1 WESTBANK CORPORATION 1999 ANNUAL REPORT A YEAR OF GROWTH AND PERFORMANCE 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 - 42 Independent Auditors' Reports ...................................... 43 Corporate Directory ................................................ 44 Corporate Information .............................................. IBC ON THE COVER Longevity and continued growth most often are accomplished through perseverance, strong roots and the ability to withstand the elements. During the nineties, Westbank's management and the Board of Directors provided the Corporation with a strong foundation and the ability to flourish and rise above the crowd. 3 FINANCIAL HIGHLIGHTS Westbank Corporation and Subsidiaries FOR THE YEAR ENDED DECEMBER 31 (Dollars in Thousands) 1999 1998 1997 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Net income $ 4,167 $ 3,377 $ 3,384 Net interest income 17,121 15,339 14,633 Non-interest income 2,330 2,427 2,529 Non-interest expense 12,598 12,200 11,066 Provision for loan losses 77 41 306 YEAR END DECEMBER 31 (Dollars in Thousands) - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Investments and mortgage-backed securities $ 81,320 $ 84,328 $ 60,213 Loans, net 438,567 293,113 268,254 Allowance for loan losses 3,908 2,665 3,057 Total assets 576,150 402,623 355,567 Total deposits 478,896 342,267 314,679 Total stockholders' equity 31,543 30,490 26,918 COMMON SHARE INFORMATION Basic weighted average shares outstanding 4,244,402 4,143,009 3,845,698 Basic earnings per share $ .98 $ .82 $ .88 (Asset/Loans/Deposits Growth Bar Chart) (in thousands) Year Assets Loans Deposits - - - - - - - - - - - - - - - - - ---- ------ ----- -------- 1995 $299,590 $233,527 $269,478 1996 331,803 254,948 298,014 1997 355,567 268,254 314,679 1998 402,623 293,113 342,267 1999 576,150 438,567 478,896 1 4 CHAIRMAN'S AND PRESIDENT'S LETTER Westbank Corporation and Subsidiaries Dear Shareholder, Some years are distinguished by solid financial achievements, others by the execution of strategies that position a company's future. In 1999, we accomplished both with a dedicated, talented team of employees and a loyal group of shareholders. Together, we have built a franchise that continues to grow in strength and long-term value. In that context, 1999 was a year of across-the-board achievement with record earnings, strong asset growth, continued excellence in operating efficiency and two strategic bank acquisitions: Cargill Bancorp, Inc., of Putnam, Connecticut and the New London Trust, F.S.B., in Danielson, Connecticut. We improved our competitive position in terms of both GROWTH and PERFORMANCE. The future belongs to those who achieve excellence through commitment and action. Net income for the year ended December 31, 1999, totaled $4.2 million or $0.98 per basic share, an increase of $790 thousand or 23% compared to $3.4 million or $0.82 per basic share for 1998. As of December 31, 1999, assets totaled $576.2 million, an increase of $173.5 million or 43% compared to year-end 1998, while loans grew by $145.4 million or 50% and totaled $438.6 million. Deposits increased to $478.9 million at year-end, representing growth of $136.6 million or 40% compared to the same period in 1998. Stockholders' equity totaled $31.5 million and the Corporation's capital ratio was 6.39%, while book value totaled $7.36. The significant growth in assets and deposits is the result of the acquisition of Cargill Bancorp, Inc. and the Connecticut division of New London Trust, F.S.B., as well as an aggressive and effective marketing campaign. Operating income increased by $1.7 million, while operating expense growth was limited to less than 4% during 1999. The strategy by which we achieved such results is simple to state: HARD WORK. Equally important this past year was the successful capital-raising venture totaling $17 million through the Westbank Corporation trust preferred securities, which were issued to support the acquisition of the New London Trust offices. The company's strength was reflected in our 1999 financial performance. The strong rate of growth, driven by successful strategic acquisitions, was a determining factor in the financial performance achieved during a period in which we integrated the acquired banks and confronted the Year 2000 (Y2K) issue. This strong performance supports Westbank's mission to achieve superior financial returns for our investors and build shareholder value. The ongoing creation of value for the Corporation's shareholders is the key measure of success. As shareholders, you expect it. Three elements to creating value are: - - - - - - - - - - - - - - - - - - Investing corporate resources wisely, - - - - - - - - - - - - - - - - - - Planning for the future and - - - - - - - - - - - - - - - - - - Providing fully personalized service and business execution. The success of the Corporation was, in large part, a result of strategic initiatives undertaken in the early 1990's, ongoing investments in personnel, our branch network, new financial products and technology. At Westbank, we depend on technology to enhance products and services and to help contain delivery costs. The Corporation committed considerable resources to the challenges surrounding the Year 2000 (Y2K) issue. We were prepared for a smooth transition into the next millennium and accomplished this without incident. Investments in technology are imperative in most industries, especially banking. We are pleased to announce that we will be introducing a fully integrated Internet banking program with which you can access your accounts and conduct banking transactions from your home or your business. We also will be implementing a debit card program that will further enhance our delivery system for individuals and businesses. Our subsidiary banks will continue to concentrate their efforts on the line of business we know well: corporate banking. At Park West Bank and Trust Company, we have built a strong and reliable middle market lending capability and developed a strong credit culture that emphasizes credit quality. We will replicate this successful formula at Cargill Bank in the northeastern Connecticut banking market. Cargill and New London Trust were traditional thrift banks who emphasized residential lending. We intend to build upon those strengths and add the corporate banking product lines to this new market in order to compete more effectively for market share and growth. Critical to our success is our excellent staff of commercial lenders who have built strong relationships with the customers they serve. The numbers speak for themselves, but at the heart of the effort are the well-trained, experienced and innovative loan professionals who make it happen each and every day. However, building on these positive results will require a strong effort, as we anticipate increased levels of competitive pressure in every area of traditional lending. Spurred by favorable interest rates through most of the year and an effective construction loan radio advertising campaign, Westbank became a leader in residential construction loans in western Massachusetts, with residential mortgage originations reaching near record levels of production. Westbank continues to differentiate itself from the competition on the basis of customer service and product delivery. As measured by delinquency and loss experience, loan quality has remained consistently favorable. We also look for growth in the Bank's portfolio of serviced loans, where Westbank administers loans sold into the secondary market. In addition to being an excellent source of fee income, this activity makes possible ongoing contact with borrowers and creates excellent opportunities to cross-sell other Bank products and services. 2 5 With Westbank Corporation stock being traded on NASDAQ, the stock price did not reflect the Bank's strong performance in 1999 but, instead, followed the general trends in financial stocks. To be sure, the year now ended witnessed the continuation - indeed, the acceleration - of the remarkable bull market in technology stocks, thus adversely affecting the small cap financial stocks. We are mindful of the opportunities faced by investors as they value Westbank Corporation stock vis-a-vis technology stocks. While it simply is not possible to accurately forecast this environment, it is possible to place it in the context of the past and for the investor in a well-managed commercial community bank, willing to assume average risks in search for above-average rewards. None of us can predict the future with accuracy, nor can we be certain that the past will be its prologue. With stock value in mind, on February 16, 2000, the Corporation implemented a Stock Repurchase Program of its common stock. The Company intends to repurchase up to 5% of the outstanding shares of its common stock or approximately 214,000 of its outstanding shares. The Stock Repurchase Program is being implemented because the Company believes the common stock is a good long-term investment opportunity for the Company, based on the current market price of the common stock. The Corporation has reviewed the impact on return on equity and earnings per share of this Stock Repurchase Program and, based on the price-to-book value ratio of the common stock, believes the investment in the common stock is an appropriate use of the Company's funds relative to other investment opportunities available to the Company at this time, given current market and economic conditions. As a result, the Company believes that the common stock will provide an acceptable return that generally is equal to or more attractive than similarly safe and sound investments. The Company intends to conduct its repurchase from shareholders through registered broker-dealers in open market purchase transactions. The Company will hold the shares as treasury shares and may use such shares to fund any stock benefit or compensation plan, to provide shares for either stock dividends or the Company's dividend reinvestment plan, or for any other purpose deemed advisable by the Company's Board of Directors. The Company believes the repurchase of the shares to be consistent with its objectives to enhance long-term stockholder value. The retirement of Leroy F. Jarrett, one of the Bank's founding Directors, brought to a close a thirty-nine-year career at Westbank Corporation. Roy served with distinction on various corporate committees, including the Executive Committee. He also was the Vice Chairman of the Board from 1991 to 1995. We are grateful to him for his many contributions, integrity and hard work. [PHOTO OF DONALD R. CHASE] Donald R. Chase The banking industry has entered the new millennium faced with many challenges. The industry expects higher interest rates as the Federal Reserve attempts to slow economic growth and control inflation. A tight labor market is expected to continue and productivity is projected to rise. Internet banking will continue to grow and thrive as society embraces the use of e-commerce. Westbank intends to roll out its own Internet banking solution this year. The pressure to gain and retain market share will continue to be as intense as ever, with new competitors emerging. As the market value of small cap bank stocks improves, mergers and acquisitions will accelerate. Westbank is positioned to take advantage of these opportunities when presented. While much of our success will be determined by events beyond our control, such as the performance of the financial markets, we can control our corporate strategy and we can manage an organization to implement it successfully. So, as we stand on the brink of a new millennium, with the aspirations that accompany such thresholds, we stand at the very pinnacle of our success. We are confident that the strategy that has provided such outstanding results for our shareholders in the past decade will continue to do precisely that in the decade that lies ahead. We appreciate your loyalty, confidence and support of Westbank Corporation. Sincerely, /s/ DONALD R. CHASE /s/ ERNEST N. LAFLAMME, JR. DONALD R. CHASE ERNEST N. LAFLAMME, JR. President and Chairman of the Board 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. On January 29, 1999, Westbank became the owner of all the outstanding stock of Cargill Bank (hereinafter sometimes referred to as "Cargill"), a state chartered savings and loan association. PARK WEST BANK AND TRUST COMPANY 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, 1999, amounted to $113,008,000 and is not included in the accompanying financial statements since such items are not assets of the Bank. CARGILL BANK Cargill is a Connecticut state chartered savings and loan association headquartered in Putnam, Connecticut. Cargill is a member of the FDIC and is subject to regulation by the State of Connecticut Department of Banking and the Office of Thrift Supervision ("OTS"). On October 29, 1999, Cargill completed its purchase of certain assets and assumption of certain liabilities of New London Trust, F.S.B., including two branches in Putnam and Danielson, Connecticut, with such assets totaling $106,000,000. Cargill provides a full range of retail banking services to individuals, businesses and nonprofit organizations through five banking offices located in Windham County, Connecticut. Such services include a wide range of checking and savings accounts, loans, safe deposit facilities and automated teller machines at all branch locations. Cargill also provides lending, depository and related financial services to commercial, industrial, financial and governmental customers. In the lending area, these services 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. EMPLOYEES As of December 31, 1999, the Corporation and its subsidiaries had the equivalent of 186 full-time officers and staff. COMPETITION Westbank's banking, real estate activity and trust services are competitive with other western Massachusetts and northeast Connecticut financial institutions. Its service area is in western Massachusetts and northeast Connecticut. 