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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, 2002 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] Yes [ ] No
The aggregate market value of voting stock held by non-affiliates of the
registrant was $298,479,217 at June 30, 2002 which includes $32,422,109 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 24, 2003 was 13,068,211.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated March 20, 2003 for the Annual
Meeting of Shareholders to be held April 29, 2003 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, 2002
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 Disclosure
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
and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions
Item 14 Controls and Procedures
Item 15 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
Signatures
Certifications
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, performance or
achievements 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 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 "Bancorp") 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 Bancorp 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 Bancorp 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.
The accounting and reporting policies of the Bancorp and the Bank, (together,
the "Corporation" or "Washington Trust") are in accordance with accounting
principles generally accepted in the United States of America and conform to
general practices of the banking industry. At December 31, 2002, the Corporation
had total assets of $1.7 billion, total deposits of $1.1 billion and total
shareholders' equity of $128.7 million.
The Corporation's Internet address is www.washtrust.com. On the same day that
the Bancorp files its annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments thereto, the Bancorp makes
such reports available free of charge through the Corporation's website.
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 owns and operates ATMs located throughout its market area that provide
an important customer delivery channel for banking transactions. The Bank is a
member of various ATM networks, including Cirrus, MasterCard, NYCE and PLUS. The
Bank also has access to the American Express, Cashstream, Discover and Visa
Networks.
Data processing for most of the Bank's deposit and loan accounts and other
applications are conducted internally, using owned equipment. Application
software is primarily obtained through purchase or licensing agreements.
The Bank's primary source of income is net interest income, the difference
between interest earned on interest-earning assets and interest paid on
interest-bearing deposits and other borrowed funds. Sources of noninterest
income include fees for management of customer investment portfolios, trusts and
estates, service charges on deposit accounts, merchant processing fees, net
gains on loan sales and other banking-related fees. Noninterest expenses include
the provision for loan losses, salaries and employee benefits, occupancy,
equipment, merchant processing, outsourced services, advertising and promotion
and other administrative expenses.
The Bank's loan portfolio is concentrated among borrowers in southern New
England, primarily Rhode Island, and to a lesser extent in Connecticut and
Massachusetts. 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. The Bank sells loans with servicing released
and 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 $1.5 billion and $1.6 billion as of December 31, 2002 and 2001,
respectively.
The following is a summary of recurring sources of income, which excludes net
realized gains on securities and the 1999 net gain on the sale of the credit
card portfolio, as a percentage of total income (net interest income plus
recurring noninterest income) during the past five years:
2002 2001 2000 1999 1998
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Net interest income 66% 65% 67% 67% 67%
Trust and investment management 15 17 19 17 17
Other noninterest income 19 18 14 16 16
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Total income 100% 100% 100% 100% 100%
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On April 16, 2002, the Corporation completed the acquisition of First Financial
Corp., the parent company of First Bank and Trust Company, a Rhode
Island-chartered community bank. The results of First Financial Corp.'s
operations have been included in the Corporation's Consolidated Statements of
Income since that date. First Financial Corp. was headquartered in Providence,
Rhode Island and its subsidiary, First Bank and Trust Company, operated banking
offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The
Corporation closed the Richmond and North Kingstown branches and consolidated
them into existing Bank branches in May 2002.
Market Area and Competition
The Bank's market area includes Washington County and a portion of Providence
County in Rhode Island, as well as a portion of New London County in
Connecticut. The Bank operates sixteen banking offices in these Rhode Island and
Connecticut counties. The locations of the banking offices are as follows:
Westerly, RI (three locations) (1) Wakefield, RI (1)
Richmond, RI (1) North Kingstown, RI (1)
Charlestown, RI (1) Cranston, RI (2)
New Shoreham (Block Island), RI (1) Providence, RI (two locations) (2) (3)
Narragansett, RI (two locations) (1) Mystic, CT (three locations)
(1) Located in Washington County.
(2) Located in Providence County.
(3) The Bank has a full service branch and a trust/investment management office
located in Providence, RI.
The Bank's banking offices in Charlestown and on Block Island are the only bank
facilities in those Rhode Island communities.
Subject to the approval of state and federal regulators, the Corporation expects
to open a full-service Bank branch office in Warwick, Rhode Island, in the
second quarter of 2003, which will expand the Bank's market area into Kent
County.
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 53% of total deposits reported by all financial institutions for
Washington County communities in which the Bank operates ten of its banking
offices as of June 30, 2002. The closest competitor held 25%, and the second
closest competitor held 10% of total deposits in the same Washington County
communities. The Corporation believes that being the largest commercial banking
institution headquartered within this market area provides a competitive
advantage over other financial institutions. With the April 2002 acquisition of
First Financial Corp., the Bank added two locations in Providence County.
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, 2002 the Corporation had 443 employees, of which 388 were
full-time and 55 were part-time.
Supervision and Regulation
General - The business in which the Corporation is 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, nor intended for the protection of the Bancorp's shareholders. To
the extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. Proposals to change regulations and laws
that affect the banking industry are frequently raised at the federal and state
level. The potential impact on the Corporation of any future revisions to the
supervisory or regulatory structure cannot be determined.
The Bancorp 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.
As a registered bank holding company, the Bancorp is subject to regulation under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to
inspection, examination and supervision 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 Bancorp 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 Bancorp does not become a
"financial holding company" under the Gramm-Leach-Bliley Act (as discussed
below), the BHC Act also requires that the Bancorp 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 Bancorp 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 Bancorp 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, Department of Banking, 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.
Transactions with Affiliates - The Federal Reserve Board recently adopted a
final rule, which will become effective April 1, 2003, to implement
comprehensively Sections 23A and 23B of the Federal Reserve Act. This new rule,
among other requirements, specifies that derivative transactions are subject to
Section 23B (including use of daily marks and two way collateralization) but
generally not to Section 23A, except that derivatives in which the bank provides
credit protection to a nonaffiliated on behalf of an affiliate will be treated
as a guarantee for purposes of Section 23A. The new rule also requires banks to
establish policies and procedures to monitor credit exposure to affiliates. The
Federal Reserve Board has stated that it intends to propose future regulations
to treat derivatives that are the functional equivalent of a loan to an
affiliate as subject to Section 23A.
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, 2002, the Bank's capital ratios placed it in the
well-capitalized category. Reference is made to Note 17 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. 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 Bancorp, 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 Bancorp, 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 Bancorp
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 from 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, as implemented by various federal regulatory agencies,
requires financial institutions, including the Bank, to implement new policies
and procedures or amend existing policies or procedures with respect to, among
other matters, anti-money laundering compliance, suspicious activity and
currency transaction reporting and due diligence on customers. The Patriot Act
also permits information sharing for counter-terrorist purposes between federal
law enforcement agencies and financial institutions, as well as among financial
institutions, subject to certain conditions, and requires the Federal Reserve
Board to evaluate the effectiveness of an applicant in combating money
laundering activities when considering applications filed under Section 3 of the
BHC Act or the Bank Merger Act.
Dividend Restrictions - The Bancorp'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 17 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, 2002, the Corporation's
net risk-weighted assets amounted to $928.8 million, its Tier 1 capital ratio
was 10.13% and its total risk-based capital ratio was 11.55%.
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 5.63% as of December 31, 2002. The Federal Reserve
Board has not advised the Corporation of any specific minimum Tier 1 leverage
capital ratio applicable to it.
Disclosure Controls and Procedures - The Sarbanes-Oxley Act of 2002 and related
rulemaking by the Securities and Exchange Commission ("SEC"), which effect
sweeping corporate disclosure and financial reporting reform, generally require
public companies to focus on their disclosure controls and procedures. As a
result thereof, public companies, such as the Bancorp, now must have disclosure
controls and procedures in place and make certain disclosures about them in
their periodic SEC filings (i.e., Forms 10-K and 10-Q) and their chief executive
officers and chief financial officers must certify in these filings that they
are responsible for developing and evaluating disclosure controls and procedures
and disclose the results of an evaluation conducted by them within the 90-day
period preceding the filing of the relevant form, among other things. We are
monitoring the status of other related ongoing rulemaking by the SEC and other
regulatory entities. Currently, management believes that we are in compliance
with the rulemaking promulgated to date.
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 southern New England, primarily Rhode Island and to a lesser
extent Connecticut and Massachusetts, because virtually our entire 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, 2002 was approximately 14,037 shares. Accordingly, sales of a significant
number of shares of common stock may adversely affect the market price of our
common stock.
Allowance for Loan Losses
The Corporation uses a methodology to systematically measure the amount of
estimated loan loss exposure inherent in the loan portfolio for purposes of
establishing a sufficient allowance for loan losses. 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 accounting principles generally accepted in the United States of America,
(SFAS No. 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 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
homogeneous 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, virtually our entire loan portfolio is
concentrated among borrowers in southern New England, primarily Rhode Island,
and to a lesser extent in Connecticut and Massachusetts 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 loans and
commercial mortgage loans are to borrowers in the hospitality and tourism
industry. 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.
The Corporation's Audit Committee of the Board of Directors is responsible for
oversight of the loan review process. This process includes review of the Bank's
procedures for determining the adequacy of the allowance for loan losses,
administration of its internal credit rating systems and the reporting and
monitoring of credit granting standards.
GUIDE 3 STATISTICAL DISCLOSURES
The following tables contain additional consolidated statistical data about the
Corporation, 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, 2002 2001 2000
---------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $77,973 $66,715 $87,084
Mortgage-backed securities 386,747 300,050 240,856
Corporate bonds 66,435 64,149 38,565
Corporate stocks 22,401 23,042 20,106
---------------------------------------------------------------------------
Total securities available for sale $553,556 $453,956 $386,611
---------------------------------------------------------------------------
(Dollars in thousands)
December 31, 2002 2001 2000
---------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $3,000 $8,311 $35,135
Mortgage-backed securities 220,711 146,702 66,715
States and political subdivisions 18,566 20,092 23,065
---------------------------------------------------------------------------
Total securities held to maturity $242,277 $175,105 $124,915
---------------------------------------------------------------------------
B. Maturities of debt securities as of December 31, 2002 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 but within After
or Less 5 Years 10 Years 10 Years Totals
------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies:
Amortized cost $28,958 $47,895 $- $- $76,853
Weighted average yield 4.04% 5.47% - - 4.93%
Mortgage-backed securities:
Amortized cost 98,935 162,701 56,723 59,802 378,161
Weighted average yield 5.05% 4.45% 3.44% 2.81% 4.19%
Corporate bonds:
Amortized cost 12,589 25,356 4,709 22,363 65,017
Weighted average yield 4.95% 4.76% 3.28% 2.48% 3.90%
------------------------------------------------------------------------------------------------------------
Total debt securities:
Amortized cost $140,482 $235,952 $61,432 $82,165 $520,031
Weighted average yield 4.83% 4.69% 3.42% 2.72% 4.27%
------------------------------------------------------------------------------------------------------------
Fair value $144,816 $242,215 $62,215 $81,909 $531,155
------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Due in After 1 Year After 5 Years
1 Year but within but within After
or Less 5 Years 10 Years 10 Years Totals
------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and
obligations of U.S
government-sponsored agencies:
Amortized cost $- $3,000 $- $- $3,000
Weighted average yield - 7.13% - - 7.13%
Mortgage-backed securities:
Amortized cost 79,875 113,528 22,722 4,586 220,711
Weighted average yield 5.81% 5.64% 5.25% 4.77% 5.64%
States and political
subdivisions:
Amortized cost 3,928 14,638 - - 18,566
Weighted average yield 4.21% 4.04% - - 4.08%
------------------------------------------------------------------------------------------------------------
Total debt securities:
Amortized cost $83,803 $131,166 $22,722 $4,586 $242,277
Weighted average yield 5.73% 5.50% 5.25% 4.77% 5.54%
------------------------------------------------------------------------------------------------------------
Fair value $86,708 $135,649 $23,391 $4,698 $250,446
------------------------------------------------------------------------------------------------------------
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, 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------------------------
Commercial:
Mortgages $197,814 $118,999 $121,817 $113,719 $87,132
Construction and development 10,337 1,930 2,809 2,902 2,855
Other (1) 174,018 139,704 115,202 115,739 113,372
--------------------------------------------------------------------------------------------------------------
Total commercial 382,169 260,633 239,828 232,360 203,359
Residential real estate:
Mortgages 269,548 223,681 236,595 212,719 191,101
Homeowner construction 11,338 11,678 14,344 12,995 15,052
--------------------------------------------------------------------------------------------------------------
Total residential real estate 280,886 235,359 250,939 225,714 206,153
--------------------------------------------------------------------------------------------------------------
Consumer 132,071 109,653 106,388 90,951 87,458
--------------------------------------------------------------------------------------------------------------
Total loans $795,126 $605,645 $597,155 $549,025 $496,970
--------------------------------------------------------------------------------------------------------------
<FN>
(1) Loans to businesses and individuals, a substantial portion of which
are fully or partially collateralized by real estate.
</FN>
B. An analysis of the maturity and interest rate sensitivity of Real Estate
Construction and Other Commercial loans as of December 31, 2002 follows:
(Dollars in thousands)
One Year One to Five After Five
Matures in: or Less Years Years Totals
--------------------------------------------------------------------------------------------------------------
Construction and development (1) $4,374 $8,627 $8,674 $21,675
Commercial - other 69,115 71,175 33,728 174,018
--------------------------------------------------------------------------------------------------------------
$73,489 $79,802 $42,402 $195,693
--------------------------------------------------------------------------------------------------------------
<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 $68,677 $53,527 $122,204
---------------------------------------------------------------------------
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, 2002.
1. Nonaccrual, Past Due and Restructured Loans
a)Nonaccrual loans as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
----------------------------------------------------------------------
$4,177 $3,827 $3,434 $3,798 $5,846
----------------------------------------------------------------------
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, 2002, 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 $312
thousand. Interest recognized on these loans amounted to approximately
$182 thousand.
There were no significant commitments to lend additional funds to
borrowers whose loans were on nonaccrual status at December 31, 2002.
b)Loans contractually past due 90 days or more and still accruing for
the dates indicated were as follows:
(Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
----------------------------------------------------------------------
$ - $ - $393 $120 $235
----------------------------------------------------------------------
c)Restructured accruing loans for the dates indicated were as follows:
(Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
----------------------------------------------------------------------
$ - $ - $ - $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, 2002, 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, 2002, potential problem loans amounted to approximately $260
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, 2002 2001 2000 1999 1998
------------------------------------ ------------- ------------- ------------- ------------- -------------
Balance at beginning of year $13,593 $13,135 $12,349 $10,966 $9,335
Charge-offs:
Commercial:
Mortgages 27 122 61 170 -
Construction and development - - - 119 -
Other 284 121 144 304 322
Residential:
Mortgages 29 - 65 - 14
Homeowner construction - - - 23 -
Consumer 157 190 413 351 317
------------------------------------ ------------- ------------- ------------- ------------- -------------
Total charge-offs 497 433 683 967 653
------------------------------------ ------------- ------------- ------------- ------------- -------------
Recoveries:
Commercial:
Mortgages 72 - 53 44 51
Construction and development - - - - -
Other - 273 157 202 270
Residential:
Mortgages - 15 46 135 9
Homeowner construction - - - 1 -
Consumer 90 53 63 128 75
------------------------------------ ------------- ------------- ------------- ------------- -------------
Total recoveries 162 341 319 510 405
------------------------------------ ------------- ------------- ------------- ------------- -------------
Net charge-offs 335 92 364 457 248
Allowance on acquired loans 1,829 - - - -
Additions charged to earnings 400 550 1,150 1,840 1,879
------------------------------------ ------------- ------------- ------------- ------------- -------------
Balance at end of year $15,487 $13,593 $13,135 $12,349 $10,966
------------------------------------ ------------- ------------- ------------- ------------- -------------
Net charge-offs to average loans .05% .02% .06% .09% .05%
------------------------------------ ------------- ------------- ------------- ------------- -------------
B. The following table presents the allocation of the allowance for loan losses:
(Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
------------------------------------ ------------- ------------- ------------- ------------- -------------
Commercial:
Mortgages $3,161 $2,195 $2,316 $1,920 $1,604
% of these loans to all loans 24.9% 19.6% 20.4% 20.7% 17.5%
Construction and development 243 33 55 56 45
% of these loans to all loans 1.3% .3% .5% .5% .6%
Other 2,832 3,024 2,250 1,979 2,142
% of these loans to all loans 21.9% 23.1% 19.3% 21.1% 22.8%
Residential:
Mortgages 1,457 1,230 1,286 1,165 1,108
% of these loans to all loans 33.9% 36.9% 39.6% 38.7% 38.5%
Homeowner construction 61 64 78 71 87
% of these loans to all loans 1.4% 2.0% 2.4% 2.4% 3.0%
Consumer 1,305 1,222 1,295 1,155 1,189
% of these loans to all loans 16.6% 18.1% 17.8% 16.6% 17.6%
Unallocated 6,428 5,825 5,855 6,003 4,791
------------------------------------ ------------- ------------- ------------- ------------- -------------
Balance at end of year $15,487 $13,593 $13,135 $12,349 $10,966
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) 2002 2001 2000
------------------------ -------------------------- --------------------------- --------------------------
Average Average Average Average Average Average
Amount Rate Paid Amount Rate Paid Amount Rate Paid
------------------------ --------------- ---------- --------------- ----------- --------------- ----------
Demand deposits $149,382 - $114,844 - $106,741 -
Savings deposits:
Regular 218,144 1.72% 128,765 1.74% 129,208 2.18%
NOW 106,188 .53% 88,097 .62% 79,782 .73%
Money market 75,216 1.70% 72,498 3.22% 31,590 3.11%
------------------------ --------------- ---------- --------------- ----------- --------------- ----------
Total savings 399,548 1.40% 289,360 1.77% 240,580 1.82%
Time deposits 454,239 3.69% 360,167 5.24% 351,961 5.64%
------------------------ --------------- ---------- --------------- ----------- --------------- ----------
Total deposits $1,003,169 2.23% $764,371 3.14% $699,282 3.46%
------------------------ --------------- ---------- --------------- ----------- --------------- ----------
B. Not Applicable.
C. Not Applicable.
D. The maturity schedule of time deposits in amounts of $100 thousand or more
at December 31, 2002 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
-----------------------------------------------------------------------------------------------------------
$71,795 $25,040 $29,945 $51,882 $178,662
-----------------------------------------------------------------------------------------------------------
E. Not Applicable
VI. RETURN ON EQUITY AND ASSETS
2002 2001 2000
------------------------------------------------------------------------------------------------------------
Return on average assets 1.07% 1.01% 1.14%
Return on average assets - operating basis (1) 1.09% 1.20% 1.20%
Return on average shareholders' equity 14.25% 13.86% 16.14%
Return on average shareholders' equity - operating basis (1) 14.60% 16.54% 16.98%
Dividend payout ratio (2) 42.11% 40.63% 41.74%
Average equity to average total assets 7.50% 7.28% 7.05%
<FN>
(1) Performance ratios measured with operating basis net income. A
reconciliation of operating basis net income and financial results
presented in accordance with accounting principles generally accepted in
the United States of America is provided below.
