1 WESTBANK CORPORATION 1998 ANNUAL REPORT A FOCUS ON GROWTH [PHOTO OF PRISM] 2 TABLE OF CONTENTS Financial Highlights ................................................... 1 Letter to Stockholders ................................................. 2 - 3 Business - Westbank Corporation and Subsidiaries ....................... 4 Selected Consolidated Financial Data ................................... 5 Management's Discussion and Analysis - Financial Results ............... 6 - 19 Consolidated Balance Sheets ............................................ 20 Consolidated Statements of Income ...................................... 21 Consolidated Statements of Stockholders' Equity ........................ 22 Consolidated Statements of Comprehensive Income ........................ 22 Consolidated Statements of Cash Flows .................................. 23 Notes to Consolidated Financial Statements ............................. 24 - 41 Independent Auditors' Report ........................................... 42 Corporate Directory .................................................... 43 Corporate Information .................................................. 44 3 FINANCIAL HIGHLIGHTS Westbank Corporation and Subsidiaries FOR THE YEAR (Dollars in Thousands) 1998 1997 1996 ---------- ---------- ---------- Net income $ 3,256 $ 3,231 $ 2,248 Net interest income 13,442 12,784 11,842 Non-interest income 2,244 2,261 2,140 Non-interest expense 10,371 9,313 9,272 Provision for loan losses 19 190 868 YEAR END (Dollars in Thousands) ---------- ---------- ---------- Investment and mortgage-backed securities $ 76,417 $ 54,591 $ 35,682 Loans, net 259,306 232,415 218,192 Allowance for loan losses 2,379 2,848 2,481 Total assets 354,973 308,265 284,909 Total deposits 299,123 271,560 255,491 Total stockholders' equity 27,301 23,751 19,745 COMMON SHARE INFORMATION Basic weighted average shares outstanding 3,767,605 3,487,160 3,285,093 Basic net income per share $ .86 $ .93 $ .68 [ASSETS/DEPOSITS/NET LOAN GROWTH LINE GRAPH] ASSETS DEPOSITS LOANS -------- -------- ------- (in Thousands) 1998 $354,793 $299,123 $259,306 1997 308,265 271,560 232,415 1996 284,909 255,491 218,192 1995 253,777 227,962 197,264 1994 243,313 218,563 192,677 1 4 CHAIRMAN'S AND PRESIDENT'S LETTER Westbank Corporation and Subsidiaries Dear Shareholder: The past year was especially rewarding because we have achieved our topmost objectives, record earnings and measured growth. Our growth strategy is based on the premise: Succeeding today and investing for tomorrow. We seek to grow at a measured, orderly pace by nurturing our core banking operations, deepening our market penetration by providing more banking services to our present customers, by acquisitions of other banks and opening new offices in selected areas. We are proud to report that net income for the year ended December 31, 1998 totaled $3.3 million or $0.84 per diluted share, compared to $3.2 million or $0.89 per diluted share for the same period a year ago. Included in the results of operations during the fourth quarter of 1998 were $400 thousand of merger costs associated with the acquisition of Cargill Bancorp, Inc., of Putnam, Connecticut, which was consummated on January 29, 1999. We look forward to the opportunity to work with the Cargill shareholders, staff and customers. The affiliation will allow Cargill to offer a wider range of products and services, while at the same time Westbank will achieve its corporate objective of expanding its market into Connecticut. Westbank is presently positioned and has sufficient resources and infrastructure to expand through acquisition. We will pursue opportunities for growth in our defined market area as well as in markets that are contiguous to our present market area, which include Connecticut, Rhode Island and Central Massachusetts. Consistent with our corporate strategies of building market share, we have expanded our geographical reach into Ludlow and Southwick, Massachusetts. These new full-service banking offices have exceeded all expectations by generating a combined total of $11 million in new deposits last year. At year-end assets totaled $355 million, an increase of $46.7 million or 15% compared to the same period in 1997. Deposits increased by $27.5 million or 10% and totaled $299.1 million. The Corporation's capital was $27.3 million at year end, representing a capital ratio of 7.69% while the Corporation's book value totaled $7.19 versus $6.63 for the same period in the prior year. Particularly gratifying was the fact that we were able to expand our loan portfolio last year while continuing to maintain our disciplined loan criteria, ample evidence that loans can be increased substantially while maintaining high credit standards. During 1998 loans increased by $26.9 million or 12% and totaled $259.3 million. At Westbank, profitability is achieved through hard work and a clear focus on what we do well. We reinvest in growth businesses and emphasize our core competencies, which include credit and service quality, both of which are absolutely essential to compete effectively. Banks cannot consistently generate exceptional profits without being top-flight credit underwriters. Westbank is recognized industry-wide for our relentless focus on maintaining superior credit quality. Customers needs seldom fall into neat categories, and usually cross from one type of banking product to another. A clear competitive advantage for Westbank is the fact that we organize around our customers and their needs, not around products. To be focused on the customer, we have to know what the customer wants, therefore, we listen to them and hear what they really need. Through our local decision-making process in our banking offices our employees are empowered to deliver customer solutions. We've helped many businesses grow from the spare bedroom to the oak boardroom. Technology helps us offer services in a more timely manner. However, sometimes customers want the personal touch. Westbank offers both. This is the essence of Westbank and the basis of the Westbank Advantage: Our products; our people; our entire company is focused on meeting the needs of the customer. Large bank mergers have negatively impacted small and medium sized businesses, which indicates that there is and will be a growing need for a community bank that offers not only a broad range of products both to businesses and consumers but also provides exceptional service. The Residential Mortgage Department continued its strong record of growth and significantly exceeded 1998 goals. Westbank assisted six hundred families in terms of purchasing a home, building their dream home or lowering their existing payments by closing on $61,000,000 in residential loans. Park West Bank and Trust Company also added an additional satellite mortgage correspondent bank, which has an excellent reputation in the Franklin County area of Western Massachusetts. We converted a portion of our mortgages into mortgage-backed securities for sale on Wall Street, providing the Bank with excellent investment grade securities and immediate liquidity. This enables Westbank to realize additional income without relinquishing its relationship with the borrower. With activity remaining strong at the end of 1998, we anticipate another strong year in 1999. Westbank's relatively new Indirect Lending Program has had a very positive impact on loan originations. Through this program Westbank receives consumer loan applications from Bank-approved automobile and recreational vehicle dealerships whose customers wish to finance their purchases. These applications are then processed according to the Bank's normal consumer loan underwriting criteria. In 1998, indirect consumer loans accounted for approximately 28.5% of the Bank's total consumer loan originations excluding mortgages. As wealth grows, so do the opportunities for those of us who manage and invest that wealth. Customer needs change as they marry, purchase homes, have children or retire. These lifestyle changes coupled with changing market conditions, make understanding all the more difficult. 2 5 Our Trust Department has a well-diversified line of services that is able to meet the changing needs of our customers throughout each phase of their life cycle. Their "job" is building long-term relationships with customers through all market conditions. That means consistently providing the capabilities and capacity to serve customers as their needs and situations change. During 1998, the Trust Department made significant strides. They have built high quality customer relationships based on the trust their customers place in them. At year-end, fiduciary accounts totaled in excess of $119 million. There is, of course, a lot of work that goes on behind the scenes that improves our ability to compete effectively. For example, we are testing and changing systems to be certain that we will cross the threshold into the next millennium. Work on Year 2000 compliance is well advanced. Credit for this accomplishment can be placed squarely on the shoulders of our Y2K committee that is comprised of executive officers in charge of each functional area of the bank. The committee is responsible for implementing our Year 2000 plan, and reporting its progress monthly to the board of directors. Our success is attributable to an exceptional team of employees, many of whom are shareholders. They work hard every day to meet and exceed the expectations of their customers and are determined that Westbank be recognized as a leader in the financial services industry. The critical link between customer satisfaction and shareholder value has always been the quality of our employees. Westbank is focused on a growth momentum. However, size is not a strategy. It is a statistic; i.e. growth only for the sake of getting bigger cannot be an objective. Westbank will grow but only in ways that lead to a stronger and more profitable company. Corporate vision is nothing without focus. Our focus will be on three strategic initiatives: Revenue Growth, Cost Control and Asset Management. Westbank will continue to emphasize the growth of its core business this year. We expect to build lending and deposit relationships with local customers in a very competitive market. Westbank has the advantage of being a reliable community bank that has a well-earned reputation for knowledgeable service by its experienced staff. Nineteen Hundred and Ninety-Nine will be a challenging year for us as we strive to enhance the environment necessary to support and expand a diversified and profitable financial services company. We will remain intently focused not only on growth, but also on operational integrity and the effectiveness required to achieve a predictable, sustainable financial performance. We are confident in the strategic direction we have chosen and where we expect it to take us throughout 1999 and beyond. [PHOTO] Donald R. Chase Westbank Corporation and its shareholders have been fortunate over the years to be well served by a strong management team and Board of Directors. After thirty-eight years of dedicated service to the Company, Alfred C. Whitaker and Paul J. McKenna, DMD will retire from the Board of Directors in April of 1999. Their dedication to Westbank and its shareholders is as strong today as it was when they, along with a small group of other businessmen founded the Bank in 1961. We would like to take this opportunity to thank them for their leadership and loyalty. We wish them well in their retirement. We welcome to the Board of Directors G. Wayne McCary, President and Chief Executive Officer of the Eastern States Exposition, the sixth largest fair in North America located in West Springfield, Massachusetts. We appreciate your loyalty, confidence and support of Westbank Corporation. Your investment in our Company is foremost in our minds as we plan for the future. We look forward to the ever-present challenges and the accompanying opportunities of the twenty-first century. Sincerely, /s/ Alfred C. Whitaker /s/ Donald R. Chase Alfred C. Whitaker Donald R. Chase Chairman of the Board President and Chief Executive Officer 3 6 BUSINESS Westbank Corporation and Subsidiaries CORPORATE ORGANIZATION 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. PARK WEST BANK AND TRUST COMPANY As of December 31, 1998, substantially all operating income and net income of the Corporation are presently accounted for by Park West. Park West is chartered as a state bank and trust company by the Commonwealth of Massachusetts, is a member of the Federal Deposit Insurance Corporation ("FDIC"), and is subject to regulation by the Massachusetts Commissioner of Banks and the FDIC. A full range of retail banking services is furnished to individuals, businesses, and nonprofit organizations through thirteen banking offices located in Hampden County. Such services include a wide range of checking and savings accounts, loans, safe deposit facilities, and automated teller machines at selected branch locations. Park West also provides lending, depository and related financial services to commercial, industrial, financial, and governmental customers. In the lending area, these include short and long term loans and revolving credit arrangements, letters of credit, inventory and accounts receivable financing, real estate construction lending, and mortgage loans. Park West also operates a Trust Department providing services normally associated with holding property in a fiduciary or agency capacity. The value of the property held by the Trust Department at December 31, 1998 amounted to $119,797,000 and is not included in the accompanying financial statements since such items are not assets of the Bank. EMPLOYEES As of December 31, 1998 the Corporation and its subsidiaries had the equivalent of 125 full time officers and staff. COMPETITION Westbank's banking, real estate activity and trust services are competitive with other Massachusetts financial institutions. Its service area is in Western Massachusetts, primarily Hampden County. Westbank's competitors include other commercial banks, mutual savings banks, savings and loan associations, credit unions, consumer finance companies, loan offices, money market funds, and other financing organizations. Competition for trust services by major commercial banks is high, with continuing efforts by those banks to solicit new business. The Trust Department prides itself as one of the few remaining corporate fiduciaries providing personal services locally. Insurance companies, mutual savings banks, investment counseling firms, and other business firms and individuals also offer active competition for such business. ACQUISITION OF 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 Connecticut chartered stock savings and loan association headquartered in Putnam, Connecticut. Under the terms of the agreement, Cargill Bancorp will be merged into Westbank Corporation. Cargill Bank will retain its local identity and remain a separate subsidiary of Westbank Corporation. Each share of Cargill Bancorp common stock will be exchanged for 1.3655 shares of Westbank common stock. On November 3, 1998, the Corporation filed a registration statement to register approximately 565,096 shares of common stock in order to facilitate this merger. Cargill shareholders approved the merger at a shareholders meeting held on December 16, 1998 and final regulatory approval was received on January 14, 1999. 