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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2000 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 000-13091
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WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
---------------------------------
RHODE ISLAND 05-0404671
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 BROAD STREET
WESTERLY, RHODE ISLAND 02891
(Address of principal executive offices) (Zip Code)
401-348-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0625 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $175,583,346 at February 27, 2001 which includes $21,840,577 held
by The Washington Trust Company under trust agreements and other instruments.
The number of shares of the registrant's common stock, $.0625 par value per
share, outstanding as of February 27, 2001 was 12,019,617.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated March 20, 2001 for the Annual
Meeting of Shareholders to be held April 24, 2001 are incorporated by reference
into Part III of this Form 10-K.
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FORM 10-K
WASHINGTON TRUST BANCORP, INC.
For the Year Ended December 31, 2000
TABLE OF CONTENTS
Description
Part I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
Part II
Item 5 Market for the Registrant's Common Stock
and Related Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
Part III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
Signatures
This report contains certain statements that may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Corporation's (as hereinafter defined) actual results could differ materially
from those projected in the forward-looking statements as a result, among other
factors, of changes in general national or regional economic conditions, changes
in interest rates, reductions in the market value of trust and investment
management assets under administration, reductions in deposit levels
necessitating increased borrowing to fund loans and investments, changes in the
size and nature of the Corporation's competition, changes in loan default and
charge-off rates, risk of an adverse action in pending litigation and changes in
the assumptions used in making such forward-looking statements.
PART I
ITEM 1. BUSINESS
Washington Trust Bancorp, Inc.
Washington Trust Bancorp, Inc. (the "Corporation" or "Washington Trust") is a
publicly-owned, registered bank holding company, organized in 1984 under the
laws of the state of Rhode Island, whose subsidiaries are permitted to engage in
banking and other financial services and businesses. The Corporation conducts
its business through its wholly owned subsidiary, The Washington Trust Company
(the "Bank"), a Rhode Island chartered commercial bank. The deposits of the Bank
are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to
regulatory limits.
The Corporation was formed in 1984 under a plan of reorganization in which
outstanding common shares of The Washington Trust Company were exchanged for
common shares of Washington Trust Bancorp, Inc. At December 31, 2000 the
Corporation had total assets of $1.218 billion, total deposits of $735.7 million
and total shareholders' equity of $89.2 million.
On June 26, 2000, the Corporation completed its acquisition of Phoenix
Investment Management Company, Inc. ("Phoenix"), an independent investment
advisory firm located in Providence, Rhode Island. Pursuant to the Agreement and
Plan of Merger, dated April 24, 2000, the acquisition was effected by means of
merger of Phoenix with and into the Bank, the wholly owned subsidiary of the
Corporation. The acquisition of Phoenix was a tax-free reorganization accounted
for as a pooling of interests. Accordingly, the consolidated financial
statements and other financial information of the Corporation have been restated
to reflect the acquisition at the beginning of the earliest period presented.
For the year ended December 31, 1999, Phoenix's investment management revenues
totaled $3.4 million.
The Washington Trust Company
The Bank was originally chartered in 1800 as the Washington Bank and is the
oldest banking institution headquartered in its market area. Its current
corporate charter dates to 1902. See discussion under "Market Area and
Competition" for further information.
The Bank provides a broad range of financial services, including:
Residential mortgages Internet banking services
Commercial loans Commercial and consumer demand deposits
Construction loans Savings, NOW and money market deposits
Consumer installment loans Certificates of deposit
Home equity lines of credit Retirement accounts
Merchant credit card services Cash management services
Automated teller machines (ATMs) Safe deposit boxes
Telephone banking services Trust and investment management services
Automated teller machines (ATMs) are located throughout the Bank's market area.
The Bank is a member of various ATM networks.
Data processing for most of the Bank's deposit and loan accounts and other
applications are conducted internally, using owned equipment. Application
software is primarily obtained through purchase or licensing agreements.
The Bank's primary source of income is net interest income, the difference
between interest earned on interest-earning assets and interest paid on
interest-bearing deposits and other borrowed funds. Sources of noninterest
income include fees for management of customer investment portfolios, trusts and
estates, service charges on deposit accounts, merchant processing fees, gains
and fees from mortgage banking activities and other banking-related fees.
Noninterest expenses include the provision for loan losses, salaries and
employee benefits, occupancy, equipment, merchant processing, office supplies,
advertising and promotion and other administrative expenses.
The Bank's lending activities are conducted primarily in southern Rhode Island
and southeastern Connecticut. The Bank provides a variety of commercial and
retail lending products. The Bank generally underwrites its residential
mortgages based upon secondary market standards. Loans are originated both for
sale in the secondary market as well as for portfolio. Most secondary market
loans are sold with servicing released, however, prior to the fourth quarter of
1999, the Corporation primarily sold loans with servicing retained.
The Bank provides trust and investment management services as trustee under
wills and trust agreements; as executor or administrator of estates; as a
provider of agency, custodial and management investment services to individuals
and institutions; and as a trustee for employee benefit plans. In January 2000,
the Bank opened a trust and investment management office in Providence, Rhode
Island. In June 2000, the Corporation acquired Phoenix, an independent
investment advisory firm located in Providence, Rhode Island. Phoenix operates
under its own name as a division of the Bank. Phoenix provides investment
advisory services including asset allocation analysis and equity, fixed income
and balanced portfolio management. The total market value of assets under
administration amounted to $1.7 billion as of December 31, 2000.
The following is a summary of recurring sources of income, which excludes net
gains on sales of securities and the 1999 net gain on sale of the credit card
portfolio, as a percentage of total income (net interest income plus recurring
noninterest income) during the past five years:
2000 1999 1998 1997 1996
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Net interest income 67% 67% 67% 69% 72%
Trust and investment management 19 17 17 18 16
Other noninterest income 14 16 16 13 12
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Total income 100% 100% 100% 100% 100%
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Market Area and Competition
The Bank's market area includes Washington County and a portion of Kent County
in southern Rhode Island, as well as a portion of New London County in
southeastern Connecticut. The Bank operates thirteen banking offices in these
Rhode Island and Connecticut counties. The locations of the banking offices are
as follows:
Westerly, RI (3 locations) Charlestown, RI Wakefield, RI
Narragansett, RI (2 locations) Richmond, RI North Kingstown, RI
New Shoreham (Block Island), RI Mystic, CT (3 locations)
The Bank's banking offices in Charlestown and on Block Island are the only bank
facilities in those Rhode Island communities.
The Bank faces strong competition from branches of major Rhode Island and
regional commercial banks, local branches of certain Connecticut banks, as well
as various credit unions, savings institutions and, to some extent, finance
companies. The principal methods of competition are through interest rates,
financing terms and other customer conveniences. The Bank had 38% of total
deposits reported by all financial institutions for communities in which the
Bank operates banking offices as of June 30, 2000. The closest competitor held
25%, and the second closest competitor held 13% of total deposits in the same
communities. The Corporation believes that being the largest commercial banking
institution headquartered within the market area provides a competitive
advantage over other financial institutions. The Bank has a marketing department
that is responsible for the review of existing products and services and the
development of new products and services.
Employees
As of December 31, 2000 the Corporation had 370 employees, of which 332 were
full-time and 38 were part-time.
Supervision and Regulation
General - The business in which the Corporation and the Bank are engaged is
subject to extensive supervision, regulation, and examination by various bank
regulatory authorities and other agencies of federal and state government. The
supervisory and regulatory activities of these authorities are often intended
primarily for the protection of customers or are aimed at carrying out broad
public policy goals that may not be directly related to the financial services
provided by the Corporation and the Bank, nor intended for the protection of the
Corporation's shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Proposals to
change regulations and laws that affect the banking industry are frequently
raised at the federal and state level. The potential impact on the Corporation
of any future revisions to the supervisory or regulatory structure cannot be
determined.
The Corporation and the Bank are required by various authorities to file
extensive periodic reports of financial and other information and such other
reports that the regulatory and supervisory authorities may require. The
Corporation is also subject to the reporting and other requirements of the
Securities Exchange Act of 1934, as amended.
The Corporation is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). As a bank holding company, the
activities of the Corporation are regulated by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The BHC Act requires that
the Corporation obtain prior approval of the Federal Reserve Board to acquire
control over a bank. Provided that the Corporation does not become a "financial
holding company" under the Gramm-Leach-Bliley Act (as discussed below), the BHC
Act also requires that the Corporation obtain prior approval of the Federal
Reserve Board to acquire certain nonbank entities and restricts the activities
of the Corporation to those closely related to banking. Federal law also
regulates transactions between the Corporation and the Bank, including loans or
extensions of credit.
The Bank is subject to the supervision of, and examination by, the FDIC, the
State of Rhode Island and the State of Connecticut, in which the Bank has
established branches. The Bank is also subject to various Rhode Island and
Connecticut business and banking regulations.
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) - Among
other things, FDICIA requires the federal banking regulators to take prompt
corrective action with respect to depository institutions that do not meet
minimum capital requirements.
FDICIA established five capital tiers, ranging from "well-capitalized" to
"critically undercapitalized". A depository institution is well-capitalized if
it significantly exceeds the minimum level required by regulation for each
relevant capital measure. Under FDICIA, an institution that is not
well-capitalized is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market. At December 31, 2000, the Bank's capital ratios placed it in the
well-capitalized category. Reference is made to Note 15 to the Corporation's
Consolidated Financial Statements for additional discussion of the Corporation's
regulatory capital requirements.
Another primary purpose of FDICIA was to recapitalize the Bank Insurance Fund
(BIF). The FDIC adopted a risk-related premium system for the assessment period
beginning January 1, 1993. Under this new system, each institution's assessment
rate is based on its capital ratios in combination with a supervisory evaluation
of the risk the institution poses to the BIF. Banks deemed to be
well-capitalized and who pose the lowest risk to the BIF will pay the lowest
assessment rates, while undercapitalized banks, which present the highest risk,
will pay the highest rates.
FDICIA contained other significant provisions that require the federal banking
regulators to establish standards for safety and soundness for depository
institutions and their holding companies in three areas: (i) operational and
managerial; (ii) asset quality, earnings and stock valuation; and (iii)
management compensation. The legislation also required that risk-based capital
requirements contain provisions for interest rate risk, credit risk and risks of
nontraditional activities. FDICIA also imposed expanded accounting and audit
reporting requirements for depository institutions. In addition, FDICIA imposed
numerous restrictions on state-chartered banks, including those that generally
limit investments and activities to those permitted to national banks, and
contains several consumer banking law provisions.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate
Act) - The Interstate Act permits adequately capitalized bank holding companies
to acquire banks in any state subject to certain concentration limits and other
conditions. The Interstate Act also authorizes the interstate merger of banks.
In addition, among other things, the Interstate Act permits banks to establish
new branches on an interstate basis provided that such action is specifically
authorized by the law of the host state. Both Rhode Island and Connecticut, the
two states in which the Corporation conducts banking operations, have adopted
legislation to "opt in" to interstate merger and branching provisions that
effectively eliminated state law barriers.
Gramm-Leach-Bliley Act - The Gramm-Leach-Bliley Act established a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHC Act framework to permit a holding company system, such as the
Corporation, to engage in a full range of financial activities through a new
entity known as a financial holding company. "Financial activities" is broadly
defined to include not only banking, insurance, and securities activities, but
also merchant banking and additional activities that the Federal Reserve Board,
in consultation with the Secretary of the Treasury, determines to be financial
in nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. In sum, the Gramm-Leach-Bliley
Act permits bank holding companies that qualify and elect to be treated as a
financial holding company to engage in a significantly broader range of
financial activities than the activities previously permitted for bank holding
companies.
Generally, the Gramm-Leach-Bliley Act and its implementing regulations:
o repeal historical restrictions on, and eliminate many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
o permit investment in non-financial enterprises, subject to significant
operational, holding period and other restrictions;
o provide a uniform framework for the functional regulation of the activities
of banks, savings institutions, and their holding companies;
o broaden the activities that may be conducted by national banks (and
derivatively state banks), banking subsidiaries of bank holding companies,
and their financial subsidiaries;
o require all financial institutions to provide notice of their privacy
policies at specified times to their retail customers and consumers of
their financial products or services, and permit retail customers and
consumers, under certain circumstances, to prohibit financial institutions
from sharing certain nonpublic personal information pertaining to them by
opting out of such sharing;
o establish guidelines for safeguarding the security, confidentiality and
integrity of customer information;
o adopt a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the Federal
Home Loan Bank ("FHLB") system;
o modify the laws governing the implementation of the Community Reinvestment
Act of 1977 ("CRA"); and
o address a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
In order to elect to become a financial holding company and engage in the new
activities, a bank holding company, such as the Corporation, must meet certain
tests and file an election form with the Federal Reserve Board, which generally
is acted on within thirty days. To qualify, all of a bank holding company's
subsidiary banks must be well-capitalized and well-managed, as measured by
regulatory guidelines. In addition, to engage in the new activities each of the
bank holding company's banks must have been rated "satisfactory" or better in
its most recent federal CRA evaluation. Furthermore, a bank holding company that
elects to be treated as a financial holding company may face significant
consequences if its banks fail to maintain the required capital and management
ratings, including entering into an agreement with the Federal Reserve Board
which imposes limitations on its operations and may even require divestitures.
Such possible ramifications may limit the ability of a bank subsidiary to
significantly expand or acquire less than well-capitalized and well-managed
institutions. At this time, the Corporation has no immediate plans to become a
financial holding company.
Dividend Restrictions - The Corporation's revenues consist of cash dividends
paid to it by the Bank. Such payments are restricted pursuant to various state
and federal regulatory limitations. Reference is made to Note 15 to the
Corporation's Consolidated Financial Statements for additional discussion of the
Corporation's ability to pay dividends.
Capital Guidelines - Regulatory guidelines have been established that require
bank holding companies and banks to maintain minimum ratios of capital to
risk-adjusted assets. Banks are required to have minimum core capital (Tier 1)
of 4% and total risk-adjusted capital (Tier 1 and Tier 2) of 8%. For the
Corporation, Tier 1 capital is essentially equal to shareholders' equity
excluding the net unrealized gain (loss) on securities available for sale. Tier
2 capital consists of a portion of the allowance for loan losses (limited to
1.25% of total risk-weighted assets). As of December 31, 2000, the Corporation's
net risk-weighted assets amounted to $663.7 million, its Tier 1 capital ratio
was 12.70% and its total risk-based capital ratio was 14.35%.
The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the
risk-based capital guidelines) divided by average assets (net of intangible
assets and excluding the effects of accounting for securities available for sale
under SFAS No. 115). The minimum leverage ratio is 3% for bank holding companies
that do not anticipate significant growth and that have well-diversified risk
(including no undue interest rate risk), excellent asset quality, high liquidity
and strong earnings. Other bank holding companies are expected to have ratios of
at least 4 - 5%, depending on their particular condition and growth plans.
Higher capital ratios could be required if warranted by the particular
circumstances or risk profile of a given bank holding company. The Corporation's
Tier 1 leverage ratio was 7.08% as of December 31, 2000. The Federal Reserve
Board has not advised the Corporation of any specific minimum Tier 1 leverage
capital ratio applicable to it.
Risk Factors:
In addition to the other information contained or incorporated by reference in
this Annual Report on Form 10-K, you should consider the following factors
relating to the business of the Corporation.
Interest Rate Volatility May Reduce Our Profitability
Significant changes in market interest rates may adversely affect both our
profitability and our financial condition. Our profitability depends in part on
the difference between rates earned on loans and investments and rates paid on
deposits and other interest-bearing liabilities. Since market interest rates may
change by differing magnitudes and at different times, significant changes in
interest rates over an extended period of time could reduce overall net interest
income. (See Item 7A, Quantitative and Qualitative Disclosures about Market
Risk, for additional discussion on interest rate risk.)
Changes in the Market Value of Trust and Investment Management Assets under
Administration May Reduce Our Profitability
Trust and investment management fees provide an important source of total
revenues. These fees are primarily dependent on the market value of trust and
investment management assets under administration. These assets primarily
consist of marketable securities. Reductions in the market value of these assets
could reduce the level of fees that we earn.
Our Allowance for Loan Losses May Not Be Adequate to Cover Actual Loan Losses
We make various assumptions and judgments about the collectibility of our loan
portfolio and provide an allowance for potential losses based on a number of
factors. If our assumptions are wrong, our allowance for loan losses may not be
sufficient to cover our losses, which would have an adverse effect on our
operating results, and may also cause us to increase the allowance in the
future. Further, our net income would decrease if we had to add additional
amounts to our allowance for loan losses. In addition to general real estate and
economic factors, the following factors could affect our ability to collect our
loans and require us to increase the allowance in the future:
o Regional credit concentration - We are exposed to real estate and
economic factors in Rhode Island and southeastern Connecticut because
virtually all of our loan portfolio is concentrated among borrowers in
these markets. Further, because a substantial portion of our loan
portfolio is secured by real estate in this area, including most
consumer loans and those commercial loans not specifically classified
as commercial mortgages, the value of our collateral is also subject to
regional real estate market conditions.
o Industry concentration - A portion of our loan portfolio consists of
loans to the hospitality and tourism industry. Loans to companies in
this industry may have a somewhat higher risk of loss than some other
industries because these businesses are seasonal, with a substantial
portion of commerce concentrated in the summer season. Accordingly, the
ability of borrowers to meet their repayment terms is more dependent on
economic, climate and other conditions and may be subject to a higher
degree of volatility from year to year.
We May Not Be Able to Compete Effectively Against Larger Financial Institutions
in Our Increasingly Competitive Industry.
The financial services industry in our market has experienced both significant
concentration and deregulation. This means that we compete with larger
financial institutions, both from banks and from other financial institutions,
for loans and deposits as well as other sources of funding in the communities we
serve, and we will likely face even greater competition in the future as a
result of recent federal legislative changes. Many of our competitors have
significantly greater resources and lending limits than we have. As a result
of those greater resources, the large financial institutions that we compete
with may be able to provide a broader range of services to their customers and
may be able to afford newer and more sophisticated technology. Our long-term
success depends on the ability of the Bank to compete successfully with other
financial institutions in their service areas.
In addition, as we strive to compete with other financial institutions, we may
expand into new areas, and there is no assurance that we will be successful in
these efforts. An example of our expansion is the Phoenix acquisition. Although
we believe that the business and management of Phoenix represent a significant
expansion of our business in the investment management area, there is no
assurance that our expansion into this area will be successful.
Limited Trading Activity in Our Common Stock Could Cause the Price of Our Shares
to Decline
While our common stock is listed and traded on the Nasdaq National Market, there
has only been limited trading activity in our common stock. The average daily
trading volume of our common stock over the twelve-month period ended December
31, 2000 was approximately 8,903 shares. Accordingly, sales of a significant
number of shares of common stock may adversely affect the market price of our
common stock.
Allowance for Loan Losses
The Corporation uses a methodology to systematically measure the amount of
estimated loan loss exposure inherent in the portfolio for purposes of
establishing a sufficient allowance for loan losses (ALL). The methodology
includes three elements: identification of specific loan losses, general loss
allocations for certain loan types based on credit grade and loss experience
factors, and general loss allocations for other environmental factors. The
methodology includes an analysis of individual loans deemed to be impaired in
accordance with the terms of SFAS 114. Other individual commercial and
commercial mortgage loans are evaluated using an internal rating system and the
application of loss allocation factors. The loan rating system and the related
loss allocation factors take into consideration the borrower's financial
condition, the borrower's performance with respect to loan terms and the
adequacy of collateral. Portfolios of more homogenous populations of loans
including residential mortgages and consumer loans are analyzed as groups taking
into account delinquency ratios and other indicators, the Corporation's
historical loss experience and comparison to industry standards of loss
allocation factors for each type of credit product. Finally, an additional
unallocated allowance is maintained based on a judgmental process whereby
management considers qualitative and quantitative assessments of other
environmental factors. For example, most of the loan portfolio is concentrated
among borrowers in southern Rhode Island and southeastern Connecticut and a
substantial portion of the portfolio is collateralized by real estate in this
area, including most consumer loans and those commercial loans not specifically
classified as commercial mortgages. A portion of the commercial and commercial
mortgage loans are to borrowers in the hospitality and tourism industry and this
concentration has been increasing in recent years. Economic conditions which may
affect the ability of borrowers to meet debt service requirements are considered
including interest rates and energy costs. Results of regulatory examinations,
historical loss ranges, portfolio composition including a trend toward somewhat
larger credit relationships, and other changes in the portfolio are also
considered. The allowance for loan losses is management's best estimate of the
probable loan losses incurred as of the balance sheet date. The allowance is
increased by provisions charged to earnings and by recoveries of amounts
previously charged off, and is reduced by charge-offs on loans.
GUIDE 3 STATISTICAL DISCLOSURES
The following tables contain additional consolidated statistical data about the
Corporation and the Bank, to be read in conjunction with the Notes to the
Consolidated Financial Statements.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. Average balance sheets are presented under the caption "Average
Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Nonaccrual loans are included in average loan balances. Average
balances are based upon daily averages.
B. An analysis of net interest earnings, including interest earned and paid,
average yields and costs, and net yield on interest-earning assets, is
presented under the caption "Average Balances/Net Interest Margin (Fully
Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Interest income is reported on the fully taxable-equivalent basis. Tax
exempt income is converted to a fully taxable equivalent basis using the
statutory federal income tax rate. For dividends on corporate stocks, the
70% federal dividends received deduction is also used in the calculation of
tax equivalency. Interest on nonaccrual loans is included in the analysis
of net interest earnings to the extent that such interest income has been
recognized in the Consolidated Statements of Income. See Guide 3
Statistical Disclosures - Item III.C.1.
