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, 1998 Commission file number 0 - 12784 WESTBANK CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04 - 2830731 (State or other jurisdiction of inc. or org.) (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: 3,780,531 shares outstanding as of July 31, 1998. WESTBANK CORPORATION AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Comprehensive Income 5 Condensed Consolidated Statements of Stockholders' Equity 6 Condensed Consolidated Statements of Cash Flows 7 Notes to Condensed Consolidated Financial Statements 8-9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-18 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 19 ITEM 2. Changes in Rights of Securities Holders 19 ITEM 3. Defaults by Company on its Senior Securities 19 ITEM 4. Results of Votes on Matters Submitted to a Vote of Security Holders 19 ITEM 5. Other events 19 ITEM 6. Exhibits and Reports on Form 8-K 20 Signatures 21 WESTBANK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollar amounts in thousands) June 30, 1998 December 31, 1997 - ------------------------------------------------------------------------------- ASSETS Cash and due from banks: Non-interest bearing $ 11,554 $ 9,603 Interest bearing 114 79 Federal Funds sold 14,561 3,678 - ------------------------------------------------------------------------------- Total cash and cash equivalents 26,229 13,360 - ------------------------------------------------------------------------------- Investment securities available for sale 28,446 20,088 Investment securities held to maturity (fair value of $33,184 in 1998 and $34,655 in 1997) 33,097 34,503 - ------------------------------------------------------------------------------- Total securities 61,543 54,591 - ------------------------------------------------------------------------------- Loans $252,957 $231,012 Mortgage loans held-for-sale 2,931 4,251 Allowance for loan losses (2,504) (2,848) - ------------------------------------------------------------------------------- Net-loans 253,384 232,415 Bank premises and equipment 5,023 4,474 Accrued interest receivable 2,182 1,968 Other assets 2,561 1,457 - ------------------------------------------------------------------------------- TOTAL ASSETS $350,922 $308,265 =============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 45,890 $ 48,638 Interest bearing 258,762 222,922 - ------------------------------------------------------------------------------- Total Deposits 304,652 271,560 Borrowed funds 11,552 11,884 Federal Home Loan borrowing 7,000 0 Accrued interest payable 467 379 Other liabilities 1,207 691 - ------------------------------------------------------------------------------- Total Liabilities 324,878 284,514 - ------------------------------------------------------------------------------- Stockholders' Equity: Common stock - $2 par value Authorized - 9,000,000 shares Issued - 3,767,313 shares in 1998 and 3,581,377 shares in 1997 7,535 7,163 Additional paid in capital 9,748 8,819 Retained earnings 8,683 7,708 Accumulated other comprehensive income 78 61 - ------------------------------------------------------------------------------- Total Stockholders' Equity 26,044 23,751 - ------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $350,922 $308,265 =============================================================================== See accompanying notes to condensed consolidated financial statements. WESTBANK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands) QUARTER ENDED SIX MONTHS ENDED 06-30-98 06-30-97 06-30-98 06-30-97 - ------------------------------------------------------------------------------- Income: Interest and fees on loans $ 5,152 $ 4,869 $ 10,131 $ 9,512 Interest and dividend income on securities 999 792 1,826 1,462 Interest on temporary investments 113 37 149 152 - ------------------------------------------------------------------------------- Total interest and dividend income 6,264 5,698 12,106 11,126 Interest expense 2,982 2,534 5,561 4,945 - ------------------------------------------------------------------------------- Net interest income 3,282 3,164 6,545 6,181 Provision for loan losses 0 40 19 190 - ------------------------------------------------------------------------------- Net interest income after provision for loan losses 3,282 3,124 6,526 5,991 - ------------------------------------------------------------------------------- Gain on securities available for sale 139 139 Other non-interest income 459 485 1,067 991 - ------------------------------------------------------------------------------- Total non-interest income 598 485 1,206 991 - ------------------------------------------------------------------------------- Non-interest expense: Salaries and benefits 1,230 1,139 2,455 2,267 Other non-interest expense 1,033 961 2,038 1,903 Occupancy - net 195 223 420 446 - ------------------------------------------------------------------------------- Total non-interest expense 2,458 2,323 4,913 4,616 - ------------------------------------------------------------------------------- Income before income taxes 1,422 1,286 2,819 2,366 Income taxes 537 549 1,095 992 - ------------------------------------------------------------------------------- Net Income $ 885 $ 737 $ 1,724 $ 1,374 =============================================================================== Net income per share -Basic $ 0.24 $ 0.21 $ 0.46 $ 0.40 -Diluted $ 0.23 $ 0.21 $ 0.45 $ 0.39 Weighted average shares outstanding -Basic 3,763,504 3,473,046 3,744,757 3,473,046 -Dilutive option shares 111,192 81,079 105,138 70,039 -Diluted 3,874,696 3,554,125 3,849,895 3,543,085 See accompanying notes to condensed consolidated financial statements. WESTBANK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollar amounts in thousands) QUARTER ENDED SIX MONTHS ENDED 06-30-98 06-30-97 06-30-98 06-30-97 - ---------------------------------------------------------------------------------------- 												 		 		 		 Net Income $885 $737 $1,724 $1,374 Other comprehensive income: Unrealized gain/(loss) on securities available for sale, net of income taxes (benefits) of $34 and $105 for the quarter and $42 and $(20) for the six month period ended June 30, 1998 and 1997, respectively. $50 $156 $64 $28 Less: reclassification adjustment for gains included in net income, net of income taxes of $31 for the three and six month periods ended June 30, 1998. 47 0 47 0 - ---------------------------------------------------------------------------------------- Other comprehensive income 3 156 17 28 - ---------------------------------------------------------------------------------------- Comprehensive Income $888 $893 $1,741 $1,402 ======================================================================================== See accompanying notes to condensed consolidated financial statements. WESTBANK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1997 AND SIX MONTHS ENDED JUNE 30, 1998 (1998 Unaudited) (Dollar amounts in thousands) ACCUMULATED OTHER COMMON STOCK ADDITIONAL COMREHENSIVE NUMBER OF PAR PAID IN RETAINED INCOME/ SHARES VALUE CAPITAL EARNINGS (LOSS) TOTAL - ---------------------------------------------------------------------------------------------- BALANCE-DECEMBER 31, 1996 3,346,802 $ 6,694 $ 7,633 $ 5,517 $ (99) $ 19,745 Net income - - - 3,231 - 3,231 Cash dividends declared ($.30 per share) - - - (1,040) - (1,040) Shares issued: Stock Option Plan 88,156 176 94 - - 270 Dividend Reinvestment and Stock Purchase Plan 146,419 293 1,092 - - 1,385 Changes in unrealized gain on securities available for sale - - - - 160 160 - ---------------------------------------------------------------------------------------------- BALANCE-DECEMBER 31, 1997 3,581,377 7,163 8,819 7,708 61 23,751 Net income 1,724 1,724 Cash dividend declared ($.20 per share) (749) (749) Shares issued: Stock Option Plan 164,257 328 665 993 Dividend Reinvestment and Stock Purchase Plan 21,679 44 264 308 Changes in unrealized gain on securities available for sale 17 17 - ---------------------------------------------------------------------------------------------- BALANCE-JUNE 30, 1998 3,767,313 $ 7,535 $ 9,748 $ 8,683 $ 78 $ 26,044 ============================================================================================== See accompanying notes to condensed consolidated financial statements. WESTBANK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (Unaudited) (Dollar amounts in thousands) 1998 1997 - ------------------------------------------------------------------------------------ 																	 Operating activities: Net income $1,724 $1,374 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 19 190 Depreciation and amortization 377 327 Provision for other real estate owned 22 23 Changes in assets and liabilities: (Increase) Decrease in accrued interest receivable (214) (359) Realized gain on sale of securities (139) Realized (gain) loss on sale of other real estate owned (30) Realized (gain) loss on sale of equipment (14) Increase (decrease) in interest payable on deposits 88 43 (Increase) decrease in other assets (1,104) (216) Increase (decrease) in other liabilities 516 557 - ------------------------------------------------------------------------------------ Net cash provided by operating activities 1,259 1,925 - ------------------------------------------------------------------------------------ Investing activities: Investments and mortgage-backed securities: Held to maturity: Purchases (18,485) (13,480) Proceeds from maturities and principal payments 19,891 5,492 Available for sale: Purchases (21,109) (4,013) Proceeds from sales 8,607 Proceeds from maturities 4,005 861 Purchases of premises and equipment (926) (447) Net (increase) decrease in loans (20,685) (13,164) Proceeds from sale of equipment 14 Proceeds from sale of other real estate owned 76 - ------------------------------------------------------------------------------------ Net cash used in investing activities (28,702) (24,661) - ------------------------------------------------------------------------------------ Financing activities: Net increase (decrease) in other borrowed funds (332) 2,009 Increase in Federal Home Loan borrowings 7,000 Net increase (decrease) in deposits 33,092 18,871 Proceeds from exercise of stock options and stock purchase plan 1,301 620 Dividends paid (749) (515) - ------------------------------------------------------------------------------------ Net cash used in financing activities 40,312 20,985 - ------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents 12,869 (1,751) Cash and cash equivalents at beginning of period 13,360 23,401 - ------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $26,229 $21,650 ==================================================================================== Cash paid during the period: Interest on deposits and other borrowings $5,473 $4,902 Income taxes 1,172 950 Transfers of loans to other real estate owned 247 85 Sales of other real estate owned financed by the bank 135 See notes to consolidated financial statements. WESTBANK CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 (Unaudited) NOTE A - GENERAL INFORMATION Westbank Corporation (hereinafter sometimes referred to as "Westbank" or the "Corporation") is a registered Bank Holding Company organized to facilitate the expansion and diversification of the business of Park West Bank and Trust Company (hereinafter sometimes referred to as "Park West" or the "Bank") into additional financial services related to banking. Substantially all operating income and net income of the Corporation are presently accounted for by Park West. NOTE B - CURRENT OPERATING ENVIRONMENT The Bank operates twelve banking offices located in Hampden County 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 are furnished to individuals, businesses and non-profit organizations. The Corporation's primary source of revenue is derived from providing loans to customers, predominately located in Western Massachusetts. Pending regulatory approval, the Bank plans to open a full service office in the town of Southwick, Massachusetts. The targeted opening date for this new office is October, 1998. 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 which can apply to a financial institution. As of June 30, 1998, Park West'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 - MERGER AGREEMENT WITH CARGILL BANCORP, INC. On July 15, 1998, the Corporation entered into an agreement to acquire Cargill Bancorp, Inc., which is a Delaware corporation and the holding company for Cargill Bank, a $47.0 million asset financial institution headquartered in Putnam, Connecticut. Under the terms of the agreement, Cargill Bancorp will be merged into Westbank Corporation. Cargill Bancorp will retain its local identity and remain a separate subsidiary of Westbank Corporation. Each share of Cargill Bancorp common stock will be exchanged for 1.3008 shares of Westbank common stock, provided that the average closing price of Westbank's common stock during the 20-day pricing period ending five days before the last regulatory approval is obtained is greater than or equal to $13.07. If Westbank's average closing price is less than $13.07 but greater than or equal to $12.00, then Cargill Bancorp shareholders will receive shares of Westbank common stock having a value of $17.00 per share. Cargill Bancorp has certain rights to terminate the agreement if Westbank's average closing price is below $12.00 per share unless Westbank agrees to deliver shares of Westbank common stock having a value of $17.00 in exchange for each share of Cargill Bancorp common stock. The merger is subject to approval of Cargill Bancorp shareholders and the receipt of regulatory approval. NOTE D - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements for the quarter and six months ended June 30, 1998 and 1997 have been prepared in accordance with 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 quarter and six month period ended June 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further