4 7 SELECTED CONSOLIDATED FINANCIAL DATA Westbank Corporation and Subsidiaries Year ended December 31, (Dollars in Thousands Except Share Amounts) 1998 1997 1996 1995 1994 ---------- ----------- ---------- ---------- ----------- Interest and dividend income $ 25,085 $ 23,156 $ 20,600 $ 20,261 $ 17,046 Interest expense 11,643 10,372 8,758 8,540 6,199 ---------- ----------- ---------- ---------- ----------- Net interest income 13,442 12,784 11,842 11,721 10,847 Provision for loan losses 19 190 868 2,690 1,473 Non-interest income 2,244 2,261 2,140 2,917 2,459 Non-interest expense 10,371 9,313 9,272 8,515 10,088 ---------- ----------- ---------- ---------- ----------- Income before income taxes 5,296 5,542 3,842 3,433 1,745 Income taxes (benefit) 2,040 2,311 1,594 1,080 (430) ---------- ----------- ---------- ---------- ----------- Net income $ 3,256 $ 3,231 $ 2,248 $ 2,353 $ 2,175 ========== =========== ========== ========== =========== Common share data: Earnings per share: Basic $ .86 $ .93 $ .68 $ .74 $ .69 Diluted $ .84 $ .89 $ .66 $ .72 $ .68 Cash dividends declared $ .40 $ .30 $ .24 $ .20 Ending book value $ 7.19 $ 6.63 $ 5.90 $ 5.50 $ 4.89 AT DECEMBER 31: Total loans -- net $ 259,306 $ 232,415 $ 218,192 $ 197,264 $ 192,677 Total assets 354,973 308,265 284,909 253,777 243,313 Total non-performing assets 928 1,375 2,698 7,904 7,435 Total deposits 299,123 271,560 255,491 227,962 218,563 Total stockholders' equity 27,301 23,751 19,745 17,703 15,344 AVERAGE FOR YEAR: Loans 250,247 232,529 209,141 197,562 182,676 Assets 335,251 300,996 266,134 253,024 232,922 Deposits 291,852 268,960 237,848 227,952 210,659 Stockholders' equity 25,974 21,491 18,561 16,755 14,722 Weighted shares outstanding - basic 3,767,605 3,487,160 3,285,093 3,181,742 3,132,934 - diluted 3,861,590 3,612,919 3,404,242 3,271,875 3,203,985 SELECTED RATIOS: Rate of return on average total assets .97% 1.07% .84% .93% .93% Rate of return on average stockholders equity 12.54% 15.03% 12.11% 14.04% 14.77% Stockholders' equity to total assets at year end 7.69% 7.70% 6.93% 6.98% 6.31% Average total stockholders' equity to average total assets 7.75% 7.14% 6.97% 6.62% 6.32% Allowance for loan losses to total loans at year end .91% 1.21% 1.12% 1.84% 1.70% Non-performing loans as a percentage of total loans at year end .27% .58% 1.07% 3.43% 3.00% Net charge-offs (recoveries) as a percentage of average loans .20% (.08)% 1.00% 1.17% .89% Other real estate owned as a percentage of total assets .06% .05% .12% .51% .64% 5 8 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS Westbank Corporation and Subsidiaries Management's discussion of operations and financial position is based on the selected consolidated financial data and should be read in conjunction with the consolidated financial statements and notes thereto. For 1998, the Corporation reported net income of $3,256,000, or $.86 per share basic and $.84 diluted, after providing $19,000 for loan losses. This compares to net income for 1997 of $3,231,000, or $.93 per share basic and $.89 diluted. The Corporation's 1997 earnings reflected a provision for loan losses of $190,000. Net interest income increased $658,000 from 1997 to 1998. Non-interest expense amounted to $10,371,000 in 1998 compared to $9,313,000 in 1997, an increase of $1,058,000, or 11%. The increase in operating expenses for 1998 is a direct result of reflecting $400,000 during the fourth quarter of 1998, for merger costs related to the acquisition of Cargill Bancorp, Inc. and the remaining increase is a result of the overall growth of the Corporation. Non-interest income was level compared to 1997. During 1998, Trust Department earnings increased by $33,000 over 1997. Gains on sale of investments and other real estate declined by $102,000, gains on sale of mortgages totaled $119,000, while service charges on deposit accounts and other non-interest income declined by $65,000 compared to 1997. Income taxes in 1998 totaled $2,040,000, a decrease of $271,000 over 1997. At December 31, 1998, the Corporation's total assets were $354,973,000, an increase of $46,708,000 or 15%, from $308,265,000 at year end 1997. The higher level of assets resulted primarily through an increase in net loans, investments and federal funds totaling $45,087,000 funded by the growth in deposits. Non-performing assets amounted to $928,000 or .26% of total assets at December 31, 1998, compared with $1,375,000 or .45% at the end of 1997. 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 December 31, 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 reporting 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. 6 9 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries COMPONENTS OF CAPITAL The following table presents the Corporation's components of capital as of December 31. The table also presents the ratio of capital to total assets. (Dollars in Thousands) 1998 1997 1996 ------- ------- -------- Stockholders' Equity Common stock $ 7,597 $ 7,163 $ 6,694 Additional paid-in-capital 10,034 8,819 7,633 Retained earnings 9,461 7,708 5,517 Accumulated other comprehensive income 209 61 (99) ------- ------- -------- Total Capital $27,301 $23,751 $ 19,745 Ratio of capital to average total assets 7.64% 7.55% 7.17% 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. In this Corporation, Tier 1 includes the common stockholders' equity; total risk-based, or supplementary capital, includes not only the equity, but also a portion of the allowance for loan losses. The following are the Corporation's risk-based capital ratios at December 31: 1998 1997 1996 ---- ---- ---- Tier 1 risk-based capital (minimum required 4%) 11.77% 11.44% 10.43% Total risk-based capital (minimum required 8%) 12.80% 12.71% 11.69% [STOCKHOLDERS' EQUITY BAR GRAPH] (Dollars in Thousands) 1998 1997 1996 ---- ---- ---- Stockholders' Equity $27,301 $23,751 $19,745 DISCUSSION OF MARKET RISK Market risk is the risk of loss due to adverse changes in market prices and rates. The management of this risk, coupled with directives to build shareholder value and profitability, is an integral part of the Corporation's overall operating strategy. The Corporation's approach to risk management, primarily interest rate risk management, is quite basic and concentrates on fundamental strategies to restructure the balance sheet and composition of assets and liabilities. Since the Corporation does not utilize interest rate futures, swaps or options transactions, its asset/liability profile is not complex. It reflects a simple approach to managing risk through the use of fixed and adjustable rate loans, rate insensitive checking accounts as well as a combination of fixed and variable rate deposit products. Bank policy includes required limits on the sensitivity of net interest income under various interest rate scenarios. The Bank seeks to control its interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Bank has adopted formal policies and practices to monitor and manage interest rate risk exposure. As part of this effort the Bank actively manages interest rate risk through the use of a simulation model which measures the sensitivity of future net interest income to changes in interest rates. In addition, the Bank regularly monitors interest rate sensitivity through gap analysis, which measures the terms to maturity or next repricing date of interest earning assets and interest bearing liabilities. 7 10 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries On a quarterly basis, an interest rate risk exposure compliance report is prepared and presented to the Bank's Board of Directors. This report presents an analysis of the change in net interest income resulting from an increase or decrease in the level of interest rates. All changes are measured as percentage changes from the projected net interest income in the flat rate scenario. The calculated estimates of change in net interest income are compared to current limits established by management and approved by the Board of Directors. The following is a summary of the interest rate exposure report as of December 31, 1998 and 1997: Change in Interest Rates Percentage Change in (In Basis Points) Net Interest Income - - ------------------------ ---------------------- 1998 1997 ------- ------ +200 (3.81)% (3.2)% Level 0% 0% -200 (3.63)% 3.7% The change in net interest income between 1998 and 1997 when rates declined 200 basis points is primarily the result of the current low interest rate environment. In the current year many deposit rates were not able to be decreased by the full 200 basis points. The inability to reduce deposit rates would cause net interest income to decline during a falling interest rate environment despite the Corporation being liability sensitive. The model utilized to create the results presented above makes various estimates at each level of interest rate change regarding cash flows from principal repayments on loans and mortgage-backed securities and/or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In order to reduce the exposure to interest rate fluctuations, the Corporation has developed strategies to manage its liquidity, shorten the effective maturities of certain interest-earning assets and increase the effective maturities of certain interest bearing liabilities. The Bank has focused its residential lending on a combination of fixed and adjustable rate mortgages. Commercial loans, commercial mortgages and consumer lending focus on adjustable and short term loans. The Bank also attempts to maintain and/or increase its savings and transaction accounts which are considered relatively insensitive to changes in interest rates. The Corporation also measures sensitivity to changes in interest rates using interest rate sensitivity gap analysis which is the difference between the cash flow amounts of interest-sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset-sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the institution is in a liability-sensitive position. Accordingly, net interest income would decline when rates rise and increase when rates fall. Also, these examples assume that interest-rate changes for assets and liabilities are of the same magnitude, whereas actual interest-rate changes generally differ in magnitude for assets and liabilities. The following table sets forth the distribution of the repricing of the Corporation's earning assets and interest bearing liabilities as of December 31, 1998, the interest rate sensitivity gap, (i.e., interest rate sensitive assets less interest rate sensitive liabilities), the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio and the cumulative interest rate sensitivity gap ratio. The table also sets forth the time periods in which earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of the Bank's customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates. 8 11 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries Three Over Three Over One Over Months Months to Year to Five (Dollars in Thousands) or Less A Year Five Years Years Total -------- -------- --------- -------- -------- EARNING ASSETS Securities including mortgage-backed securities $ 2,835 $ 1,493 $ 3,692 $ 68,397 $ 76,417 Interest bearing cash 292 292 Loans 47,025 32,454 96,251 85,955 261,685 Federal funds sold 48 48 -------- -------- --------- -------- -------- 50,200 33,947 99,943 154,352 338,442 INTEREST BEARING LIABILITIES Savings deposits 4,291 38,618 42,909 NOW Accounts 1,846 16,609 18,455 Money market accounts 29,045 29,045 Negotiated rate certificates 12,777 8,439 3,373 24,589 Other time deposits 36,521 68,022 30,302 134,845 Borrowed funds 20,307 7,000 27,307 -------- -------- --------- -------- -------- $ 98,650 $ 82,598 $ 95,902 $ $277,150 ======== ======== ========= ======== ======== Interest Rate Sensitivity Gap $(48,450) $(48,651) $ 4,041 $154,352 $ 61,292 Cumulative Interest Rate Sensitivity Gap $(48,450) $(97,101) $ (93,060) $ 61,292 Interest Rate Sensitivity Gap Ratio (14.32)% (14.37)% 1.19% 45.61% 18.11% Cumulative Interest Rate Sensitivity Gap Ratio (14.32)% (28.69)% (27.50)% 18.11% The presentation of a run off and repricing of savings accounts and NOW accounts is based on the Corporation's historical experience with $4,291,000 and $1,846,000, respectively, included in the three month to one year category and the remainder placed in the one to five year category of the interest bearing liabilities. Westbank seeks to manage the mix of asset and liability maturities to control the effect of changes in the general level of interest rates on net interest income. In periods of rising interest rates, Westbank's negative interest rate sensitivity gap as to earning assets and interest-bearing liabilities maturing in less than one year may cause a diminution of Westbank's income; correspondingly, in periods of declining interest rates, a negative interest rate sensitivity gap may provide additional income. Except for its effect on the general level of interest rates, inflation does not have a material impact on Westbank's earnings due to the rate of variability and short-term maturities of its earning assets. 