C. An analysis of rate/volume changes in interest income and interest expense
is presented under the caption "Volume/Rate Analysis - Interest Income and
Expense (Fully Taxable Equivalent Basis)" of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The net change attributable to both volume and rate has been allocated
proportionately.
II. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
A. The carrying amounts of securities as of the dates indicated are presented
in the following tables:
(Dollars in thousands)
December 31, 2000 1999 1998
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Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $87,084 $86,310 $118,348
Mortgage-backed securities 240,856 189,086 145,806
Corporate bonds 38,565 33,684 27,503
Corporate stocks 20,106 21,351 28,184
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Total securities available for sale $386,611 $330,431 $319,841
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(Dollars in thousands)
December 31, 2000 1999 1998
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Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $35,135 $28,231 $21,987
Mortgage-backed securities 66,715 62,209 46,088
States and political subdivisions 23,065 25,932 27,572
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Total securities held to maturity $124,915 $116,372 $95,647
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B. Maturities of debt securities as of December 31, 2000 are presented in the
following tables. Mortgage-backed securities are included based on their
weighted average maturities, adjusted for anticipated prepayments. Yields
on tax exempt obligations are not computed on a tax equivalent basis.
(Dollars in thousands) Due in After 1 Year After 5 Years
1 Year but Within 5 but Within 10 After
Securities Available for Sale or Less Years Years 10 Years Totals
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U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies:
Amortized cost $19,414 $33,608 $26,270 $6,871 $86,163
Weighted average yield 6.48% 6.70% 6.89% 6.97% 6.73%
Mortgage-backed securities:
Amortized cost 38,914 111,942 47,152 42,428 240,436
Weighted average yield 7.11% 7.12% 7.17% 7.24% 7.15%
Corporate bonds:
Amortized cost 801 18,805 1,063 18,417 39,086
Weighted average yield 6.53% 6.95% 9.08% 7.77% 7.39%
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Total debt securities:
Amortized cost $59,129 $164,355 $74,485 $67,716 $365,685
Weighted average yield 6.89% 7.01% 7.10% 7.36% 7.07%
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Fair value $59,199 $165,409 $75,057 $66,840 $366,505
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(Dollars in thousands) Due in After 1 Year After 5 Years
1 Year but Within 5 but Within 10 After
Securities Held to Maturity or Less Years Years 10 Years Totals
-----------------------------------------------------------------------------------------------------------
U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies:
Amortized cost $8,673 $21,702 $4,760 $ - $35,135
Weighted average yield 7.08% 6.67% 6.37% - 6.73%
Mortgage-backed securities:
Amortized cost 11,388 31,055 17,256 7,016 66,715
Weighted average yield 6.68% 6.67% 6.67% 6.81% 6.69%
States and political
subdivisions:
Amortized cost 3,405 11,412 8,248 - 23,065
Weighted average yield 4.37% 4.29% 4.24% - 4.28%
------------------------------------------------------------------------------------------------------------
Total debt securities:
Amortized cost $23,466 $64,169 $30,264 $7,016 $124,915
Weighted average yield 6.50% 6.25% 5.96% 6.81% 6.26%
------------------------------------------------------------------------------------------------------------
Fair value $23,553 $64,460 $30,316 $7,039 $125,368
------------------------------------------------------------------------------------------------------------
C. Not applicable.
III. LOAN PORTFOLIO
A. The following table sets forth the composition of the Corporation's loan
portfolio for each of the past five years:
(Dollars in thousands)
December 31, 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------
Commercial:
Mortgages $121,817 $113,719 $87,132 $76,483 $77,482
Construction and development 2,809 2,902 2,855 5,508 5,314
Other 115,202 115,739 113,372 129,258 110,491
-------------------------------------------------------------------------------------------------------------
Total commercial 239,828 232,360 203,359 211,249 193,287
Residential real estate:
Mortgages 236,595 212,719 191,101 188,729 177,450
Homeowner construction 14,344 12,995 15,052 8,414 6,977
-------------------------------------------------------------------------------------------------------------
Total residential real estate 250,939 225,714 206,153 197,143 184,427
-------------------------------------------------------------------------------------------------------------
Consumer 106,388 90,951 87,458 81,394 68,198
-------------------------------------------------------------------------------------------------------------
Total loans $597,155 $549,025 $496,970 $489,786 $445,912
-------------------------------------------------------------------------------------------------------------
B. An analysis of the maturity and interest rate sensitivity of Real Estate
Construction and Other Commercial loans as of December 31, 2000 follows:
(Dollars in thousands)
One Year One to Five After Five
Matures in: or Less Years Years Totals
-------------------------------------------------------------------------------------------------------------
Construction and development (1) $2,199 $5,498 $9,456 $17,153
Commercial - other 42,456 46,355 26,391 115,202
-------------------------------------------------------------------------------------------------------------
$44,655 $51,853 $35,847 $132,355
-------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes homeowner construction and commercial construction and
development. Maturities of homeowner construction loans are included
based on their contractual conventional mortgage repayment terms
following the completion of construction.
</FN>
Sensitivity to changes in interest rates for all such loans due after one year
is as follows:
(Dollars in thousands) Floating or
Predetermined Adjustable
Rates Rates Totals
---------------------------------------------------------------------------
Principal due after one year $51,025 $36,675 $87,700
---------------------------------------------------------------------------
C. Risk Elements
Reference is made to the caption "Asset Quality" included in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Included therein is a discussion of the Corporation's credit
review and accounting practices, as well as information relevant to
nonperforming assets at December 31, 2000.
1. Nonaccrual, Past Due and Restructured Loans
a) Nonaccrual loans as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------
$3,434 $3,798 $5,846 $7,644 $8,197
---------------------------------------------------------------------------
Loans, with the exception of certain well-secured residential mortgage
loans, are placed on nonaccrual status and interest recognition is
suspended when such loans are 90 days or more overdue with respect to
principal and/or interest. Well-secured residential mortgage loans are
permitted to remain on accrual status provided that full collection of
principal and interest is assured. Loans are also placed on nonaccrual
status when, in the opinion of management, full collection of principal and
interest is doubtful. Interest previously accrued, but not collected on
such loans is reversed against current period income. Cash receipts on
nonaccrual loans are recorded as interest income or as a reduction of
principal if full collection of the loan is doubtful or if impairment of
the collateral is identified. Loans are removed from nonaccrual status when
they have been current as to principal and interest for a period of time,
the borrower had demonstrated an ability to comply with repayment terms,
and when, in management's opinion, the loans are considered to be fully
collectible.
For the year ended December 31, 2000, the gross interest income that would
have been recognized if loans on nonaccrual status had been current in
accordance with their original terms was approximately $411 thousand.
Interest recognized on these loans amounted to approximately $250 thousand.
There were no significant commitments to lend additional funds to borrowers
whose loans were on nonaccrual status at December 31, 2000.
b) Loans contractually past due 90 days or more and still accruing for
the dates indicated were as follows:
(Dollars in thousands)
December 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------
$393 $120 $235 $651 $1,517
---------------------------------------------------------------------------
c) Restructured accruing loans for the dates indicated were as follows:
(Dollars in thousands)
December 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------
$ - $446 $ - $ - $ -
---------------------------------------------------------------------------
Restructured accruing loans include those for which concessions, such as
reduction of interest rates other than normal market rate adjustments or
deferral of principal or interest payments, have been granted due to a
borrower's financial condition. Interest on restructured loans is accrued
at the reduced rate.
2. Potential Problem Loans
Potential problem loans consist of certain accruing commercial loans that
were less than 90 days past due at December 31, 2000, but were identified
by management of the Bank as potential problem loans. Such loans are
characterized by weaknesses in the financial condition of borrowers or
collateral deficiencies. Based on historical experience, the credit quality
of some of these loans may improve as a result of collection efforts, while
the credit quality of other loans may deteriorate, resulting in some amount
of losses. These loans are not included in the analysis of nonaccrual, past
due and restructured loans in Section III.C.1 above. At December 31, 2000,
potential problem loans amounted to approximately $209 thousand. The
Corporation's loan policy provides guidelines for the review of such loans
in order to facilitate collection.
Depending on future events, these potential problem loans, and others not
currently identified, could be classified as nonperforming in the future.
3. Foreign Outstandings: None
4. Loan Concentrations: The Corporation has no concentration of loans that
exceed 10% of its total loans except as disclosed by types of loan in
Section III.A.
D. Other Interest-Bearing Assets: None
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is management's best estimate of probable
credit losses in the loan portfolio that have been incurred as of the
balance sheet date. The level of the allowance is based on management's
ongoing review of the growth and composition of the loan portfolio, net
charge-off experience, current and expected economic conditions, and other
pertinent factors. Loans (or portions thereof) deemed to be uncollectible
are charged against the allowance and recoveries of amounts previously
charged off are added to the allowance. Loss experience on loans is
presented in the following table for the years indicated:
(Dollars in thousands)
December 31, 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------
Balance at beginning of year $12,349 $10,966 $9,335 $9,009 $8,322
Charge-offs
Commercial:
Mortgages 61 170 - 248 330
Construction and development - 119 - - 15
Other 144 304 322 740 415
Residential:
Mortgages 65 - 14 174 166
Homeowner construction - 23 - - -
Consumer 413 351 317 360 395
------------------------------------------------------------------------------------------------------------
Total charge-offs 683 967 653 1,522 1,321
------------------------------------------------------------------------------------------------------------
Recoveries
Commercial:
Mortgages 53 44 51 110 33
Construction and development - - - 7 -
Other 157 202 270 233 628
Residential:
Mortgages 46 135 9 13 13
Homeowner construction - 1 - - -
Consumer 63 128 75 61 116
------------------------------------------------------------------------------------------------------------
Total recoveries 319 510 405 424 790
------------------------------------------------------------------------------------------------------------
Net charge-offs 364 457 248 1,098 531
Additions charged to earnings 1,150 1,840 1,879 1,424 1,218
------------------------------------------------------------------------------------------------------------
Balance at end of year $13,135 $12,349 $10,966 $9,335 $9,009
------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans .06% .09% .05% .23% .13%
------------------------------------------------------------------------------------------------------------
B. The following table presents the allocation of the allowance for loan losses:
(Dollars in thousands)
December 31, 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------
Commercial:
Mortgages $2,316 $1,920 $1,604 $1,368 $1,410
% of these loans to all loans 20.4% 20.7% 17.5% 15.6% 17.4%
Construction and development 55 56 45 72 61
% of these loans to all loans .5% .5% .6% 1.1% 1.2%
Other 2,250 1,979 2,142 2,461 2,452
% of these loans to all loans 19.3% 21.1% 22.8% 26.4% 24.8%
Residential:
Mortgages 1,286 1,165 1,108 1,127 1,273
% of these loans to all loans 39.6% 38.7% 38.5% 38.6% 39.8%
Homeowner construction 78 71 87 50 50
% of these loans to all loans 2.4% 2.4% 3.0% 1.7% 1.5%
Consumer 1,295 1,155 1,189 1,117 1,173
% of these loans to all loans 17.8% 16.6% 17.6% 16.6% 15.3%
Unallocated 5,855 6,003 4,791 3,140 2,590
-------------------------------------------------------------------------------------------------------------
Balance at end of year $13,135 $12,349 $10,966 $9,335 $9,009
100.0% 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------------------------------------------
V. DEPOSITS
A. Average deposit balances outstanding and the average rates paid thereon are
presented in the following table:
(Dollars in thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Paid Amount Rate Paid Amount Rate Paid
-----------------------------------------------------------------------------------------------------------
Demand deposits $106,741 - $97,716 - $83,100 -
Savings deposits:
Regular 129,208 2.18% 128,218 2.19% 112,914 2.39%
NOW 79,782 .73% 75,167 .93% 67,617 .94%
Money market 31,590 3.11% 25,547 2.11% 23,969 2.12%
-----------------------------------------------------------------------------------------------------------
Total savings 240,580 1.82% 228,932 1.77% 204,500 1.87%
Time deposits 351,961 5.64% 318,281 4.99% 309,094 5.42%
-----------------------------------------------------------------------------------------------------------
Total deposits $699,282 3.46% $644,929 3.09% $596,694 3.45%
-----------------------------------------------------------------------------------------------------------
B. Not Applicable
C. Not Applicable
D. The maturity schedule of time deposits in amounts of $100 thousand or more
at December 31, 2000 was as follows:
(Dollars in thousands) Over 3 Over 6
3 months through through Over 12
Time remaining until maturity or less 6 months 12 months months Totals
--------------------------------------------------------------------------------------------------------------
$78,567 $7,943 $11,657 $24,690 $122,857
--------------------------------------------------------------------------------------------------------------
E. Not Applicable
VI. RETURN ON EQUITY AND ASSETS
2000 1999 1998
------------------------------------------------------------------------------------------------------------
Return on average assets 1.14% 1.19% 1.31%
Return on average assets - operating basis (1) 1.20% 1.21% 1.24%
Return on average shareholders' equity 16.14% 15.73% 16.09%
Return on average shareholders' equity - operating basis (1) 16.98% 16.04% 15.21%
Dividend payout ratio (2) 41.74% 41.51% 42.11%
Average equity to average total assets 7.05% 7.55% 8.17%
<FN>
(1) Excludes second quarter 2000 and third quarter 1999 acquisition related
expenses of $1.1 million and $1.3 million, respectively, after income
taxes. Excludes third quarter 1999 net gain on sale of credit card
portfolio of $285 thousand, after income taxes. Also includes a pro
forma income tax provision on pre-acquisition earnings of Phoenix,
which operated as a sub-S corporation prior to the acquisition. The pro
forma income tax provision amounted to $413 thousand and $767 thousand
for the years ended December 31, 2000 and 1999, respectively.
(2) Represents the ratio of historical per share dividends declared by the
Corporation to diluted earnings per share, on an operating basis,
restated for the pooling effect of the Corporation, Pier Bank and
Phoenix.
</FN>
VII. SHORT-TERM BORROWINGS
Not Applicable
ITEM 2. PROPERTIES
The Corporation conducts its business from its corporate headquarters and other
properties listed below all of which are considered to be in good condition and
adequate for the purposes for which they are used.
The following table sets forth certain information relating to bank premises
owned or used by the Corporation in conducting its business:
Own/Lease
Location Description Expiration Date
- -------------------------------------------------------------------------------------------------------------------
23 Broad Street, Westerly, RI Corporate headquarters Own
1200 Main Street, Wyoming (Richmond), RI Branch office Own
126 Franklin Street, Westerly, RI Branch office Own
Ocean Avenue, New Shoreham (Block Island), RI Branch office Lease / 2001 (1)
4137 Old Post Road, Charlestown, RI Branch office Own
20 Point Judith Road, Narragansett, RI Branch office Own
7625 Post Road, North Kingstown, RI Branch office Own
730 Kingstown Road, Wakefield, RI Branch office Lease / 2005 (1)
885 Boston Neck Road, Narragansett, RI Branch office Own
Olde Mistick Village, 27 Coogan Boulevard, Mystic, CT Branch office Lease / 2003
McQuades Marketplace, Main Street, Westerly, RI Supermarket branch Lease / 2002 (1)
McQuades Marketplace, 10 Clara Drive, Mystic, CT Supermarket branch Lease / 2002 (1)
A & P Super Market, Route 1, Mystic, CT Supermarket branch Lease / 2002 (1)
66 South Main Street, Providence, RI Trust and investment services office Lease / 2004 (1)
5 Ledward Avenue, Westerly, RI Operations facility Lease / 2001 (1)
2 Crosswinds Drive, Westerly, RI Operations facility Own
<FN>
(1) Lease may be extended by the Corporation beyond the indicated expiration
date.
</FN>
ITEM 3. LEGAL PROCEEDINGS
On January 28, 1997, a suit was filed against the Bank in the Superior Court of
Washington County, Rhode Island by Maxson Automatic Machinery Company
("Maxson"), a former corporate customer, and Maxson's shareholders for damages
which the plaintiffs allegedly incurred as a result of an embezzlement by
Maxson's former president, treasurer and fifty percent shareholder, which
allegedly occurred between 1986 and 1995. The suit alleges that the Bank erred
in permitting this individual, while an officer of Maxson, to transfer funds
from Maxson's account at the Bank for his personal benefit. The claims against
the Bank are based upon theories of breach of fiduciary duty, negligence, breach
of contract, unjust enrichment, conversion, failure to act in a commercially
reasonable manner, and constructive fraud.
Management believes, based on its review with counsel of the development of this
matter to date, that the Bank has asserted meritorious affirmative defenses in
this litigation. Additionally, the Bank has filed counterclaims against Maxson
and its shareholders as well as claims against the former Maxson officer
allegedly responsible for the embezzlement. The Bank is vigorously asserting its
defenses and affirmative claims. The discovery phase of the case has been
completed, though the parties are attempting to resolve several discovery
disputes. The Bank has also filed several motions, all of which seek dismissal
of one or more of the plaintiffs' claims and/or exclusion of portions of the
plaintiffs' evidence. The court began hearing argument on the motions on March
8, 2001, and has expressed a desire to hear further argument. There is currently
no scheduled trial date. During discovery, the plaintiffs have offered various
theories and amounts of alleged damages, ranging from $5.0 million to $12.7
million, plus interest thereon. The plaintiffs have also filed a motion to amend
the complaint to add a claim for punitive damages. The court has deferred ruling
on whether to permit this amendment. Because of the numerous uncertainties that
surround the litigation, management and legal counsel are unable to estimate the
amount of loss, if any, that the Bank may incur with respect to this litigation.
Consequently, no loss provision has been recorded.
The Corporation is involved in various other claims and legal proceedings
arising out of the ordinary course of business. Management is of the opinion,
based on its review with counsel of the development of such matters to date,
that the ultimate disposition of such other matters will not materially affect
the consolidated financial position or results of operations of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of all executive officers of the Corporation and the
Bank with their titles, ages, and length of service, followed by certain
biographical information.
Years of
Name Title Age Service
--------------------------------------------------------------------------------------------------------------------
John C. Warren Chairman and Chief Executive Officer of the Corporation and the Bank 55 5
John F. Treanor President and Chief Operating Officer of the Corporation and the Bank 53 2
David V. Devault, CPA Executive Vice President, Treasurer and Chief Financial Officer
of the Corporation and the Bank 46 14
Harvey C. Perry II Senior Vice President and Secretary of the Corporation and the Bank 51 26
Stephen M. Bessette Senior Vice President - Retail Lending of the Bank 53 4
Vernon F. Bliven Senior Vice President - Human Resources of the Bank 51 28
Elizabeth B. Eckel Senior Vice President - Marketing of the Bank 40 9
William D. Gibson Senior Vice President - Credit Administration of the Bank 54 2
Joseph E. LaPlume Senior Vice President and Regional Manager of the Bank 55 1
Barbara J. Perino, CPA Senior Vice President - Operations and Technology of the Bank 39 12
B. Michael Rauh, Jr. Senior Vice President - Retail Banking of the Bank 41 9
James M. Vesey Senior Vice President and Chief Credit Officer of the Bank 52 2
John C. Warren joined the Bank and the Corporation in 1996 as President and
Chief Operating Officer. In 1997, he was elected President and Chief Executive
Officer. In 1999, he was elected Chairman and Chief Executive Officer of the
Corporation and the Bank.
John F. Treanor joined the Bank and the Corporation in April 1999 as President
and Chief Operating Officer. He served as Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Treasurer of SIS Bancorp, Inc.
from 1994 to 1999.
David V. Devault joined the Bank in 1986 as Controller. He was elected Vice
President and Chief Financial Officer of the Corporation and the Bank in 1987.
He was elected Senior Vice President and Chief Financial Officer of the
Corporation and the Bank in 1990. In 1997, he was also elected Treasurer of the
Corporation and the Bank. In 1998, he was elected Executive Vice President,
Treasurer and Chief Financial Officer of the Corporation and the Bank.
Harvey C. Perry II joined the Bank in 1974 and was elected Assistant Trust
Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982.
He was elected Vice President and Secretary of the Corporation and the Bank in
1984, and Senior Vice President and Secretary of the Corporation and the Bank in
1990.
Stephen M. Bessette joined the Bank in February 1997 as Senior Vice President -
Retail Lending. Prior to joining the Bank he held the position of Executive Vice
President at Ameristone Mortgage Corporation since June 1995.
Vernon F. Bliven joined the Bank in 1972 and was elected Assistant Vice
President in 1980, Vice President in 1986 and Senior Vice President - Human
Resources in 1993.
Elizabeth B. Eckel joined the Bank in 1991 as Director of Advertising and Public
Relations. In 1995, she was named Vice President - Marketing. She was promoted
to Senior Vice President - Marketing in 2000.
William D. Gibson joined the Bank in March 1999 as Senior Vice President -
Credit Administration. Prior to joining the Bank, he served as Senior Vice
President of Credit Review and Senior Vice President of Credit and Loan
Administration of Citizens Bank since October 1977.
Joseph E. LaPlume joined the Bank in August 1999 as Senior Vice President and
Regional Manager. Prior to joining the Bank he served as President and Chief
Executive Officer of Pier Bank since November 1993.
Barbara J. Perino joined the Bank in 1988 as Financial Accounting Officer. She
was named Controller in 1989 and Vice President - Controller in 1992. In 1998
she was promoted to Senior Vice President - Operations and Technology.
B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and
was promoted in 1993 to Senior Vice President - Retail Banking.
James M. Vesey joined the Bank in 1998 as Senior Vice President - Commercial
Lending. In 2000, he was named Senior Vice President and Chief Credit Officer.
Prior to joining the Bank he held the position of Senior Vice President and
Director of Business Banking at Citizens Bank since December 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock has traded on the Nasdaq National Market since
May 1996. Previously, the Corporation's stock traded on the Nasdaq Small-Cap
Market since June 1992, and had been listed on the Nasdaq Over-The-Counter
Market system since June 1987.