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. 4 7 SELECTED CONSOLIDATED FINANCIAL DATA Westbank Corporation and Subsidiaries Year ended December 31, (Dollars in Thousands, except share amounts) 1999 1998 1997 1996 1995 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Interest and dividend income $ 32,437 $ 28,631 $ 26,724 $ 24,059 $ 23,475 Interest expense 15,316 13,292 12,091 10,524 10,145 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Net interest income 17,121 15,339 14,633 13,535 13,330 Provision for loan losses 77 41 306 944 2,907 Non-interest income 2,330 2,427 2,529 2,340 3,104 Non-interest expense 12,598 12,200 11,066 11,278 9,969 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 6,776 5,525 5,790 3,653 3,558 Income taxes 2,609 2,148 2,406 1,516 1,132 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 4,167 $ 3,377 $ 3,384 $ 2,137 $ 2,426 ================================================================================================================================ Common share data: Earnings per share: Basic $ .98 $ .82 $ .88 $ .59 $ .69 Diluted $ .96 $ .79 $ .85 $ .57 $ .67 Cash dividends declared $ .40 $ .40 $ .30 $ .24 $ .20 Ending book value $ 7.36 $ 7.26 $ 6.84 $ 6.19 $ 5.80 AT DECEMBER 31: Total loans -- net $ 438,567 $ 293,113 $ 268,254 $ 254,948 $ 233,527 Total assets 576,150 402,623 355,567 331,803 299,590 Total non-performing assets 2,881 1,494 2,025 3,791 8,655 Total deposits 478,896 342,267 314,679 298,014 269,478 Total borrowings 46,546 27,807 11,884 9,269 7,677 Mandatory redeemable trust preferred stock 17,000 Total stockholders' equity 31,543 30,490 26,918 22,717 20,786 AVERAGE FOR YEAR: Loans 349,614 284,629 270,066 246,366 232,423 Assets 450,691 382,924 348,561 313,063 297,676 Deposits 384,410 335,110 312,725 280,855 269,105 Stockholders' equity 31,187 29,229 24,638 21,777 19,741 Weighted shares outstanding - Basic 4,244,402 4,143,009 3,845,698 3,643,270 3,539,919 - Diluted 4,333,326 4,272,682 4,003,015 3,762,419 3,630,052 SELECTED RATIOS: Rate of return on average total assets .92% .88% .97% .68% .81% Rate of return on average stockholders' equity 13.36% 11.55% 13.73% 9.81% 12.29% Average total stockholders' equity to average total assets 6.92% 7.63% 7.07% 6.96% 6.63% Allowance for loan losses to total loans at year end .88% .90% 1.13% 1.05% 1.65% Non-performing loans as a percentage of total loans at year end .56% .37% .68% 1.23% 2.89% Net charge-offs (recoveries) as a percentage of average loans .14% .15% (.02)% .88% 1.03% Other real estate owned as a percentage of total assets .08% .12% .10% .19% .53% 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. Effective January 29, 1999, Cargill Bancorp, Inc., and its subsidiary ("Cargill") were merged with and into Westbank Corporation, pursuant to a plan of merger dated July 15, 1998. Each share of Cargill common stock was converted into 1.3655 shares of the Corporation's common stock. Approximately 400,164 of Westbank common shares were issued for the outstanding common stock of Cargill. The transaction was accounted for using the pooling-of-interests method and, accordingly, all historical financial data has been restated to include both entities for all periods presented. The restatement of the historical data is based on Westbank's fiscal year-end December 31 and Cargill's fiscal year-end September 30 for all periods prior to 1999. On October 29, 1999, Cargill Bank completed its acquisition of the Connecticut division of New London Trust, F.S.B. The two New London Trust offices became part of Cargill Bank, increasing its number of offices to five. The acquisition resulted in $106 million of assets (loans of $84 million) and $106 million of liabilities being acquired as of October 29, 1999. The Corporation has accounted for this acquisition on the purchase accounting method. For 1999, the Corporation reported net income of $4,167,000, or $.98 per share basic and $.96 diluted, after providing $77,000 for loan losses. This compares to net income for 1998 of $3,377,000, or $.82 per share basic and $.79 diluted. The Corporation's 1998 earnings reflected a provision for loan losses of $41,000. Net interest income increased $1,782,000 from 1998 to 1999. Non-interest expense amounted to $12,598,000 in 1999 compared to $12,200,000 in 1998, an increase of $398,000, or 3.3%. The increase in operating expenses for 1999 is a result of the overall growth of the Corporation. Non-interest income declined by $97,000 compared to 1998. During 1999, Trust Department earnings were level with 1998. Gains on sale of investments, other real estate and sale of mortgages declined by $174,000, while service charges on deposit accounts, other non-interest income and loan servicing fees increased by $73,000 compared to 1998. Income taxes in 1999 totaled $2,609,000, an increase of $461,000 versus 1998. At December 31, 1999, the Corporation's total assets were $576,150,000, an increase of $173,527,000 or 43%, from $402,623,000 at year-end 1998. The higher level of assets resulted primarily from the acquisition of the New London Trust offices totaling approximately $106,000,000 and normal operating growth of approximately $68,000,000. The growth in assets was funded largely by the assumption of New London Trust deposits of $106,000,000 and overall deposit growth at the banking subsidiaries. Non-performing assets amounted to $2,881,000 or .50% of total assets at December 31, 1999, compared with $1,494,000 or .37% at the end of 1998. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") imposes significant regulatory restrictions and requirements on banking institutions insured by the FDIC and their holding companies. FDICIA established capital categories into which financial institutions are placed based on capital level. Each capital category establishes different degrees of regulatory restrictions which can apply to a financial institution. As of December 31, 1999, Park West's and Cargill's capital was at a level that placed each 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) 1999 1998 1997 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Stockholders' Equity Common stock $ 8,567 $ 8,397 $ 7,865 Additional paid-in-capital 11,633 11,076 9,711 Retained earnings 13,317 10,803 9,282 Accumulated other comprehensive income (loss) (1,974) 214 60 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Total Capital $ 31,543 $ 30,490 $ 26,918 =============================================================================== Ratio of capital to average total assets 6.92% 7.53% 7.44% 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 and a portion of the mandatory redeemable preferred stock; total risk-based, or supplementary capital includes not only the equity but also a portion of the allowance for loan losses and a portion of the mandatory redeemable preferred stock. The following are the Corporation's risk-based capital ratios at December 31: 1999 1998 1997 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Tier 1 risk-based capital (minimum required 4%) 10.17% 11.94% 11.57% Total risk-based capital (minimum required 8%) 12.50% 13.00% 12.77% 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 and investments, rate-insensitive checking accounts as well as a combination of fixed and variable rate deposit products and borrowed funds. 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 that 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, 1999 and 1998: Percentage Change in Change in Interest Rates Net Interest Income (In Basis Points) 1999 1998 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- +200 (3.00)% (5.21)% Level 0% 0% -200 2.00% (0.71)% The change in net interest income between 1999 and 1998 when rates decline 200 basis points was primarily the result of the low interest rate environment during 1998. In the prior year, many deposit rates were not able to be decreased by the full 200 basis points. The inability to reduce deposit rates would have caused 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, 1999, 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 $ 1,662 $ 15,555 $ 64,103 $ 81,320 Interest bearing cash 275 $ 695 177 1,147 Loans 64,473 64,848 150,082 163,072 442,475 Federal funds sold 13,389 13,389 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------- 79,799 65,543 165,814 227,175 538,331 INTEREST BEARING LIABILITIES Savings deposits 8,657 77,909 86,566 NOW accounts 3,108 27,974 31,082 Money market accounts 32,694 32,694 Other time deposits 96,995 127,450 44,466 268,911 Borrowed funds and preferred stock 39,547 7,000 17,222 63,769 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------- $ 169,236 $ 139,215 $ 157,349 $ 17,222 $ 483,022 ============================================================================================================= Interest Rate Sensitivity Gap $ (89,437) $ (73,672) $ 8,465 $ 209,953 $ 55,309 Cumulative Interest Rate Sensitivity Gap (89,437) (163,109) (154,644) 55,309 Interest Rate Sensitivity Gap Ratio (16.61)% (13.69)% 1.57% 39.00% 10.27% Cumulative Interest Rate Sensitivity Gap Ratio (16.61)% (30.30)% (28.73)% 10.27% The presentation of a run off and repricing of savings accounts and NOW accounts is based on the Corporation's historical experience with $8,657,000 and $3,108,000, 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. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY - INTEREST RATES AND INTEREST DIFFERENTIAL The following table presents the condensed average balance sheets for 1999, 1998 and 1997. 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: 9 12 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries 1999 1998 1997 AVERAGE Average Average INTEREST YIELD/ Interest Yield/ Interest Yield/ AVERAGE INCOME/ RATE Average Income/ Rate Average Income/ Rate (Dollars in Thousands) BALANCE EXPENSE PAID Balance Expense Paid Balance Expense Paid - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Securities: U.S. Treasury $ 812 $ 49 6.03% $ 3,663 $ 221 6.03% $ 6,978 $ 430 6.16% Federal agencies 69,536 4,638 6.67 61,856 3,994 6.46 42,072 2,833 6.73 Tax exempt federal (a) 284 20 7.04 Other securities 1,910 155 8.12 4,969 304 6.12 3,835 240 6.26 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total securities 72,542 4,862 6.70 70,488 4,519 6.41 52,885 3,503 6.62 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Interest-bearing cash and temporary investments 2,559 123 4.81 792 29 3.66 1,340 73 5.45 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Loans: (b) Commercial 52,356 4,221 8.06 41,129 3,810 9.26 38,058 3,640 9.56 Tax exempt federal (a) 2,191 198 9.04 Real estate 258,639 20,120 7.78 213,377 17,400 8.15 205,984 17,153 8.33 Consumer 36,428 2,815 7.73 30,123 2,435 8.08 26,024 2,100 8.07 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total loans 349,614 27,354 7.82 284,629 23,645 8.31 270,066 22,893 8.48 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Federal funds sold 3,287 171 5.20 7,761 438 5.64 4,800 255 5.31 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets 428,002 $32,510 7.60% 363,670 $28,631 7.87% 329,091 $26,724 8.12% - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (3,019) (2,920) (2,840) Cash and due from banks 12,033 11,120 10,888 Other assets 13,675 11,054 11,422 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $450,691 $382,924 $348,561 ================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings $ 63,611 $ 1,742 2.74% $ 50,588 $ 1,382 2.73% $ 47,020 $ 1,160 2.47% Money market 29,465 883 3.00 31,663 1,195 3.77 17,132 572 3.34 Negotiated rate certificates 34,934 1,754 5.02 22,977 1,118 4.87 18,528 922 4.98 Other time deposits 202,834 9,296 4.58 181,085 8,967 4.95 184,165 9,146 4.97 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total time deposits 330,844 13,675 4.13 286,313 12,662 4.42 266,845 11,800 4.42 Borrowed funds/preferred stock 33,001 1,641 4.97 16,906 630 3.73 9,065 291 3.21 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 363,845 15,316 4.21 303,219 13,292 4.38 275,910 12,091 4.38 Demand deposits 53,566 48,797 45,880 Other liabilities 2,093 1,679 2,133 Stockholders' equity 31,187 29,229 24,638 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $450,691 $382,924 $348,561 ================================================================================================================================== Net interest income 17,194 15,339 14,633 Yield spread 3.49% 3.49% 3.74% Net yield on earning assets 4.02% 4.22% 4.45% Deduct tax equivalent adjustment 73 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $17,121 $15,339 $14,633 ================================================================================================================================== (a) Tax equivalent basis. Interest income on non-taxable investment securities and loans includes the effects of the tax equivalent adjustments using the marginal federal tax rate of 34% in adjusting tax exempt interest income to a fully taxable basis. (b) 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 1999, the yield spread remained level at 3.49% versus 1998. The Corporation's net interest margin decreased during 1999 to 4.02% from 4.22% in 1998, a decrease of 20 basis points. During 1998, the yield spread declined to 3.49% from 3.74% in 1997, down 25 basis points. The Corporation's net interest margin decreased during 1998 to 4.22% from 4.45% in 1997, a decrease of 23 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 1999 as compared with 1998 and 1998 compared with 1997. 