(2) Represents the ratio of historical per share dividends declared by the
Bancorp to diluted earnings per share, on an operating basis, restated as a
result of the June 2000 acquisition Phoenix, which was accounted for under
the pooling of interests method.
</FN>
The following table presents a reconciliation of financial results
presented in accordance with accounting principles generally accepted in
the United States of America and operating basis results.
(Dollars in thousands)
2002 2001 2000
--------------------------------------------------------------------------------------------------------
Net income $16,757 $13,108 $13,209
Nonoperating items, net of tax
Acquisition costs 417 - 1,101
Litigation settlement, net of insurance recovery - 2,538 -
Pro-forma income taxes on pre-acquisition earnings
of acquired company - - (413)
--------------------------------------------------------------------------------------------------------
Total nonoperating items 417 2,538 688
--------------------------------------------------------------------------------------------------------
Net income - operating basis $17,174 $15,646 $13,897
--------------------------------------------------------------------------------------------------------
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
180 Washington Street, Providence RI Branch office Own
645 Reservoir Avenue, Cranston, RI Branch office Own & Lease (2)
McQuades Marketplace, Main Street, Westerly, RI Supermarket branch Lease / 2007 (1)
McQuades Marketplace, 10 Clara Drive, Mystic, CT Supermarket branch Lease / 2003 (1)
A & P Super Market, Route 1, Mystic, CT Supermarket branch Lease / 2005 (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 Crosswind Road, Westerly, RI Operations facility Own
<FN>
(1) Lease may be extended by the Corporation beyond the indicated expiration
date.
(2) Owned building on leased land. Lease expiration date is May 2009.
</FN>
In addition to the facilities listed above, the Bank has four owned offsite-ATMs
in leased spaces. The terms of these leases are negotiated annually.
ITEM 3. LEGAL PROCEEDINGS
Reed & Lundy Matter - In June 1999 a lawsuit was filed against First Bank and
Trust Company ("First Bank") in Providence County (Rhode Island) Superior Court
by Read & Lundy, Inc. and its principal, Cliff McFarland (collectively, the
Plaintiffs). The Bank was substituted as defendant in June 2002 following the
acquisition of First Financial Corp., the parent company of First Bank. The
original complaint alleged claims for breach of contract, tortious interference
with contractual relations, and civil conspiracy arising out of First Bank's
1996 loan to a third party company. The Plaintiffs allege that the loan to the
third party enabled that company to compete unlawfully with Read & Lundy and
thereby diminished Read & Lundy's profitability. The complaint was amended in
December 2001 to add a claim for violation of the Rhode Island Trade Secrets
Act.
In December 2002, a judgment in the favor of the Bank and a dismissal of this
lawsuit was rendered on all counts by way of summary judgment motion. In
December 2002, the Plaintiffs appealed the judgment.
The Plaintiffs had previously filed a suit in the same court in 1996 against the
third party company and its founder. The Bank is not a party to this suit. In
September 2001, judgment was entered against the third party company and its
founder in favor of the Plaintiffs for approximately $1.6 million in
compensatory and punitive damages, including pre-judgment interest.
The Plaintiffs contend that the Bank as an alleged co-conspirator of the third
party company is liable for this entire amount, none of which has been collected
from the third party company. The Plaintiffs are also seeking additional
compensatory damages and other costs allegedly arising after the third party
trial. Including interest, it is estimated that the amount of the claim against
the Bank is approximately $2.0 million.
Management believes, based on its review with counsel of the development of this
matter to date, that the Bank has asserted meritorious defenses in this
litigation. The discovery phase of the case has been completed and the Bank
filed a motion for summary judgment on all counts. As discussed above, in
December 2002, a judgment in favor of the Bank and a dismissal of the suit was
rendered on all counts by way of summary judgment motion. In December 2002, the
Plaintiffs appealed the judgment. Because of the uncertainties surrounding the
outcome of the litigation no assurance can be given that the litigation will be
resolved in favor of the Bank. Management and legal counsel are unable to
estimate the amount of loss, if any, that may be incurred with respect to this
litigation. Consequently, no loss provision has been recorded.
A second claim ancillary to this litigation was brought by the Plaintiffs in
March 2002. The Bank has also been substituted for First Bank in these
proceedings. In this matter, the Plaintiffs brought a motion seeking enforcement
of a prejudgment writ of attachment obtained in 1997 by the Plaintiffs against
funds held by First Bank as collateral for the loan to the third party company.
In 1999, First Bank had applied these funds as an offset to that loan. In August
2002, judgment against the Bank was rendered on this motion requiring the Bank
to make the funds available for attachment by the Plaintiffs. This judgment is
under appeal to the Rhode Island Supreme Court. As of September 30, 2002, the
Corporation has recorded a liability for the judgment award of $273 thousand in
connection with this matter. As a pre-acquisition contingency, the offset to the
liability has been recognized as a portion of the purchase price of First
Financial Corp.
Kiepler Matter - On February 20, 2001, a suit was filed against the Bank in its
capacity as trustee of the Walfred M. Nyman Trust (the "Nyman Trust") in the
United States District Court for the District of Rhode Island (the "District
Court") by Beverly Kiepler ("Kiepler"), as beneficiary of the Nyman Trust, for
damages which the Nyman Trust allegedly incurred as a result of the Bank's
failure to file suit against Robert C. Nyman, Kenneth J. Nyman and Keith Johnson
(the "Co-Defendants") for their wrongful dilution of the stock value of Nyman
Manufacturing Company ("Nyman Mfg."), an asset of the Nyman Trust. The amount of
damages to the Nyman Trust caused by the alleged dilution was approximately $1.3
million, based on the number of shares of Nyman Mfg. that were held by the Nyman
Trust. Kiepler has alleged that the Bank breached its fiduciary duty by failing
to join a suit brought by Kiepler in her individual capacity as a shareholder of
Nyman Mfg., against the Co-Defendants.
This case is being vigorously contested by management. Management believes that
the Bank did not breach its fiduciary duties and that the allegations by Kiepler
are without merit. Because of the numerous uncertainties that surround the
litigation, management and legal counsel are unable to estimate the amount of
loss, if any, that the Bank may incur with respect to this litigation.
Consequently, no loss provision for this lawsuit has been recorded.
Maxson Matter - On May 11, 2001, the Bank entered into an agreement with Maxson
Automatic Machinery Company ("Maxson"), a former corporate customer, and
Maxson's shareholders to settle a lawsuit for claims 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. 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 connection with this matter,
in August 2001, and in December 2001, the Bank received settlements from
insurance carriers in the amounts of $775 thousand ($553 thousand net of tax)
and $400 thousand ($252 thousand net of tax), respectively. 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, 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of all executive officers of the Bancorp 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 Bancorp and the Bank 57 7
John F. Treanor President and Chief Operating Officer of the Bancorp and the Bank 55 4
David V. Devault Executive Vice President, Treasurer and Chief Financial Officer
of the Bancorp and the Bank; Secretary of the Bank 48 16
Harvey C. Perry II Senior Vice President and Secretary of the Bancorp; 53 28
Senior Vice President - Director of Non-Profit Resources of the
Bank
Dennis L. Algiere Senior Vice President - Compliance and Community Affairs, of the 42 8
Bank
Stephen M. Bessette Senior Vice President - Retail Lending, of the Bank 55 6
Vernon F. Bliven Senior Vice President - Human Resources, of the Bank 53 30
Elizabeth B. Eckel Senior Vice President - Marketing, of the Bank 42 11
William D. Gibson Senior Vice President - Credit Administration, of the Bank 56 4
Barbara J. Perino, CPA Senior Vice President - Operations and Technology, of the Bank 41 14
B. Michael Rauh, Jr. Senior Vice President - Retail Banking, of the Bank 43 11
James M. Vesey Senior Vice President and Chief Credit Officer, of the Bank 55 4
John C. Warren joined the Bancorp and the Bank 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
Bancorp and the Bank.
John F. Treanor joined the Bancorp and 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 Bancorp and the Bank in 1987. He
was elected Senior Vice President and Chief Financial Officer of the Bancorp and
the Bank in 1990. In 1997, he was also elected Treasurer of the Bancorp and the
Bank. In 1998, he was elected Executive Vice President, Treasurer and Chief
Financial Officer of the Bancorp and the Bank. He was appointed to the position
of Secretary of the Bank in 2002.
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 Bancorp and the Bank in 1984,
and Senior Vice President and Secretary of the Bancorp and the Bank in 1990. In
2002, he was appointed Senior Vice President - Director of Non-Profit Resources
of the Bank.
Dennis L. Algiere joined the Bank in April 1995 as Compliance Officer. He was
named Vice President - Compliance in December 1996 and was promoted to Senior
Vice President - Compliance and Community Affairs in September 2001.
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.
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 Bancorp's common stock has traded on the Nasdaq National Market since May
1996. Previously, the Bancorp'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, 2002 and 2001 are presented in the following table. The
stock prices are based on the high and low sales prices during the respective
quarter.
2002 Quarters 1 2 3 4
----------------------------------------------------------------------------
Stock prices:
High $19.72 $24.11 $23.83 $21.20
Low 18.00 19.05 19.12 19.10
Cash dividend declared per share $.14 $.14 $.14 $.14
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
The Bancorp will continue to review future common stock dividends based on
profitability, financial resources and economic conditions. The Bancorp
(including the Bank prior to 1984) has recorded consecutive quarterly dividends
for over one hundred years.
The Bancorp'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 Bancorp is included in Note 17
to the Consolidated Financial Statements.
At February 24, 2003 there were 2,202 holders of record of the Bancorp's common
stock.
Equity Compensation Plan Information
The following table provides information as of December 31, 2002 regarding
shares of common stock of the Bancorp that may be issued under our existing
equity compensation plans, including the 1988 Amended and Restated Stock Option
Plan (the "1988 Plan"), the 1997 Equity Incentive Plan (the "1997 Plan") and the
Nonqualified Deferred Compensation Plan (the "Deferred Compensation Plan"). The
table does not include information about the proposed 2003 Plan which has been
submitted for shareholder approval at the annual meeting and no grants have been
made under the 2003 Plan.
Equity Compensation Plan Information
------------------------------------------------------------------------------------------------------------
Plan category Number of securities
remaining available for
Number of securities to Weighted Average future issuance under
be issued upon exercise exercise price of equity compensation plan
of outstanding options, outstanding options, (excluding securities
warrants and rights (1) warrants and rights referenced in column (a))
------------------------------ ------------------------- ----------------------- ---------------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders (2) 1,149,739 $15.61 186,438
Equity compensation plans
not approved by security
holders (3) 6,446 N/A (4) 18,554
------------------------------ ------------------------- ----------------------- ---------------------------
Total 1,156,185 $15.61 204,992
------------------------------ ------------------------- ----------------------- ---------------------------
<FN>
(1) Does not include any restricted stock as such shares are already
reflected in the Bancorp's outstanding shares.
(2) Consists of the 1988 Plan and the 1997 Plan.
(3) Consists of the Deferred Compensation Plan which is described below.
(4) Does not include information about the phantom stock units outstanding
under the Deferred Compensation Plan as such units do not have any
exercise price.
</FN>
The Deferred Compensation Plan
The Deferred Compensation Plan was established as of January 1, 1999. The
Deferred Compensation Plan has not been approved by our shareholders.
The Deferred Compensation Plan allows our directors and officers to defer a
portion of their compensation. The deferred compensation is contributed to a
rabbi trust. The trustee of the rabbi trust invests the assets of the trust in
shares of selected mutual funds as well as shares of the Bancorp's common stock
pursuant to the directions of the plan participants. All shares of the Bancorp's
common stock are purchased in the open market.
ITEM 6. SELECTED FINANCIAL DATA
The following tables represent selected consolidated financial data as of and
for the years ended December 31, 2002, 2001, 2000, 1999 and 1998. The selected
consolidated financial data is derived from the Corporation's Consolidated
Financial Statements that have been audited by KPMG LLP. The selected
consolidated financial data set forth below does not purport to be complete and
should be read in conjunction with, and are qualified in their entirety by, the
more detailed information including the Consolidated Financial Statements and
related Notes, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," appearing elsewhere herein.
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, 2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------------------------------
Financial Results:
Interest income $87,339 $87,527 $85,099 $73,002 $67,226
Interest expense 43,057 48,160 47,231 37,394 34,658
---------------------------------------------------------------------------------------------------------------
Net interest income 44,282 39,367 37,868 35,608 32,568
Provision for loan losses 400 550 1,150 1,840 1,879
---------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 43,882 38,817 36,718 33,768 30,689
Noninterest income 23,258 21,485 19,712 18,826 16,517
---------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 67,140 60,302 56,430 52,594 47,206
Noninterest expense 42,990 41,653 37,548 35,329 30,793
---------------------------------------------------------------------------------------------------------------
Income before income taxes 24,150 18,649 18,882 17,265 16,413
Income tax expense 7,393 5,541 5,673 4,754 4,235
---------------------------------------------------------------------------------------------------------------
Net income $16,757 $13,108 $13,209 $12,511 $12,178
---------------------------------------------------------------------------------------------------------------
Net income - operating basis (1) $17,174 $15,646 $13,897 $12,759 $11,510
---------------------------------------------------------------------------------------------------------------
Per share information ($):
Earnings per share:
Basic 1.32 1.09 1.10 1.05 1.04
Basic - operating basis (1) 1.35 1.30 1.16 1.07 .98
Diluted 1.30 1.07 1.09 1.03 1.01
Diluted - operating basis (1) 1.33 1.28 1.15 1.06 .95
Cash dividends declared (3) .56 .52 .48 .44 .40
Book value 9.87 8.15 7.43 6.55 6.66
Market value - closing stock price 19.53 19.00 14.00 17.75 21.50
Performance Ratios (%):
Return on average assets 1.07 1.01 1.14 1.19 1.31
Return on average assets - operating basis (2) 1.09 1.20 1.20 1.21 1.24
Return on average shareholders' equity 14.25 13.86 16.14 15.73 16.09
Return on average shareholders'
equity - operating basis (2) 14.60 16.54 16.98 16.04 15.21
Dividend payout ratio (4) 42.11 40.63 41.74 41.51 42.11
Asset Quality Ratios (%):
Nonperforming loans to total loans .53 .63 .58 .69 1.18
Nonperforming assets to total assets .24 .28 .28 .35 .61
Allowance for loan losses to nonaccrual loans 370.78 355.20 382.50 325.15 187.59
Allowance for loan losses to total loans 1.95 2.24 2.20 2.25 2.21
Net charge-offs to average total loans .05 .02 .06 .09 .05
Capital Ratios (%):
Total equity to total assets 7.37 7.19 7.32 7.07 7.87
Tier 1 leverage capital ratio 5.63 6.84 7.08 7.22 7.37
Total risk-based capital ratio 11.55 14.22 14.35 14.38 14.87
<FN>
(1) A reconciliation of operating basis net income and financial results
presented in accordance with accounting principles generally accepted in
the United States of America is provided on the following page.
(2) Ratios measured with operating basis net income.
(3) Represents historical per share dividends declared by the Bancorp.
(4) Represents the ratio of historical per share dividends declared by the
Bancorp to diluted earnings per share, on an operating basis, restated as a
result of the 1999 and 2000 acquisitions of Pier Bank Inc. and Phoenix,
respectively, which were accounted for under the pooling of interests
method.
</FN>
The following table presents a reconciliation of financial results presented in
accordance with accounting principles generally accepted in the United States of
America and operating basis results.