The quarterly common stock price ranges and dividends paid per share for the
years ended December 31, 2000 and 1999 are presented in the following table. The
stock prices are based on the high and low sales prices during the respective
quarter.
2000 Quarters 1 2 3 4
----------------------------------------------------------------------------
Stock prices:
High 17.50 $15.94 $15.63 $14.63
Low 13.88 14.50 14.50 13.38
Cash dividend declared per share $.12 $.12 $.12 $.12
1999 Quarters 1 2 3 4
----------------------------------------------------------------------------
Stock prices:
High $21.88 $20.38 $18.00 $19.00
Low 16.50 15.75 14.75 15.25
Cash dividend declared per share $.11 $.11 $.11 $.11
The Corporation will continue to review future common stock dividends based on
profitability, financial resources and economic conditions. The Corporation
(including the Bank prior to 1984) has recorded consecutive quarterly dividends
for over one hundred years.
The Corporation's primary source of funds for dividends paid to shareholders is
the receipt of dividends from the Bank. A discussion of the restrictions on the
advance of funds or payment of dividends to the Corporation is included in Note
15 to the Consolidated Financial Statements.
At February 27, 2001 there were 2,081 holders of record of the Corporation's
common stock.
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED OPERATING DATA AND FINANCIAL RATIOS: (Dollars in thousands)
At or for the years ended December 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------
Financial Results:
Interest income $85,099 $73,002 $67,226 $61,402 $48,613
Interest expense 47,231 37,394 34,658 31,159 20,941
---------------------------------------------------------------------------------------------------------------
Net interest income 37,868 35,608 32,568 30,243 27,672
Provision for loan losses 1,150 1,840 1,879 1,424 1,218
---------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 36,718 33,768 30,689 28,819 26,454
Noninterest income 19,712 18,826 16,517 14,525 11,127
---------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 56,430 52,594 47,206 43,344 37,581
Noninterest expense 37,548 35,329 30,793 27,988 23,671
---------------------------------------------------------------------------------------------------------------
Income before income taxes 18,882 17,265 16,413 15,356 13,910
Income tax expense 5,673 4,754 4,235 3,884 4,457
---------------------------------------------------------------------------------------------------------------
Net income $13,209 $12,511 $12,178 $11,472 $9,453
---------------------------------------------------------------------------------------------------------------
Per share information ($): (1)
Earnings per share:
Basic 1.10 1.05 1.04 .99 .83
Basic - operating basis (2) 1.16 1.07 .98 .92 .80
Diluted 1.09 1.03 1.01 .96 .81
Diluted - operating basis (2) 1.15 1.06 .95 .89 .78
Cash dividends declared (3) .48 .44 .40 .35 .31
Book value 7.43 6.55 6.66 6.20 5.54
Market value - closing stock price 14.00 17.75 21.50 23.33 13.78
Performance Ratios (%):
Return on average assets 1.14 1.19 1.31 1.40 1.53
Return on average assets - operating basis (2) 1.20 1.21 1.24 1.30 1.48
Return on average shareholders' equity 16.14 15.73 16.09 16.85 15.80
Return on average shareholders' equity -
operating basis (2) 16.98 16.04 15.21 15.64 15.27
Dividend payout ratio (4) 41.74 41.51 42.11 39.33 39.74
Asset Quality Ratios (%):
Nonperforming loans to total loans .58 .69 1.18 1.56 1.84
Nonperforming assets to total assets .28 .35 .61 .99 1.33
Allowance for loan losses to nonaccrual loans 382.50 325.15 187.59 122.12 109.91
Allowance for loan losses to total loans 2.20 2.25 2.21 1.91 2.02
Net charge-offs to average loans .06 .09 .05 .23 .13
Capital Ratios (%):
Total equity to total assets 7.32 7.07 7.87 8.37 8.68
Tier 1 leverage capital ratio 7.08 7.22 7.37 7.61 8.78
Total risk-based capital ratio 14.35 14.38 14.87 14.37 14.98
<FN>
(1) Adjusted to reflect the 3-for-2 stock splits paid on August 3, 1998 and
November 19, 1997.
(2) Excludes second quarter 2000 and third quarter 1999 acquisition related
expenses of $1.1 million and $1.3 million, respectively, after income
taxes. Excludes third quarter 1999 net gain on sale of credit card
portfolio of $285 thousand, after income taxes. Also includes a pro
forma income tax provision on pre-acquisition earnings of Phoenix,
which operated as a sub-S corporation prior to the acquisition. The pro
forma income tax provision amounted to $413 thousand and $767 thousand
for the twelve-month periods ended December 31, 2000 and 1999,
respectively.
(3) Represents historical per share dividends declared by the Corporation.
(4) Represents the ratio of historical per share dividends declared by the
Corporation to diluted earnings per share, on an operating basis,
restated for the pooling effect of the Corporation, Pier Bank and
Phoenix.
</FN>
SELECTED BALANCE SHEET DATA: (Dollars in thousands)
December 31, 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
Financial Condition:
Cash and cash equivalents $43,860 $44,520 $34,654 $31,547 $23,184
Total securities 511,526 446,803 415,488 293,949 229,970
FHLB stock 19,558 17,627 16,583 16,444 11,683
Net loans 584,020 536,676 486,004 480,451 436,903
Other 59,103 59,979 42,421 39,027 30,808
-----------------------------------------------------------------------------------------------------------------
Total assets $1,218,067 $1,105,605 $995,150 $861,418 $732,548
-----------------------------------------------------------------------------------------------------------------
Deposits $735,684 $660,753 $627,763 $572,803 $509,797
FHLB advances 377,362 352,548 264,106 187,001 138,493
Other borrowings 3,227 4,209 15,033 20,337 14,000
Other liabilities 12,608 9,928 9,897 9,218 6,694
Shareholders' equity 89,186 78,167 78,351 72,059 63,564
-----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,218,067 $1,105,605 $995,150 $861,418 $732,548
-----------------------------------------------------------------------------------------------------------------
Asset Quality:
Nonaccrual loans $3,434 $3,798 $5,846 $7,644 $8,197
Other real estate owned, net 9 49 243 888 1,574
-----------------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,443 $3,847 $6,089 $8,532 $9,771
-----------------------------------------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
2000 Q1 (1) Q2 Q3 Q4 Year
- ----------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $11,650 $12,132 $12,669 $12,972 $49,423
Income from securities 7,407 7,898 8,322 8,441 32,068
Dividends on corporate stock and
FHLB stock 671 670 715 715 2,771
Interest on federal funds sold
and other short-term investments 160 218 252 207 837
- ----------------------------------------------------------------------------------------------------------------
Total interest income 19,888 20,918 21,958 22,335 85,099
- ----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 996 998 1,087 1,302 4,383
Time deposits 4,448 4,778 5,187 5,428 19,841
FHLB advances 5,251 5,772 5,886 5,977 22,886
Other 25 41 30 25 121
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 10,720 11,589 12,190 12,732 47,231
- ----------------------------------------------------------------------------------------------------------------
Net interest income 9,168 9,329 9,768 9,603 37,868
Provision for loan losses 350 350 250 200 1,150
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 8,818 8,979 9,518 9,403 36,718
- ----------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,514 2,805 2,657 2,568 10,544
Service charges on deposit accounts 796 806 842 853 3,297
Merchant processing fees 272 536 906 430 2,144
Income from bank-owned life insurance 242 259 271 275 1,047
Mortgage banking activities 121 134 139 191 585
Net gains on sales of securities 384 374 - 2 760
Other income 432 240 594 69 1,335
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 4,761 5,154 5,409 4,388 19,712
- ----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 4,956 5,050 4,885 4,859 19,750
Net occupancy 636 630 617 718 2,601
Equipment 800 937 1,082 773 3,592
Legal, audit and professional fees 478 405 434 566 1,883
Merchant processing costs 225 421 712 349 1,707
Advertising and promotion 357 348 278 213 1,196
Office supplies 173 185 140 143 641
Acquisition related expenses - 1,035 - - 1,035
Other 1,284 1,422 1,450 987 5,143
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 8,909 10,433 9,598 8,608 37,548
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 4,670 3,700 5,329 5,183 18,882
Income tax expense 1,238 1,308 1,585 1,542 5,673
- ----------------------------------------------------------------------------------------------------------------
Net income $3,432 $2,392 $3,744 $3,641 $13,209
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share $.29 $.20 $.31 $.30 $1.10
Diluted earnings per share $.28 $.20 $.31 $.30 $1.09
Cash dividends declared per share (2) $.12 $.12 $.12 $.12 $.48
<FN>
(1) Amounts have been restated as a result of the second quarter 2000
acquisition of Phoenix and differ from those reported in the previously
filed Quarterly Report on Form 10-Q.
(2) Represents historical per share dividends declared by the Corporation.
</FN>
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
1999 (1) Q1 Q2 Q3 Q4 Year
- ----------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $10,808 $11,078 $11,420 $11,522 $44,828
Income from securities 6,108 6,207 6,518 6,780 25,613
Dividends on corporate stock and
FHLB stock 535 518 486 504 2,043
Interest on federal funds sold
and other short-term investments 159 128 131 100 518
- ----------------------------------------------------------------------------------------------------------------
Total interest income 17,610 17,931 18,555 18,906 73,002
- ----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 946 1,004 1,053 1,040 4,043
Time deposits 3,888 3,945 3,986 4,052 15,871
FHLB advances 3,846 4,027 4,257 4,725 16,855
Other 219 254 121 31 625
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 8,899 9,230 9,417 9,848 37,394
- ----------------------------------------------------------------------------------------------------------------
Net interest income 8,711 8,701 9,138 9,058 35,608
Provision for loan losses 482 458 450 450 1,840
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 8,229 8,243 8,688 8,608 33,768
- ----------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,242 2,322 2,324 2,426 9,314
Service charges on deposit accounts 758 794 777 840 3,169
Merchant processing fees 250 393 599 293 1,535
Income from bank-owned life insurance - 196 238 242 676
Mortgage banking activities 498 378 295 205 1,376
Net gains (losses) on sales of securities 262 122 (4) 298 678
Net gain on sale of credit card portfolio - - 438 - 438
Other income 359 478 405 398 1,640
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 4,369 4,683 5,072 4,702 18,826
- ----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 4,440 4,552 4,608 4,694 18,294
Net occupancy 601 624 652 617 2,494
Equipment 741 792 801 788 3,122
Legal, audit and professional fees 216 258 292 313 1,079
Merchant processing costs 158 299 537 319 1,313
Advertising and promotion 195 328 205 263 991
Office supplies 170 171 164 227 732
Acquisition related expenses - - 1,552 - 1,552
Other 1,699 1,313 1,218 1,522 5,752
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 8,220 8,337 10,029 8,743 35,329
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 4,378 4,589 3,731 4,567 17,265
Income tax expense 1,205 1,244 1,229 1,076 4,754
- ----------------------------------------------------------------------------------------------------------------
Net income $3,173 $3,345 $2,502 $3,491 $12,511
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share $.27 $.28 $.21 $.29 $1.05
Diluted earnings per share $.26 $.28 $.21 $.28 $1.03
Cash dividends declared per share (2) $.11 $.11 $.11 $.11 $.44
<FN>
(1) Amounts have been restated as a result of the second quarter 2000
acquisition of Phoenix and differ from those reported in the Annual Report
on Form 10-K for the year ended December 31, 1999.
(2) Represents historical per share dividends declared by the Corporation.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This report contains statements that are "forward-looking statements". We may
also make written or oral forward-looking statements in other documents we file
with the Securities and Exchange Commission, in our annual reports to
shareholders, in press releases and other written materials, and in oral
statements made by our officers, directors or employees. You can identify
forward-looking statements by the use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and
other expressions which predict or indicate future events and trends and which
do not relate to historical matters. You should not rely on forward-looking
statements, because they involve known and unknown risks, uncertainties and
other factors, some of which are beyond the control of the Corporation. These
risks, uncertainties and other factors may cause the actual results, performance
or achievements of the Corporation to be materially different from the
anticipated future results, performance or achievements expressed or implied by
the forward-looking statements.
Some of the factors that might cause these differences include the following:
changes in general national or regional economic conditions, changes in interest
rates, reductions in the market value of trust and investment management assets
under administration, reductions in deposit levels necessitating increased
borrowing to fund loans and investments, changes in the size and nature of the
Corporation's competition, changes in loan defaults and charge-off rates, risk
of an adverse action in pending litigation, and changes in the assumptions used
in making such forward-looking statements. In addition, the factors described
under "Risk Factors" in Item 1 of this report may result in these differences.
You should carefully review all of these factors, and you should be aware that
there may be other factors that could cause these differences. These
forward-looking statements were based on information, plans and estimates at the
date of this report, and we do not promise to update any forward-looking
statements to reflect changes in underlying assumptions or factors, new
information, future events or other changes.
Financial Overview
Washington Trust recorded net income of $13.2 million, or $1.09 per diluted
share, for 2000. In the second quarter of 2000, the Corporation completed the
acquisition of Phoenix and recorded acquisition-related expenses of $1.1
million, after income taxes. During the third quarter of 1999, the Corporation
completed its acquisition of Pier Bank and also recognized a nonrecurring gain
on the sale of its credit card loan portfolio. 1999 results included acquisition
related expenses of $1.3 million, net of income taxes, and the loan sale gain,
net of expenses and related income taxes, of $285 thousand. The acquisitions
were accounted for under the pooling of interests method and accordingly, the
consolidated financial statements for the Corporation have been restated to
reflect the acquisitions at the beginning of each period presented.
Substantially all of Phoenix related revenues have been recorded as trust and
investment management revenue in noninterest income. Results excluding
acquisition-related expenses, net of taxes, and the loan sale gain, net of
taxes, are referred to herein as "operating". Operating basis earnings also
include a pro forma tax provision for pre-acquisition earnings of Phoenix, which
operated as a sub-S corporation prior to the acquisition.
Operating earnings for the year 2000 amounted to $13.9 million, an increase of
8.9% from $12.8 million reported for 1999. Diluted earnings per share, on an
operating basis, amounted to $1.15 for 2000, up from $1.06 per share in 1999.
The Corporation's rates of return on average assets and average equity, on an
operating basis, for 2000 were 1.20% and 16.98%, respectively. Comparable
amounts for the year 1999 were 1.21% and 16.04%, respectively.
For the year ended December 31, 2000, net interest income (the difference
between interest earned on loans and securities and interest paid on deposits
and other borrowings) amounted to $37.9 million, up 6.3% over the 1999 amount.
The net interest margin for the year 2000 amounted to 3.55%, compared to 3.71%
in 1999. Other noninterest income (noninterest income excluding net gains on
sales of securities and the nonrecurring 1999 loan sale gain) amounted to $19.0
million for the year 2000, up 7.0% from $17.7 million in 1999. The increase was
primarily due to growth in revenues for trust and investment management
services, offset in part by a decline in revenue from mortgage banking
activities.
For the year 2000, total operating noninterest expense (total noninterest
expense excluding acquisition-related expenses) amounted to $36.5 million, up
8.1% over the comparable 1999 amount. The increase was primarily attributable to
higher salaries and benefits expense, increases in legal, audit and professional
fees, and higher equipment costs. Included in other noninterest expense for the
twelve months ended December 31, 2000 and 1999 were contributions of appreciated
equity securities to the Corporation's charitable foundation amounting to $424
thousand and $270 thousand, respectively. These transactions resulted in
realized securities gains of $310 thousand and $262 thousand, respectively, for
the same periods.
Total consolidated assets amounted to $1.218 billion at December 31, 2000, up
10.2% from the December 31, 1999 balance of $1.106 billion. Average assets rose
10.3% during 2000 and amounted to $1.161 billion. The growth in assets was
primarily attributable to purchases of securities and growth in the loan
portfolio. Increases in FHLB advances as well as an 11.3% increase in total
deposits funded the growth in assets. Total deposits amounted to $735.7 million
and $660.8 million at December 31, 2000 and 1999, respectively. FHLB advances
totaled $377.4 million at December 31, 2000, up 7.0% from the prior year balance
of $352.5 million.
Nonperforming assets (nonaccrual loans and property acquired through
foreclosure) amounted to $3.4 million or .28% of total assets at December 31,
2000, compared to $3.8 million or .35% of total assets at December 31, 1999. The
Corporation's loan loss provision was $1.2 million and $1.8 million in 2000 and
1999, respectively.
Total shareholders' equity amounted to $89.2 million at December 31, 2000,
compared to $78.2 million at December 31, 1999. Included in shareholders' equity
at December 31, 2000 was net unrealized gains on securities available for sale,
net of tax, of $4.0 million compared to net unrealized losses of $191 thousand
at December 31, 1999.
Book value per share as of December 31, 2000 and 1999 amounted to $7.43 and
$6.55, respectively.
Liquidity
Liquidity is the ability of a financial institution to meet maturing liability
obligations and customer loan demand. Washington Trust's primary source of
liquidity is customer deposits. Customer deposits (time, savings and demand
deposits) funded approximately 60.2% of total average assets in 2000. Other
sources of funding include discretionary use of purchased liabilities (i.e.,
FHLB term advances and federal funds purchased), cash flows from the
Corporation's securities portfolios and loan repayments. In addition, securities
designated as available for sale may be sold in response to short-term or
long-term liquidity needs.
The Corporation's Asset/Liability Committee ("ALCO") establishes and monitors
internal liquidity measures to manage liquidity exposure. Liquidity remained
well within target ranges established by the ALCO during 2000. Net loans as a
percentage of total assets amounted to 47.9% at December 31, 2000, compared to
48.5% at December 31, 1999. Total securities as a percentage of total assets
amounted to 42.0% at December 31, 2000, up from 40.4% at December 31, 1999.
These changes resulted primarily from the 10.2% increase in total assets in
2000.
For the year ended December 31, 2000, net cash provided by financing activities
was $92.2 million. Proceeds from FHLB advances totaled $404.5 million, while
repayments of FHLB advances totaled $379.7 million in 2000. Additionally, $74.9
million was generated from overall growth in deposits. Net cash used in
investing activities was $110.3 million in 2000, the majority of which was used
to purchase securities. While the Corporation does not have any significant
capital commitments, it expects to continue to expend funds to upgrade and
expand equipment and premises to support its operations. Net cash provided by
operating activities amounted to $17.5 million in 2000, $13.2 million of which
was generated by net income. (See the Consolidated Statements of Cash Flows for
further information about sources and uses of cash.)
Acquisitions
On June 26, 2000, the Corporation completed its acquisition of Phoenix, an
independent investment advisory firm located in Providence, Rhode Island.
Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the
acquisition was effected by means of merger of Phoenix with and into the Bank,
the wholly owned subsidiary of the Corporation. For the year ended December 31,
1999, Phoenix's investment management revenues totaled $3.4 million. Expenses
directly attributable to the 2000 acquisition of Phoenix amounted to $1.1
million, after income taxes, and were charged to earnings at the date of
combination. Acquisition related expenses primarily consisted of legal and
investment advisory fees.
On August 25, 1999, the Corporation completed the acquisition of Pier Bank, a
Rhode Island chartered community bank headquartered in South Kingstown, Rhode
Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999,
the acquisition was effected by means of the merger of Pier Bank with and into
the Bank, the wholly owned subsidiary of the Corporation. The conversion of
customer deposit and loan accounts took place on September 24, 1999. Expenses
directly attributable to the merger amounted to $1.3 million, net of income
taxes, and were charged to earnings at the date of combination. Acquisition
expenses consisted of professional fees, data processing/integration costs,
write-down of assets and severance obligations. Asset write-downs amounted to
$126 thousand and consisted of fixed assets, primarily obsolete technology
equipment, abandoned in connection with the acquisition.
The acquisitions were tax-free reorganizations and were accounted for under the
pooling of interests method. Accordingly, the consolidated financial statements
and other financial information of the Corporation have been restated to present
the combined financial condition and results of operations as if the combination
had been in effect for all periods presented.
Net Interest Income
Net interest income is the primary source of Washington Trust's operating
income. The level of net interest income is affected by the volume of average
interest-earning assets and interest-bearing liabilities, market interest rates
and other factors. The following discussion presents net interest income on a
fully taxable equivalent (FTE) basis by adjusting income and yields on
tax-exempt loans and securities to be comparable to taxable loans and
securities.
FTE net interest income increased $2.3 million, or 6.2%, from 1999 to 2000, due
primarily to the growth in interest-earning assets. The net interest margins
(FTE net interest income as a percentage of average interest-earning assets) for
2000 and 1999 were 3.55% and 3.71%, respectively. The interest rate spread
declined 23 basis points to 2.96% in 2000. Earning asset yields rose 36 basis
points during 2000, while the cost of interest-bearing liabilities increased 59
basis points, thereby narrowing the net interest spread. Higher cost of funds
associated with FHLB advances and time deposits were primarily responsible for
the decrease in the net interest margin.
FTE interest income totaled $86.2 million in 2000, up from $74.1 million in
1999. The yield on interest-earning assets amounted to 7.85% in 2000, up from
7.49% in 1999. Average interest-earning assets amounted to $1.098 billion or
11.0% over the comparable 1999 amount. The growth in average interest-earning
assets was primarily due to growth in securities and loans. Total average
securities rose $61.9 million, or 13.3%, in 2000, mainly due to purchases of
taxable debt securities. The FTE rate of return on securities was 6.93% in 2000,
up from 6.24% in 1999. The increase in yield reflects higher marginal rates on
investment purchases during 2000 relative to the prior year.