9 12 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY - INTEREST RATES AND INTEREST DIFFERENTIAL The following table presents the condensed average balance sheets for 1998, 1997 and 1996. The total dollar amount of interest income from earning assets and the resultant yields are calculated on a taxable equivalent basis. The interest paid on interest-bearing liabilities, expressed both in dollars and rates, is shown in the table: 1998 1997 AVERAGE AVERAGE INTEREST YIELD/ INTEREST YIELD/ AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE (Dollars in Thousands) BALANCE EXPENSE PAID BALANCE EXPENSE PAID ----------- ----------- ------- ----------- ----------- -------- ASSETS Securities: U.S. Treasury $ 3,663 $ 221 6.03% $ 6,873 $ 424 6.17% Federal agencies 57,202 3,689 6.45 39,476 2,627 6.65 Other securities 1,348 87 6.45 1,807 108 5.98 ----------- ----------- ------- ----------- ----------- -------- Total securities 62,213 3,997 6.42 48,156 3,159 6.56 ----------- ----------- ------- ----------- ----------- -------- Interest-bearing cash and temporary investments 122 6 4.92 88 7 7.95 ----------- ----------- ------- ----------- ----------- -------- Loans: (a) Commercial 40,652 3,751 9.23 37,375 3,586 9.59 Real estate 180,068 14,583 8.10 169,892 14,117 8.31 Consumer 29,527 2,382 8.07 25,262 2,032 8.04 ----------- ----------- ------- ----------- ----------- -------- Total loans 250,247 20,716 8.28 232,529 19,735 8.33 ----------- ----------- ------- ----------- ----------- -------- Federal funds sold 6,637 366 5.51 4,800 255 5.31 ----------- ----------- ------- ----------- ----------- -------- Total earning assets 319,219 $ 25,085 7.86% 285,573 $ 23,156 8.11% ----------- ----------- ------- ----------- ----------- -------- Allowance for loan losses (2,686) (2,628) Cash and due from banks 9,695 9,776 Other assets 9,023 8,275 ----------- ----------- ------- ----------- ----------- -------- Total assets $ 335,251 $ 300,996 =========== =========== ======= =========== =========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings $ 39,950 $ 1,144 2.86% $ 37,060 $ 936 2.53% Money market 31,041 1,181 3.80 16,625 560 3.37 Negotiated rate certificates 22,397 1,086 4.85 18,032 894 4.96 Other time deposits 151,392 7,617 5.03 152,709 7,696 5.04 ----------- ----------- ------- ----------- ----------- -------- Total time deposits 244,780 11,028 4.51 224,426 10,086 4.49 Borrowed funds 16,186 615 3.80 8,989 286 3.18 ----------- ----------- ------- ----------- ----------- -------- Total interest-bearing liabilities 260,966 11,643 4.46 233,415 10,372 4.44 Demand deposits 47,071 44,534 Other liabilities 1,240 1,556 Stockholder's equity 25,974 21,491 ----------- ----------- ------- ----------- ----------- -------- Total liabilities and stockholders' equity $ 335,251 $ 300,996 =========== =========== ======= =========== =========== ======== Net interest income $ 13,442 $ 12,784 Yield spread 3.40% 3.67% =========== =========== ======= =========== =========== ======== Net Yield on earning assets 4.21% 4.48% =========== =========== ======= =========== =========== ======== 1996 AVERAGE INTEREST YIELD/ AVERAGE INCOME/ RATE (Dollars in Thousands) BALANCE EXPENSE PAID ----------- ----------- ------- ASSETS Securities: U.S. Treasury $ 8,360 $ 535 6.40% Federal agencies 24,625 1,647 6.69 Other securities 2,465 159 6.45 ----------- ----------- ------- Total securities 35,450 2,341 6.60 ----------- ----------- ------- Interest-bearing cash and temporary investments 853 70 8.20 ----------- ----------- ------- Loans: (a) Commercial 34,865 3,285 9.42 Real estate 154,501 12,941 8.38 Consumer 19,775 1,716 8.68 ----------- ----------- ------- Total loans 209,141 17,942 8.58 ----------- ----------- ------- Federal funds sold 4,845 247 5.10 ----------- ----------- ------- Total earning assets 250,289 $ 20,600 8.23% ----------- ----------- ------- Allowance for loan losses (3,189) Cash and due from banks 9,667 Other assets 9,367 ----------- ----------- ------- Total assets $ 266,134 =========== =========== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings $ 33,802 $ 749 2.21% Money market 13,682 362 2.65 Negotiated rate certificates 16,117 802 4.98 Other time deposits 131,348 6,590 5.02 ----------- ----------- ------- Total time deposits 194,949 8,503 4.36 Borrowed funds 8,603 255 2.96 ----------- ----------- ------- Total interest-bearing liabilities 203,552 8,758 4.30 Demand deposits 42,898 Other liabilities 1,123 Stockholder's equity 18,561 ----------- ----------- ------- Total liabilities and stockholders' equity $ 266,134 =========== =========== ======= Net interest income $ 11,842 Yield spread 3.93% =========== =========== ======= Net Yield on earning assets 4.73% =========== =========== ======= (a) Average loan balances above include non-accrual loans. When a loan is placed in non-accrual status, interest income is recorded to the extent actually received in cash or is applied to reduce principal. During 1998, the yield spread declined to 3.40% from 3.67% in 1997, down 27 basis points. The Corporation's net interest margin decreased during 1998 to 4.21% from 4.48% in 1997, a decrease of 27 basis points. During 1997, the yield spread declined to 3.67% from 3.93% in 1996, down 26 basis points. The Corporation's net interest margin decreased during 1997 to 4.48% from 4.73% in 1996, a decrease of 25 basis points. The section titled Rate/Volume Analysis further describes the change in yields. 10 13 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries RATE/VOLUME ANALYSIS OF INTEREST MARGIN ON EARNING ASSETS The following table sets forth, for each major category of interest earning assets and interest bearing liabilities, the dollar amounts of interest income (calculated on a taxable equivalent basis) and interest expense and changes therein for 1998 as compared with 1997 and 1997 compared with 1996. 1998 Compared With 1997 -------------------------------------------------- Increase Due to* (Dollars in Thousands) 1998 1997 (Decrease) Volume Rate ------- ------- ------- ------- -------- Interest earned: Securities: U.S. Treasury $ 221 $ 424 $ (203) $ (194) $ (9) Federal agencies 3,689 2,627 1,062 1,145 (83) Other securities 87 108 (21) (29) 8 Interest-bearing cash 6 7 (1) 2 (3) Loans: Commercial 3,751 3,586 165 305 (140) Real estate 14,583 14,117 466 830 (364) Consumer 2,382 2,032 350 343 7 Federal funds sold 366 255 111 100 11 ------- ------- ------- ------- -------- 25,085 23,156 1,929 2,502 (573) ------- ------- ------- ------- -------- Interest expense: Savings 1,144 936 208 76 132 Money market 1,181 560 621 541 80 Negotiated rate certificates 1,086 894 192 213 (21) Other time deposits 7,617 7,696 (79) (64) (15) Borrowed funds 615 286 329 265 64 ------- ------- ------- ------- -------- 11,643 10,372 1,271 1,031 240 ------- ------- ------- ------- -------- $13,442 $12,784 $ 658 $ 1,471 $ (813) ======= ======= ======= ======= ======== 1997 Compared With 1996 ----------------------------------------------- Increase Due to* (Dollars in Thousands) 1997 1996 (Decrease) Volume Rate ------- ------- ------- ------- ------- Interest earned: Securities: U.S. Treasury $ 424 $ 535 $ (111) $ (93) $ (18) Federal agencies 2,627 1,647 980 990 (10) Other securities 108 159 (51) (40) (11) Interest-bearing cash 7 70 (63) (60) (3) Loans: Commercial 3,586 3,285 301 240 61 Real estate 14,117 12,941 1,176 1,284 (108) Consumer 2,032 1,716 316 450 (134) Federal funds sold 255 247 8 (2) 10 ------- ------- ------- ------- ------- 23,156 20,600 2,556 2,769 (213) ------- ------- ------- ------- ------- Interest expense: Savings 936 749 187 74 113 Money market 560 362 198 87 111 Negotiated rate certificates 894 802 92 95 (3) Other time deposits 7,696 6,590 1,106 1,079 27 Borrowed funds 286 255 31 11 20 ------- ------- ------- ------- ------- 10,372 8,758 1,614 1,346 268 ------- ------- ------- ------- ------- $12,784 $11,842 $ 942 $ 1,423 $(481) ======= ======= ======= ======= ======= * The dollar amount of changes in interest income and interest expense attributable to changes in rate and volume has been allocated between rate and volume based on changes in rates times the prior year's volume and the changes in volume times the prior year's rate. Net interest income for 1998 increased to $13,442,000, up 5% from $12,784,000 in 1997. A 12% increase in average earning assets and a 25 basis point decline in average rate of return resulted in an increase in volume of $2,502,000 and a decrease in rate of $573,000. An increase of 12% in average interest bearing liabilities and a 12 basis point increase in average rate of interest paid contributed to an increase in volume of $1,031,000 and an increase in rate of $240,000. Net interest income for 1997 increased to $12,784,000, up 8% from $11,842,000 in 1996. A 14% increase in average earning assets and a 12 basis point decline in average rate of return resulted in an increase in volume of $2,769,000 and a decrease in rate of $213,000. An increase of 15% in average interest bearing liabilities and a 14 basis point increase in average rate of interest paid contributed to an increase in volume of $1,346,000 and an increase in rate of $268,000. LIQUIDITY Liquidity management requires close scrutiny of the mix and maturity of deposits and borrowings and short-term investments. Cash and due from banks, federal funds sold, investment securities and mortgage-backed securities, as compared to deposits, are used by Westbank to compute its liquidity on a daily basis as adjusted for regulatory purposes. Westbank's ratio of such assets to total deposits was 21.35% for 1998 compared to 20.74% for 1997. In addition, Westbank is subject to Regulation D of the Federal Reserve Bank (FRB), which requires depository institutions to maintain reserve balances on deposit with the FRB based on certain average depositor balances. Westbank is in compliance with Regulation D. Management of Westbank believes that its current liquidity is sufficient to meet current and anticipated funding needs. Refer to Note 7 in the Notes To Consolidated Financial Statements for a discussion of the Corporation's external sources of liquidity. 11 14 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries INVESTMENT PORTFOLIO Refer to Note 2 in the Notes To Consolidated Financial Statements of this report which covers the maturity distribution and market values at December 31, 1998 of the securities portfolio. The following table shows the amortized cost (in thousands) of the Corporation's securities held to maturity at December 31: 1998 1997 1996 ---- ---- ---- U. S. Government obligations $ 998 $ 4,246 $ 5,998 Federal agency obligations 24,692 30,081 13,827 Mortgage-backed securities 130 176 216 Other debt securities 1,254 ------- ------- ------- Amortized cost $25,820 $34,503 $21,295 ======= ======= ======= The following table shows the fair value (in thousands) of the Corporation's securities available for sale at December 31: 1998 1997 1996 -------- -------- ------- U. S. Government obligations $ 928 $ 2,058 $ 1,990 Federal agency obligations 25,611 3,486 2,465 Mortgage-backed securities 22,652 13,219 8,807 Equity securities 1,406 1,325 1,125 -------- -------- ------- 50,597 20,088 14,387 Gross unrealized (gain) loss on securities available for sale (355) (105) 170 -------- -------- ------- Amortized cost $ 50,242 $ 19,983 $14,557 ======== ======== ======= The following table shows weighted average yields and maturity distribution of debt securities at December 31, 1998: Within 1 Year 1 to 5 Years 5 to 10 Years After 10 Years Total Average Amortized Average Amortized Average Amortized Average Amortized Average Amortized Yield Cost Yield Cost Yield Cost Yield Cost Yield Cost ------- -------- ------- ---------- -------- --------- -------- ------ ------- --------- U. S. Government obligations 5.61% $1,428 6.25% $ 498 5.76% $ 1,926 Federal agency obligations 5.19 1,499 6.52 3,194 6.19% $42,578 6.41% $ 3,000 6.45 50,271 Mortgage-backed securities 8.24 130 6.57 22,358 6.58 22,488 ------- -------- ------- ---------- -------- --------- -------- ------ ------- --------- Total debt Securities 5.40% $2,927 6.50% $3,692 6.20% $42,708 6.58% $25,358 6.47% $74,685 ======= ======== ======= ========== ======== ========= ======== ====== ======= ========= The weighted average yield has been computed by dividing annualized interest income, including the accretion of discount and the amortization of premiums, by the book value of securities outstanding. 12 15 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries LOAN PORTFOLIO The following table sets forth the classification (in thousands) of the Corporation's loans by major category at December 31: 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Commercial $ 41,348 $ 41,031 $ 35,523 $ 35,116 $ 34,306 --------- --------- --------- --------- --------- Real Estate: Construction 5,596 5,249 6,071 7,550 8,517 Residential (1-4 family) 138,618 120,504 121,132 99,321 81,333 Residential (5 or more) 856 1,828 1,908 2,632 4,034 Commercial properties 56,942 50,931 41,261 47,566 58,310 --------- --------- --------- --------- --------- Total Real Estate 202,012 178,512 170,372 157,069 152,194 --------- --------- --------- --------- --------- Consumer 18,632 15,991 15,093 8,896 9,383 --------- --------- --------- --------- --------- Lease financing 230 352 --------- --------- --------- --------- --------- Gross loans 261,992 235,534 220,988 201,311 196,235 Deferred loan origination fees-net of costs (307) (271) (315) (340) (233) --------- --------- --------- --------- --------- Total Loans 261,685 235,263 220,673 200,971 196,002 Allowance for loan losses (2,379) (2,848) (2,481) (3,707) (3,325) --------- --------- --------- --------- --------- Net loans $ 259,306 $ 232,415 $ 218,192 $ 197,264 $ 192,677 ========= ========= ========= ========= ========= The Corporation's loan portfolio is not concentrated within a single industry or a group of related industries, however, underlying collateral values are dependent upon market fluctuations in the Western Massachusetts area. The aggregate amount of loans to executive officers, directors and organizations with which they are associated amounted to $2,660,000 or 9.7% of stockholders' equity as of December 31, 1998 compared to $2,043,000 or 8.6% as of December 31, 1997. The following table provides the maturity distribution and sensitivity to changes in interest rates of commercial loans and commercial real estate construction loans at December 31, 1998: [LOAN MIX PIE CHART] (IN THOUSANDS) LOAN TYPE AMOUNT Commercial Real Estate $ 63,394 Residential Real Estate 138,618 Commercial Loans 41,348 Consumer Loans 18,832 12 Months 1 - 5 After (Dollars in Thousands) or Less Years 5 Years Total ------- ------ ------ ------- Commercial $32,308 $7,322 $1,718 $41,348 Commercial real estate-construction 5,596 5,596 ------- ------ ------ ------- Totals $37,904 $7,322 $1,718 $46,944 ======= ====== ====== ======= Of the commercial loans which mature beyond one year approximately $4,147,000 have fixed rates and the remaining $4,893,000 are floating rate loans. In the normal course of business, various commitments and contingent liabilities are outstanding, such as guarantees, standby letters of credit, commitments to extend credit and various financial instruments with off-balance-sheet risk that are not reflected in the financial statements. The most significant of these are commitments to grant loans and commitments to advance funds under existing loan agreements which were $8,740,000 and $31,055,000, respectively, at December 31, 1998 and $9,629,000 and $29,210,000, respectively, in 1997. See further discussion in Note 13 to the Consolidated Financial Statements. 