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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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For annual and transition reports pursuant to sections 13 or 15(d) of the
Securities Exchange Act of 1934
(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, 2001 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ____________
Commission file number: 000-13091
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WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
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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)
Registrant's telephone number, including area code: 401-348-1200
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. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $223,126,458 at February 26, 2002 which includes $25,959,984 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 26, 2002 was 11,999,822.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated March 20, 2002 for the Annual
Meeting of Shareholders to be held April 23, 2002 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, 2001
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 assets
under management, 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,
unanticipated difficulties in completing the merger with First Financial Corp.
and integrating First Financial's operations, unanticipated costs relating to
the merger, fluctuations in the value of the stock to be issued in the merger
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 Bank were exchanged for common shares of the
Corporation. At December 31, 2001 the Corporation had total assets of $1.362
billion, total deposits of $816.9 million and total shareholders' equity of
$97.9 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 and is among the
oldest banks in the United States. Its current corporate charter dates to 1902.
See the 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
The Bank's ATMs are located throughout its market area. The Bank is a member of
various ATM networks, such as NYCE, PLUS, Cirrus and Cashstream.
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 2000, the
Corporation acquired Phoenix Investment Management Company, Inc. ("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 trust
and investment management assets under administration, including Phoenix,
amounted to $1.6 billion as of December 31, 2001.
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:
2001 2000 1999 1998 1997
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Net interest income 65% 67% 67% 67% 69%
Trust and investment management 17 19 17 17 18
Other noninterest income 18 14 16 16 13
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Total income 100% 100% 100% 100% 100%
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On November 13, 2001, the Corporation announced that it had signed a definitive
agreement to acquire First Financial Corp., a bank holding company and parent of
First Bank and Trust Company, a Rhode Island-chartered community bank. First
Financial Corp., with assets of $185.2 million at December 31, 2001, is
headquartered in Providence, Rhode Island. First Bank and Trust Company operates
banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode
Island. The acquisition, which is expected to be completed in the second quarter
of 2002, is subject to certain customary conditions including approval by First
Financial Corp.'s shareholders as well as state and federal banking regulators.
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.
On August 29, 2001, the Corporation announced its intention to build a
full-service branch office in Warwick, Rhode Island. The branch is subject to
the approval of local authorities, as well as state and federal regulators. The
branch is expected to open in the fall of 2002.
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, 2001. The closest competitor held
25%, and the second closest competitor held 12% 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, 2001 the Corporation had 403 employees, of which 351 were
full-time and 52 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
and the Bank 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"), and the State of Rhode
Island, Department of Business Regulation, Division of Banking (the "Division").
The BHC Act requires that the Corporation obtain prior approval of the Federal
Reserve Board to acquire substantially all of the assets of a bank, to acquire
direct or indirect ownership or control of more than 5% of the voting shares of
any bank, or increasing such ownership or control of any bank or merging or
consolidating with any bank holding company. 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 more than 5% of the voting
shares of certain nonbank entities and restricts the activities of the
Corporation to those closely related to banking. The Federal Reserve Board has
the authority to issue orders to bank holding companies to cease and desist from
unsound banking practices and violations of conditions imposed by, or violations
of agreements with, the Federal Reserve Board. The Federal Reserve Board is also
empowered to assess civil money penalties against companies or individuals who
violate the BHC Act or orders or regulations thereunder, to order termination of
ownership and control of a non-banking subsidiary by a bank holding company.
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 Federal
Deposit Insurance Corporation (the "FDIC"), the Division 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.
The Bank pays deposit insurance premiums to the FDIC based on an assessment rate
established by the FDIC for Bank Insurance Fund - member institutions. The FDIC
has established a risk-based assessment system under which institutions are
classified, and generally pay premiums according to their perceived risk to the
federal deposit insurance funds.
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, 2001, 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 the law of the host state
specifically authorizes such action. 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 bank holding companies that qualify
and elect to be treated as financial holding companies to engage in a range of
financial activities broader than would be permissible for traditional bank
holding companies, such as the Corporation, that have not elected to be treated
as financial holding companies. "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.
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 a broader
array of activities, a bank holding company, such as the Corporation, must meet
certain tests and file an election form with the Federal Reserve Board. 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.
Customer Information Security - The Federal Reserve Board, the FDIC and other
bank regulatory agencies have adopted final guidelines (the "Guidelines") for
safeguarding confidential customer information. The Guidelines require each
financial institution, under the supervision and ongoing oversight of its Board
of Directors, to create a comprehensive written information security program
designed to ensure the security and confidentiality of customer information,
protect against any anticipated threats or hazards to the security or integrity
of such information; and protect against unauthorized access to or use of such
information that could result in substantial harm or inconvenience to any
customer.
Privacy - The Gramm-Leach Bliley Act requires financial institutions to
implement policies and procedures regarding the disclosure of nonpublic personal
information about consumers to nonaffiliated third parties. In general, the
statute requires the financial institution to explain to consumers its policies
and procedures regarding the disclosure of such nonpublic personal information,
and, except as otherwise required by law, the financial institution is
prohibited form disclosing such information except as provided in its policies
and procedures.
USA Patriot Act - The USA Patriot Act of 2001 (the "Patriot Act"), designed to
deny terrorists and others the ability to obtain anonymous access to the United
States financial system, has significant implications for depository
institutions, brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act mandates or will require financial institutions to
implement additional policies and procedures with respect to, or additional
measures designed to address, any or all of the following matters, among others:
money laundering; suspicious activities and currency transaction reporting; and
currency crimes.
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, 2001, the Corporation's
net risk-weighted assets amounted to $718.9 million, its Tier 1 capital ratio
was 12.63% and its total risk-based capital ratio was 14.22%.
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 6.84% as of December 31, 2001. 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, 2001 was approximately 14,005 shares. Accordingly, sales of a significant
number of shares of common stock may adversely affect the market price of our
common stock.
Risk Factors Relating to the Acquisition of First Financial Corp.
Washington Trust may be unable to successfully integrate First Financial's
operations and retain key First Financial employees.
The merger involves the integration of two companies that previously operated
independently. The difficulties of combining the companies' operations include:
o integrating personnel with diverse business backgrounds;
o combining different corporate cultures; and
o retaining key employees.
The process of integrating operations could cause an interruption of, or loss of
momentum in, the activities of Washington Trust's business and the loss of key
personnel. The integration of the two companies will require the experience and
expertise of certain key employees who are expected to be retained by Washington
Trust. We cannot assure you, however, that Washington Trust will be successful
in retaining these employees for the time period necessary to successfully
integrate our operations with those of Washington Trust. The diversion of
management's attention and any delays or difficulties encountered in connection
with the merger and the integration of the two companies' operations could have
an adverse effect on the business and results of operations of the combined
company.
If the merger is not completed, Washington Trust will have incurred substantial
expenses without realizing the expected benefits.
Washington Trust has incurred substantial expenses in connection with the
proposed merger. The completion of the merger depends on the satisfaction of
several conditions and the receipt of regulatory approvals. We cannot guarantee
that these conditions will be met. If the merger is not completed, Washington
Trust expects to incur approximately $700,000 to $900,000 in merger related
expenses. These expenses could have a material adverse impact on the financial
condition of Washington Trust because it would not have realized the expected
benefits of the merger.
Unanticipated costs relating to the merger could reduce Washington Trust's
future earnings per share.
Washington Trust believes that it has reasonably estimated the likely costs of
integrating the operations of First Financial into Washington Trust, and the
incremental costs of operating as a combined company. However, it is possible
that unexpected transaction costs such as taxes, fees or professional expenses
or unexpected future operating expenses such as increased personnel costs or
increased taxes, as well as other types of unanticipated adverse developments,
could have a material adverse effect on the results of operations and financial
condition of Washington Trust after the merger. If unexpected costs are
incurred, the merger could have a significant dilutive effect on Washington
Trust's earnings per share. In other words, if the merger is completed,
Washington Trust believes that the earnings per share of Washington Trust common
stock could be less than it would have been if the merger had not been
completed.
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 generally accepted accounting principles. 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 parameters
including the borrower's financial condition, the borrower's debt service
coverage, 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. Further, 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, 2001 2000 1999
---------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $66,715 $87,084 $86,310
Mortgage-backed securities 300,050 240,856 189,086
Corporate bonds 64,149 38,565 33,684
Corporate stocks 23,042 20,106 21,351
---------------------------------------------------------------------------
Total securities available for sale $453,956 $386,611 $330,431
---------------------------------------------------------------------------
(Dollars in thousands)
December 31, 2001 2000 1999
---------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $8,311 $35,135 $28,231
Mortgage-backed securities 146,702 66,715 62,209
States and political subdivisions 20,092 23,065 25,932
---------------------------------------------------------------------------
Total securities held to maturity $175,105 $124,915 $116,372
---------------------------------------------------------------------------
B. Maturities of debt securities as of December 31, 2001 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
-----------------------------------------------------------------------------------------------------------
U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies:
Amortized cost $11,716 $16,552 $31,209 $4,891 $64,368
Weighted average yield 6.28% 6.82% 3.97% 2.99% 5.05%
Mortgage-backed securities:
Amortized cost 76,446 169,556 34,947 15,780 296,729
Weighted average yield 5.69% 5.54% 4.75% 3.81% 5.39%
Corporate bonds:
Amortized cost - 33,022 9,603 22,309 64,934
Weighted average yield 0.00% 5.65% 4.15% 3.07% 4.54%
-----------------------------------------------------------------------------------------------------------
Total debt securities:
Amortized cost $88,162 $219,130 $75,759 $42,980 $426,031
Weighted average yield 5.77% 5.65% 4.35% 3.33% 5.21%
-----------------------------------------------------------------------------------------------------------
Fair value $89,325 $223,222 $76,898 $41,469 $430,914
-----------------------------------------------------------------------------------------------------------
(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 $208 $8,080 $23 $ - $8,311
Weighted average yield 17.22% 7.35% 17.22% - 7.63%
Mortgage-backed securities:
Amortized cost 25,028 68,297 37,793 15,584 146,702
Weighted average yield 6.51% 6.51% 6.53% 6.47% 6.51%
States and political
subdivisions:
Amortized cost 790 15,602 3,700 - 20,092
Weighted average yield 4.46% 4.24% 4.18% - 4.24%
-----------------------------------------------------------------------------------------------------------
Total debt securities:
Amortized cost $26,026 $91,979 $41,516 $15,584 $175,105
Weighted average yield 6.54% 6.20% 6.32% 6.47% 6.30%
-----------------------------------------------------------------------------------------------------------
Fair value $26,335 $93,482 $42,017 $15,761 $177,595
-----------------------------------------------------------------------------------------------------------
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, 2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------------------------
Commercial:
Mortgages $118,999 $121,817 $113,719 $87,132 $76,483
Construction and development 1,930 2,809 2,902 2,855 5,508
Other 139,704 115,202 115,739 113,372 129,258
--------------------------------------------------------------------------------------------------------------
Total commercial 260,633 239,828 232,360 203,359 211,249
Residential real estate:
Mortgages 223,681 236,595 212,719 191,101 188,729
Homeowner construction 11,678 14,344 12,995 15,052 8,414
--------------------------------------------------------------------------------------------------------------
Total residential real estate 235,359 250,939 225,714 206,153 197,143
--------------------------------------------------------------------------------------------------------------
Consumer 109,653 106,388 90,951 87,458 81,394
--------------------------------------------------------------------------------------------------------------
Total loans $605,645 $597,155 $549,025 $496,970 $489,786
--------------------------------------------------------------------------------------------------------------
B. An analysis of the maturity and interest rate sensitivity of Real Estate
Construction and Other Commercial loans as of December 31, 2001 follows:
(Dollars in thousands)
One Year One to Five After Five
Matures in: or Less Years Years Totals
--------------------------------------------------------------------------------------------------------------
Construction and development (1) $2,533 $6,050 $5,025 $13,608
Commercial - other 58,706 49,246 31,752 139,704
--------------------------------------------------------------------------------------------------------------
$61,239 $55,296 $36,777 $153,312
--------------------------------------------------------------------------------------------------------------
<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 $63,992 $28,081 $92,073
---------------------------------------------------------------------------
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, 2001.
1. Nonaccrual, Past Due and Restructured Loans
a) Nonaccrual loans as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 2001 2000 1999 1998 1997
------------------------------------------------------------------------
$3,827 $3,434 $3,798 $5,846 $7,644
------------------------------------------------------------------------
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, 2001, 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 $435 thousand.
Interest recognized on these loans amounted to approximately $209 thousand.