Average loans amounted to $569.7 million in 2000, up $46.9 million, or 9.0%, in
2000. The FTE rate of return on total loans was 8.70% in 2000, up from 8.60% in
1999, due primarily to higher yields on new loan originations. Average
residential real estate loans amounted to $240.4 million, up 12.3% from the
prior year level. The yield on residential real estate loans amounted to 7.81%,
up slightly from the prior year. Average commercial loans rose 5.2% to $230.8
million in 2000. The yield on commercial loans amounted to 9.51%, an increase of
14 basis points from the prior year yield of 9.37%. Average consumer loans rose
10.3% in 2000 to $98.5 million. The yield on consumer loans amounted to 8.96%,
up 33 basis points from 8.63% in 1999.
As a result of higher levels of FHLB advances and increases in time deposits,
average interest-bearing liabilities increased 11.0% to $965.2 million at
December 31, 2000, and interest expense increased 26.3% and totaled $47.2
million in 2000. The rate paid on interest-bearing liabilities rose 59 basis
points to 4.89% in 2000 primarily due to higher interest rates. Average FHLB
advances increased by $61.0 million, or 19.7%, from 1999 and amounted to $370.6
million in 2000. The advances were used primarily to match fund the purchase of
securities. The average rate paid on FHLB advances for 2000 was 6.17%, an
increase of 73 basis points from the prior year.
Average time deposits increased by $33.7 million, or 10.6%, from 1999 and rose
65 basis points in the rate paid. Average savings deposits grew 5.1% to $240.6
million in 2000. The rate paid on savings deposits for 2000 amounted to 1.82%,
compared to 1.77% for 1999. In addition, average demand deposits, an
interest-free source of funding, increased 9.2% from 1999 and amounted to $106.7
million in 2000.
Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)
The following table presents average balance and interest rate information.
Tax-exempt income is converted to a fully taxable equivalent basis using the
statutory federal income tax rate. For dividends on corporate stocks, the 70%
federal dividends received deduction is also used in the calculation of tax
equivalency. Nonaccrual and renegotiated loans, as well as interest earned on
these loans (to the extent recognized in the Consolidated Statements of Income)
are included in amounts presented for loans.
Years ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------
Assets:
Residential real estate loans $240,410 18,777 7.81 $214,124 16,687 7.79 $199,347 16,347 8.20
Commercial and other loans 230,772 21,946 9.51 219,393 20,564 9.37 207,787 20,072 9.66
Consumer loans 98,479 8,826 8.96 89,292 7,707 8.63 83,882 7,587 9.05
------------------------------------------------------------------------------------------------------------------
Total loans 569,661 49,549 8.70 522,809 44,958 8.60 491,016 44,006 8.96
Federal funds sold and other
short-term investments 13,247 837 6.32 10,635 518 4.88 12,000 650 5.41
Taxable debt securities 456,434 30,992 6.79 399,058 24,432 6.12 315,177 19,706 6.25
Nontaxable debt securities 25,050 1,652 6.60 26,945 1,786 6.63 22,533 1,435 6.37
Corporate stocks and FHLB 33,848 3,157 9.33 30,041 2,394 7.97 30,265 2,409 7.96
stock
------------------------------------------------------------------------------------------------------------------
Total securities 528,579 36,638 6.93 466,679 29,130 6.24 379,975 24,200 6.37
------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 1,098,240 86,187 7.85 989,488 74,088 7.49 870,991 68,206 7.83
------------------------------------------------------------------------------------------------------------------
Cash and due from banks 18,362 18,625 17,007
Allowance for loan losses (12,881) (11,767) (10,194)
Premises and equipment, net 22,774 24,167 23,733
Other 34,715 32,578 25,187
------------------------------------------------------------------------------------------------------------------
Total assets $1,161,210 $1,053,091 $926,724
------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders'
Equity:
Savings deposits $240,580 4,383 1.82 $228,932 4,043 1.77 $204,500 3,834 1.87
Time deposits 351,961 19,841 5.64 318,281 15,871 4.99 309,094 16,744 5.42
FHLB advances 370,642 22,886 6.17 309,594 16,855 5.44 228,295 13,213 5.79
Other 2,003 121 6.03 12,383 625 5.05 15,626 867 5.55
------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 965,186 47,231 4.89 869,190 37,394 4.30 757,515 34,658 4.58
------------------------------------------------------------------------------------------------------------------
Demand deposits 106,741 97,716 83,100
Other liabilities 7,445 6,315 7,980
Shareholders' equity 81,838 79,870 78,129
------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,161,210 $1,053,091 $926,724
------------------------------------------------------------------------------------------------------------------
Net interest income $38,956 $36,694 $33,548
------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.96 3.19 3.25
Net interest margin 3.55 3.71 3.85
------------------------------------------------------------------------------------------------------------------
<FN>
Interest income amounts presented in the preceding table include the following
adjustments for taxable equivalency for the years indicated:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Commercial and other loans $126 $130 $137
Nontaxable debt securities 576 605 485
Corporate stocks and FHLB stock 386 351 358
</FN>
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)
2000/1999 1999/1998 1998/1997
-------------------------------------------------------------------------------------------------------------------
Net Net Net
(Dollars in thousands) Volume Rate Change Volume Rate Change Volume Rate Change
-------------------------------------------------------------------------------------------------------------------
Interest on:
Interest-earning assets:
Residential real estate loans $2,053 37 2,090 $1,176 (835) 341 $681 (148) 533
Commercial and other loans 1,079 302 1,381 1,099 (606) 493 308 21 329
Consumer loans 815 305 1,120 476 (358) 118 906 (237) 669
Federal funds sold and other
short-term investments 145 174 319 (35) (97) (132) 150 (1) 149
Taxable debt securities 3,730 2,830 6,560 5,145 (420) 4,725 4,538 (1,426) 3,112
Nontaxable debt securities (125) (9) (134) 290 62 352 431 (44) 387
Corporate stocks and FHLB
stock 325 438 763 (18) 3 (15) 184 (117) 67
-------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 8,022 4,077 12,099 8,133 (2,251) 5,882 7,198 (1,952) 5,246
-------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 210 130 340 440 (231) 209 359 (302) 57
Time deposits 1,778 2,192 3,970 487 (1,360) (873) 1,215 (209) 1,006
FHLB advances 3,589 2,442 6,031 4,466 (824) 3,642 2,638 (207) 2,431
Other (608) 104 (504) (168) (74) (242) 15 (10) 5
-------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 4,969 4,868 9,837 5,225 (2,489) 2,736 4,227 (728) 3,499
-------------------------------------------------------------------------------------------------------------------
Net interest income $3,053 (791) 2,262 $2,908 238 3,146 $2,971 (1,224) 1,747
-------------------------------------------------------------------------------------------------------------------
Noninterest Income
Noninterest income is an important source of revenue for the Corporation. For
the year ended December 31, 2000, recurring noninterest income, which excludes
net gains on sales of securities and the nonrecurring net gain on the sale of
the credit card portfolio, accounted for 33% of total revenues (net interest
income plus recurring noninterest income). Washington Trust's primary sources of
recurring noninterest income are trust and investment management revenues,
servicing of deposit accounts, merchant credit card processing fees and mortgage
banking activities. Also included in noninterest income are earnings generated
from bank-owned life insurance ("BOLI") purchased in 1999.
Revenue from trust and investment management services continues to be the
largest component of noninterest income. Trust and investment management revenue
represented 53.5% of noninterest income and amounted to $10.5 million in 2000,
up by 13.2% from the $9.3 million reported in 1999. This increase is primarily
attributable to the increase in the number of accounts under management.
Service charges on deposit accounts rose 4.0% to $3.3 million in 2000. Changes
in the fee structures of various deposit products during the year, as well as
growth in the Corporation's total deposit base, were contributing factors in
this increase.
Revenue from mortgage banking activities associated with the originations of
loans for the secondary market totaled $585 thousand in 2000, down from $1.4
million in 1999, due to decreased loan sales resulting from lower mortgage
refinancing activity. Mortgage banking activities include the capitalization of
mortgage servicing rights of $27 thousand and $313 thousand in 2000 and 1999,
respectively.
Most secondary market loans had previously been sold with servicing retained,
however, in the fourth quarter of 1999, the Corporation began selling
substantially all residential mortgage loans with servicing released. Mortgage
servicing fee income amounted to $450 thousand for the year ended December 31,
2000, compared to the prior year amount of $426 thousand. Due to increases in
interest rates, a lower amount of valuation adjustments on mortgage servicing
rights was required in 2000 than in 1999. Servicing income, excluding valuation
adjustments and amortization, as a percentage of average loans serviced was 30
basis points in 2000 and in 1999. The balance of serviced loans at December 31,
2000 amounted to $180.6 million, compared to $193.9 million at December 31,
1999.
In the second quarter of 1999, the Corporation purchased $18.0 million of BOLI
as a financing tool for employee benefits. The Corporation expects to benefit
from the BOLI contracts as a result of the tax-free growth in cash surrender
value and death benefits that are expected to be generated over time. Included
in other income was $1.0 million and $676 thousand of earnings on BOLI for the
years ended December 31, 2000 and 1999, respectively. (See additional discussion
on BOLI under the caption "Financial Condition".)
Noninterest Expense
Total noninterest expense, excluding acquisition related expenses, rose 8.1% to
$36.5 million in 2000. This increase was primarily attributable to higher
salaries and benefit expense, increases in legal, audit and professional fees
and higher equipment costs. Legal, audit and professional fees totaled $1.9
million, up $804 thousand from the corresponding 1999 amount. The increase was
primarily due to legal costs associated with an ongoing litigation matter. These
costs are expected to continue through the second quarter of 2001. At this time,
management of the Corporation is not able to determine whether such costs will
continue beyond the second quarter of 2001. Total equipment costs for 2000
amounted to $3.6 million, up $470 thousand from the corresponding 1999 amount.
In 2000, the Corporation recorded an impairment adjustment of $293 thousand
resulting from a remeasurement of the useful lives of technology equipment.
Income Taxes
Income tax expense amounted to $5.7 million and $4.8 million in 2000 and 1999,
respectively. The Corporation's effective tax rate was 30.0% in 2000, compared
to a rate of 27.5% in 1999. These rates differed from the federal rate of 35.0%
due to the benefits of tax-exempt income and the dividends received deduction as
well as the results of the tax planning strategies designed to reduce income
taxes and the effect of the second quarter 2000 acquisition of Phoenix. Phoenix
operated as a sub-S corporation prior to the acquisition. The acquisition was a
tax-free reorganization accounted for as a pooling of interests.
The Corporation's net deferred tax asset amounted to $2.1 million and $3.5
million at December 31, 2000 and 1999, respectively. In addition to future
taxable income and the reversal of deferred tax liabilities, a primary source of
recovery of deferred tax assets is taxes paid in prior years available for
carryback. (See Note 12 to the Consolidated Financial Statements for additional
information regarding income taxes.)
Financial Condition
Securities
Securities are designated as either available for sale or held to maturity at
the time of purchase. Securities available for sale may be sold in response to
changes in market conditions, prepayment risk, rate fluctuations, liquidity, or
capital requirements. Securities available for sale are reported at fair value,
with any unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of tax, until realized.
Securities designated as held to maturity are part of the Corporation's
portfolio of long-term interest-earning assets. These securities are classified
as long-term because the Corporation has the intent and ability to hold them
until maturity. Securities held to maturity are reported at amortized cost.
Securities Available for Sale
The amortized cost of securities available for sale at December 31, 2000
amounted to $380.0 million, an increase of $50.3 million over the 1999 amount.
This increase was due primarily to purchases of mortgage-backed securities.
At December 31, 2000, the net unrealized gains on securities available for sale
amounted to $6.6 million, an increase of $5.9 million from the comparable 1999
amount. This increase was attributable to the effects of reductions in medium
and long-term bond rates that occurred during 2000. (See Note 3 to the
Consolidated Financial Statements for detail of unrealized gains and losses
associated with securities available for sale.)
Securities Held to Maturity
The amortized cost of securities held to maturity increased $8.5 million, to
$124.9 million at December 31, 2000. This increase is primarily attributable to
purchases of obligations of U.S. government-sponsored agencies and
mortgage-backed securities. The net unrealized gains on securities held to
maturity amounted to $453 thousand at December 31, 2000 compared to $3.5 million
in net unrealized losses at December 31, 1999.
Federal Home Loan Bank Stock
The Corporation is required to maintain a level of investment in FHLB stock that
currently is based on the level of its FHLB advances. As of December 31, 2000
and 1999, the Corporation's investment in FHLB stock totaled $19.6 million and
$17.6 million, respectively. The Gramm-Leach-Bliley Act requires the FHLB to
issue new capitalization requirements to be implemented by May 2002.
Loans
Total loans amounted to $597.2 million at December 31, 2000, up $48.2 million,
or 8.8%, from the December 31, 1999 amount of $549.0 million. The increase in
total loans was led by growth in the residential and consumer loan portfolios.
Total residential real estate loans increased $25.2 million, or 11.2%, in 2000.
Consumer loans were up $15.4 million, or 17.0%, in 2000. The increase in
consumer loans was mainly due to growth in home equity loans and lines. Total
commercial loans increased $7.5 million, or 3.2%, in 2000, with the largest
increase occurring in the commercial mortgage portfolio.
Other Assets
Other assets totaled $28.0 million at December 31, 2000, compared to $28.9
million at December 31, 1999. Included in other assets is BOLI, which amounted
to $19.7 million and $18.7 million at December 31, 2000 and 1999, respectively.
The Corporation purchased $18.0 million of BOLI in 1999 as a financing tool for
employee benefits. The Corporation expects to benefit from the BOLI contracts as
a result of the tax-free growth in cash surrender value and death benefits that
are expected to be generated over time. The purchase of the life insurance
policy results in an interest sensitive asset on the Corporation's consolidated
balance sheet that provides monthly tax-free income to the Corporation. The
largest risk to the BOLI program is credit risk of the insurance carriers. To
mitigate this risk, annual financial condition reviews are completed on all
carriers. BOLI is included in other assets on the Corporation's consolidated
balance sheets at its cash surrender value. Increases in BOLI's cash surrender
value are reported as other income in the Corporation's consolidated statements
of income.
Deposits
Total deposits at December 31, 2000 amounted to $735.7 million, up 11.3% from
the prior year balance of $660.8 million. Demand deposits rose 10.4% to $113.0
million. Savings deposits rose 10.2% to $259.3 million. Time deposits totaled
$363.4 million at December 31, 2000, compared to $323.0 million at December 31,
1999. The $40.4 million increase in time deposits was primarily attributable to
increases in consumer and commercial certificates of deposits.
Borrowings
Washington Trust uses advances from the Federal Home Loan Bank of Boston as well
as other borrowings as part of its overall funding strategy. The additional FHLB
advances and other borrowings were used to meet short-term liquidity needs, to
fund loan growth and to purchase securities. Total advances amounted to $377.4
million at December 31, 2000, up from $352.5 million one year earlier. (See Note
10 to the Consolidated Financial Statements for additional information about
borrowings.)
Asset Quality
Nonperforming Assets
Nonperforming assets include nonaccrual loans and other real estate owned.
Nonperforming assets declined to .28% of total assets at December 31, 2000
compared to .35% of total assets at December 31, 1999. Nonaccrual loans as a
percentage of total loans fell from .69% at the end of 1999 to .58% at December
31, 2000. Approximately $1.8 million, or 53.2% of total nonaccrual loans, were
less than 90 days past due at December 31, 2000.
The following table presents nonperforming assets and related ratios:
(Dollars in thousands)
December 31, 2000 1999
---------------------------------------------------------------------------
Nonaccrual loans:
Residential real estate $796 $1,015
Commercial and other:
Mortgages 1,076 702
Construction and development - 95
Other 1,018 1,242
Consumer 544 744
---------------------------------------------------------------------------
Total nonaccrual loans 3,434 3,798
Other real estate owned, net 9 49
---------------------------------------------------------------------------
Total nonperforming assets $3,443 $3,847
---------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .58% .69%
Nonperforming assets as a percentage of total assets .28% .35%
Nonaccrual Loans
Loans, with the exception of certain well-secured residential mortgage loans,
are placed on nonaccrual status and interest recognition is suspended when such
loans are 90 days or more past due with respect to principal and/or interest.
Well-secured residential mortgage loans are permitted to remain on accrual
status provided that full collection of principal and interest is assured. Loans
are also placed on nonaccrual status when, in the opinion of management, full
collection of principal and interest is doubtful. Interest previously accrued,
but uncollected, is reversed against current period income. Subsequent cash
receipts on nonaccrual loans are recognized as interest income, or recorded as a
reduction of principal if full collection of the loan is doubtful or if
impairment of the collateral is identified.
Nonaccrual loans are returned to accrual status when the obligation has
performed in accordance with the contract terms for a reasonable period of time
and the ultimate collectibility of the contractual principal and interest is no
longer doubtful.
Included in accruing loans 90 days or more past due at December 31, 2000 are
residential mortgages amounting to $346 thousand which are considered
well-collateralized and in the process of collection and therefore are deemed to
have no loss exposure.
(Dollars in thousands)
December 31, 2000 1999
---------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $1,608 $1,902
Nonaccrual loans less than 90 days past due 1,826 1,896
---------------------------------------------------------------------------
Total nonaccrual loans $3,434 $3,798
---------------------------------------------------------------------------
Accruing loans 90 days or more past due,
primarily all residential mortgages (1) $393 $120
---------------------------------------------------------------------------
(1) Not included in nonperforming assets
Restructured Loans
Loans are considered restructured when the Corporation has granted concessions
to a borrower due to the borrower's financial condition that it otherwise would
not have considered. These concessions include modifications of the terms of the
debt such as reduction of the stated interest rate other than normal market rate
adjustments, extension of maturity dates, or reduction of principal balance or
accrued interest. The decision to restructure a loan, versus aggressively
enforcing the collection of the loan, may benefit the Corporation by increasing
the ultimate probability of collection. Included in nonaccrual loans at December
31, 2000 and 1999, are loans whose terms have been restructured amounting to
$118 thousand and $142 thousand, respectively. There were no commitments to lend
additional funds to borrowers whose loans had been restructured.
Other Real Estate Owned
Other real estate owned ("OREO") is comprised of properties acquired through
foreclosure and other legal means, and loans determined to be substantively
repossessed. A loan is considered to be substantively repossessed when the
Corporation has taken possession of the collateral, but has not completed legal
foreclosure proceedings. OREO is carried at the lower of cost or fair value
minus estimated costs to sell. A valuation allowance is maintained for declines
in market value and estimated selling costs.
The balance of OREO amounted to $9 thousand at December 31, 2000, down from the
prior year amount of $49 thousand. Decreases in OREO resulted from sales of
foreclosed properties and repossessed assets that exceeded the level of
foreclosures and repossessions. During 2000, proceeds from sales of foreclosed
properties and repossessed assets amounted to $95 thousand. Washington Trust has
provided financing to facilitate the sales of some of these properties.
Financing is generally provided at market rates with credit terms similar to
those available to other borrowers.
Allowance for Loan Losses
The Corporation uses a methodology to systematically measure the amount of
estimated loan loss exposure inherent in the portfolio for purposes of
establishing a sufficient allowance for loan losses (ALL). The methodology
includes three elements: identification of specific loan losses, general loss
allocations for certain loan types based on credit grade and loss experience
factors, and general loss allocations for other environmental factors. The
methodology includes an analysis of individual loans deemed to be impaired in
accordance with the terms of SFAS 114. Other individual commercial and
commercial mortgage loans are evaluated using an internal rating system and the
application of loss allocation factors. The loan rating system and the related
loss allocation factors take into consideration the borrower's financial
condition, the borrower's performance with respect to loan terms and the
adequacy of collateral. Portfolios of more homogenous populations of loans
including residential mortgages and consumer loans are analyzed as groups taking
into account delinquency ratios and other indicators, the Corporation's
historical loss experience and comparison to industry standards of loss
allocation factors for each type of credit product. Finally, an additional
unallocated allowance is maintained based on a judgmental process whereby
management considers qualitative and quantitative assessments of other
environmental factors. For example, most of the loan portfolio is concentrated
among borrowers in southern Rhode Island and southeastern Connecticut and a
substantial portion of the portfolio is collateralized by real estate in this
area, including most consumer loans and those commercial loans not specifically
classified as commercial mortgages. A portion of the commercial and commercial
mortgage loans are to borrowers in the hospitality and tourism industry and this
concentration has been increasing in recent years. Economic conditions which may
affect the ability of borrowers to meet debt service requirements are considered
including interest rates and energy costs. Results of regulatory examinations,
historical loss ranges, portfolio composition including a trend toward somewhat
larger credit relationships, and other changes in the portfolio are also
considered.
The allowance for loan losses is management's best estimate of the probable loan
losses incurred as of the balance sheet date. The allowance is increased by
provisions charged to earnings and by recoveries of amounts previously charged
off, and is reduced by charge-offs on loans.
The allowance for loan losses amounted to $13.1 million, or 2.20% of total
loans, at December 31, 2000, compared to $12.3 million, or 2.25%, at December
31, 1999.
The following table reflects the activity in the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2000 1999
-------------------------------------------------------------------------
Beginning balance $12,349 $10,966
Charge-offs, net of recoveries:
Residential:
Real estate (19) 135
Construction - (22)
Commercial:
Mortgages (8) (126)
Construction and development - (119)
Other 13 (102)
Consumer (350) (223)
-------------------------------------------------------------------------
Net charge-offs (364) (457)
Provision for loan losses 1,150 1,840
-------------------------------------------------------------------------
Ending balance $13,135 $12,349
-------------------------------------------------------------------------
Allowance for loan losses to nonaccrual loans 382.50% 325.15%
Allowance for loan losses to total loans 2.20% 2.25%
-------------------------------------------------------------------------
Capital Resources
Total shareholders' equity increased $11.0 million during 2000 and amounted to
$89.2 million at December 31, 2000. The overall increase was mainly attributable
to earnings retention of $6.6 million. Capital growth also resulted from a $4.2
million increase in accumulated other comprehensive income due to unrealized
gains on securities. Stock option exercises increased shareholders' equity by
$222 thousand in 2000. Cash dividends declared per share amounted to $.48 and
$.44 in 2000 and 1999, respectively.
