(loss) on securities available for sale 1,133 1,133 Income tax benefit for exercise of non-qualified stock options 84 84 Five percent common stock dividend 207,690 415 2,752 (3,167) Repurchase of common stock (202,658) (2,615) (2,615) - --------------------------------------------------------------------------------------------------------------------------- BALANCE - DECEMBER 31, 2002 4,367,780 9,047 14,497 18,780 (2,091) 2,379 42,612 =========================================================================================================================== (Unaudited) Net income 3,008 3,008 Cash dividends declared ($.12 per share) (1,057) (1,057) Shares issued from treasury stock: Stock option plan 17,080 (100) 223 123 Dividend reinvestment and stock purchase plan 24,428 36 315 351 Changes in unrealized gain/(loss) on securities available for sale (549) (549) Income tax benefit for exercise of non-qualified stock options 83 83 Repurchase of common stock (25,727) (364) (364) - --------------------------------------------------------------------------------------------------------------------------- BALANCE - JUNE 30, 2003 4,383,561 $9,047 $14,516 $ 20,731 $ (1,917) $ 1,830 $44,207 =========================================================================================================================== See accompanying notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (DOLLARD IN THOUSANDS) Quarter Ended June 30, Six Months Ended June 30, 2003 2002 2003 2002 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 1,502 $1,940 $ 3,008 $3,358 - --------------------------------------------------------------------------------------------------------------------------- Unrealized gain (loss) on securities available for sale, net of income taxes (benefit) of $66 and $872 for the quarter and $(193) and $200 for the six-month periods ended June 30, 2003 and 2002 respectively 128 1,693 (375) 389 Reclassification adjustment for gains (losses) Included in net income, net of income taxes (benefit) of $(1) and $0 for the second quarter of 2003 and 2002 respectively, and net of income taxes of $(89) and $94 for the six months ended June 30, 2003 and 2002 respectively (3) (174) 183 - --------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) 125 1,693 (549) 572 - --------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 1,627 $3,633 $ 2,459 $3,930 =========================================================================================================================== 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, 2003 2002 - ------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 3,008 $ 3,358 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 733 Provision for other real estate owned 11 Accretion of discount on investment securities (20) (27) Depreciation and amortization 339 380 Realized loss/(gain) on sale of securities (263) 277 Gain on sale of mortgages (246) (73) Gain on sale of other real estate owned (55) (Increase)/Decrease in accrued interest receivable 403 (212) (Increase) in bank-owned life insurance (196) (Increase) in other assets (2,037) (253) Increase/(Decrease) in accrued interest payable on deposits (139) 436 (Decrease) in other liabilities (28) (735) - ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 821 3,840 ======================================================================================================= Investing activities: Investments and mortgage-backed securities: Held to maturity: Proceeds from maturities and principal payments 119 193 Available for sale: Purchases (21,392) (35,127) Proceeds from sales 7,459 21,260 Proceeds from maturities and principal payments 49,267 47,958 Purchases of premises and equipment (104) (27) Proceeds from loan sales 6,462 Net (increase) in loans (9,524) (48,186) Proceeds from sale of other real estate owned 250 - ------------------------------------------------------------------------------------------------------- Net cash provided by/(used in) investing activities 32,287 (13,679) ======================================================================================================= Financing activities: Net increase/(decrease) in deposits (24,464) 27,780 Net increase/(decrease) in borrowings (9,989) 3,335 Treasury stock (purchased)/issued, net 193 (23) Dividends paid (1,057) (934) - ------------------------------------------------------------------------------------------------------- Net cash provided by/(used in) financing activities (35,317) 30,158 ======================================================================================================= Decrease in cash and cash equivalents (2,209) 20,319 Cash and cash equivalents at beginning of period 47,250 17,451 - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 45,041 $ 37,770 ======================================================================================================= Cash paid: Interest on deposits and other borrowings $ 7,571 $ 8,965 Income taxes 6,180 2,293 Supplemental disclosure of cash flow information: Securitization of loans into mortgage-backed securities 26,079 23,495 See accompanying notes to condensed consolidated financial statements. 6 WESTBANK CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (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 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements for the quarters and six-month periods ended June 30, 2003 and 2002 have been prepared in accordance with accounting principles generally accepted in the United States of America ("generally accepted accounting principles"). Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim reports. 