1999 Compared With 1998 1998 Compared With 1997 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Increase Due to* Increase Due to* (Dollars in Thousands) 1999 1998 (Decrease) Volume Rate 1998 1997 (Decrease) Volume Rate - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Interest earned: Securities: U.S. Treasury $ 49 $ 221 $ (172) $ (172) $ 221 $ 430 $ (209) $ (200) $ (9) Federal agencies 4,638 3,994 644 510 $ 134 3,994 2,833 1,161 1,281 (120) Tax exempt federal 20 20 20 Other securities 155 304 (149) (227) 78 304 240 64 69 (5) Interest-bearing cash 123 29 94 82 12 29 73 (44) (24) (20) Loans: Commercial 4,221 3,810 411 947 (536) 3,810 3,640 170 286 (116) Tax exempt federal 198 198 198 Real estate 20,120 17,400 2,720 3,552 (832) 17,400 17,153 247 600 (353) Consumer 2,815 2,435 380 490 (110) 2,435 2,100 335 332 3 Federal funds sold 171 438 (267) (235) (32) 438 255 183 166 17 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- 32,510 28,631 3,879 5,165 (1,286) 28,631 26,724 1,907 2,510 (603) - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Interest expense: Savings 1,742 1,382 360 356 4 1,382 1,160 222 93 129 Money market 883 1,195 (312) (80) (232) 1,195 572 623 540 83 Negotiated rate certificates 1,754 1,118 636 600 36 1,118 922 196 218 (22) ` Other time deposits 9,296 8,967 329 1,028 (699) 8,967 9,146 (179) (142) (37) Borrowed funds 1,641 630 1,011 749 262 630 291 339 285 54 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- 15,316 13,292 2,024 2,653 (629) 13,292 12,091 1,201 994 207 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $17,194 $15,339 $1,855 $2,512 $ (657) $15,339 $14,633 $ 706 $1,516 $(810) ================================================================================================================================== * 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 1999 increased to $17,194,000, up 12% from $15,339,000 in 1998. An 18% increase in average earning assets and a 27 basis point decline in average rate of return resulted in an increase in volume of $5,165,000 and a decrease in rate of $1,286,000. An increase of 20% in average interest-bearing liabilities and a 17 basis point decline in average rate of interest paid contributed to an increase in volume of $2,653,000 and in increase in rate of $629,000. Net interest income for 1998 increased to $15,339,000, up 5% from $14,633,000 in 1997. An 11% increase in average earning assets and a 25 basis point decline in average rate of return resulted in an increase in volume of $2,510,000 and a decrease in rate of $603,000. An increase of 10% in average interest-bearing liabilities and a 1 basis point increase in average rate of interest paid contributed to an increase in volume of $994,000 and an increase in rate of $207,000. 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. 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, 1999 of the securities portfolio. The following table shows the amortized cost (in thousands) of the Corporation's securities held to maturity at December 31: 1999 1998 1997 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- U. S. Government obligations $ 499 $ 998 $ 4,246 Federal agency obligations 9,459 26,890 32,927 Mortgage-backed securities 1,846 2,728 2,330 Other debt securities 99 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Amortized cost $11,804 $30,616 $39,602 ================================================================================ The following table shows the fair value (in thousands) of the Corporation's securities available for sale at December 31: 1999 1998 1997 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- U. S. Government obligations $ 11 $ 928 $ 2,058 Federal agency obligations 50,379 26,667 3,486 Mortgage-backed securities 16,504 24,372 13,502 Municipal bonds 598 Equity securities 2,024 1,745 1,664 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- 69,516 53,712 20,710 Gross unrealized (gain) loss on securities available for sale 3,053 (352) (104) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Amortized cost $ 72,569 $ 53,360 $ 20,606 =============================================================================== The following table shows weighted average yields and maturity distribution of debt securities at December 31, 1999: 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 5.5% $11 6.39% $ 499 6.37% $ 510 Federal agency obligations 6.44 14,028 6.89% $45,183 6.41% $ 3,000 6.77 62,211 Mortgage-backed securities 6.67 1,053 6.84 790 6.36 17,170 6.40 19,013 Municipal bonds 4.59 615 4.59 615 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------ Total debt Securities 5.5% $11 6.46% $15,580 6.86% $46,588 6.37% $20,170 6.67% $82,349 ============================================================================================================================== 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: 1999 1998 1997 1996 1995 ===================================================================================================== Commercial $ 56,276 $ 41,760 $ 41,661 $ 36,153 $ 36,080 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------- Real Estate: Construction 5,952 5,998 5,302 6,662 8,526 Residential (1-4 family) 263,832 168,744 152,896 153,781 132,530 Commercial properties 85,385 60,348 55,127 45,506 51,059 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------- Total Real Estate 355,169 235,090 213,325 205,949 192,115 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------- Consumer 31,556 19,277 16,648 15,943 9,701 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------- Gross loans 443,001 296,127 271,634 258,045 237,896 Deferred loan origination fees-net of costs (526) (349) (323) (398) (445) - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------- Total Loans 442,475 295,778 271,311 257,647 237,451 Allowance for loan losses (3,908) (2,665) (3,057) (2,699) (3,924) - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------- Net loans $ 438,567 $ 293,113 $ 268,254 $ 254,948 $ 233,527 ===================================================================================================== 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 and Northeastern Connecticut areas. The aggregate amount of loans to executive officers, directors and organizations with which they are associated amounted to $3,266,000 or 10.4% of stockholders' equity as of December 31, 1999, compared to $3,041,000 or 10% as of December 31, 1998. 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, 1999: (Loan Mix Pie Chart) (in thousands) Residential Real Estate...............$269,784 Commercial Loans...................... 56,276 Commercial Real Estate................ 85,385 Consumer Loans........................ 31,556 12 Months 1 - 5 After (Dollars in Thousands) or Less Years 5 Years Total =================================================================================== Commercial $42,723 $12,229 $ 1,324 $56,276 Commercial real estate-construction 5,952 5,952 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------- Totals $48,675 $12,229 $ 1,324 $62,228 =================================================================================== Of the commercial loans which mature beyond one year, approximately $13,157,000 have fixed rates and the remaining $396,000 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 $4,604,000 and $38,827,000, respectively, at December 31, 1999 and $9,281,000 and $31,457,000, respectively, in 1998. See further discussion in Note 14 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 of 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, 1999, 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) 1999 1998 1997 1996 1995 ========================================================================================================================== Balance at beginning of year $ 2,665 $ 3,057 $ 2,699 $ 3,924 $ 3,402 Provision charged to expense 77 41 306 944 2,907 Acquisition 1,669 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- 4,411 3,098 3,005 4,868 6,309 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- Charge-offs: Loans secured by real estate 78 318 394 1,745 2,180 Construction/land development 190 12 Commercial and industrial loans 455 153 250 510 246 Consumer loans 90 47 116 94 122 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- 623 518 760 2,539 2,560 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- Recoveries: Loans secured by real estate 79 42 354 324 24 Construction/land development 14 14 75 Commercial and industrial loans 15 30 445 12 51 Consumer loans 12 13 13 20 25 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- 120 85 812 370 175 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- Net charge-offs (recoveries) 503 433 (52) 2,169 2,385 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 3,908 $ 2,665 $ 3,057 $ 2,699 $ 3,924 ========================================================================================================================== Average loans outstanding $ 349,614 $ 284,629 $ 270,066 $ 246,366 $ 232,422 ========================================================================================================================== Net charge-offs (recoveries) as a percentage of average loans 0.14% 0.15% (0.02)% 0.88% 1.03% Net charge-offs (recoveries) as a percentage of the allowance at January 1 18.87 14.16 (1.93) 55.28 70.11 Allowance as a percentage of total loans at December 31 0.88 0.90 1.13 1.05 1.65 Allowance as a percentage of non-performing loans at December 31 160.23 259.24 166.87 85.41 55.42 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: 1999 1998 1997 1996 1995 % OF % of % of % of % of TOTAL Total Total Total Total (Dollars in Thousands) AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------ Loans secured by real estate $2,986 78.84% $1,764 77.38% $2,083 76.55% $1,763 77.23% $2,898 77.17% Construction/land development 64 1.34 70 2.03 83 1.97 94 2.58 156 3.58 Commercial and industrial loans 581 12.70 628 14.10 697 15.35 685 14.01 776 15.17 Consumer loans 277 7.12 203 6.49 194 6.13 157 6.18 94 4.08 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------ $3,908 100% $2,665 100% $3,057 100% $2,699 100% $3,924 100% ============================================================================================================================== 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. The increase in the allowance for loan losses from 1998 to 1999 is primarily the result of the acquisition of a loan loss allowance totaling $1,669,000 related to the loans acquired with the purchase of the New London Trust offices. 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) 1999 1998 1997 1996 1995 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------------- Loans on a non-accrual basis $ 2,001 $ 797 $ 1,648 $ 2,878 $ 6,578 ========================================================================================================== Non-accrual loans as a percentage of total net loans outstanding 0.46% 0.27% 0.61% 1.13% 2.82% Non-accrual loans as a percentage of total assets 0.35% 0.20% 0.46% 0.87% 2.20% Loans contractually past due 90 days or more and still accruing $ 438 $ 231 $ 184 $ 282 $ 503 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 $77,000, $35,000, $79,000, $240,000 and $331,000 for 1999, 1998, 1997, 1996 and 1995, respectively. The increase in non-accrual loans from 1999 is attributable to the loans acquired with the purchase of the New London Trust branches. The Corporation charged off approximately $400,000 in loans during the last quarter of 1999. This charge-off amount was in anticipation of a sale of a non-performing loan pool, which closed after year-end. 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 1999 and 1998 on impaired loans was not significant. At December 31, 1999 and 1998, the recorded investment in impaired loans was $2,365,000 and $1,419,000 respectively, for which no additional specific allowance for loan losses was recorded. For the twelve months ended December 31, 1999, the average recorded investment in impaired loans was $874,000 compared to $1,366,000 for 1998. 