The ratio of total equity to total assets amounted to 7.3% at December 31, 2000,
compared to 7.1% at December 31, 1999. Book value per share at December 31, 2000
amounted to $7.43, a 13.4% increase from the year-earlier amount of $6.55 per
share.
The Corporation and the Bank are subject to various regulatory capital
requirements. The Corporation and the Bank are categorized as well-capitalized
under the regulatory framework for prompt corrective action. (See Note 15 to the
Consolidated Financial Statements for additional discussion of capital
requirements.)
Litigation
The Bank is party to a lawsuit filed by a former corporate customer and the
customer's shareholders for damages which the plaintiffs allegedly incurred as a
result of an embezzlement by an officer and fifty percent shareholder of the
customer. Management believes, based on its review with counsel of the
development of this matter to date, that the Bank has asserted meritorious
affirmative defenses in this litigation. Additionally, the Bank has filed
counterclaims against the customer and its shareholders, as well as claims
against the individual allegedly responsible for the embezzlement. The Bank is
vigorously asserting its defenses and affirmative claims. The discovery phase of
the case has been completed, though the parties are attempting to resolve
several discovery disputes. The Bank has also filed several motions, all of
which seek dismissal of one or more of the plaintiffs' claims and/or exclusion
of portions of the plaintiffs' evidence. The court began hearing argument on the
motions on March 8, 2001, and has expressed a desire to hear further argument.
There is currently no scheduled trial date. During discovery, the plaintiffs
have offered various theories and amounts of alleged damages, ranging from $5.0
million to $12.7 million, plus interest thereon. The plaintiffs have also filed
a motion to amend the complaint to add a claim for punitive damages. The court
has deferred ruling on whether to permit this amendment. Because of the numerous
uncertainties that surround the litigation, management and legal counsel are
unable to estimate the amount of loss, if any, that the Bank may incur with
respect to this litigation. Consequently, no loss provision for this lawsuit has
been recorded.
Recent Accounting Developments
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" standardizes the accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires a corporation to recognize all derivatives as either assets or
liabilities in the balance sheet and to measure those instruments at fair value.
This Statement defines conditions and criteria to be used in designating a
derivative as a specific type of hedging instrument. SFAS No. 133 also explains
the accounting for changes in the fair value of a derivative, which depends on
the intended use and the resulting designation. Under this Statement, a
corporation is required to establish at the inception of the hedge the method to
be used for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. Those
methods must be consistent with the corporation's approach to managing risk. The
Corporation adopted SFAS No. 133 effective January 1, 2001. The adoption of this
standard did not have a material impact on the financial position and earnings
of the Corporation.
Comparison of 1999 with 1998
Washington Trust recorded net income of $12.5 million, or $1.03 per diluted
share, for 1999. Net income for 1998 amounted to $12.2 million, or $1.01 per
diluted share.
Operating earnings for the fiscal year 1999 amounted to $12.8 million, an
increase of 10.9% from $11.5 million earned in 1998. Diluted earnings per share,
on an operating basis, amounted to $1.06 for 1999, up from $.95 per share in
1998. The Corporation's rates of return on average assets and average equity, on
an operating basis, for 1999 were 1.21% and 16.04%, respectively. Comparable
amounts for 1998 were 1.24% and 15.21%.
Fully taxable equivalent net interest income increased $3.1 million or 9.4% from
1999 to 1998 due primarily to growth in interest-earning assets and lower costs
of funds. The net interest margins for 1999 and 1998 were 3.71% and 3.85%,
respectively. The interest rate spread declined 6 basis points to 3.19% in 1999.
Earning asset yields fell 34 basis points during 1999, while the cost of
interest-bearing liabilities declined 28 basis points, thereby narrowing the net
interest spread. Growth in the securities portfolios as well as interest expense
associated with the increases in FHLB advances, were primarily responsible for
the decrease in the net interest margin.
Noninterest income totaled $18.8 million and $16.5 million for 1999 and 1998,
respectively. The $2.3 million increase resulted primarily from growth in
revenues for trust and investment management services and income from BOLI,
offset in part by a decline in revenue from mortgage banking activities. Trust
and investment management revenue totaled $9.3 million for 1999, up 12.0% from
1998. BOLI was purchased during the second quarter of 1999 as a financing tool
for employee benefits. Income from BOLI amounted to $676 thousand in 1999. Also
included in other income was a $438 thousand net gain on sale of the credit card
portfolio that occurred in the third quarter of 1999. Operating noninterest
expenses (excluding acquisition related expenses) amounted to $33.8 million for
1999, up $3.0 million from 1998. The increase was primarily attributable to
higher salaries and benefits expense and equipment costs. Equipment costs rose
13.0% over the prior year period due primarily to depreciation expense
associated with 1998 investments in technology.
Total assets rose $110.5 million or 11.1% to $1.106 billion at December 31,
1999. Average assets amounted to $1.053 billion in 1999, up 13.6% from the prior
year. Asset growth was primarily attributable to a $52.1 million increase in
total loans and a $31.3 increase in the carrying value of securities. Included
in other assets is BOLI, which amounted to $18.7 million at December 31, 1999.
Increases in FHLB advances as well as total deposits funded the growth in
assets. Average interest-bearing liabilities amounted to $869.2 million at
December 31, 1999, up 14.7% from December 31, 1998.
Nonperforming assets amounted to $3.8 million or .35% of total assets at
December 31, 1999, down from $6.1 million or .61% at December 31,1998. The
Corporation's loan loss provision was $1.8 million and $1.9 million in 1999 and
1998, respectively. Net loan charge-offs amounted to $457 thousand in 1999, up
from $248 thousand in 1998. The allowance for loan losses represented 2.25% of
total loans at December 31, 1999 compared to 2.21% at December 31, 1998.
Shareholders' equity amounted to $78.2 million at December 31, 1999, compared to
$78.4 million at December 31, 1998. The decline was mainly attributable to
reductions in net unrealized gains on securities of $7.6 million. Capital growth
resulted from $6.1 million of earnings retention and $941 thousand from stock
option exercises. Book value per share amounted to $6.55 at December 31, 1999,
down slightly from the year-earlier amount of $6.66 per share. The ratio of
capital to assets was 7.1% and 7.9% at December 31, 1999 and 1998, respectively.
Dividends paid per share amounted to $.44 in 1999, up 10.0% from the prior year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
Interest rate risk is one of the major market risks faced by the Corporation.
The ALCO is responsible for establishing policy guidelines on liquidity and
acceptable exposure to interest rate risk. The objective of the ALCO is to
manage assets and funding sources to produce results which are consistent with
Washington Trust's liquidity, capital adequacy, growth, risk and profitability
goals.
The ALCO manages the Corporation's interest rate risk using income simulation to
measure interest rate risk inherent in the Corporation's on-balance sheet and
off-balance sheet financial instruments at a given point in time by showing the
effect of interest rate shifts on net interest income over a 60-month period.
The simulations assume that the size and general composition of the
Corporation's balance sheet remain constant over the 60-month simulation horizon
and take into account the specific repricing, maturity, call options, and
prepayment characteristics of differing financial instruments that may vary
under different interest rate scenarios. Non-contractual savings deposits are
classified as short-term (three months or less) for both maturity and repricing
purposes. The characteristics of financial instrument classes are reviewed
periodically by the ALCO to ensure their accuracy and consistency.
The ALCO reviews simulation results to determine whether the negative exposure
of net interest income to changes in interest rates remains within established
tolerance levels over a 24-month horizon, and to develop appropriate strategies
to manage this exposure. In addition, the ALCO reviews 60-month horizon results
to assess longer-term risk inherent in the balance sheet. As of December 31,
2000 and December 31, 1999, net interest income simulation indicated exposure to
changing interest rates over a 24-month horizon to a degree that remained within
tolerance levels established by the Corporation. The Corporation defines maximum
unfavorable net interest income exposure to be a change of no more than 5% in
net interest income over the first 12 months and no more than 10% over the
second 12 months of the simulation horizon.
The following table summarizes the effect that interest rate shifts would have
on net interest income for a 24-month period using the Corporation's on and
off-balance sheet financial instruments as of December 31, 2000. Interest rates
are assumed to shift by a parallel 200 basis points over a 12-month period,
except for core savings deposits, which are assumed to shift by lesser amounts
due to their historical insensitivity to rate changes. Further, deposits are
assumed to have certain minimum rate levels below which they will not fall. It
should be noted that the rate scenario used does not necessarily reflect the
ALCO's view of the "most likely" change in interest rates over the next 24
months. Furthermore, since a static balance sheet is assumed, the results do not
reflect the anticipated future net interest income of the Corporation for the
same period. The following table presents these 24-month net interest income
simulation results:
(Dollars in thousands)
Flat Falling Rising
Rates Rates Rates
----------------------------------------------------------------------------------------------------------
Interest-earning assets:
Fixed rate mortgage-backed securities $18,307 $17,236 $18,741
Adjustable rate mortgage-backed securities 24,141 20,432 27,563
Callable securities 8,644 7,847 9,130
Other securities 22,449 19,964 24,779
Fixed rate mortgages 21,664 20,400 22,442
Adjustable rate mortgages 16,219 15,377 17,060
Other fixed rate loans 35,770 34,221 37,317
Other adjustable rate loans 29,625 25,970 33,272
Interest rate floor contracts (net of premium amortization) (120) 144 (120)
----------------------------------------------------------------------------------------------------------
Total interest income 176,699 161,591 190,184
----------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Core savings deposits 10,848 9,788 11,012
Time deposits 40,481 34,852 48,031
FHLB advances 47,341 42,988 51,888
Other borrowings 382 292 471
----------------------------------------------------------------------------------------------------------
Total interest expense 99,052 87,920 111,402
----------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 2000 $77,647 $73,671 $78,782
----------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 1999 $72,038 $73,447 $68,158
----------------------------------------------------------------------------------------------------------
The ALCO estimates that the negative exposure of net interest income to falling
rates results from the difficulty of reducing rates paid on deposits given the
current level of interest rates. If rates were to fall sharply and remain at low
levels for a sustained period, retail deposit rates would likely fall by a
limited amount, while rates earned on assets would drop more rapidly. While the
ALCO reviews simulation assumptions to ensure that they are reasonable and
current, income simulation may not always prove to be an accurate indicator of
interest rate risk since the repricing, maturity and prepayment characteristics
of financial instruments, especially core savings deposits, may change to a
different degree than estimated. In addition, since income simulations assume
that the Corporation's balance sheet will remain static over the 60-month
simulation horizon, the results do not reflect adjustments in strategy that the
ALCO could implement in response to rate shifts.
The Corporation also monitors the potential change in market value of its
available for sale debt securities in parallel rate shifts of up to 200 basis
points. The purpose is to determine market value exposure which may not be
captured by income simulation, but which might result in changes to the
Corporation's capital position. Results are calculated using industry-standard
analytical techniques and securities data. The following table summarizes the
potential change in market value of the Corporation's available for sale debt
securities as of December 31, 2000 and 1999 resulting from immediate 200 basis
point parallel rate shifts:
(Dollars in thousands)
Falling Rising
Rates Rates
---------------------------------------------------------------------------------------------------------
Security Type:
U.S. Treasury and government-sponsored agency securities (noncallable) $1,560 $(1,421)
U.S. government-sponsored agency securities (callable) 755 (1,560)
Corporate securities 807 (842)
Fixed rate mortgage-backed securities 358 (4,803)
Adjustable rate mortgage-backed securities 3,501 (2,227)
Fixed rate collateralized mortgage obligations 21 (251)
Adjustable rate collateralized mortgage obligations 171 (2,146)
---------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 2000 $7,173 $(13,250)
---------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 1999 $7,795 $(14,149)
---------------------------------------------------------------------------------------------------------
The Corporation also monitors the potential change in market value of its
available for sale debt securities using "value at risk" analysis. The
anticipated maximum market value reduction for the bank's available for sale
securities portfolio at December 31, 2000, including both debt and equity
securities, was 3.5%, assuming a one-year time horizon and a 5% probability of
occurrence for "value at risk" analysis.
At December 31, 2000, gap analysis showed that the Corporation's cumulative
one-year gap was a negative $128.9 million, or 11.2% of earning assets. The
following table details the amounts of interest-earning assets and
interest-bearing liabilities at December 31, 2000 that are expected to mature or
reprice in each of the time periods presented. To the extent applicable, amounts
of assets and liabilities that mature or reprice within a particular period were
determined in accordance with their contractual terms. Fixed rate mortgages,
mortgage-backed securities and consumer installment loans have been allocated
based on expected amortization and prepayment rates using standard industry
assumptions. Savings, NOW and money market deposit accounts, which have no
contractual term and are subject to immediate repricing, are presented in the
under three-month category. Management believes that gap analysis has
substantial limitations as a measure of interest rate risk, as it does not
address the effect of changes in interest rates nor the magnitude of resulting
changes in net interest income. For this reason, the ALCO does not use gap
analysis to establish interest rate risk targets or assess interest rate risk
exposure.
The following table summarizes the Corporation's gap analysis as of December 31,
2000:
(Dollars in thousands)
3 Months 3 to 6 6 Months 1 to 5 Over
or Less Months to 1 Year Years 5 Years
----------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $159,862 $47,398 $76,632 $197,432 $117,470
Debt securities 145,938 43,527 73,870 171,778 56,306
Other 21,400 - - - 39,665
----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 327,200 90,925 150,502 369,210 213,441
Interest-bearing liabilities:
Deposits 401,667 48,088 61,707 111,196 14
FHLB advances 71,424 52,868 58,500 164,933 29,637
Other borrowings 3,227 - - - -
----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 476,318 100,956 120,207 276,129 29,651
----------------------------------------------------------------------------------------------------------------
Interest sensitivity gap per period $(149,118) $(10,031) $30,295 $93,081 $183,790
----------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(149,118) $(159,149) $(128,854) $(35,773) $148,017
----------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap - 1999 $(160,584) $(215,036) $(244,217) $(63,744) $117,447
----------------------------------------------------------------------------------------------------------------
On occasion, the Corporation has supplemented its interest rate risk management
strategies with off-balance sheet transactions. Such transactions are intended
to hedge specifically identified risks inherent in the Corporation's balance
sheet, and not to produce speculative profits. The Corporation has written
policy guidelines that designate limits on the notional value of off-balance
sheet transactions and require periodic evaluation of risks associated with
these transactions, including counterparty credit risk.
During 1995, the Corporation entered into interest rate floor contracts with a
notional principal amount of $50 million and a five-year term maturing in
February 2000. During 1998, the Corporation entered into additional floor
contracts with a notional principal amount of $20 million and a five-year term
maturing in March 2003. These contracts are intended to function as a hedge
against reductions in interest income realized from prime-based loans. These
contracts were purchased for a total premium of $1.2 million, which is amortized
over the life of the contracts. The Corporation receives payment for these
contracts if certain interest rates fall below specified levels. During 2000,
the Corporation recorded premium amortization, net of income, of $67 thousand on
its floor contracts. (See Note 7 to the Consolidated Financial Statements for
additional information regarding the floor contracts.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are contained herein.
Description
Independent Auditors' Report
Consolidated Balance Sheets
December 31, 2000 and 1999
Consolidated Statements of Income
For the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
[firm logo here][KPMG]
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc.:
We have audited the consolidated financial statements of Washington Trust
Bancorp, Inc. and subsidiary (the "Corporation") as listed in the accompanying
index. 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 auditing standards generally accepted
in the United States of America. 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 Washington Trust
Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ending December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Providence, Rhode Island
January 15, 2001
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $22,460 $27,091
Federal funds sold and other short-term investments 21,400 17,429
Mortgage loans held for sale 1,639 1,647
Securities:
Available for sale, at fair value 386,611 330,431
Held to maturity, at cost; fair value $125,368
in 2000 and $112,868 in 1999 124,915 116,372
- -------------------------------------------------------------------------------------------------------------------
Total securities 511,526 446,803
Federal Home Loan Bank stock, at cost 19,558 17,627
Loans 597,155 549,025
Less allowance for loan losses 13,135 12,349
- -------------------------------------------------------------------------------------------------------------------
Net loans 584,020 536,676
Premises and equipment, net 21,710 23,442
Accrued interest receivable 7,800 6,010
Other assets 27,954 28,880
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,218,067 $1,105,605
- -------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $113,012 $102,384
Savings 259,309 235,395
Time 363,363 322,974
- -------------------------------------------------------------------------------------------------------------------
Total deposits 735,684 660,753
Dividends payable 1,445 1,202
Federal Home Loan Bank advances 377,362 352,548
Other borrowings 3,227 4,209
Accrued expenses and other liabilities 11,163 8,726
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,128,881 1,027,438
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares in 2000 and 1999; issued
12,006,809 shares in 2000 and 11,925,571 shares in 1999 750 745
Paid-in capital 10,144 9,927
Retained earnings 74,265 67,686
Accumulated other comprehensive income (loss) 4,027 (191)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 89,186 78,167
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,218,067 $1,105,605
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $49,423 $44,828 $43,869
Interest on securities 32,068 25,613 20,656
Dividends on corporate stock and Federal Home Loan Bank stock 2,771 2,043 2,051
Interest on federal funds sold and other short-term investments 837 518 650
- --------------------------------------------------------------------------------------------------------------------
Total interest income 85,099 73,002 67,226
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 4,383 4,043 3,834
Time deposits 19,841 15,871 16,744
Federal Home Loan Bank advances 22,886 16,855 13,213
Other 121 625 867
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 47,231 37,394 34,658
- --------------------------------------------------------------------------------------------------------------------
Net interest income 37,868 35,608 32,568
Provision for loan losses 1,150 1,840 1,879
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 36,718 33,768 30,689
- --------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 10,544 9,314 8,315
Service charges on deposit accounts 3,297 3,169 2,955
Merchant processing fees 2,144 1,535 1,221
Income from bank-owned life insurance 1,047 676 -
Mortgage banking activities 585 1,376 2,218
Net gains on sales of securities 760 678 504
Net gain on sale of credit card portfolio - 438 -
Other income 1,335 1,640 1,304
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 19,712 18,826 16,517
- --------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 19,750 18,294 16,550
Net occupancy 2,601 2,494 2,412
Equipment 3,592 3,122 2,763
Legal, audit and professional fees 1,883 1,079 1,027
Merchant processing costs 1,707 1,313 1,005
Advertising and promotion 1,196 991 799
Office supplies 641 732 774
Acquisition related expenses 1,035 1,552 -
Other 5,143 5,752 5,463
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 37,548 35,329 30,793
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 18,882 17,265 16,413
Income tax expense 5,673 4,754 4,235
- --------------------------------------------------------------------------------------------------------------------
Net income $13,209 $12,511 $12,178
- --------------------------------------------------------------------------------------------------------------------
Per share information:
Basic earnings per share $1.10 $1.05 $1.04
Diluted earnings per share $1.09 $1.03 $1.01
Cash dividends declared per share (1) $.48 $.44 $.40
<FN>
(1) Represents historical per share dividends declared by Washington Trust
Bancorp, Inc.