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, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 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 Annual Report on Form 10-K for the year ended December 31, 2002. NOTE C - STOCK-BASED COMPENSATION Prior to January 1, 2003, the Corporation accounted for stock-based employee compensation under the intrinsic value method consistent with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations, as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Effective January 1, 2003, the Corporation adopted the fair value recognition provisions of SFAS No. 123 prospectively to all employee awards granted, modified or settled after January 1, 2003. In accordance with this Statement, the Corporation began expensing the cost of the stock-based employee compensation for all new employee awards granted. The following table shows net income and earnings per share for the quarters ended June 30, 2003 and 2002 and for the six month periods ended June 30, 2002 and 2003, as if the fair value based method had been applied to all outstanding and unvested awards in each period. 7 Quarter Ended June 30, Six Months Ended June 30, (DOLLARS IN THOUSANDS) 2003 2002 2003 2002 - --------------------------------------------------------------------------------------------------------------------------- Net income: Reported net income $ 1,502 $1,940 $3,008 $3,358 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 47 67 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related taxes effects (1) 47 22 67 27 - --------------------------------------------------------------------------------------------------------------------------- Pro forma net income $ 1,502 $1,918 $3,008 $3,331 =========================================================================================================================== Earnings per share: Basic - as reported $0.34 $0.46 $0.69 $0.79 =========================================================================================================================== Basic - pro forma $0.34 $0.46 $0.69 $0.79 =========================================================================================================================== Diluted - as reported $0.33 $0.45 $0.67 $0.78 =========================================================================================================================== Diluted - pro forma $0.33 $0.44 $0.67 $0.77 =========================================================================================================================== (1) All previously awarded grants were fully amortized prior to January 2, 2003. NOTE D - CONTINGENT LIABILITIES On June 23, 2003, the Corporation's subsidiary Westbank ("the Bank") settled its dispute with the Massachusetts Department of Revenue ("DOR") over a change in state law regarding tax deductions for real estate investment trust ("REIT") dividends for 2002 and prior tax years. The financial settlement with the DOR had no material impact on the Corporation's financial results for the quarter ended June 30, 2003. 8 NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS On January 1, 2003, the Corporation adopted FASB Interpretation 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Corporation has financial and performance letters of credit. Financial letters of credit require the Corporation to make payment if the customer's financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Corporation to make payments if the customer fails to perform certain non-financial contractual obligations. The Corporation previously did not record a liability when guaranteeing obligations, unless it became probable that the Corporation would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the Corporation issues or modifies subsequent to December 31, 2002. The Corporation defines the initial fair value of the letters of credit as the fee received from the customer. The fees collected as of June 30, 2003 were immaterial. The maximum potential undiscounted amount of future payments of letters of credit under FIN 45 as of June 30, 2003 were approximately $203,000, of which $193,000 will expire on January 15, 2004 and $10,000 will expire on February 13, 2004. Amounts due under these letters of credit would be reduced by any proceeds that the Corporation would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. The Corporation has not recorded any contingent liabilities related to these letters of credit. In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin 51, "Consolidated Financial Statements", for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest ("variable interest entities"). Variable interest entities, within the scope of FIN 46, will be required to be consolidated by their primary beneficiary. The primary beneficiary is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Corporation does not anticipate FIN 46 will have a material impact on its consolidated financial position or results of operations. On May 15, 2003, the FASB issued Statement 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." Statement 150 requires the reclassification of certain financial instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in fair value of redemption amount, as applicable, in earnings. On July 1, 2003, the Corporation will adopt FASB Statement 150, requiring the Corporation to change the classification of mandatorily redeemable preferred stock in the statement of financial position from the mezzanine to liabilities. The change will not have a material impact on the Corporation's results of operations. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2003 AND 2002 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 that may affect such future performance, are based on factors that are beyond the Corporation's ability to control or predict with precision, including future market conditions and the behavior of other market participants. Among the factors that could cause actual results to differ materially from such forward-looking statements are the following: 1. The status of the economy in general, as well as in the Corporation's primary market areas of western Massachusetts and northeastern Connecticut; 2. The real estate market in western Massachusetts and northeastern Connecticut; 3. Competition in the Corporation's primary market area from other banks, especially in light of continued consolidation in the New England banking industry; 4. Changes in interest rates; 5. The cost and other effects of unanticipated legal and administrative cases and proceedings, settlements and investigations; 6. Changes in laws and regulations, including federal and state banking laws and regulations, to which the Corporation and its subsidiaries are subject; 7. Changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board or any regulatory agency having authority over the Corporation and/or its subsidiaries; and 8. Disruption in general economic conditions due to military or terrorist activity. Forward-looking statements speak only as of the date they were made. While the Corporation periodically reassesses material trends and uncertainties affecting the Corporation's performance in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its quarterly and annual reports, the Corporation does not intend to review or revise any particular forward-looking statement. 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 that have been identified as assets for which there is not a positive intent to hold to maturity, including all marketable equity securities, are classified as available for sale with unrealized gains (losses), net of income taxes, reported as a separate component of stockholders' equity. The Corporation determines if securities will be classified as held to maturity or available for sale at the time of purchase. In addition, any mortgage-backed securities created out of the Corporation's own inventory of residential real estate loans are also considered available for sale. Gains and losses on sales of securities are recognized in non-interest income at the time of sale on a specific identification basis. Securities that have experienced an other than temporary decline in fair 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 ninety (90) days, unless the loan principal and interest are determined by management to be fully collectible and the loan is in the process of collection. Any unpaid amounts previously accrued on these loans are reversed from income. Interest received on a loan in non-accrual status is applied to reduce principal or, if management determines that the principal is collectible, applied to interest on a cash basis. A loan is returned to accrual status after the borrower has brought the loan current and has demonstrated compliance with the loan terms for a sufficient period, and management's doubts concerning collectibility have been removed. The Corporation measures impairment of loans in accordance with SFAS No. 114, "Accounting for Impairment of a Loan", as Amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (collectively SFAS No. 114). A loan is recognized as impaired when it is probable that either principal or interest are not collectible in accordance with the terms of the loan agreement. Measurement of impairment for commercial loans is generally based on the present value of expected future cash flows discounted at the loan's effective interest rate. Commercial real estate loans are generally measured based on the fair value of the underlying collateral. If the estimated fair value of the impaired loan is less than the related recorded amount, a specific valuation allowance is established or a write-down is charged against the allowance for loan losses. Smaller balance homogenous loans, including residential real estate and consumer loans, are excluded from the provisions of SFAS No. 114. Generally, income is recorded only on a cash basis for impaired loans. The appropriateness of the allowance for loan losses is evaluated quarterly by management. Factors considered in evaluating the appropriateness of the allowance include the size and concentration of the portfolio, previous loss experience, current economic conditions and their effect on borrowers, the financial condition of individual borrowers and the related performance of individual loans in relation to contract terms. The provision for loan losses charged to operating expense is based upon management's judgment of the amount necessary to maintain the allowance at an appropriate level to absorb losses. Management also retains an independent loan review consultant to provide advice on the appropriateness of the loan loss allowance. Loan losses are charged against the allowance for loan losses when management believes the collectibility of the principal is doubtful. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. There were no mortgage loans originated and intended for sale. Net unrealized losses are recognized through a valuation allowance charged to income as of June 30, 2003. 