informatimn, 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, 1997. NOTE E - 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, 1998 standby letters of credit amounted to $627,000 and loan commitments were $30,609,055 and unused balances available on home equity lines of credit were $7,864,233. Trust Assets - Property with a book value of $115,895,000 at June 30, 1998 held for customers in a fiduciary or agency capacity, is not included in the accompanying balance sheet since such items are not assets of the Bank. NOTE F - STOCKHOLDERS' EQUITY The FDIC imposes leverage capital ratio requirements for state non-member Banks. The Bank's leverage capital ratio as of June 30, 1998 and December 31, 1997 was 7.15% and 7.04%, respectively. In addition, the FDIC has established risk-based capital requirements for insured institutions of, Tier 1 risk-based capital of 4.00% and total risk-based capital of 8.00%. The Bank's risk-based capital at June 30, 1998, for Tier 1 was 10.72% and total risk- based capital was 11.97%, which meets the FDIC criteria for a well-capitalized financial institution. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Chanees in Financial Condition - Total consolidated assets amounted to $350,922,000 on June 30, 1998, compared to $308,265,000 on December 31, 1997. As of June 30, 1998 and June 30, 1997, earning assets amounted to, respectively, $332,106,000 or 95% of total assets, and $288,151,000, or 94% of total assets. Earning assets increased during the first six months of 1998 as a result of increases in securities, loans and temporary funds. Deposits originated throughout the Bank's branch system, as well as a $7,000,000, 5 year fixed rate borrowing through the Federal Home Loan Bank provided the funds to support the increase in earning assets. Changes in Results of Operations - For the quarter ended June 30, 1998, net income totaled $885,000 compared to $737,000 for the quarter ended June 30, 1997. For the six months ended June 30, 1998, net income was $1,724,000 compared to $1,374,000 for the same period during 1997. Included in the results for the six months ended June 30, 1998 is a gain on the sale of securities available for sale totaling $139,000. An overall increase in interest income and interest expense reflects an increase in volume and decrease in interest rates on earning assets and an increase in volume and rates on interest-bearing deposits. Further analysis is provided in sections on net interest revenue and supporting schedules. Allowance for Loan Losses and Non-Performing Assets - The Corporation did not record a provision for loan losses in the current quarter compared to $40,000 for the same period in 1997. Loans written off against the allowance for loan losses after recoveries amounted to $363,000 for the six months ended June 30, 1998. During the current quarter the Corporation sold a pool of classified loans totaling $1,772,000. As a result of the classified loan sale the Corporation charged-off $266,000 to the allowance for loan loss. The entire loss from the sale of classified loans had been previously reserved for. After giving effect to the actions described above, the allowance for loan losses at June 30, 1998 totaled $2,504,000 or .98% of total loans, as compared to $2,848,000 or 1.21% at December 31, 1997. Non-performing past due loans at June 30, 1998 aggregated $492,000 or 0.19% of total loans compared to $1,226,000 or 0.52% at December 31, 1997. The percentage of non-performing and past due loans compared to total assets on those same dates, respectively, amounted to 0.14% and 0.27%. The change in non-performing loans was primarily the result of the sale of classified loans described above. Other real estate owned at June 30, 1998 totaled $269,000 and stands at 0.08% of total assets at the end of the current quarter. 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 the provision for loan losses, the write 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 deems 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. Year 2000 Mindful of the need to sustain the integrity of its computer systems as the year 2000 approaches, the Corporation has taken steps to ensure that all systems are ready to operate accurately on and beyond the year 2000. The Corporation fully understands the need to prevent disruption of computer and technical systems, and the Corporation is committed to providing its customers with high quality service. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year 2000(Continued) While most of its systems are already year 2000 compliant, the Corporation has prepared an action plan to ensure the continued integrity of its systems beyond the turn of the century. The plan includes the following five phases: (1) the awareness phase; (2) the assessment phase; (3) the renovation phase; (4) the validation phase; and (5) the implementation phase. The Corporation is currently in the renovation and validation phases of the plan and intends to complete these phases by December 31, 1998. The Corporation relies on outside providers for its core banking software and data processing. The Corporation's plan will apply to such vendors. To date, the Bank has incurred approximately $25,000 in year 2000 related expenses, and has estimated that capital expenditures related to the year 2000 issue will total approximately $300,000. The Corporation believes at this time that its efforts are adequate to address its year 2000 concerns. The Corporation has designed its plan to address its year 2000 concerns based upon guidance from the Federal Financial Institutions Examining Council. In addition, the FDIC monitors the Corporation's preparation for the year 2000 on a periodic basis. The information presented with respect to year 2000 compliance is forward looking information. As such, it is subject to risks and uncertainties that would cause actual results to differ materially from the projected results discussed in this report. WESTBANK CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) 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. 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 shareholders' 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, Park West Bank and Trust Company. (Dollar amounts in thousands) QUARTER ENDED SIX MONTHS ENDED 06-30-98 06-30-97 06-30-98 06-30-97 - --------------------------------------------------------------------------------------------- 									 	 			 		 			 Interest and dividend income $6,264 $5,698 $12,106 $11,126 Interest expense 2,982 2,534 5,561 4,945 - --------------------------------------------------------------------------------------------- Net interest income $3,282 $3,164 $6,545 $6,181 ============================================================================================= INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS (Dollar amounts in thousands) QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------ Average Average Average Average Balance Rate Balance Rate Balance Rate Balance Rate - ------------------------------------------------------------------------------------------------ 	 	 		 	 		 Earning Assets $317,493 7.89% $279,168 8.16% $304,277 7.96% $275,149 8.09% - ------------------------------------------------------------------------------------------------ Interest-bearing liabilities 260,722 4.57 229,261 4.42% 247,707 4.49 225,941 4.38 - ------------------------------------------------------------------------------------------------ Interest rate spread 3.32 3.74 3.47 3.71 - ------------------------------------------------------------------------------------------------ Interest-free resources used to fund earning assets 56,771 49,907 56,570 49,208 - ------------------------------------------------------------------------------------------------ Total Sources of Funds $317,493 3.76 $279,168 3.63 $304,277 3.66 $275,149 3.59 ================================================================================================ Net Yield on Earning Assets 4.13% 4.53% 4.30% 4.50% ================================================================================================ WESTBANK CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) CHANGES IN NET INTEREST INCOME (Dollar amounts in thousands) QUARTER ENDED 06-30-98 SIX MONTHS ENDED 06-30-98 O V E R O V E R QUARTER ENDED 06-30-97 SIX MONTHS ENDED 06-30-97 - ------------------------------------------------------------------------------- CHANGE DUE TO CHANGE DUE TO VOLUME RATE TOTAL VOLUME RATE TOTAL - ------------------------------------------------------------------------------- Interest Income: Loans $434 $(151) $283 $749 $(130) $619 Securities 223 (16) 207 402 (38) 364 Federal funds 62 14 76 (24) 21 (3) - ------------------------------------------------------------------------------- Total Interest Earned 719 (153) 566 1,127 (147) 980 - ------------------------------------------------------------------------------- Interest Expense: Interest bearing deposits 285 81 366 390 120 510 Other Borrowed Funds 64 18 82 86 20 106 - ------------------------------------------------------------------------------- Total Interest Expense $349 $ 99 $448 $476 $140 $616 - ------------------------------------------------------------------------------- Net Interest Income $370 $(252) $118 $651 $(287) $364 =============================================================================== Net interest earned increased by $118,000 during the second quarter of 1998 compared to the second quarter of 1997. For the six month period ended June 30, 1998 net interest income increased by $364,000 versus the same period of 1997. Average earning assets increased by $29,128,000 during the first six months of 1998. The average earning base was $304,277,000 compared to $275,149,000 in the same period last year. 