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 are considered to be impaired as described in Note 1 to the financial statements. OTHER REAL ESTATE OWNED The following table sets forth information regarding other real estate owned at December 31: (Dollars in Thousands) 1999 1998 1997 1996 1995 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------- Other real estate owned - net $442 $466 $353 $631 $1,574 Other real estate owned as a percentage of total assets .08% .12% .10% .19% .53% DEPOSITS The following table sets forth the average amounts of various classifications of deposits: 1999 1998 1997 (Dollars in Thousands) AMOUNT RATE Amount Rate Amount Rate - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------- Savings $ 63,611 2.74% $ 50,588 2.73% $ 47,020 2.47% Money market 29,465 3.00 31,663 3.77 17,132 3.34 Negotiated rate certificates 34,934 5.02 22,977 4.87 18,528 4.98 Other time deposits 202,834 4.58 181,085 4.95 184,165 4.97 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------- 330,844 4.13% 286,313 4.42% 266,845 4.42% Demand deposits 53,566 48,797 45,880 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------------- $ 384,410 $ 335,110 $ 312,725 ==================================================================================================== (DEPOSIT MIX PIE CHART) (as of December 31, 1999) (in thousands) - - - - - - - - - - - - - - - - - --------------------------------------- Demand Deposits $ 59,643 Savings Deposits 86,566 NOW Deposits 31,082 Money Market Deposits 32,694 Other Time Deposits 268,911 ======================================= Certificates of deposits of $100,000 and over at December 31, 1999 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 $25,576 $9,768 $11,511 $5,394 $52,249 ============================================================================================= 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: 1999 1998 1997 - - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------- Return on average total assets .92% .88% .97% Return on average stockholders' equity 13.36 11.55 13.73 Average stockholders' equity to average total assets 6.92 7.63 7.07 Dividend payout ratio 39.67 44.54 30.76 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) 1999 1998 1997 - - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------- Balance at year end $46,546 $27,807 $11,884 Average amount outstanding 28,751 16,442 9,065 Maximum amount outstanding at any month-end 46,769 28,307 14,036 Average interest rate for the year 5.37% 3.83% 3.20% Average interest rate on year-end balance 4.97 3.85 3.15 STATEMENTS OF INCOME In the following sections of Management's Discussion and Analysis of the Statements of Income, the comparative results of 1999, 1998 and 1997 will be covered in greater detail. As of December 31, 1999, the principal earning assets of the holding company consist of a commercial bank, Park West Bank and Trust Company, and a Connecticut state-chartered savings and loan association, Cargill Bank. 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, 1999. The significant changes are discussed in the analysis that follow the summary. Percentage of increase (decrease) 1999 1998 Over Over (Dollars in Thousands) 1999 1998 1997 1998 1997 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------- Net interest income $17,121 $15,339 $14,633 11.62% 4.82% Provision for loan losses 77 41 306 87.80 (86.60) Non-interest income 2,330 2,427 2,529 (4.00) (4.03) Non-interest expense 12,598 12,200 11,066 3.16 10.25 Income taxes 2,609 2,148 2,406 17.67 (10.72) - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------- Net Income $ 4,167 $ 3,377 $ 3,384 23.39% (0.21)% ====================================================================================== 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 1999 amounted to $32,437,000 as compared to $28,631,000 for 1998 and $26,724,000 for 1997. For 1999 this represents an increase of $3,806,000 or 13% over 1998, while interest income increased by $1,907,000 or 7% in 1998 versus 1997. The increase in 1999 is the result of an increase in average earning assets of $64,332,000 or 18%, offset by a decrease of 20 basis points in average earning interest rate. The increase in 1998 over 1997 is the result of an increase in average earning assets of $34,579,000 offset by a 25 basis point decrease in average earning interest rate. 17 20 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries INTEREST EXPENSE Interest expense for 1999 on deposits and borrowings amounted to $15,316,000 as compared to $13,292,000 in 1998 and $12,091,000 for 1997. Interest expense increased by $2,024,000 or 15% during 1999 compared to 1998 and 1998 interest expense increased by $1,201,000 or 10% versus 1997. The 1999 increase is the result of an increase in average interest-bearing liabilities of $60,626,000 and a 17 basis point decrease in the average rate of interest paid compared to 1998. The increase in interest expense during 1998 versus 1997 is the result of an increase of average interest-bearing liabilities of $27,309,000 combined with a 1 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). NET INTEREST INCOME BAR CHART 1995 1996 1997 1998 1999 (in thousands) - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- $13,330 $13,535 $14,633 $15,339 $17,121 The following table sets forth Westbank's net interest income: (Dollars in Thousands) 1999 1998 1997 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Total interest income $32,437 $28,631 $26,724 Total interest expense 15,316 13,292 12,091 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Net interest income $17,121 $15,339 $14,633 ================================================================================ 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. PROVISION FOR LOAN LOSSES The 1999 provision for loan losses totaled $77,000 compared with $41,000 in 1998, an increase of 88%. During 1998, the provision decreased by $265,000 versus 1997. The decrease in the provision for loan losses during 1998 versus 1997 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 $2,330,000 in 1999, a decrease of $97,000 from the prior year and a decrease of $199,000 versus 1997. Non-interest income for 1999 reflects an increase in Trust Department earnings of $4,000, an increase in service charges on deposit accounts and other non-interest income of $251,000, a decrease in loan servicing income of $178,000 and decreases from the gain on sale of investments, other real estate and mortgages totaling $174,000 compared to 1998. 18 21 MANAGEMENT'S DISCUSSION AND ANALYSIS - FINANCIAL RESULTS (CONTINUED) Westbank Corporation and Subsidiaries NON-INTEREST EXPENSE The components of other operating expenses are as follows: (Dollars in Thousands) 1999 1998 1997 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Salaries and benefits $ 6,541 $ 5,797 $ 5,461 Occupancy 881 802 794 Other non-interest expense 5,153 5,497 4,590 Other real estate owned expenses and provision 23 104 221 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- $12,598 $12,200 $11,066 ================================================================================ (Operating Expenses Bar Chart) (as a percentage of average assets) 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- 3.34% 3.60% 3.17% 3.19% 2.79% Overall non-interest expense increased during 1999 by $398,000 versus 1998 and by $1,532,000 compared to 1997. During 1999, salaries and benefits increased by $744,000, attributable to overall corporate growth and the staff requirements for the addition of the branch offices acquired during 1999. Occupancy increased by $79,000 versus 1998. Finally, other non-interest expense and depreciation and amortization expense decreased in 1999 by $344,000, the result of the recognition of approximately $595,000 of merger expense related to the acquisition of Cargill Bancorp, Inc., recorded during 1998. INCOME TAXES For the year ended December 31, 1999, Westbank Corporation recorded a tax expense of $2,609,000 compared to 1998, when the Corporation recorded a tax expense of $2,148,000. NET INCOME The net income for 1999 of $4,167,000, or $.98 per share basic and $.96 per share diluted, is based on a weighted average of 4,244,402 basic and 4,333,326 diluted shares outstanding, compared with a net income for 1998 of $3,377,000, or $.82 per share basic and $.79 per share diluted based on a weighted average of 4,143,009 basic and 4,272,682 diluted. Net income in 1997 was $3,384,000, or $.88 per share basic and $.85 per share diluted and based on weighted average shares of 3,845,698 basic and 4,003,015 diluted. (Net Income Bar Chart) (in thousands) 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- $2,426 $2,137 $3,384 $3,377 $4,167 NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which will be effective in 2001. For further discussion, see the Summary of Significant Accounting Policies in the Notes to the Financial Statements. [BARCHART] 19 22 CONSOLIDATED BALANCE SHEETS Westbank Corporation and Subsidiaries December 31, (Dollars in Thousands, except share amounts) 1999 1998 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- ASSETS Cash and due from banks: Non-interest bearing $ 17,006 $ 11,291 Interest bearing 1,147 1,880 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- 18,153 13,171 Federal funds sold 13,389 1,069 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total cash and cash equivalents 31,542 14,240 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Securities (Note 2): Investment securities available for sale 69,516 53,712 Investment securities held to maturity (fair value of $11,472 in 1999 and $30,817 in 1998) 11,804 30,616 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total securities 81,320 84,328 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Loans, net of allowance for loan losses of $3,908 in 1999 and $2,665 in 1998 (Note 3) 436,411 290,767 Mortgage loans held for sale (Note 3) 2,156 2,346 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total loans 438,567 293,113 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Property and equipment (Note 4) 7,809 6,851 Other real estate owned, net of allowance for losses $31 in 1999 (Note 5) 442 466 Accrued interest receivable 3,243 2,457 Intangible assets, net of amortization $100 9,971 Other assets 3,256 1,168 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total assets $ 576,150 $ 402,623 ======================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (Note 6): Non-interest bearing $ 59,643 $ 51,395 Interest bearing 419,253 290,872 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total deposits 478,896 342,267 Borrowed funds (Note 7) 46,546 27,807 Interest payable on deposits 732 429 Other liabilities 1,433 1,630 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total liabilities 527,607 372,133 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Mandatory redeemable preferred stock (Note 8) 17,000 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Commitments and contingent liabilities (Notes 13 and 14) Stockholders' equity (Notes 11 and 16): 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 4,283,719 shares in 1999 and 4,198,838 shares in 1998 8,567 8,397 Additional paid-in capital 11,633 11,076 Retained earnings 13,317 10,803 Accumulated other comprehensive income (loss) (1,974) 214 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total stockholders' equity 31,543 30,490 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 576,150 $ 402,623 ======================================================================================== 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) 1999 1998 1997 ================================================================================================ Interest and dividend income: Interest and fees on loans $ 27,288 $ 23,645 $ 22,893 Interest and dividend income from securities 4,855 4,614 3,569 Interest from interest-bearing cash and federal funds sold 294 372 262 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Total interest and dividend income 32,437 28,631 26,724 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Interest expense: Interest on deposits (Note 6) 13,773 12,662 11,800 Interest on borrowed funds (Note 7) 1,543 630 291 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Total interest expense 15,316 13,292 12,091 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Net interest income 17,121 15,339 14,633 Provision for loan losses (Note 3) 77 41 306 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 17,044 15,298 14,327 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Non-interest income: Trust department income 502 498 465 Service charges on deposits 938 766 808 Loan servicing 292 470 494 Gain on sale of securities available for sale 92 141 259 Gain on sale of other real estate owned (Note 5) 34 43 67 Gain on sale of mortgages 4 120 5 Other non-interest income 468 389 431 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Total non-interest income 2,330 2,427 2,529 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Non-interest expense: Compensation and benefits (Note 10) 6,541 5,797 5,461 Depreciation and amortization 968 851 772 Data processing 945 808 751 Occupancy expense 881 802 794 Other real estate owned expenses (Note 5) 23 104 221 Other non-interest expense (Note 15) 3,240 3,838 3,067 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Total non-interest expense 12,598 12,200 11,066 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Income before income taxes 6,776 5,525 5,790 Income taxes (Note 9) 2,609 2,148 2,406 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------ Net income $ 4,167 $ 3,377 $ 3,384 ================================================================================================ Earnings per share (Note 12): - Basic $ .98 $ .82 $ .88 - Diluted $ .96 $ .79 $ .85 ================================================================================================ Weighted average shares outstanding (Note 12): - Basic 4,244,402 4,143,009 3,845,698 - Diluted 4,333,326 4,272,682 4,003,015 ================================================================================================ See notes to consolidated financial statements. 