</FN>
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $745 $9,927 $67,686 $(191) $ - $78,167
Net income 13,209 13,209
Other comprehensive income, net of tax:
Net unrealized gains on securities,
net of reclassification adjustment 4,218 4,218
---------
Comprehensive income 17,427
Cash dividends declared (6,630) (6,630)
Shares issued 5 217 222
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $750 $10,144 $74,265 $4,027 $ - $89,186
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 $737 $8,986 $61,581 $7,401 $(354) $78,351
Net income 12,511 12,511
Other comprehensive loss, net of tax:
Net unrealized losses on securities,
net of reclassification adjustment (7,592) (7,592)
---------
Comprehensive income 4,919
Cash dividends declared (6,406) (6,406)
Shares issued 8 1,319 12 1,339
Shares retired (378) 378 -
Shares repurchased (36) (36)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $745 $9,927 $67,686 $(191) $ - $78,167
- ----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1998 $523 $9,776 $55,373 $7,074 $(687) $72,059
Net income 12,178 12,178
Other comprehensive income, net of tax:
Net unrealized gains on securities,
net of reclassification adjustment 327 327
---------
Comprehensive income 12,505
Cash dividends declared (5,763) (5,763)
Stock split in form of stock dividend 207 (207) -
Shares issued 7 (790) 3,338 2,555
Shares repurchased (3,005) (3,005)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $737 $8,986 $61,581 $7,401 $(354) $78,351
- ----------------------------------------------------------------------------------------------------------------------
Disclosure of Reclassification Amount:
Years ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized holding gains (losses) arising during the period $6,631 $(10,827) $1,025
Less: Income tax effect (1,919) 3,682 (381)
Reclassification adjustment for net gains included in
net income (760) (678) (504)
Income tax effect on reclassification adjustment 266 231 187
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $4,218 $(7,592) $327
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $13,209 $12,511 $12,178
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,150 1,840 1,879
Depreciation of premises and equipment 3,308 3,004 2,637
Accretion of discount (in excess of) less than
amortization of premium on debt securities (149) 461 1,001
Deferred income tax benefit (681) (741) (379)
Increase in bank-owned life insurance cash surrender value (1,047) (676) -
Net gains on sales of securities (760) (678) (504)
Net gains on loan sales (322) (695) (1,436)
Net gain on sale of credit card portfolio - (438) -
Proceeds from sale of credit card portfolio - 5,192 -
Proceeds from sales of loans 23,769 47,627 89,533
Loans originated for sale (23,437) (42,785) (90,940)
Increase in accrued interest receivable (1,790) (97) (741)
Decrease (increase) in other assets 275 (1,424) 387
Increase in accrued expenses and other liabilities 2,912 1,432 629
Other, net 1,075 1,782 1,551
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,512 26,315 15,795
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities: Securities available for sale:
Purchases (128,227) (168,644) (232,273)
Proceeds from sales 40,288 81,398 95,666
Maturities and principal repayments 38,507 65,379 58,621
Securities held to maturity:
Purchases (22,745) (54,948) (52,582)
Maturities and principal repayments 14,235 34,212 8,727
Purchases of Federal Home Loan Bank stock (1,931) (1,044) (139)
Principal collected on loans under loan originations (48,756) (57,622) (7,289)
Proceeds from sales of other real estate owned 95 513 1,381
Purchases of premises and equipment (1,813) (2,510) (3,861)
Purchase of bank-owned life insurance - (18,000) -
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (110,347) (121,266) (131,749)
- ---------------------------------------------------------------------------------------------------------------------
(Continued)
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 74,931 32,990 54,960
Net decrease in other borrowings (982) (10,824) (5,305)
Proceeds from Federal Home Loan Bank advances 404,500 550,837 611,300
Repayment of Federal Home Loan Bank advances (379,686) (462,395) (534,195)
Repayment of obligations under capital leases - (21) (21)
Purchase of treasury stock - (36) (3,005)
Net effect of common stock transactions (201) 475 1,012
Cash dividends paid (6,387) (6,209) (5,685)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 92,175 104,817 119,061
- ---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (660) 9,866 3,107
Cash and cash equivalents at beginning of year 44,520 34,654 31,547
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $43,860 $44,520 $34,654
- ---------------------------------------------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate owned $109 $576 $789
Loans charged off 683 967 653
Loans made to facilitate the sale of other real estate owned 60 180 61
Increase (decrease) in unrealized gain on securities
available for sale, net of tax 4,218 (7,592) 327
Increase in paid-in capital resulting from tax benefits on
stock option exercises 423 864 1,543
Supplemental Disclosures:
Interest payments $45,970 $36,690 $34,761
Income tax payments 5,838 4,363 2,324
The accompanying notes are an integral part of these consolidated financial
statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
General
Washington Trust Bancorp, Inc. (the "Corporation") is a publicly owned,
registered bank holding company, organized under the laws of the State of Rhode
Island. The Corporation provides a complete product line of financial services
through its wholly owned subsidiary, The Washington Trust Company (the "Bank"),
a Rhode Island chartered commercial bank. The Bank was originally chartered in
1800 and provides a variety of financial services including commercial,
residential and consumer lending, retail and commercial deposit products and
trust and investment management services through its branch offices in Rhode
Island and Connecticut. The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation ("FDIC"), subject to regulatory limits.
The activities of the Corporation and the Bank are subject to the regulatory
supervision of the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") and the FDIC, respectively. Both companies are subject to
various Rhode Island and Connecticut business and banking regulations.
On June 26, 2000, the Corporation completed its acquisition of Phoenix
Investment Management Company, Inc. ("Phoenix"), an independent investment
advisory firm. Pursuant to the Agreement and Plan of Merger, dated April 24,
2000, the Corporation issued 1,010,808 shares of its common stock to the
shareholders of Phoenix. For the years ended December 31, 1999 and 1998,
investment management revenues of Phoenix totaled $3.4 million and $3.1 million,
respectively. Net income of Phoenix for 1999 and 1998 amounted to $1.9 million
and $1.7 million, respectively. Dividends paid to Phoenix shareholders totaled
$1.8 million for 1999 and $1.7 million for 1998. Expenses directly attributable
to the second quarter 2000 acquisition of Phoenix amounted to $1.1 million,
after income taxes, and primarily consisted of legal and investment advisory
fees.
On August 25, 1999, the Corporation completed its acquisition of Pier Bank, a
Rhode Island chartered community bank headquartered in South Kingstown, Rhode
Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999,
the Corporation issued 746,345 shares of its common stock to the shareholders of
Pier Bank. At December 31, 1998, Pier Bank had total assets of $59.4 million and
total shareholders' equity of $4.5 million. For the year ended December 31,
1998, Pier Bank's net income amounted to $459 thousand. Expenses directly
attributable to the third quarter 1999 acquisition of Pier Bank amounted to $1.3
million, net of income taxes, and consisted mainly of professional fees, data
processing/integration costs, write-down of assets and severance obligations.
Pier Bank asset write-downs amounted to $126 thousand and consisted of fixed
assets, primarily obsolete technology equipment, abandoned in connection with
the acquisition.
Acquisition related expenses were charged to earnings at the dates of
combination. The acquisitions were accounted for under the pooling of interests
method and, accordingly, the financial statements and other financial
information of the Corporation have been restated to reflect the acquisitions at
the beginning of the earliest period presented.
(1) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Corporation
and the Bank. All significant intercompany transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current year
classification.
The accounting and reporting policies of the Corporation conform to generally
accepted accounting principles and to general practices of the banking industry.
The Corporation has one reportable operating segment. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ from
those estimates. A material estimate that is particularly susceptible to change
is the determination of the allowance for loan losses.
Securities
Securities Available for Sale
The Corporation designates securities that it intends to use as part of its
asset/liability strategy or that may be sold as a result of changes in market
conditions, changes in prepayment risk, rate fluctuations, liquidity or capital
requirements as available for sale. The determination to classify such
securities as available for sale is made at the time of purchase.
Securities available for sale are reported at fair value, with any unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of tax, until realized. Any decline in fair value
below the amortized cost basis of an individual security deemed to be other than
temporary is recognized as a realized loss in the accounting period in which the
determination is made. The fair value of the security at the time of the
write-down becomes the new cost basis of the security.
Realized gains or losses from sales of equity securities are determined using
the average cost method, while other realized gains and losses are determined
using the specific identification method.
Securities Held to Maturity
The determination to classify debt securities in the held-to-maturity category
is made at the time of purchase and is based on management's intent and ability
to hold the securities until maturity. Debt securities in the held-to-maturity
portfolio are stated at cost, adjusted for amortization of premium and accretion
of discount (calculated on a method that approximates the interest method).
Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston. As a
requirement of membership, the Bank must own a minimum amount of FHLB stock,
calculated periodically based primarily on its level of borrowings from the
FHLB. The Bank may redeem FHLB stock in excess of the minimum required. In
addition, the FHLB may require members to redeem stock in excess of the
requirement. FHLB stock is redeemable at par, which equals cost. Since no market
exists for these shares, they are valued at par.
Mortgage Banking Activities
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost, net of
unamortized deferred loan origination fees and costs, or market. Unrealized
losses, if any, are charged to current period earnings.
Mortgage Servicing Rights
Rights to service mortgage loans for others are recognized as an asset,
including rights acquired through both purchases and originations. The total
cost of originated mortgage loans that are sold with servicing rights retained
is allocated between the mortgage servicing rights and the loans without the
mortgage servicing rights based on their relative fair values. Capitalized
mortgage servicing rights are included in other assets and are amortized as an
offset to other income over the period of estimated net servicing income. They
are periodically evaluated for impairment based on their fair value. Impairment
is measured on an aggregated basis according to interest rate band and period of
origination. The fair value is estimated based on the present value of expected
cash flows, incorporating assumptions for discount rate, prepayment speed and
servicing cost. Any impairment is recognized as a charge to earnings through a
valuation allowance.
Portfolio Loans
Loans held in portfolio are stated at the principal amount outstanding, net of
unamortized deferred loan origination fees and costs. Interest income is accrued
on a level yield basis based on principal amounts outstanding. Deferred loan
origination fees and costs are amortized as an adjustment to yield over the life
of the related loans.
Nonaccrual Loans
Loans, with the exception of certain well-secured residential mortgage loans,
are placed on nonaccrual status and interest recognition is suspended when such
loans are 90 days or more overdue with respect to principal and/or interest.
Well-secured residential mortgage loans are permitted to remain on accrual
status provided that full collection of principal and interest is assured. Loans
are also placed on nonaccrual status when, in the opinion of management, full
collection of principal and interest is doubtful. Interest previously accrued
but not collected on such loans is reversed against current period income.
Subsequent cash receipts on nonaccrual loans are applied to the outstanding
principal balance of the loan or recognized as interest income depending on
management's assessment of the ultimate collectibility of the loan. Loans are
removed from nonaccrual status when they have been current as to principal and
interest for a period of time, the borrower has demonstrated an ability to
comply with repayment terms, and when, in management's opinion, the loans are
considered to be fully collectible.
Impaired Loans
A loan is impaired when it is probable that the creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The Corporation considers all nonaccrual commercial loans to be
impaired. Impairment is measured on a discounted cash flow method, or at the
loan's observable market price, or at the fair value of the collateral if the
loan is collateral dependent. Impairment is measured based on the fair value of
the collateral if it is determined that foreclosure is probable.
Restructured Loans
Restructured loans include those for which concessions such as reduction of
interest rates other than normal market rate adjustments, or deferral of
principal or interest payments have been granted due to a borrower's financial
condition. Subsequent cash receipts on restructured loans are applied to the
outstanding principal balance of the loan, or recognized as interest income
depending on management's assessment of the ultimate collectibility of the loan.
Allowance for Loan Losses
The Corporation uses a methodology to systematically measure the amount of
estimated loan loss exposure inherent in the portfolio for purposes of
establishing a sufficient allowance for loan losses (ALL). The methodology
includes three elements: identification of specific loan losses, general loss
allocations for certain loan types based on credit grade and loss experience
factors, and general loss allocations for other environmental factors. The
methodology includes an analysis of individual loans deemed to be impaired in
accordance with the terms of SFAS 114. Other individual commercial and
commercial mortgage loans are evaluated using an internal rating system and the
application of loss allocation factors. The loan rating system and the related
loss allocation factors take into consideration the borrower's financial
condition, the borrower's performance with respect to loan terms and the
adequacy of collateral. Portfolios of more homogenous populations of loans
including residential mortgages and consumer loans are analyzed as groups taking
into account delinquency ratios and other indicators, the Corporation's
historical loss experience and comparison to industry standards of loss
allocation factors for each type of credit product. Finally, an additional
allowance is maintained based on a judgmental process whereby management
considers qualitative and quantitative assessments of other factors including
regional credit concentration, industry concentration, results of regulatory
examinations, historical loss ranges, portfolio composition, economic conditions
such as interest rates and energy costs and other changes in the portfolio. The
allowance for loan losses is management's best estimate of the probable loan
losses incurred as of the balance sheet date. The allowance is increased by
provisions charged to earnings and by recoveries of amounts previously charged
off, and is reduced by charge-offs on loans.
While management believes that the allowance for loan losses is adequate, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies periodically review the
Corporation's allowance for loan losses. Such agencies may require additions to
the allowance based on their judgments about information available to them at
the time of their examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation for financial reporting purposes is calculated on the straight-line
method over the estimated useful lives of assets. Expenditures for major
additions and improvements are capitalized while the costs of current
maintenance and repairs are charged to operating expenses.
Other Real Estate Owned (OREO)
Other real estate owned consists of property acquired through foreclosure and
loans determined to be substantively repossessed. Real estate loans that are
substantively repossessed include only those loans for which the Corporation has
taken possession of the collateral, but has not completed legal foreclosure
proceedings.
OREO is stated at the lower of cost or fair value minus estimated costs to sell
at the date of acquisition or classification to OREO status. Fair value of such
assets is determined based on independent appraisals and other relevant factors.
Any write-down to fair value at the time of foreclosure is charged to the
allowance for loan losses. A valuation allowance is maintained for declines in
market value and for estimated selling expenses. Increases to the valuation
allowance, expenses associated with ownership of these properties, and gains and
losses from their sale are included in foreclosed property costs.
Transfers and Servicing of Assets and Extinguishments of Liabilities
The Corporation accounts and reports for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control. This approach
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. After a transfer of financial assets, the Corporation
recognizes all financial and servicing assets it controls and liabilities it has
incurred and derecognizes financial assets it no longer controls and liabilities
that have been extinguished. This financial components approach focuses on the
assets and liabilities that exist after the transfer. Many of these assets and
liabilities are components of financial assets that existed prior to the
transfer. If a transfer does not meet the criteria for a sale, the Corporation
accounts for a transfer as a secured borrowing with a pledge of collateral.
Interest Rate Risk Management Agreements
The Corporation uses off-balance sheet financial instruments from time to time
as part of its interest rate risk management strategy. Interest rate swap and
floor agreements are entered into as hedges against future interest rate
fluctuations on specifically identified assets or liabilities. The Corporation
does not enter into agreements for trading or speculative purposes. Therefore,
these agreements are not marked to market.
The net amounts to be paid or received on outstanding interest rate risk
management agreements are recognized on the accrual basis as an adjustment to
the related interest income or expense over the life of the agreements. Premiums
paid for interest rate floor agreements are amortized as an adjustment to
interest income over the term of the agreements. Unamortized premiums are
included in other assets. Gains or losses resulting from the termination of
interest rate swap and floor agreements on qualifying hedges of existing assets
or liabilities are deferred and amortized over the remaining lives of the
related assets/liabilities as an adjustment to the yield. Unamortized deferred
gains/losses on terminated interest rate swap and floor agreements are included
in the underlying assets/liabilities hedged.
Pension Costs
The Corporation accounts for pension benefits using the net periodic benefit
cost method, which recognizes the compensation cost of an employee's pension
benefit over that employee's approximate service period.
Stock-Based Compensation
The Corporation measures compensation cost for stock-based compensation plans
using the intrinsic value based method prescribed by Accounting Principles Board
("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net
income and earnings per share computed using the fair value based method of
accounting for these plans as required by SFAS No. 123.
Income Taxes
Income tax expense is determined based on the asset and liability method,
whereby 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
bases. 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.
Earnings Per Share (EPS)
Diluted EPS is computed by dividing net income by the average number of common
shares and common stock equivalents outstanding. Common stock equivalents arise
from the assumed exercise of outstanding stock options, if dilutive. The
computation of basic EPS excludes common stock equivalents from the denominator.
Comprehensive Income
Comprehensive income is defined as all changes in equity, except for those
resulting from investments by and distribution to shareholders. Net income is a
component of comprehensive income, with all other components referred to in the
aggregate as other comprehensive income.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold, and other short-term
investments. Generally, federal funds are sold on an overnight basis.
Derivative Instruments and Hedging Activities
In 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 establishes accounting and reporting standards
for all derivative instruments, including certain derivative instruments
embedded in other financial instruments, and for hedging activities. The
standard requires an entity to record all derivatives, at fair value, as either
assets or liabilities on the balance sheet. The change in a derivative's fair
value is to be recorded either in current period earnings or other comprehensive
income depending on whether the derivative qualifies for hedge accounting and
the hedge classification. The Corporation adopted SFAS No. 133 effective January
1, 2001. The adoption of this standard did not have a material impact on the
financial position and earnings of the Corporation.
(2) Cash and Due from Banks
The Bank is required to maintain certain average reserve balances with the
Federal Reserve Board. Such reserve balances amounted to $6.4 million and $6.0
million at December 31, 2000 and 1999, respectively.
(3) Securities
Securities are summarized as follows:
(Dollars in thousands)
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $86,163 $1,162 $(241) $87,084
Mortgage-backed securities 240,436 1,462 (1,042) 240,856
Corporate bonds 39,086 348 (869) 38,565
Corporate stocks 14,314 6,494 (702) 20,106
----------------------------------------------------------------------------------------------------------
Total securities available for sale 379,999 9,466 (2,854) 386,611
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 35,135 265 (121) 35,279
Mortgage-backed securities 66,715 685 (467) 66,933
States and political subdivisions 23,065 121 (30) 23,156
----------------------------------------------------------------------------------------------------------
Total securities held to maturity 124,915 1,071 (618) 125,368
----------------------------------------------------------------------------------------------------------
Total securities $504,914 $10,537 $(3,472) $511,979
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $87,558 $347 $(1,595) $86,310
Mortgage-backed securities 191,934 70 (2,918) 189,086
Corporate bonds 34,364 31 (711) 33,684
Corporate stocks 15,833 6,582 (1,064) 21,351
----------------------------------------------------------------------------------------------------------
Total securities available for sale 329,689 7,030 (6,288) 330,431
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 28,231 - (895) 27,336
Mortgage-backed securities 62,209 54 (2,189) 60,074
States and political subdivisions 25,932 23 (497) 25,458
----------------------------------------------------------------------------------------------------------
Total securities held to maturity 116,372 77 (3,581) 112,868
----------------------------------------------------------------------------------------------------------
Total securities $446,061 $7,107 $(9,869) $443,299
----------------------------------------------------------------------------------------------------------
Included in corporate stocks at December 31, 2000 are preferred stocks, which
are callable at the discretion of the issuer, with an amortized cost of $9.6
million and a fair value of $9.3 million. Call features on these stocks range
from four months to seven years.
The contractual maturities and weighted average yields of debt securities are
summarized below. Weighted average yields are computed on a fully taxable basis.
Mortgage-backed securities are included based on weighted average maturities,
adjusted for anticipated prepayments.
(Dollars in thousands) Weighted
Amortized Fair Average
December 31, 2000 Cost Value Yield
-------------------------------------------------------------------------
Securities Available for Sale:
Due in 1 year or less $59,129 $59,199 6.89%
After 1 but within 5 years 164,355 165,409 7.01%
After 5 but within 10 years 74,485 75,057 7.10%
After 10 years 67,716 66,840 7.36%
-------------------------------------------------------------------------
Total debt securities available for sale 365,685 366,505 7.07%
-------------------------------------------------------------------------
Securities Held to Maturity:
Due in 1 year or less 23,466 23,553 6.50%
After 1 but within 5 years 64,169 64,460 6.25%
After 5 but within 10 years 30,264 30,316 5.96%
After 10 years 7,016 7,039 6.81%
-------------------------------------------------------------------------
Total debt securities held to maturity 124,915 125,368 6.26%
-------------------------------------------------------------------------
Total debt securities $490,600 $491,873 6.87%
-------------------------------------------------------------------------
At December 31, 2000, the Corporation owned debt securities with an aggregate
carrying value of $62.5 million that are callable at the discretion of the
issuers. The majority of these securities are U.S. Treasury and
government-sponsored agency obligations, included in both the available for sale
and held to maturity categories. Final maturities of these securities range from
twenty-six months to thirty years with call features ranging from one month to
seven years.
The following is a summary of amounts relating to sales of securities available
for sale:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998
-------------------------------------------------------------------------
Proceeds from sales $40,288 $81,398 $95,666
-------------------------------------------------------------------------
Realized gains $1,358 $2,213 $1,161
Realized losses (598) (1,535) (657)
-------------------------------------------------------------------------
Net realized gains $760 $678 $504
-------------------------------------------------------------------------
Securities available for sale and held to maturity with a fair value of $65.3
million and $46.9 million were pledged to secure Treasury Tax and Loan deposits,
borrowings and public deposits at December 31, 2000 and 1999, respectively. In
addition, securities available for sale and held to maturity with a fair value
of $31.2 million and $52.0 million were collateralized for the discount window
at the Federal Reserve Bank at December 31, 2000 and 1999, respectively. There
were no borrowings with the Federal Reserve Bank at either date.
(4) Loans
The following is a summary of loans:
(Dollars in thousands)
December 31, 2000 1999
-------------------------------------------------------------------------
Commercial and other:
Mortgages (1) $121,817 $113,719
Construction and development (2) 2,809 2,902
Other (3) 115,202 115,739
-------------------------------------------------------------------------
Total commercial and other 239,828 232,360
Residential real estate:
Mortgages 236,595 212,719
Homeowner construction 14,344 12,995
-------------------------------------------------------------------------
Total residential real estate 250,939 225,714
Consumer 106,388 90,951
-------------------------------------------------------------------------
Total loans $597,155 $549,025
-------------------------------------------------------------------------
(1) Amortizing mortgages, primarily secured by income producing property
(2) Loans for construction of residential and commercial properties and
for land development
(3) Loans to businesses and individuals, a substantial portion of which
are fully or partially collateralized by real estate
Concentrations of Credit Risk
The Corporation's lending activities are primarily conducted in southern Rhode
Island and southeastern Connecticut. The Corporation grants single family and
multi-family residential loans, commercial real estate loans, commercial loans,
and a variety of consumer loans. In addition, loans are granted for the
construction of residential homes, commercial real estate properties, and for
land development. The ability of single family residential and consumer
borrowers to honor their repayment commitments is generally dependent on the
level of overall economic activity within the market area and real estate
values. The ability of commercial borrowers to honor their repayment commitments
is dependent on the general economy as well as the health of the real estate
economic sector in the Corporation's market area.
Nonaccrual Loans
The balance of loans on nonaccrual status as of December 31, 2000 and 1999 was
$3.4 million and $3.8 million, respectively. Interest income that would have
been recognized had these loans been current in accordance with their original
terms was approximately $411 thousand in 2000 and $447 thousand in 1999.
Interest income attributable to these loans included in the Consolidated
Statements of Income amounted to approximately $250 thousand in 2000 and $217
thousand in 1999. Included in nonaccrual loans at December 31, 2000 and 1999 are
loans amounting to $118 thousand and $142 thousand, respectively, whose terms
have been restructured.