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 SIX MONTHS ENDED 06-30-98 06-30-97 06-30-98 06-30-97 - ---------------------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent - ---------------------------------------------------------------------------------------------------------------- Salaries and benefits $1,230 19.64% $1,139 18.42% $2,455 18.44% $2,267 18.71% Other non-interest expense 1,033 16.50 961 15.54 2,038 15.30 1,903 15.70 Occupancy - net 195 3.11 223 3.61 420 3.16 446 3.68 - ---------------------------------------------------------------------------------------------------------------- Total Operating Expenses $2,458 39.25% $2,323 37.57% $4,913 36.90% $4,616 38.09% ================================================================================================================ For the six month period ended June 30, 1998, operating expenses increased by approximately $297,000 over the 1997 period. The increase was a result of increases in salary and benefits totaling $188,000 and non-interest expense totaling $135,000. The increases are primarily the result of overall growth of the Corporation. WESTBANK CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) CAPITAL RATIOS 6/30/98 6/30/97 - ------------------------------------------------------------------------------ Ratio of "Tier 1" leverage capital to total assets at end of period 7.42% 6.90% 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 tiers. For this Corporation, Tier 1 includes the common stockholders' equity; Tier 2, or supplementary capital, includes not only the equity, but also, a portion of the allowance for loan losses, net unrealized gain/(losses) on securities available for sale are not permitted to be included for regulatory capital purposes. The following are the Corporation's risk-based capital ratios at June 30, 1998: Tier 1 Capital (minimum required 4.00%) 11.69% Tier 2 Capital (minimum required 8.00%) 12.94% 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, 1998. (Dollar amounts in thousands) Three Over Three Over One Over Months Months to Year to Five or Less One Year Five Years Years Total - ---------------------------------------------------------------------------------- 			 Earning Assets $67,643 $38,202 $94,620 $131,641 $332,106 Interest Bearing Liabilities 91,137 86,409 99,768 0 277,314 - ---------------------------------------------------------------------------------- Interest Rate Sensitivity Gap $(23,494) $(48,207) $(5,148) $131,641 $54,792 ================================================================================== Cumulative Interest Rate Sensitivity Gap $(23,494) $(71,701) $(76,849) $54,792 Interest Rate Sensitivity Gap Ratio (7.07)% (14.52)% (1.55)% 39.64% Cumulative Interest Rate Sensitivity Gap Ratio (7.07)% (21.59)% (23.14)% 16.50% WESTBANK CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) LIQUIDITY Cash and due from banks, federal funds sold, investment securities, mortgage-backed securities and loans available for sale, as compared to deposits and short term liabilities, are used by the Corporation to compute its liquidity on a daily basis. At June 30, 1998, the Corporation's ratio of such assets to total deposits and borrowed funds was 22.93%. PROVISION AND ALLOWANCE FOR LOAN LOSSES (Dollar amounts in thousands) QUARTER ENDED SIX MONTHS ENDED 06-30-98 06-30-97 06-30-98 06-30-97 - ------------------------------------------------------------------------------------------- Balance at beginning of period $2,852 $2,424 $2,848 $2,481 Provision charged to expense 0 40 19 190 - ------------------------------------------------------------------------------------------- 2,852 2,464 2,867 2,671 - ------------------------------------------------------------------------------------------- Charge-offs: Loans secured by real estate 300 155 340 239 Commercial and industrial loans 40 12 47 143 Consumer loans 13 28 24 42 - ------------------------------------------------------------------------------------------- 353 195 411 424 - ------------------------------------------------------------------------------------------- Recoveries: Loans secured by real estate 2 111 27 130 Commercial and industrial loans 0 174 15 175 