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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 MARCH 31, 2003
Commission file number 0 - 12784
WESTBANK CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2830731
(State or 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 per share: 4,382,845 shares outstanding as of April
30, 2003.
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WESTBANK CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
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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 Flow 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 20
ITEM 4. Controls and Procedures 20
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
Exhibit Index 21
Signatures 22
Section 302 Certifications 23-24
2
ITEM 1. FINANCIAL STATEMENTS
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (Unaudited)
- --------------------------------------------------------------------------------
December 31, 2002 ASSETS Cash and due from banks:
Non-interest bearing $ 15,583 $ 18,967
Interest bearing 94 98
Federal funds sold 38,468 28,185
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Total cash and cash equivalents 54,145 47,250
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Securities available for sale 95,866 132,296
Securities held to maturity
(approximate market value of
$399 in 2003 and $459 in 2002) 377 436
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Total securities 96,243 132,732
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Loans 479,264 478,832
Allowance for loan losses 5,182 5,111
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Net loans 474,082 473,721
Premises and equipment, net 6,434 6,586
Accrued interest receivable 2,481 3,037
Intangible assets 8,837 8,837
Bank-owned life insurance 8,431 8,333
Other assets 2,766 2,367
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 653,419 $ 682,863
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 73,489 $ 74,169
Interest bearing 463,221 487,578
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Total deposits 536,710 561,747
Borrowed funds 52,276 56,392
Accrued interest payable 607 665
Other liabilities 3,884 4,447
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Total liabilities 593,477 623,251
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Mandatory redeemable preferred stock 17,000 17,000
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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 14,492 14,497
Retained earnings 19,755 18,780
Treasury stock (2,057) (2,091)
Accumulated other comprehensive income 1,705 2,379
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Total Stockholders' Equity 42,942 42,612
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 653,419 $ 682,863
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See accompanying notes to condensed consolidated financial statements.
3
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Income:
Interest and fees on loans $ 7,633 $ 8,069
Interest and dividend income on securities 1,669 2,371
Interest on federal funds sold 62 3
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Total interest and dividend income 9,364 10,443
Interest expense 3,848 4,544
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Net interest income 5,516 5,899
Provision for loan losses 300
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Net interest income after
provision for loan losses 5,516
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5,599
Non-interest income:
Gain/(Loss) on sale of securities 259 (277)
Gain on sale of loans 127
Other non-interest income 734 883
- --------------------------------------------------------------------------------
Total non-interest income 993 733
- --------------------------------------------------------------------------------
Non-interest expenses:
Salaries and benefits 2,370 2,244
Other non-interest expense 1,347 1,572
Occupancy - net 445 374
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Total non-interest expense 4,162 4,190(1)
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Income before income taxes2,347 2,142
Income taxes 841 724
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NET INCOME $ 1,506 $ 1,418(1)
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Net income per share
- Basic $ 0.35 $ 0.32(1)
- Diluted $ 0.33 $ 0.31(1)
Weighted average shares outstanding
- Basic 4,344,446 4,476,906
- Dilutive Option Shares 153,081 97,372
- --------------------------------------------------------------------------------
- Diluted 4,497,527 4,574,278
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(1) Net income for the quarter ended March 31, 2002 has been restated for the
effect of the adoption of SFAS No. 147 ("Acquisition of Certain Financial
Institutions") as of September 30, 2002 to remove the amortization expense
that was recorded. Accordingly, non-interest expense has been reduced by
$171,000, net income has been increased by $103,000, and basic and diluted
were adjusted by $0.01 and $0.01 for the removal of amortization expenses
related to goodwill.
See accompanying notes to condensed consolidated financial statements.