13 16 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries LOAN LOSS EXPERIENCE The provision for loan losses is an amount added to the allowance against which loan losses are charged. The provision for losses is dependent on actual net write-offs and an evaluation as to the collectibility of the loan portfolio taking into consideration such factors as the financial condition of individual borrowers, historical loss experience with respect to various portfolio segments, current and near term economic conditions, and the size of the portfolio. Based on these reviews, the allowance for loan losses at December 31, 1998, is deemed to be adequate by management. In the determination of the allowance for loan losses management obtains independent appraisals for a significant number of properties. Management has also retained an independent loan review consultant to provide advice on the adequacy of the loan loss allowance. The following table sets forth the historical relationship among the average amount of loans outstanding, the allowance for loan losses, provision for loan losses charged to operating expenses, losses charged off, recoveries and selected ratios: Year Ended December 31, (Dollars in Thousands) 1998 1997 1996 1995 1994 -------- --------- -------- -------- -------- Balance at beginning of year $ 2,848 $ 2,481 $ 3,707 $ 3,325 $ 3,472 Provision charged to expense 19 190 868 2,690 1,473 -------- --------- -------- -------- -------- 2,867 2,671 4,575 6,015 4,945 -------- --------- -------- -------- -------- Charge-offs: Loans secured by real estate 368 337 1,688 2,129 1,291 Construction/land development 190 Commercial and industrial loans 153 190 503 230 480 Consumer loans 43 106 82 119 91 Lease financing receivables 5 7 -------- --------- -------- -------- -------- 564 633 2,463 2,483 1,869 -------- --------- -------- -------- -------- Recoveries: Loans secured by real estate 37 354 324 24 25 Construction/land developing 14 75 Commercial and industrial loans 30 444 10 45 204 Consumer loans 9 11 19 25 14 Lease financing receivables 1 2 6 6 -------- --------- -------- -------- -------- 76 810 369 175 249 -------- --------- -------- -------- -------- Net charge-offs (recoveries) 488 (177) 2,094 2,308 1,620 -------- --------- -------- -------- -------- Balance at end of year $ 2,379 $ 2,848 $ 2,481 $ 3,707 $ 3,325 ======== ========= ======== ======== ======== Average loans outstanding $250,247 $ 232,529 $209,141 $197,562 $182,676 ======== ========= ======== ======== ======== Net charge-offs (recoveries) as a percentage of average loans .20% (.08)% 1.00% 1.17% .89% Net charge-offs (recoveries) as a percentage of the allowance at January 1 17.13% (7.13)% 56.49% 69.41% 46.66% Allowance as a percentage of total loans at December 31 .91% 1.21% 1.12% 1.84% 1.70% Allowance as a percentage of non-performing loans at December 31 337.93% 232.30% 105.08% 53.76% 56.52% 14 17 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries Allocation of the balance as of December 31 of the allowance for loan losses applicable to: (Dollars in Thousands) 1998 1997 1996 1995 1994 ==== ==== ==== ==== ==== % OF % OF % OF % OF % OF TOTAL TOTAL TOTAL TOTAL TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Loans secured by real estate $1,307 74.97% $1,595 73.53% $1,582 74.31% $2,717 74.23% $2,496 73.18% Construction/land development 70 2.14 79 2.23 91 2.75 150 3.76 127 4.35 Commercial and industrial loans 554 15.78 615 17.44 656 16.10 687 17.47 514 17.50 Consumer loans 198 7.11 189 6.80 152 6.84 89 4.43 125 4.79 Lease financing receivables 64 .11 63 .18 Unallocated 250 370 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- $2,379 100% $2,848 100% $2,481 100% $3,707 100% $3,325 100% ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== The approach the Corporation uses in determining the adequacy of the allowance for loan losses is the combination of a target reserve and 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 adequacy of the collateral on these same loans. In addition, the Corporation allocates a general reserve against the remainder of the loan portfolio. NON-PERFORMING ASSETS LOANS Loans on which interest and principal payments are 90 days or more past due are placed on a non-accrual basis (earlier if deemed appropriate) and interest is reversed unless management determines that the collectibility of principal and interest is not reasonably considered in doubt. The following table sets forth information with regard to non-performing loans as of the end of each year indicated: (Dollars in Thousands) 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Loans on a non-accrual basis $ 473 $ 1,042 $ 2,079 $ 6,180 $ 4,890 ========= ========= ========= ========= ========= Non-accrual loans as a percentage of total net loans outstanding .18% .45% .95% 3.13% 2.54% Non-accrual loans as a percentage of total assets .13% .34% .73% 2.44% 2.01% Loans contractually past due 90 days or more and still accruing $ 231 $ 184 $ 282 $ 277 $ 492 The gross amount of interest that would have been accrued at the original contract rate on loans on a non-accrual basis (in thousands) was $22, $59, $178, $296, and $399, for 1998, 1997, 1996, 1995, and 1994, respectively. Interest income included in the results of operations relating to these loans was $20,000 in 1994. The decrease in non-accrual loans from 1997 is attributable to the continued resolution of non-performing loans throughout 1998. During the second quarter of 1998 the Corporation sold a pool of non-performing loans. The decrease in the allowance for loan losses is attributable to charging-off previously reserved amounts directly related to the sale of non-performing loans referred to above. 15 18 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries The Bank evaluates each impaired loan to determine the appropriate income recognition practice. Generally, income is recorded only on a cash basis for impaired loans. Interest income recognized during 1998 and 1997 on impaired loans was not significant. At December 31, 1998 and 1997, the recorded investment in impaired loans was $473,000 and $960,000 respectively, for which no additional specific allowance for loan losses was recorded. For the twelve months ended December 31, 1998, the average recorded investment in impaired loans was $487,000 compared to $1,272,000 for 1997. RESTRUCTURED LOANS A restructured loan is one for which the Corporation has modified the contractual terms to provide a reduction in the rate of interest and, in most instances, an extension of payments of principal or interest or both because of a deterioration in the financial position of the borrower. Restructured loans modified prior to January 1, 1995 which are performing in accordance with their new terms are not included in non-accrual loans unless concern exists as to the ultimate collection of principal or interest and are not considered to be impaired. Those entered into after January 1, 1995 are considered to be impaired as described in Note 1 to the financial statements. Restructured loans, which are classified as accruing loans, amounted to $439,000 in 1995 and $501,000 in 1994. Interest income reduction because of restructuring was not significant for 1995 and 1994. [NON-PERFORMING ASSETS BAR CHART] NON-PERFORMING ASSETS -------------- (In Thousands) 1998 $ 928 1997 1,375 1996 2,698 1995 7,904 1994 7,435 OTHER REAL ESTATE OWNED The following table sets forth information regarding other real estate owned at December 31: (Dollars in Thousands) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Other real estate owned - net $ 224 $ 149 $ 337 $ 1,300 $ 1,552 Other real estate owned as a percentage of total assets .06% .05% .12% .51% .64% DEPOSITS The following table sets forth the average amounts of various classifications of deposits: 1998 1997 1996 (Dollars in Thousands) AMOUNT RATE AMOUNT RATE AMOUNT RATE --------- ----- --------- ------ --------- ------ Savings $ 39,950 2.86% $ 37,060 2.53% $ 33,802 2.21% Money market 31,041 3.80 16,625 3.37 13,682 2.65 Negotiated rate certificates 22,397 4.85 18,032 4.96 16,117 4.98 Other time deposits 151,392 5.03 152,709 5.04 131,348 5.02 --------- ----- --------- ------ --------- ------ 244,780 4.51% 224,426 4.49% 194,949 4.36% Demand deposits 47,071 44,534 42,898 --------- --------- -------- $291,851 $268,960 $237,847 ========= ========= ======== Certificates of deposits of $100,000 and over at December 31, 1998 had the following maturities: 3 MONTHS 3 TO 6 6 TO 12 1 YEAR TO (Dollars in Thousands) OR LESS MONTHS MONTHS 5 YEARS TOTAL Totals $12,776 $4,349 $4,090 $3,374 $24,589 16 19 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries RETURN ON EQUITY AND ASSETS The Corporation's return on average equity and assets for each of the years ended December 31, were as follows: 1998 1997 1996 ------ ------ -------- Return on average total assets .97% 1.07% .84% Return on average stockholders' equity 12.54 15.03 12.11 Average stockholders' equity to average total assets 7.75 7.14 6.97 Dividend payout ratio 46.16 32.19 34.88 BORROWINGS The following table summarizes borrowings. Average interest rates during each year were computed by dividing total interest expense by the average amount borrowed: (Dollars in Thousands) 1998 1997 1996 ------- ------- ------- Balance at year end $27,307 $11,884 $ 8,769 Average amount outstanding 16,186 8,989 8,603 Maximum amount outstanding at any month-end 27,307 13,536 12,294 Average interest rate for the year 3.80% 3.18% 2.95% Average interest rate on year-end balance 3.79 3.15 2.89 [RETURN ON ASSETS BAR GRAPH] 1998 1997 1996 ------ ------ ------ RETURN ON ASSETS 0.97% 1.07% 0.84% STATEMENTS OF INCOME In the following sections of Management's Discussion and Analysis of the Statements of Income, the comparative results of 1998, 1997 and 1996 will be covered in greater detail. As of December 31, 1998, the principal earning assets of the holding company consist of a commercial bank, Park West Bank and Trust Company. Noteworthy are the effects of sources of income from earning assets and expense of interest-bearing liabilities. Presented below is a comparative summary of percentages of increases and decreases for the three years ended December 31, 1998. The significant changes are discussed in the analysis that follow the summary. Percentage of increase (decrease) ------------------- 1998 1997 Over Over (Dollars in Thousands) 1998 1997 1996 1997 1996 -------- -------- -------- ------- ----- Net interest income $13,442 $12,784 $11,842 5.15% 7.95% Provision for loan losses 19 190 868 (90.00) (78.11) Non-interest income 2,244 2,261 2,140 (.75) 5.65 Non-interest expense 10,371 9,313 9,272 11.36 .44 Income taxes 2,040 2,311 1,594 (11.73) 44.98 -------- -------- -------- ------- ----- Net Income $ 3,256 $ 3,231 $ 2,248 .77% 43.73% ======== ======== ======== ====== ====== INTEREST INCOME Westbank's earning assets include a diverse portfolio of interest earning instruments ranging from Westbank'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. Total interest income for 1998 amounted to $25,085,000 as compared to $23,156,000 for 1997 and $20,600,000 for 1996. For 1998 this represents an increase of $1,929,000 or 8% over 1997, while interest income increased by $2,556,000 or 12% in 1997 versus 1996. The increase in 1998 is the result of an increase in average earning assets of $33,646,000 or 12% offset by a decrease of 25 basis points in average earning interest rate. The increase in 1997 over 1996 is the result of an increase in average earning assets of $35,284,000 offset by a 12 basis point decrease in average earning interest rate. INTEREST EXPENSE Interest expense for 1998 on deposits and borrowings amounted to $11,643,000 as compared to $10,372,000 in 1997 and $8,758,000 for 1996. Interest expense increased by $1,271,000 or 12% during 1998 compared to 1997 and 1997 interest expense increased by $1,614,000 or 18% versus 1996. The 1998 increase is the result of an increase in average interest bearing 17 20 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries liabilities of $27,551,000 and a 2 basis point increase in the average rate of interest paid compared to 1997. The increase in interest expense during 1997 versus 1996 is the result of an increase of average interest bearing liabilities of $29,863,000 combined with a 14 basis point increase in average interest rate paid. NET INTEREST INCOME 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. Westbank's management 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 following table sets forth Westbank's net interest income: (Dollars in Thousands) 1998 1997 1996 ------- ------- ------- Total interest income $25,085 $23,156 $20,600 Total interest expense 11,643 10,372 8,758 ------- ------- ------- Net interest income $13,442 $12,784 $11,842 ======= ======= ======= The RATE/VOLUME ANALYSIS OF INTEREST MARGIN ON EARNING ASSETS section includes and sets forth each major category of interest earning assets and interest bearing liabilities which result in net interest income. [NET INTEREST INCOME BAR GRAPH] (In Thousands) 1998 1997 1996 ------- ------- ------- Net interest income $13,442 $12,784 $11,842 PROVISION FOR LOAN LOSSES The 1998 provision for loan losses totaled $19,000 compared with $190,000 in 1997, a decrease of 90%. During 1997, the provision decreased by $678,000 versus 1996 representing a decrease of 78%. The decrease in the provision for loan losses during 1998 is directly attributable to the decrease in non-performing loans and the overall credit quality of the Bank's loan portfolio. A full discussion appears previously under the headings of LOAN LOSS EXPERIENCE and NON-PERFORMING ASSETS. NON-INTEREST INCOME Income from sources other than interest was $2,244,000 in 1998, a decrease of $17,000 from the prior year and an increase of $104,000 versus 1996. Non-interest income for 1998 reflects an increase in Trust Department earnings of $33,000, a decrease in service charges on deposit accounts and other non-interest income of $65,000 and increases from the gain on sale of investments, other real estate and mortgages totaling $15,000 compared to 1997. NON-INTEREST EXPENSE The components of other operating expenses at December 31 are as follows: (Dollars in Thousands) 1998 1997 1996 ------- ------ ------ Salaries and benefits $ 5,115 $4,730 $4,376 Occupancy 643 633 648 Other real estate owned expenses and provision 58 63 484 Other non-interest expense 4,555 3,887 3,764 ------- ------ ------ $10,371 $9,313 $9,272 ======= ====== ====== Overall non-interest expense increased during 1998 by $1,058,000 versus 1997 and $1,099,000 compared to 1996. During 1998, salaries and benefits increased by $385,000 attributable to overall corporate growth and the staff requirements for the addition of two new branch offices during 1998. Occupancy remained level with 1997. Finally, other non-interest expense and depreciation and amortization expense increased in 1998 by $668,000, the result of the recognition of approximately $400,000 of merger expense related to the acquisition of Cargill Bancorp, Inc. combined with overall corporate growth during 1998. 18 21 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries INCOME TAXES For the year ended December 31, 1998 Westbank Corporation recorded a tax expense of $2,040,000 compared to 1997, when the Corporation recorded a tax expense of $2,311,000. The lower tax expense for 1998 was the result of a lower tax rate during 1998. NET INCOME The net income for 1998 of $3,256,000, or $.86 per share basic and $.84 per share diluted, is based on a weighted average of 3,767,605 basic and 3,861,590 diluted shares outstanding, compared with a net income for 1997 of $3,231,000, or $.93 per share basic and $.89 per share diluted based on a weighted average of 3,487,160 basic and 3,612,919 diluted. Net income in 1996 was $2,248,000, or $.68 per share basic and $.66 per share diluted and based on weighted average shares of 3,285,093 basic and 3,404,242 diluted. NEW ACCOUNTING STANDARDS The Corporation adopted two new accounting standards in 1998, Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, and No. 131, Disclosures about Segments of an Enterprise and Related Information. During 1998 the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 134, Accounting for Mortgage-Backed Securities retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. For further discussion see the Summary of Significant Accounting Policies in the Notes to the Financial Statements. YEAR 2000 The Corporation has taken steps to ensure that all of its computer systems (the "Systems") are ready to operate accurately on and beyond January 1, 2000. In the event that the Corporation's Systems are not Year 2000 compliant as of January 1, 2000, the Corporation would face significant operational difficulties. 