There were no significant commitments to lend additional funds to borrowers
whose loans were on nonaccrual status at December 31, 2001.
b) Loans contractually past due 90 days or more and still accruing for the
dates indicated were as follows:
(Dollars in thousands)
December 31, 2001 2000 1999 1998 1997
------------------------------------------------------------------------
$ - $393 $120 $235 $651
------------------------------------------------------------------------
c) Restructured accruing loans for the dates indicated were as follows:
(Dollars in thousands)
December 31, 2001 2000 1999 1998 1997
------------------------------------------------------------------------
$ - $ - $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, 2001, 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, 2001,
potential problem loans amounted to approximately $98 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, 2001 2000 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Balance at beginning of year $13,135 $12,349 $10,966 $9,335 $9,009
Charge-offs:
Commercial:
Mortgages 122 61 170 - 248
Construction and development - - 119 - -
Other 121 144 304 322 740
Residential:
Mortgages - 65 - 14 174
Homeowner construction - - 23 - -
Consumer 190 413 351 317 360
----------------------------------------------------------------------------------------------------------
Total charge-offs 433 683 967 653 1,522
----------------------------------------------------------------------------------------------------------
Recoveries:
Commercial:
Mortgages - 53 44 51 110
Construction and development - - - - 7
Other 273 157 202 270 233
Residential:
Mortgages 15 46 135 9 13
Homeowner construction - - 1 - -
Consumer 53 63 128 75 61
----------------------------------------------------------------------------------------------------------
Total recoveries 341 319 510 405 424
----------------------------------------------------------------------------------------------------------
Net charge-offs 92 364 457 248 1,098
Additions charged to earnings 550 1,150 1,840 1,879 1,424
----------------------------------------------------------------------------------------------------------
Balance at end of year $13,593 $13,135 $12,349 $10,966 $9,335
----------------------------------------------------------------------------------------------------------
Net charge-offs to average loans .02% .06% .09% .05% .23%
----------------------------------------------------------------------------------------------------------
B. The following table presents the allocation of the allowance for loan losses:
(Dollars in thousands)
December 31, 2001 2000 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Commercial:
Mortgages $2,195 $2,316 $1,920 $1,604 $1,368
% of these loans to all loans 19.6% 20.4% 20.7% 17.5% 15.6%
Construction and development 33 55 56 45 72
% of these loans to all loans .3% .5% .5% .6% 1.1%
Other 3,024 2,250 1,979 2,142 2,461
% of these loans to all loans 23.1% 19.3% 21.1% 22.8% 26.4%
Residential:
Mortgages 1,230 1,286 1,165 1,108 1,127
% of these loans to all loans 36.9% 39.6% 38.7% 38.5% 38.6%
Homeowner construction 64 78 71 87 50
% of these loans to all loans 2.0% 2.4% 2.4% 3.0% 1.7%
Consumer 1,222 1,295 1,155 1,189 1,117
% of these loans to all loans 18.1% 17.8% 16.6% 17.6% 16.6%
Unallocated 5,825 5,855 6,003 4,791 3,140
----------------------------------------------------------------------------------------------------------
Balance at end of year $13,593 $13,135 $12,349 $10,966 $9,335
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) 2001 2000 1999
----------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Paid Amount Rate Paid Amount Rate Paid
----------------------------------------------------------------------------------------------------------
Demand deposits $114,844 - $106,741 - $97,716 -
Savings deposits:
Regular 128,765 1.74% 129,208 2.18% 128,218 2.19%
NOW 88,097 .62% 79,782 .73% 75,167 .93%
Money market 72,498 3.22% 31,590 3.11% 25,547 2.11%
----------------------------------------------------------------------------------------------------------
Total savings 289,360 1.77% 240,580 1.82% 228,932 1.77%
Time deposits 360,167 5.24% 351,961 5.64% 318,281 4.99%
----------------------------------------------------------------------------------------------------------
Total deposits $764,371 3.14% $699,282 3.46% $644,929 3.09%
----------------------------------------------------------------------------------------------------------
B. Not Applicable
C. Not Applicable
D. The maturity schedule of time deposits in amounts of $100 thousand or more at
December 31, 2001 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
-----------------------------------------------------------------------------------------------------------
$61,791 $24,604 $7,879 $32,541 $126,815
-----------------------------------------------------------------------------------------------------------
E. Not Applicable
VI. RETURN ON EQUITY AND ASSETS
2001 2000 1999
------------------------------------------------------------------------------------------------------------
Return on average assets 1.01% 1.14% 1.19%
Return on average assets - operating basis (1) 1.20% 1.20% 1.21%
Return on average shareholders' equity 13.86% 16.14% 15.73%
Return on average shareholders' equity - operating basis (1) 16.54% 16.98% 16.04%
Dividend payout ratio (2) 40.63% 41.74% 41.51%
Average equity to average total assets 7.28% 7.05% 7.55%
<FN>
(1) Excludes 2001 litigation settlement expense, net of insurance recovery,
of $2.5 million, after income taxes. Excludes $1.1 million second
quarter 2000 and $1.3 million third quarter 1999 expenses, after income
taxes, incurred in connection with the respective acquisitions of
Phoenix and PierBank . 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 / 2006 (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 / 2003 (1)
2 Crosswinds Drive, Westerly, RI Operations facility Own
132 Fairgrounds Road, West Kingston, RI Standalone ATM Lease / 2002 (2)
1 Water Street, Block Island, RI Standalone ATM Lease / 2002 (2)
194 Great Island Road, Narragansett, RI Standalone ATM Lease / 2002 (1)(2)
258 Post Road, Westerly, RI Standalone ATM Lease / 2002 (2)
<FN>
(1) Lease may be extended by the Corporation beyond the indicated expiration
date.
(2) Owned ATM in leased space.
</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 alleged 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 were 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.
On May 11, 2001, the Bank entered into an agreement with the plaintiffs to
settle the suit. Under the terms of the agreement, which did not involve an
admission of wrongdoing, the Bank agreed to pay $4.8 million to the plaintiffs.
The cost of this settlement was recorded in the consolidated financial
statements as of and for the quarter ended March 31, 2001. Net of the related
income tax effect, the cost of the settlement amounted to $3.3 million. In
August 2001, the Bank received a settlement from an insurance carrier in the
amount of $775 thousand ($553 thousand net of tax) in connection with this
matter. In December 2001, the Bank received a settlement from another insurance
carrier in the amount of $400 thousand ($252 thousand net of tax) in connection
with this matter. The recoveries were recorded as reductions of the litigation
settlement cost included in other noninterest expenses. No further insurance
recoveries are expected.
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, 2001.
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 56 6
John F. Treanor President and Chief Operating Officer of the Corporation and the Bank 54 3
David V. Devault Executive Vice President, Treasurer and Chief Financial Officer of
the Corporation and the Bank 47 15
Harvey C. Perry II Senior Vice President and Secretary of the Corporation and the Bank 52 27
Stephen M. Bessette Senior Vice President - Retail Lending of the Bank 54 5
Vernon F. Bliven Senior Vice President - Human Resources of the Bank 52 29
Elizabeth B. Eckel Senior Vice President - Marketing of the Bank 41 10
William D. Gibson Senior Vice President - Credit Administration of the Bank 55 3
Joseph E. LaPlume Senior Vice President, Business Services of the Bank 56 2
Barbara J. Perino, CPA Senior Vice President - Operations and Technology of the Bank 40 13
B. Michael Rauh, Jr. Senior Vice President - Retail Banking of the Bank 42 10
James M. Vesey Senior Vice President and Chief Credit Officer of the Bank 53 3
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. He was named Senior Vice President, Business Services in 2001.
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, 2001 and 2000 are presented in the following table. The
stock prices are based on the high and low sales prices during the respective
quarter.
2001 Quarters 1 2 3 4
----------------------------------------------------------------------------
Stock prices:
High $17.75 $22.62 $22.14 $19.73
Low 13.75 16.35 16.69 17.76
Cash dividend declared per share $.13 $.13 $.13 $.13
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
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 26, 2002 there were 2,080 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, 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------------
Financial Results:
Interest income $87,527 $85,099 $73,002 $67,226 $61,402
Interest expense 48,160 47,231 37,394 34,658 31,159
---------------------------------------------------------------------------------------------------------------
Net interest income 39,367 37,868 35,608 32,568 30,243
Provision for loan losses 550 1,150 1,840 1,879 1,424
---------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 38,817 36,718 33,768 30,689 28,819
Noninterest income 21,485 19,712 18,826 16,517 14,525
---------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 60,302 56,430 52,594 47,206 43,344
Noninterest expense 41,653 37,548 35,329 30,793 27,988
---------------------------------------------------------------------------------------------------------------
Income before income taxes 18,649 18,882 17,265 16,413 15,356
Income tax expense 5,541 5,673 4,754 4,235 3,884
---------------------------------------------------------------------------------------------------------------
Net income $13,108 $13,209 $12,511 $12,178 $11,472
---------------------------------------------------------------------------------------------------------------
Net income - operating basis (2) $15,646 $13,897 $12,759 $11,510 $10,651
---------------------------------------------------------------------------------------------------------------
Per share information ($): (1)
Earnings per share:
Basic 1.09 1.10 1.05 1.04 .99
Basic - operating basis (2) 1.30 1.16 1.07 .98 .92
Diluted 1.07 1.09 1.03 1.01 .96
Diluted - operating basis (2) 1.28 1.15 1.06 .95 .89
Cash dividends declared (3) .52 .48 .44 .40 .35
Book value 8.15 7.43 6.55 6.66 6.20
Market value - closing stock price 19.00 14.00 17.75 21.50 23.33
Performance Ratios (%):
Return on average assets 1.01 1.14 1.19 1.31 1.40
Return on average assets - operating 1.20 1.20 1.21 1.24 1.30
basis (2)
Return on average shareholders' equity 13.86 16.14 15.73 16.09 16.85
Return on average shareholders'
equity -
operating basis (2) 16.54 16.98 16.04 15.21 15.64
Dividend payout ratio (4) 40.63 41.74 41.51 42.11 39.33
Asset Quality Ratios (%):
Nonperforming loans to total loans .63 .58 .69 1.18 1.56
Nonperforming assets to total assets .28 .28 .35 .61 .99
Allowance for loan losses to nonaccrual 355.20 382.50 325.15 187.59 122.12
loans
Allowance for loan losses to total loans 2.24 2.20 2.25 2.21 1.91
Net charge-offs to average loans .02 .06 .09 .05 .23
Capital Ratios (%):
Total equity to total assets 7.19 7.32 7.07 7.87 8.37
Tier 1 leverage capital ratio 6.84 7.08 7.22 7.37 7.61
Total risk-based capital ratio 14.22 14.35 14.38 14.87 14.37
<FN>
(1) Adjusted to reflect the 3-for-2 stock split paid on August 3, 1998.
(2) Excludes 2001 litigation settlement expense, net of insurance recovery, of
$2.5 million, after income taxes. Excludes $1.1 million second quarter
2000 and $1.3 million third quarter 1999 expenses, after income taxes,
incurred in connection with the respective acquisitions of Phoenix and
PierBank. 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.
(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, PierBank and Phoenix.
</FN>
SELECTED BALANCE SHEET DATA: (Dollars in thousands)
December 31, 2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------
Financial Condition:
Cash and cash equivalents $50,899 $43,860 $44,520 $34,654 $31,547
Total securities 629,061 511,526 446,803 415,488 293,949
FHLB stock 23,491 19,558 17,627 16,583 16,444
Net loans 592,052 584,020 536,676 486,004 480,451
Other 66,726 59,103 59,979 42,421 39,027
-----------------------------------------------------------------------------------------------------------------
Total assets $1,362,229 $1,218,067 $1,105,605 $995,150 $861,418
-----------------------------------------------------------------------------------------------------------------
Deposits $816,876 $735,684 $660,753 $627,763 $572,803
FHLB advances 431,490 377,362 352,548 264,106 187,001
Other borrowings 2,087 3,227 4,209 15,033 20,337
Other liabilities 13,839 12,608 9,928 9,897 9,218
Shareholders' equity 97,937 89,186 78,167 78,351 72,059
-----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,362,229 $1,218,067 $1,105,605 $995,150 $861,418
-----------------------------------------------------------------------------------------------------------------
Asset Quality:
Nonaccrual loans $3,827 $3,434 $3,798 $5,846 $7,644
Other real estate owned, net 30 9 49 243 888
-----------------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,857 $3,443 $3,847 $6,089 $8,532
-----------------------------------------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
2001 Q1 Q2 Q3 Q4 Year
- ----------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $13,161 $12,659 $12,846 $11,952 $50,618
Income from securities 8,390 8,691 8,752 8,155 33,988
Dividends on corporate stock and
FHLB stock 617 582 591 537 2,327
Interest on federal funds sold
and other short-term investments 203 180 134 77 594
- ----------------------------------------------------------------------------------------------------------------
Total interest income 22,371 22,112 22,323 20,721 87,527
- ----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 1,368 1,386 1,300 1,073 5,127
Time deposits 5,175 4,872 4,573 4,246 18,866
FHLB advances 6,225 6,529 5,971 5,343 24,068
Other 28 25 23 23 99
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 12,796 12,812 11,867 10,685 48,160
- ----------------------------------------------------------------------------------------------------------------
Net interest income 9,575 9,300 10,456 10,036 39,367
Provision for loan losses 200 150 100 100 550
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 9,375 9,150 10,356 9,936 38,817
- ----------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,573 2,735 2,620 2,480 10,408
Service charges on deposit accounts 866 920 894 834 3,514
Merchant processing fees 341 650 1,099 552 2,642
Mortgage banking activities 209 627 352 870 2,058
Income from bank-owned life insurance 272 279 287 296 1,134
Net gains (losses) on sales of securities 5 403 - (60) 348
Other income 323 355 401 302 1,381
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 4,589 5,969 5,653 5,274 21,485
- ----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,191 5,168 5,326 5,160 20,845
Net occupancy 723 629 652 628 2,632
Equipment 825 809 760 981 3,375
Legal, audit and professional fees 312 524 235 265 1,336
Merchant processing costs 270 530 872 452 2,124
Advertising and promotion 204 275 311 447 1,237
Office supplies 164 164 157 177 662
Litigation settlement cost, net of
recovery 4,800 - (775) (400) 3,625
Other 1,259 1,675 1,466 1,417 5,817
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 13,748 9,774 9,004 9,127 41,653
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 216 5,345 7,005 6,083 18,649
Income tax expense 62 1,545 2,163 1,771 5,541
- ----------------------------------------------------------------------------------------------------------------
Net income $154 $3,800 $4,842 $4,312 $13,108
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share $.01 $.32 $.40 $.36 $1.09
Diluted earnings per share $.01 $.31 $.40 $.35 $1.07
Cash dividends declared per share $.13 $.13 $.13 $.13 $.52
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
2000 Q1 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
Mortgage banking activities 121 134 139 191 585
Income from bank-owned life insurance 242 259 271 275 1,047
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 $.12 $.12 $.12 $.12 $.48
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 assets under
management, 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, unanticipated
difficulties in completing the merger with First Financial Corp. and integrating
First Financial's operations, unanticipated costs relating to the merger 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.