(Dollars in thousands)
For the years ended December 31, 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
Net income $16,757 $13,108 $13,209 $12,511 $12,178
Nonoperating items, net of tax
Acquisition costs 417 - 1,101 1,300 -
Litigation settlement, net of
insurance recovery - 2,538 - - -
Pro-forma income taxes on
pre-acquisition earnings of
acquired company - - (413) (767) (668)
Net gain on sale of credit card portfolio - - - (285) -
----------------------------------------------------------------------------------------------------------------
Total nonoperating items 417 2,538 688 248 668
----------------------------------------------------------------------------------------------------------------
Net income - operating basis $17,174 $15,646 $13,897 $12,759 $11,510
----------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA: (Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------------------------------
Financial Condition:
Cash and cash equivalents $51,048 $50,899 $43,860 $44,520 $34,654
Total securities 795,833 629,061 511,526 446,803 415,488
FHLB stock 24,582 23,491 19,558 17,627 16,583
Net loans 779,639 592,052 584,020 536,676 486,004
Goodwill and other intangibles 25,260 669 799 928 1,057
Other 69,299 66,057 58,304 59,051 41,364
---------------------------------------------------------------------------------------------------------------
Total assets $1,745,661 $1,362,229 $1,218,067 $1,105,605 $995,150
---------------------------------------------------------------------------------------------------------------
Deposits $1,110,493 $816,876 $735,684 $660,753 $627,763
FHLB advances 480,080 431,490 377,362 352,548 264,106
Other borrowings 9,183 2,087 3,227 4,209 15,033
Other liabilities 17,184 13,839 12,608 9,928 9,897
Shareholders' equity 128,721 97,937 89,186 78,167 78,351
---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $1,745,661 $1,362,229 $1,218,067 $1,105,605 $995,150
---------------------------------------------------------------------------------------------------------------
Asset Quality:
Nonaccrual loans $4,177 $3,827 $3,434 $3,798 $5,846
Other real estate owned, net 86 30 9 49 243
---------------------------------------------------------------------------------------------------------------
Total nonperforming assets $4,263 $3,857 $3,443 $3,847 $6,089
---------------------------------------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
2002 Q1 Q2 Q3 Q4 Year
- -----------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $10,981 $12,823 $12,958 $12,814 $49,576
Income from securities 8,188 9,307 9,342 8,734 35,571
Dividends on corporate stock and FHLB stock 483 497 500 493 1,973
Interest on federal funds sold and other
short-term investments 62 46 63 48 219
- -----------------------------------------------------------------------------------------------------------------
Total interest income 19,714 22,673 22,863 22,089 87,339
- -----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 971 1,182 1,773 1,672 5,598
Time deposits 4,123 4,340 4,161 4,152 16,776
FHLB advances 5,219 5,510 4,963 4,904 20,596
Other 17 20 28 22 87
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 10,330 11,052 10,925 10,750 43,057
- -----------------------------------------------------------------------------------------------------------------
Net interest income 9,384 11,621 11,938 11,339 44,282
Provision for loan losses 100 100 100 100 400
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 9,284 11,521 11,838 11,239 43,882
- -----------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,565 2,667 2,468 2,471 10,171
Service charges on deposit accounts 827 975 986 999 3,787
Merchant processing fees 446 776 1,221 559 3,002
Net gains on loan sales 516 398 608 1,362 2,884
Income from bank-owned life insurance 288 285 291 291 1,155
Net gains (losses) on sales of securities 291 381 (52) 58 678
Other income 295 303 507 476 1,581
- -----------------------------------------------------------------------------------------------------------------
Total noninterest income 5,228 5,785 6,029 6,216 23,258
- -----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,575 6,008 6,047 6,163 23,793
Net occupancy 625 670 675 724 2,694
Equipment 785 798 887 863 3,333
Merchant processing costs 357 614 965 455 2,391
Legal, audit and professional fees 173 221 815 684 1,893
Advertising and promotion 240 436 271 233 1,180
Outsourced services 261 266 245 305 1,077
Amortization of intangibles 32 189 220 210 651
Acquisition related expenses - 605 - - 605
Other 1,116 1,667 1,204 1,386 5,373
- -----------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,164 11,474 11,329 11,023 42,990
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 5,348 5,832 6,538 6,432 24,150
Income tax expense 1,604 1,808 2,027 1,954 7,393
- -----------------------------------------------------------------------------------------------------------------
Net income $3,744 $4,024 $4,511 $4,478 $16,757
- -----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 12,044.9 12,858.7 13,032.9 13,038.0 12,737.3
Weighted average shares outstanding - diluted 12,174.6 13,065.1 13,254.3 13,225.8 12,932.4
Per share information:
Basic earnings per share $.31 $.31 $.35 $.34 $1.32
Diluted earnings per share $.31 $.31 $.34 $.34 $1.30
Cash dividends declared per share $.14 $.14 $.14 $.14 $.56
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
Net gains on loan sales 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
Merchant processing costs 270 530 872 452 2,124
Legal, audit and professional fees 312 524 235 265 1,336
Advertising and promotion 204 275 311 447 1,237
Outsourced services 232 254 213 276 975
Amortization of intangibles 32 32 32 33 129
Litigation settlement cost, net of recovery 4,800 - (775) (400) 3,625
Other 1,159 1,153 1,378 1,285 5,375
- -----------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 12,012.2 12,031.3 12,056.9 12,055.7 12,039.2
Weighted average shares outstanding - diluted 12,123.2 12,237.8 12,270.1 12,215.7 12,202.5
Per share information:
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
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 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
Subject to the approval of state and federal regulators, the Corporation expects
to open a full service branch office in Warwick, Rhode Island in the second
quarter 2003, which will expand the Bank's market area into Kent County.
Critical Accounting Policies
Accounting policies involving significant judgments and assumptions by
management, which have, or could have, a material impact on the carrying value
of certain assets and impact income, are considered critical accounting
policies. The Corporation considers the following to be its critical accounting
policies: allowance for loan losses and review of goodwill and intangible assets
for impairment. There have been no significant changes in the methods or
assumptions used in the accounting policies that require material estimates and
assumptions.
Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses necessarily
involves a high degree of judgment. The Corporation uses a methodology to
systematically measure the amount of estimated loan loss exposure inherent in
the loan portfolio for purposes of establishing a sufficient allowance for loan
losses. 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 accounting principles generally
accepted in the United States of America (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 parameters
including the borrower's financial condition, the borrower's performance with
respect to loan terms and the adequacy of collateral. Portfolios of more
homogeneous 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, virtually our entire loan portfolio is
concentrated among borrowers in southern New England, primarily Rhode Island and
to a lesser extent in Connecticut and Massachusetts, 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 loans and commercial mortgage
loans are to borrowers in the hospitality and tourism industry. 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 Corporation's Audit Committee of the Board of Directors is responsible for
oversight of the loan review process. This process includes review of the Bank's
procedures for determining the adequacy of the allowance for loan losses,
administration of its internal credit rating systems and the reporting and
monitoring of credit granting standards.
Accounting for Acquisitions and Review of Goodwill for Impairment
In April 2002, the Corporation completed its acquisition of First Financial
Corp. which was accounted for under the purchase method of accounting. For
acquisitions accounted for under the purchase method, the Corporation is
required to record assets acquired and liabilities assumed at their fair value,
which in many instances involves estimates based on third party, internal or
other valuation techniques. In addition, purchase acquisitions typically result
in goodwill or other intangible assets, which are subject to ongoing periodic
impairment tests. Goodwill is evaluated for impairment using market value
comparisons for similar institutions. The valuation technique contains estimates
as to the comparability of the selected market information to the specifics of
the Corporation. Furthermore, the determination of which intangible assets have
finite lives is subjective, as is the determination of the amortization period
for such intangible assets. In connection with the acquisition of First
Financial Corp., the Corporation has recorded $22.6 million of goodwill and $2.7
million of intangible assets as of December 31, 2002.
Financial Overview
Net income for the year ended December 31, 2002 amounted to $16.8 million, or
$1.30 per diluted share, compared to $13.1 million, or $1.07 per diluted share,
for 2001. The Corporation's rates of return on average assets and average equity
for 2002 were 1.07% and 14.25%, respectively. Comparable amounts for the year
2001 were 1.01% and 13.86%, respectively.
In 2002, the Corporation completed the acquisition of First Financial Corp., and
recorded acquisition-related expenses of $417 thousand after tax ($.03 per
diluted share). The acquisition was accounted for as a purchase in accordance
with SFAS No. 141 "Business Combinations" and the provisions of SFAS No. 142
"Goodwill and Other Intangible Assets" were also applied. In 2001, the
Corporation recorded a litigation settlement expense, net of insurance recovery,
of $2.5 million after tax ($.21 per diluted share). Results excluding the
acquisition-related expenses and litigation settlement expense, net of taxes,
are referred to herein as "operating."
The following table presents a reconciliation of financial results presented in
accordance with accounting principles generally accepted in the United States of
America and operating basis results:
(Dollars in thousands)
December 31, 2002 2001
---------------------------------------------------------------------------
Net income $16,757 $13,108
Nonoperating items, net of tax
Acquisitions costs 417 -
Litigation settlement, net of insurance recovery - 2,538
---------------------------------------------------------------------------
Total nonoperating items 417 2,538
---------------------------------------------------------------------------
Net income - operating basis $17,174 $15,646
---------------------------------------------------------------------------
Operating net income for the year 2002 amounted to $17.2 million, or $1.33 per
diluted share, up 9.8% on a dollar basis and 3.9% on a diluted per share basis
from $15.6 million, or $1.28 per share, reported for 2001. The Corporation's
rates of return on average assets and average equity, on an operating basis, for
2002 were 1.09% and 14.60%, respectively. Comparable amounts for the year 2001
were 1.20% and 16.54%, respectively.
For the year ended December 31, 2002, net interest income (the difference
between interest earned on loans and securities and interest paid on deposits
and other borrowings) amounted to $44.3 million, up 12.5% from $39.4 million for
2001. Although net interest income has increased, the net interest margin in
2002 amounted to 3.10%, down from 3.30% in 2001, and has been affected by the
significant decline in market interest rates. The decrease in the net interest
margin reflects a decline in yields on loans and securities, which has been
offset somewhat by lower funding costs of interest-bearing deposits and FHLB
advances. The Corporation expects that these conditions affecting net interest
income will continue for the near term. (See additional discussion under the
caption "Net Interest Income.")
For the years ended December 31, 2002 and 2001, the Corporation's provision for
loan losses amounted to $400 thousand and $550 thousand, respectively. The
provision decreased due to management's belief that the allowance for loan
losses is at a reasonable level based on its current evaluation. The allowance
for loan losses is management's best estimate of the probable loan losses
incurred as of the balance sheet date. The allowance for loan losses increased
from $13.6 million at December 31, 2001 to $15.5 million at December 31, 2002
due to the $1.8 million allowance on acquired loans and the 2002 provision and
recoveries, net of charge-offs.
Other noninterest income (noninterest income excluding net realized gains on
securities) amounted to $22.6 million for the year 2002, up from the 2001 amount
of $21.1 million. The growth in noninterest income was primarily attributable to
increases in gains on loan sales and service fees, and was offset in part by
declines in trust and investment management income.
The Corporation recognized net realized gains on securities amounting to $678
thousand and $348 thousand in 2002 and 2001, respectively. Included in net
realized gains on securities in 2002 were $459 thousand in loss write-downs on
certain equity securities deemed to be other than temporarily impaired based on
an analysis of the financial condition and operating outlook of the issuers.
For the year 2002, total operating noninterest expense (total noninterest
expense excluding acquisition-related expenses and litigation settlement cost,
net of recovery) amounted to $42.4 million, up 11.5% over the comparable 2001
amount. The increase was primarily attributable to normal growth and higher
operating costs resulting from the April 2002 acquisition of First Financial
Corp. Included in other noninterest expense for the twelve months ended December
31, 2002 and 2001 were contributions of appreciated equity securities to the
Corporation's charitable foundation amounting to $403 thousand and $353
thousand, respectively. These transactions resulted in realized securities gains
of $381 thousand and $351 thousand, respectively, for the same periods.
Total consolidated assets amounted to $1.746 billion at December 31, 2002, up
28.1% from the December 31, 2001 balance of $1.362 billion. Average assets rose
20.7% during 2002 and amounted to $1.569 billion. The growth in assets was
mainly attributable to the April 2002 purchase of First Financial Corp. and
purchases of investment securities. During 2002, total loans increased $189.5
million, or 31.3%, including $115.5 million acquired from First Financial Corp.
Total securities increased $166.8 million, or 26.5%, in 2002. Purchases of
securities were funded primarily with deposit growth. Total deposits amounted to
$1.110 billion, up $293.6 million, or 35.9%, from the December 31, 2001 balance.
Included in the deposit balance increase were $137.7 million of deposits
acquired from First Financial Corp. FHLB advances totaled $480.1 million at
December 31, 2002, up $48.6 million, or 11.3%, from the prior year balance.
Nonaccrual loans as a percentage of total loans at December 31, 2002 amounted to
..53%, down from .63% at December 31, 2001. Nonperforming assets (nonaccrual
loans and property acquired through foreclosure) totaled $4.3 million or .24% of
total assets at December 31, 2002, compared to $3.9 million or .28% of total
assets at December 31, 2001.
Total shareholders' equity amounted to $128.7 million at December 31, 2002, up
$30.8 million, or 31.4%, from the prior year balance. This increase is
attributable to common stock issued in connection with the First Financial Corp.
acquisition. (See additional discussion under the caption "Acquisitions" below
and Note 2 to the Corporation's Consolidated Financial Statements for additional
information regarding the acquisition.) Included in shareholders' equity at
December 31, 2002 was accumulated other comprehensive income on securities
available for sale, net of tax, of $9.3 million compared to $6.4 million in
accumulated other comprehensive income associated with net unrealized gains on
securities available for sale and the interest rate floor contract at December
31, 2001. (See Note 17 to the Corporation's Consolidated Financial Statements
for additional discussion on shareholders' equity.)
Book value per share as of December 31, 2002 and 2001 amounted to $9.87 and
$8.15, 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 64.0% of total average assets in 2002. 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 2002. Net loans as a
percentage of total assets amounted to 44.7% at December 31, 2002, compared to
43.5% at December 31, 2001. Total securities as a percentage of total assets
amounted to 45.6% at December 31, 2002, down from 46.2% at December 31, 2001.
These changes resulted primarily from loans acquired, purchases of debt
securities and the 28.1% increase in total assets in 2002.
For the year ended December 31, 2002, net cash provided by financing activities
was $180.1 million. Proceeds from FHLB advances totaled $717.2 million, while
repayments of FHLB advances totaled $690.7 million in 2002. Additionally, $156.4
million was generated from overall growth in deposits, excluding amounts
acquired from First Financial Corp. Net cash used in investing activities was
$200.4 million in 2002, the majority of which was used to purchase securities.
In addition, as a result of the acquisition of First Financial Corp., the
Corporation acquired $34.5 million in cash, net of the payment made for the
acquisition. A substantial portion of the First Financial Corp. investment
portfolio was liquidated prior to the April 16, 2002 acquisition date. In 2002
and 2001, the Corporation expended $3.4 million in each year to upgrade and
expand equipment and premises in order to support its operations. Net cash
provided by operating activities amounted to $20.4 million in 2002, $16.8
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 April 16, 2002, the Corporation completed the acquisition of First Financial
Corp., the parent company of First Bank and Trust Company, a Rhode
Island-chartered community bank. The results of First Financial Corp.'s
operations have been included in the Corporation's Consolidated Statements of
Income since that date. First Financial Corp. was headquartered in Providence,
Rhode Island and its subsidiary, First Bank and Trust Company, operated banking
offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The
Corporation closed the Richmond and North Kingstown branches and consolidated
them into existing Bank branches in May 2002. Pursuant to the Agreement and Plan
of Merger dated November 12, 2001, the acquisition was effected by means of the
merger of First Financial Corp. with and into the Bancorp and the merger of
First Bank and Trust Company with and into the Bank. The acquisition was
accounted for as a purchase in accordance with SFAS No. 141 "Business
Combinations" and the provisions of SFAS No. 142 "Goodwill and Other Intangible
Assets" were also applied. The Corporation acquired assets totaling $204.8
million, including goodwill of $21.6 million, and liabilities amounting to
$166.7 million. In accordance with accounting principles generally accepted in
the United States of America, the Corporation also capitalized $968 thousand of
business combination costs (primarily legal, accounting and investment advisor
fees) to goodwill, which resulted in the recording of goodwill totaling $22.6
million. The Corporation expects that some adjustments of the fair values
assigned to the assets acquired and liabilities assumed at April 16, 2002 may be
subsequently recorded, although such adjustments are not expected to be
material.
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.
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. The acquisition of Phoenix was
a tax-free reorganization and was 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 $4.9 million, or 12.1%, from 2001 to 2002. The
increase was primarily due to growth in interest-earning assets and lower cost
of funds on interest-bearing liabilities.
The net interest margins (FTE net interest income as a percentage of average
interest-earning assets) for 2002 and 2001 were 3.10% and 3.30%, respectively.
The interest rate spread decreased slightly from 2.77% in 2001 to 2.71% in 2002.
Earning asset yields declined 118 basis points during 2002, while the cost of
interest-bearing liabilities decreased 112 basis points. The significant decline
in market interest rates has adversely affected the net interest margin. The
decrease in the net interest margin reflects a decline in yields on loans and
securities offset somewhat by lower funding costs of interest-bearing deposits
and FHLB advances. The Corporation expects that these conditions affecting net
interest income will continue for the near term.
The yield on interest-earning assets amounted to 6.05% in 2002, down from 7.23%
in 2001. Average interest-earning assets amounted to $1.461 billion or 19.2%
over the comparable 2001 amount of $1.225 billion. The growth in average
interest-earning assets was due to growth in securities and loans.
Total average securities rose $135.3 million, or 22.0%, in 2002, mainly due to
purchases of taxable debt securities. The FTE rate of return on securities was
5.14% in 2002, down from 6.13% in 2001. The decrease in yields on securities
reflects a combination of lower yields on variable rate securities tied to
short-term interest rates and lower marginal rates on investment purchases
during 2002 relative to the prior year.
Average loans amounted to $709.5 million in 2002, up $100.4 million, or 16.5%,
from 2001. The FTE rate of return on total loans was 7.01% in 2002, compared to
8.34% in 2001. This decline is primarily due to lower marginal yields on
floating and adjustable rate loans in 2002 as compared to the prior year and a
decline in yields on new loan originations. Average commercial loans rose 35.2%
to $341.4 million while the yield on commercial loans declined 174 basis points
to 7.51%. Included in interest income on commercial loans was $229 thousand of
depreciation in the value of the interest rate floor contract through the
termination of the contract in May 2002. Appreciation in the value of the
interest rate floor contract in 2001 amounted to $642 thousand. (See Note 9 to
the Consolidated Financial Statements for additional information regarding the
interest rate floor contract.) Average residential real estate loans amounted to
$246.9 million, down 2.0% from the prior year level. This decrease was primarily
a result of heavy residential mortgage refinancing activity, spurred by a low
interest rate environment, which increased the amount of loans sold into the
secondary market. The yield on residential real estate loans decreased 78 basis
points from the prior year, amounting to 6.88%. Average consumer loans rose
15.6% over the prior year and amounted to $121.1 million. The yield on consumer
loans declined 191 basis points from the prior year to 5.88%, primarily due to a
decline in the yield on home equity lines.