11 RECENT ACCOUNTING PRONOUNCEMENTS - On January 1, 2003, the Corporation adopted FASB Interpretation 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Corporation has financial and performance letters of credit. Financial letters of credit require the Corporation to make payment if the customer's financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Corporation to make payments if the customer fails to perform certain non-financial contractual obligations. The Corporation previously did not record a liability when guaranteeing obligations, unless it became probable that the Corporation would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the Corporation issues or modifies subsequent to December 31, 2002. The Corporation defines the initial fair value of the letters of credit as the fee received from the customer. The fees collected as of June 30, 2003 were immaterial. The maximum potential undiscounted amount of future payments of letters of credit under FIN 45 as of June 30, 2003 were approximately $203,000, of which $193,000 will expire on January 15, 2004 and $10,000 will expire on February 13, 2004. Amounts due under these letters of credit would be reduced by any proceeds that the Corporation would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. The Corporation has not recorded any contingent liabilities related to these letters of credit. CHANGES IN FINANCIAL CONDITION - Total consolidated assets amounted to $649,838,000 on June 30, 2003 compared to $682,863,000 on December 31, 2002. As of June 30, 2003 and December 31, 2002, earning assets amounted to, respectively, $604,169,000 or 93% of total assets and $639,847,000 or 94% of total assets. Earning assets decreased during the first six months of 2003 as a result of a decrease in loans, federal funds sold and securities. A decrease in deposits and a decrease in borrowed funds offset the decrease in earning assets. CHANGES IN RESULTS OF OPERATIONS - For the quarter ended June 30, 2003, net income totaled $1,502,000 compared to $1,940,000 for the quarter ended June 30, 2002. During the second quarter of 2003, the Corporation securitized approximately $26,000,000 in residential loans and sold another $6,500,000 of real estate loans in the secondary mortgage market. For the six months ended June 30, 2003, net income was $3,008,000, compared to $3,358,000 for the same period during 2002. Non-interest income declined by $993,000 during the second quarter of 2003 compared to the second quarter of 2002. During the second quarter of 2003, the Corporation recognized a gain on sale of securities available for sale and a gain on sale of loans totaling $4,000 and $246,000 respectively, while other non-interest income totaled $744,000. Included in other non-interest income is $271,250 in write-downs of the Bank's mortgage servicing assets. During the second quarter of 2002, the Corporation's non-interest income included $579,000 in life insurance proceeds. Non-interest expense totaled $4,229,000 for the quarter ended June 30, 2003, an increase of $63,000 versus the second quarter of 2002. The overall decrease in interest income reflects a decrease in volume and a decline in interest rates on earning assets, while the decrease in interest expense reflects a decrease in interest-bearing liabilities and a decrease in rates as compared to the second quarter of 2002. Further analysis is provided in sections on net interest revenue and supporting schedules. ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS - A decrease of $60,000 has been reflected in the allowance for loan losses at June 30, 2003 as compared to June 30, 2002. The Corporation recorded no provision for the quarter ended June 30, 2003 as compared to $433,000 in 2002. Loans written off against the allowance for loan losses after recoveries amounted to net charge-offs of $60,000 for the quarter ended June 30, 2003 versus net charge-offs of $38,000 for the same period of 2002. The allowance for loan losses at June 30, 2003 totaled $5,122,000 or 1.12% of total loans, as compared to $5,111,000 or 1.07% at December 31, 2002. Non-performing past due loans at June 30, 2003 aggregated $1,462,000 or 0.32% of total loans compared to $1,558,000 or 0.33% at December 31, 2002. The percentage of non-performing and past due loans compared to total assets on those same dates, respectively, amounted to 0.23% and 0.23%. Management has made every effort to evaluate all circumstances known at this time that could affect the collectibility of loans and has reflected these in determining 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 the results of management's loan reserve evaluation process 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 that 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, 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------- Interest and dividend income $8,933 $ 10,206 $18,297 $ 20,649 Interest expense 3,584 4,449 7,432 8,993 - ---------------------------------------------------------------------------------------------------- Net interest income 5,349 5,757 10,865 11,656 Tax equivalent adjustment 27 51 50 89 - ---------------------------------------------------------------------------------------------------- NET INTEREST INCOME (TAXABLE EQUIVALENT) $ 5,376 $ 5,808 $10,915 $ 11,745 ==================================================================================================== INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS (DOLLAR AMOUNTS IN THOUSANDS) Quarter Ended June 30, Six Months Ended June 30, - ------------------------------------------------------------------------------------------------------------------------ 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Balance Rate Balance Rate Balance Rate Balance Rate - ------------------------------------------------------------------------------------------------------------------------ Earning assets $604,565 5.93% $609,753 6.73% $613,847 5.98% $ 607,521 6.82% - ------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities 521,869 2.75 532,410 3.34 532,166 2.79 534,671 3.36 - ------------------------------------------------------------------------------------------------------------------------ Interest rate spread 3.18 3.39 3.19 3.46 - ------------------------------------------------------------------------------------------------------------------------ Interest-free resources used to fund earning assets 82,696 77,343 81,667 72,850 - ------------------------------------------------------------------------------------------------------------------------ Total Sources of Funds $604,565 $609,753 $613,847 $ 607,521 - ------------------------------------------------------------------------------------------------------------------------ NET YIELD ON EARNING ASSETS 3.56% 3.81% 3.56% 3.87% ======================================================================================================================== 13 CHANGES IN NET INTEREST INCOME (DOLLAR AMOUNTS IN THOUSANDS) QUARTER ENDED JUNE 30, 2003 OVER QUARTER ENDED JUNE 30, 2002 - -------------------------------------------------------------------------------- CHANGE DUE TO VOLUME RATE TOTAL - -------------------------------------------------------------------------------- Interest Income: Loans $ (67) $ (651) $ (718) Securities (316) (288) (604) Federal funds 57 (32) 25 - -------------------------------------------------------------------------------- Total Interest Earned (326) (971) (1,297) Interest Expense: Interest-bearing deposits 49 (737) (688) Other borrowed funds (215) 38 (177) - -------------------------------------------------------------------------------- Total Interest Expense (166) (699) (865) - -------------------------------------------------------------------------------- NET INTEREST INCOME $ (160) $ (272) $ (432) ================================================================================ For the quarter June 30, 2003, a decrease in average earning assets of $5,188,000 or 0.85% and a 80-basis-point decrease in average rate of return resulted in a decrease in volume of $326,000 and a decrease in rate of $971,000. A decrease in average interest-bearing liabilities of $10,541,000 or 1.98% and a 59-basis-point decrease in average rate of interest paid contributed to a decrease in volume of $166,000 and a decrease in rate of $699,000. Net interest earned on a tax equivalent basis decreased to $5,376,000 for the second quarter of 2003, down $432,000 as compared with the quarter ended June 30, 2002. 14 CHANGES IN NET INTEREST INCOME (DOLLAR AMOUNTS IN THOUSANDS) SIX MONTHS ENDED JUNE 30, 2003 OVER SIX MONTHS ENDED JUNE 30, 2002 - -------------------------------------------------------------------------------- CHANGE DUE TO VOLUME RATE TOTAL - -------------------------------------------------------------------------------- Interest Income: Loans $ 373 $(1,541) $(1,168) Securities (718) (589) (1,307) Federal funds 113 (29) 84 - -------------------------------------------------------------------------------- Total Interest Earned (232) (2,159) (2,391) Interest Expense: Interest-bearing deposits 311 (1,560) (1,249) Other borrowed funds (368) 56 (312) - -------------------------------------------------------------------------------- Total Interest Expense (57) (1,504) (1,561) - -------------------------------------------------------------------------------- NET INTEREST INCOME $ (175) $ (655) $ (830) ================================================================================ For the six-month period ended June 30, 2003, an increase in average earning assets of $6,326,000 or 1.04% and an 84-basis-point decrease in average rate of return resulted in a decrease in volume of $232,000 and a decrease in rate of $2,159,000. A decrease in average interest-bearing liabilities of $2,505,000 or 0.47% and a 57-basis-point decrease in average rate of interest paid contributed to a decrease in volume of $57,000 and a decrease in rate of $1,504,000. Net interest earned on a tax equivalent basis decreased to $10,915,000 for the six-month period ended June 30, 2003, down $830,000 as compared with the six months ended June 30, 2002. OPERATING EXPENSES The components of total operating expenses for the periods and their percentage of interest income and non-interest income are as follows: (DOLLAR AMOUNTS IN THOUSANDS) Quarter Ended June 30, Six Months Ended June 30, 2003 2002 2003 2002 - --------------------------------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent - --------------------------------------------------------------------------------------------------------------------------- Salaries and benefits $ 2,443 24.61% $ 2,277 19.73% $4,813 23.73% $4,521 19.90% Other non-interest expense 1,421 14.31 1,493 12.93 2,768 13.65 3,065 13.49 Occupancy - net 365 3.68 396 3.43 810 3.99 770 3.39 - --------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 4,229 42.60% $ 4,166 36.09% $8,391 41.37% $8,356 36.78% =========================================================================================================================== For the three-month period ended June 30, 2003, operating expenses increased by approximately $63,000 versus the 2002 period. Salaries and benefits increased by $166,000, while other non-interest expense and occupancy decreased by $72,000 and $31,000 respectively. For the six-month period ended June 30, 2003, operating expenses increased by approximately $35,000 versus the 2002 period. Salaries and benefits increased by $292,000, while other non-interest expense decreased by $297,000 and occupancy increased by $40,000. The net increase of approximately $35,000 is a direct result of the Corporation's continued commitment to control other non-interest expenses. 