Recent Events
On August 29, 2001, the Corporation announced its intention to build a
full-service branch office in Warwick, Rhode Island. The branch is subject to
the approval of local authorities, as well as state and federal regulators. The
branch is expected to open in the fall of 2002.
On November 13, 2001, the Corporation announced that it had signed a definitive
agreement to acquire First Financial Corp., parent of First Bank and Trust
Company, a Rhode Island-chartered community bank. First Financial Corp., with
assets of $185.2 million at December 31, 2001, is headquartered in Providence,
Rhode Island. First Bank and Trust Company operates banking offices in
Providence, Cranston, Richmond and North Kingstown, Rhode Island. In the merger,
each share of First Financial Corp. common stock will be converted into a
combination of $16.00 in cash and shares of Washington Trust Bancorp, Inc.
common stock based on an exchange ratio. Based on a Washington Trust stock price
of $18.00, First Financial Corp. shareholders would receive 0.889 shares of
Washington Trust common stock (with a value of $16.00) for a combination of cash
and stock initially valued at $32.00 per share and an aggregate transaction
value of approximately $39 million. However, the actual number and value of
Washington Trust Bancorp, Inc. common stock to be issued to First Financial
Corp. shareholders will be based on an exchange formula using the average
closing price of Washington Trust Bancorp, Inc. common stock during the 15
trading days prior to receiving final regulatory approval, within a range of
0.842 per share and 0.941 per share. At December 31, 2001, First Financial Corp.
had 1,213,741 shares outstanding. The purchase, which is expected to be
completed in the second quarter of 2002, is subject to certain customary
conditions including approval by First Financial Corp.'s shareholders as well as
state and federal banking regulators. Upon consummation of this event, the
provisions of SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill
and Other Intangible Assets" will be applied.
Financial Overview
Washington Trust recorded net income of $13.1 million, or $1.07 per diluted
share, for 2001, as compared to $13.2 million, or $1.09 per diluted share, for
2000. The Corporation's rates of return on average assets and average equity for
2001 were 1.01% and 13.86%, respectively. Comparable amounts for the year 2000
were 1.14% and 16.14%, respectively.
In 2001, the Corporation recorded a litigation settlement expense, net of
insurance recovery, of $2.5 million, after income taxes. In 2000, the
Corporation completed the acquisition of Phoenix and recorded
acquisition-related expenses of $1.1 million, after income taxes. The
acquisition was accounted for under the pooling of interests method. Results
excluding the litigation settlement expense, net of taxes, and
acquisition-related expenses, 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 2001 amounted to $15.6 million, an increase of
12.6% from $13.9 million reported for 2000. Diluted earnings per share, on an
operating basis, amounted to $1.28 for 2001, up from $1.15 per share in 2000.
The Corporation's rates of return on average assets and average equity, on an
operating basis, for 2001 were 1.20% and 16.54%, respectively. Comparable
amounts for the year 2000 were 1.20% and 16.98%, respectively.
For the year ended December 31, 2001, net interest income (the difference
between interest earned on loans and securities and interest paid on deposits
and other borrowings) amounted to $39.4 million, up 4.0% over the 2000 amount.
The net interest margin for the year 2001 amounted to 3.30%, compared to 3.55%
in 2000. The decrease in the net interest margin was primarily due to the
decline in yields on loans and securities offset somewhat by lower funding costs
of interest-bearing deposits, FHLB advances and other borrowed funds. Other
noninterest income (noninterest income excluding net gains on sales of
securities) amounted to $21.1 million for the year 2001, up 11.5% from $19.0
million in 2000. The increase was primarily due to growth in revenues from
mortgage banking activities.
For the year 2001, total operating noninterest expense (total noninterest
expense excluding litigation settlement and acquisition-related expenses)
amounted to $38.0 million, up 4.1% over the comparable 2000 amount. The increase
was primarily attributable to higher salaries and benefits expense. Included in
other noninterest expense for the twelve months ended December 31, 2001 and 2000
were contributions of appreciated equity securities to the Corporation's
charitable foundation amounting to $353 thousand and $424 thousand,
respectively. These transactions resulted in realized securities gains of $351
thousand and $310 thousand, respectively, for the same periods.
Total consolidated assets amounted to $1.362 billion at December 31, 2001, up
11.8% from the December 31, 2000 balance of $1.218 billion. Average assets rose
11.9% during 2001 and amounted to $1.299 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 11.0% increase in total
deposits funded the growth in assets. Total deposits amounted to $816.9 million
and $735.7 million at December 31, 2001 and 2000, respectively. FHLB advances
totaled $431.5 million at December 31, 2001, up 14.3% from the prior year
balance of $377.4 million.
Nonperforming assets (nonaccrual loans and property acquired through
foreclosure) amounted to $3.9 million or .28% of total assets at December 31,
2001, compared to $3.4 million or .28% of total assets at December 31, 2000. The
Corporation's loan loss provision was $550 thousand and $1.2 million in 2001 and
2000, respectively.
Total shareholders' equity amounted to $97.9 million at December 31, 2001,
compared to $89.2 million at December 31, 2000. Included in shareholders' equity
at December 31, 2001 was accumulated other comprehensive income on securities
available for sale and the interest rate floor contract, net of tax, of $6.4
million compared to $4.0 million in accumulated other comprehensive income
associated with net unrealized gains on securities available for sale at
December 31, 2000.
Book value per share as of December 31, 2001 and 2000 amounted to $8.15 and
$7.43, 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 58.8% of total average assets in 2001. 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 2001. Net loans as a
percentage of total assets amounted to 43.5% at December 31, 2001, compared to
47.9% at December 31, 2000. Total securities as a percentage of total assets
amounted to 46.2% at December 31, 2001, up from 42.0% at December 31, 2000.
These changes resulted primarily from purchases of debt securities and the 11.8%
increase in total assets in 2001.
For the year ended December 31, 2001, net cash provided by financing activities
was $127.6 million. Proceeds from FHLB advances totaled $1.217 billion, while
repayments of FHLB advances totaled $1.163 billion in 2001. Additionally, $81.2
million was generated from overall growth in deposits. Net cash used in
investing activities was $130.1 million in 2001, the majority of which was used
to purchase securities. In addition, the Corporation expended $3.4 million to
upgrade and expand equipment and premises in order to support its operations.
Net cash provided by operating activities amounted to $9.5 million in 2001,
$13.1 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 $1.5 million, or 3.7%, from 2000 to 2001, 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
2001 and 2000 were 3.30% and 3.55%, respectively. The interest rate spread
declined 19 basis points to 2.77% in 2001. Earning asset yields declined 62
basis points during 2001, while the cost of interest-bearing liabilities
decreased 43 basis points, thereby narrowing the net interest spread. The
decline in yields on loans and securities offset somewhat by lower funding costs
of interest-bearing deposits, FHLB advances and other borrowed funds was
primarily responsible for the decrease in the net interest margin.
FTE interest income totaled $88.6 million in 2001, up from $86.2 million in
2000. The yield on interest-earning assets amounted to 7.23% in 2001, down from
7.85% in 2000. Average interest-earning assets amounted to $1.225 billion or
11.6% over the comparable 2000 amount. The growth in average interest-earning
assets was due to growth in securities and loans. Total average securities rose
$87.7 million, or 16.6%, in 2001, mainly due to purchases of taxable debt
securities. The FTE rate of return on securities was 6.13% in 2001, down from
6.93% in 2000. The decrease in yield reflects a combination of lower yields on
variable rate securities tied to short-term interest rates and lower marginal
rates on investment purchases during 2001 relative to the prior year.
Average loans amounted to $609.0 million in 2001, up $39.3 million, or 6.9%,
from 2000. The FTE rate of return on total loans was 8.34% in 2001, compared to
8.70% in 2000. This decline is primarily due to lower marginal yields on
floating and adjustable rate loans in 2001 as compared to the prior year and a
decline in yields on new loan originations. Average residential real estate
loans amounted to $251.8 million, up 4.7% from the prior year level. The yield
on residential real estate loans amounted to 7.66%, down 15 basis points from
the prior year yield. Average commercial loans rose 9.4% to $252.5 million in
2001. The yield on commercial loans amounted to 9.25%, a decrease of 26 basis
points from the prior year yield of 9.51%. Included in interest income on
commercial loans was $642 thousand of appreciation in the value of the interest
rate floor contract for 2001. Average consumer loans rose 6.4% in 2001 to $104.7
million. The yield on consumer loans amounted to 7.79%, down from 8.96% in 2000
primarily due to a decline in the yield on home equity lines.
Average interest-bearing liabilities increased 12.0% to $1.081 billion at
December 31, 2001. Due to lower interest rates in 2001, the Corporation's total
cost of funds on interest-bearing liabilities amounted to 4.46% in 2001, a
decrease of 43 basis points from the prior year yield level. Average savings
deposits increased 20.3% to $289.4 million in 2001 from the comparable 2000
amount. The rate paid on savings deposits for 2001 was 1.77%, compared to 1.82%
in 2000. Average time deposits increased $8.2 million with a decrease of 40
basis points in the rate paid. In addition, average demand deposits, an
interest-free source of funding, increased 7.6% from 2000 to $114.8 million in
2001.
Average FHLB advances increased by $57.9 million, or 15.6%, from 2000 and
amounted to $428.5 million. This increase was used primarily to fund the
purchase of securities. The average rate paid on FHLB advances in 2001 was
5.62%, a decrease of 55 basis points from the prior year.