21 24 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Westbank Corporation and Subsidiaries Accumulated Common Stock Additional Other Par paid-in Retained Comprehensive (Dollars in Thousands, except share amounts) Shares Value capital earnings Income/(Loss) Total =============================================================================================================================== Balance, December 31, 1996 3,671,428 $7,343 $ 8,386 $ 7,087 $ (99) $ 22,717 Net income 3,384 3,384 Cash dividends declared ($.30 per share) (1,040) (1,040) Stock dividend (5% on Cargill Bancorp shares) 16,076 32 117 (149) Shares issued: Stock option plan 98,612 197 116 313 Dividend reinvestment and stock purchase plan 146,419 293 1,092 1,385 Changes in unrealized gain (loss) on securities available for sale 159 159 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 3,932,535 7,865 9,711 9,282 60 26,918 Net income 3,377 3,377 Cash dividends declared ($.40 per share) (1,503) (1,503) Stock dividend (5% on Cargill Bancorp shares) 17,389 35 93 (129) (1) Shares issued: Stock option plan 199,799 399 742 1,141 Dividend reinvestment and stock purchase plan 49,115 98 530 628 Cargill interim loss for the quarter ended December 31, 1998 (Note 1) (224) (224) Changes in unrealized gain (loss) on securities available for sale 154 154 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 4,198,838 8,397 11,076 10,803 214 30,490 Net income 4,167 4,167 Cash dividends declared ($.40 per share) (1,653) (1,653) Shares issued: Stock option plan 30,255 61 78 139 Dividend reinvestment and stock purchase plan 54,626 109 479 588 Changes in unrealized gain (loss) on securities available for sale (2,188) (2,188) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 4,283,719 $8,567 $ 11,633 $ 13,317 $ (1,974) $ 31,543 =============================================================================================================================== See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, (Dollars in Thousands) 1999 1998 1997 ============================================================================================= Net Income $ 4,167 $ 3,377 $ 3,384 - - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------- Unrealized gain (loss) on securities available for sale, net of income taxes (benefit) of ($1,376) in 1999, $150 in 1998, and ($271) in 1997 (2,245) 246 327 Less: reclassification adjustment for gains included in net income, net of income taxes of $35 in 1999, $49 in 1998 and $76 in 1997 57 92 168 - - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) (2,188) 154 159 - - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------- Comprehensive Income $ 1,979 $ 3,531 $ 3,543 ============================================================================================= See notes to consolidated financial statements. 22 25 CONSOLIDATED STATEMENTS OF CASH FLOWS Westbank Corporation and Subsidiaries Years ended December 31, (Dollars in Thousands) 1999 1998 1997 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Operating activities: Net income $ 4,167 $ 3,377 $ 3,384 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cargill interim loss for period ended December 31, 1998 (224) Provision for loan losses 77 41 306 Provision for other real estate owned 31 22 109 Depreciation and amortization 968 851 772 Intangible amortization 100 Realized gain on sale of securities (92) (141) (259) Realized gain on sale of other real estate owned (34) (43) (67) Realized gain on sale of mortgages (4) (120) (5) Deferred income taxes (104) (107) 164 Change in assets and liabilities net of effects from purchase of New London Trust: Loans held for sale 190 2,100 (8,099) Accrued interest receivable (786) (217) (314) Other assets (2,138) 814 90 Interest payable on deposits 303 44 51 Other liabilities (316) 36 147 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 2,362 6,433 (3,721) ============================================================================================================================= Investing activities: Securities: Held to maturity: Purchases (1,050) (21,473) (28,920) Proceeds from maturities 19,862 30,459 15,557 Available for sale: Purchases (35,627) (41,210) (8,748) Proceeds from sales 4,679 8,607 10,019 Proceeds from maturities 11,723 5,164 2,484 Purchases of premises and equipment (1,926) (1,801) (835) Net increase in loans (144,797) (32,987) (15,210) Proceeds from sale of other real estate owned 382 618 791 Assumption of liabilities of New London Trust, net of cash acquired (9,971) - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (156,725) (52,623) (24,862) ============================================================================================================================= Financing activities: Net increase in deposits 136,629 27,588 16,660 Net increase in short-term borrowings 18,962 8,923 2,615 Increase in long-term borrowings 7,000 Proceeds from mandatory redeemable preferred stock 17,000 Proceeds from exercise of stock options and stock purchase plan 727 1,897 1,698 Dividends paid (1,653) (1,504) (1,040) - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 171,665 43,904 19,933 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 17,302 (2,286) (8,650) Cash and cash equivalents at beginning of year 14,240 16,526 25,176 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 31,542 $ 14,240 $ 16,526 ============================================================================================================================= Cash paid during the year: Interest on deposits and other borrowings $ 15,013 $ 13,075 $ 11,754 Income taxes 2,600 2,103 1,990 Supplemental disclosure of cash flow information: Securitization of loans into mortgage-backed securities 5,067 9,314 Transfers of loans to other real estate owned 701 806 Loans to facilitate the sale of other real estate owned 618 120 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, 1999, the Corporation operates two banking subsidiaries (the "Banks"), Park West Bank and Trust Company ("Park West") with thirteen banking offices and a trust department located in Hampden County, Massachusetts, and Cargill Bank ("Cargill") with five offices in Windham County, Connecticut. 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 and Northeast Connecticut. MERGER WITH CARGILL BANCORP, INC. Effective January 29, 1999, Cargill Bancorp, Inc., and its subsidiary ("Cargill") were merged with and into Westbank Corporation ("Westbank"), pursuant to a plan of merger dated July 15, 1998. Each share of Cargill common stock was converted into 1.3655 shares of the Corporation's common stock. A total of 400,164 Westbank common shares were issued for the outstanding common stock of Cargill. The transaction was accounted for using the pooling-of-interests method and, accordingly, all historical financial data has been restated to include both entities for all periods presented. Directs costs of mergers accounted for by the pooling-of-interests method are expensed as incurred. Merger-related costs expensed in 1998 aggregated $595,000. These merger expenses included legal, accounting, regulatory and severance costs, as well as integration costs such as conversions, abandonments and relocations, etc. The restatement of the historical financial data is based on Westbank's fiscal year end December 31 and Cargill's fiscal year end September 30. The Cargill loss of $224,000 for the quarter ended December 31, 1998, has been included directly in stockholders' equity in order to conform Cargill's reporting periods to the Corporation's as of December 31, 1998. For the quarter ended December 31, 1998, Cargill had net interest income of $456,000 and a net loss of $224,000. Included in operating expenses were $346,000 of merger and related costs that were primarily the cause of their loss. The following table presents summary results of operations for the companies for the immediate periods prior to the merger: (Dollars in Thousands) Westbank Cargill Combined - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- MONTH ENDED JANUARY 29, 1999: NET INTEREST INCOME $ 1,192 $ 138 $ 1,330 NET INCOME 355 21 376 1998 Year: Net interest income $13,442 $ 1,897 $15,339 Net income 3,256 121 3,377 1997 Year: Net interest income $12,784 $ 1,849 $14,633 Net income 3,231 153 3,384 ACQUISITION OF BRANCHES On October 29, 1999, the Corporation completed its acquisition of the Connecticut division of New London Trust, F.S.B. The two New London Trust offices became part of Cargill Bank, increasing its number of offices to five. The acquisition was allocated as follows: Cash and cash equivalents $ 8,722 Loans 83,895 Other real estate owned 498 Bank premises and equipment 1,877 Intangible assets 10,071 Other assets 995 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Total Assets $106,058 ================================================================================ Deposits $105,516 Other liabilities 542 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Total Liabilities $106,058 ================================================================================ The corporation has accounted for this acquisition on the purchase accounting method, including the results of their operations since October 29, 1999. The intangible assets are being amortized over fifteen years. 24 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries The pro forma results of operations for the years ended December 31, 1999 and 1998, as if this acquisition had occurred at the beginning of these years, were as follows: 1999 1998 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Net interest income $ 19,986 $ 18,256 Net income 4,520 3,467 Basic earnings per share $ 1.07 $ .84 Diluted earnings per share $ 1.04 $ .81 BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, Park West Bank and Trust Company, its subsidiaries, Lorac Leasing Corp., Park West Securities Corporation and PWB&T Inc., and Cargill Bank. All material intercompany balances and transactions have been eliminated upon consolidation. Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation. The Corporation operates two community banks offering different products and services. Since the Corporation derives a significant portion of its revenue and expense from the Banks, 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, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and intangible assets. 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 Corporation's allowances for losses on loans and other real estate owned. Such agencies may require the Corporation to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. NEW ACCOUNTING STANDARDS 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 2001 financial statements. The Corporation has not determined the effect of this standard on its financial statements. 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 $2,564,000 for 1999. SECURITIES Securities that management has the positive intent and ability to hold until maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Those securities which have been identified as assets for which there is not a positive intent to hold to maturity, including all marketable equity securities, are classified as available for sale with unrealized gains (losses), net of income taxes, reported as a separate component of stockholders' equity. The Corporation determines if securities will be classified as held to maturity or available for sale at the time of purchase. In addition, any mortgage-backed securities created out of the Corporation's own inventory of residential real estate loans are also considered available for sale. Gains and losses on sales of securities are recognized in non-interest income at the time of sale on a specific identification basis. Securities which have experienced an other than temporary decline in value are written down to estimated fair value, establishing a new cost basis with the amount of the write-down expensed as a realized loss. The Corporation does not engage in trading activities. Mortgage-backed securities held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts determined by a method that approximates the level-yield method. Management has the positive ability and the intent to hold these assets until maturity. 25 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 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 Corporation 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 Corporation evaluates each impaired loan to determine the appropriate income recognition practice. Generally, income is recorded only on a cash basis for impaired loans. 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 Corporation 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 Corporation's standard underwriting criteria, including receipt of an adequate down payment. 