Consumer loans 3 6 6 8 - ------------------------------------------------------------------------------------------- 5 291 48 313 - ------------------------------------------------------------------------------------------- Net charge-offs (recoveries) 348 (96) 363 111 - ------------------------------------------------------------------------------------------- 				 Balance at end of period $2,504 $2,560 $2,504 $2,560 =========================================================================================== Net Charge-offs to: Average loans 1.40% (.04)% 1.49% .05% Loans at end of period 1.36% (.04)% 1.42% .05% Allowance for loan losses 13.90% (3.75)% 14.50% 4.34% Allowance for loan losses as a percentage of: Average loans 1.01% 1.12% 1.03% 1.14% Loans at end of period 0.98% 1.10% 0.98% 1.10% The approach the Corporation uses in determining the adequacy of the allowance for loan losses is the combination of a target reserve and a general reserve allocation. 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 general reserve against the remainder of the loan portfolio. NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS (Dollar amounts in thousands) 06-30-98 03-31-98 12-31-97 09-30-97 06-30-97 - ------------------------------------------------------------------------------------- Non-Accrual Loans: Loans secured by real estate $290 $595 $ 983 $ 897 $1,143 Construction/Land development 3 2 3 0 33 Commercial and Industrial Loans 24 37 37 6 240 Consumer Loans 0 1 19 9 5 - ------------------------------------------------------------------------------------- $317 $635 $1,042 $ 912 $1,421 - ------------------------------------------------------------------------------------- Loans Contractually past due 90 days or more still accruing: Loans secured by real estate $143 $193 $ 170 $ 198 $15 Commercial and Industrial Loans 24 24 0 18 0 Consumer Loans 8 6 14 54 10 - ------------------------------------------------------------------------------------- $175 $223 $ 184 $ 270 $25 - ------------------------------------------------------------------------------------- Total non-accrual, past due and restructured loans $492 $858 $1,226 $1,182 $1,446 - ------------------------------------------------------------------------------------- Non-accrual, past due and restructured loans as a percentage of total loans 0.19% 0.36% 0.52% 0.49% 0.62% - ------------------------------------------------------------------------------------- Allowance for loan losses as a percentage of non accrual, past due and restructured loans 508.94% 332.40% 232.30% 233.08% 177.04% - ------------------------------------------------------------------------------------- Other real estate owned - net $269 $379 $149 $277 $323 - ------------------------------------------------------------------------------------- Total non-performing assets $761 $1,237 $1,375 $1,459 $1,769 - ------------------------------------------------------------------------------------- Non-performing assets as a percentage of total assets 0.22% 0.39% 0.45% 0.45% 0.57% - ------------------------------------------------------------------------------------- WESTBANK CORPORATION AND SUBSIDIARIES QUARTERLY TO DATE AVERAGE BALANCES INTEREST EARNED - INTEREST EXPENSE (Dollar amounts in thousands) - ------------------------------------------------------------------------------------------------------ FOR THE QUARTER ENDED FOR THE QUARTER ENDED JUNE 30, 1998 JUNE 30, 1997 Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------ Federal Funds sold and temporary investments $ 6,552 $ 113 6.90% $2,781 $37 5.32% Securities 61,987 999 6.45 48,233 792 6.57 Loans 248,954 5,152 8.28 228,154 4,869 8.54 - ------------------------------------------------------------------------------------------------------ Total earning assets $317,493 $6,264 7.89 279,168 $5,698 8.16 - ------------------------------------------------------------------------------------------------------ Loan loss allowance (2,818) (2,500) All other assets 18,602 18,128 - ------------------------------------------------------------------------------------------------------ TOTAL ASSETS $333,277 $294,796 ====================================================================================================== LIABILITIES AND EQUITY Interest bearing deposits $244,182 $2,816 4.61 $219,436 $2,450 4.47 Borrowed funds 16,540 166 4.01 9,825 84 3.42 - ------------------------------------------------------------------------------------------------------ Total interest bearing liabilities 260,722 $2,982 4.57 229,261 $2,534 4.42 - ------------------------------------------------------------------------------------------------------ Interest rate spread 3.32% 