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, 2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------------------------------------
Assets:
Residential real estate loans $251,774 19,279 7.66 $240,410 18,777 7.81 $214,124 16,687 7.79
Commercial and other loans 252,501 23,344 9.25 230,772 21,946 9.51 219,393 20,564 9.37
Consumer loans 104,767 8,164 7.79 98,479 8,826 8.96 89,292 7,707 8.63
------------------------------------------------------------------------------------------------------------------
Total loans 609,042 50,787 8.34 569,661 49,549 8.70 522,809 44,958 8.60
Federal funds sold and other
short-term investments 15,088 594 3.94 13,247 837 6.32 10,635 518 4.88
Taxable debt securities 540,955 33,057 6.11 456,434 30,992 6.79 399,058 24,432 6.12
Nontaxable debt securities 21,765 1,430 6.57 25,050 1,652 6.60 26,945 1,786 6.63
Corporate stocks and FHLB
stock 38,480 2,705 7.03 33,848 3,157 9.33 30,041 2,394 7.97
------------------------------------------------------------------------------------------------------------------
Total securities 616,288 37,786 6.13 528,579 36,638 6.93 466,679 29,130 6.24
------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 1,225,330 88,573 7.23 1,098,240 86,187 7.85 989,488 74,088 7.49
------------------------------------------------------------------------------------------------------------------
Cash and due from banks 19,759 18,362 18,625
Allowance for loan losses (13,556) (12,881) (11,767)
Premises and equipment, net 22,869 22,774 24,167
Other 44,924 34,715 32,578
------------------------------------------------------------------------------------------------------------------
Total assets $1,299,326 $1,161,210 $1,053,091
------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders'
Equity:
Savings deposits $289,360 5,127 1.77 $240,580 4,383 1.82 $228,932 4,043 1.77
Time deposits 360,167 18,866 5.24 351,961 19,841 5.64 318,281 15,871 4.99
FHLB advances 428,519 24,068 5.62 370,642 22,886 6.17 309,594 16,855 5.44
Other 2,570 99 3.86 2,003 121 6.03 12,383 625 5.05
------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,080,616 48,160 4.46 965,186 47,231 4.89 869,190 37,394 4.30
------------------------------------------------------------------------------------------------------------------
Demand deposits 114,844 106,741 97,716
Other liabilities 9,294 7,445 6,315
Shareholders' equity 94,572 81,838 79,870
------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,299,326 $1,161,210 $1,053,091
------------------------------------------------------------------------------------------------------------------
Net interest income $40,413 $38,956 $36,694
------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.77 2.96 3.19
Net interest margin 3.30 3.55 3.71
------------------------------------------------------------------------------------------------------------------
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, 2001 2000 1999
- --------------------------------------------------------------------------------
Commercial and other loans $169 $126 $130
Nontaxable debt securities 499 576 605
Corporate stocks and FHLB stock 378 386 351
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)
2001/2000 2000/1999 1999/1998
----------------------------------------------------------------------------------------------------------------
Net Net Net
(Dollars in thousands) Volume Rate Change Volume Rate Change Volume Rate Change
----------------------------------------------------------------------------------------------------------------
Interest on:
Interest-earning assets:
Residential real estate loans $875 (373) 502 $2,053 37 2,090 $1,176 (835) 341
Commercial and other loans 1,785 (618) 1,167 1,079 302 1,381 1,099 (606) 493
Consumer loans 750 (1,181) (431) 815 305 1,120 476 (358) 118
Federal funds sold and other
short-term investments 105 (348) (243) 145 174 319 (35) (97) (132)
Taxable debt securities 5,366 (3,301) 2,065 3,730 2,830 6,560 5,145 (420) 4,725
Nontaxable debt securities (216) (6) (222) (125) (9) (134) 290 62 352
Corporate stocks and FHLB
stock 394 (846) (452) 325 438 763 (18) 3 (15)
----------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 9,059 (6,673) 2,386 8,022 4,077 12,099 8,133 (2,251) 5,882
----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 867 (123) 744 210 130 340 440 (231) 209
Time deposits 454 (1,429) (975) 1,778 2,192 3,970 487 (1,360) (873)
FHLB advances 3,369 (2,187) 1,182 3,589 2,442 6,031 4,466 (824) 3,642
Other 30 (52) (22) (608) 104 (504) (168) (74) (242)
----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 4,720 (3,791) 929 4,969 4,868 9,837 5,225 (2,489) 2,736
----------------------------------------------------------------------------------------------------------------
Net interest income $4,339 (2,882) 1,457 $3,053 (791) 2,262 $2,908 238 3,146
----------------------------------------------------------------------------------------------------------------
Noninterest Income
Noninterest income is an important source of revenue for the Corporation. For
the year ended December 31, 2001, recurring noninterest income, which excludes
net gains on sales of securities and the 1999 nonrecurring net gain on the sale
of the credit card portfolio, accounted for 34.9% 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 48.4% of noninterest income and amounted to $10.4 million in 2001,
down slightly from the $10.5 million reported in 2000. This decrease is
primarily attributable to financial market declines.
Service charges on deposit accounts rose 6.6% to $3.5 million in 2001. 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 $2.1 million in 2001, up from $585
thousand in 2000, due to increased loan sales resulting from strong mortgage
refinancing activity in a low interest rate environment. Mortgage banking
activities include the capitalization of mortgage servicing rights of $35
thousand and $27 thousand in 2001 and 2000, 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 $400 thousand for the year ended December 31,
2001, compared to the prior year amount of $450 thousand. Servicing income,
excluding valuation adjustments and amortization, as a percentage of average
loans serviced was 30 basis points in 2001 and in 2000. The balance of serviced
loans at December 31, 2001 amounted to $146.7 million, compared to $180.6
million at December 31, 2000.
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 $1.1 million and $1.0 million of earnings on BOLI for the
years ended December 31, 2001 and 2000, respectively. (See additional discussion
on BOLI under the caption "Financial Condition".)
Noninterest Expense
Total recurring noninterest expense, which excludes acquisition related expenses
and net litigation settlement costs, rose 4.1% to $38.0 million in 2001. This
increase was primarily attributable to higher salaries and benefit expense.
Legal, audit and professional fees totaled $1.3 million, down $547 thousand from
the corresponding 2000 amount. The decrease was primarily due to the reduction
in legal defense costs associated with the settlement of a litigation matter in
May 2001. Total equipment costs for 2001 amounted to $3.4 million, down $217
thousand from the corresponding 2000 amount. In 2001 and 2000, the Corporation
recorded impairment adjustments of $107 thousand and $293 thousand,
respectively, resulting from remeasurements of the useful lives of technology
equipment.
Income Taxes
Income tax expense amounted to $5.5 million and $5.7 million in 2001 and 2000,
respectively. The Corporation's effective tax rate was 29.7% in 2001, compared
to a rate of 30.0% in 2000. 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 $1.4 million and $2.1
million at December 31, 2001 and 2000, respectively. Primary sources of recovery
of deferred tax assets are future taxable income and the reversal of deferred
tax liabilities. (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.
The transition provisions of SFAS No. 133 provided that at the date of initial
application an entity may transfer any security classified as "held to maturity"
to "available for sale" or "trading." On January 1, 2001, the Corporation
transferred held to maturity securities with an amortized cost of $43.6 million
and an estimated fair value of $42.6 million into the available for sale
category. The transition adjustment amounted to an unrealized loss, net of tax,
of $367 thousand and was reported in other comprehensive income.
Securities Available for Sale
The amortized cost of securities available for sale at December 31, 2001
amounted to $443.8 million, an increase of $63.8 million over the 2000 amount.
This increase was due primarily to purchases of mortgage-backed securities.
At December 31, 2001, the net unrealized gains on securities available for sale
amounted to $10.2 million, an increase of $3.6 million from the comparable 2000
amount. This increase was attributable to the effects of reductions in medium
and long-term bond rates that occurred during 2001. (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 $50.2 million, to
$175.1 million at December 31, 2001. This increase is primarily attributable to
purchases of mortgage-backed securities. The net unrealized gains on securities
held to maturity amounted to $2.5 million at December 31, 2001 compared to $453
thousand in net unrealized gains at December 31, 2000.
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, 2001
and 2000, the Corporation's investment in FHLB stock totaled $23.5 million and
$19.6 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 $605.6 million at December 31, 2001, up $8.5 million, or
1.4%, from the December 31, 2000 amount of $597.2 million. The increase in total
loans was led by growth in the commercial and consumer loan portfolios.
Total residential real estate loans decreased $15.6 million, or 6.2%, in 2001
due to refinancings sold into the secondary market. Consumer loans were up $3.3
million, or 3.1%, in 2001. The increase in consumer loans was mainly due to
growth in home equity lines. Total commercial loans increased $20.8 million, or
8.7%, in 2001, with the largest increase occurring in the other commercial loans
portfolio.
Other Assets
Other assets totaled $29.8 million at December 31, 2001, compared to $28.0
million at December 31, 2000. Included in other assets is BOLI, which amounted
to $20.9 million and $19.7 million at December 31, 2001 and 2000, 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, 2001 amounted to $816.9 million, up 11.0% from
the prior year balance of $735.7 million. Demand deposits rose 19.3% to $134.8
million. Savings deposits rose 22.2% to $317.0 million. Time deposits totaled
$365.1 million at December 31, 2001, compared to $363.4 million at December 31,
2000.
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 $431.5
million at December 31, 2001, up from $377.4 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 were .28% of total assets at December 31, 2001 and 2000.
Nonaccrual loans as a percentage of total loans increased from .58% at the end
of 2000 to .63% at December 31, 2001. Approximately $1.6 million, or 42.6% of
total nonaccrual loans, were less than 90 days past due at December 31, 2001.
The following table presents nonperforming assets and related ratios:
(Dollars in thousands)
December 31, 2001 2000
---------------------------------------------------------------------------
Nonaccrual loans:
Residential real estate $1,161 $796
Commercial and other:
Mortgages 1,472 1,076
Construction and development - -
Other 509 1,018
Consumer 685 544
---------------------------------------------------------------------------
Total nonaccrual loans 3,827 3,434
Other real estate owned, net 30 9
---------------------------------------------------------------------------
Total nonperforming assets $3,857 $3,443
---------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .63% .58%
Nonperforming assets as a percentage of total assets .28% .28%
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.
There are no accruing loans 90 days or more past due at December 31, 2001.
Included in accruing loans 90 days or more past due at December 31, 2000 were
residential mortgages amounting to $393 thousand which were considered
well-collateralized and in the process of collection and therefore were deemed
to have no loss exposure.
(Dollars in thousands)
December 31, 2001 2000
---------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $2,195 $1,608
Nonaccrual loans less than 90 days past due 1,632 1,826
---------------------------------------------------------------------------
Total nonaccrual loans $3,827 $3,434
---------------------------------------------------------------------------
Accruing loans 90 days or more past due,
primarily all residential mortgages (1) $ - $393
---------------------------------------------------------------------------
(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, 2001 and 2000, are loans whose terms have been restructured amounting to $28
thousand and $118 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 $30 thousand at December 31, 2001, up from the
prior year amount of $9 thousand. Increases in OREO resulted from foreclosures
and repossessions that exceeded the level of sales of foreclosed properties and
repossessed assets. During 2001, proceeds from sales of foreclosed properties
and repossessed assets amounted to $151 thousand. Washington Trust occasionally
provides 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 loans 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 $13.6 million, or 2.24% of total
loans, at December 31, 2001, compared to $13.1 million, or 2.20%, at December
31, 2000.
The following table reflects the activity in the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2001 2000
-------------------------------------------------------------------------
Beginning balance $13,135 $12,349
Charge-offs, net of recoveries:
Residential:
Real estate 15 (19)
Construction - -
Commercial:
Mortgages (122) (8)
Construction and development - -
Other 152 13
Consumer (137) (350)
-------------------------------------------------------------------------
Net charge-offs (92) (364)
Provision for loan losses 550 1,150
-------------------------------------------------------------------------
Ending balance $13,593 $13,135
-------------------------------------------------------------------------
Allowance for loan losses to nonaccrual loans 355.20% 382.50%
Allowance for loan losses to total loans 2.24% 2.20%
-------------------------------------------------------------------------
Capital Resources
Total shareholders' equity increased $8.8 million during 2001 and amounted to
$97.9 million at December 31, 2001. The overall increase was mainly attributable
to earnings retention of $6.8 million. Capital growth also resulted from a $2.4
million increase in accumulated other comprehensive income due to an increase in
unrealized gains on securities. Stock option exercises increased shareholders'
equity by $573 thousand in 2001. Cash dividends declared per share amounted to
$.52 and $.48 in 2001 and 2000, respectively. Common stock shares repurchased
amounted to $1.1 million at December 31, 2001. The Corporation authorized a
stock repurchase of up to 250,000 shares of common stock in September 2001. (See
Note 15 to the Consolidated Financial Statements for additional discussion of
the stock repurchase plan).
The ratio of total equity to total assets amounted to 7.2% at December 31, 2001,
compared to 7.3% at December 31, 2000. Book value per share at December 31, 2001
amounted to $8.15, a 9.7% increase from the year-earlier amount of $7.43 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
In January 1997, a suit was filed against the Washington Trust Bancorp Inc.'s
bank subsidiary (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 alleged 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.
On May 11, 2001, the Bank entered into an agreement with the plaintiffs to
settle the suit. Under the terms of the agreement, which does not involve an
admission of wrongdoing, the Bank agreed to pay $4.8 million to the plaintiffs.
The cost of this settlement was recorded in the consolidated financial
statements as of and for the quarter ended March 31, 2001. Net of the related
income tax effect, the cost of the settlement amounted to $3.3 million. In
August 2001, the Bank received a settlement from an insurance carrier in the
amount of $775 thousand ($553 thousand net of tax) in connection with this
matter. In December 2001, the Bank received a settlement from another insurance
carrier in the amount of $400 thousand ($252 thousand net of tax) in connection
with this matter. The recoveries were recorded as reductions of the litigation
settlement cost included in other noninterest expenses. No further insurance
recoveries are expected.
Recent Accounting Developments
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations. SFAS 141 addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this Statement are to be accounted for using one method - the purchase
method. Therefore, this Statement eliminates the use of the pooling-of-interests
method for accounting for business combinations. The provisions of SFAS 141
apply to all business combinations initiated after June 30, 2001, and also apply
to all business combinations accounted for using the purchase method for which
the date of acquisition is July 1, 2001 or later.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. The provisions of this Statement are required to be
applied starting with fiscal years beginning after December 15, 2001.
The adoption of the foregoing pronouncements is not expected to have a material
impact on the Corporation's financial statements with respect to any business
combinations which occurred prior to 2002. SFAS Nos. 141 and 142 will be applied
to the acquisition of First Financial Corp., which is expected to be completed
in the second quarter of 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities and is
effective for financial statements issued for all fiscal years beginning after
June 15, 2002. The adoption of this pronouncement is not expected to have a
material impact on the Corporation's financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement supersedes FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." This Statement established a single
accounting model to be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, broadened the presentation
of discontinued operations to include more disposal transactions, and resolves
significant implementation issues related to SFAS No. 121. The provisions of
this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The provisions of this Statement are to be applied prospectively. The adoption
of this pronouncement is not expected to have a material impact on the
Corporation's financial statements.
Comparison of 2000 with 1999
Washington Trust recorded net income of $13.2 million, or $1.09 per diluted
share, for 2000. Net income for 1999 amounted to $12.5 million, or $1.03 per
diluted share.
