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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