4
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2002 AND THREE MONTHS ENDED MARCH 31, 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
($.40 per share) (1,849) (1,849)
Shares issued from treasury stock:
Stock option plan 54,055 (243) 547 304
Dividend reinvestment
and stock purchase plan 42,310 122 408 530
Changes in unrealized gain/(loss)
on securities available for sale 1,133 1,133
Repurchase of common stock (202,658) (2,615) (2,615)
Income tax benefit for exercise of
non-qualified stock options 84 84
Five percent common stock dividend 207,690 415 2,752 (3,167)
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BALANCE-DECEMBER 31, 2002 4,367,780 9,047 14,497 18,780 (2,091) 2,379 42,612
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(UNAUDITED)
Net income 1,506 1,506
Cash dividends declared
($.11 per share) (531) (531)
Shares issued from treasury stock:
Dividend reinvestment
and stock purchase plan 20,723 (13) 260 247
Changes in unrealized gain/(loss)
on securities available for sale (674) (674)
Repurchase of common stock (16,126) (226) (226)
Income tax benefit for exercise of
non-qualified stock options 8 8
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BALANCE - MARCH 31, 2003 4,372,377 $ 9,047 $ 14,492 $ 19,755 $ (2,057) $ 1,705 $ 42,942
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See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Three months ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Net Income $ 1,506 $1,418
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Unrealized loss on securities available for sale,
net of income tax benefit of $259 in 2003
and $605 in 2002 (503) (1,304)
Reclassification adjustment for gains (losses)
included in net income, net of income taxes
(benefit) of $(88) in 2003 and $94 in 2002 (171) 183
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Other Comprehensive Loss (674) (1,121)
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COMPREHENSIVE INCOME $ 832 $ 297
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See accompanying notes to condensed consolidated financial statements.
5
WESTBANK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
Three months ended March 31 2003 2002
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Operating activities:
Net income $ 1,506 $ 1,418
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 300
Realized investment accretion (income)/expense 28 (18)
Depreciation and amortization 196 185
Realized loss/(gain) on sale of securities (259) 277
Gain on sale of mortgages (127)
Gain on sale of other real estate owned (22)
(Increase)/Decrease in accrued interest receivable 556 (184)
(Increase) in bank-owned life insurance (98)
Increase in other assets (399) (481)
Increase/(Decrease) in accrued interest payable on deposits (58) 48
Decrease in other liabilities (563) (33)
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Net cash provided by operating activities 909 1,363
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Investing activities:
Investments and mortgage-backed securities:
Held to maturity:
Proceeds from maturities and principal payments 59 93
Available for sale:
Purchases (665) (21,640)
Proceeds from sales 7,208 21,260
Proceeds from maturities and principal payments 29,444 15,512
Purchases of premises and equipment (44) (11)
Net increase in loans (361) (25,240)
Proceeds from sale of other real estate owned 86
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Net cash provided by (used in) investing activities 35,641 (9,940)
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Financing activities:
Net increase/(decrease) in borrowings (4,116) 4,788
Net increase/(decrease) in deposits (25,037) 4,092
Treasury stock (purchased)/issued, net 29 (303)
Dividends paid (531) (469)
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Net cash (used in)/provided by financing activities (29,655) 8,108
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Increase/(Decrease) in cash and cash equivalents 6,895 (469)
Cash and cash equivalents at beginning of period 47,250 17,451
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Cash and cash equivalents at end of period $ 54,145 $ 16,982
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Cash paid:
Interest on deposits and other borrowings $ 3,906 $ 4,496
Income taxes 892 312
Supplemental disclosure of cash flow information:
Securitization of loans into mortgage-backed securities 23,495
Unrealized loss on securities available for sale, net of taxes 674 1,121
See accompanying notes to condensed consolidated financial statements.
6
WESTBANK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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 ended March 31, 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 three-month period ended March 31, 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's 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 three months
ended March 31, 2003 and 2002, as if the fair value based method has been
applied to all outstanding and unvested awards in each period.
7
Three months ended March 31,
(DOLLARS IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
Net income:
Reported net income $1,506 $1,418
Add:Stock-based employee compensation expense
Included in reported net income, net of related
Tax effects 12 0
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards net of related taxes
effects (2) 12 5
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Pro forma net income $1,506 $1,413
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Earnings per share:
Basic - as reported $0.35 $0.32
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Basic - pro forma $0.35 $0.32
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Diluted - as reported $0.33 $0.31
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Diluted - pro forma $0.33 $0.31
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(2) All previously awarded grants were fully amortized prior to January 2, 2003.
NOTE D - CONTINGENT LIABILITIES
The Commonwealth of Massachusetts has recently enacted legislation that repealed
the real estate investment trust (REIT) benefit effective for the years ending
on or after December 31, 1999. 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
REIT. On February 4, 2003, the Corporation's subsidiary Westbank ("the Bank")
received a Notice of Assessment from the DOR for the tax year ended 2001. The
notice was based on DOR's intent to disallow the dividend-received deduction
between the Bank's subsidiary, Park West REIT, and the Bank.
In the event that the dividend-received deduction from its REIT subsidiary is
disallowed, the Corporation's tax liability would total approximately $706,000
for the years 2000, 2001 and 2002, exclusive of any interest charge. As of March
31, 2003, the Corporation's financial statements reflect a $706,000 liability in
connection with taxes that may be owed by the Corporation in association with
the REIT.