Average interest-bearing liabilities increased 19.2% to $1.288 billion at
December 31, 2002. Due to lower rates paid on both borrowed funds and deposits,
the Corporation's total cost of funds on interest-bearing liabilities amounted
to 3.34% in 2002, a decrease of 112 basis points from the prior year yield
level.
Average savings deposits increased 38.1% to $399.6 million in 2002. The rate
paid on savings deposits for 2002 was 1.40%, compared to 1.77% in 2001. Average
time deposits increased $94.1 million with a decrease of 155 basis points in the
rate paid. In addition, average demand deposits, an interest-free source of
funding, increased 30.1% from 2001 to $149.4 million in 2002.
Average FHLB advances increased by $2.5 million from 2001 and amounted to $431.0
million. The average rate paid on FHLB advances in 2002 was 4.78%, a decrease of
84 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, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------
Assets:
Residential real estate loans $246,915 16,989 6.88 $251,774 19,279 7.66 $240,410 18,777 7.81
Commercial and other loans 341,434 25,632 7.51 252,501 23,344 9.25 230,772 21,946 9.51
Consumer loans 121,110 7,122 5.88 104,767 8,164 7.79 98,479 8,826 8.96
- ---------------------------------------------------------------------------------------------------------------------
Total loans 709,459 49,743 7.01 609,042 50,787 8.34 569,661 49,549 8.70
Federal funds sold and other
short-term investments 14,477 219 1.52 15,088 594 3.94 13,247 837 6.32
Taxable debt securities 674,095 34,746 5.15 540,955 33,057 6.11 456,434 30,992 6.79
Nontaxable debt securities 19,544 1,267 6.48 21,765 1,430 6.57 25,050 1,652 6.60
Corporate stocks and FHLB stock 43,491 2,379 5.47 38,480 2,705 7.03 33,848 3,157 9.33
- ---------------------------------------------------------------------------------------------------------------------
Total securities 751,607 38,611 5.14 616,288 37,786 6.13 528,579 36,638 6.93
- ---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,461,066 88,354 6.05 1,225,330 88,573 7.23 1,098,240 86,187 7.85
- ---------------------------------------------------------------------------------------------------------------------
Cash and due from banks 29,069 19,759 18,362
Allowance for loan losses (15,016) (13,556) (12,881)
Premises and equipment, net 23,741 22,869 22,774
Other 69,803 44,924 34,715
- ---------------------------------------------------------------------------------------------------------------------
Total assets $1,568,663 $1,299,326 $1,161,210
- ---------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders'
Equity:
Savings deposits $399,548 5,598 1.40 $289,360 5,127 1.77 $240,580 4,383 1.82
Time deposits 454,239 16,776 3.69 360,167 18,866 5.24 351,961 19,841 5.64
FHLB advances 431,000 20,596 4.78 428,519 24,068 5.62 370,642 22,886 6.17
Other 3,539 87 2.46 2,570 99 3.86 2,003 121 6.03
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,288,326 43,057 3.34 1,080,616 48,160 4.46 965,186 47,231 4.89
- ---------------------------------------------------------------------------------------------------------------------
Demand deposits 149,382 114,844 106,741
Other liabilities 13,364 9,294 7,445
Shareholders' equity 117,591 94,572 81,838
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,568,663 $1,299,326 $1,161,210
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $45,297 $40,413 $38,956
- ---------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.71 2.77 2.96
Net interest margin 3.10 3.30 3.55
- ---------------------------------------------------------------------------------------------------------------------
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, 2002 2001 2000
- --------------------------------------------------------------------------------
Commercial and other loans $167 $169 $126
Nontaxable debt securities 442 499 576
Corporate stocks and FHLB stock 406 378 386
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)
2002/2001 2001/2000 2000/1999
- ----------------------------------------------------------------------------------------------------------------------
Net Net Net
(Dollars in thousands) Volume Rate Change Volume Rate Change Volume Rate Change
- ----------------------------------------------------------------------------------------------------------------------
Interest on:
Interest-earning assets:
Residential real estate loans ($498) (1,840) (2,338) $875 (373) 502 $2,053 37 2,090
Commercial and other loans 8,197 (4,374) 3,823 1,785 (618) 1,167 1,079 302 1,381
Consumer loans 1,244 (3,773) (2,529) 750 (1,181) (431) 815 305 1,120
Federal funds sold and
other short-term investments (24) (351) (375) 105 (348) (243) 145 174 319
Taxable debt securities 8,136 (6,445) 1,691 5,366 (3,301) 2,065 3,730 2,830 6,560
Nontaxable debt securities (146) (19) (165) (216) (6) (222) (125) (9) (134)
Corporate stocks and FHLB stock 352 (678) (326) 394 (846) (452) 325 438 763
- ----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 17,261 (17,480) (219) 9,059 (6,673) 2,386 8,022 4,077 12,099
- ----------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 1,952 (1,481) 471 867 (123) 744 210 130 340
Time deposits 4,928 (7,018) (2,090) 454 (1,429) (975) 1,778 2,192 3,970
FHLB advances 139 (3,611) (3,472) 3,369 (2,187) 1,182 3,589 2,442 6,031
Other 38 (50) (12) 30 (52) (22) (608) 104 (504)
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 7,057 (12,160) (5,103) 4,720 (3,791) 929 4,969 4,868 9,837
- ----------------------------------------------------------------------------------------------------------------------
Net interest income $10,204 (5,320) 4,884 $4,339 (2,882) 1,457 $3,053 (791) 2,262
- ----------------------------------------------------------------------------------------------------------------------
Noninterest Income
Noninterest income is an important source of revenue for Washington Trust. For
the year ended December 31, 2002, recurring noninterest income, which excludes
net realized gains on securities, accounted for 33.8% 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 net gains on loan sales. 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 43.7% of noninterest income. For the year ended December 31, 2002,
trust and investment management revenues totaled $10.2 million, down slightly
from the $10.4 million reported for 2001, reflecting the financial market
declines. The market value of trust and investment management assets under
administration amounted to $1.524 billion and $1.578 billion at December 31,
2002 and 2001, respectively.
Service charges on deposit accounts rose 7.8% to $3.8 million in 2002. Growth in
the Corporation's total deposit base, as well as changes in the fee structures
of various deposit products during the year, were contributing factors in this
increase.
Net gains on loan sales totaled $2.9 million in 2002, up $826 thousand, or
40.1%, from 2001. Included in net gains on loan sales are net gains on sales of
fixed rate residential mortgages, changes in the fair value of commitments to
originate and commitments to sell fixed rate residential mortgages, net gains on
sales of the guaranteed portion of SBA loan originations in 2002 and
capitalization of loan servicing rights. As a result of the decline in interest
rates, the Corporation experienced heavy residential mortgage activity,
predominantly refinancing, which increased the amount of residential mortgage
loans sold into the secondary market. The Corporation expects this activity to
continue through the first quarter of 2003, however this level of activity may
not be sustainable in future periods. The capitalization of loan servicing
rights amounted to of $152 thousand and $35 thousand in 2002 and 2001,
respectively. Changes in the fair value of commitments totaled $(154) thousand
and $86 thousand in 2002 and 2001, respectively.
The Corporation sells residential mortgage loans with servicing released and
retained. In addition, the Corporation began selling the guaranteed portion of
SBA loan originations with servicing retained in 2002. Loan servicing fee income
amounted to $135 thousand for the year ended December 31, 2002, compared to the
prior year amount of $400 thousand. Due to accelerated prepayments, the
Corporation recorded $177 thousand of valuation adjustments on loan servicing
rights in 2002. The decline in loan servicing rights was primarily attributable
to these valuation adjustments recorded as reductions in servicing fees.
Servicing income, excluding valuation adjustments and amortization, as a
percentage of average loans serviced amounted to 34 basis points in 2002,
compared to 30 basis points in 2001. The balance of serviced loans at December
31, 2002 amounted to $121.3 million, compared to $146.7 million at December 31,
2001.
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.
Noninterest income included $1.2 million and $1.1 million of earnings on BOLI
for the years ended December 31, 2002 and 2001, respectively. (See additional
discussion on BOLI under the caption "Financial Condition".)
Noninterest Expense
Noninterest expenses, excluding acquisition related expenses and net litigation
settlement costs, totaled $42.4 million in 2002, up $4.4 million from the prior
year. This increase was primarily attributable to normal growth and higher
operating costs resulting from the April 2002 acquisition of First Financial
Corp.
Salaries and benefit expense, the largest component of total noninterest
expense, amounted to $23.8 million for 2002, up 14.1% from the $20.8 million
reported for 2001.
Legal, audit and professional fees totaled $1.9 million compared to $1.3 million
in 2001. Included in legal, audit and professional fees in 2002 are
approximately $831 thousand in costs associated with a special consulting
project in connection with trust and investment management services. The
Corporation does not consider the amounts incurred in connection with this
project to be recurring costs.
Amortization of intangibles totaled $651 thousand in 2002 compared to $129
thousand in 2002. (See Note 8 to the Consolidated Financial Statements for
additional information regarding intangible assets.)
Total equipment costs for 2002 amounted to $3.3 million, down $42 thousand from
the corresponding 2001 amount. In 2001, the Corporation recorded impairment
adjustments of $107 thousand, respectively, resulting from remeasurements of the
useful lives of technology equipment.
Income Taxes
Income tax expense amounted to $7.4 million and $5.5 million in 2002 and 2001,
respectively. The Corporation's effective tax rate was 30.6% in 2002, compared
to a rate of 29.7% in 2001. The increase in the effective tax rate was primarily
due to the effect of the 2001 litigation settlement, net of insurance recovery,
on the 2001 tax rate. These rates differed from the federal rate of 35.0% due to
the benefits of tax-exempt income, the dividends received deduction and income
from BOLI.
The Corporation's net deferred tax asset amounted to $1.2 million and $1.4
million at December 31, 2002 and 2001, respectively. Primary sources of recovery
of deferred tax assets are future taxable income and the reversal of deferred
tax liabilities. (See Note 14 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, 2002
amounted to $539.1 million, an increase of $95.3 million over the 2001 amount.
This increase was due primarily to purchases of mortgage-backed securities.
At December 31, 2002, the net unrealized gains on securities available for sale
amounted to $14.4 million, an increase of $4.3 million from the comparable 2001
amount. This increase was attributable to the effects of decreases in medium and
long-term rates that occurred during 2002. (See Note 4 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 $67.2 million, to
$242.3 million at December 31, 2002. This increase is primarily attributable to
purchases of mortgage-backed securities. The net unrealized gains on securities
held to maturity amounted to $8.2 million at December 31, 2002 compared to $2.5
million in net unrealized gains at December 31, 2001.
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, 2002
and 2001, the Corporation's investment in FHLB stock totaled $24.6 million and
$23.5 million, respectively. The Gramm-Leach-Bliley Act required the FHLB to
issue new capitalization requirements. The requirements were approved for
issuance in May 2002.
Loans
During 2002, total loans increased 31.3% to $795.1 million, including $115.5
million in loans acquired from First Financial Corp. in April 2002.
Residential real estate loans were impacted by the refinancing of fixed rate
residential loans being sold into the secondary market. In 2002, average
residential real estate loans decreased $4.9 million. The Bank purchased a total
of $52.6 million of residential mortgages from other financial institutions in
2002, more than half of which were purchased in the fourth quarter of 2002. As
of December 31, 2002, total residential real estate loans amounted to $280.9
million, up $45.5 million, or 19.3%, from the 2001 balance of $235.4 million.
Total commercial loans increased $121.5 million to $382.2 million at December
31, 2002. Consumer loans were up $22.4 million, or 20.4%, in 2002. The increase
in consumer loans was mainly due to growth in home equity lines.
Goodwill and Other Intangibles
The second quarter 2002 acquisition of First Financial Corp. resulted in the
recording of goodwill of $22.6 million. Included in this amount were $968
thousand of business combination costs (primarily legal, accounting and
investment advisor fees) capitalized in accordance with accounting principles
generally accepted in the United States of America. In accordance with the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
acquired in business combinations after June 30, 2001 will not be amortized.
At December 31, 2002 and December 31, 2001, the Corporation had other intangible
assets with carrying values of $2.7 million and $669 thousand, respectively. In
conjunction with the 2002 First Financial Corp. acquisition, the Corporation
recorded core deposit intangibles of $1.8 million with an average useful life of
ten years. Amortization expense associated with these other intangible assets,
amounted to $650 thousand and $129 thousand for 2002 and 2001, respectively.
Other Assets
Other assets totaled $32.5 million at December 31, 2002, compared to $29.1
million at December 31, 2001. Included in other assets is BOLI, which amounted
to $22.0 million and $20.9 million at December 31, 2002 and 2001, 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, 2002 amounted to $1.110 billion, up 35.9% from
the prior year balance of $816.9 million. Included in this amount are $137.7
million of deposits acquired from First Financial Corp. Demand deposits rose
16.9% to $157.5 million. Savings deposits rose 48.7% to $471.4 million. Time
deposits totaled $481.6 million at December 31, 2002, compared to $365.1 million
at December 31, 2001.
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 FHLB advances amounted to
$480.1 million at December 31, 2002, up from $431.5 million one year earlier.
(See Note 12 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 .24% of total assets at December 31, 2002, down from
..28% at December 31, 2001. Nonaccrual loans as a percentage of total loans
declined from .63% at the end of 2001 to .53% at December 31, 2002.
Approximately $2.0 million, or 47.4% of total nonaccrual loans, were less than
90 days past due at December 31, 2002.
The following table presents nonperforming assets and related ratios:
(Dollars in thousands)
December 31, 2002 2001
---------------------------------------------------------------------------
Nonaccrual loans:
Residential real estate $1,202 $1,161
Commercial and other:
Mortgages 1,356 1,472
Construction and development - -
Other 1,354 509
Consumer 265 685
---------------------------------------------------------------------------
Total nonaccrual loans 4,177 3,827
Other real estate owned, net 86 30
---------------------------------------------------------------------------
Total nonperforming assets $4,263 $3,857
---------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .53% .63%
Nonperforming assets as a percentage of total assets .24% .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 were no accruing loans 90 days or more past due at December 31, 2002 and
2001.
(Dollars in thousands)
December 31, 2002 2001
---------------------------------------------------------------------------
Nonaccrual loans 90 days or more past due $2,198 $2,195
Nonaccrual loans less than 90 days past due 1,979 1,632
---------------------------------------------------------------------------
Total nonaccrual loans $4,177 $3,827
---------------------------------------------------------------------------
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, 2002 and 2001, are loans whose terms have been restructured amounting to $51
thousand and $85 thousand, respectively. There were no significant 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 $86 thousand at December 31, 2002, up from the
prior year amount of $30 thousand. Increases in OREO resulted from foreclosures
and repossessions that exceeded the level of sales of foreclosed properties and
repossessed assets. During 2002, proceeds from sales of foreclosed properties
and repossessed assets amounted to $61 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 loan portfolio for purposes of
establishing a sufficient allowance for loan losses. See additional discussion
regarding allowance for loan losses under the caption "Critical Accounting
Policies".
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 $15.5 million, or 1.95% of total
loans, at December 31, 2002, compared to $13.6 million, or 2.24%, at December
31, 2001.
The following table reflects the activity in the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2002 2001
-------------------------------------------------------------------------
Beginning balance $13,593 $13,135
Charge-offs, net of recoveries:
Residential:
Real estate (29) 15
Construction - -
Commercial:
Mortgages 46 (122)
Construction and development - -
Other (285) 152
Consumer (67) (137)
-------------------------------------------------------------------------
Net charge-offs (335) (92)
Allowance on acquired loans 1,829 -
Provision for loan losses 400 550
-------------------------------------------------------------------------
Ending balance $15,487 $13,593
-------------------------------------------------------------------------
Allowance for loan losses to nonaccrual loans 370.78% 355.20%
Allowance for loan losses to total loans 1.95% 2.24%
-------------------------------------------------------------------------
Capital Resources
Total shareholders' equity increased $30.8 million, or 31.4%, during 2002 and
amounted to $128.7 million at December 31, 2002. This increase was principally
attributable to common stock issued in connection with the acquisition of First
Financial Corp. (See Note 2 to the Consolidated Financial Statements for
additional discussion of the acquisition.) Capital growth also resulted from
earnings retention of $9.6 million and a $2.9 million increase in accumulated
other comprehensive income due to an increase in unrealized gains on securities.
Stock option exercises increased shareholders' equity by $519 thousand in 2002.
Cash dividends declared per share amounted to $.56 and $.52 in 2002 and 2001,
respectively. Common stock shares repurchased amounted to $853 thousand at
December 31, 2002, compared to $1.0 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 17 to the Consolidated Financial Statements
for additional discussion of the stock repurchase plan.)
The ratio of total equity to total assets amounted to 7.37% at December 31,
2002, compared to 7.19% at December 31, 2001. Book value per share at December
31, 2002 amounted to $9.87, a 21.1% increase from the year-earlier amount of
$8.15 per share.
The Corporation is subject to various regulatory capital requirements. The
Corporation is categorized as well-capitalized under the regulatory framework
for prompt corrective action. (See Note 17 to the Consolidated Financial
Statements for additional discussion of capital requirements.)
Litigation
Reed & Lundy Matter - In June 1999 a lawsuit was filed against First Bank and
Trust Company ("First Bank") in Providence County (Rhode Island) Superior Court
by Read & Lundy, Inc. and its principal, Cliff McFarland (collectively, the
Plaintiffs). The Bank was substituted as defendant in June 2002 following the
acquisition of First Financial Corp., the parent company of First Bank. The
original complaint alleged claims for breach of contract, tortious interference
with contractual relations, and civil conspiracy arising out of First Bank's
1996 loan to a third party company. The Plaintiffs allege that the loan to the
third party enabled that company to compete unlawfully with Read & Lundy and
thereby diminished Read & Lundy's profitability. The complaint was amended in
December 2001 to add a claim for violation of the Rhode Island Trade Secrets
Act.
In December 2002, a judgment in the favor of the Bank and a dismissal of this
lawsuit was rendered on all counts by way of summary judgment motion. In
December 2002, the Plaintiffs appealed the judgment.