26 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries LOAN SALES AND SERVICING RIGHTS The Corporation 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 Corporation 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. 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 at the date of grant. 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 $113,008,000 and $119,797,000 at December 31, 1999 and 1998, 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. 27 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 2 - SECURITIES Investment securities held to maturity at December 31 are as follows: 1999 GROSS GROSS NET AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED (Dollars in Thousands) COST GAINS LOSSES VALUE GAIN ================================================================================================= U.S. Government obligations $ 499 $ 1 $ 500 $ 1 Federal agency obligations 9,459 $ 313 9,146 (313) Mortgage-backed securities 1,846 8 28 1,826 (20) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------- $ 11,804 $ 9 $ 341 $11,472 $ (332) ================================================================================================= 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 26,890 145 27,035 145 Mortgage-backed securities 2,728 30 $ 2 2,756 28 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------- $ 30,616 $203 $ 2 $ 30,817 $ 201 ================================================================================================= During 1999 and 1998 there were no sales of investment securities classified as held to maturity. Investment securities available for sale at December 31 are as follows: 1999 GROSS GROSS NET AMORTIZED UNREALIZED UNREALIZED FAIR UNREALIZED (Dollars in Thousands) COST GAINS LOSSES VALUE GAIN ================================================================================================= U.S. Government obligations $ 11 $ 11 Federal agency obligations 52,765 $2,386 50,379 $(2,386) Equity securities 1,996 $ 28 2,024 28 Mortgage-backed securities 17,182 3 681 16,504 (678) Municipal bonds 615 17 598 (17) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------- $ 72,569 $ 31 $3,084 $ 69,516 $(3,053) ================================================================================================= 1998 Gross Gross Net Amortized unrealized unrealized Fair unrealized (Dollars in Thousands) cost gains losses value gain ================================================================================================= U.S. Government obligations $ 928 $ 928 Federal agency obligations 26,629 $ 124 $ 86 26,667 $ 38 Equity securities 1,716 29 1,745 29 Mortgage-backed securities 24,087 299 14 24,372 285 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------- $ 53,360 $ 452 $ 100 $ 53,712 $ 352 ================================================================================================= During 1999, 1998 and 1997, the Corporation recognized gross gains on securities available for sale totaling $92,000, $141,000 and $259,000, respectively. The contractual maturities of held-to-maturity and available-for-sale securities, other than equity securities, as of December 31, 1999, 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 following December 31, 1999 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. 28 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries AMORTIZED FAIR (Dollars in Thousands) COST VALUE - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Held to Maturity: Over 1 year to 5 years $ 3,388 $ 3,367 Over 5 years to 10 years 7,780 7,470 Over 10 years 636 635 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Total debt obligations $11,804 $11,472 ================================================================================ AMORTIZED FAIR (Dollars in Thousands) COST VALUE - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Available for Sale: Within 1 year $ 11 $ 11 Over 1 year to 5 years 12,192 11,749 Over 5 years to 10 years 38,808 37,175 Over 10 years 19,562 18,557 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Total debt obligations $70,573 $67,492 ================================================================================ At December 31, 1999 securities with a book value and fair value of $20,681,000 and $19,758,000, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes as required by law. 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consisted of the following at December 31: (Dollars in Thousands) 1999 1998 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Commercial $ 56,276 $ 41,760 Real estate construction 5,952 5,998 Real estate 349,217 229,092 Consumer 31,556 19,277 443,001 296,127 Allowance for loan losses (3,908) (2,665) Deferred loan origination fees (526) (349) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- $ 438,567 $ 293,113 =============================================================================== Changes in the allowance for loan losses are summarized as follows: (Dollars in Thousands) 1999 1998 1997 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Balance, beginning of year $ 2,665 $ 3,057 $ 2,699 Acquisition 1,669 Provision for loan losses 77 41 306 Loans charged off (623) (518) (760) Recoveries 120 85 812 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Balance, end of year $ 3,908 $ 2,665 $ 3,057 =============================================================================== The aggregate principal balance of non-accrual loans was $2,001,000 and $797,000 at December 31, 1999 and 1998 respectively. Contractual interest income that was not recognized on such non-accrual loans was $77,000, $35,000 and $79,000 for 1999, 1998 and 1997, respectively. 29 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries The Corporation did not sell any loans with recourse during 1999 or 1998. The remaining recourse exposure on prior sales was $1,230,000 at December 31, 1999. 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 $349,217,000 in real estate loans at December 31, 1999, $268,953,000 are collateralized by 1-4 family dwellings. The majority of the collateral for these loans is located in the Corporation's market area of western Massachusetts and northeast Connecticut. Commercial real estate and real estate construction loans represented $86,217,000 in outstanding principal at December 31, 1999. 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 $56,276,000 at December 31, 1999, represent loans made to businesses primarily in western Massachusetts and northeastern Connecticut. The Corporation 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) 1999 1998 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Balance at beginning of year $ 3,041 $ 2,386 New loans granted 766 886 Repayments of principal (541) (231) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Balance at end of year $ 3,266 $ 3,041 =============================================================================== At December 31, 1999 and 1998, the recorded investment in impaired loans was $2,365,000 and $1,419,000, respectively, for which no additional specific allowance for loan losses was recorded. For the years ended December 31, 1999, 1998 and 1997, the average recorded investment in impaired loans was $874,000, $1,366,000 and $2,080,000 respectively. Interest income recognized during 1999, 1998 and 1997 on impaired loans was not significant. The Corporation had no commitments to lend additional funds to borrowers having loans that are on non-accrual status, 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 $97,622,000, $115,391,000 and $133,359,000 at December 31, 1999, 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) 1999 1998 Lives - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Property (including land of $1,514 in 1999 and $1,546 in 1998) $ 7,091 $ 5,214 15-40 years Capital lease building 263 263 15 years Furniture and equipment 4,857 4,167 3-10 years Leasehold and building improvements 2,461 2,825 5-15 years Motor vehicles 114 114 3 years - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- 14,786 12,583 Accumulated depreciation 6,977 5,732 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Property and Equipment $ 7,809 $ 6,851 ================================================================================ 30 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 5 - OTHER REAL ESTATE OWNED At December 31, other real estate owned consisted of properties acquired through foreclosure as follows: (Dollars in Thousands) 1999 1998 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------ Real estate acquired through foreclosure - net of OREO allowance $442 $466 ==================================================================================== Changes in the allowance for other real estate owned losses are summarized as follows: (Dollars in Thousands) 1999 1998 1997 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------- Balance, beginning of year $ 200 $195 Acquisition $31 Provision for other real estate owned charged to operations 22 29 Write-downs (net of payments) (222) (24) - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------- Balance, end of year $31 $200 ========================================================================================= 6 - DEPOSITS Deposit accounts by type as of December 31 are summarized as follows: (Dollars in Thousands) 1999 RATE 1998 Rate - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Demand deposit $ 59,643 $ 51,395 Savings 86,566 2.97% 53,689 2.87% NOW accounts 31,082 .49 25,993 .45 Money market accounts 32,694 3.29 29,659 2.54 Other time deposits 268,911 5.04 181,531 5.29 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- $478,896 $342,267 =============================================================================== At December 31, 1999, the scheduled maturities of other time deposits and IRA deposits with a fixed maturity are as follows: (Dollars in Thousands) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------ 2000 $230,009 2001 28,637 2002 8,570 2003 794 2004 and after 901 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------ $268,911 ============================================================================== Certificates of deposit with balances greater than or equal to $100,000 amounted to $52,249,000 and $26,880,000 as of December 31, 1999 and 1998, respectively. Interest paid on these deposits totaled approximately $1,754,000 and $1,250,000, respectively. 7 - BORROWED FUNDS Short-term borrowings as of December 31 are as follows: (Dollars in Thousands) 1999 1998 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Securities sold under agreements to repurchase $ 9,212 $11,953 Purchased federal funds 270 FHLB advance 26,740 7,310 Treasury tax and loan notes 3,594 1,274 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Total short term borrowings $39,546 $20,807 ================================================================================ The above short-term borrowings generally mature daily. 31 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries The following information relates to long-term debt as of December 31: (Dollars in Thousands) 1999 1998 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- FHLB Term advance 5.87% due May 12, 2003 $7,000 $7,000 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- 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) 1999 1998 1997 - - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------- Balance at year end $43,546 $27,807 $11,884 Average amount outstanding 28,751 16,442 9,065 Maximum amount outstanding at any month-end 46,769 28,307 14,036 Average interest rate for the year 5.37% 3.83% 3.20% Average interest rate on year-end balance 4.97% 3.85% 3.15% The Corporation maintains a revolving line of credit with the Fleet Bank of Massachusetts for $3,000,000 that is renewed on an annual basis. There were no amounts outstanding against this line as of December 31, 1999 or 1998. The Corporation had additional short term borrowing capacity through the Federal Home Loan Bank of $7,244,000 through its Ideal Way program that was unused at year-end 1999. 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 - MANDATORY REDEEMABLE PREFERRED STOCK On September 30, 1999, the Corporation completed its offering of 1,700,000 shares, 9.6% trust preferred stock, each with a liquidation amount of $10. The $17 million trust preferred debentures are due September 30, 2029. Quarterly cash distributions were paid beginning December 31, 1999. Of the $17 million in proceeds, the Corporation contributed $15.5 million of the net proceeds to Cargill Bank as equity capital to support the acquisition of two Connecticut branches of New London Trust, F.S.B. (see Note 1). 