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 March
31, 2003 were immaterial. The maximum potential undiscounted amount of future
payments of letters of credit under FIN 45 as of March 31, 2003 are
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 to have a
material impact on its consolidated financial position or results of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 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 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;
6. The cost and other effects of unanticipated legal and administrative cases
and proceedings, settlements and investigations;
7. Unanticipated changes in laws and regulations, including federal and state
banking laws and regulations, to which the Corporation and its subsidiaries
are subject;
8. 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
9. 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 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 ninety
(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 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 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
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 required 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
undertaking 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 March
31, 2003 were immaterial. The maximum potential undiscounted amount of future
payments of letters of credit under FIN 45 as of March 31, 2003 are
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 $653,419,000 on March 31, 2003 compared to
$682,863,000 on December 31, 2002. As of March 31, 2003, and December 31, 2002,
earning assets amounted to, respectively, $614,069,000 or 94% of total assets,
and $639,847,000 or 94% of total assets. Earning assets decreased during the
first three months of 2003 as a result of an increase in loans and federal funds
sold, which was offset by a decease in 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 March 31, 2003, net income totaled $1,506,000 compared to
$1,418,000 for the three-month period ended March 31, 2002.
Non-interest income increased by $260,000 during the first quarter of 2003
compared to the first quarter of 2002. During the first quarter of 2003, the
Corporation recognized a gain on sale of securities available for sale totaling
$259,000, while other non-interest income totaled $734,000. Included in other
non-interest income are $131,000 in write-downs of the Bank's mortgage servicing
assets. Non-interest expense totaled $4,162,000 for the quarter ended March 31,
2003, a decrease of $28,000 versus the first quarter of 2002.
The overall decrease in interest income reflects an increase 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 first quarter of 2002. Further analysis is provided in
sections on net interest revenue and supporting schedules.
12
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS -
An increase of $71,000 has been reflected in the allowance for loan losses in
the quarter, with $-0- being provided compared to $300,000 in 2002. Loans
written off against the allowance for loan losses after recoveries amounted to
net recoveries of $71,000 for the first three months of 2003 versus net
charge-off's of $191,000 for the same period of 2002.
After giving effect to the actions described above, the allowance for loan
losses at March 31, 2003, totaled $5,182,000 or 1.08% of total loans, as
compared to $5,111,000 or 1.07% at December 31, 2002.
Non-performing past due loans at March 31, 2003, aggregated $1,425,000 or 0.30%
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 0.22% and 0.23%.
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
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 results provided by the
loan grading system and circumstances known at this time.
13
NET INTEREST INCOME
The Corporation's earning assets include a diverse portfolio of earning
instruments ranging from the Corporation's core business of loan extensions to
interest-bearing securities issued by federal, state and municipal authorities.
These earning assets are financed through a combination of interest-bearing and
interest-free sources.
Net interest income, the most significant component of earnings, is the amount
by which the interest generated by assets exceeds the interest expense on
liabilities. For analytical purposes, the interest earned on tax exempt assets
is adjusted to a "tax equivalent" basis to recognize the income tax savings
which facilitates comparison between taxable and tax exempt assets.
The Corporation analyzes its performance by utilizing the concepts of interest
rate spread and net yield on earning assets. The interest rate spread represents
the difference between the yield on earning assets and interest paid on
interest-bearing liabilities. The net yield on earning assets is the difference
between the rate of interest on earning assets and the effective rate paid on
all funds - interest-bearing liabilities, as well as interest-free sources
(primarily demand deposits and stockholders' equity).
The balances and rates derived for the analysis of net interest income presented
on the following pages reflect the consolidated assets and liabilities of the
Corporation's principal earning subsidiary, Westbank.