The Plaintiffs had previously filed a suit in the same court in 1996 against the
third party company and its founder. The Bank is not a party to this suit. In
September 2001, judgment was entered against the third party company and its
founder in favor of the Plaintiffs for approximately $1.6 million in
compensatory and punitive damages, including pre-judgment interest.
The Plaintiffs contend that the Bank as an alleged co-conspirator of the third
party company is liable for this entire amount, none of which has been collected
from the third party company. The Plaintiffs are also seeking additional
compensatory damages and other costs allegedly arising after the third party
trial. Including interest, it is estimated that the amount of the claim against
the Bank is approximately $2.0 million.
Management believes, based on its review with counsel of the development of this
matter to date, that the Bank has asserted meritorious defenses in this
litigation. The discovery phase of the case has been completed and the Bank
filed a motion for summary judgment on all counts. As discussed above, in
December 2002, a judgment in favor of the Bank and a dismissal of the suit was
rendered on all counts by way of summary judgment motion. In December 2002, the
Plaintiffs appealed the judgment. Because of the uncertainties surrounding the
outcome of the litigation no assurance can be given that the litigation will be
resolved in favor of the Bank. Management and legal counsel are unable to
estimate the amount of loss, if any, that may be incurred with respect to this
litigation. Consequently, no loss provision has been recorded.
A second claim ancillary to this litigation was brought by the Plaintiffs in
March 2002. The Bank has also been substituted for First Bank in these
proceedings. In this matter, the Plaintiffs brought a motion seeking enforcement
of a prejudgment writ of attachment obtained in 1997 by the Plaintiffs against
funds held by First Bank as collateral for the loan to the third party company.
In 1999, First Bank had applied these funds as an offset to that loan. In August
2002, judgment against the Bank was rendered on this motion requiring the Bank
to make the funds available for attachment by the Plaintiffs. This judgment is
under appeal to the Rhode Island Supreme Court. As of September 30, 2002, the
Corporation has recorded a liability for the judgment award of $273 thousand in
connection with this matter. As a pre-acquisition contingency, the offset to the
liability has been recognized as a portion of the purchase price of First
Financial Corp.
Kiepler Matter - On February 20, 2001, a suit was filed against the Bank in its
capacity as trustee of the Walfred M. Nyman Trust (the "Nyman Trust") in the
United States District Court for the District of Rhode Island (the "District
Court") by Beverly Kiepler ("Kiepler"), as beneficiary of the Nyman Trust, for
damages which the Nyman Trust allegedly incurred as a result of the Bank's
failure to file suit against Robert C. Nyman, Kenneth J. Nyman and Keith Johnson
(the "Co-Defendants") for their wrongful dilution of the stock value of Nyman
Manufacturing Company ("Nyman Mfg."), an asset of the Nyman Trust. The amount of
damages to the Nyman Trust caused by the alleged dilution was approximately $1.3
million, based on the number of shares of Nyman Mfg. that were held by the Nyman
Trust. Kiepler has alleged that the Bank breached its fiduciary duty by failing
to join a suit brought by Kiepler in her individual capacity as a shareholder of
Nyman Mfg., against the Co-Defendants.
This case is being vigorously contested by management. Management believes that
the Bank did not breach its fiduciary duties and that the allegations by Kiepler
are without merit. Because of the numerous uncertainties that surround the
litigation, management and legal counsel are unable to estimate the amount of
loss, if any, that the Bank may incur with respect to this litigation.
Consequently, no loss provision for this lawsuit has been recorded.
Maxson Matter - On May 11, 2001, the Bank entered into an agreement with Maxson
Automatic Machinery Company ("Maxson"), a former corporate customer, and
Maxson's shareholders to settle a lawsuit for claims 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. 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 connection with this matter,
in August 2001, and in December 2001, the Bank received settlements from
insurance carriers in the amounts of $775 thousand ($553 thousand net of tax)
and $400 thousand ($252 thousand net of tax), respectively. 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 FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 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 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
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, for
the disposal of a segment of a business." The changes in this Statement improve
financial reporting by requiring that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and by broadening the presentation of discontinued operations to
include more disposal transactions. The provisions of SFAS No. 144 were
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The adoption
of this pronouncement did not have a material impact on the Corporation's
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements, and SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers." In addition, this Statement amends SFAS No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The adoption of this
pronouncement did not have a material impact on the Corporation's financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issues No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of this pronouncement is not
expected to have a material impact on the Corporation's financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." This Statement amended SFAS No. 72 to exclude from its
scope most acquisitions of financial institutions and to require that such
transactions be accounted for in accordance with SFAS No. 141 and, under certain
circumstances, previously recognized SFAS No. 72 intangible assets be
reclassified to goodwill. In addition, this Statement amends SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," to include in
its scope long-term customer-relationship intangible assets of financial
institutions. The Corporation adopted SFAS No. 147 effective October 1, 2002. No
material reclassifications or adjustments to goodwill and other intangible
assets were necessary.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." This Statement amends SFAS No. 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Additionally, this Statement amends APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure about those
effects in interim financial information. The amendments to SFAS No. 123 are
effective for financial statements for fiscal years ending after December 15,
2002. The amendment to Opinion No. 28 shall be effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002.
Comparison of 2001 with 2000
Washington Trust recorded net income of $13.1 million, or $1.07 per diluted
share, for 2001. Net income for 2000 amounted to $13.2 million, or $1.09 per
diluted share. 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 the second quarter
of 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, and
accordingly, financial data for all prior periods were restated to reflect the
acquisition at the beginning of each period presented. 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 the pre-acquisition earnings of
Phoenix, which operated as a sub-S corporation prior to the acquisition.
The following table presents a reconciliation of financial results presented in
accordance with accounting principles generally accepted in the United States of
America and operating basis results:
(Dollars in thousands)
December 31, 2001 2000
------------------------------------------------------------------------------------------------------------
Net income $13,108 $13,209
Nonoperating items, net of tax
Acquisitions costs - 1,101
Litigation settlement, net of insurance recovery 2,538 -
Pro-forma income taxes on pre-acquisition earnings of acquired company - (413)
------------------------------------------------------------------------------------------------------------
Total nonoperating items 2,538 688
------------------------------------------------------------------------------------------------------------
Net income - operating basis $15,646 $13,897
------------------------------------------------------------------------------------------------------------
Operating net income for 2001 amounted to $15.6 million, an increase of 12.6%
from the $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 2000 were 1.20% and 16.98%.
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% from $37.9 million in
2000. Fully taxable equivalent net interest income increased $1.5 million, or
3.7%, from 2000 to 2001, primarily due to the growth in interest-earning assets.
The net interest margins for 2001 and 2000 were 3.30% and 3.55%, respectively.
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 realized gains on
securities) totaled $21.1 million for 2001, an increase of 11.5% from the $19.0
million reported for 2000. The increase was primarily due to growth in net gains
on loan sales. Trust and investment management income, the largest component of
noninterest income, totaled $10.4 million for 2001, down slightly from the $10.5
million reported in 2000. The decrease in Trust and investment management income
is mainly attributable to financial market declines. Net gains on loan sales
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.
Operating noninterest expenses (excluding litigation settlement costs, net of
insurance recovery and acquisition-related expenses) amounted to $38.0 million
for 2001, up $4.1% from 2000. This increase was primarily attributable to higher
salaries and benefit expense. Legal, audit and professional fees totaled $1.3
million in 2001, down $547 thousand from the corresponding 2000 amount. The
decrease was mainly 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.
Total consolidated assets amounted to $1.362 billion at December 31, 2002, up
11.8% from the December 31, 2000 balance of $1.218 billion. Average assets rose
11.9% in 2001 and amounted to $1.299 billion. Asset growth 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 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. Net loan charge-offs amounted to $92
thousand in 2001, down from $364 thousand in 2000. The allowance for loan losses
represented 2.24% of total loans at December 31, 2001 compared to 2.20% in 2000.
Total shareholders' equity amounted to $97.9 million at December 31, 2001,
compared to $89.2 million at December 31, 2000. Capital growth resulted
primarily from $6.8 million of earnings retention and a $2.4 million increase in
accumulated other comprehensive income due to an increase in unrealized gains on
securities. Book value per share as of December 31, 2001 amounted to $8.15, up
9.7% from the $7.43 per share amount in 2000. The ratio of capital to assets was
7.2% and 7.3% at December 31, 2001 and 2000, respectively. Dividends declared
per share amounted to $.52 in 2001, up 8.3% 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 that 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,
2002 and December 31, 2001, 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, 2002. Interest rates
are assumed to shift by a parallel 200 basis points upward, 100 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, 2002, 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. 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 following table presents
these 24-month net interest income simulation results:
(Dollars in thousands) Rate Scenarios
-----------------------------------------------------------
Flat Down 100 Up 100 Up 200
Rates Basis Points Basis Points Basis Points
- ------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Fixed rate mortgage-backed securities $47,596 $43,814 $49,609 $51,758
Adjustable rate mortgage-backed securities 10,736 8,761 12,833 14,789
Callable securities 5,138 4,725 5,472 6,089
Other securities 11,347 10,795 12,926 14,516
Fixed rate mortgages 19,345 18,715 19,866 20,340
Adjustable rate mortgages 13,357 12,664 13,932 14,615
Other fixed rate loans 46,005 45,311 46,778 46,668
Other adjustable rate loans 21,677 19,456 24,027 26,369
- ------------------------------------------------------------------------------------------------------------------
Total interest income 175,200 164,241 185,443 195,144
- ------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Core savings deposits 9,150 7,747 11,137 12,706
Time deposits 27,568 25,355 31,441 34,192
FHLB advances 36,150 33,628 38,569 41,751
Other borrowings 347 171 395 537
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 73,215 66,901 81,542 89,185
- ------------------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 2002 $101,986 $97,340 $103,901 $105,958
- ------------------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 2001 $82,986 $79,903 $87,126 $86,329
- ------------------------------------------------------------------------------------------------------------------
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 significantly below current levels. If rates were to fall and remain
low for a sustained period, core savings deposit rates would likely not fall as
fast as other market rates, while asset yields would decline as current asset
holdings mature or reprice. The pace of asset cash flows would also be likely to
increase in a falling rate environment due to more rapid mortgage-related
prepayments and redemption of callable securities. 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 may change to a different degree than estimated. Specifically,
mortgage-backed securities and mortgage loans involve a level of risk that
unforeseen changes in prepayment speeds may cause related cash flows to vary
significantly in differing rate environments. Such changes could increase or
decrease the amortization of premium or accretion of discounts related to such
instruments, thereby affecting interest income. Changes in prepayment speeds can
also affect the level of reinvestment risk associated with cash flow from these
instruments, as well as their market value. The sensitivity of core savings
deposits to fluctuations in interest rates could also differ from the ALCO's
simulation assumptions, and could result in changes in both liability mix and
interest expense that differ from those used to estimate interest rate risk
exposure.
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, 2002 and 2001 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) $776 $(721)
U.S. government-sponsored agency securities (callable) 906 (962)
Corporate securities 635 (463)
Mortgage-backed securities 9,734 (2,408)
--------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 2002 $12,049 $(4,554)
--------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 2001 $4,434 $(16,803)
--------------------------------------------------------------------------------------------------------
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, 2002, including both debt and equity
securities, was 4.4%, assuming a one-year time horizon and a 5% probability of
occurrence for "value at risk" analysis.
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.
On May 7, 2002, the Corporation terminated a five-year interest rate floor
contract with a notional amount of $20.0 million that was to mature in February
2003. The floor contract was intended to function as a hedge against reductions
in interest income realized from prime-based loans and entitled the Corporation
to receive payment from a counterparty if the three-month LIBOR rate fell below
5.50%. In connection with the early termination, the Corporation agreed to a
final payment from the counterparty of $606 thousand. The Corporation recognized
the fair value of this derivative as an asset on the balance sheet and changes
in fair value were recorded in current earnings. (See Note 9 to the Consolidated
Financial Statements for additional information regarding the interest rate
floor contract.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are contained herein.
Description
Independent Auditors' Report
Management's Responsibility for Financial Statements
Consolidated Balance Sheets
December 31, 2002 and 2001
Consolidated Statements of Income
For the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Independent Auditors' Report
[GRAPHIC OF AUDITORS' LOGO OMITTED]
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, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ending December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Providence, Rhode Island
January 14, 2003
Management's Responsibility for Financial Statements
Scope of Responsibility - Management prepares the accompanying financial
statements and related information and is responsible for their integrity and
objectivity. The statements were prepared in conformity with United States
accounting principles generally accepted in the United States of America. These
financial statements include amounts that are based on management's estimates
and judgments. We believe that these statements present fairly the corporation's
financial position and results of operations and that the other information
contained in the annual report is consistent with the financial statements.
Internal Controls - We maintain and rely on systems of internal accounting
controls designed to provide reasonable assurance that assets are safeguarded
and transactions are properly authorized and recorded. We continually monitor
these internal accounting controls, modifying and improving them as business
conditions and operations change. Our internal audit department also
independently reviews and evaluates these controls. We recognize the inherent
limitations in all internal control systems and believe that our systems provide
an appropriate balance between the costs and benefits desired. We believe our
systems of internal accounting controls provide reasonable assurance that errors
or irregularities that would be material to the financial statements are
prevented or detected in the normal course of business.
Independent Auditors - Our independent auditors, KPMG LLP, have audited the
consolidated financial statements. Their audit was conducted in accordance with
auditing standards generally accepted in the United States of America, which
includes the consideration of our internal controls to the extent necessary to
form an independent opinion on the consolidated financial statements prepared by
management.
Audit Committee - The audit committee of the board of directors, composed solely
of outside directors, assists the board of directors in overseeing management's
discharge of its financial reporting responsibilities. The committee meets with
management, our director of internal audit and representatives of KPMG LLP to
discuss significant changes to financial reporting principles and policies and
internal controls and procedures proposed or contemplated by management, our
internal auditors or KPMG LLP. Additionally, the committee assists the board of
directors in the selection, evaluation and, if applicable, replacement of our
independent auditors; and in the evaluation of the independence of the
independent auditors. Both internal audit and KPMG LLP have access to the audit
committee without management's presence.
Code of Ethics - We recognize our responsibility for maintaining a strong
ethical climate. This responsibility is addressed in the company's written code
of ethics.