In the second quarter of 2000, the Corporation completed the acquisition of
Phoenix Investment Management Company, Inc. 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
include acquisition-related expenses of $1.3 million, net of income taxes, and
the loan sale gain, net of taxes, of $285 thousand. These acquisitions were
accounted for under the pooling of interests method, and accordingly, financial
data for all prior periods were restated to reflect the acquisitions at the
beginning of each period presented. Operating basis earnings exclude
acquisition-related expenses, net of taxes, and the loan sale gain, net of
taxes. Operating earnings also include a pro forma tax provision for the
pre-acquisition earnings of Phoenix, which operated as a sub-S corporation prior
to the acquisition.
Operating earnings for 2000 amounted to $13.9 million, an increase of 8.9% from
the $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, were 1.20% and 16.98% for 2000, respectively. Comparable
amounts for 1999 were 1.21% and 16.04%.
Fully taxable equivalent net interest income increased $2.3 million, or 6.2%,
from 1999 to 2000, primarily due to the growth in interest-earning assets. The
net interest margins 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 costs of funds associated with FHLB advances and time deposits
were primarily responsible for the decrease in the net interest margin.
Recurring noninterest income, which excludes net gains on sales of securities
and the 1999 net gain on the sale of the credit card portfolio, totaled $19.0
million and $17.7 million for 2000 and 1999, respectively. The $1.3 million
increase resulted primarily from growth in revenues for trust and investment
management services, offset in part by a decline in revenue from mortgage
banking activities. Trust and investment management income totaled $10.5 million
for 2000, up 13.2% from the $9.3 million reported in 1999. 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.
Operating noninterest expenses (excluding acquisition-related expenses) amounted
to $36.5 million for 2000, up $2.7 million from 1999. 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 in 2000, up $804 thousand from 1999. The
increase was mainly due to legal defense costs associated with a long-standing
lawsuit settled in 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.
Total assets rose $112.5 million, or 10.2% to $1.218 billion at December 31,
2000. Average assets amounted to $1.161 billion in 2000, up 10.3% from the prior
year. Asset growth was primarily attributable a $64.7 million increase in the
carrying value of securities and a $47.3 million increase in the loan portfolio.
Increases in FHLB advances as well as an 11.3% increase in total deposits funded
the growth in assets. Average interest-bearing liabilities amounted to $965.2
million at December 31, 2000, up 11.0% from 1999.
Nonperforming assets amounted to $3.4 million or .28% of total assets at
December 31, 2000, down from $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. Net loan charge-offs amounted to $364
thousand in 2000, down from $457 thousand in 1999. The allowance for loan losses
represented 2.20% of total loans at December 31, 2000 compared to 2.25% in 1999.
Shareholder's equity amounted to $89.2 million at December 31, 2000, compared to
$78.2 million at December 31, 1999. Capital growth resulted primarily from $6.6
million of earnings retention and a $4.2 million increase in accumulated other
comprehensive income due to unrealized gains on securities. Book value per share
as of December 31, 2000 amounted to $7.43, up 13.4% from the $6.55 per share
amount in 1999. The ratio of capital to assets was 7.3% and 7.1% at December 31,
2000 and 1999, respectively. Dividends paid per share amounted to $.48 in 2000,
up 9.1% 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,
2001 and December 31, 2000, 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, 2001. Interest rates
are assumed to shift by a parallel 200 basis points upward or 100 basis points
downward 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. The asymmetric rate shift scenarios presented below
reflect the fact that given the low level of interest rates at December 31,
2001, a parallel rate decline of 200 basis points is extremely unlikely to
occur, as this would effectively reduce many interest rates to zero. It should
be noted that the rate scenarios used do 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 $38,561 $36,950 $40,388
Adjustable rate mortgage-backed securities 10,439 8,876 13,534
Callable securities 2,945 2,761 3,303
Other securities 16,110 14,797 18,825
Fixed rate mortgages 19,916 19,402 20,767
Adjustable rate mortgages 13,919 13,564 14,717
Other fixed rate loans 36,864 36,014 38,561
Other adjustable rate loans 16,368 14,584 19,954
Interest rate floor contracts 141 266 (109)
----------------------------------------------------------------------------------------------------------
Total interest income 155,263 147,214 169,940
----------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Core savings deposits 8,153 7,134 9,262
Time deposits 23,668 21,796 30,058
FHLB advances 40,401 38,352 44,183
Other borrowings 55 29 108
----------------------------------------------------------------------------------------------------------
Total interest expense 72,277 67,311 83,611
----------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 2001 $82,986 $79,903 $86,329
----------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 2000 $77,647 $73,671 $78,782
----------------------------------------------------------------------------------------------------------
The ALCO estimates that the negative exposure of net interest income to falling
rates results from the difficulty of reducing rates paid on core savings
deposits given the current level of interest rates. If rates were to fall and
remain low for a sustained period, core savings deposit rates might not be
reduced much below current levels, while rates earned on assets would decline as
current assets mature or reprice. 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 changing interest rate environments. 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, 2001 and 2000 resulting from immediate 200 basis point
parallel rate shifts:
(Dollars in thousands)
Falling Rising
Security Type Rates Rates
---------------------------------------------------------------------------------------------------------
U.S. Treasury and government-sponsored agency securities (noncallable) $1,066 $(974)
U.S. government-sponsored agency securities (callable) 218 (431)
Corporate securities 809 (864)
Fixed rate mortgage-backed securities 600 (11,275)
Adjustable rate mortgage-backed securities 2,262 (1,448)
Fixed rate collateralized mortgage obligations (27) (132)
Adjustable rate collateralized mortgage obligations (494) (1,679)
---------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 2001 $4,434 $(16,803)
---------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 2000 $7,173 $(13,250)
---------------------------------------------------------------------------------------------------------
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, 2001, including both debt and equity
securities, was 3.7%, assuming a one-year time horizon and a 5% probability of
occurrence for "value at risk" analysis.
At December 31, 2001, gap analysis showed that the Corporation's cumulative
one-year gap was a negative $135.9 million, or 10.6% of earning assets. The
following table details the amounts of interest-earning assets and
interest-bearing liabilities at December 31, 2001 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 assumptions based on
recent historical performance. 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,
2001:
(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 $167,775 $49,741 $75,268 $227,468 $93,103
Debt securities 176,591 38,344 84,166 260,138 46,780
Other 20,500 - - - 46,533
----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 364,866 88,085 159,434 487,606 186,416
Interest-bearing liabilities:
Deposits 413,216 133,586 44,386 90,899 6
FHLB advances 83,030 27,504 44,500 204,654 71,802
Other borrowings 2,087 - - - -
----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 498,333 161,090 88,886 295,553 71,808
----------------------------------------------------------------------------------------------------------------
Interest sensitivity gap per period $(133,467) $(73,005) $70,548 $192,053 $114,608
----------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(133,467) $(206,472) $(135,924) $56,129 $170,737
----------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap - 2000 $(149,118) $(159,149) $(128,854) $(35,773) $148,017
----------------------------------------------------------------------------------------------------------------
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 1998, the Corporation entered into an interest rate floor contract with a
notional principal amount of $20 million and a five-year term maturing in
February 2003. This contract is intended to function as a hedge against
reductions in interest income realized from prime-based loans. The Corporation
receives payment for this contract if certain interest rates fall below
specified levels. Effective January 1, 2001 with the adoption of SFAS No. 133,
the Corporation recognized the fair value of this derivative, amounting to $97
thousand, as an asset on the balance sheet. At December 31, 2001, the carrying
value of the interest rate floor contract amounted to $739 thousand and is
reported in other assets. (See Note 7 to the Consolidated Financial Statements
for additional information regarding the floor contract.)
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, 2001 and 2000
Consolidated Statements of Income
For the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
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, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ending December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Providence, Rhode Island
January 15, 2002
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
December 31, 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $30,399 $22,460
Federal funds sold and other short-term investments 20,500 21,400
Mortgage loans held for sale 7,710 1,639
Securities:
Available for sale, at fair value 453,956 386,611
Held to maturity, at cost; fair value $177,595
in 2001 and $125,368 in 2000 175,105 124,915
- -------------------------------------------------------------------------------------------------------------------
Total securities 629,061 511,526
Federal Home Loan Bank stock, at cost 23,491 19,558
Loans 605,645 597,155
Less allowance for loan losses 13,593 13,135
- -------------------------------------------------------------------------------------------------------------------
Net loans 592,052 584,020
Premises and equipment, net 22,102 21,710
Accrued interest receivable 7,124 7,800
Other assets 29,790 27,954
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,362,229 $1,218,067
- -------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $134,783 $113,012
Savings 316,953 259,309
Time 365,140 363,363
- -------------------------------------------------------------------------------------------------------------------
Total deposits 816,876 735,684
Dividends payable 1,569 1,445
Federal Home Loan Bank advances 431,490 377,362
Other borrowings 2,087 3,227
Accrued expenses and other liabilities 12,270 11,163
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,264,292 1,128,881
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares in 2001 and 2000; issued
12,065,283 shares in 2001 and 12,006,809 shares in 2000 754 750
Paid-in capital 10,696 10,144
Retained earnings 81,114 74,265
Accumulated other comprehensive income 6,416 4,027
Treasury stock, at cost; 54,102 shares in 2001 (1,043) -
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 97,937 89,186
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,362,229 $1,218,067
- -------------------------------------------------------------------------------------------------------------------
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 except per share amounts)
Years ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $50,618 $49,423 $44,828
Interest on securities 33,988 32,068 25,613
Dividends on corporate stock and Federal Home Loan Bank stock 2,327 2,771 2,043
Interest on federal funds sold and other short-term investments 594 837 518
- --------------------------------------------------------------------------------------------------------------------
Total interest income 87,527 85,099 73,002
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 5,127 4,383 4,043
Time deposits 18,866 19,841 15,871
Federal Home Loan Bank advances 24,068 22,886 16,855
Other 99 121 625
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 48,160 47,231 37,394
- --------------------------------------------------------------------------------------------------------------------
Net interest income 39,367 37,868 35,608
Provision for loan losses 550 1,150 1,840
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 38,817 36,718 33,768
- --------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 10,408 10,544 9,314
Service charges on deposit accounts 3,514 3,297 3,169
Merchant processing fees 2,642 2,144 1,535
Mortgage banking activities 2,058 585 1,376
Income from bank-owned life insurance 1,134 1,047 676
Net gains on sales of securities 348 760 678
Net gain on sale of credit card portfolio - - 438
Other income 1,381 1,335 1,640
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 21,485 19,712 18,826
- --------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 20,845 19,750 18,294
Net occupancy 2,632 2,601 2,494
Equipment 3,375 3,592 3,122
Legal, audit and professional fees 1,336 1,883 1,079
Merchant processing costs 2,124 1,707 1,313
Advertising and promotion 1,237 1,196 991
Office supplies 662 641 732
Litigation settlement cost, net of insurance recovery 3,625 - -
Acquisition related expenses - 1,035 1,552
Other 5,817 5,143 5,752
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 41,653 37,548 35,329
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 18,649 18,882 17,265
Income tax expense 5,541 5,673 4,754
- --------------------------------------------------------------------------------------------------------------------
Net income $13,108 $13,209 $12,511
- --------------------------------------------------------------------------------------------------------------------
Per share information:
Basic earnings per share $1.09 $1.10 $1.05
Diluted earnings per share $1.07 $1.09 $1.03
Cash dividends declared per share (1) $.52 $.48 $.44
<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, 2001 $750 $10,144 $74,265 $4,027 $ - $89,186
Net income 13,108 13,108
Cumulative effect of change in
accounting principle, net of tax (391) (391)
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
$1,499 income tax expense 3,000 3,000
Reclassification adjustments (220) (220)
---------
Comprehensive income 15,497
Cash dividends declared (6,259) (6,259)
Shares issued 4 552 17 573
Shares repurchased (1,060) (1,060)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $754 $10,696 $81,114 $6,416 $(1,043) $97,937
- ----------------------------------------------------------------------------------------------------------------------
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:
Unrealized gains on securities, net of
$1,919 income tax expense 4,712 4,712
Reclassification adjustment (494) (494)
------------
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:
Unrealized losses on securities, net of
$3,682 income tax benefit (7,145) (7,145)
Reclassification adjustment (447) (447)
------------
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
- ----------------------------------------------------------------------------------------------------------------------
Disclosure of Reclassification Amount:
Years ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for net gains included in net income $(348) $(760) $(678)
Income tax effect on net gains 122 266 231
Reclassification adjustment for amortization of unrealized loss
on interest rate floor contract included in net income 10 - -
Income tax effect on interest rate floor contract amortization (4) - -
- ----------------------------------------------------------------------------------------------------------------------
Net reclassification adjustments $(220) $(494) $(447)
- ----------------------------------------------------------------------------------------------------------------------
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, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $13,108 $13,209 $12,511
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 550 1,150 1,840
Depreciation of premises and equipment 3,036 3,323 3,004
Amortization of premium in excess of (less than)
accretion of discount on debt securities 489 (149) 461
Deferred income tax benefit (644) (681) (741)
Increase in bank-owned life insurance cash surrender value (1,134) (1,047) (676)
Appreciation of derivative instruments (712) - -
Net gains on sales of securities (348) (760) (678)
Net gains on loan sales (1,686) (322) (695)
Net gain on sale of credit card portfolio - - (438)
Proceeds from sale of credit card portfolio - - 5,192
Proceeds from sales of loans 98,198 23,769 47,627
Loans originated for sale (102,583) (23,437) (42,785)
Decrease (increase) in accrued interest receivable 676 (1,790) (97)
(Increase) decrease in other assets (801) 315 (1,424)
Increase in accrued expenses and other liabilities 807 2,857 1,432
Other, net 517 1,075 1,782
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,473 17,512 26,315
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (160,774) (128,227) (168,644)
Proceeds from sales 238 40,288 81,398
Maturities and principal repayments 140,145 38,507 65,379
Securities held to maturity:
Purchases (131,570) (22,745) (54,948)
Maturities and principal repayments 37,841 14,235 34,212
Purchases of Federal Home Loan Bank stock (3,933) (1,931) (1,044)
Principal collected on loans under loan originations (8,757) (48,756) (57,622)
Proceeds from sales of other real estate owned 151 95 513
Purchases of premises and equipment (3,416) (1,813) (2,510)
Purchase of bank-owned life insurance - - (18,000)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (130,075) (110,347) (121,266)
- ---------------------------------------------------------------------------------------------------------------------
(Continued)
Years ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 81,192 74,931 32,990
Net decrease in other borrowings (1,140) (982) (10,845)
Proceeds from Federal Home Loan Bank advances 1,217,000 404,500 550,837
Repayment of Federal Home Loan Bank advances (1,162,872) (379,686) (462,395)
Purchase of treasury stock (670) - (36)
Net effect of common stock transactions 266 (201) 475
Cash dividends paid (6,135) (6,387) (6,209)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 127,641 92,175 104,817
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 7,039 (660) 9,866
Cash and cash equivalents at beginning of year 43,860 44,520 34,654
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $50,899 $43,860 $44,520
- ---------------------------------------------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate owned $187 $109 $576
Loans charged off 433 683 967
Loans made to facilitate the sale of other real estate owned - 60 180
Increase (decrease) in unrealized gain on securities
available for sale, net of tax 2,389 4,218 (7,592)
Increase in paid-in capital resulting from tax benefits on
stock option exercises 307 423 864
Supplemental Disclosures:
Interest payments $48,859 $45,970 $36,690
Income tax payments 5,632 5,838 4,363
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, 2001 and 2000
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 also subject to
various Rhode Island and Connecticut business and banking regulations.