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 services without interruption. While the Corporation has determined that many of the Systems are Year 2000 compliant, the Corporation has prepared an action plan (the "year 2000 Project") to ensure the continued integrity of its Systems. The Year 2000 Project includes 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 implementation phase. The Corporation relies on outside providers for the core banking software and data processing portions of the Systems. The Year 2000 Project applies to such vendors. The Year 2000 Project also includes a contingency plan to be implemented in the event that the Year 2000 Project reveals that any of the Systems are not Year 2000 compliant. In addition, in the event that, despite the Year 2000 Project, the Corporation experiences disruption due to Year 2000 problems, the Corporation is developing a business resumption plan, which should be complete by June 30, 1999. As of December 31, 1998, the Corporation has incurred approximately $113,000 in year 2000 related expenses, and has estimated that capital expenditures related to the year 2000 issue will total approximately $300,000. The Corporation has designed the Year 2000 Project 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 set forth above is designed to be a "year 2000 Readiness Disclosure", as that term is defined in the Year 2000 Information Readiness and Disclosure Act. This information is forward looking information, and, 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. 19 22 CONSOLIDATED BALANCE SHEETS Westbank Corporation and Subsidiaries December 31, (Dollars in Thousands, except share amounts) 1998 1997 -------- -------- ASSETS Cash and due from banks: Non-interest bearing $ 9,941 $ 9,603 Interest bearing 292 79 -------- -------- 10,233 9,682 Federal funds sold 48 3,678 -------- -------- Total cash and cash equivalents 10,281 13,360 -------- -------- Securities (Note 2): Investment securities available for sale 50,597 20,088 Investment securities held to maturity (fair value of $25,985 in 1998 and $34,655 in 1997) 25,820 34,503 -------- -------- Total securities 76,417 54,591 -------- -------- Loans, net of allowance for loan losses of $2,379 in 1998 and $2,848 in 1997 (Note 3) 257,045 228,164 Mortgage loans held for sale (Note 3) 2,261 4,251 Property and equipment (Note 4) 5,582 4,474 Other real estate owned, net of allowance for losses $200 in 1997 (Note 5) 224 149 Accrued interest receivable 2,173 1,968 Other assets 990 1,308 -------- -------- Total assets $354,973 $308,265 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (Note 6): Non-interest bearing $ 49,280 $ 48,638 Interest bearing 249,843 222,922 -------- -------- Total deposits 299,123 271,560 Borrowed funds (Note 7) 27,307 11,884 Interest payable on deposits 424 379 Other liabilities 818 691 -------- -------- Total liabilities 327,672 284,514 -------- -------- Commitments and contingent liabilities (Notes 12 and 13) Stockholders' equity (Notes 10, 11 and 15): Preferred stock, par value $5 per share, authorized 100,000 shares; none issued Common stock, par value $2 per share, authorized 9,000,000 shares; issued and outstanding 3,798,674 shares in 1998 and 3,581,377 shares in 1997 7,597 7,163 Additional paid-in capital 10,034 8,819 Retained earnings 9,461 7,708 Accumulated other comprehensive income (Note 2) 209 61 -------- -------- Total stockholders' equity 27,301 23,751 -------- -------- Total liabilities and stockholders' equity $354,973 $308,265 ======== ======== See notes to consolidated financial statements. 20 23 CONSOLIDATED STATEMENTS OF INCOME Westbank Corporation and Subsidiaries Years ended December 31, (Dollars in Thousands, except share amounts) 1998 1997 1996 ---------- ---------- ---------- Interest and dividend income: Interest and fees on loans $ 20,716 $ 19,735 $ 17,942 Interest and dividend income from securities 3,997 3,159 2,383 Interest from interest bearing cash and federal funds sold 372 262 275 ---------- ---------- ---------- Total interest and dividend income 25,085 23,156 20,600 ---------- ---------- ---------- Interest expense: Interest on deposits 9,942 9,227 7,701 Interest on certificates of deposit - $100,000 or more 1,086 859 802 Interest on borrowed funds 615 286 255 ---------- ---------- ---------- Total interest expense 11,643 10,372 8,758 ---------- ---------- ---------- Net interest income 13,442 12,784 11,842 Provision for loan losses (Note 3) 19 190 868 ---------- ---------- ---------- Net interest income after provision for loan losses 13,423 12,594 10,974 ---------- ---------- ---------- Non-interest income: Trust department income 498 465 425 Service charges on deposits 621 669 716 Gain on sale of securities available for sale 141 219 112 Gain on sale of other real estate owned (Notes 5) 43 67 3 Gain on sale of mortgages 119 2 4 Other non-interest income (Note 14) 822 839 880 ---------- ---------- ---------- Total non-interest income 2,244 2,261 2,140 ---------- ---------- ---------- Non-interest expense: Salaries and wages 4,309 3,927 3,647 Pension and employee benefits (Note 9) 806 803 729 Occupancy expense 643 633 648 Depreciation and amortization expense 733 653 618 Other real estate owned expenses (Note 5) 58 63 484 Other non-interest expense (Note 14) 3,822 3,234 3,146 ---------- ---------- ---------- Total non-interest expense 10,371 9,313 9,272 ---------- ---------- ---------- Income before income taxes 5,296 5,542 3,842 Income taxes (Note 8) 2,040 2,311 1,594 ---------- ---------- ---------- Net income $ 3,256 $ 3,231 $ 2,248 ========== ========== ========== Earnings per share (Note 11): - Basic $ .86 $ .93 $ .68 - Diluted $ .84 $ .89 $ .66 ========== ========== ========== Weighted average shares outstanding: - Basic 3,767,605 3,487,160 3,285,093 - Diluted 3,861,590 3,612,919 3,404,242 ========== ========== ========== See notes to consolidated financial statements. 21 24 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Westbank Corporation and Subsidiaries Accumulated Common Stock Additional Other (Dollars in Thousands, Par paid-in Retained Comprehensive except share amounts) Shares Value capital earnings Income Total --------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1995 3,221,603 $ 6,443 $ 7,141 $ 4,053 $ 66 $ 17,703 Net income 2,248 2,248 Cash dividends declared ($.24 per share) (784) (784) Shares issued: Stock option plan 30,584 61 25 86 Dividend reinvestment and stock purchase plan 94,615 190 467 657 Change in unrealized gain (loss) on securities available for sale (165) (165) --------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1996 3,346,802 6,694 7,633 5,517 (99) 19,745 Net income 3,231 3,231 Cash dividends declared ($.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 (loss) 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 3,256 3,256 Cash dividends declared ($.40 per share) (1,503) (1,503) Shares issued: Stock option plan 168,182 336 685 1,021 Dividend reinvestment and stock purchase plan 49,115 98 530 628 Changes in unrealized gain (loss) on securities available for sale 148 148 --------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1998 3,798,674 $ 7,597 $ 10,034 $ 9,461 $ 209 $ 27,301 ========= ========== ========== ========== ========== ========== See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in Thousands) 1998 1997 1996 ------ ------ -------- Net Income $3,256 $3,231 $ 2,248 ------ ------ -------- Unrealized gain (loss) on securities available for sale, net of income taxes (benefit) of $150 in 1998, $271 in 1997, and ($71) in 1996 240 303 (99) Less: reclassification adjustment for gains included in net income, net of income taxes of $49 in 1998, $76 in 1997, and $46 in 1996 92 143 66 ------ ------ -------- Other Comprehensive Income 148 160 (165) ------ ------ -------- Comprehensive Income $3,404 $3,391 $ 2,083 ====== ====== ======== See notes to consolidated financial statements. 22 25 CONSOLIDATED STATEMENTS OF CASH FLOWS Westbank Corporation and Subsidiaries Years ended December 31, (Dollars in Thousands) 1998 1997 1996 --------- -------- --------- Operating activities: Net income $ 3,256 $ 3,231 $ 2,248 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 19 190 868 Provision for other real estate owned 22 29 390 Depreciation and amortization 735 653 618 Realized gain on sale of securities (141) (219) (112) Realized gain on sale of other real estate owned (43) (67) (3) Realized gain on miscellaneous assets (83) Deferred income taxes (20) 74 461 Change in: Loans held for sale 1,990 (8,099) (279) Accrued interest receivable (205) (332) 22 Other assets 318 14 503 Interest payable on deposits 45 51 19 Other liabilities 127 115 (50) --------- -------- --------- Net cash provided (used) by operating activities 6,103 (4,360) 4,602 ========= ======== ========= Investing activities: Securities: Held to maturity: Purchases (18,485) (26,912) (11,329) Proceeds from maturities 27,168 13,704 8,243 Available for sale: Purchases (46,222) (8,155) (2,988) Proceeds from sales 8,607 10,019 2,857 Proceeds from maturities 4,024 2,160 6,858 Proceeds on sale of miscellaneous assets 296 Purchases of premises and equipment (1,843) (788) (1,030) Net increase in loans (25,858) (15,674) (26,484) Proceeds from sale of other real estate owned 295 166 1,145 --------- -------- --------- Net cash used in investing activities (52,314) (25,480) (22,432) ========= ======== ========= Financing activities: Net increase in deposits 27,563 16,069 27,529 Net increase in short-term borrowings 8,423 3,115 1,592 Increase in long-term borrowings 7,000 Proceeds from exercise of stock options and stock purchase plan 1,649 1,655 743 Dividends paid (1,503) (1,040) (784) --------- -------- --------- Net cash used by financing activities 43,132 19,799 29,08 --------- -------- --------- Increase (decrease) in cash and cash equivalents (3,079) (10,041) 11,250 Cash and cash equivalents at beginning of year 13,360 23,401 12,151 --------- -------- --------- Cash and cash equivalents at end of year $ 10,281 $ 13,360 $ 23,401 ========= ======== ========= Cash paid during the year: Interest on deposits and other borrowings $ 11,598 $ 10,035 $ 8,739 Income taxes 2,097 1,988 1,243 Supplemental disclosure of cash flow information: Securitization of loans into mortgage-backed securities 5,067 9,314 3,639 Transfers of loans to other real estate owned 392 134 1,115 Transfer of miscellaneous asset from other real estate owned to premises and equipment 291 Loans to facilitate the sale of other real estate owned 120 667 See notes to consolidated financial statements. 23 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Westbank Corporation and Subsidiaries 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Westbank Corporation (the "Corporation") and its subsidiaries are in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a description of the more significant policies. NATURE OF BUSINESS As of December 31, 1998, the Corporation operates thirteen banking offices located in Hampden County, Massachusetts 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. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary, Park West Bank and Trust Company ("Park West" or the "Bank"), its subsidiaries, Lorac Leasing Corp., Park West Securities Corporation and PWB&T Inc. All material intercompany balances and transactions have been eliminated upon consolidation. Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. The Corporation operates in one segment - a community bank offering different products and services. Since the Corporation derives a significant portion of its revenue and expense from the Bank, no meaningful allocation of its resources is possible. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of income and expenses for each year. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and other real estate owned, management obtains independent appraisals for significant properties. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for losses on loans and other real estate owned. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. NEW ACCOUNTING STANDARDS As of January 1, 1998, the Corporation adopted a Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying of comprehensive income and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for the way public companies report information about operating segments in both interim and annual financial statements and related disclosures. Adoption of these statements did not impact the Corporation's consolidated balance sheets, statements of income or cash flows and was limited to the form and content of its disclosures. Both statements were effective for fiscal years beginning after December 31, 1997 and required restatement of all prior periods presented to conform to the provisions of these statements. In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement established accounting and reporting standards for derivative instruments including derivative activities. This statement will be effective for the Corporation's fiscal 2000 financial statements. In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed Securities retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This statement further amends SFAS No. 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold these investments. This statement will be effective for the Corporation's 1999 financial statements. Management is currently evaluating the future impact of these standards. 24 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries CASH AND CASH EQUIVALENTS The Corporation defines cash and due from banks and federal funds sold to be cash and cash equivalents. The Bank is required to maintain average reserve balances with the Federal Reserve Bank. These balances can be in the form of either vault cash or funds left on deposit with the Federal Reserve Bank. The average amount of these balances was $2,380,000 for 1998. 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 Bank's own inventory of residential real estate loans are also considered available for sale. Gains and losses on sales of securities are recognized in other 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. 