John C. Warren David V. Devault
----------------------- -------------------------------------
John C. Warren David V. Devault
Chairman and Executive Vice President,
Chief Executive Officer Treasurer and Chief Financial Officer
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $39,298 $30,399
Federal funds sold and other short-term investments 11,750 20,500
Mortgage loans held for sale 4,566 7,710
Securities:
Available for sale, at fair value 553,556 453,956
Held to maturity, at cost; fair value $250,446 in 2002 and $177,595 in 2001 242,277 175,105
- -------------------------------------------------------------------------------------------------------------------
Total securities 795,833 629,061
Federal Home Loan Bank stock, at cost 24,582 23,491
Loans 795,126 605,645
Less allowance for loan losses 15,487 13,593
- -------------------------------------------------------------------------------------------------------------------
Net loans 779,639 592,052
Premises and equipment, net 24,415 22,102
Accrued interest receivable 7,773 7,124
Goodwill and other intangibles 25,260 669
Other assets 32,545 29,121
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,745,661 $1,362,229
- -------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $157,539 $134,783
Savings 471,354 316,953
Time 481,600 365,140
- -------------------------------------------------------------------------------------------------------------------
Total deposits 1,110,493 816,876
Dividends payable 1,825 1,569
Federal Home Loan Bank advances 480,080 431,490
Other borrowings 9,183 2,087
Accrued expenses and other liabilities 15,359 12,270
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,616,940 1,264,292
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity:
Common stock of $.0625 par value; authorized 30 million
shares in 2002 and 2001; issued 13,086,795 shares
in 2002 and 12,065,283 shares in 2001 818 754
Paid-in capital 28,767 10,696
Retained earnings 90,717 81,114
Unamortized employee restricted stock (24) -
Accumulated other comprehensive income 9,294 6,416
Treasury stock, at cost; 44,361 shares in 2002 and 54,102 shares in 2001 (851) (1,043)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 128,721 97,937
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,745,661 $1,362,229
- -------------------------------------------------------------------------------------------------------------------
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, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $49,576 $50,618 $49,423
Interest on securities 35,571 33,988 32,068
Dividends on corporate stock and Federal Home Loan Bank stock 1,973 2,327 2,771
Interest on federal funds sold and other short-term investments 219 594 837
- -------------------------------------------------------------------------------------------------------------------
Total interest income 87,339 87,527 85,099
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 5,598 5,127 4,383
Time deposits 16,776 18,866 19,841
Federal Home Loan Bank advances 20,596 24,068 22,886
Other 87 99 121
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 43,057 48,160 47,231
- -------------------------------------------------------------------------------------------------------------------
Net interest income 44,282 39,367 37,868
Provision for loan losses 400 550 1,150
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 43,882 38,817 36,718
- -------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 10,171 10,408 10,544
Service charges on deposit accounts 3,787 3,514 3,297
Merchant processing fees 3,002 2,642 2,144
Net gains on loan sales 2,884 2,058 585
Income from bank-owned life insurance 1,155 1,134 1,047
Net realized gains on securities 678 348 760
Other income 1,581 1,381 1,335
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 23,258 21,485 19,712
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 23,793 20,845 19,750
Net occupancy 2,694 2,632 2,601
Equipment 3,333 3,375 3,592
Merchant processing costs 2,391 2,124 1,707
Legal, audit and professional fees 1,893 1,336 1,883
Advertising and promotion 1,180 1,237 1,196
Outsourced services 1,077 975 776
Amortization of intangibles 651 129 129
Acquisition related expenses 605 - 1,035
Litigation settlement cost, net of insurance recovery - 3,625 -
Other 5,373 5,375 4,879
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 42,990 41,653 37,548
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 24,150 18,649 18,882
Income tax expense 7,393 5,541 5,673
- -------------------------------------------------------------------------------------------------------------------
Net income $16,757 $13,108 $13,209
- -------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 12,737.3 12,039.2 11,976.9
Weighted average shares outstanding - diluted 12,932.4 12,202.5 12,102.6
Per share information:
Basic earnings per share $1.32 $1.09 $1.10
Diluted earnings per share $1.30 $1.07 $1.09
Cash dividends declared per share $.56 $.52 $.48
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
Unamortized Accumulated
Employee Other
Common Paid-in Retained Restricted Comprehensive Treasury
Stock Capital Earnings Stock Income (Loss) Stock Total
- -------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $745 $9,927 $67,686 $ - $(191) $ - $78,167
Net income 13,209 13,209
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of $1,919 income tax expense 4,712 4,712
Reclassification adjustments (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
- -------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------
Net income 16,757 16,757
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of $1,629 income tax expense 3,310 3,310
Reclassification adjustments (432) (432)
-------------
Comprehensive income 19,635
Cash dividends declared (7,154) (7,154)
Issuance of employee restricted stock 1 (25) 24 -
Amortization of employee restricted stock 1 1
Shares issued (185) 704 519
Shares issued for acquisition 64 18,255 18,319
Shares repurchased (536) (536)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $818 $28,767 $90,717 $(24) $9,294 $(851) $128,721
- -------------------------------------------------------------------------------------------------------------------------
Disclosure of Reclassification Amount:
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for net gains included in net income $(678) $(348) $(760)
Income tax effect on net gains 237 122 266
Reclassification adjustment for amortization of unrealized loss
on interest rate floor contract included in net income 13 10 -
Income tax effect on interest rate floor contract amortization (4) (4) -
- -------------------------------------------------------------------------------------------------------------------------
Net reclassification adjustments $(432) $(220) $(494)
- -------------------------------------------------------------------------------------------------------------------------
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, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $16,757 $13,108 $13,209
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 400 550 1,150
Depreciation of premises and equipment 2,988 3,036 3,323
Amortization of premium in excess of (less than)
accretion of discount on debt securities 1,983 489 (149)
Deferred income tax benefit (1,262) (644) (681)
Increase in bank-owned life insurance cash surrender value (1,155) (1,134) (1,047)
Depreciation (appreciation) of derivative instruments 384 (712) -
Net amortization of intangibles 510 129 129
Net realized gains on securities (678) (348) (760)
Net gains on loan sales (2,647) (1,686) (322)
Proceeds from sales of loans 126,382 98,198 23,769
Loans originated for sale (120,587) (102,583) (23,437)
(Increase) decrease in accrued interest receivable (175) 676 (1,790)
(Increase) decrease in other assets (1,981) (930) 186
(Decrease) Increase in accrued expenses and other liabilities (733) 807 2,857
Other, net 248 517 1,075
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,434 9,473 17,512
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (307,083) (160,774) (128,227)
Proceeds from sales 29,964 238 40,288
Maturities and principal repayments 187,549 140,145 38,507
Securities held to maturity:
Purchases (152,157) (131,570) (22,745)
Maturities and principal repayments 84,447 37,841 14,235
Purchases of Federal Home Loan Bank stock - (3,933) (1,931)
Principal collected on loans (under) over loan originations (12,507) 6,394 (48,756)
Purchases of loans (62,433) (15,151) -
Proceeds from sales of other real estate owned 61 151 95
Purchases of premises and equipment (3,400) (3,416) (1,813)
Proceeds from sale of premises and equipment 638 - -
Cash acquired, net of payment made for acquisition 34,506 - -
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (200,415) (130,075) (110,347)
- ----------------------------------------------------------------------- -------------- ---------------- -------------
Cash flows from financing activities:
Net increase in deposits 156,420 81,192 74,931
Net increase (decrease) in other borrowings 4,242 (1,140) (982)
Proceeds from Federal Home Loan Bank advances 717,200 1,217,000 404,500
Repayment of Federal Home Loan Bank advances (690,695) (1,162,872) (379,686)
Purchase of treasury stock (536) (670) -
Net effect of common stock transactions 397 266 (201)
Cash dividends paid (6,898) (6,135) (6,387)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 180,130 127,641 92,175
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 149 7,039 (660)
Cash and cash equivalents at beginning of year 50,899 43,860 44,520
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $51,048 $50,899 $43,860
- ---------------------------------------------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate owned $84 $187 $109
Loans charged off 497 433 683
Loans made to facilitate the sale of other real estate owned - - 60
Increase in unrealized gain on securities available for sale,
net of tax 2,878 2,389 4,218
Increase in paid-in capital resulting from tax benefits on
stock option exercises 123 307 423
In conjunction with the April 16, 2002 acquisition of First Financial Corp.,
assets were acquired and liabilities were assumed as follows:
Fair value of assets acquired $204,762 - -
Less liabilities assumed 166,708 - -
Supplemental Disclosures:
Interest payments $42,955 $48,859 $45,970
Income tax payments 8,607 5,632 5,838
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, 2002 and 2001
General
The Bancorp is a publicly owned, registered bank holding company, organized
under the laws of the State of Rhode Island. The Bancorp provides a complete
product line of financial services through the 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
FDIC, subject to regulatory limits.
The activities of the Bancorp and the Bank are subject to the regulatory
supervision of the Federal Reserve Board and the FDIC, respectively. Both
companies are also subject to various Rhode Island business and banking
regulations. The Bank is subject to various Connecticut business and banking
regulations.
(1) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Bancorp 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 accounting
principles generally accepted in the United States of America 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. Material estimates
that are particularly susceptible to change are the determination of the
allowance for loan losses and the review of goodwill for impairment.
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 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.
Loan Servicing Rights - Rights to service loans for others are recognized as an
asset, including rights acquired through both purchases and originations. The
total cost of originated loans that are sold with servicing rights retained is
allocated between the loan servicing rights and the loans without the servicing
rights based on their relative fair values. Capitalized loan 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 loan portfolio for purposes of
establishing a sufficient allowance for loan losses. 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 accounting principles generally accepted in the United States of America
(SFAS 114). Other individual commercial and commercial mortgage loans are
evaluated using an internal rating system and the application of loss allocation
factors. The loan rating system and the related loss allocation factors take
into consideration parameters including the borrower's financial condition, the
borrower's performance with respect to loan terms and the adequacy of
collateral. Portfolios of more homogeneous 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.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired for transactions accounted for using purchase accounting.
Goodwill and intangible assets that are not amortized are tested for impairment,
based on their fair values, at least annually. An intangible asset that is
subject to amortization is also reviewed for impairment based on its fair value.
Any impairment is recognized as a charge to earnings and the adjusted carrying
amount of the intangible asset becomes its new accounting basis. The remaining
useful life of an intangible asset that is being amortized is also evaluated
each reporting period to determine whether events and circumstances warrant a
revision to the remaining period of amortization.
Effective January 1, 2002, the Corporation adopted the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets." As of the date of adoption, the
Corporation had unamortized identifiable intangible assets totaling $669
thousand. No material reclassifications or adjustments to the useful lives of
finite-lived intangible assets were made as a result of adopting the new
standards.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." This Statement amended SFAS No. 72 to exclude from its
scope most acquisitions of financial institutions and to require that such
transactions be accounted for in accordance with SFAS No. 141 and, under certain
circumstances, previously recognized SFAS No. 72 intangible assets be
reclassified to goodwill. In addition, this Statement amends SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," to include in
its scope long-term customer-relationship intangible assets of financial
institutions. The Corporation adopted SFAS No. 147 effective October 1, 2002. No
material reclassifications or adjustments to goodwill and other intangible
assets were necessary.
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 and SFAS No. 148.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." This Statement amends SFAS No. 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Additionally, this Statement amends APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure about those
effects in interim financial information. The amendments to SFAS No. 123 are
effective for financial statements for fiscal years ending after December 15,
2002. The amendment to Opinion No. 28 shall be effective for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002.
In determining the pro forma disclosures required by SFAS No. 123 and SFAS No.
148, 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 and SFAS No. 148, the
weighted average assumptions used and the grant date fair value of options
granted in 2002, 2001 and 2000:
(Dollars in thousands, except per share amounts)
Years ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------
Net income As reported $16,757 $13,108 $13,209
Less:
Total stock-based compensation
determined under fair value
method for all awards, net of tax (1,143) (923) (808)
------------------------------------------------------------------------------------------------------------
Pro forma $15,614 $12,185 $12,401
Basic earnings per share As reported $1.32 $1.09 $1.10
Pro forma $1.23 $1.01 $1.04
Diluted earnings per share As reported $1.30 $1.07 $1.09
Pro forma $1.21 $1.00 $1.02
Weighted average fair value $6.92 $5.27 $5.01
Expected life 6.4 years 9.0 years 9.3 years
Risk-free interest rate 4.98% 5.32% 6.39%
Expected volatility 36.2% 33.0% 32.6%
Expected dividend yield 2.7% 3.8% 3.9%
The pro forma effect on net income and earnings per share for 2002, 2001 and
2000 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.
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.
Guarantees
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
considers standby letters of credit a guarantee of the Corporation. 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. Under the standby letters of credit, the Corporation is
required to make payments to the beneficiary of the letters of credit upon
request by the beneficiary contingent upon the customer's failure to perform
under the terms of the underlying contract with the beneficiary.
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. Premiums paid for interest rate floor agreements were
amortized as an adjustment to interest income over the term of the agreements.
(2) Acquisitions and Mergers
On April 16, 2002, the Corporation completed the acquisition of First Financial
Corp., the parent company of First Bank and Trust Company, a Rhode
Island-chartered community bank. The results of First Financial Corp.'s
operations have been included in the Corporation's Consolidated Statements of
Income since that date. First Financial Corp. was headquartered in Providence,
Rhode Island and its subsidiary, First Bank and Trust Company, operated banking
offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The
Corporation closed the Richmond and North Kingstown branches and consolidated
them into existing Bank branches in May 2002. Pursuant to the Agreement and Plan
of Merger dated November 12, 2001, the acquisition was effected by means of the
merger of First Financial Corp. with and into the Bancorp and the merger of
First Bank and Trust Company with and into the Bank. The acquisition was
accounted for as a purchase in accordance with SFAS No. 141 "Business
Combinations" and the provisions of SFAS No. 142 "Goodwill and Other Intangible
Assets" were also applied.
The Bancorp issued 1,021,512 common shares and paid $19.4 million in cash to the
First Financial Corp. shareholders in connection with the acquisition. The total
purchase price of First Financial Corp. was $38.1 million. Shareholders of First
Financial common stock received 0.842 of a Bancorp share plus $16.00 in cash for
each share of First Financial common stock, with cash paid in lieu of fractional
shares.
The following table summarizes the fair values of the assets acquired and
liabilities assumed for First Financial Corp. at the date of acquisition. The
Corporation expects that some adjustments of the fair values assigned to the
assets acquired and liabilities assumed at April 16, 2002 may be subsequently
recorded, although such adjustments are not expected to be material. A
substantial portion of the First Financial Corp. investment portfolio was
liquidated prior to April 16, 2002.
(Dollars in thousands) April 16,
2002
-------------------------------------------------------------------------
Assets:
Cash and due from banks $43,034
Short-term investments 11,208
Investments 6,521
Federal Home Loan Bank stock 1,091
Net loans 113,703
Premises and equipment, net 2,539
Accrued interest receivable 474
Goodwill 21,620
Other assets 4,572
-------------------------------------------------------------------------
Total assets acquired $204,762
-------------------------------------------------------------------------
Liabilities:
Deposits $137,729
Federal Home Loan Bank advances 22,303
Other borrowings 2,854
Accrued expenses and other liabilities 3,822
-------------------------------------------------------------------------
Total liabilities acquired $166,708
-------------------------------------------------------------------------
Net assets acquired $38,054
-------------------------------------------------------------------------
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 Bancorp 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. The expenses were charged to earnings at the date of combination. The
acquisition was 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 acquisition at the beginning of
the earliest period presented.
(3) 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 $12.2 million and $8.4
million at December 31, 2002 and 2001, respectively.
(4) Securities
Securities are summarized as follows:
(Dollars in thousands)
Amortized Unrealized Unrealized Fair
December 31, 2002 Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $74,852 $3,121 $- $77,973
Mortgage-backed securities 378,162 8,830 (245) 386,747
Corporate bonds 67,018 1,386 (1,969) 66,435
Corporate stocks 19,077 4,459 (1,135) 22,401
----------------------------------------------------------------------------------------------------------
Total securities available for sale 539,109 17,796 (3,349) 553,556
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 3,000 13 - 3,013
Mortgage-backed securities 220,711 7,199 - 227,910
States and political subdivisions 18,566 957 - 19,523
----------------------------------------------------------------------------------------------------------
Total securities held to maturity 242,277 8,169 - 250,446
----------------------------------------------------------------------------------------------------------
Total securities $781,386 $25,965 $(3,349) $804,002
----------------------------------------------------------------------------------------------------------
(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
----------------------------------------------------------------------------------------------------------
Included in corporate stocks at December 31, 2002 are preferred stocks, which
are callable at the discretion of the issuer, with an amortized cost of $11.5
million and a fair value of $11.3 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, 2002 Cost Value Yield
---------------------------------------------------------------------------------------------------------
Securities Available for Sale:
Due in 1 year or less $140,482 $144,816 4.83%
After 1 but within 5 years 235,953 242,215 4.69%
After 5 but within 10 years 61,432 62,215 3.42%
After 10 years 82,165 81,909 2.72%
---------------------------------------------------------------------------------------------------------
Total debt securities available for sale 520,032 531,155 4.27%
---------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
Due in 1 year or less 83,803 86,708 5.73%
After 1 but within 5 years 131,166 135,649 5.50%
After 5 but within 10 years 22,722 23,391 5.25%
After 10 years 4,586 4,698 4.77%
---------------------------------------------------------------------------------------------------------
Total debt securities held to maturity 242,277 250,446 5.54%
---------------------------------------------------------------------------------------------------------
Total debt securities $762,309 $781,601 4.67%
---------------------------------------------------------------------------------------------------------
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, 2002, the Corporation owned debt securities with an aggregate
carrying value of $89.6 million that are callable at the discretion of the
issuers. The majority of these securities are U.S. Treasury and
government-sponsored agency obligations, included in both the available for sale
and held to maturity categories. Final maturities of these securities range from
twenty-five months to twenty-nine 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, 2002 2001 2000
---------------------------------------------------------------------------------------------------------
Proceeds from sales $29,964 $238 $40,288
---------------------------------------------------------------------------------------------------------
Realized gains $1,137 $522 $1,358
Realized losses - (174) (598)
Other than temporary write-downs (459) - -
---------------------------------------------------------------------------------------------------------
Net realized gains $678 $348 $760
---------------------------------------------------------------------------------------------------------
Included in net realized gains on securities in 2002 were $459 thousand in loss
write-downs on certain equity securities deemed to be other than temporarily
impaired based on an analysis of the financial condition and operating outlook
of the issuers.
Included in other noninterest expense for the twelve months ended December 31,
2002, 2001 and 2000 were contributions of appreciated equity securities to the
Corporation's charitable foundation amounting to $403 thousand, $353 thousand
and $424 thousand, respectively. These transactions resulted in realized
securities gains of $381 thousand, $351 thousand and $310 thousand,
respectively, for the same periods.
Securities available for sale and held to maturity with a fair value of $559.7
million and $394.4 million were pledged to secure borrowings, Treasury Tax and
Loan deposits and public deposits at December 31, 2002 and 2001, respectively.
(See Note 12 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 $27.6 million and $28.4 million were
collateralized for the discount window at the Federal Reserve Bank at December
31, 2002 and 2001, respectively. There were no borrowings with the Federal
Reserve Bank at either date.
(5) Loans
The following is a summary of loans:
(Dollars in thousands)
December 31, 2002 2001
-------------------------------------------------------------------------
Commercial and other:
Mortgages (1) $197,814 $118,999
Construction and development (2) 10,337 1,930
Other (3) 174,018 139,704
-------------------------------------------------------------------------
Total commercial and other 382,169 260,633
Residential real estate:
Mortgages (4) 269,548 223,681
Homeowner construction 11,338 11,678
-------------------------------------------------------------------------
Total residential real estate 280,886 235,359
Consumer 132,071 109,653
-------------------------------------------------------------------------
Total loans (5) $795,126 $605,645
-------------------------------------------------------------------------
(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 12 to the Consolidated Financial
Statements for additional discussion of FHLB borrowings).
(5) Net of $478 thousand and $788 thousand of unearned income and
unamortized loan origination and other fees net of costs at December
31, 2002 and 2001, respectively. Includes $1.1 million and $132
thousand of net purchased premium at December 31, 2002 and 2001,
respectively
Concentrations of Credit Risk
The Corporation's loan portfolio is concentrated among borrowers in southern New
England, primarily Rhode Island, and to a lesser extent in Connecticut and
Massachusetts. 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, 2002 and 2001 was
$4.2 million and $3.8 million, respectively. Interest income that would have
been recognized had these loans been current in accordance with their original
terms was approximately $312 thousand in 2002 and $435 thousand in 2001.
Interest income attributable to these loans included in the Consolidated
Statements of Income amounted to approximately $182 thousand in 2002 and $209
thousand in 2001. Included in nonaccrual loans at December 31, 2002 and 2001 are
loans amounting to $51 thousand and $85 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, 2002 2001
---------------------------------------------------------------
Impaired loans requiring an allowance $716 $786
Impaired loans not requiring an allowance 1,994 1,222
---------------------------------------------------------------
Total recorded investment in impaired loans $2,710 $2,008
---------------------------------------------------------------
(Dollars in thousands)
Years ended December 31, 2002 2001 2000
-------------------------------------------------------------------------
Average recorded investment in impaired loans $2,219 $2,188 $2,056
-------------------------------------------------------------------------
Interest income recognized on impaired loans $100 $122 $191
-------------------------------------------------------------------------
Loan Servicing Activities
At December 31, 2002 and 2001, mortgage loans and other loans sold to others and
serviced by the Corporation on a fee basis under various agreements amounted to
$121.3 million and $146.7 million, respectively. Loans serviced for others are
not included in the Consolidated Balance Sheets.