On November 13, 2001, the Corporation announced that it had signed a definitive
agreement to acquire First Financial Corp., a bank holding company and parent of
First Bank and Trust Company, a Rhode Island-chartered community bank. First
Financial Corp., with assets of $185.2 million at December 31, 2001, is
headquartered in Providence, Rhode Island. First Bank and Trust Company operates
banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode
Island. The acquisition, which is expected to be completed in the second quarter
of 2002, is subject to certain customary conditions including approval by First
Financial Corp.'s shareholders as well as state and federal banking regulators.
On June 26, 2000, the Corporation completed the 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 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 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.
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 - Residential mortgage loans originated for sale
are classified as held for sale. These loans are specifically identified and are
carried at the lower of aggregate cost, net of unamortized deferred loan
origination fees and costs, or market. Forward commitments to sell residential
mortgage loans are contracts that the Corporation enters into for the purpose of
reducing the market risk associated with originating loans for sale should
interest rates change. Forward commitments are recorded at fair market value and
are reported in other assets. Market value is estimated based on outstanding
investor commitments or, in the absence of such information, current investor
yield requirements.
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 generally accepted accounting principles. 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. The estimated useful
lives of premises and improvements range from five to fifty years. For
furniture, fixtures and equipment, the estimated useful lives range from two to
twenty years.
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.
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
Effective January 1, 2001, the Corporation adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 sets accounting and
reporting standards for derivative instruments and hedging activities and
requires that all derivatives be recognized on the balance sheet at fair value.
The Corporation recognized an after-tax loss of $391 thousand from the
cumulative effect of adoption of this accounting standard.
The Corporation uses interest rate contracts (swaps and floors) 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 derivative instruments for any purpose other than cash flow
hedging purposes. That is, the Corporation does not enter into derivative
instruments for trading or speculative purposes.
By using derivative financial instruments to hedge exposures to changes in
interest rates, the Corporation exposes itself to credit risk and market risk.
Credit risk is the failure of the counterparty to perform under the terms of the
derivative contract. When the fair value of a derivative contract is positive,
the counterparty owes the Corporation, which creates credit risk for the
Corporation. When the fair value of a derivative contract is negative, the
Corporation owes the counterparty and, therefore, it does not possess credit
risk. The Corporation minimizes the credit risk in derivative instruments by
entering into transactions with highly rated counterparties that management
believes to be creditworthy.
Market risk is the adverse effect on the value of a financial instrument that
results from a change in interest rates. The market risk associated with
interest rate contracts is managed by establishing and monitoring parameters
that limit the types and degree of market risk that may be undertaken.
The net amounts to be paid or received on outstanding interest rate contracts
are recognized on the accrual basis as an adjustment to the related interest
income or expense over the life of the agreements. Changes in fair value of
interest rate contracts are recorded in current earnings. 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.
Prior to the adoption of SFAS No. 133, the Corporation recognized the amount of
unamortized premiums paid for interest rate floor agreements as the carrying
value of these contracts. Unamortized premiums were reported in other assets and
amounted to $133 thousand at December 31, 2000. Premiums paid for interest rate
floor agreements were amortized as an adjustment to interest income over the
term of the agreements.
(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 $8.4 million and $6.4
million at December 31, 2001 and 2000, respectively.
(3) Securities
Securities are summarized as follows:
(Dollars in thousands)
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $64,368 $2,348 $(1) $66,715
Mortgage-backed securities 296,729 4,411 (1,090) 300,050
Corporate bonds 64,934 1,130 (1,915) 64,149
Corporate stocks 17,752 5,938 (648) 23,042
----------------------------------------------------------------------------------------------------------
Total securities available for sale 443,783 13,827 (3,654) 453,956
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 8,311 307 - 8,618
Mortgage-backed securities 146,702 1,753 (48) 148,407
States and political subdivisions 20,092 485 (7) 20,570
----------------------------------------------------------------------------------------------------------
Total securities held to maturity 175,105 2,545 (55) 177,595
----------------------------------------------------------------------------------------------------------
Total securities $618,888 $16,372 $(3,709) $631,551
----------------------------------------------------------------------------------------------------------
(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
----------------------------------------------------------------------------------------------------------
Included in corporate stocks at December 31, 2001 are preferred stocks, which
are callable at the discretion of the issuer, with an amortized cost of $11.4
million and a fair value of $11.2 million. Call features on these stocks range
from three months to six 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, 2001 Cost Value Yield
-------------------------------------------------------------------------
Securities Available for Sale:
Due in 1 year or less $88,162 $89,325 5.77%
After 1 but within 5 years 219,130 223,222 5.65%
After 5 but within 10 years 75,759 76,898 4.35%
After 10 years 42,980 41,469 3.33%
-------------------------------------------------------------------------
Total debt securities available for sale 426,031 430,914 5.21%
-------------------------------------------------------------------------
Securities Held to Maturity:
Due in 1 year or less 26,026 26,335 6.54%
After 1 but within 5 years 91,979 93,482 6.20%
After 5 but within 10 years 41,516 42,017 6.32%
After 10 years 15,584 15,761 6.47%
-------------------------------------------------------------------------
Total debt securities held to maturity 175,105 177,595 6.30%
-------------------------------------------------------------------------
Total debt securities $601,136 $608,509 5.53%
-------------------------------------------------------------------------
The transition provisions of SFAS No. 133 also provide that at the date of
initial application an entity may transfer any security classified as "held to
maturity" to "available for sale" or "trading." On January 1, 2001, the
Corporation transferred held to maturity securities with an amortized cost of
$43.6 million and an estimated fair value of $42.6 million into the available
for sale category. The transition adjustment amounted to an unrealized loss, net
of tax, of $367 thousand and was reported in other comprehensive income.
At December 31, 2001, the Corporation owned debt securities with an aggregate
carrying value of $41.3 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
thirty-three months to twenty-eight years with call features ranging from one
month to five years.
The following is a summary of amounts relating to sales of securities available
for sale:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999
-------------------------------------------------------------------------
Proceeds from sales $238 $40,288 $81,398
-------------------------------------------------------------------------
Realized gains $522 $1,358 $2,213
Realized losses (174) (598) (1,535)
-------------------------------------------------------------------------
Net realized gains $348 $760 $678
-------------------------------------------------------------------------
Securities available for sale and held to maturity with a fair value of $394.4
million and $65.3 million were pledged to secure Treasury Tax and Loan deposits,
borrowings and public deposits at December 31, 2001 and 2000, respectively. The
increase in securities pledged is primarily attributable to new collateral
practices for FHLB borrowings issued in 2001. (See Note 10 to the Consolidated
Financial Statements for additional discussion of FHLB borrowings). In addition,
securities available for sale and held to maturity with a fair value of $28.4
million and $31.2 million were collateralized for the discount window at the
Federal Reserve Bank at December 31, 2001 and 2000, respectively. There were no
borrowings with the Federal Reserve Bank at either date.
Included in other noninterest expense for the twelve months ended December 31,
2001, 2000 and 1999 were contributions of appreciated equity securities to the
Corporation's charitable foundation amounting to $353 thousand, $424 thousand
and $270 thousand, respectively. These transactions resulted in realized
securities gains of $351 thousand, $310 thousand and $262 thousand,
respectively, for the same periods.
(4) Loans
The following is a summary of loans:
(Dollars in thousands)
December 31, 2001 2000
-------------------------------------------------------------------------
Commercial and other:
Mortgages (1) $118,999 $121,817
Construction and development (2) 1,930 2,809
Other (3) 139,704 115,202
-------------------------------------------------------------------------
Total commercial and other 260,633 239,828
Residential real estate:
Mortgages (4) 223,681 236,595
Homeowner construction 11,678 14,344
-------------------------------------------------------------------------
Total residential real estate 235,359 250,939
Consumer 109,653 106,388
-------------------------------------------------------------------------
Total loans $605,645 $597,155
-------------------------------------------------------------------------
(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
(4) A substantial portion of these loans is used as qualified collateral
for FHLB borrowings (See Note 10 to the Consolidated Financial
Statements for additional discussion of FHLB borrowings).
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, 2001 and 2000 was
$3.8 million and $3.4 million, respectively. Interest income that would have
been recognized had these loans been current in accordance with their original
terms was approximately $435 thousand in 2001 and $411 thousand in 2000.
Interest income attributable to these loans included in the Consolidated
Statements of Income amounted to approximately $209 thousand in 2001 and $250
thousand in 2000. Included in nonaccrual loans at December 31, 2001 and 2000 are
loans amounting to $28 thousand and $118 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, 2001 2000
-------------------------------------------------------------------------
Impaired loans requiring an allowance $786 $813
Impaired loans not requiring an allowance 1,222 1,301
-------------------------------------------------------------------------
Total recorded investment in impaired loans $2,008 $2,114
-------------------------------------------------------------------------
(Dollars in thousands)
Years ended December 31, 2001 2000 1999
-------------------------------------------------------------------------
Average recorded investment in impaired loans $2,188 $2,056 $3,418
-------------------------------------------------------------------------
Interest income recognized on impaired loans $122 $191 $351
-------------------------------------------------------------------------
Mortgage Servicing Activities
At December 31, 2001 and 2000, mortgage loans sold to others and serviced by the
Corporation on a fee basis under various agreements amounted to $146.7 million
and $180.6 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, 2001 2000 1999
-------------------------------------------------------------------------
Balance at beginning of year $905 $996 $808
Additions 35 27 313
Amortization (110) (118) (125)
-------------------------------------------------------------------------
Balance at end of year $830 $905 $996
-------------------------------------------------------------------------
Capitalized mortgage servicing rights are periodically evaluated for impairment.
As of December 31, 2001 and 2000, 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 2001 and 2000 was as
follows:
(Dollars in thousands)
December 31, 2001 2000
-------------------------------------------------------------------------
Balance at beginning of year $2,591 $2,279
Additions 2,371 2,061
Reductions (1,688) (1,749)
-------------------------------------------------------------------------
Balance at end of year $3,274 $2,591
-------------------------------------------------------------------------
(5) Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999
-------------------------------------------------------------------------
Balance at beginning of year $13,135 $12,349 $10,966
Provision charged to expense 550 1,150 1,840
Recoveries of loans previously charged off 341 319 510
Loans charged off (433) (683) (967)
-------------------------------------------------------------------------
Balance at end of year $13,593 $13,135 $12,349
-------------------------------------------------------------------------
Included in the allowance for loan losses at December 31, 2001, 2000 and 1999
was an allowance for impaired loans amounting to $163 thousand, $209 thousand
and $475 thousand, respectively.