15 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, 2003. (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 $117,772 $ 51,308 $164,664 $270,425 $604,169 Interest-Bearing Liabilities 139,414 108,320 263,122 17,337 528,193 - -------------------------------------------------------------------------------------------------------------------- Interest Rate Sensitivity Gap $(21,642) $(57,012) $(98,458) $253,088 $ 75,976 ==================================================================================================================== Cumulative Interest Rate Sensitivity Gap $(21,642) $(78,654) $(177,112) $ 75,976 Interest Rate Sensitivity Gap Ratio (3.58)% (9.44)% (16.30)% 41.89% Cumulative Interest Rate Sensitivity Gap Ratio (3.58)% (13.02)% (29.31)% 12.58% 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. 16 PROVISION AND ALLOWANCE FOR LOAN LOSSES (DOLLAR AMOUNTS IN THOUSANDS) Quarter Ended June 30, Six Months Ended June 30, - ------------------------------------------------------------------------------------------------------- 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------- Balance at beginning of period $5,182 $4,288 $5,111 $4,179 Provision for loan losses 433 733 - ------------------------------------------------------------------------------------------------------- 5,182 4,721 5,111 4,912 - ------------------------------------------------------------------------------------------------------- Less charge-offs: Loans secured by real estate 2 20 6 124 Commercial and industrial loans 32 4 32 36 - ------------------------------------------------------------------------------------------------------- Consumer loans 27 43 67 142 - ------------------------------------------------------------------------------------------------------- 61 67 105 302 - ------------------------------------------------------------------------------------------------------- Add recoveries: Loans secured by real estate 15 100 16 Commercial and industrial loans 8 13 28 Consumer loans 1 6 3 29 - ------------------------------------------------------------------------------------------------------- 1 29 116 73 - ------------------------------------------------------------------------------------------------------- Net charge-offs (recoveries) 60 38 (11) 229 - ------------------------------------------------------------------------------------------------------- BALANCE AT END OF PERIOD $5,122 $4,683 $5,122 $4,683 ======================================================================================================= Net charge-offs (recoveries) to: Average loans .01% .01% Nil .05% Loans at end of period .01% .01% Nil .05% Allowance for loan losses at January 1 1.17% .89% (.22)% 5.50% Allowance for loan losses at June 30 as a percentage of Average loans 1.12% 1.02% 1.10% 1.03% Loans at end of period 1.12% 1.00% 1.12% 1.00% 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. 17 NON-ACCRUAL, PAST DUE AND NON-PERFORMING LOANS (DOLLAR AMOUNTS IN THOUSANDS) 6-30-03 3-31-03 12-31-02 9-30-02 6-30-02 - ------------------------------------------------------------------------------------------------------ Non-accrual loans $1,116 $1,052 $1,372 $2,246 $1,412 - ------------------------------------------------------------------------------------------------------ Loans contractually past due 90 days or more still accruing 346 373 186 1,025 307 - ------------------------------------------------------------------------------------------------------ Total non-accrual, past due and restructured loans 1,462 1,425 1,558 3,271 1,719 - ------------------------------------------------------------------------------------------------------ Non-accrual, past due and restructured loans as a percentage of total loans 0.32% 0.30% 0.33% 0.69% 0.37% - ------------------------------------------------------------------------------------------------------ Allowance for loan losses as a percentage of non-accrual, past due and restructured loans 350.34% 363.90% 328.05% 150.64% 272.43% - ------------------------------------------------------------------------------------------------------ Other real estate owned - net - ------------------------------------------------------------------------------------------------------ Total non-performing assets $1,462 $1,425 $1,558 $3,271 $1,719 Non-performing assets as a percentage of total assets 0.23% 0.22% 0.23% 0.47% 0.26% - ------------------------------------------------------------------------------------------------------ 18 QUARTER-TO-DATE AVERAGE BALANCES INTEREST EARNED - INTEREST EXPENSE (DOLLAR AMOUNTS IN THOUSANDS) Quarter ended June 30, 2003 2002 - -------------------------------------------------------------------------------------------------------------------------- Balance Interest(1) Rate Balance Interest(1) Rate - -------------------------------------------------------------------------------------------------------------------------- Federal funds sold and temporary investments $ 21,797 $ 54 0.99% $ 3,794 $ 29 3.06% Securities 125,311 1,602 5.11 144,680 2,206 6.10 Loans 457,457 7,304 6.39 461,279 8,022 6.96 - -------------------------------------------------------------------------------------------------------------------------- Total earning assets 604,565 $8,960 5.93% 