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. The Corporation does not engage in trading activities. LOANS Loans have been reduced by deferred loan fees and the allowance for loan losses. Interest on commercial and real estate loans is accrued on the principal amount of loans outstanding. Interest on installment and other loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as income over the life of the related loan as an adjustment to the loan's yield. Non-accrual loans are loans on which the accrual of interest ceases when the collection of principal or interest payments is determined to be doubtful by management. It is the general policy of the Corporation to discontinue the accrual of interest when principal or interest payments are delinquent 90 days unless the loan principal and interest are determined by management to be fully collectible. Any unpaid amounts previously accrued on these loans are reversed from income. Interest received on a loan in non-accrual status is applied to reduce principal or, if management determines that the principal is collectible, applied to interest on a cash basis. A loan is returned to accrual status after the borrower has brought the loan current and has demonstrated compliance with the loan terms for a sufficient period and management's doubts concerning collectibility have been removed. The Bank measures impairment of commercial loans by using 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. Smaller balance homogenous loans, including residential real estate and consumer loans, are collectively evaluated for impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Bank evaluates each impaired loan to determine the appropriate income recognition practice. Generally, income is recorded only on a cash basis for impaired loans. 25 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries The adequacy of the allowance for loan losses is evaluated regularly by management. Factors considered in evaluating the adequacy of the allowance include the size of the portfolio, previous loss experience, current economic conditions and their effect on borrowers, the financial condition of individual borrowers and the related performance of individual loans in relation to contract terms. The provision for loan losses charged to operating expense is based upon management's judgment of the amount necessary to maintain the allowance at a level adequate to absorb losses. Loan losses are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance charged to income. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method. Amortization of leasehold improvements is charged over the terms of the respective leases, including option periods or the estimated useful lives of the improvements, whichever is shorter. Gains and losses are recognized upon disposal of assets. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals are capitalized. OTHER REAL ESTATE OWNED Other real estate owned ("OREO") includes properties the Bank has acquired through foreclosure. OREO is recorded at the lower of cost or fair value at the date of acquisition, less estimated selling costs. At the time of foreclosure, the excess, if any, of the loan amount over the fair value of the asset acquired is charged off against the allowance for loan losses. Operating expenses to administer OREO properties are charged directly to operating expenses. Valuation allowances are established subsequent to acquisition, as necessary, based upon management's continuing assessment of the fair values of the properties. Loans granted in conjunction with sales of OREO are required to comply with the Bank's standard underwriting criteria, including receipt of an adequate down payment. LOAN SALES AND SERVICING RIGHTS The Bank sells loans in the secondary market and retains the related servicing rights. Mortgage servicing rights are recognized as an asset when loans are sold with servicing retained, by allocating the cost of an originated mortgage loan between the loan and the servicing right based on estimated relative fair values. The cost allocated to the servicing right is capitalized as a separate asset and amortized in proportion to, and over the period of, estimated net servicing income. Capitalized mortgage servicing rights are evaluated for impairment by comparing the asset's unamortized cost to its current estimated fair value. Fair values are estimated using a discounted cash flow approach, which considers future servicing income and costs, current market interest rates, and anticipated prepayment and default rates. In making impairment evaluations, mortgage servicing rights are stratified based on one or more of the predominant risk characteristics of the underlying loans. The Bank has stratified its servicing portfolio for this purpose between fixed and adjustable rate loans. Impairment losses, if any, are recognized through a valuation allowance for each impaired stratum. Adjustments to the valuation allowance are charged or credited to income. INCOME TAXES The asset and liability method of accounting for income taxes is utilized. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance will be established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 26 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries PENSION PLAN The Corporation has a trusteed defined contribution pension plan covering substantially all employees. The Corporation's policy is to fund accrued pension cost. STOCK OPTIONS The Corporation measures compensation cost of stock options on the intrinsic value of the common stock options granted. Intrinsic value is the excess of the market value of the common stock over the exercise price. Because stock options are granted with fixed terms and with an exercise price equal to the market price of the common stock at the date of grant, there is no measured compensation cost of stock options. The pro forma disclosures for net income and earnings per share as if a fair value based method of accounting had been applied are contained in these notes to the consolidated financial statements. TRUST DEPARTMENT Assets held by the Corporation for customers in a fiduciary or agency capacity are not included in the consolidated financial statements, as such items are not assets of the Corporation. Such assets totaled approximately $119,797,000 and $117,234,000 at December 31, 1998 and 1997, respectively. Trust income is recognized on a cash basis. The amounts recognized under this method are not materially different from amounts that would be recognized on the accrual basis. EARNINGS PER SHARE Basic earnings per share is the result of dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all potentially dilutive common shares that were outstanding during the year. 2 - SECURITIES Investment securities held to maturity at December 31 are as follows: 1998 GROSS GROSS NET AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED (Dollars in Thousands) COST GAINS LOSSES VALUE GAIN - - ---------------------- --------- ---------- ---------- ------- ---------- U.S. Government obligations $ 998 $ 28 $ 1,026 $ 28 Federal agency obligations 24,692 131 24,823 131 Mortgage-backed securities 130 6 136 6 --------- ---------- ---------- ------- ---------- $25,820 $ 165 $25,985 $165 ========= ========== ========== ======= ========== 1997 GROSS GROSS NET AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED (Dollars in Thousands) COST GAINS LOSSES VALUE GAIN - - ---------------------- --------- ---------- ---------- -------- ---------- U.S. Government obligations $ 4,246 $ 35 $1 $ 4,280 $ 34 Federal agency obligations 30,081 117 8 30,190 109 Mortgage-backed securities 176 9 185 9 --------- ---------- ---------- -------- ---------- $34,503 $161 $9 $34,655 $152 ========= ========== ========== ======== ========== During 1998 and 1997 there were no sales of investment securities classified as held to maturity. 27 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries Investment securities available for sale at December 31 are as follows: 1998 GROSS GROSS NET AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED (Dollars in Thousands) COST GAINS LOSSES VALUE GAIN/(LOSS) --------- ---------- ---------- -------- ---------- U.S. Government obligations $ 928 $ 928 Federal agency obligations 25,579 $118 $86 25,611 $ 32 Equity securities 1,377 29 1,406 29 Mortgage-backed securities 22,358 297 3 22,652 294 --------- ---------- ---------- -------- ---------- $50,242 $444 $89 $50,597 $355 ========= ========== ========== ======== ========== 1997 GROSS GROSS NET AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED (Dollars in Thousands) COST GAINS LOSSES VALUE GAIN/(LOSS) --------- ---------- ---------- -------- ---------- U.S. Government obligations $ 2,058 $ 2,058 Federal agency obligations 3,500 $ 3 $17 3,486 $ (14) Equity securities 1,303 22 1,325 22 Mortgage-backed securities 13,122 97 13,219 97 --------- ---------- ---------- -------- ---------- $19,983 $122 $17 $20,088 $105 ========= ========== ========== ======== ========== During 1998 and 1997, the Corporation recognized gross gains on securities available for sale totaling $141,000 and $219,000, respectively. The contractual maturities of securities, other than equity securities, as of December 31, 1998 are summarized in the following tables. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations. For the purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their contractual maturities because of principal repayments. AMORTIZED FAIR (Dollars in Thousands) COST VALUE - - --------------------- --------- --------- Held to Maturity: Within 1 year $ 499 $ 505 Over 1 year to 5 years 3,692 3,762 Over 5 years to 10 years 21,629 21,718 --------- --------- Total bond and debt obligations $25,820 $25,985 ========= ========= AMORTIZED FAIR (Dollars in Thousands) COST VALUE - - --------------------- --------- --------- Available for Sale: Within 1 year $ 2,428 $ 2,423 Over 1 year to 5 years Over 5 years to 10 years 21,079 21,161 Over 10 years 25,358 25,607 --------- --------- Total bond and debt obligations $48,865 $49,191 ========= ========= At December 31, 1998 securities with a book value and fair value of $17,998,000 and $18,092,000, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes as required by law. 28 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consisted of the following at December 31: (Dollars in Thousands) 1998 1997 --------- --------- Commercial $ 41,348 $ 41,031 Real estate construction 5,596 5,249 Real estate 196,416 173,263 Consumer 18,632 15,991 --------- --------- 261,992 235,534 Allowance for loan losses (2,379) (2,848) Deferred loan origination fees (307) (271) --------- --------- $ 259,306 $ 232,415 ========= ========= Changes in the allowance for loan losses are summarized as follows: (Dollars in Thousands) 1998 1997 1996 ------ ------ ------- Balance, beginning of year $2,848 $2,481 $ 3,707 Provision for loan losses 19 190 868 Loans charged off (564) (633) (2,463) Recoveries 76 810 369 ------ ------ ------- $2,379 $2,848 $ 2,481 ====== ====== ======= The aggregate principal balance of non-accrual loans was $473,000, $1,042,000 and $2,079,000 at December 31, 1998, 1997 and 1996, respectively. Contractual interest income which was not recognized on such non-accrual loans was $22,000, $59,000 and $178,000 for 1998, 1997 and 1996, respectively. The Corporation did not sell any loans with recourse during 1998 or 1997. The remaining recourse exposure on prior sales was $2,007,000 at December 31, 1998. Management does not believe that its recourse obligations subject the Corporation to any material risk of loss in the future. The Corporation has suffered no losses as a result of these recourse obligations. Of the $202,012,000 in real estate loans at December 31, 1998, $138,618,000 are collateralized by 1-4 family dwellings. The majority of the collateral for these loans is located in the Bank's direct market area of Western Massachusetts. Commercial real estate and real estate construction loans represented $62,538,000 in outstanding principal at December 31, 1998. These loans encompass a wider region extending throughout Massachusetts and Southern New England. Most are collateralized by commercial real estate developments. Commercial loans both collateralized and uncollateralized of $41,348,000 at December 31, 1998 represent loans made to businesses in Western Massachusetts. The Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with its directors and officers. Such loans, in the opinion of management, do not include more than the normal risk of collectibility nor other unfavorable features. The following summarizes the activity with respect to indebtedness, both direct and indirect, for directors, policy-making officers and major stockholders during the years ended December 31: (Dollars in Thousands) 1998 1997 ------- -------- Balance at beginning of year $2,043 $ 1,162 New loans granted 735 2,880 Repayments of principal (118) (1,999) ------- -------- Balance at end of year $2,660 $ 2,043 ======= ======== 29 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries At December 31, 1998 and 1997, the recorded investment in impaired loans was $473,000, and $960,000, respectively, for which no additional specific allowance for loan losses was recorded. For the twelve months ended December 31, 1998, 1997 and 1996, the average recorded investment in impaired loans was $487,000, $1,272,000 and $3,267,000, respectively. Interest income recognized during 1998, 1997 and 1996 on impaired loans was not significant. The Corporation had no commitments to lend additional funds to borrowers having loans which are on non-accrual status, are impaired or restructured. The Corporation services loans for others which are not included in the consolidated balance sheets. The unpaid balances of these loans totaled $111,250,000 and $128,442,000 at December 31, 1998 and 1997, respectively. 4 - PROPERTY AND EQUIPMENT Major classes of property and equipment at December 31 are summarized as follows: ESTIMATED (Dollars in Thousands) 1998 1997 LIVES -------- ------ ----------- Property (including land of $1,388 in 1998 and $1,029 in 1997) $ 4,159 $3,163 30-40 years Furniture and equipment 3,403 3,063 3-10 years Leasehold and building improvements 2,707 2,516 5-15 years Motor vehicles 100 105 3 years -------- ------ ----------- 10,369 8,847 -------- ------ ----------- Accumulated depreciation 4,787 4,373 -------- ------ ----------- Property and Equipment $ 5,582 $4,474 ======== ====== =========== 5 - OTHER REAL ESTATE OWNED At December 31, other real estate owned consisted of properties acquired through foreclosure as follows: (Dollars in Thousands) 1998 1997 - - ---------------------- ---- ---- Real estate acquired through foreclosure - net of OREO provision $224 $149 - - ---------------------- ---- ---- Changes in the allowance for other real estate owned losses are summarized as follows: (Dollars in Thousands) 1998 1997 1996 ------ ----- ------- Balance, beginning of year $ 200 $195 $ 65 Provision for other real estate owned charged to operations 22 29 390 Write-downs (net of payments) (222) (24) (260) ------ ----- ------- Balance, end of year $ $200 $ 195 ====== ===== ======= 30 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 6 - DEPOSITS Deposit accounts by type as of December 31 are summarized as follows: (Dollars in Thousands) 1998 1997 -------- -------- Demand deposit $ 49,280 $ 48,638 Savings 42,909 35,151 N.O.W. 18,455 15,853 Money market deposits 29,045 25,167 IRA'S 30,339 28,582 Other time deposits 129,095 118,169 -------- -------- $299,123 $271,560 ======== ======== At December 31, 1998, the scheduled maturities of other time deposits and IRA deposits with a fixed maturity are as follows: (Dollars in Thousands) - - ------------------------------- 1999 $116,547 2000 22,049 2001 9,291 2002 2,323 2003 and after 12 - - -------------- -------- $150,222 ======== Certificates of deposit with balances greater than or equal to $100,000 amounted to $24,589,000 and $17,682,000 as of December 31, 1998 and 1997, respectively. Interest paid on these deposits totaled approximately $1,086,000 and $894,000, respectively. 