Impaired Loans
Impaired loans consist of all nonaccrual commercial loans. The following is a
summary of impaired loans:
(Dollars in thousands)
December 31, 2000 1999
-------------------------------------------------------------------------
Impaired loans requiring an allowance $813 $1,668
Impaired loans not requiring an allowance 1,301 371
-------------------------------------------------------------------------
Total recorded investment in impaired loans $2,114 $2,039
-------------------------------------------------------------------------
(Dollars in thousands)
Years ended December 31, 2000 1999
-------------------------------------------------------------------------
Average recorded investment in impaired loans $2,056 $3,418
-------------------------------------------------------------------------
Interest income recognized on impaired loans $191 $351
-------------------------------------------------------------------------
Mortgage Servicing Activities
At December 31, 2000 and 1999, mortgage loans sold to others and serviced by the
Corporation on a fee basis under various agreements amounted to $180.6 million
and $193.9 million, respectively. Loans serviced for others are not included in
the Consolidated Balance Sheets.
The following is a summary of capitalized mortgage servicing rights:
(Dollars in thousands)
December 31, 2000 1999
-------------------------------------------------------------------------
Balance at beginning of year $996 $808
Additions 27 313
Amortization (118) (125)
-------------------------------------------------------------------------
Balance at end of year $905 $996
-------------------------------------------------------------------------
Capitalized mortgage servicing rights are periodically evaluated for impairment.
As of December 31, 2000 and 1999, the balance of the valuation allowance
amounted to $320 thousand.
Loans to Related Parties
The Corporation has made loans in the ordinary course of business to certain
directors and executive officers including their immediate families and their
affiliated companies. Such loans were made under normal interest rate and
collateralization terms. Activity related to these loans in 2000 and 1999 was as
follows:
(Dollars in thousands)
December 31, 2000 1999
-------------------------------------------------------------------------
Balance at beginning of year $2,279 $2,455
Additions 2,061 1,406
Reductions (1,749) (1,582)
-------------------------------------------------------------------------
Balance at end of year $2,591 $2,279
-------------------------------------------------------------------------
(5) Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998
-------------------------------------------------------------------------
Balance at beginning of year $12,349 $10,966 $9,335
Provision charged to expense 1,150 1,840 1,879
Recoveries of loans previously charged off 319 510 405
Loans charged off (683) (967) (653)
-------------------------------------------------------------------------
Balance at end of year $13,135 $12,349 $10,966
-------------------------------------------------------------------------
Included in the allowance for loan losses at December 31, 2000, 1999 and 1998
was an allowance for impaired loans amounting to $209 thousand, $475 thousand
and $803 thousand, respectively.
(6) Premises and Equipment
The following is a summary of premises and equipment:
(Dollars in thousands)
December 31, 2000 1999
-------------------------------------------------------------------------
Land and improvements $2,099 $2,245
Premises and improvements 25,114 24,624
Furniture, fixtures and equipment 19,319 18,456
-------------------------------------------------------------------------
46,532 45,325
Less accumulated depreciation 24,822 21,883
-------------------------------------------------------------------------
Total premises and equipment, net $21,710 $23,442
-------------------------------------------------------------------------
(7) Financial Instruments With Off-Balance Sheet Risk and Derivative Financial
Instruments
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to manage the Corporation's exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, financial guarantees and interest rate swaps and floors.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the Consolidated Balance Sheets. The contract or
notional amounts of these instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The Corporation
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The contractual and notional
amounts of financial instruments with off-balance sheet risk are as follows:
(Dollars in thousands)
December 31, 2000 1999
----------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans $32,145 $38,380
Home equity lines 45,876 38,428
Other loans 20,241 15,479
Standby letters of credit 2,246 500
Financial instruments whose notional amounts exceed the amount of credit risk:
Interest rate floor contracts 20,000 70,000
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer as long as
there are no violations 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 some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each borrower's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained is based on
management's credit evaluation of the borrower.
Standby Letters of Credit
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
Interest Rate Risk Management Agreements
The Corporation uses interest rate swaps and floors from time to time as part of
its interest rate risk management strategy. Swaps are agreements in which the
Corporation and another party agree to exchange interest payments (e.g.,
fixed-rate for variable-rate payments) computed on a notional principal amount.
A floor is a purchased contract that entitles the Corporation to receive payment
from a counterparty if a rate index falls below a contractual rate. The amount
of the payment is the difference between the contractual floor rate and the rate
index multiplied by the notional principal amount of the contract. If the rate
index does not fall below the contractual floor rate, no payment is received.
The credit risk associated with swap and floor transactions is the risk of
default by the counterparty. To minimize this risk, the Corporation enters into
interest rate agreements only with highly rated counterparties that management
believes to be creditworthy. The notional amounts of these agreements do not
represent amounts exchanged by the parties and thus, are not a measure of the
Corporation's potential loss exposure.
During 1995, the Corporation entered into interest rate floor contracts with a
total notional amount of $50 million that matured in February 2000. The
Corporation received payment under the 1995 contracts with a total notional
value of $30 million when the prime rate fell below 9.0% and on the remaining
$20 million when 3-month LIBOR at quarterly resetting dates was below 6.19%. In
March 1998, the Corporation entered into a five-year interest rate floor
contract with a notional amount of $20 million that matures in February 2003.
The 1998 floor contract entitles the Corporation to receive payment from
counterparts if the three-month LIBOR rate falls below 5.50%. The purpose of the
floor contracts is to offset the risk of future reductions in interest earned on
certain floating rate loans. The 3-month LIBOR applicable to the outstanding
floor contract at December 31, 2000 was 6.40%. At December 31, 2000, the fair
value, or the value to the Corporation of terminating the contracts, was $98
thousand. The remaining unamortized premium for these contracts, included in
other assets, amounted to $133 thousand at December 31, 2000.
The Corporation has not terminated any interest rate swap agreements or floor
contracts and there are no unamortized deferred gains or losses.
(8) Other Real Estate Owned
Other real estate owned is included in other assets on the Corporation's
consolidated balance sheets. An analysis of the composition of OREO follows:
(Dollars in thousands)
December 31, 2000 1999
------------------------------------------------------------------------
Residential real estate $ - $43
Commercial real estate - 55
Repossessed assets 11 45
Land 37 -
------------------------------------------------------------------------
48 143
Valuation allowance (39) (94)
------------------------------------------------------------------------
Other real estate owned, net $9 $49
------------------------------------------------------------------------
An analysis of the activity relating to OREO follows:
(Dollars in thousands)
Years ended December 31, 2000 1999
------------------------------------------------------------------------
Balance at beginning of year $143 $312
Net transfers from loans 109 576
Sales (154) (745)
Other (50) -
------------------------------------------------------------------------
48 143
Valuation allowance (39) (94)
------------------------------------------------------------------------
Other real estate owned, net $9 $49
------------------------------------------------------------------------
The following is an analysis of activity relating to the OREO valuation
allowance:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998
------------------------------------------------------------------------
Balance at beginning of year $94 $69 $76
Provision charged to expense 3 99 14
Sales (8) (53) (1)
Selling expenses incurred - (21) (20)
Other (50) - -
------------------------------------------------------------------------
Balance at end of year $39 $94 $69
------------------------------------------------------------------------
Net realized gains on dispositions of properties amounted to $44 thousand, $39
thousand, and $50 thousand in 2000, 1999 and 1998, respectively. These amounts
are included in other noninterest expense in the Consolidated Statements of
Income.
(9) Time Certificates of Deposit
Scheduled maturities of time certificates of deposit at December 31, 2000 were
as follows:
(Dollars in thousands)
Years ending December 31: 2001 $252,224
2002 99,243
2003 8,116
2004 3,015
2005 751
2006 and thereafter 14
------------------------------------------------------------------------
Balance at December 31, 2000 $363,363
------------------------------------------------------------------------
The aggregate amount of time certificates of deposit in denominations of $100
thousand or more was $122.9 million and $100.6 million at December 31, 2000 and
1999, respectively.
(10) Borrowings
Federal Home Loan Bank Advances
The following table presents scheduled maturities and weighted average interest
rates paid on FHLB advances outstanding at December 31, 2000:
(Dollars in thousands) Weighted
Average Rate Amount
-------------------------------------------------------------------------
Years ending December 31: 2001 6.43% $176,977
2002 6.37% 70,412
2003 6.29% 61,007
2004 6.27% 19,159
2005 6.38% 3,208
2006 and thereafter 5.95% 46,599
-------------------------------------------------------------------------
Balance at December 31, 2000 $377,362
-------------------------------------------------------------------------
Included in the outstanding amounts disclosed are callable advances totaling
$42.5 million. Call features on these advances range from one to five years. In
addition to the outstanding advances, the Bank also has access to an unused line
of credit amounting to $8.0 million at December 31, 2000. Under agreement with
the FHLB, the Bank is required to maintain qualified collateral, free and clear
of liens, pledges, or encumbrances that, based on certain percentages of book
and market values, has a value equal to the aggregate amount of the line of
credit and outstanding advances. Qualified collateral may consist of residential
mortgage loans, U.S. government or agency securities, and amounts maintained on
deposit at the FHLB. The Bank maintains qualified collateral in excess of the
amount required to collateralize the line of credit and outstanding advances at
December 31, 2000.
Other Borrowings
The following is a summary of other borrowings:
(Dollars in thousands)
December 31, 2000 1999
------------------------------------------------------------------------
Treasury, Tax and Loan demand note balance $2,813 $3,948
Other 414 261
------------------------------------------------------------------------
Other borrowings $3,227 $4,209
------------------------------------------------------------------------
There were no securities sold under repurchase agreements outstanding at
December 31, 2000 and 1999. Securities sold under repurchase agreements
generally mature within 90 days. The securities underlying the agreements are
held in safekeeping by the counterparty in the name of the Corporation and are
repurchased when the agreement matures. Accordingly, these underlying securities
are included in securities available for sale and the obligations to repurchase
such securities are reflected as a liability. The following is a summary of
amounts relating to securities sold under repurchase agreements:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998
------------------------------------------------------------------------
Maximum amount outstanding at any month-end $ - $23,525 $26,767
Average amount outstanding $ - $10,316 $13,323
Weighted average rate - 5.05% 5.56%
(11) Employee Benefits
Defined Benefit Pension Plans
The Corporation's noncontributory tax-qualified defined benefit pension plan
covers substantially all employees. Benefits are based on an employee's years of
service and highest 3-year compensation. The plan is funded on a current basis,
in compliance with the requirements of the Employee Retirement Income Security
Act. The prepaid benefit costs relating to the defined benefit pension plan
amounted to $63 thousand and $448 thousand at December 31, 2000 and 1999,
respectively.
The Corporation has a nonqualified retirement plan to provide supplemental
retirement benefits to certain employees, as defined in the plan. The accrued
pension liability related to this plan amounted to $534 thousand and $400
thousand at December 31, 2000 and 1999, respectively. The actuarial assumptions
used for this supplemental plan are the same as those used for the Corporation's
tax-qualified pension plan. The projected benefit obligation for this plan
amounted to $1.4 million and $1.1 million at September 30, 2000 and 1999,
respectively.
The following is a reconciliation of the benefit obligation, fair value of plan
assets and funded status of the Corporation's defined benefit pension plans:
(Dollars in thousands)
Years ended September 30, 2000 1999
-------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of plan year $13,823 $14,479
Service cost 722 652
Interest cost 1,013 1,001
Amendments - 174
Actuarial loss (gain) 63 (1,801)
Benefits paid (693) (682)
-------------------------------------------------------------------------
Benefit obligation at end of plan year $14,928 $13,823
-------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of plan year $17,780 $16,349
Actual return on plan assets 1,297 2,053
Employer contribution 61 60
Benefits paid (693) (682)
-------------------------------------------------------------------------
Fair value of plan assets at end of plan year $18,445 $17,780
-------------------------------------------------------------------------
Certain changes in the items shown are not recognized as they occur, but are
amortized systematically over subsequent periods. Unrecognized amounts to be
amortized and the amounts included in the Consolidated Balance Sheets are as
follows:
(Dollars in thousands)
2000 1999
-------------------------------------------------------------------------
Funded status at September 30, $3,517 $3,957
Unrecognized transition asset (43) (49)
Unrecognized prior service cost 533 620
Unrecognized net actuarial gain (4,478) (4,480)
-------------------------------------------------------------------------
(Accrued) prepaid benefit cost at December 31, $(471) $48
-------------------------------------------------------------------------
September 30, 2000 1999
-------------------------------------------------------------------------
Assumptions Used:
Discount rate 7.75% 7.50%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 5.00% 5.00%
The components of net pension cost include the following:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998
-------------------------------------------------------------------------
Components of Net Periodic Benefit Cost:
Service cost $722 $652 $502
Interest cost 1,013 1,002 915
Expected return on plan assets (1,229) (1,106) (992)
Amortization of transition asset (6) (6) (6)
Amortization of prior service cost 87 75 75
Recognized net actuarial (gain) loss (8) 11 6
-------------------------------------------------------------------------
Net periodic benefit cost $579 $628 $500
-------------------------------------------------------------------------
401(k) Plan
The Corporation's 401(k) Plan provides a specified match of employee
contributions for substantially all employees. Total employer matching
contributions under this plan amounted to $320 thousand, $275 thousand and $256
thousand in 2000, 1999 and 1998, respectively.
Profit Sharing Plan
The Corporation has a nonqualified profit sharing plan that rewards employees,
excluding those key employees participating in the Short-Term Incentive Plan,
for their contributions to the Corporation's success. The annual profit sharing
benefit is determined by a formula tied to return on equity and is subject to
approval by the Corporation's Board of Directors each year. The amount of the
profit sharing benefit was $392 thousand, $333 thousand and $322 thousand for
2000, 1999 and 1998, respectively.
Short-Term Incentive Plan
The Corporation's nonqualified Short-Term Incentive Plan rewards key employees
for their contributions to the Corporation's success. This plan provides for
annual payments up to a maximum percentage of each participant's base salary,
which percentages vary among participants. Payment amounts are based on the
achievement of target levels of return on equity and/or the achievement of
individual objectives. Participants in this plan are not eligible to receive
benefits provided under the profit sharing component of the Savings and Profit
Sharing Plan. The expense of the Short-Term Incentive Plan amounted to $1.3
million, $969 thousand and $688 thousand in 2000, 1999 and 1998, respectively.
Other Incentive Plans
In connection with the acquisition of Phoenix, there are incentive compensation
arrangements based on current and future year revenue goals. The expense
recognized for these arrangements in 2000, applicable to the period subsequent
to the June 26, 2000 acquisition date, amounted to $200 thousand. In addition,
the Corporation has other nonqualified incentive plans. Certain employees, who
do not participate in the profit sharing plan or the Short-Term Incentive Plan,
participate in one of these plans. The incentives are based on a variety of plan
specific factors, including general organizational profitability, product line
result, and individual business development goals. The aggregate cost of these
various plans amounted to $963 thousand, $717 thousand and $799 thousand in
2000, 1999 and 1998, respectively.
Directors' Retainer Continuation Plan
The Corporation previously offered a nonqualified plan that provided retirement
benefits to non-officer directors. In 1996, the provisions of the plan were
terminated for active directors and the related accrued benefit was settled. The
benefits provided under this plan continue for retired directors. The expense of
this plan is included in other noninterest expense and amounted to $24 thousand,
$24 thousand and $25 thousand for 2000, 1999 and 1998, respectively. Accrued and
unpaid benefits under this plan are an unfunded obligation of the Bank. The
accrued liability related to this plan amounted to $241 thousand and $248
thousand at December 31, 2000 and 1999, respectively.
Deferred Compensation Plan
The Corporation's Nonqualified Deferred Compensation Plan provides supplemental
retirement and tax benefits to directors and certain officers. The plan is
funded primarily through pre-tax contributions made by the participants. The
Corporation has recorded the assets and liabilities for the deferred
compensation plan at the lower of cost or market in the consolidated balance
sheets. The participants in the plan bear the risk of market fluctuations of the
underlying assets. The accrued liability related to this plan amounted to $1.2
million and $953 thousand at December 31, 2000 and 1999, respectively, and is
included in other liabilities on the accompanying consolidated balance sheets.
The corresponding invested assets are reported in other assets.
(12) Income Taxes
The components of income tax expense were as follows:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998
------------------------------------------------------------------------
Current tax expense:
Federal $6,311 $5,446 $4,564
State 43 49 50
------------------------------------------------------------------------
Total current tax expense 6,354 5,495 4,614
------------------------------------------------------------------------
Deferred tax benefit:
Federal (681) (741) (371)
State - - (8)
------------------------------------------------------------------------
Total deferred tax benefit (681) (741) (379)
------------------------------------------------------------------------
Total income tax expense $5,673 $4,754 $4,235
------------------------------------------------------------------------
Total income tax expense varied from the amount determined by applying the
Federal income tax rate to income before income taxes. The reasons for the
differences were as follows:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998
------------------------------------------------------------------------
Tax expense at Federal statutory rate $6,609 $5,239 $5,052
Increase (decrease) in taxes resulting from:
Tax-exempt income (377) (457) (401)
Acquisition related expenses 89 268 -
Dividends received deduction (259) (246) (261)
Bank-owned life insurance (366) (237) -
State tax, net of Federal income tax benefit 28 32 26
Other (51) 155 (181)
------------------------------------------------------------------------
Total income tax expense $5,673 $4,754 $4,235
------------------------------------------------------------------------
The approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 2000 and
1999 are as follows:
(Dollars in thousands)
December 31, 2000 1999
------------------------------------------------------------------------
Gross deferred tax assets:
Allowance for loan losses $4,468 $4,211
Deferred compensation 414 242
Deferred loan origination fees 317 366
Net operating loss carryover 250 292
Other 915 987
------------------------------------------------------------------------
Gross deferred tax assets 6,364 6,098
------------------------------------------------------------------------
Gross deferred tax liabilities:
Securities available for sale (2,315) (252)
Deferred loan origination costs (862) (811)
Premises and equipment (759) (1,060)
Pension (11) (146)
Other (276) (306)
------------------------------------------------------------------------
Gross deferred tax liabilities (4,223) (2,575)
------------------------------------------------------------------------
Net deferred tax asset $2,141 $3,523
------------------------------------------------------------------------
In addition to future taxable income and the reversal of deferred tax
liabilities, a primary source of recovery of deferred tax assets is taxes paid
in prior years available for carryback.
(13) Operating Leases
At December 31, 2000, the Corporation was committed to rent premises used in
banking operations under noncancellable operating leases. Rental expense under
the operating leases amounted to $604 thousand, $478 thousand and $526 thousand
for 2000, 1999 and 1998, respectively. The minimum annual lease payments under
the terms of these leases, exclusive of renewal provisions, are as follows:
(Dollars in thousands)
Years ending December 31: 2001 $418
2002 311
2003 246
2004 223
2005 51
------------------------------------------------------------------------
$1,249
------------------------------------------------------------------------
(14) Litigation
On January 28, 1997, a suit was filed against the Bank in the Superior Court of
Washington County, Rhode Island by Maxson Automatic Machinery Company
("Maxson"), a former corporate customer, and Maxson's shareholders for damages
which the plaintiffs allegedly incurred as a result of an embezzlement by
Maxson's former president, treasurer and fifty percent shareholder, which
allegedly occurred between 1986 and 1995. The suit alleges that the Bank erred
in permitting this individual, while an officer of Maxson, to transfer funds
from Maxson's account at the Bank for his personal benefit. The claims against
the Bank are based upon theories of breach of fiduciary duty, negligence, breach
of contract, unjust enrichment, conversion, failure to act in a commercially
reasonable manner, and constructive fraud.
Management believes, based on its review with counsel of the development of this
matter to date, that the Bank has asserted meritorious affirmative defenses in
this litigation. Additionally, the Bank has filed counterclaims against Maxson
and its shareholders as well as claims against the former Maxson officer
allegedly responsible for the embezzlement. The Bank is vigorously asserting its
defenses and affirmative claims. The discovery phase of the case has been
completed, though the parties are attempting to resolve several discovery
disputes. The Bank has also filed several motions, all of which seek dismissal
of one or more of the plaintiffs' claims and/or exclusion of portions of the
plaintiffs' evidence. The court began hearing argument on the motions on March
8, 2001, and has expressed a desire to hear further argument. There is currently
no scheduled trial date. During discovery, the plaintiffs have offered various
theories and amounts of alleged damages, ranging from $5.0 million to $12.7
million, plus interest thereon. The plaintiffs have also filed a motion to amend
the complaint to add a claim for punitive damages. The court has deferred ruling
on whether to permit this amendment. Because of the numerous uncertainties that
surround the litigation, management and legal counsel are unable to estimate the
amount of loss, if any, that the Bank may incur with respect to this litigation.
Consequently, no loss provision has been recorded.
The Corporation is involved in various other claims and legal proceedings
arising out of the ordinary course of business. Management is of the opinion,
based on its review with counsel of the development of such matters to date,
that the ultimate disposition of such other matters will not materially affect
the consolidated financial position or results of operations of the Corporation.
(15) Shareholders' Equity
Stock Splits
A 3-for-2 stock split, in the form of a stock dividend, was paid on August 3,
1998 to shareholders of record on July 17, 1998. The par value of the common
stock remained unchanged at $.0625 per share. Cash payments were made in lieu of
issuing fractional shares. All share and per share amounts in the consolidated
financial statements and related notes have been restated to reflect the stock
split.
Stock Repurchase Plan
In December 1997, the Corporation's Board of Directors approved a program to
repurchase up to 225,000, or approximately 2.3%, of its outstanding common
shares. This plan replaced the June 1996 authorization to repurchase 195,750
shares. The Corporation planned to hold the repurchased shares as treasury stock
to be used for general corporate purposes. Approximately 139,274 shares were
repurchased in 1998 at a total cost of $3.0 million. In April 1999, the
Corporation's Board of Directors approved the termination of the Corporation's
stock repurchase plan.
Rights
On August 1996, the Corporation declared a dividend of one common share purchase
right (a "Right") for each share of common stock payable on September 3, 1996 to
shareholders of record on that date. Such Rights also apply to new issuances of
shares after that date. Each Right entitles the registered holder to purchase
from the Corporation one share of its common stock at a price of $35.56 per
share, subject to adjustment.