609,753 10,257 6.73% - -------------------------------------------------------------------------------------------------------------------------- Loan loss allowance (5,200) (4,405) All other assets 42,082 44,583 - -------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $641,447 $649,931 ========================================================================================================================== LIABILITIES AND EQUITY Interest-bearing deposits $457,923 $2,772 2.42% $451,420 $3,460 3.07% Borrowed funds 63,946 812 5.08 80,990 989 4.89 - -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing Liabilities 521,869 $3,584 2.75 532,410 4,449 3.34 - -------------------------------------------------------------------------------------------------------------------------- Interest rate spread 3.18% 3.39% Demand deposits 72,275 72,708 Other liabilities 4,077 5,265 Shareholders' equity 43,226 39,548 - -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $641,447 $5,376 $649,931 ========================================================================================================================== Net Interest Income (tax equivalent basis) $5,808 Interest Earned/Earning Assets 5.93% 6.73% Interest Expense/Earning Assets 2.37 2.92 - -------------------------------------------------------------------------------------------------------------------------- Net Yield on Earning Assets 3.56% 3.81% Deduct tax equivalent adjustment 27 51 - -------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $5,349 $5,757 ========================================================================================================================== (1) Amounts shown are adjusted to a "tax equivalent" basis. 19 QUARTER-TO-DATE AVERAGE BALANCES INTEREST EARNED - INTEREST EXPENSE (DOLLAR AMOUNTS IN THOUSANDS) Six months ended June 30, 2003 2002 - -------------------------------------------------------------------------------------------------------------------------- Balance Interest(1) Rate Balance Interest(1) Rate - -------------------------------------------------------------------------------------------------------------------------- Federal funds sold and temporary investments $ 23,294 $ 116 1.00% $ 2,714 $ 32 2.36% Securities 122,953 3,274 5.33 148,080 4,581 6.19 Loans 467,600 14,957 6.40 456,727 16,125 7.06 - -------------------------------------------------------------------------------------------------------------------------- Total earning assets 613,847 $18,347 5.98% 607,521 20,738 6.82% - -------------------------------------------------------------------------------------------------------------------------- Loan loss allowance (5,178) (4,306) All other assets 42,475 45,256 - -------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $651,144 $648,471 ========================================================================================================================== LIABILITIES AND EQUITY Interest-bearing deposits $464,621 $ 5,737 2.47% $444,016 $ 6,986 3.15% Borrowed funds 67,545 1,695 5.02 90,655 2,007 4.43 - -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing Liabilities 532,166 $ 7,432 2.79 534,671 8,993 3.36 - -------------------------------------------------------------------------------------------------------------------------- Interest rate spread 3.19% 3.46% Demand deposits 71,752 69,183 Other liabilities 4,342 5,421 Shareholders' equity 42,884 39,196 - -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $651,144 $648,471 ========================================================================================================================== Net Interest Income (tax equivalent basis) $10,915 $11,745 Interest Earned/Earning Assets 5.98% 6.82% Interest Expense/Earning Assets 2.42 2.95 - -------------------------------------------------------------------------------------------------------------------------- Net Yield on Earning Assets 3.56% 3.87% Deduct tax equivalent adjustment 50 89 - -------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $10,865 $11,656 ========================================================================================================================== (1) Amounts shown are adjusted to a "tax equivalent" basis. 20 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 2002 Annual Report filed with the Securities and Exchange Commission. ITEM 4. CONTROLS AND PROCEDURES Within 90 days prior to the filing date of this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluations. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings Certain litigation is pending against the Corporation and its subsidiaries. Management, after consultation with legal counsel, does not anticipate that any liability arising out of such litigation will have a material affect 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 21 EXHIBIT INDEX 3. Articles of Organization, as amended* (a) Articles of Organization, as amended* (b) Bylaws, as amended* 31.1 Section 302 Certification of Chief Executive Officer 31.2 Section 302 Certification of Chief Financial Officer 32 Section 906 Certification of Chief Executive Officer and Chief Financial Officer * Incorporated by reference to identically numbered exhibits contained in Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. b. Reports on Form 8-K -- NONE. 22 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 11, 2003 /s/ Donald R. Chase --------------------------------------- Donald R. Chase President and Chief Executive Officer Date: August 11, 2003 /s/ John M. Lilly --------------------------------------- John M. Lilly Treasurer and Chief Financial Officer 23