(6) Premises and Equipment
The following is a summary of premises and equipment:
(Dollars in thousands)
December 31, 2001 2000
-------------------------------------------------------------------------
Land and improvements $2,105 $2,099
Premises and improvements 25,358 25,114
Furniture, fixtures and equipment 20,027 19,319
-------------------------------------------------------------------------
47,490 46,532
Less accumulated depreciation 25,388 24,822
-------------------------------------------------------------------------
Total premises and equipment, net $22,102 $21,710
-------------------------------------------------------------------------
(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, interest rate swaps and floors and
commitments to originate and commitments to sell fixed rate mortgage loans.
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, 2001 2000
----------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans $41,891 $32,145
Home equity lines 52,583 45,876
Other loans 12,065 20,241
Standby letters of credit 2,303 2,246
Financial instruments whose notional amounts exceed the amount of credit risk:
Interest rate floor contracts 20,000 20,000
Forward loan commitments:
Commitments to originate fixed rate mortgage loans to be sold 5,329 1,081
Commitments to sell fixed rate mortgage loans 13,093 2,663
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.
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 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, 2001 was 1.88%. Effective January 1, 2001 with
the adoption of SFAS No. 133, the Corporation recognized the fair value of this
derivative as an asset on the balance sheet, which amounted to $97 thousand. At
December 31, 2001 the carrying value of the interest rate floor contract
amounted to $739 thousand and is reported in other assets. Changes in fair value
of the interest rate contract are recorded in current earnings. Included in
interest income for the year ended December 31, 2001 was $642 thousand of
appreciation in value of the interest rate floor contract.
The Corporation has not terminated any interest rate swap agreements or floor
contracts and there are no unamortized deferred gains or losses.
Forward Loan Commitments
Effective January 1, 2001, with the adoption of SFAS No. 133, the Corporation
recognizes commitments to originate and commitments to sell fixed rate mortgage
loans as derivative financial instruments. Accordingly, the Corporation
recognizes the fair value of these commitments as an asset on the balance sheet.
At December 31, 2001 the carrying value of these commitments amounted to $86
thousand and is reported in other assets. Changes in the fair value are recorded
in current earnings and amounted to $86 thousand for the year ended December 31,
2001.
(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, 2001 2000
------------------------------------------------------------------------
Residential real estate $ - $ -
Commercial real estate - -
Repossessed assets 29 11
Land 37 37
------------------------------------------------------------------------
66 48
Valuation allowance (36) (39)
------------------------------------------------------------------------
Other real estate owned, net $30 $9
------------------------------------------------------------------------
An analysis of the activity relating to OREO follows:
(Dollars in thousands)
Years ended December 31, 2001 2000
------------------------------------------------------------------------
Balance at beginning of year $48 $143
Net transfers from loans 187 109
Sales (169) (154)
Other - (50)
------------------------------------------------------------------------
66 48
Valuation allowance (36) (39)
------------------------------------------------------------------------
Other real estate owned, net $30 $9
------------------------------------------------------------------------
The following is an analysis of activity relating to the OREO valuation
allowance:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999
------------------------------------------------------------------------
Balance at beginning of year $39 $94 $69
Provision charged to expense 9 3 99
Sales (12) (8) (53)
Selling expenses incurred - - (21)
Other - (50) -
------------------------------------------------------------------------
Balance at end of year $36 $39 $94
------------------------------------------------------------------------
Net realized gains on dispositions of properties amounted to $320, $44 thousand,
and $39 thousand in 2001, 2000 and 1999, 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, 2001 were
as follows:
(Dollars in thousands)
Years ending December 31: 2002 $274,305
2003 75,988
2004 7,464
2005 1,225
2006 6,152
2007 and thereafter 6
------------------------------------------------------------------------
Balance at December 31, 2001 $365,140
------------------------------------------------------------------------
The aggregate amount of time certificates of deposit in denominations of $100
thousand or more was $126.8 million and $122.9 million at December 31, 2001 and
2000, respectively.
(10) Borrowings
Federal Home Loan Bank Advances
The following table presents maturities and weighted average interest rates paid
on FHLB advances outstanding at December 31, 2001:
(Dollars in thousands) Scheduled Redeemed at Weighted
Maturity Call Date (1) Average Rate (2)
------------------------------------------------------------------------------------------------------------
Years ending December 31: 2002 $165,470 $191,970 4.36%
2003 86,664 99,664 5.81%
2004 70,454 70,454 4.78%
2005 22,246 27,246 4.78%
2006 24,710 24,710 5.01%
2007 and thereafter 61,946 17,446 5.80%
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $431,490 $431,490
------------------------------------------------------------------------------------------------------------
<FN>
(1) Callable FHLB advances are shown in the respective periods assuming
that the callable debt is redeemed at the call date while all other
advances are shown in the periods corresponding to their scheduled
maturity date.
(2) Weighted average rate based on scheduled maturity dates.
</FN>
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, 2001. 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, U.S. government-sponsored
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, 2001.
Other Borrowings
The following is a summary of other borrowings:
(Dollars in thousands)
December 31, 2001 2000
------------------------------------------------------------------------
Treasury, Tax and Loan demand note balance $1,583 $2,813
Other 504 414
------------------------------------------------------------------------
Other borrowings $2,087 $3,227
------------------------------------------------------------------------
There were no securities sold under repurchase agreements outstanding at
December 31, 2001 and 2000. 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, 2001 2000 1999
------------------------------------------------------------------------
Maximum amount outstanding at any month-end $ - $ - $23,525
Average amount outstanding $ - $ - $10,316
Weighted average rate - - 5.05%
(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 accrued benefit costs relating to the defined benefit pension plan
amounted to $399 thousand at December 31, 2001. As of December 31, 2000, the
plan's prepaid benefit costs amounted to $31 thousand.
The Corporation has a nonqualified retirement plan to provide supplemental
retirement benefits to certain employees, as defined in the plan. The primary
purpose of this plan is to restore benefits which would otherwise be provided by
the level of the tax-qualified defined benefit pension plan but which are
limited by the Internal Revenue Code. The accrued pension liability related to
this plan amounted to $777 thousand and $534 thousand at December 31, 2001 and
2000, 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 at September
30, 2001 and 2000, respectively.
Additionally, in July 2001 the Corporation initiated a nonqualified retirement
plan to provide supplemental retirement benefits to certain executives, as
defined by the plan. The accrued pension liability of this plan amounted to $63
thousand at December 31, 2001. Using the same actuarial assumptions as the other
aforementioned pension plans, the projected benefit obligation of this plan
amounted to $700 thousand at September 30, 2001.
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, 2001 2000
-------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of plan year $14,928 $13,823
Benefit obligation of executive plan at July 1, 2001 633 -
Service cost 909 722
Interest cost 1,162 1,013
Actuarial loss 985 63
Benefits paid (731) (693)
-------------------------------------------------------------------------
Benefit obligation at end of plan year $17,886 $14,928
-------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of plan year $18,445 $17,780
Actual return on plan assets (260) 1,297
Employer contribution 61 61
Benefits paid (731) (693)
-------------------------------------------------------------------------
Fair value of plan assets at end of plan year $17,515 $18,445
-------------------------------------------------------------------------
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)
2001 2000
-------------------------------------------------------------------------
Funded status at September 30, $(370) $3,517
Unrecognized transition asset (37) (43)
Unrecognized prior service cost 1,047 533
Unrecognized net actuarial gain (1,879) (4,478)
-------------------------------------------------------------------------
Accrued benefit cost at December 31, $(1,239) $(471)
-------------------------------------------------------------------------
September 30, 2001 2000
-------------------------------------------------------------------------
Assumptions Used:
Discount rate 7.25% 7.75%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 4.75% 5.00%
The components of net pension cost include the following:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999
-------------------------------------------------------------------------
Components of Net Periodic Benefit Cost:
Service cost $910 $722 $652
Interest cost 1,162 1,013 1,002
Expected return on plan assets (1,341) (1,229) (1,106)
Amortization of transition asset (6) (6) (6)
Amortization of prior service cost 119 87 75
Recognized net actuarial (gain) loss (47) (8) 11
-------------------------------------------------------------------------
Net periodic benefit cost $797 $579 $628
-------------------------------------------------------------------------
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 $358 thousand, $320 thousand and $275
thousand in 2001, 2000 and 1999, respectively.
Profit Sharing Plan
The Corporation has a nonqualified profit sharing plan that rewards employees,
excluding those key employees participating in the Annual Performance Plan, for
their contributions to the Corporation's success. The annual profit sharing
benefit is determined by a formula tied to net income and is subject to approval
by the Corporation's Board of Directors each year. The amount of the profit
sharing benefit was $410 thousand, $392 thousand and $333 thousand for 2001,
2000 and 1999, respectively.
Annual Performance Plan
The Corporation's nonqualified Annual Performance Plan (formerly known as the
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, with percentages varying among
participants. Payment amounts are based on the achievement of target levels of
net income, earnings per share and 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 Plan. The expense of the Annual
Performance Plan amounted to $1.4 million, $1.3 million and $969 thousand in
2001, 2000 and 1999, 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 amounted to $153 thousand and $200 thousand in
2001 and 2000, respectively. In addition, the Corporation has other nonqualified
incentive plans. Certain employees, who do not participate in the profit sharing
plan or the Annual Performance Plan, participate in one of these plans. The
incentives are based on a variety of plan specific factors, including general
organizational profitability, product line results, and individual business
development goals. The aggregate cost of these various plans amounted to $805
thousand, $963 thousand and $717 thousand in 2001, 2000 and 1999, 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
for 2001, 2000 and 1999, respectively. Accrued and unpaid benefits under this
plan are an unfunded obligation of the Bank. The accrued liability related to
this plan amounted to $233 thousand and $241 thousand at December 31, 2001 and
2000, 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 $1.3
million and $1.2 million at December 31, 2001 and 2000, 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, 2001 2000 1999
------------------------------------------------------------------------
Current tax expense:
Federal $6,164 $6,311 $5,446
State 22 43 49
------------------------------------------------------------------------
Total current tax expense 6,186 6,354 5,495
------------------------------------------------------------------------
Deferred tax benefit:
Federal (645) (681) (741)
State - - -
------------------------------------------------------------------------
Total deferred tax benefit (645) (681) (741)
------------------------------------------------------------------------
Total income tax expense $5,541 $5,673 $4,754
------------------------------------------------------------------------
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, 2001 2000 1999
------------------------------------------------------------------------
Tax expense at Federal statutory rate $6,527 $6,609 $5,239
Increase (decrease) in taxes resulting from:
Tax-exempt income (366) (377) (457)
Acquisition related expenses - 89 268
Dividends received deduction (253) (259) (246)
Bank-owned life insurance (397) (366) (237)
State tax, net of Federal income tax benefit 14 28 32
Other 16 (51) 155
------------------------------------------------------------------------
Total income tax expense $5,541 $5,673 $4,754
------------------------------------------------------------------------
The approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 2001 and
2000 are as follows:
(Dollars in thousands)
December 31, 2001 2000
------------------------------------------------------------------------
Gross deferred tax assets:
Allowance for loan losses $4,663 $4,468
Deferred compensation 446 414
Deferred loan origination fees 300 317
Pension 140 -
PierBank net operating loss carryover 208 250
Other 1,101 915
------------------------------------------------------------------------
Gross deferred tax assets 6,858 6,364
------------------------------------------------------------------------
Gross deferred tax liabilities:
Securities available for sale (3,559) (2,315)
Deferred loan origination costs (885) (862)
Premises and equipment (455) (759)
Pension - (11)
Interest rate floor contract (219) -
Other (329) (276)
------------------------------------------------------------------------
Gross deferred tax liabilities (5,447) (4,223)
------------------------------------------------------------------------
Net deferred tax asset $1,411 $2,141
------------------------------------------------------------------------
Primary sources of recovery of deferred tax assets are future taxable income and
the reversal of deferred tax liabilities.
(13) Operating Leases
At December 31, 2001, the Corporation was committed to rent premises used in
banking operations under noncancellable operating leases. Rental expense under
the operating leases amounted to $520 thousand, $604 thousand and $478 thousand
for 2001, 2000 and 1999, 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: 2002 $405
2003 334
2004 293
2005 121
2006 41
------------------------------------------------------------------------
Total minimum lease payments $1,194
------------------------------------------------------------------------
(14) Litigation
In January 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 alleged 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. In May 2001, the
Bank entered into an agreement with the plaintiffs to settle the suit. Under the
terms of the agreement, which does not involve an admission of wrongdoing, the
Bank agreed to pay $4.8 million to the plaintiffs. The cost of this settlement
was recorded in the consolidated financial statements as of and for the quarter
ended March 31, 2001. Net of the related income tax effect, the cost of the
settlement amounted to $3.3 million. In August 2001, the Bank received a
settlement from an insurance carrier in the amount of $775 thousand ($553
thousand net of tax) in connection with this matter. In December 2001, the Bank
received a settlement from another insurance carrier in the amount of $400
thousand ($252 thousand net of tax) in connection with this matter. The
recoveries were recorded as reductions of the litigation settlement cost
included in other noninterest expenses.
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 Repurchase Plan
In September 2001, the Corporation's Board of Directors approved a stock
repurchase plan authorizing up to 250,000, or 2.1%, of its outstanding common
shares to be repurchased. The Corporation plans to hold the repurchased shares
as treasury stock to be used for general corporate purposes. At December 31,
2001, 55,000 shares were repurchased under this plan with a total cost of $1.1
million.