The Rights are not exercisable or separable from the common stock until the
earlier of 10 days after a person or group (an "Acquiring Person") acquires
beneficial ownership of 15% or more of the outstanding common shares or
announces a tender offer to do so. The Rights, which expire on August 31, 2006,
may be redeemed by the Corporation at any time prior to the acquisition by an
Acquiring Person of beneficial ownership of 15% or more of the common stock at a
price of $.001 per Right. In the event that any party becomes an Acquiring
Person, each holder of a Right, other than Rights owned by the Acquiring Person,
will have the right to receive upon exercise that number of common shares having
a market value of two times the purchase price of the Right. In the event that,
at any time after any party becomes an Acquiring Person, the Corporation is
acquired in a merger or other business combination transaction or 50% or more of
its assets or earning power are sold, each holder of a Right will have the right
to purchase that number of shares of the acquiring company having a market value
of two times the purchase price of the Right.
Dividends
The primary source of funds for dividends paid by the Corporation is dividends
received from the Bank. The Corporation and the Bank are regulated enterprises
and their abilities to pay dividends are subject to regulatory review and
restriction. Certain regulatory and statutory restrictions exist regarding
dividends, loans, and advances from the Bank to the Corporation. Generally the
Bank has the ability to pay dividends to the parent subject to minimum
regulatory capital requirements. Under the most restrictive of these
requirements, the Bank could have declared aggregate additional dividends of
$36.3 million as of December 31, 2000.
Stock Option Plans
The Corporation's 1997 Equity Incentive Plan (the "1997 Plan") permits the
granting of options and other equity incentives to key employees, directors,
advisors, and consultants. Up to 1,012,500 shares of the Corporation's common
stock may be used from authorized but unissued shares, treasury stock, or shares
available from expired awards. Options are designated either as non-qualified or
as incentive options. The exercise price of each option may not be less than the
fair market value on the date of the grant. In general, the option price is
payable in cash, by the delivery of shares of the Corporation's common stock
already owned by the grantee, or a combination thereof. Awards may be granted at
any time until April 29, 2007.
The 1988 Amended and Restated Stock Option Plan (the "1988 Plan") provided for
the granting of options to directors, officers and key employees. The 1988 Plan
permitted options to be granted at any time until December 31, 1997. The 1988
Plan provided for shares of the Corporation's common stock to be used from
authorized but unissued shares, treasury stock, or shares available from expired
options. Options were designated either as non-qualified or as incentive
options. The exercise price of options granted was equal to the fair market
value on the date of grant. In general, the option price is payable in cash, by
the delivery of shares of the Corporation's common stock already owned by the
grantee, or a combination thereof.
The 1997 Plan and the 1988 Plan permit options to be granted with stock
appreciation rights ("SARs"), however, no options have been granted with SARs.
Options granted under the plans vest according to various terms at the end of
ten years. The following table presents changes in options outstanding during
2000, 1999 and 1998:
Years ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------
Outstanding at January 1 806,380 $11.49 851,329 $8.90 1,128,584 $7.73
Granted 216,390 $15.27 160,104 $17.64 24,435 $21.33
Exercised (150,972) $7.21 (194,430) $4.95 (292,618) $5.22
Cancelled (25,258) $17.05 (10,623) $16.10 (9,072) $15.87
- ------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 846,540 $13.05 806,380 $11.49 851,329 $8.90
- ------------------------------------------------------------------------------------------------------------------
Exercisable at December 31 616,918 $12.02 613,367 $9.73 682,249 $7.32
- ------------------------------------------------------------------------------------------------------------------
The weighted average exercise price and remaining contractual life for options
outstanding at December 31, 2000 were as follows:
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------------
$2.13 to $4.27 64,843 1.7 years $3.57 64,843 $3.57
$4.28 to $6.40 21,723 3.4 years $5.56 21,723 $5.56
$6.41 to $8.53 93,107 3.9 years $7.04 93,107 $7.04
$8.54 to $10.67 90,143 5.2 years $9.54 90,143 $9.54
$10.68 to $12.80 104,904 6.2 years $11.65 104,904 $11.65
$12.81 to $14.93 7,100 9.6 years $14.75 1,775 $14.75
$14.94 to $17.07 224,000 9.3 years $15.36 53,230 $15.41
$17.08 to $19.20 193,456 7.7 years $17.83 139,929 $17.96
$19.21 to $21.33 47,264 7.0 years $20.42 47,264 $20.42
- -----------------------------------------------------------------------------------------------------------------
Total 846,540 6.7 years $13.05 616,918 $12.02
- -----------------------------------------------------------------------------------------------------------------
As discussed in Note 1, the Corporation accounts for its stock option plan using
the intrinsic value based method prescribed by APB Opinion No. 25, and in
addition, is required to disclose pro forma net income and earnings per share
using the fair value based method prescribed by SFAS No. 123. Accordingly, no
compensation cost for these plans has been recognized in the Consolidated
Statements of Income for 2000, 1999 and 1998.
In determining the pro forma disclosures required by SFAS No. 123, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following table presents pro forma net
income and earnings per share assuming the stock option plan was accounted for
using the fair value method prescribed by SFAS No. 123, the weighted average
assumptions used and the grant date fair value of options granted in 2000, 1999
and 1998:
(Dollars in thousands, except per share amounts)
Years ended December 31, 2000 1999 1998
--------------------------------------------------------------------------
Net income As reported $13,209 $12,511 $12,178
Pro forma $12,401 $11,942 $11,838
Basic earnings per share As reported $1.10 $1.05 $1.04
Pro forma $1.04 $1.01 $1.01
Diluted earnings per share As reported $1.09 $1.03 $1.01
Pro forma $1.02 $.99 $.98
Weighted average fair value $5.01 $5.36 $5.40
Expected life 9.3 years 9.0 years 8.6 years
Risk-free interest rate 6.39% 5.91% 6.04%
Expected volatility 32.6% 32.8% 25.9%
Expected dividend yield 3.9% 3.9% 4.0%
The pro forma effect on net income and earnings per share for 2000, 1999 and
1998 is not representative of the pro forma effect on net income and earnings
per share for future years because it does not reflect compensation cost for
options granted prior to January 1, 1995.
Dividend Reinvestment
Under the Amended and Restated Dividend Reinvestment and Stock Purchase Plan,
607,500 shares of common stock were originally reserved to be issued for
dividends reinvested and cash payments to the plan.
Reserved Shares
As of December 31, 2000, a total of 1,764,691 common stock shares were reserved
for issuance under the 1988 Plan, the 1997 Plan and the Amended and Restated
Dividend Reinvestment and Stock Purchase Plan.
Regulatory Capital Requirements
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the Federal Reserve Board and the FDIC,
respectively. These requirements were established to more accurately assess the
credit risk inherent in the assets and off-balance sheet activities of financial
institutions. 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 consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital to average assets (as defined). Management
believes, as of December 31, 2000, that the Corporation and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 2000, the most recent notification from the FDIC categorized
the Bank as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
The following table presents the Corporation's and the Bank's actual capital
amounts and ratios at December 31, 2000 and 1999, as well as the corresponding
minimum regulatory amounts and ratios:
(Dollars in thousands) To Be Well Capitalized
Under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
As of December 31, 2000:
Total Capital (to Risk-Weighted Assets):
Consolidated $95,264 14.35% $53,093 8.00% $66,367 10.00%
Bank $94,862 14.29% $53,093 8.00% $66,367 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $84,302 12.70% $26,547 4.00% $39,820 6.00%
Bank $83,900 12.64% $26,547 4.00% $39,820 6.00%
Tier 1 Capital (to Average Assets): (1)
Consolidated $84,302 7.08% $47,609 4.00% $59,511 5.00%
Bank $83,900 7.05% $47,602 4.00% $59,502 5.00%
As of December 31, 1999:
Total Capital (to Risk-Weighted Assets):
Consolidated $87,512 14.38% $48,694 8.00% $60,868 10.00%
Bank $85,477 14.04% $48,694 8.00% $60,868 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $77,362 12.71% $24,347 4.00% $36,521 6.00%
Bank $75,327 12.38% $24,347 4.00% $36,521 6.00%
Tier 1 Capital (to Average Assets): (1)
Consolidated $77,362 7.22% $42,866 4.00% $53,583 5.00%
Bank $75,327 7.03% $42,866 4.00% $53,583 5.00%
<FN>
(1) Leverage ratio
</FN>
(16) Earnings per Share
(Dollars in thousands, except per share amounts)
Years ended December 31, 2000 1999 1998
---------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
----------------------------------------------------------------
Net income $13,209 $13,209 $12,511 $12,511 $12,178 $12,178
Share amounts, in thousands:
Average outstanding 11,976.9 11,976.9 11,874.4 11,874.4 11,725.9 11,725.9
Common stock equivalents - 125.7 - 218.3 - 380.1
---------------------------------------------------------------------------------------------------------
Weighted average outstanding 11,976.9 12,102.6 11,874.4 12,092.7 11,725.9 12,106.0
---------------------------------------------------------------------------------------------------------
Earnings per share $1.10 $1.09 $1.05 $1.03 $1.04 $1.01
---------------------------------------------------------------------------------------------------------
(17) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
that the Corporation disclose estimated fair values of its financial
instruments. Fair value estimates are made as of a specific point in time, based
on relevant market information and information about the financial instrument.
These estimates do not reflect any pricing adjustments that could result from
the sale of the Corporation's entire holding of a particular financial
instrument. Because no quoted market exists for a portion of the financial
instruments, fair value estimates are based on subjective judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. Changes in
assumptions could significantly affect the estimates of fair value. Fair value
estimates, methods, and assumptions are set forth as follows:
Cash and Securities
The carrying amount of short-term instruments such as cash and federal funds
sold is used as an estimate of fair value.
The fair value of securities available for sale and held to maturity is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers. No market exists for shares of the
FHLB of Boston. Such stock may be redeemed at par upon termination of FHLB
membership and is therefore valued at par, which equals cost.
Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is estimated using the quoted
market prices for sales of similar loans on the secondary market.
Loans
Fair values are estimated for categories of loans with similar financial
characteristics. Loans are segregated by type and are then further segmented
into fixed rate and adjustable rate interest terms to determine their fair
value. The fair value of fixed rate commercial and consumer loans is calculated
by discounting scheduled cash flows through the estimated maturity of the loan
using interest rates offered at December 31, 2000 and 1999 that reflect the
credit and interest rate risk inherent in the loan. The estimate of maturity is
based on the Corporation's historical repayment experience. For residential
mortgages, fair value is estimated by using quoted market prices for sales of
similar loans on the secondary market, adjusted for servicing costs. The fair
value of floating rate commercial and consumer loans approximates carrying
value. The fair value of nonaccrual loans is calculated by discounting estimated
cash flows, using a rate commensurate with the risk associated with the loan
type or by other methods that give consideration to the value of the underlying
collateral.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market
accounts is equal to the amount payable on demand as of December 31, 2000 and
1999. The discounted values of cash flows using the rates currently offered for
deposits of similar remaining maturities were used to estimate the fair value of
certificates of deposit.
Securities Sold Under Agreements to Repurchase
The carrying amount of securities sold under repurchase agreements approximates
fair value.
Federal Home Loan Bank Advances
Rates currently available to the Corporation for advances with similar terms and
remaining maturities are used to estimate fair value of existing advances.
Off-Balance Sheet Instruments
The fair values of interest rate swap agreements and floor contracts generally
reflect the estimated amounts that the Corporation would receive or pay to
terminate the contracts. The fair value of commitments to extend credit is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties.
The following table presents the fair values of the Corporation's financial
instruments:
(Dollars in thousands)
December 31, 2000 1999
--------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------------
Financial Assets
On-balance sheet:
Cash and cash equivalents $43,860 $43,860 $44,520 $44,520
Mortgage loans held for sale 1,639 1,639 1,647 1,647
Securities available for sale 386,611 386,611 330,431 330,431
Securities held to maturity 124,915 125,368 116,372 112,868
FHLB stock 19,558 19,558 17,627 17,627
Loans, net of allowance for loan losses 584,020 596,362 536,676 537,019
Accrued interest receivable 7,800 7,800 6,010 6,010
Off-balance sheet financial instruments
relating to assets:
Interest rate floor contracts 133 98 224 111
Financial Liabilities
On-balance sheet:
Noninterest bearing demand deposits $113,012 $113,012 $102,384 $102,384
Non-term savings accounts 259,309 259,309 235,395 235,395
Certificates of deposit 363,363 366,459 322,974 324,184
FHLB advances 377,362 379,149 352,548 347,568
Other borrowings 3,227 3,227 4,209 4,209
Accrued interest payable 4,503 4,503 3,322 3,322
Other off-balance sheet financial instruments, consisting largely of loan
commitments and letters of credit, contain provisions for fees, conditions and
term periods that are consistent with customary market practices. Accordingly,
the fair value amounts (considered to be the discounted present value of the
remaining contractual fees over the unexpired commitment period) would not be
material and therefore are not disclosed.
(18) Parent Company Financial Statements
The following are parent company only financial statements of the Corporation
reflecting the investment in the bank subsidiary on the equity basis of
accounting. The Statements of Changes in Shareholders' Equity for the parent
company only are identical to the Consolidated Statements of Changes in
Shareholders' Equity and are therefore not presented.
(Dollars in thousands)
Balance Sheets
December 31, 2000 1999
---------------------------------------------------------------------------------------------------------
Assets:
Cash on deposit with bank subsidiary $767 $2,397
Investment in bank subsidiary at equity value 88,784 76,132
Dividend receivable from bank subsidiary 1,080 840
Due from bank subsidiary - -
---------------------------------------------------------------------------------------------------------
Total assets $90,631 $79,369
---------------------------------------------------------------------------------------------------------
Liabilities:
Dividends payable $1,445 $1,202
---------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares in 2000 and 1999; issued
12,006,809 shares in 2000 and 11,925,571 shares in 1999 750 745
Paid-in capital 10,144 9,927
Retained earnings 74,265 67,686
Accumulated other comprehensive income (loss) 4,027 (191)
---------------------------------------------------------------------------------------------------------
Total shareholders' equity 89,186 78,167
---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $90,631 $79,369
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Statements of Income
Years ended December 31, 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Dividends from bank subsidiary $5,198 $5,860 $8,160
Equity in undistributed earnings of subsidiary 8,011 6,651 4,018
----------------------------------------------------------------------------------------------------------
Net income $13,209 $12,511 $12,178
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Statements of Cash Flows
Years ended December 31, 2000 1999 1998
---------------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net income $13,209 $12,511 $12,178
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity effect of undistributed earnings of subsidiary (8,011) (6,651) (4,018)
Decrease (increase) in dividend receivable (240) 360 -
Other - - 77
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,958 6,220 8,237
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock - (36) (3,005)
Net effect of common stock transactions (201) 475 1,012
Cash dividends paid (6,387) (6,209) (5,685)
---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,588) (5,770) (7,678)
----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (1,630) 450 559
Cash at beginning of year 2,397 1,947 1,388
---------------------------------------------------------------------------------------------------------
Cash at end of year $767 $2,397 $1,947
---------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Required information regarding directors is presented under the caption "Nominee
and Director Information" in the Corporation's Proxy Statement dated March 20,
2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001
and incorporated herein by reference.
Required information regarding executive officers of the Corporation is included
in Part I under the caption "Executive Officers of the Registrant".
Information required with respect to compliance with Section 16(a) of the
Exchange Act appears under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Corporation's Proxy Statement dated March 20, 2001
prepared for the Annual Meeting of Shareholders to be held April 24, 2001, which
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item appears under the caption "Compensation of
Directors and Executive Officers - Executive Compensation" in the Corporation's
Proxy Statement dated March 20, 2001 prepared for the Annual Meeting of
Shareholders to be held April 24, 2001, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item appears under the caption "Nominee and
Director Information" in the Corporation's Proxy Statement dated March 20, 2001
prepared for the Annual Meeting of Shareholders to be held April 24, 2001, which
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
caption "Indebtedness and Other Transactions" in the Corporation's Proxy
Statement dated March 20, 2001 prepared for the Annual Meeting of Shareholders
to be held April 24, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements of the Registrant required in response to
this Item are listed in response to Part II, Item 8 of this Report.
2. Financial Statement Schedules. All schedules normally required by
Article 9 of Regulation S-K and all other schedules to the consolidated
financial statements of the Registrant have been omitted because the
required information is either not required, not applicable, or is
included in the consolidated financial statements or notes thereto.
(b) There were no reports on Form 8-K filed during the quarter ended December
31, 2000.
(c) Exhibit Index.
Exhibit Number
--------------------
3.a Restated Articles of Incorporation of the Registrant
- Filed herewith.
3.b Amendment to Restated Articles of Incorporation -
Filed as Exhibit 3.i to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 1997. (1)
3.c Amended and Restated By-Laws of the Corporation -
Filed as Exhibit 3.c to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1997 (1)
4 Rights Agreement between the Registrant and The
Washington Trust Company dated as of August 15, 1996
(including Form of Right Certificate attached thereto
as Exhibit A) - Filed as Exhibit 1 to the
Registrant's Registration Statement on Form 8-A (File
No. 000-13091) filed with the Commission on August
16, 1996. (1)
10.a Supplemental Pension Benefit and Profit Sharing Plan
- Filed herewith. (2)
10.b Short Term Incentive Plan Description - Filed as
Exhibit 10.b to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1997. (1) (2)
10.c Amended and Restated Nonqualified Deferred
Compensation Plan - Filed as Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 (File
No. 333-72277) filed with the Commission on February
12, 1999. (1) (2)
10.d Amended and Restated 1988 Stock Option Plan - Filed
herewith. (2)
10.e Vote of the Board of Directors of the Corporation
which constitutes the 1996 Directors' Stock Plan -
Filed as Exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 (File No.
333-13167) filed with the Commission on October 1,
1996. (1) (2)
10.f The Registrant's 1997 Equity Incentive Plan - Filed
as Exhibit 10.a to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30,
1997. (1) (2)
10.g Revised Change in Control Agreements with Executive
Officers - Filed as Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2000. (1) (2)
10.h Change in Control Agreement with an Executive Officer
- Filed as Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 2000. (1) (2)
10.i Amendment to the Registrant's 1997 Equity Incentive
Plan - Filed as Exhibit 10.b to the Registrant's
Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000. (1) (2)
10.j Amendment to the Registrant's Supplemental Pension
Benefit and Profit Sharing Plan - Filed herewith. (2)
10.k Amendment to the Registrant's Supplemental Pension
Benefit and Profit Sharing Plan - Filed herewith. (2)
10.l Amendment to the Registrant's Amended and Restated
Nonqualified Deferred Compensation Plan - Filed
herewith. (2)
10.m Employment Agreement with an Executive Officer -
Filed herewith. (2)
21 Subsidiaries of the Registrant - Filed as Exhibit 21
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996. (1)
23 Consent of Independent Accountants - Filed herewith.
--------------------
(1) Not filed herewith. In accordance with Rule 12b-32
promulgated pursuant to the Securities Exchange Act of 1934,
as amended, reference is made to the documents previously
filed with the Commission, which are incorporated by
reference herein.
(2) Management contract or compensatory plan or arrangement
(d) Financial Statement Schedules.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WASHINGTON TRUST BANCORP, INC.
----------------------------------------------
(Registrant)
Date: March 9, 2001 By John C. Warren
-------------------- ----------------------------------------------
John C. Warren
Chairman, Chief Executive Officer and Director
(principal executive officer)
Date: March 9, 2001 By David V. Devault
-------------------- ----------------------------------------------
David V. Devault
Executive Vice President, Treasurer and Chief
Financial Officer (principal financial and
principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 9, 2001 Alcino G. Almeida
-------------------- ----------------------------------------------
Alcino G. Almeida, Director
Date: March 9, 2001 Gary P. Bennett
-------------------- ----------------------------------------------
Gary P. Bennett, Director
Date: March 9, 2001 Steven J. Crandall
-------------------- ----------------------------------------------
Steven J. Crandall, Director
Date: March 9, 2001 Richard A. Grills
-------------------- ----------------------------------------------
Richard A. Grills, Director
Date: March 9, 2001 Larry J. Hirsch
-------------------- ----------------------------------------------
Larry J. Hirsch, Director
Date: March 9, 2001 Katherine W. Hoxsie
-------------------- ----------------------------------------------
Katherine W. Hoxsie, Director
Date:
-------------------- ----------------------------------------------
Mary E. Kennard, Director
Date: March 9, 2001 Joseph J. Kirby
-------------------- ----------------------------------------------
Joseph J. Kirby, Director
Date: March 9, 2001 Edward M. Mazze
-------------------- ----------------------------------------------
Edward M. Mazze, Director
Date: March 9, 2001 James W. McCormick, Jr.
-------------------- ----------------------------------------------
James W. McCormick, Jr., Director
Date: March 9, 2001 Victor J. Orsinger II
-------------------- ----------------------------------------------
Victor J. Orsinger II, Director
Date: March 9, 2001 H. Douglas Randall III
-------------------- ----------------------------------------------
H. Douglas Randall, III, Director
Date: March 9, 2001 Joyce Olson Resnikoff
-------------------- ----------------------------------------------
Joyce Olson Resnikoff, Director
Date: March 9, 2001 James P. Sullivan
-------------------- ----------------------------------------------
James P. Sullivan, Director
Date:
-------------------- ----------------------------------------------
Neil H. Thorp, Director
Date: March 9, 2001 John F. Treanor
-------------------- ----------------------------------------------
John F. Treanor, Director
Date: March 9, 2001 John C. Warren
-------------------- ----------------------------------------------
John C. Warren, Director