The following is a summary of capitalized loan servicing rights:
(Dollars in thousands)
December 31, 2002 2001 2000
-------------------------------------------------------------------------
Balance at beginning of year $830 $90 $996
Additions 152 35 27
Acquired loan servicing rights (1) 453 - -
Amortization (176) (110) (118)
-------------------------------------------------------------------------
Balance at end of year $1,259 $830 $905
-------------------------------------------------------------------------
(1) The acquired loan servicing rights have a weighted average
amortization period of 15 years.
Capitalized loan servicing rights are periodically evaluated for impairment.
Both amortization and impairment of loan servicing rights are recorded as
reductions in loan servicing fees.
The following is an analysis of activity relating to the loan servicing rights
valuation allowance:
(Dollars in thousands)
December 31, 2002 2001 2000
-------------------------------------------------------------------------
Balance at beginning of year $320 $320 $320
Provision charged to earnings 177 - -
-------------------------------------------------------------------------
Balance at end of year $497 $320 $320
-------------------------------------------------------------------------
Estimated aggregate amortization expense related to loan servicing assets is as
follows:
(Dollars in thousands)
-------------------------------------------------------------------------
Years ending December 31: 2003 $267
2004 200
2005 159
2006 133
2007 111
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 2002 and 2001 was as
follows:
(Dollars in thousands)
December 31, 2002
-------------------------------------------------------------------------
Balance at beginning of year $3,274
Additions 12,488
Reductions (5,708)
-------------------------------------------------------------------------
Balance at end of year $10,054
-------------------------------------------------------------------------
(6) Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2002 2001 2000
-------------------------------------------------------------------------
Balance at beginning of year $13,593 $13,135 $12,349
Allowance on acquired loans 1,829 - -
Provision charged to expense 400 550 1,150
Recoveries of loans previously charged off 162 341 319
Loans charged off (497) (433) (683)
-------------------------------------------------------------------------
Balance at end of year $15,487 $13,593 $13,135
-------------------------------------------------------------------------
Included in the allowance for loan losses at December 31, 2002, 2001 and 2000
was an allowance for impaired loans amounting to $29 thousand, $163 thousand and
$209 thousand, respectively.
(7) Premises and Equipment
The following is a summary of premises and equipment:
(Dollars in thousands)
December 31, 2002 2001
-------------------------------------------------------------------------
Land and improvements $3,880 $2,105
Premises and improvements 27,242 25,358
Furniture, fixtures and equipment 21,657 20,027
-------------------------------------------------------------------------
52,779 47,490
Less accumulated depreciation 28,364 25,388
-------------------------------------------------------------------------
Total premises and equipment, net $24,415 $22,102
-------------------------------------------------------------------------
(8) Goodwill and other intangibles
The second quarter 2002 acquisition of First Financial Corp. resulted in the
recording of goodwill of $22.6 million. Included in this amount were $968
thousand of business combination costs (primarily legal, accounting and
investment advisor fees) capitalized in accordance with accounting principles
generally accepted in the United States of America. In accordance with the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
acquired in business combinations after June 30, 2001 will not be amortized.
At December 31, 2002 and December 31, 2001, the Corporation had other intangible
assets with carrying values of $2.7 million and $669 thousand, respectively. In
conjunction with the 2002 First Financial Corp. acquisition, the Corporation
recorded core deposit intangibles of $1.8 million with an average useful life of
ten years. Amortization expense associated with these other intangible assets,
amounted to $650 thousand and $129 thousand for 2002 and 2001, respectively.
The changes in the carrying value of goodwill and other intangible assets for
the year ended December 31, 2002 are as follows:
(Dollars in thousands) Core Deposit Other Total
Goodwill Intangibles Intangibles Intangibles
----------------------------------------------------------------------------------------------------------
Balance at beginning of year $ - $669 $ - $669
Recorded during the period 22,588 1,801 852 25,241
Amortization expense - (461) (189) (650)
Impairment recognized - - - -
----------------------------------------------------------------------------------------------------------
Balance at end of year $22,588 $2,009 $663 $25,260
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Core Deposit Other Total
Estimated amortization expense Intangibles Intangibles Intangibles
----------------------------------------------------------------------------------------------------------
2003 $435 $284 $719
2004 359 284 643
2005 303 95 398
2006 261 - 261
2007 140 - 140
The components of intangible assets are as follows:
(Dollars in thousands)
Gross Carrying Accumulated
Intangible assets Amount Amortization Amount
----------------------------------------------------------------------------------------------------------
Core deposit intangibles $3,096 $1,087 $2,009
Other intangibles 852 189 663
----------------------------------------------------------------------------------------------------------
Total $3,948 $1,276 $2,672
----------------------------------------------------------------------------------------------------------
(9) 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, 2002 2001
----------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans $51,434 $41,891
Home equity lines 71,692 52,583
Other loans 12,729 12,065
Standby letters of credit 2,440 2,303
Financial instruments whose notional amounts exceed the amount of credit risk:
Interest rate floor contracts - 20,000
Forward loan commitments:
Commitments to originate fixed rate mortgage loans to be sold 23,942 5,329
Commitments to sell fixed rate mortgage loans 28,536 13,093
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. Under the standby letters of credit, the Corporation is
required to make payments to the beneficiary of the letters of credit upon
request by the beneficiary contingent upon the customer's failure to perform
under the terms of the underlying contract with the beneficiary. Standby letters
of credit extend up to three years. At December 31, 2002 and 2001, the maximum
potential amount of undiscounted future payments, not reduced by amounts that
may be recovered totaled $2.4 million and $2.3 million, respectively. At
December 31, 2002 and 2001, there was no liability to beneficiaries resulting
from standby letters of credit.
At December 31, 2002, a substantial portion of the standby letters of credit
were supported by pledged collateral. The collateral obtained is determined
based on management's credit evaluation of the customer. Should the Corporation
be required to make payments to the beneficiary, repayment from the customer to
the Corporation is required.
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.
The Corporation was party to a five-year interest rate floor contract with a
notional amount of $20.0 million that was to mature in February 2003. The floor
contract entitled the Corporation to receive payment from a counterparty if the
three-month LIBOR rate fell below 5.50%. The Corporation and the counterparty
agreed to an early termination date of May 7, 2002 and the Corporation received
a final payment from the counterparty of $606 thousand.
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
and changes in fair value were recorded in current earnings. The carrying value
of the interest rate floor contract amounted to $739 thousand at December 31,
2001 and was reported in other assets. Included in interest income for the year
ended December 31, 2002, was $229 thousand of depreciation in value through the
termination date. Included in interest income for the year ended December 31,
2001 was $642 thousand of appreciation in value of the interest rate floor
contract, respectively.
The Corporation has not terminated any interest rate swap agreements or floor
contracts, other than disclosed above.
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, 2002 and 2001, the carrying value of these commitments amounted
to $(45) thousand and $86 thousand, respectively, and is reported in other
assets. Changes in the fair value are recorded in current earnings and amounted
to $154 thousand for the year ended December 31, 2002 compared to $86 thousand
for the year ended December 31, 2001.
(10) 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, 2002 2001
------------------------------------------------------------------------
Residential real estate $84 $ -
Commercial real estate - -
Repossessed assets 11 29
Land - 37
------------------------------------------------------------------------
95 66
Valuation allowance (9) (36)
------------------------------------------------------------------------
Other real estate owned, net $86 $30
------------------------------------------------------------------------
An analysis of the activity relating to OREO follows:
(Dollars in thousands)
Years ended December 31, 2002 2001
------------------------------------------------------------------------
Balance at beginning of year $66 $48
Net transfers from loans 84 187
Sales (55) (169)
Other - -
------------------------------------------------------------------------
95 66
Valuation allowance (9) (36)
------------------------------------------------------------------------
Other real estate owned, net $86 $30
------------------------------------------------------------------------
The following is an analysis of activity relating to the OREO valuation
allowance:
(Dollars in thousands)
Years ended December 31, 2002 2001 2000
------------------------------------------------------------------------
Balance at beginning of year $36 $39 $94
Provision charged to expense 4 9 3
Sales (31) (12) (8)
Selling expenses incurred - - -
Other - - (50)
------------------------------------------------------------------------
Balance at end of year $9 $36 $39
------------------------------------------------------------------------
Net realized gains on dispositions of properties amounted to $76 thousand, $320
dollars, and $44 thousand in 2002, 2001 and 2000, respectively. These amounts
are included in other noninterest expense in the Consolidated Statements of
Income.
(11) Time Certificates of Deposit
Scheduled maturities of time certificates of deposit at December 31, 2002 were
as follows:
(Dollars in thousands)
Years ending December 31: 2003 $318,941
2004 66,910
2005 20,933
2006 14,094
2007 53,913
2008 and thereafter 6,809
------------------------------------------------------------------------
Balance at December 31, 2002 $481,600
------------------------------------------------------------------------
The aggregate amount of time certificates of deposit in denominations of $100
thousand or more was $179.0 million and $126.8 million at December 31, 2002 and
2001, respectively.
(12) Borrowings
Federal Home Loan Bank Advances
The following table presents maturities and weighted average interest rates paid
on FHLB advances outstanding at December 31, 2002:
(Dollars in thousands) Scheduled Redeemed at Weighted
Maturity Call Date (1) Average Rate (2)
--------------------------------------------------------------------------------------------------------------
Years ending December 31: 2003 $208,803 $259,440 3.32%
2004 92,643 92,643 4.35%
2005 42,525 47,525 4.12%
2006 34,081 34,081 4.57%
2007 22,537 32,537 4.80%
2008 and thereafter 79,491 13,854 5.29%
--------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $480,080 $480,080
--------------------------------------------------------------------------------------------------------------
<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, 2002. 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. The FHLB maintains a security interest in
various assets of the Bank including, but not limited to, 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, 2002. Included in the
collateral were securities available for sale and held to maturity with a fair
value of $540.0 million and $376.5 million that were specifically pledged to
secure FHLB borrowings at December 31, 2002 and December 31, 2001, respectively.
Unless there is an event of default under the agreement, the Corporation may
use, encumber or dispose any portion of the collateral in excess of the amount
required to secure FHLB borrowings, except for that collateral which has been
specifically pledged.
Other Borrowings
The following is a summary of other borrowings:
(Dollars in thousands)
December 31, 2002 2001
------------------------------------------------------------------------
Treasury, Tax and Loan demand note balance $8,283 $1,583
Other 900 504
------------------------------------------------------------------------
Other borrowings $9,183 $2,087
------------------------------------------------------------------------
There were no securities sold under repurchase agreements outstanding at
December 31, 2002 and 2001. 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, 2002 2001 2000
------------------------------------------------------------------------------------------
Maximum amount outstanding at any month-end $2,864 $ - $ -
Average amount outstanding $783 $ - $ -
Weighted average rate 1.47% - -
(13) 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. At December 31, 2002 and 2001, the accrued benefit costs relating to the
defined benefit pension plan amounted to $733 thousand and $399 thousand,
respectively.
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 $1.1 million and $777 thousand at December 31, 2002 and
2001, 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 $1.8 million at September
30, 2002 and $1.4 million at September 30, 2001.
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 $189
thousand at December 31, 2002 and $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 $764 thousand and $700
thousand at September 30, 2002 and 2001, respectively.
As a result of the second quarter 2002 acquisition of First Financial Corp., the
Corporation assumed a nonqualified executive retirement plan to provide
supplemental retirement benefits to a former First Financial Corp. executive.
The accrued pension liability of this plan amounted to $3.0 million at December
31, 2002. Using the same assumptions as the other aforementioned pension plans,
the projected benefit obligation amounted to $3.1 million at September 30, 2002.
The nonqualified retirement plans provide for the designation of assets in rabbi
trusts. At December 31, 2002 and 2001, assets designated for this purpose with
the carrying value of $3.2 million and $492 thousand, respectively, are included
in Other Assets in the Corporation's Consolidated Balance Sheets.
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) Qualified Non-Qualified
Pension Plan Retirement Plans
----------------------------------------------------------------------------------------------------------
Years ended September 30, 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of period $15,761 $13,565 $2,125 $1,363
Benefit obligation of executive plan at May 1,2002 - - 3,012 -
Benefit obligation of executive plan at July 1,2001 - - - 633
Service cost 1,029 793 174 116
Interest cost 1,119 1,025 287 137
Actuarial loss (gain) 1,230 1,048 251 (63)
Benefits paid (627) (670) (228) (61)
----------------------------------------------------------------------------------------------------------
Benefit obligation at end of period $18,512 $15,761 $5,621 $2,125
----------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of period $17,515 $18,445
Actual return on plan assets (367) (260)
Employer contribution 381 -
Benefits paid (627) (670)
------------------------------------------------------------------------------------
Fair value of plan assets at end of period $16,902 $17,515
------------------------------------------------------------------------------------
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) Qualified Non-Qualified
Pension Plan Retirement Plans
----------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------
Funded status $(1,610) $1,755 $(5,621) $(2,125)
Unrecognized transition asset (31) (37) - -
Unrecognized prior service cost 185 218 712 829
Unrecognized net actuarial loss (gain) 723 (2,335) 686 456
----------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31, $(733) $(399) $(4,223) $(840)
----------------------------------------------------------------------------------------------------------
The assumptions used in determining the benefit obligation were as follows:
Qualified Non-Qualified
Pension Plan Retirement Plans
----------------------------------------------------------------------------------------------------------
September 30, 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------
Assumptions Used:
Discount rate 6.75% 7.25% 6.75% 7.25%
Rate of compensation increase 4.25% 4.75% 4.25% 4.75%
The assumptions used and the components of net pension cost include the
following:
(Dollars in thousands) Qualified Non-Qualified
Pension Plan Retirement Plans
----------------------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000 2002 2001 2000
----------------------------------------------------------------------------------------------------------
Assumptions Used:
Discount rate 7.25% 7.75% 7.50% 7.25% 7.75% 7.50%
Expected return on plan assets 8.50% 8.50% 8.50% - - -
Rate of compensation increase 4.75% 5.00% 5.00% 4.75% 5.00% 5.00%
Net pension cost:
Service cost $1,029 $793 $676 $174 $116 $46
Interest cost 1,119 1,025 933 287 137 80
Expected return on plan assets (1,446) (1,340) (1,229) - - -
Amortization of transition asset (6) (6) (6) - - -
Amortization of prior service cost 33 33 33 118 86 54
Recognized net actuarial (gain) loss (14) (75) (22) 19 28 14
----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $715 $430 $385 $598 $367 $194
----------------------------------------------------------------------------------------------------------
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 $425 thousand, $358 thousand and $320
thousand in 2002, 2001 and 2000, 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 $421 thousand, $410 thousand and $392 thousand for 2002,
2001 and 2000, 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 $1.3 million, $1.4 million and $1.3 million in
2002, 2001 and 2000, 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 $453 thousand, $153 thousand and
$200 thousand in 2002, 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 $1.3 million, $805 thousand and $963 thousand in 2002,
2001 and 2000, 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 $11 thousand
for 2002, and $24 thousand for 2001 and 2000, respectively. Accrued and unpaid
benefits under this plan are an unfunded obligation of the Bank. The accrued
liability related to this plan amounted to $212 thousand and $233 thousand at
December 31, 2002 and 2001, respectively.
Deferred Compensation Plan
The 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 fair
value in the consolidated balance sheets. The participants in the plan bear the
risk of market fluctuations of the underlying assets. The accrued liability
related to this plan amounted to $1.2 million and $1.3 million at December 31,
2002 and 2001, respectively, and is included in other liabilities on the
accompanying consolidated balance sheets. The corresponding invested assets are
reported in other assets.
(14) Income Taxes
The components of income tax expense were as follows:
(Dollars in thousands)
Years ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------------
Current tax expense:
Federal $8,636 $6,164 $6,311
State 19 22 43
--------------------------------------------------------------------------------------
Total current tax expense 8,655 6,186 6,354
--------------------------------------------------------------------------------------
Deferred tax benefit:
Federal (1,262) (645) (681)
State - - -
--------------------------------------------------------------------------------------
Total deferred tax benefit (1,262) (645) (681)
--------------------------------------------------------------------------------------
Total income tax expense $7,393 $5,541 $5,673
--------------------------------------------------------------------------------------
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, 2002 2001 2000
--------------------------------------------------------------------------------------
Tax expense at Federal statutory rate $8,453 $6,527 $6,609
Increase (decrease) in taxes resulting from:
Tax-exempt income (349) (366) (377)
Acquisition related expenses - - 89
Dividends received deduction (271) (253) (259)
Bank-owned life insurance (404) (397) (366)
State tax, net of Federal income tax benefit 12 14 28
Other (48) 16 (51)
--------------------------------------------------------------------------------------
Total income tax expense $7,393 $5,541 $5,673
--------------------------------------------------------------------------------------
The approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 2002 and
2001 are as follows:
(Dollars in thousands)
December 31, 2002 2001
------------------------------------------------------------------------
Gross deferred tax assets:
Allowance for loan losses $5,156 $4,663
Supplemental retirement benefits 1,478 388
Deferred compensation 426 446
Deferred loan origination fees 389 300
Pension 256 140
Pier Bank net operating loss carryover 166 208
Other 947 713
------------------------------------------------------------------------
Gross deferred tax assets 8,818 6,858
------------------------------------------------------------------------
Gross deferred tax liabilities:
Securities available for sale (5,057) (3,559)
Deferred loan origination costs (1,057) (885)
Premises and equipment (685) (455)
Amortization of intangibles (426) -
Interest rate floor contract - (219)
Other (418) (329)
------------------------------------------------------------------------
Gross deferred tax liabilities (7,643) (5,447)
------------------------------------------------------------------------
Net deferred tax asset $1,175 $1,411
------------------------------------------------------------------------
Primary sources of recovery of deferred tax assets are future taxable income and
the reversal of deferred tax liabilities.