7 - BORROWED FUNDS Short term borrowings as of December 31 are as follows: (Dollars in Thousands) 1998 1997 ------- ------- Securities sold under agreements to repurchase $11,953 $ 8,020 Purchased federal funds 270 270 FHLB Advance, 5.18% 6,810 Treasury tax and loan notes 1,274 3,594 ------- ------- Total short term borrowings $20,307 $11,884 ======= ======= The above short term borrowings mature daily. The following information relates to long-term debt as of December 31, 1998: (Dollars in Thousands) ------ FHLB Term advance 5.87% due 5/12/03 $7,000 ====== 31 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries The following table summarizes borrowings. Average interest rates during each year were computed by dividing total interest expense by the average amount borrowed: (Dollars in Thousands) 1998 1997 1996 ------- ------- --------- Balance at year end $27,307 $11,884 $ 8,769 Average amount outstanding 16,186 8,989 8,603 Maximum amount outstanding at any month-end 27,307 13,536 12,294 Average interest rate for the year 3.80% 3.18% 2.95% Average interest rate on year-end balance 3.79% 3.15% 2.89% The Corporation maintains lines of credit with the Fleet Bank of Massachusetts for $3,000,000 and the Bank of Boston for $1,500,000. Both are revolving lines of credit with no set expiration date. There were no amounts outstanding against either line as of December 31, 1998 or 1997. The Bank had additional short term borrowing capacity through the Federal Home Loan Bank of $6,301,000 through its Ideal Way program that was unused at year end 1998. Advances from the Federal Home Loan Bank of Boston (FHLB) are collateralized by the Company's holdings of FHLB stock and residential real estate loans. 8 - INCOME TAXES The income taxes (benefits) were as follows: (Dollars in Thousands) 1998 1997 1996 ------ ------ ----- Current tax: Federal $1,796 $1,836 $ 917 State 264 403 317 ------ ------ ------ Total current 2,060 2,239 1,234 ------ ------ ------ Deferred tax: Deferred taxes (20) 74 461 Change in valuation allowance for deferred tax assets (2) (101 ------ ------ ------ Total deferred (20) 72 360 ------ ------ ------ Total income taxes $2,040 $2,311 $1,594 ====== ====== ====== The differences between the effective tax rate and the federal statutory tax rate on income before taxes are reconciled as follows: 1998 1997 1996 ---- ---- ---- Federal statutory rate 34.0% 34.0% 34.0% Change in valuation allowance for deferred tax asset 1.0 State income taxes, net of federal benefit 4.0 6.0 7.0 Other .5 .7 ---- ---- ---- 38.5% 41.7% 41.0% ==== ==== ==== 32 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31 are presented below: (Dollars in Thousands) 1998 1997 ----- ----- Deferred tax assets: Other real estate owned $ 84 Deferred loan fees $ 122 112 State tax net operating loss carryforward 99 Non-accrual interest 11 48 Amortization 12 Other 95 39 ----- ----- Total gross deferred tax assets 240 382 Valuation allowance (99) ----- ----- Net deferred tax assets 240 283 ----- ----- Deferred tax liabilities: Bond accretion 8 17 Unrealized gain on securities 146 44 Depreciation 179 150 Allowance for loan losses 193 249 Deferred FNMA premium 4 5 Prepaid pension 26 ----- ----- Total gross deferred tax liabilities 530 491 ----- ----- Net deferred tax liability $(290) $(208) ===== ===== In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets and liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Corporation will realize the benefits of these deductible differences, net of the recorded valuation allowance. 9 - PENSION PLAN The Bank has a defined contribution pension plan (money purchase), covering substantially all of its employees. Contributions to the pension plan are a percentage of individual employees' salary. Total pension expense for 1998, 1997 and 1996 amounted to $212,000, $201,000 and $213,000, respectively. At May 31, 1998, the most recent plan year end, total plan assets were $3,671,379 and the vested balance was $3,568,546. The pension plan assets are invested in money market funds, government bonds, corporate and government agency bonds and marketable securities. 10 - STOCK OPTIONS The Corporation has three fixed option plans which reserve shares of common stock for issuance to executives, key employees and directors. During 1998, 1997 and 1996 no compensation cost was required to be recognized for the stock option plans. Had compensation costs for the Corporation's three stock option plans been determined based on the fair value at the grant date for awards in 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the Corporation's net earnings and earnings per share would have been as follows: (Dollars in Thousands, except per share data) 1998 1997 1996 --------- --------- --------- Net earnings -- as reported $ 3,256 $ 3,231 $ 2,248 Net earnings -- pro forma $ 2,708 $ 3,136 $ 1,966 Earnings per share -- as reported - Basic $ .86 $ .93 $ .68 - Diluted $ .84 $ .89 $ .66 Earnings per share -- pro forma - Basic $ .72 $ .90 $ .60 - Diluted $ .70 $ .87 $ .58 33 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries The Corporation offers shares of common stock to officers and key employees pursuant to the 1985 Incentive Stock Option Plan. As of December 31, 1998, all options granted are exercisable. The following is a summary of the changes in options outstanding: 1998 1997 1996 --------- -------- -------- Options granted and exercisable at the beginning of the year 191,466 277,122 307,706 Options exercised: at $2.00 (27,741) (16,268) at $2.50 (350) (27,450) (9,200) at $3.50 (20,302) (5,116) at $6.00 (146,832) (10,163) --------- -------- -------- Options granted and exercisable at the end of the year 44,284 191,466 277,122 ========= ======== ======== Unless exercised the options will expire ten years after granting. No options are available for future grants. The Corporation adopted a Directors Stock Option Plan during 1995. The following is a summary of the changes in options outstanding under the Directors Stock Option Plan: 1998 1997 199 -------- -------- ------ Options granted and exercisable at the beginning of the year 53,000 44,000 33,000 Options granted and exercisable: at $6.00 at $7.125 11,000 at $9.375 11,000 at $12.875 9,000 at $14.75 3,000 Options exercised at $6.00 (15,000) (2,000) at $7.125 (2,000) at $9.375 (2,000 -------- -------- ------ Options granted and exercisable at the end of the year 46,000 53,000 44,000 ====== ====== ====== Options available for future grants 58,000 70,000 81,000 ====== ====== ====== Unless exercised, the options will expire twenty years after granting. The Corporation adopted an incentive stock option plan during 1996 for directors and employees. At the 1998 Annual Meeting of Shareholders the 1996 Incentive Stock Option Plan was amended to increase the number of shares reserved for issuance by 200,000 shares. The following is a summary of the changes in the 1996 Incentive Stock Option Plan: 1998 1997 1996 -------- -------- -------- Options outstanding at the beginning of the year 36,500 45,500 Options authorized 200,000 178,500 ======== ======== ======== Options granted and exercisable at the beginning of the year 141,500 133,000 -------- -------- -------- Options granted and exercisable to directors at $8.00 11,000 Options granted and exercisable to employees at $8.125 122,500 Options granted and exercisable to directors at $9.00 9,000 Options granted and exercisable to directors at $15.25 10,000 Options granted and exercisable to employees at $13.375 107,000 Options exercised at $8.125 (500) Options exercised at $8.00 (2,000) Options terminated (500) ======== ======== ======== Options granted and exercisable at the end of the year 256,500 141,500 133,000 ======== ======== ======== Options available for future grants 119,500 36,500 45,500 ======== ======== ======== 34 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 11 - EARNINGS PER SHARE The following is a reconciliation of the shares and earnings per share utilized for the basic and diluted earnings per share computations: Shares Per Share --------- --------- Basic Earnings Per Share: 1998 3,767,605 $.86 1997 3,487,160 .93 1996 3,285,093 .68 Effect of Dilutive Option Shares: 1998 93,985 $.02 1997 125,759 .04 1996 119,149 .02 Diluted Earnings Per Share: 1998 3,861,590 $.84 1997 3,612,919 .89 1996 3,404,242 .66 12 - LEASES The Corporation leases certain facilities under long-term operating lease agreements. The following is a schedule of future minimum lease payments for such operating leases as of December 31, 1998: (Dollars in Thousands) - - ---------------------- 1999 $ 256 2000 255 2001 154 2002 141 2003 75 After 2003 169 ------ Total minimum lease payments $1,050 ====== Rent expense for 1998, 1997 and 1996 amounted to $237, $236 and $223, respectively. 13 - COMMITMENTS, CONTINGENT LIABILITIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business, various commitments and contingent liabilities are outstanding, such as guarantees, standby letters of credit, commitments to extend credit and various financial instruments with off-balance-sheet risk that are not reflected in the financial statements. Financial instruments with off-balance-sheet risk involve elements of credit risk, interest rate risk, liquidity risk and market risk. Management does not anticipate any significant losses as a result of these transactions. The following table summarizes the contractual value of financial instruments and other commitments at December 31: (Dollars in Thousands) 1998 1997 -------- -------- Commitments to grant loans $ 8,740 $ 9,629 Stand-by letters of credit and financial guarantees 1,012 1,022 Commitments to advance funds under existing loan agreements 31,055 29,210 The Bank uses the same credit policies in making commitment and conditional obligations as it does for on-balance-sheet instruments. 35 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may be expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property plant and equipment and income-producing commercial properties. Certain litigation is pending against the Corporation. Management, after consultation with legal counsel, does not anticipate that any ultimate liability arising out of such litigation will have a material effect on the Corporation's financial condition or results of operations. 14 - OTHER NON-INTEREST INCOME AND EXPENSE The components of other non-interest income and expense, which are in excess of 1% of the aggregate of total interest income and non-interest expense and not shown separately on the consolidated statements of income, are as follows: Years Ended December 31, (Dollars in Thousands) 1998 1997 1996 - - ---------------------- ---- ---- ---- Income: Loan servicing fees $451 $472 $484 Expenses: Service bureau expense 707 654 556 Merger related expenses 396 Professional fees 322 Advertising 349 314 321 Supplies 292 242 15 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") addresses the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning internal controls, accounting, and operations. Both the Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's or Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (as defined in the regulations) of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. 36 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries As of December 31, 1998, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios. There are no conditions or events since that notification that management believes have changed the institution's category. The Corporation's and the Bank's actual capital amounts and ratios are also presented in the following table: MINIMUM CAPITAL TO BE CONSIDERED WELL CAPITALIZED UNDER PROMPT MINIMUM CAPITAL CORRECTIVE ACTION ACTUAL ADEQUACY PURPOSES PROVISIONS (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - - ---------------------- ------ ----- ------ ----- ------ ----- DECEMBER 31, 1998 TOTAL CAPITAL (TO RISK WEIGHTED ASSETS): BANK $27,890 12.20% $18,291 8.00% $22,864 10.00% HOLDING COMPANY 29,471 12.80 18,415 8.00 N/A N/A TIER I CAPITAL (TO RISK WEIGHTED ASSETS): BANK 25,510 11.16 9,146 4.00 13,718 6.00 HOLDING COMPANY 27,092 11.77 9,207 4.00 N/A N/A TIER I CAPITAL (TO AVERAGE ASSETS): BANK 25,510 7.24 14,102 4.00 17,628 5.00 HOLDING COMPANY 27,092 7.64 14,176 4.00 N/A N/A December 31, 1997 Total Capital (To risk weighted assets): Bank $ 24,535 11.97% $ 16,397 8.00% $ 20,496 10.00% Holding Company 26,277 12.71 16,535 8.00 N/A N/A Tier I Capital (To risk weighted assets): Bank 21,969 10.70 8,198 4.00 12,298 6.00 Holding Company 23,690 11.44 8,268 4.00 N/A N/A Tier I Capital (To average assets): Bank 21,969 7.04 12,493 4.00 15,617 5.00 Holding Company 23,690 7.55 12,544 4.00 N/A N/A On November 19, 1997, the Board of Directors of the Corporation adopted an Amended and Restated Shareholder Rights Plan (the "rights Plan"). Pursuant to the terms of the Rights Plan, the Board of Directors declared a dividend distribution to stockholders of record as of the close of business on December 4, 1997 (the "Record Date") of one Preferred Stock Purchase Right (a "Right") for each outstanding share of Common Stock of the Corporation. In addition, one Right automatically attaches to each share of Common Stock issued subsequent to the Record Date, until November 19, 2007. Each Right entitles the registered holder to purchase from the Corporation, a unit of one ten-thousandths of a share (a "Unit") of Series A Junior Participating Cumulative Preferred Stock, par value $5.00 per share ("Preferred Stock"), at a cash exercise price of $60.00 per share of Common Stock, subject to adjustment. The Corporation has reserved 12,000 shares of Preferred Stock for issuance upon exercise of the Rights. 37 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries Currently, the Rights are not exercisable and are attached to and trade with the outstanding shares of Common Stock. The Rights will separate from the Common Stock and become exercisable upon the earliest to occur of (i) the close of business on the tenth calendar day following the first public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of 15% or more of the outstanding shares of the Corporation's Common Stock (an "Acquiring Person"), (ii) the close of business on the tenth business day (or such date as the Board of Directors may determine) following the commencement of a tender offer or exchange offer that would result upon its consummation in a person or a group becoming the beneficial owner of 15% of the outstanding shares of the Corporation's Common Stock, (iii) the determination by the Board of Directors that any person is an "Adverse Person." Upon the occurrence of any one of the above events, each holder of a Right (other than the Acquiring Person or the Adverse Person, as the case may be) is entitled to acquire such number of Units of the Preferred Stock of the Corporation which are equivalent to such number of shares of Common Stock having a value twice the current exercise price of the Right. If the Corporation is acquired in a merger or other business combination transaction after any such event, each holder of a Right is then entitled to purchase at the then current exercise price, shares of the acquiring companies common stock having a value of twice the exercise price of the Right. Until a Right is exercised, the holder has no rights as a stockholder of the Corporation (beyond those rights as an existing stockholder), including the right to vote or to receive dividends. While the distribution of the Rights is not taxable to stockholders or to the Corporation, stockholders may, depending upon the circumstances, recognize taxable income in the event the Rights become exercisable for Units, other securities of the Corporation, other consideration or for shares of common stock of an acquiring company. The Rights may be redeemed in whole by the Corporation, under certain circumstances, at a price of $.001 per Right. The Rights and the Rights Plan expire on November 19, 2007. 