3.74% Demand deposits 45,917 43,037 Other liabilities 1,033 1,687 Shareholders' equity 25,605 20,811 - ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND EQUITY $333,277 $294,796 ====================================================================================================== NET INTEREST INCOME $3,282 $3,164 ====================================================================================================== Interest Earned/Earning Assets 7.89% 8.16% Interest Expense/Earning Assets 3.76 3.63 - ------------------------------------------------------------------------------------------------------ Net Yield on Earning Assets 4.13% 4.53% ====================================================================================================== WESTBANK CORPORATION AND SUBSIDIARIES YEAR TO DATE AVERAGE BALANCES INTEREST EARNED - INTEREST EXPENSE (Dollar amounts in thousands) - ------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1998 JUNE 30, 1997 Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------ Federal Funds sold and 		 temporary investments $4,561 $149 6.53% $5,747 $ 152 5.29% Securities 56,844 1,826 6.42 44,426 1,462 6.58 Loans 242,872 10,131 8.34 224,976 9,512 8.46 - ------------------------------------------------------------------------------------------------------ Total earning assets $304,277 $12,106 7.96 275,149 $11,126 8.09 - ------------------------------------------------------------------------------------------------------ Loan loss allowance (2,870) (2,518) All other assets 18,120 17,810 - ------------------------------------------------------------------------------------------------------ TOTAL ASSETS $319,527 $290,441 ====================================================================================================== LIABILITIES AND EQUITY Interest bearing deposits $234,299 $5,315 4.54 $217,254 $4,805 4.42 Borrowed funds 13,408 246 3.67 8,687 140 3.22 - ------------------------------------------------------------------------------------------------------ Total interest bearing liabilities 247,707 $5,561 4.49 225,941 $4,945 4.38 - ------------------------------------------------------------------------------------------------------ Interest rate spread 3.47% 3.71% Demand deposits 45,609 42,457 Other liabilities 1,032 1,564 Shareholders' equity 25,179 20,479 - ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND EQUITY $319,527 $290,441 ====================================================================================================== NET INTEREST INCOME $6,545 $6,181 ====================================================================================================== Interest Earned/Earning Assets 7.96% 8.09% 															 Interest Expense/Earning Assets 3.66 3.59 - ------------------------------------------------------------------------------------------------------ Net Yield on Earning Assets 4.30% 4.50% ====================================================================================================== WESTBANK CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. Legal Proceedings - None 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 Information Concerning Forward-Looking Statements. Westbank 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 which 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 Westbank. 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 Westbank will be those anticipated by Westbank 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 Westbank'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 Westbank's prime market area, Western Massachusetts; 2. The recovery of the real estate market in Western Massachusetts; 3. Competition in Westbank's prime 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 Westbank 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, Westbank does not intend to review or revise any particular forward looking statement in light of future events. ITEM 6. Exhibits and Reports on Form 8 a. Exhibits EXHIBIT INDEX Page No. 3.1 Articles of Organization, as amended * 3.2 By-Laws, as amended ** 27. Financial Data Schedule TO BE INCLUDED * 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 in exhibit 5.1 contained in the Registrant's Current Report filed on February 2, 1998. b. Reports on Form-8 - On July 15, 1998 the Registrant filed a Curent Report on Form 8-K regarding the proposed acquisition of Cargill Bancorp, Inc. and Cargill Bank. WESTBANK CORPORATION AND SUBSIDIARIES 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 10, 1998 /s/Donald R. Chase Donald R. Chase President and Chief Executive Officer Date: August 10, 1998 /s/John M. Lilly John M. Lilly Treasurer and Chief Financial Officer