9 - INCOME TAXES The income taxes (benefits) were as follows: (Dollars in Thousands) 1999 1998 1997 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------- Current tax: Federal $ 2,327 $ 1,943 $ 1,836 State 386 312 408 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------- Total current 2,713 2,255 2,244 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------- Deferred tax: Deferred taxes (104) (107) 164 Change in valuation allowance for deferred tax assets (2) - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------- Total deferred (104) (107) 162 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------------- Total income taxes $ 2,609 $ 2,148 $ 2,406 ============================================================================================== The differences between the effective tax rate and the federal statutory tax rate on income before taxes are reconciled as follows: 1999 1998 1997 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------- 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 4.4 6.1 Other .5 .5 .5 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------- 38.5% 38.9% 41.6% =================================================================================== 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) 1999 1998 ================================================================================ Deferred tax assets: Other real estate owned $ 6 Deferred loan fees 186 $ 122 Unrealized loss on securities 1,080 Reserve for loan losses 96 Deferred income 17 Accrued expenses not deducted for tax 176 Non-accrual interest 20 11 Amortization 92 12 Other 113 95 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Total deferred tax assets 1,497 529 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Deferred tax liabilities: Bond accretion 4 8 Unrealized gain (loss) on securities 151 Depreciation 237 345 Allowance for loan losses 122 193 Deferred FNMA premium 1 4 Earned income not yet taxed 141 Other 93 37 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Total gross deferred tax liabilities 457 879 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Net deferred tax asset (liability) $1,040 $(350) ================================================================================ 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 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 in which the deferred tax assets are deductible, management believes it is more likely than not that the Corporation will realize the benefits of these deductible differences, net of the recorded valuation allowance. 10 - PENSION PLAN The Corporation has a defined contribution pension plan (money purchase), covering substantially all of its employees at Park West and Cargill Bank. Contributions to the money purchase plan are a percentage of individual employees' salary. Total pension expense for 1999, 1998 and 1997 amounted to $242,000, $212,000 and $204,000, respectively. At December 31, 1999, the most recent plan year end of the money purchase plan, total plan assets were $4,187,000. The money purchase plan assets are invested in money market funds, government bonds, corporate and government agency bonds and marketable securities. 11 - STOCK OPTIONS The Corporation has four fixed-option plans which reserve shares of common stock for issuance to executives, key employees and directors. During 1999, 1998 and 1997, no compensation cost was required to be recognized for the stock option plans. Had compensation costs for the Corporation's four stock option plans been determined based on the fair value at the grant date for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS No. 123, the Corporation's net earnings and earnings per share would have been as follows: 33 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries (Dollars in Thousands, except per share data) 1999 1998 1997 - - - - - - - - - - - - - - - - - ---------------------------------------------------------------------------------------- Net earnings - as reported $ 4,167 $ 3,377 $ 3,384 Net earnings - pro forma 4,096 2,709 3,003 Earnings per share - as reported - Basic .98 .82 .88 - Diluted .96 .79 .85 Earnings per share - pro forma - Basic .97 .65 .78 - Diluted .95 .63 .75 The Corporation offers shares of common stock to officers and key employees pursuant to the 1985 Incentive Stock Option Plan. As of December 31, 1999, all options granted are exercisable. The following is a summary of the changes in options outstanding: 1999 1998 1997 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Options granted and exercisable at the beginning of the year 44,284 191,466 277,122 Options exercised: at $2.00 (27,741) at $2.50 (350) (27,450) at $3.50 (20,302) at $6.00 (3,301) (146,832) (10,163) Options terminated at $6.00 (1,155) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Options granted and exercisable at the end of the year 39,828 44,284 191,466 =============================================================================== Unless exercised the options will expire ten years after granting. No options are available for future grants. The Corporation adopted a Cargill Directors and Officers Stock Option Plan during 1992. The following is a summary of the changes in options outstanding under the Cargill Directors and Officers Stock Option Plan: 1999 1998 1997 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Options granted and exercisable at the beginning of the year 65,862 97,479 107,935 Options exercised at $4.02 (21,954) (31,617) (10,456) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Options granted and exercisable at the end of the year 43,908 65,862 97,479 =============================================================================== Unless exercised the options will expire twenty 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: 1999 1998 1997 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Options granted and exercisable at the beginning of the year 46,000 53,000 44,000 Options granted and exercisable: at $7.125 at $9.375 11,000 at $12.875 9,000 at $14.75 3,000 at $12.00 10,000 Options exercised at $6.00 (4,000) (15,000) (2,000) at $7.125 (1,000) (2,000) at $9.375 (2,000) - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Options granted and exercisable at the end of the year 51,000 46,000 53,000 ================================================================================ Options available for future grants 48,000 58,000 70,000 ================================================================================ Unless exercised, the options will expire twenty years after granting. 34 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 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: 1999 1998 1997 ============================================================================================================ Options available 119,500 36,500 45,500 Options authorized 200,000 ============================================================================================================ Options granted and exercisable at the beginning of the year 256,500 141,500 133,000 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------ 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 granted and exercisable to directors at $10.50 9,000 Options granted and exercisable to employees at $10.125 83,500 Options exercised at $8.125 (500) Options exercised at $8.00 (2,000) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------ Options granted and exercisable at the end of the year 349,000 256,500 141,500 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------ Options available for future grants 27,000 119,500 36,500 ============================================================================================================ 12 - 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: 1999 4,244,402 $.98 1998 4,143,009 .82 1997 3,845,698 .88 Effect of Dilutive Option Shares: 1999 88,924 .02 1998 129,673 .03 1997 157,317 .03 Diluted Earnings Per Share: 1999 4,333,326 .96 1998 4,272,682 .79 1997 4,003,015 .85 13 - 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, 1999: (Dollars in Thousands) =============================================================================== 2000 $ 334 2001 232 2002 216 2003 145 2004 121 After 2004 578 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Total minimum lease payments $1,626 =============================================================================== Rent expense for 1999, 1998 and 1997 amounted to $291,000, $274,000 and $273,000, respectively. 35 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 14 - 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) 1999 1998 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------- Commitments to grant loans $ 4,604 $ 9,281 Stand-by letters of credit and financial guarantees 835 1,012 Commitments to advance funds under existing loan agreements 38,827 31,457 The Corporation uses the same credit policies in making commitment and conditional obligations as it does for on-balance-sheet instruments. 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 Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation 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. In the normal course of business, 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. 15 - OTHER NON-INTEREST EXPENSE The components of other non-interest expense, which are in excess of 1% of the aggregate of total interest income and non-interest income, and not shown separately on the consolidated statements of income, are as follows: Years Ended December 31, (Dollars in Thousands) 1999 1998 1997 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Merger related expenses $595 Advertising $432 385 $350 Supplies 324 277 16 - 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 Banks 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 banking subsidiaries' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, a bank must meet specific capital guidelines that involve quantitative measures of a bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. A 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 a 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, 1999, that the Corporation meets all capital adequacy requirements to which it is subject. 36 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 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 and a portion of the mandatory redeemable preferred stock; total risk-based, or supplementary capital includes not only the equity but also a portion of the allowance for loan losses and a portion of the mandatory redeemable preferred stock. As of December 31, 1999, the most recent notification from the Federal Deposit Insurance Corporation categorized both Park West and Cargill as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a 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. Included in Cargill's capital is approximately $15.5 million contributed by the holding company in connection with the preferred trust offering. (Note 8) The Corporation's, Park West's and Cargill'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, 1999 TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): PARK WEST $31,389 11.66% $21,533 8.00% $26,917 10.00% CARGILL 10,088 12.55 6,429 8.00 8,036 10.00 HOLDING COMPANY 44,454 12.50 28,452 8.00 N/A N/A TIER I CAPITAL (TO RISK-WEIGHTED ASSETS): PARK WEST 29,031 10.79 10,767 4.00 16,150 6.00 CARGILL 9,077 11.30 3,215 4.00 4,822 6.00 HOLDING COMPANY 36,175 10.17 14,226 4.00 N/A N/A TIER I CAPITAL (TO AVERAGE ASSETS): PARK WEST 29,031 7.01 16,557 4.00 20,697 5.00 CARGILL 9,077 5.81 6,237 4.00 7,796 5.00 HOLDING COMPANY 36,175 6.92 20,904 4.00 N/A N/A December 31, 1998 Total Capital (To risk-weighted assets): Park West $27,890 12.20% $18,291 8.00% $22,864 10.00% Cargill 3,475 14.93 1,862 8.00 2,327 10.00 Holding Company 32,946 13.00 20,281 8.00 N/A N/A Tier I Capital (To risk-weighted assets): Park West 25,510 11.16 9,146 4.00 13,718 6.00 Cargill 3,189 13.70 931 4.00 1,396 6.00 Holding Company 30,281 11.94 10,141 4.00 N/A N/A Tier I Capital (To average assets): Park West 25,510 7.24 14,102 4.00 17,628 5.00 Cargill 3,189 6.69 1,907 4.00 2,364 5.00 Holding Company 30,281 7.53 16,092 4.00 N/A N/A 37 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 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. 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, or (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 as 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 company's 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. Cargill's retained earnings at December 31, 1999, include $458,000 that is set aside in accordance with existing provisions of the Internal Revenue Code to absorb losses on loans. If, in the future, this amount were used for any other purposes, a tax liability could be incurred. It is not anticipated that such amount will be made available for dividends or that a tax thereon will be imposed. Cargill previously converted from a state chartered mutual savings and loan association to a state chartered stock savings and loan association. At the time of conversion, Cargill established a liquidation account in an amount equal to Cargill's net worth. In the event of a complete liquidation of Cargill (and only in such event), each eligible account holder will be entitled to receive a liquidation distribution from the liquidation account before any liquidation distribution may be made with respect to capital stock. The balance in the liquidation account at December 31, 1999 was $85,000. Cargill may not declare or pay a cash dividend on or purchase any of its stock if the effect would be to reduce the net worth of Cargill below either the amount of the liquidation account or the capital requirements of its regulators. 17 - 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, 1999 and 1998, the ESOP held no shares of the Corporation's stock. 