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Interest and dividend income $9,364 $10,443
Interest expense 3,848 4,544
- --------------------------------------------------------------------------------
Net interest income 5,516 5,899
Tax equivalent adjustment 23 38
================================================================================
NET INTEREST INCOME (TAXABLE EQUIVALENT) $5,539 $ 5,937
================================================================================
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Average Average
Balance Rate Balance Rate
- --------------------------------------------------------------------------------
Earning Assets $623,233 6.02% $605,288 6.93%
- --------------------------------------------------------------------------------
Interest-bearing liabilities 542,594 2.84 536,932 3.39
- --------------------------------------------------------------------------------
Interest rate spread 3.18 3.54
- --------------------------------------------------------------------------------
Interest-free resources used
to fund earning assets 80,639 68,356
- --------------------------------------------------------------------------------
Total Sources of Funds $623,233 2.47 $605,288 3.00
================================================================================
NET YIELD ON EARNING ASSETS 3.55% 3.93%
================================================================================
14
CHANGES IN NET INTEREST INCOME
(DOLLAR AMOUNTS IN THOUSANDS)
QUARTER ENDED MARCH 31, 2003
OVER
QUARTER ENDED MARCH 31, 2002
- --------------------------------------------------------------------------------
CHANGE DUE TO
VOLUME RATE TOTAL
- --------------------------------------------------------------------------------
Interest Income:
Loans $442 $ (892) $ (450)
Securities (449) (254) (703)
Federal Funds 58 1 59
- --------------------------------------------------------------------------------
Total Interest Earned 51 (1,145) (1,094)
Interest Expense:
Interest-bearing deposits 262 (823) (561)
Other borrowed funds (332) 197 (135)
- --------------------------------------------------------------------------------
Total Interest Expense (70) (626) (696)
- --------------------------------------------------------------------------------
NET INTEREST INCOME $121 $ (519) $ (398)
================================================================================
For the quarter ended March 31, 2003, an increase in average earning assets of
$17,945,000 or 2.96% and a 91-basis-point decrease in average rate of return
resulted in an increase in volume of $51,000 and a decrease in rate of
$1,145,000. An increase in average interest-bearing liabilities of $5,662,000 or
1.05% and a 55-basis-point decrease in average rate of interest paid contributed
to an increase in volume of $70,000 and a decrease in rate of $626,000. Net
interest earned on a tax equivalent basis decreased to $5,539,999 for the first
quarter of 2003, down $398,000 as compared with the quarter ended March 31,
2002.
OPERATING EXPENSES
The components of total operating expenses for the periods and their percentage
of gross income are as follows:
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Amount Percent Amount Percent
- --------------------------------------------------------------------------------
Salaries and benefits $2,370 22.88% $2,244 20.08%
Other non-interest expense 1,347 13.01 1,572 14.07
Occupancy - net 445 4.30 374 3.35
- --------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $4,162 40.19% $4,190 39.03%
================================================================================
For the three-month period ended March 31, 2003, operating expenses decreased by
approximately $28,000 versus the
2002 period. Salaries and benefits increased by $126,000, while other
non-interest expense decreased by $225,000 and occupancy increased by $71,000.
The decrease is a direct result of the Corporation's 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 March 31,
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 $129,728 $ 58,026 $166,823 $259,492 $614,069
Interest-Bearing
Liabilities 128,320 126,863 260,257 17,057 532,497
- ----------------------------------------------------------------------------------------------------
Interest Rate
Sensitivity Gap $ 1,408 $(68,837) $(93,434) $242,435 $81,572
====================================================================================================
Cumulative Interest
Rate Sensitivity Gap $ 1,408 $(67,429) $(160,863) $ 81,572
Interest Rate
Sensitivity Gap Ratio 0.23% (11.21)% (15.22)% 39.48%
Cumulative Interest
Rate Sensitivity Gap Ratio 0.23% (10.98)% (26.20)% 13.28%
LIQUIDITY
The Corporation's liquidity represents the ability to meet loan commitments,
deposit withdrawals and any other cash needs as they arise. Funds to meet
liquidity needs are available by converting liquid assets or by generating new
deposits or through other funding sources. Factors affecting a bank's liquidity
needs include changes in interest rates, demand for loan products and general
economic conditions. The Corporation has alternative sources of liquidity,
including federal funds lines of credit, lines of credit available through the
Federal Home Loan Bank of Boston and repurchase agreements. Management believes
that the Corporation's level of liquidity is adequate to meet current and future
funding needs.