Rights
In 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
$35.8 million as of December 31, 2001.
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
2001, 2000 and 1999:
Years ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------
Outstanding at January 1 845,109 $13.05 806,380 $11.49 851,329 $8.90
Granted 206,695 $17.81 216,390 $15.27 160,104 $17.64
Exercised (69,930) $7.03 (150,972) $7.21 (194,430) $4.95
Cancelled (1,815) $17.98 (26,689) $17.07 (10,623) $16.10
- ------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 980,059 $14.47 845,109 $13.05 806,380 $11.49
- ------------------------------------------------------------------------------------------------------------------
Exercisable at December 31 695,667 $13.47 615,487 $12.01 613,367 $9.73
- ------------------------------------------------------------------------------------------------------------------
The weighted average exercise price and remaining contractual life for options
outstanding at December 31, 2001 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
- -----------------------------------------------------------------------------------------------------------------
$3.26 to $4.27 29,504 1.3 years $4.04 29,504 $4.04
$4.28 to $6.40 21,642 2.4 years $5.56 21,642 $5.56
$6.41 to $8.53 80,160 2.9 years $7.10 80,160 $7.10
$8.54 to $10.67 85,228 4.3 years $9.53 85,228 $9.53
$10.68 to $12.80 98,149 5.3 years $11.65 98,149 $11.65
$12.81 to $14.93 7,100 8.6 years $14.75 3,550 $14.75
$14.94 to $17.07 217,138 8.3 years $15.35 124,944 $15.39
$17.08 to $19.20 395,562 8.1 years $17.82 206,914 $17.86
$19.21 to $21.33 45,576 5.8 years $20.45 45,576 $20.45
- -----------------------------------------------------------------------------------------------------------------
Total 980,059 6.7 years $14.47 695,667 $13.47
- -----------------------------------------------------------------------------------------------------------------
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 2001, 2000 and 1999.
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 2001, 2000
and 1999:
(Dollars in thousands, except per share amounts)
Years ended December 31, 2001 2000 1999
--------------------------------------------------------------------------
Net income As reported $13,108 $13,209 $12,511
Pro forma $12,185 $12,401 $11,942
Basic earnings per share As reported $1.09 $1.10 $1.05
Pro forma $1.01 $1.04 $1.01
Diluted earnings per share As reported $1.07 $1.09 $1.03
Pro forma $1.00 $1.02 $.99
Weighted average fair value $5.27 $5.01 $5.36
Expected life 9.0 years 9.3 years 9.0 years
Risk-free interest rate 5.32% 6.39% 5.91%
Expected volatility 33.0% 32.6% 32.8%
Expected dividend yield 3.8% 3.9% 3.9%
The pro forma effect on net income and earnings per share for 2001, 2000 and
1999 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, 2001, a total of 1,692,645 common stock shares were reserved
for issuance under the 1988 Plan, 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, 2001, that the Corporation and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 2001, 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, 2001 and 2000, as well as the corresponding
minimum regulatory amounts and ratios:
To Be Well Capitalized
Under Prompt
For Capital Adequacy Corrective Action
(Dollars in thousands) Actual Purposes Provisions
---------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
As of December 31, 2001:
Total Capital (to Risk-Weighted Assets):
Consolidated $102,226 14.22% $57,515 8.00% $71,893 10.00%
Bank $100,408 13.97% $57,515 8.00% $71,893 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $90,801 12.63% $28,757 4.00% $43,136 6.00%
Bank $88,983 12.38% $28,757 4.00% $43,136 6.00%
Tier 1 Capital (to Average Assets): (1)
Consolidated $90,801 6.84% $53,117 4.00% $66,396 5.00%
Bank $88,983 6.70% $53,139 4.00% $66,423 5.00%
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%
<FN>
(1) Leverage ratio
</FN>
(16) Earnings per Share
(Dollars in thousands, except per share amounts)
Years ended December 31, 2001 2000 1999
---------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
----------------------------------------------------------------
Net income $13,108 $13,108 $13,209 $13,209 $12,511 $12,511
Share amounts, in thousands:
Average outstanding 12,039.2 12,039.2 11,976.9 11,976.9 11,874.4 11,874.4
Common stock equivalents - 163.3 - 125.7 - 218.3
---------------------------------------------------------------------------------------------------------
Weighted average outstanding 12,039.2 12,202.5 11,976.9 12,102.6 11,874.4 12,092.7
---------------------------------------------------------------------------------------------------------
Earnings per share $1.09 $1.07 $1.10 $1.09 $1.05 $1.03
---------------------------------------------------------------------------------------------------------
(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 the estimated value to sell
the loans 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, 2001 and 2000 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, 2001 and
2000. 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.
Derivative Financial 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 forward 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. 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.
The following table presents the fair values of the Corporation's financial
instruments:
(Dollars in thousands)
December 31, 2001 2000
--------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------------
Financial Assets
On-balance sheet:
Cash and cash equivalents $50,899 $50,899 $43,860 $43,860
Mortgage loans held for sale 7,747 7,710 1,639 1,639
Securities available for sale 453,956 453,956 386,611 386,611
Securities held to maturity 175,105 177,595 124,915 125,368
FHLB stock 23,491 23,491 19,558 19,558
Loans, net of allowance for loan losses 592,052 611,425 584,020 596,362
Accrued interest receivable 7,124 7,124 7,800 7,800
Derivative financial instruments
relating to assets:
Interest rate floor contracts 739 739 133 98
Forward loan commitments 86 86 - 15
Financial Liabilities
On-balance sheet:
Noninterest bearing demand deposits $134,783 $134,783 $113,012 $113,012
Non-term savings accounts 316,953 316,953 259,309 259,309
Certificates of deposit 365,140 370,018 363,363 366,459
FHLB advances 431,490 453,740 377,362 379,149
Other borrowings 2,087 2,087 3,227 3,227
Accrued interest payable 3,885 3,885 4,503 4,503
(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.
Balance Sheets
(Dollars in thousands)
December 31, 2001 2000
---------------------------------------------------------------------------------------------------------
Assets:
Cash on deposit with bank subsidiary $898 $767
Investment in bank subsidiary at equity value 96,118 88,784
Dividend receivable from bank subsidiary 2,880 1,080
---------------------------------------------------------------------------------------------------------
Total assets $99,896 $90,631
---------------------------------------------------------------------------------------------------------
Liabilities:
Dividends payable $1,569 $1,445
Accrued expenses and other liabilities 390 -
---------------------------------------------------------------------------------------------------------
Total liabilities 1,959 1,445
---------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized
30 million shares in 2001 and 2000; issued
12,065,283 shares in 2001 and 12,006,809 shares in 2000 754 750
Paid-in capital 10,696 10,144
Retained earnings 81,114 74,265
Accumulated other comprehensive income 6,416 4,027
Treasury stock, at cost; 54,102 shares in 2001 (1,043) -
---------------------------------------------------------------------------------------------------------
Total shareholders' equity 97,937 89,186
---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $99,896 $90,631
---------------------------------------------------------------------------------------------------------
Statements of Income
(Dollars in thousands)
Years ended December 31, 2001 2000 1999
----------------------------------------------------------------------------------------------------------
Dividends from bank subsidiary $8,470 $5,198 $5,860
Equity in undistributed earnings of subsidiary 4,638 8,011 6,651
----------------------------------------------------------------------------------------------------------
Net income $13,108 $13,209 $12,511
----------------------------------------------------------------------------------------------------------
Statements of Cash Flows
(Dollars in thousands)
Years ended December 31, 2001 2000 1999
---------------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net income $13,108 $13,209 $12,511
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity effect of undistributed earnings of subsidiary (4,638) (8,011) (6,651)
(Increase) decrease in dividend receivable (1,800) (240) 360
Other - - -
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,670 4,958 6,220
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (670) - (36)
Net effect of common stock transactions 266 (201) 475
Cash dividends paid (6,135) (6,387) (6,209)
---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,539) (6,588) (5,770)
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 131 (1,630) 450
Cash at beginning of year 767 2,397 1,947
---------------------------------------------------------------------------------------------------------
Cash at end of year $898 $767 $2,397
---------------------------------------------------------------------------------------------------------
(19) Acquisition of First Financial Corporation
On November 13, 2001, the Corporation announced that it had signed a definitive
agreement to acquire First Financial Corp., a bank holding company and parent of
First Bank and Trust Company, a Rhode Island-chartered community bank. First
Financial Corp., with assets of $185.2 million at December 31, 2001, is
headquartered in Providence, Rhode Island. First Bank and Trust Company operates
banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode
Island. In the merger, each share of First Financial Corp. common stock will be
converted into a combination of $16.00 in cash and shares of Washington Trust
Bancorp, Inc. common stock based on an exchange ratio. Based on a Washington
Trust stock price of $18.00, First Financial Corp. shareholders would receive
0.889 shares of Washington Trust common stock (with a value of $16.00) for a
combination of cash and stock initially valued at $32.00 per share and an
aggregate transaction value of approximately $39 million. However, the actual
number and value of Washington Trust Bancorp, Inc. common stock to be issued to
First Financial Corp. shareholders will be based on an exchange formula using
the average closing price of Washington Trust Bancorp, Inc. common stock during
the 15 trading days prior to receiving final regulatory approval, within a range
of 0.842 per share and 0.941 per share. At December 31, 2001, First Financial
Corp. had 1,213,741 shares outstanding. The purchase, which is expected to be
completed in the second quarter of 2002, is subject to certain customary
conditions including approval by First Financial Corp.'s shareholders as well as
state and federal banking regulators. Upon consummation of this event, the
provisions of SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill
and Other Intangible Assets" will be applied.
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,
2002 prepared for the Annual Meeting of Shareholders to be held April 23, 2002
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, 2002
prepared for the Annual Meeting of Shareholders to be held April 23, 2002, 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, 2002 prepared for the Annual Meeting of
Shareholders to be held April 23, 2002, 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, 2002
prepared for the Annual Meeting of Shareholders to be held April 23, 2002, 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, 2002 prepared for the Annual Meeting of Shareholders
to be held April 23, 2002.
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, 2001.
(c) Exhibit Index.
Exhibit
Number
---------
3.a Restated Articles of Incorporation of the Registrant - Filed as
Exhibit 3.a to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000. (1)
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 as
Exhibit 10.a to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000. (1) (2)
10.b Short Term Incentive Plan Description - Filed as Exhibit 10.4 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 as Exhibit
10.d to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000. (1) (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.a 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 as Exhibit 10.j to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000. (1) (2)
10.k July 2000 Amendment to the Registrant's Supplemental Pension
Benefit and Profit Sharing Plan - Filed as Exhibit 10.k to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000. (1) (2)
10.l Amendment to the Registrant's Nonqualified Deferred Compensation
Plan - Filed as Exhibit 10.l to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.m Employment Agreement with an Executive Officer - Filed as Exhibit
10.m to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000. (1) (2)
10.n Amendment to Change in Control Agreement with Executive Officers
- Filed as Exhibit 10.a to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2001. (1)
(2)
10.o Supplemental Executive Retirement Plan - Filed as Exhibit 10.b to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2001. (1) (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 5, 2002 By John C. Warren
-------------------- ----------------------------------------------
John C. Warren
Chairman, Chief Executive Officer and Director
(principal executive officer)
Date: March 5, 2002 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 5, 2002 Alcino G. Almeida
-------------------- ---------------------------------------------
Alcino G. Almeida, Director
Date: March 5, 2002 Gary P. Bennett
-------------------- ---------------------------------------------
Gary P. Bennett, Director
Date: March 5, 2002 Steven J. Crandall
-------------------- ---------------------------------------------
Steven J. Crandall, Director
Date:
-------------------- ---------------------------------------------
Richard A. Grills, Director
Date: March 5, 2002 Larry J. Hirsch
-------------------- ---------------------------------------------
Larry J. Hirsch, Director
Date: March 5, 2002 Katherine W. Hoxsie
-------------------- ---------------------------------------------
Katherine W. Hoxsie, Director
Date: March 5, 2002 Mary E. Kennard
-------------------- ---------------------------------------------
Mary E. Kennard, Director
Date: March 5, 2002 Joseph J. Kirby
-------------------- ---------------------------------------------
Joseph J. Kirby, Director
Date: March 5, 2002 Edward M. Mazze
-------------------- ---------------------------------------------
Edward M. Mazze, Director
Date: March 5, 2002 Victor J. Orsinger II
-------------------- ---------------------------------------------
Victor J. Orsinger II, Director
Date: March 5, 2002 H. Douglas Randall III
-------------------- ---------------------------------------------
H. Douglas Randall, III, Director
Date: March 5, 2002 Joyce Olson Resnikoff
-------------------- ---------------------------------------------
Joyce Olson Resnikoff, Director
Date: March 5, 2002 James P. Sullivan
-------------------- ---------------------------------------------
James P. Sullivan, Director
Date: March 5, 2002 Neil H. Thorp
-------------------- ---------------------------------------------
Neil H. Thorp, Director
Date: March 5, 2002 John F. Treanor
-------------------- ---------------------------------------------
John F. Treanor, Director
Date: March 5, 2002 John C. Warren
-------------------- ---------------------------------------------
John C. Warren, Director