16 - EMPLOYEE STOCK OWNERSHIP PLAN The Corporation established an Employees' Stock Ownership Plan ("ESOP"). The ESOP has been funded by a $100 contribution from the Corporation. At December 31, 1998 and 1997, the ESOP held no shares of the Corporation's stock. 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments. The following table represents the carrying amount and estimated fair value of the Corporation's financial instruments at December 31: 1998 1997 ---- ---- CARRYING ESTIMATED CARRYING ESTIMATED (Dollars in Thousands) AMOUNT FAIR VALUE AMOUNT FAIR VALUE --------- ---------- -------- ---------- Assets: Cash and due from banks $ 10,233 $ 10,233 $ 9,682 $ 9,682 Federal funds sold 48 48 3,678 3,678 Investment securities held to maturity 25,820 25,985 34,503 34,655 Investment securities available for sale 50,597 50,597 20,088 20,088 Loans 259,306 265,971 232,415 233,841 Accrued interest receivable 2,173 2,173 1,968 1,968 Liabilities: Deposits 299,123 300,286 271,560 272,097 Borrowed funds 27,307 27,471 11,884 11,884 Interest payable on deposits 424 424 379 379 CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD The carrying amount for cash and due from banks and for federal funds sold approximates fair value and mature in 90 days or less. INVESTMENT SECURITIES The fair value of securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. 38 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries LOANS Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories. The fair value of performing loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, including loans held for sale, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. Fair value for significant non-performing loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. ACCRUED INTEREST RECEIVABLE, INTEREST PAYABLE ON DEPOSITS The carrying amount for these items approximate the fair value due to their short-term nature. DEPOSITS The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, regular savings, NOW accounts, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. BORROWED FUNDS The fair value of such borrowings was estimated by utilizing future cash flows discounted using the Bank's current borrowing rate for similar instruments. For short-term borrowings the carrying amount approximates the fair value due to their short-term nature. COMMITMENTS TO EXTEND CREDIT The stated value of commitments to extend credit approximates fair value as the current fees charged for similar commitments does not differ significantly from quoted fees. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Such differences are not considered significant. 18 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION 1998 1997 ------------------------------------------- -------------------------------------------- (Dollars in Thousands, except per share amounts) Q1 Q2 Q3 Q4 YEAR Q1 Q2 Q3 Q4 YEAR ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- Interest income $5,842 $6,264 $6,561 $6,418 $25,085 $5,428 $5,698 $5,979 $6,051 $23,156 Interest expense 2,579 2,982 3,161 2,921 11,643 2,411 2,534 2,740 2,687 10,372 ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- Net interest income 3,263 3,282 3,400 3,497 13,442 3,017 3,164 3,239 3,364 12,784 Provision for loan losses 19 19 150 40 190 Non-interest income 608 598 542 496 2,244 506 485 565 705 2,261 Non-interest expense 2,455 2,458 2,483 2,975 10,371 2,293 2,323 2,397 2,300 9,313 ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- Income before income taxes 1,397 1,422 1,459 1,018 5,296 1,080 1,286 1,407 1,769 5,542 Income taxes 558 537 549 396 2,040 443 549 589 730 2,311 ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- Net income $ 839 $ 885 $ 910 $ 622 $ 3,256 $ 637 $ 737 $ 818 $1,039 $ 3,231 ====== ====== ====== ====== ======= ====== ====== ====== ====== ======= Earnings per share - Basic $ .22 $ .24 $ .24 $ .16 $ .86 $ .19 $ .22 $ .23 $ .29 $ .93 - Diluted $ .22 $ .23 $ .24 $ .16 $ .84 $ .18 $ .21 $ .22 $ .28 $ .89 ====== ====== ====== ====== ======= ====== ====== ====== ====== ======= 39 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 19 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS December 31, (Dollars in Thousands) 1998 1997 BALANCE SHEETS Assets Cash $ 20 $ 31 Investment in subsidiaries 25,719 22,030 Other investments 922 1,372 Other assets 762 339 ------- ------- Total assets 27,423 $ 23,772 ======= ======= Liabilities $122 $ 21 ------- ------- Stockholders' equity Preferred stock - none Common stock, par value $2 per share 7,597 7,163 Additional paid-in capital 10,034 8,819 Retained earnings 9,461 7,708 Accumulated other comprehensive income 209 61 ------- ------- Stockholders' equity 27,301 23,751 ------- ------- Total liabilities and stockholders' equity $27,423 $23,772 ======= ======= 1998 1997 1996 -------- ------ -------- STATEMENTS OF INCOME Dividend from subsidiary $ $ 520 $ 520 Interest income 85 38 19 Other income (expense) - net (510) (114) (117) -------- ------ -------- Income (loss) before taxes and undistributed income of subsidiaries (425) 444 422 Income tax benefit 140 24 Undistributed income of subsidiaries 3,541 2,787 1,802 -------- ------ -------- Net income $ 3,256 $3,231 $ 2,248 ======== ====== ======== 1998 1997 1996 -------- -------- -------- STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income $ 3,256 $ 3,231 $ 2,248 Operating activities: Equity in income of subsidiaries (3,541) (2,787) (1,802) Increase in other assets (423) (32) (307) Increase in other liabilities 101 13 8 -------- -------- -------- Net cash provided by (used in) operating activities (607) 425 147 -------- -------- -------- Cash flows from investing activities: Investment securities (purchases) maturities 450 (1,039) (88) -------- -------- -------- Cash flows from financing activities: Proceeds from stock options exercised 1,119 270 86 Proceeds from dividend reinvestment and optional stock purchases 530 1,385 657 Dividends paid (1,503) (1,040) (785) -------- -------- -------- Net cash (used in) provided by financing activities 146 615 (42) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (11) 1 17 Cash and cash equivalents at the beginning of the year 31 30 13 -------- -------- -------- Cash and cash equivalents at the end of the year $ 20 $ 31 $ 30 ======== ======== ======== 40 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 20 - ACQUISITION OF CARGILL BANCORP, INC. The Corporation completed the acquisition of Cargill Bancorp, Inc. ("Cargill") on January 29, 1999. Cargill served as the holding company for Cargill Bank, which will continue to operate its three banking offices in Northeastern Connecticut and will retain its name and Connecticut charter as a separate subsidiary of the Corporation. Under the terms of the merger agreement, each share of Cargill will be exchanged for 1.3655 shares of the Corporation. Westbank will issue a total of 400,164 shares. The Corporation will account for the acquisition as a pooling of interests, and as such, future consolidated financial statements will include Cargill's financial data as if Cargill had been combined at the beginning of the earliest period presented. The pro forma combined accounts in the table below are presented for informational purposes and are not necessarily indicative of the results of operations of the combined company that would have actually occurred had the merger been consummated as of the earliest period presented. The pro forma combined amounts are not necessarily indicative of future results of the combined company. No adjustments have been included in the pro forma combined company financial statements for anticipated operating cost savings. Westbank's fiscal year ends December 31 and Cargill's fiscal year ends September 30. The unaudited pro forma financial data combines the financial information of Westbank at and for the fiscal years ended December 31, 1998, 1997, and 1996 with financial information of Cargill for the fiscal years ended September 30, 1998, 1997, and 1996. The following table sets forth the unaudited pro forma results of operations of the combined entities: Years Ended December 31, (In thousands, except per share data) WESTBANK CARGILL COMBINED --------- ------- -------- 1998: NET INTEREST INCOME $13,442 $1,897 $15,339 NET INCOME 3,256 121 3,377 DILUTED EARNINGS PER SHARE .84 .40 .79 1997: Net interest income $ 12,784 $1,849 $ 14,633 Net income 3,231 153 3,384 Diluted earnings per share .89 .54 .85 1996: Net interest income $ 11,842 $1,693 $ 13,535 Net income (loss) 2,248 (111) 2,137 Diluted earnings (loss) per share .66 (.42) .57 41 44 INDEPENDENT AUDITORS' REPORT Westbank Corporation and Subsidiaries The Stockholders and Board of Directors, Westbank Corporation We have audited the accompanying consolidated balance sheets of Westbank Corporation and Subsidiaries (the "Corporation") as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Westbank Corporation and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Hartford, Connecticut January 29, 1999 42 45 CORPORATE DIRECTORY Westbank Corporation and Subsidiaries DIRECTORS WESTBANK CORPORATION AND PARK WEST BANK AND TRUST COMPANY ALFRED C. WHITAKER Chairman of the Board WESTBANK CORPORATION Sales Consultant ROLAND O. ARCHAMBAULT President PINNACLE RACEWAY MARK A. BEAUREGARD Attorney at Law RESNIC, BEAUREGARD, WAITE & DRISCOLL DAVID R. CHAMBERLAND President CHICOPEE BUILDING SUPPLY, INC. DONALD R. CHASE President and Chief Executive Officer WESTBANK CORPORATION President and Chief Executive Officer PARK WEST BANK AND TRUST COMPANY LEROY F. JARRETT President and Treasurer (Retired) NEW ENGLAND CHURCH INTERIORS ERNEST N. LAFLAMME, JR. Treasurer CITY OF CHICOPEE G. WAYNE MCCARY President and CEO EASTERN STATES EXPOSITION PAUL J. MCKENNA, D.M.D. Orthodontist ROBERT J. PERLAK Private Investor GEORGE R. SULLIVAN Executive Vice President SULLIVAN PAPER COMPANY, INC. JAMES E. TREMBLE President VALLEY CINEMA, INC. OFFICERS WESTBANK CORPORATION ALFRED C. WHITAKER Chairman of the Board Assistant Corporate Clerk ERNEST N. LAFLAMME, JR. Vice Chairman of the Board DONALD R. CHASE President and Chief Executive Officer JOHN M. LILLY Treasurer and Chief Financial Officer ROBERT J. PERLAK Corporate Clerk OFFICERS PARK WEST BANK AND TRUST COMPANY DONALD R. CHASE President and Chief Executive Officer ROBERT J. PERLAK Corporate Clerk ALFRED C. WHITAKER Assistant Clerk FINANCE DIVISION JOHN M. LILLY Executive Vice President and Treasurer IRVING M. WALKER, JR., CMA Accounting Officer LOAN DIVISION GARY L. BRIGGS Executive Vice President PAUL M. ACCORSI Senior Vice President DAVID M. BARSZCZ Vice President CLIFFORD R. BORDEAUX Assistant Vice President GERARD E. DRAPEAU Vice President RICHARD N. HANCHETT Vice President MICHAEL M. LEFEBVRE Vice President JOSEPH S. LEMAY Assistant Vice President JOHN E. O'BRIEN Loan Operations Officer RESIDENTIAL REAL ESTATE STANLEY F. OSOWSKI Senior Vice President WOLFGANG A. ADAMETZ Vice President LOAN CREDIT & COLLECTION TRENTON E. TAYLOR Senior Vice President PATRICIA A. NEBOSKY Assistant Vice President EDP/OPERATIONS S. STEVEN KONIECKI Senior Vice President MARKETING JOSEPH L. ROLAK Director of Marketing and Vice President COMPLIANCE JANE M. KNAPP Vice President BRANCH ADMINISTRATION/ HUMAN RESOURCES KATHLEEN A. JALBERT Senior Vice President DEBORAH A. KUMIEGA Assistant Vice President H. ELLEN BELLOWS Branch Manager GARY B. SZYMANIAK Community Banking Officer AUDITING DIVISION LLOYD S. HALL, CBA Director of Auditing TRUST DIVISION ROBERT A. GIBOWICZ Senior Trust Officer 43 46 CORPORATE INFORMATION Westbank Corporation and Subsidiaries WESTBANK CORPORATION Westbank Tower, 225 Park Avenue West Springfield, MA 01089-3310 (413) 747-1400 ANNUAL MEETING The Annual Meeting of Stockholders of Westbank Corporation will be held on Wednesday, April 21, 1999 at nine o'clock in the morning at the Carriage House at Storrowton Tavern, 1305 Memorial Avenue, West Springfield, Massachusetts. TRANSFER AGENT AND REGISTRAR Park West Bank and Trust Company -- Trust Department INDEPENDENT AUDITORS Deloitte & Touche LLP Hartford, Connecticut CORPORATE COUNSEL Doherty, Wallace, Pillsbury and Murphy, P.C. Springfield, Massachusetts INFORMATION SERVICE Westbank Corporation welcomes stockholder and public interest in our services and activities. Questions pertaining to material presented in this Report and requests for a copy of the Annual Report (Form 10-K) filed with the Securities and Exchange Commission should be directed to John M. Lilly, Treasurer and Chief Financial Officer, at the above address EQUAL OPPORTUNITY EMPLOYER The Corporation has maintained its commitment to equal opportunity and affirmative action in employment and personnel policies and pledges to recruit, hire, train and promote persons in all job classifications without regard to race, color, religion, sex, national origin, veterans status, age or handicap. COMMON STOCK - MARKET INFORMATION The table below shows cash dividend data and the range of bid prices by quarter for the Corporation's common stock. The source of the bid ranges is the local newspaper's listing of the NASD regional market quotations: 1998 1997 BID BID --------------------------- -------------------------- HIGH LOW DIVIDEND HIGH LOW DIVIDEND ------- ------- -------- ------- ------- -------- First $17 1/4 $12 $ 0.10 $10 $ 8 3/4 $0.075 Second 16 5/8 13 7/8 0.10 9 1/2 8 1/2 0.075 Third 14 3/4 10 3/8 0.10 11 8 5/8 0.075 Fourth 13 9 3/8 0.10 13 5/8 10 5/8 0.075 The above quotations of the Corporation's common stock represent prices between dealers. They do not include retail markup, markdown or commissions. At January 31, 1999 the Corporation had 1,202 stockholders. Westbank Corporation's common stock is traded on the NASDAQ National Market Exchange, the trading symbol is "WBKC". For information on the Westbank Corporation Dividend Reinvestment and Stock Purchase Plan, call: Park West Bank and Trust Company, Trust Department (413) 747-1482. The following firms make a market in Westbank Corporation's Common Stock: Advest, Inc. First Albany Corporation McConnell, Budd & Downes, Inc. Keefe, Bruyette & Woods, Inc. 44 47 Design: Robert Farrell Associates, Inc./Printing: Sterling Press 48 [WESTBANK CORPORATION LOGO]