38 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 18 - 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: 1999 1998 CARRYING ESTIMATED Carrying Estimated (Dollars in Thousands) AMOUNT FAIR VALUE Amount Fair Value - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------------------------------------ Assets: Cash and due from banks $ 18,153 $ 18,153 $ 13,171 $ 13,171 Federal funds sold 13,389 13,389 1,069 1,069 Investment securities held to maturity 11,804 11,472 30,616 30,817 Investment securities available for sale 69,516 69,516 53,712 53,712 Loans 438,567 438,158 293,113 301,442 Liabilities: Deposits 478,896 476,671 342,267 343,814 Borrowed funds 46,546 46,546 27,807 27,807 Mandatory redeemable preferred stock 17,000 17,213 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 matures 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. 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. 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 AND MANDATORY REDEEMABLE PREFERRED STOCK The fair value of such borrowings and mandatory redeemable preferred stock was estimated by utilizing future cash flows discounted using current borrowing rates for similar instruments. For short-term borrowings, the carrying amount approximates the fair value due to their short-term nature. 39 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 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. 19 - SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION 1999 FIRST SECOND THIRD FOURTH (Dollars in Thousands, except per share amounts) QUARTER QUARTER QUARTER QUARTER ============================================================================================================================= Interest income $7,343 $7,653 $7,954 $9,487 Interest expense 3,325 3,481 3,697 4,812 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net interest income 4,018 4,172 4,257 4,675 Provision for losses 75 2 Non-interest income 618 492 601 619 Non-interest expense 2,915 2,939 2,988 3,756 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,646 1,723 1,870 1,538 Income taxes 625 652 735 597 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net income $1,021 $1,071 $1,135 $ 941 ============================================================================================================================= Earnings per share - Basic $ .24 $ .25 $ .27 $ .22 - Diluted $ .24 $ .25 $ .26 $ .21 ============================================================================================================================= 1998 First Second Third Fourth Quarter Quarter Quarter Quarter ============================================================================================================================= Interest income $6,722 $7,156 $7,450 $7,303 Interest expense 2,998 3,383 3,577 3,334 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net interest income 3,724 3,773 3,873 3,969 Provision for losses 28 12 1 Non-interest income 616 641 589 581 Non-interest expense 2,836 2,857 2,838 3,669 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,476 1,545 1,624 880 Income taxes 593 589 619 347 - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 883 $ 956 $1,005 $ 533 ============================================================================================================================= Earnings per share - Basic $ .21 $ .23 $ .24 $ .13 - Diluted $ .21 $ .22 $ .24 $ .12 ============================================================================================================================= 40 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries 20 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS December 31, (Dollars in Thousands) 1999 1998 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- BALANCE SHEETS Assets Cash $ 1,096 $ 66 Investment in subsidiaries 46,097 28,912 Other investments 9 922 Other assets 1,357 762 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Total assets $ 48,559 $ 30,662 ================================================================================ Liabilities $ 16 $ 172 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Mandatory redeemable preferred stock 17,000 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Stockholders' equity Preferred stock - none Common stock, par value $2 per share 8,567 8,397 Additional paid-in capital 11,633 11,076 Retained earnings 13,317 10,803 Accumulated other comprehensive income (loss) (1,974) 214 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Stockholders' equity 31,543 30,490 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 48,559 $ 30,662 ================================================================================ December 31, (Dollars in Thousands) 1999 1998 1997 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- STATEMENTS OF INCOME Dividend from subsidiary $ 600 $ 100 $ 550 Interest income (expense) (385) 85 38 Other income (expense) - net (85) (735) (144) - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Income (loss) before taxes and undistributed income of subsidiaries 130 (550) 444 Income tax benefit 159 215 2 Undistributed income of subsidiaries 3,878 3,712 2,938 - - - - - - - - - - - - - - - - - ------------------------------------------------------------------------------- Net income $ 4,167 $ 3,377 $ 3,384 =============================================================================== 41 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Westbank Corporation and Subsidiaries December 31, (Dollars in Thousands) 1999 1998 1997 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income $ 4,167 $ 3,377 $ 3,384 Cargill interim loss for quarter ended 12/31/98 (224) Operating activities: Equity in income of subsidiaries (3,878) (3,622) (2,938) Increase in other assets (595) (418) (33) Increase (decrease) in other liabilities (156) 151 2 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (462) (736) 415 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Investment securities (purchases) maturities 918 450 (1,039) Contribution of capital to subsidiary (15,500) - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (14,582) 450 (1,039) - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from mandatory redeemable preferred stock issue 17,000 Proceeds from stock options exercised 139 1,141 314 Proceeds from dividend reinvestment and optional stock purchases 588 628 1,385 Dividends paid (1,653) (1,504) (1,041) - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 16,074 265 658 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,030 (21) 34 Cash and cash equivalents at the beginning of the year 66 87 53 - - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at the end of the year $ 1,096 $ 66 $ 87 ==================================================================================================================== 42 45 INDEPENDENT AUDITORS' REPORTS Westbank Corporation and Subsidiaries The Shareholders and Board of Directors, Westbank Corporation We have audited the consolidated balance sheets of Westbank Corporation and subsidiaries (the "Corporation") as of December 31, 1999 and 1998 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, 1999. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger on January 29, 1999, of Cargill Bancorp, Inc., and subsidiary and Westbank Corporation and subsidiaries, which has been accounted for as a pooling of interests as described in Note 1 to the consolidated financial statements. We did not audit the consolidated balance sheets of Cargill Bancorp, Inc., as of September 30, 1998, or the related statements of income, comprehensive income, stockholders' equity and cash flows of Cargill Bancorp, Inc., for each of the two years in the period ended September 30, 1998, which statements reflect total assets of $48,241,000 as of September 30, 1998, and net interest income of $1,897,000 and $1,849,000 for the years ended September 30, 1998 and 1997, respectively. Those statements were audited by other auditors whose report dated October 30, 1998, has been furnished to us and our opinion, insofar as it relates to the amounts included for Cargill Bancorp, Inc., and subsidiary for 1998 and 1997 is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those 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 and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Westbank Corporation and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Hartford, Connecticut January 19, 2000 Shareholders and Board of Directors, Cargill Bancorp, Inc. We have audited the consolidated statements of financial condition of Cargill Bancorp, Inc., and subsidiary as of September 30, 1998, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for the years ended September 30, 1998 and 1997. 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. Those 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 financial position of Cargill Bancorp, Inc., and subsidiary as of September 30, 1998, and the results of its operations and its cash flows for the years ended September 30, 1998 and 1997, in conformity with generally accepted accounting principles. SNYDER & HALLER Hartford, Connecticut October 30, 1998 43 46 CORPORATE DIRECTORY Westbank Corporation and Subsidiaries DIRECTORS WESTBANK CORPORATION AND PARK WEST BANK AND TRUST COMPANY ERNEST N. LAFLAMME, JR. Chairman of the Board, WESTBANK CORPORATION Treasurer, City of Chicopee ROLAND O. ARCHAMBAULT President and Owner, 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 G. WAYNE MCCARY President and Chief Executive Officer, EASTERN STATES EXPOSITION ROBERT J. PERLAK Corporate Clerk, WESTBANK CORPORATION Private Investor GEORGE R. SULLIVAN Chief Executive Officer, SULLIVAN PAPER COMPANY, INC. JAMES E. TREMBLE President, VALLEY COMMUNICATIONS SYSTEMS, INC. CARGILL BANK JOHN J. MAHER Chairman of the Board, CARGILL BANK Attorney at Law, MAHER AND COTNOIR GARY L. BRIGGS Executive Vice President, CARGILL BANK Executive Vice President, PARK WEST BANK AND TRUST COMPANY DONALD R. CHASE, President and Chief Executive Officer, WESTBANK CORPORATION SHAWN C. DONOHOE Project Manager, RIVER MILL INDUSTRIAL COMPLEX RAYMOND P. FAUCHER Co-owner, SUPERIOR BAKERY/ SUPERIOR CAKE PRODUCTS KENNETH R. LACASSE President and Chief Executive Officer, CARGILL BANK ELLIS H. PAINE President & Owner, EHPCO, INC. DANIEL S. ROVERO Mayor, PUTNAM, CONNECTICUT FREDERICK J. WITKOWSKI President (Retired), JOHNSON CORRUGATED PRODUCTS CORP. H. DEXTER YOUNG Corporate Clerk, CARGILL BANK Owner, VALLEYSIDE FARM OFFICERS WESTBANK CORPORATION DONALD R. CHASE President and Chief Executive Officer JOHN M. LILLY Treasurer and Chief Financial Officer GARY L. BRIGGS Executive Vice President KATHLEEN A. JALBERT Senior Vice President TRENTON E. TAYLOR Senior Vice President LLOYD S. HALL Director of Auditing PARK WEST BANK AND TRUST COMPANY DONALD R. CHASE President and Chief Executive Officer AUDITING DIVISION LLOYD S. HALL, CBA Director of Auditing BRANCH ADMINISTRATION/ HUMAN RESOURCES KATHLEEN A. JALBERT Senior Vice President DEBORAH A. KUMIEGA Assistant Vice President GARY B. SZYMANIAK Community Banking Officer COMPLIANCE JANE M. KNAPP Vice President EDP/OPERATIONS S. STEVE KONIECKI Senior Vice President FINANCE DEPARTMENT JOHN M. LILLY Executive Vice President and Treasurer IRVING M. WALKER, JR. Controller LOAN DIVISION GARY L. BRIGGS Executive Vice President PAUL M. ACCORSI Senior Vice President DAVID M. BARSZCZ Vice President GERARD E. DRAPEAU Vice President RICHARD N. HANCHETT Vice President MICHAEL M. LEFEBVRE Vice President CLIFFORD R. BORDEAUX Assistant Vice President JOSEPH S. LEMAY Assistant Vice President JOHN E. O'BRIEN Loan Operations Officer LOAN CREDIT AND COLLECTION TRENTON E. TAYLOR Senior Vice President PATRICIA A. NEBOSKY Assistant Vice President MARKETING JOSEPH L. ROLAK Director of Marketing and Vice President RESIDENTIAL REAL ESTATE STANLEY F. OSOWSKI Senior Vice President WOLFGANG A. ADAMETZ Vice President TRUST DIVISION ROBERT A. GIBOWICZ Senior Trust Officer CARGILL BANK KENNETH R. LACASSE President and Chief Executive Officer HOWARD STANTON, III Senior Vice President and Chief Financial Officer GARY L. BRIGGS Executive Vice President S. STEVE KONIECKI Senior Vice President STANLEY F. OSOWSKI Senior Vice President TRENTON E. TAYLOR Senior Vice President ANTHONY CAPUANO, JR. Vice President, Senior Loan Officer ELAINE C. DESSERT Assistant Vice President J. THOMAS MORRISON Assistant Vice President KATHRYN J. SAUCIER Assistant Vice President 44 47 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 19, 2000, 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. 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 NASDAQ regional market quotations. 1999 1998 BID Bid HIGH LOW DIVIDEND High Low Dividend - - - - - - - - - - - - - - - - - ----------------------------------------------------------------------------- First $12 7/8 $10 1/2 $0.10 $17 1/4 $12 $0.10 Second 10 1/2 9 1/8 0.10 16 5/8 13 7/8 0.10 Third 11 15/16 10 0.10 14 3/4 10 3/8 0.10 Fourth 10 5/8 8 3/8 0.10 13 9 3/8 0.10 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, 2000, the Corporation had 1,354 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) 747-1400. The following firms make a market in Westbank Corporation's common stock: Advest Inc. First Albany Corporation Keefe, Bruyette & Woods, Inc. McConnell, Budd & Downes, Inc. Moors & Cabot, Inc. Ryan, Beck & Co., Inc. Tucker Anthony Incorporated 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. Design: Robert Farrell Associates, Inc./Printing: Hadley Printing Company, Inc. 48 [RECTANGLE BOX GRAPHIC]