(15) Operating Leases
At December 31, 2002, the Corporation was committed to rent premises used in
banking operations under noncancellable operating leases. Rental expense under
the operating leases amounted to $525 thousand, $520 thousand and $604 thousand
for 2002, 2001 and 2000, 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: 2003 $468
2004 383
2005 199
2006 61
2007 16
------------------------------------------------------------------------
Total minimum lease payments $1,127
------------------------------------------------------------------------
(16) Litigation
Reed & Lundy Matter - In June 1999 a lawsuit was filed against First Bank and
Trust Company ("First Bank") in Providence County (Rhode Island) Superior Court
by Read & Lundy, Inc. and its principal, Cliff McFarland (collectively, the
Plaintiffs). The Bank was substituted as defendant in June 2002 following the
acquisition of First Financial Corp., the parent company of First Bank. The
original complaint alleged claims for breach of contract, tortious interference
with contractual relations, and civil conspiracy arising out of First Bank's
1996 loan to a third party company. The Plaintiffs allege that the loan to the
third party enabled that company to compete unlawfully with Read & Lundy and
thereby diminished Read & Lundy's profitability. The complaint was amended in
December 2001 to add a claim for violation of the Rhode Island Trade Secrets
Act.
In December 2002, a judgment in the favor of the Bank and a dismissal of this
lawsuit was rendered on all counts by way of summary judgment motion. In
December 2002, the Plaintiffs appealed the judgment.
The Plaintiffs had previously filed a suit in the same court in 1996 against the
third party company and its founder. The Bank is not a party to this suit. In
September 2001, judgment was entered against the third party company and its
founder in favor of the Plaintiffs for approximately $1.6 million in
compensatory and punitive damages, including pre-judgment interest.
The Plaintiffs contend that the Bank as an alleged co-conspirator of the third
party company is liable for this entire amount, none of which has been collected
from the third party company. The Plaintiffs are also seeking additional
compensatory damages and other costs allegedly arising after the third party
trial. Including interest, it is estimated that the amount of the claim against
the Bank is approximately $2.0 million.
Management believes, based on its review with counsel of the development of this
matter to date, that the Bank has asserted meritorious defenses in this
litigation. The discovery phase of the case has been completed and the Bank
filed a motion for summary judgment on all counts. As discussed above, in
December 2002, a judgment in favor of the Bank and a dismissal of the suit was
rendered on all counts by way of summary judgment motion. In December 2002, the
Plaintiffs appealed the judgment. Because of the uncertainties surrounding the
outcome of the litigation no assurance can be given that the litigation will be
resolved in favor of the Bank. Management and legal counsel are unable to
estimate the amount of loss, if any, that may be incurred with respect to this
litigation. Consequently, no loss provision has been recorded.
A second claim ancillary to this litigation was brought by the Plaintiffs in
March 2002. The Bank has also been substituted for First Bank in these
proceedings. In this matter, the Plaintiffs brought a motion seeking enforcement
of a prejudgment writ of attachment obtained in 1997 by the Plaintiffs against
funds held by First Bank as collateral for the loan to the third party company.
In 1999, First Bank had applied these funds as an offset to that loan. In August
2002, judgment against the Bank was rendered on this motion requiring the Bank
to make the funds available for attachment by the Plaintiffs. This judgment is
under appeal to the Rhode Island Supreme Court. As of September 30, 2002, the
Corporation has recorded a liability for the judgment award of $273 thousand in
connection with this matter. As a pre-acquisition contingency, the offset to the
liability has been recognized as a portion of the purchase price of First
Financial Corp.
Kiepler Matter - On February 20, 2001, a suit was filed against the Bank in its
capacity as trustee of the Walfred M. Nyman Trust (the "Nyman Trust") in the
United States District Court for the District of Rhode Island (the "District
Court") by Beverly Kiepler ("Kiepler"), as beneficiary of the Nyman Trust, for
damages which the Nyman Trust allegedly incurred as a result of the Bank's
failure to file suit against Robert C. Nyman, Kenneth J. Nyman and Keith Johnson
(the "Co-Defendants") for their wrongful dilution of the stock value of Nyman
Manufacturing Company ("Nyman Mfg."), an asset of the Nyman Trust. The amount of
damages to the Nyman Trust caused by the alleged dilution was approximately $1.3
million, based on the number of shares of Nyman Mfg. that were held by the Nyman
Trust. Kiepler has alleged that the Bank breached its fiduciary duty by failing
to join a suit brought by Kiepler in her individual capacity as a shareholder of
Nyman Mfg., against the Co-Defendants.
This case is being vigorously contested by management. Management believes that
the Bank did not breach its fiduciary duties and that the allegations by Kiepler
are without merit. Because of the numerous uncertainties that surround the
litigation, management and legal counsel are unable to estimate the amount of
loss, if any, that the Bank may incur with respect to this litigation.
Consequently, no loss provision for this lawsuit has been recorded.
Maxson Matter - On May 11, 2001, the Bank entered into an agreement with Maxson
Automatic Machinery Company ("Maxson"), a former corporate customer, and
Maxson's shareholders to settle a lawsuit for claims 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. 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 connection with this matter,
in August 2001, and in December 2001, the Bank received settlements from
insurance carriers in the amounts of $775 thousand ($553 thousand net of tax)
and $400 thousand ($252 thousand net of tax), respectively. 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.
(17) Shareholders' Equity
Stock Repurchase Plan
In September 2001, the Bancorp'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 Bancorp plans to hold the repurchased shares as treasury stock
to be used for general corporate purposes. At December 31, 2002 and 2001, 28,000
shares and 55,000 shares were repurchased under this plan with a total cost of
$536 thousand and $1.1 million, respectively.
Rights
In August 1996, the Bancorp 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 Bancorp 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 Bancorp is dividends
received from the Bank. The Bancorp 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 Bancorp. 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 $25.1 million as of
December 31, 2002.
Stock Option Plans
The Bancorp'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 Bancorp'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 Bancorp's common stock already
owned by the grantee, or a combination thereof. Awards may be granted at any
time until April 29, 2007. At December 31, 2002, restricted stock awards
outstanding amounted to 1,260 shares. The award vests in one-third increments
over a three-year period. Restrictions are removed at the end of each vesting
period. If participants are not employees at the end of the vesting periods,
unvested awards are forfeited. For the year ended December 31, 2002,
compensation expense related to restricted stock awards amounted to $1 thousand.
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 Bancorp'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 Bancorp'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
2002, 2001 and 2000:
Years ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise Of Exercise of Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------
Outstanding at January 1 980,059 $14.47 845,109 $13.05 806,380 $11.49
Granted 219,610 $20.07 206,695 $17.81 216,390 $15.27
Exercised (40,769) $11.68 (69,930) $7.03 (150,972) $7.21
Cancelled (9,161) $18.21 (1,815) $17.98 (26,689) $17.07
- ----------------------------------------------------------------------------------------------------------------
Outstanding at December 31 1,149,739 $15.61 980,059 $14.47 845,109 $13.05
- ----------------------------------------------------------------------------------------------------------------
Exercisable at December 31 849,739 $14.52 695,667 $13.47 615,487 $12.01
- ----------------------------------------------------------------------------------------------------------------
The weighted average exercise price and remaining contractual life for options
outstanding at December 31, 2002 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
- ----------------------------------------------------------------------------------------------------------------
$4.12 to $4.27 21,715 .4 years $4.12 21,715 $4.12
$4.28 to $6.40 21,567 1.4 years $5.56 21,567 $5.56
$6.41 to $8.53 76,125 1.9 years $7.10 76,125 $7.10
$8.54 to $10.67 78,323 3.3 years $9.53 78,323 $9.53
$10.68 to $12.80 95,304 4.2 years $11.65 95,304 $11.65
$12.81 to $14.93 5,250 7.6 years $14.73 3,750 $14.73
$14.94 to $17.07 208,491 7.2 years $15.35 165,735 $15.38
$17.08 to $19.20 381,638 7.1 years $17.82 294,740 $17.82
$19.21 to $21.33 261,326 8.5 years $20.14 92,480 $20.25
- ----------------------------------------------------------------------------------------------------------------
Total 1,149,739 6.4 years $15.61 849,739 $14.52
- ----------------------------------------------------------------------------------------------------------------
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 and SFAS No. 148.
Accordingly, no compensation cost for these plans has been recognized in the
Consolidated Statements of Income for 2002, 2001 and 2000.
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, 2002, a total of 1,649,827 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 Bancorp 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 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 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, 2002, that the Corporation meets all capital adequacy requirements
to which it is subject.
As of December 2002, 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, 2002 and 2001, as well as the corresponding
minimum regulatory amounts and ratios:
To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
(Dollars in thousands) Actual Purposes Action Provisions
---------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------
As of December 31, 2002:
Total Capital (to Risk-Weighted Assets):
Consolidated $107,245 11.55% $74,302 8.00% $92,878 10.00%
Bank $105,105 11.32% $74,302 8.00% $92,878 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $94,091 10.13% $37,151 4.00% $55,727 6.00%
Bank $91,951 9.90% $37,151 4.00% $55,727 6.00%
Tier 1 Capital (to Average Assets): (1)
Consolidated $94,091 5.63% $66,802 4.00% $83,503 5.00%
Bank $91,951 5.50% $66,836 4.00% $83,544 5.00%
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%
<FN>
(1) Leverage ratio
</FN>
(18) Earnings per Share
(Dollars in thousands, except per share amounts)
Years ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
---------------------------------------------------------------
Net income $16,757 $16,757 $13,108 $13,108 $13,209 $13,209
Share amounts, in thousands:
Average outstanding 12,737.3 12,737.3 12,039.2 12,039.2 11,976.9 11,976.9
Common stock equivalents - 195.1 - 163.3 - 125.7
--------------------------------------------------------------------------------------------------------
Weighted average outstanding 12,737.3 12,932.4 12,039.2 12,202.5 11,976.9 12,102.6
--------------------------------------------------------------------------------------------------------
Earnings per share $1.32 $1.30 $1.09 $1.07 $1.10 $1.09
--------------------------------------------------------------------------------------------------------
(19) 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, 2002 and 2001 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, 2002 and
2001. 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, 2002 2001
--------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------------
Financial Assets
On-balance sheet:
Cash and cash equivalents $51,048 $51,048 $50,899 $50,899
Mortgage loans held for sale 4,566 4,713 7,747 7,710
Securities available for sale 553,556 553,556 453,956 453,956
Securities held to maturity 242,277 250,446 175,105 177,595
FHLB stock 24,582 24,582 23,491 23,491
Loans, net of allowance for loan losses 779,639 818,677 592,052 611,425
Accrued interest receivable 7,773 7,773 7,124 7,124
Bank-owned life insurance 22,013 22,013 20,857 20,857
Assets in rabbi trusts 3,237 3,237 492 492
Derivative financial instruments
relating to assets:
Interest rate floor contracts - - 739 739
Forward loan commitments (45) (45) 86 86
Financial Liabilities
On-balance sheet:
Noninterest bearing demand deposits $157,539 $157,539 $134,783 $134,783
Non-term savings accounts 471,354 471,354 316,953 316,953
Certificates of deposit 481,600 498,577 365,140 370,018
FHLB advances 480,080 513,979 431,490 453,740
Other borrowings 9,183 9,183 2,087 2,087
Accrued interest payable 3,986 3,986 3,885 3,885
(20) Parent Company Financial Statements
The following are parent company only financial statements of the Corporation
reflecting the investment in the Bank 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, 2002 2001
---------------------------------------------------------------------------------------------------------
Assets:
Cash on deposit with bank subsidiary 2,466 $898
Investment in bank subsidiary at equity value 126,580 96,118
Dividend receivable from bank subsidiary 1,500 2,880
---------------------------------------------------------------------------------------------------------
Total assets $130,546 $99,896
---------------------------------------------------------------------------------------------------------
Liabilities:
Dividends payable $1,825 $1,569
Accrued expenses and other liabilities - 390
---------------------------------------------------------------------------------------------------------
Total liabilities 1,825 1,959
---------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized 30 million shares
in 2002 and 2001; issued 13,086,795 shares in 2002
and 12,065,283 shares in 2001 818 754
Paid-in capital 28,769 10,696
Retained earnings 90,717 81,114
Unamortized employee restricted stock (24) -
Accumulated other comprehensive income 9,294 6,416
Treasury stock, at cost; 44,361 shares in 2002 and 54,102 shares in 2001 (853) (1,043)
---------------------------------------------------------------------------------------------------------
Total shareholders' equity 128,721 97,937
---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $130,546 $99,896
---------------------------------------------------------------------------------------------------------
Statements of Income
(Dollars in thousands)
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------
Dividends from bank subsidiary $26,742 $8,470 $5,198
Equity in undistributed earnings of subsidiary (9,985) 4,638 8,011
----------------------------------------------------------------------------------------------------------
Net income $16,757 $13,108 $13,209
----------------------------------------------------------------------------------------------------------
Statements of Cash Flows
(Dollars in thousands)
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net income $16,757 $13,108 $13,209
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity effect of undistributed earnings of subsidiary 9,985 (4,638) (8,011)
Decrease (increase) in dividend receivable 1,380 (1,800) (240)
Other (390) - -
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,732 6,670 4,958
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of securities available for sale 521 - -
Cash paid for acquisition (19,648) - -
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (19,127) - -
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (536) (670) -
Net effect of common stock transactions 397 266 (201)
Cash dividends paid (6,898) (6,135) (6,387)
----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (7,037) (6,539) (6,588)
----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,568 131 (1,630)
Cash at beginning of year 898 767 2,397
----------------------------------------------------------------------------------------------------------
Cash at end of year $2,466 $898 $767
----------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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,
2003 prepared for the Annual Meeting of Shareholders to be held April 29, 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, 2003
prepared for the Annual Meeting of Shareholders to be held April 29, 2003, 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, 2003 prepared for the Annual Meeting of
Shareholders to be held April 29, 2003, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item appears under the caption "Nominee and
Director Information" in the Corporation's Proxy Statement dated March 20, 2003
prepared for the Annual Meeting of Shareholders to be held April 29, 2003, 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, 2003 prepared for the Annual Meeting of Shareholders
to be held April 29, 2003.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within
the 90 days prior to the date of this report, the Corporation carried out an
evaluation under the supervision and with the participation of the Corporation's
management, including the Corporation's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Corporation in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. We will review and update our disclosure controls
and procedures on an ongoing basis, including our internal controls and
procedures for financial reporting, and we may from time to time make changes
aimed at enhancing their effectiveness and to ensure that our systems evolve
with our business.
(b) Changes in internal controls.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. The financial statements of the Corporation
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-X and all other schedules to the
consolidated financial statements of the Corporation have been omitted
because the required information is either not required, not
applicable, or is included in the consolidated financial statements or
notes thereto.
3. Exhibits. See Part (c) below.
(b) There were no reports on Form 8-K filed during the quarter ended December
31, 2002.
(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 herewith.
3.c Amended and Restated By-Laws of the Corporation - Filed herewith.
4.a Amended and Restated Agreement, between the Registrant and Mellon
Investor Services LLC, dated March 1, 2002 - Filed as Exhibit 4.a
to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002. (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 herewith. (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 herewith. (2)
10.f The Registrant's 1997 Equity Incentive Plan - Filed herewith. (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 Amendment to 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 September 30,
2001. (1) (2)
10.n 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)
10.o Amendment to 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 March 31,
2002. (1) (2)
10.p Amendment to the Registrant's Trust Agreement Under The
Washington Trust Company's Supplemental Pension Benefit and
Profit Sharing Plan - Filed as Exhibit 10.b to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2002. (1) (2)
10.q Noncompetition Agreement - Filed as Exhibit 10.a to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2002. (1) (2)
21 Subsidiaries of the Registrant - Filed herewith
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 18, 2003 By John C. Warren
-------------- ----------------------------------------------
John C. Warren
Chairman, Chief Executive Officer and Director
(principal executive officer)
Date: March 18, 2003 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 18, 2003 Alcino G. Almeida
-------------------- ---------------------------------
Alcino G. Almeida, Director
Date: March 18, 2003 Gary P. Bennett
-------------------- ---------------------------------
Gary P. Bennett, Director
Date: March 18, 2003 Steven J. Crandall
-------------------- ---------------------------------
Steven J. Crandall, Director
Date: March 18, 2003 Richard A. Grills
-------------------- ---------------------------------
Richard A. Grills, Director
Date: March 18, 2003 Larry J. Hirsch
-------------------- ---------------------------------
Larry J. Hirsch, Director
Date: March 18, 2003 Katherine W. Hoxsie
-------------------- ---------------------------------
Katherine W. Hoxsie, Director
Date: March 18, 2003 Mary E. Kennard
-------------------- ---------------------------------
Mary E. Kennard, Director
Date: March 18, 2003 Edward M. Mazze
-------------------- ---------------------------------
Edward M. Mazze, Director
Date: March 18, 2003 Victor J. Orsinger II
-------------------- ---------------------------------
Victor J. Orsinger II, Director
Date: March 18, 2003 H. Douglas Randall III
-------------------- ---------------------------------
H. Douglas Randall, III, Director
Date:
-------------------- ---------------------------------
Joyce Olson Resnikoff, Director
Date: March 18, 2003 James P. Sullivan
-------------------- ---------------------------------
James P. Sullivan, Director
Date: March 18, 2003 Neil H. Thorp
-------------------- ---------------------------------
Neil H. Thorp, Director
Date: March 18, 2003 John F. Treanor
-------------------- ---------------------------------
John F. Treanor, Director
Date: March 18, 2003 John C. Warren
-------------------- ---------------------------------
John C. Warren, Director
CERTIFICATIONS
I, John C. Warren, Chairman and Chief Executive Officer of Washington Trust
Bancorp, Inc. certify that:
1. I have reviewed this annual report on Form 10-K of Washington Trust
Bancorp, Inc. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003 By John C. Warren
- -------------------- ----------------------------------
John C. Warren
Chairman, Chief Executive Officer
(principal executive officer)
CERTIFICATIONS
I, David V. Devault, Executive Vice President, Treasurer and Chief Financial
Officer of Washington Trust Bancorp, Inc. certify that:
1. I have reviewed this annual report on Form 10-K of Washington Trust
Bancorp, Inc. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003 By David V. Devault
- -------------------- ------------------------------------
David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting
officer)