16
PROVISION AND ALLOWANCE FOR LOAN LOSSES
(DOLLAR AMOUNTS IN THOUSANDS)
Quarter ended March 31, 2003 2002
- --------------------------------------------------------------------------------
Balance at beginning of period $5,111 $4,179
Provision for loan losses 300
- --------------------------------------------------------------------------------
$5,111 4,479
- --------------------------------------------------------------------------------
Less charge-offs:
Loans secured by real estate 4 104
Commercial and industrial loans 32
Consumer loans 40 99
- --------------------------------------------------------------------------------
44 235
- --------------------------------------------------------------------------------
Add-recoveries:
Loans secured by real estate 100 1
Commercial and industrial loans 13 20
Consumer loans 2 23
- --------------------------------------------------------------------------------
115 44
- --------------------------------------------------------------------------------
Net charge-offs (recoveries) (71) 191
- --------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $5,182 $4,288
================================================================================
Net charge-offs (recoveries) to:
Average loans (.02%) .04%
Loans at end of period (.01%) .04%
Allowance for loan losses at January 1 (1.39%) 4.57%
Allowance for loan losses at March 31 as a percentage of:
Average loans 1.08% .95%
Loans at end of period 1.08% .96%
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)
03-31-03 12-31-02 09-30-02 06-30-02 03-31-02
- ----------------------------------------------------------------------------------------------------
Non-accrual loans $1,052 $1,372 $2,246 $1,412 $1,355
- ----------------------------------------------------------------------------------------------------
Loans contractually past
due 90 days or more
still accruing 373 186 1,025 307 194
- ----------------------------------------------------------------------------------------------------
Total non-accrual, past due
and restructured loans 1,425 1,558 3,271 1,719 1,549
- ----------------------------------------------------------------------------------------------------
Non-accrual, past due and
restructured loans as a
percentage of total loans 0.30% 0.33% 0.69% 0.37% 0.35%
- ----------------------------------------------------------------------------------------------------
Allowance for loan losses as a
percentage of non-accrual,
past due and restructured loans 363.90% 328.05% 150.64% 272.43% 276.82%
- ----------------------------------------------------------------------------------------------------
Other real estate owned - net 130
- ----------------------------------------------------------------------------------------------------
Total non-performing assets $1,425 $1,558 $3,271 $1,719 $1,679
Non-performing assets as a
percentage of total assets 0.22% 0.23% 0.47% 0.26% 0.26%
- ----------------------------------------------------------------------------------------------------
18
QUARTER-TO-DATE AVERAGE BALANCES
INTEREST EARNED - INTEREST EXPENSE
(DOLLAR AMOUNTS IN THOUSANDS)
Three months ended March 31, 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Balance Interest(1) Rate Balance Interest(1) Rate
- -----------------------------------------------------------------------------------------------------------------------
Federal funds sold and
temporary investments $ 24,786 $ 62 1.00% $ 1,634 $ 3 0.74%
Securities 120,608 1,672 5.55 151,479 2,375 6.27
Loans 477,839 7,653 6.41 452,175 8,103 7.17
- -----------------------------------------------------------------------------------------------------------------------
Total earning assets 623,233 $ 9,387 6.02% 605,288 $ 10,481 6.93%
- -----------------------------------------------------------------------------------------------------------------------
Loan loss allowance (5,155) (4,205)
All other assets 42,836 45,928
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $660,914 $647,011
=======================================================================================================================
LIABILITIES AND EQUITY
Interest bearing deposits $471,368 $ 2,965 2.52% $436,611 $ 3,526 3.23%
Borrowed funds 71,226 883 4.96 100,321 1,018 4.06
- -----------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 542,594 3,848 2.84 536,932 4,544 3.39
- -----------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.18% 3.54%
Demand deposits 71,176 65,658
Other liabilities 4,609 5,578
Shareholders' equity 42,535 38,843
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND EQUITY $660,914 $647,011
=======================================================================================================================
Net Interest Income(tax equivalent basis) $ 5,539 $5,937
Interest Earned/Earning Assets 6.02% 6.93%
Interest Expense/Earning Assets 2.47 3.00
- -----------------------------------------------------------------------------------------------------------------------
Net Yield on Earning Assets 3.55% 3.93%
Deduct tax equivalent adjustment 23 38
- -----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 5,516 $5,899
=======================================================================================================================
(1) Amounts shown are adjusted to a "tax equivalent" basis.
19
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 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
Exhibit 99.1 - Certification of Periodic Report
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.
21
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned thereunto duly authorized.
WESTBANK CORPORATION
Date: May 8, 2003 /s/ Donald R. Chase
-----------------------------------
Donald R. Chase
President and Chief Executive Officer
Date: May 8, 2003 /s/ John M. Lilly
-----------------------------------
John M. Lilly
Treasurer and Chief Financial Officer
22
SECTION 302 CERTIFICATIONS
SARBANES-OXLEY ACT OF 2002
I, Donald R. Chase, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Westbank Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining the disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data, and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 8, 2003 /s/ Donald R. Chase
-------------------------------------
Donald R. Chase
President and Chief Executive Officer
23
SECTION 302 CERTIFICATIONS
SARBANES-OXLEY ACT OF 2002
I, John M. Lilly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Westbank Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data, and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 8, 2003 /s/ John M. Lilly
-------------------------------------
John M. Lilly
Treasurer and Chief Financial Officer
24