ITEM 1. BUSINESS
Washington Trust Bancorp, Inc. Washington Trust Bancorp, Inc. (the "Corporation" or "Washington Trust") is a publicly-owned, registered bank holding company, organized in 1984 under the laws of the state of Rhode Island, whose subsidiaries are permitted to engage in banking and other financial services and businesses. The Corporation conducts its business through its wholly owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits.
The Corporation was formed in 1984 under a plan of reorganization in which outstanding common shares of The Washington Trust Company were exchanged for common shares of Washington Trust Bancorp, Inc. At December 31, 2000 the Corporation had total assets of $1.218 billion, total deposits of $735.7 million and total shareholders' equity of $89.2 million.
On June 26, 2000, the Corporation completed its acquisition of Phoenix Investment Management Company, Inc. ("Phoenix"), an independent investment advisory firm located in Providence, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the acquisition was effected by means of merger of Phoenix with and into the Bank, the wholly owned subsidiary of the Corporation. The acquisition of Phoenix was a tax-free reorganization accounted for as a pooling of interests. Accordingly, the consolidated financial statements and other financial information of the Corporation have been restated to reflect the acquisition at the beginning of the earliest period presented. For the year ended December 31, 1999, Phoenix's investment management revenues totaled $3.4 million.
The Washington Trust Company The Bank was originally chartered in 1800 as the Washington Bank and is the oldest banking institution headquartered in its market area. Its current corporate charter dates to 1902. See discussion under "Market Area and Competition" for further information.
The Bank provides a broad range of financial services, including:
Residential mortgages Internet banking services Commercial loans Commercial and consumer demand deposits Construction loans Savings, NOW and money market deposits Consumer installment loans Certificates of deposit Home equity lines of credit Retirement accounts Merchant credit card services Cash management services Automated teller machines (ATMs) Safe deposit boxes Telephone banking services Trust and investment management services
Automated teller machines (ATMs) are located throughout the Bank's market area. The Bank is a member of various ATM networks.
Data processing for most of the Bank's deposit and loan accounts and other applications are conducted internally, using owned equipment. Application software is primarily obtained through purchase or licensing agreements.
The Bank's primary source of income is net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing deposits and other borrowed funds. Sources of noninterest income include fees for management of customer investment portfolios, trusts and estates, service charges on deposit accounts, merchant processing fees, gains and fees from mortgage banking activities and other banking-related fees. Noninterest expenses include the provision for loan losses, salaries and employee benefits, occupancy, equipment, merchant processing, office supplies, advertising and promotion and other administrative expenses.
The Bank's lending activities are conducted primarily in southern Rhode Island and southeastern Connecticut. The Bank provides a variety of commercial and retail lending products. The Bank generally underwrites its residential mortgages based upon secondary market standards. Loans are originated both for sale in the secondary market as well as for portfolio. Most secondary market loans are sold with servicing released, however, prior to the fourth quarter of 1999, the Corporation primarily sold loans with servicing retained.
The Bank provides trust and investment management services as trustee under wills and trust agreements; as executor or administrator of estates; as a provider of agency, custodial and management investment services to individuals and institutions; and as a trustee for employee benefit plans. In January 2000, the Bank opened a trust and investment management office in Providence, Rhode Island. In June 2000, the Corporation acquired Phoenix, an independent investment advisory firm located in Providence, Rhode Island. Phoenix operates under its own name as a division of the Bank. Phoenix provides investment advisory services including asset allocation analysis and equity, fixed income and balanced portfolio management. The total market value of assets under administration amounted to $1.7 billion as of December 31, 2000.
The following is a summary of recurring sources of income, which excludes net gains on sales of securities and the 1999 net gain on sale of the credit card portfolio, as a percentage of total income (net interest income plus recurring noninterest income) during the past five years:
2000 1999 1998 1997 1996 --------------------------------------------------------------------------- Net interest income 67% 67% 67% 69% 72% Trust and investment management 19 17 17 18 16 Other noninterest income 14 16 16 13 12 --------------------------------------------------------------------------- Total income 100% 100% 100% 100% 100% ---------------------------------------------------------------------------
Market Area and Competition The Bank's market area includes Washington County and a portion of Kent County in southern Rhode Island, as well as a portion of New London County in southeastern Connecticut. The Bank operates thirteen banking offices in these Rhode Island and Connecticut counties. The locations of the banking offices are as follows:
Westerly, RI (3 locations) Charlestown, RI Wakefield, RI Narragansett, RI (2 locations) Richmond, RI North Kingstown, RI New Shoreham (Block Island), RI Mystic, CT (3 locations)
The Bank's banking offices in Charlestown and on Block Island are the only bank facilities in those Rhode Island communities.
The Bank faces strong competition from branches of major Rhode Island and regional commercial banks, local branches of certain Connecticut banks, as well as various credit unions, savings institutions and, to some extent, finance companies. The principal methods of competition are through interest rates, financing terms and other customer conveniences. The Bank had 38% of total deposits reported by all financial institutions for communities in which the Bank operates banking offices as of June 30, 2000. The closest competitor held 25%, and the second closest competitor held 13% of total deposits in the same communities. The Corporation believes that being the largest commercial banking institution headquartered within the market area provides a competitive advantage over other financial institutions. The Bank has a marketing department that is responsible for the review of existing products and services and the development of new products and services.
Employees As of December 31, 2000 the Corporation had 370 employees, of which 332 were full-time and 38 were part-time.
Supervision and Regulation General - The business in which the Corporation and the Bank are engaged is subject to extensive supervision, regulation, and examination by various bank regulatory authorities and other agencies of federal and state government. The supervisory and regulatory activities of these authorities are often intended primarily for the protection of customers or are aimed at carrying out broad public policy goals that may not be directly related to the financial services provided by the Corporation and the Bank, nor intended for the protection of the Corporation's shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Proposals to change regulations and laws that affect the banking industry are frequently raised at the federal and state level. The potential impact on the Corporation of any future revisions to the supervisory or regulatory structure cannot be determined.
The Corporation and the Bank are required by various authorities to file extensive periodic reports of financial and other information and such other reports that the regulatory and supervisory authorities may require. The Corporation is also subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended.
The Corporation is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a bank holding company, the activities of the Corporation are regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The BHC Act requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire control over a bank. Provided that the Corporation does not become a "financial holding company" under the Gramm-Leach-Bliley Act (as discussed below), the BHC Act also requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire certain nonbank entities and restricts the activities of the Corporation to those closely related to banking. Federal law also regulates transactions between the Corporation and the Bank, including loans or extensions of credit.
The Bank is subject to the supervision of, and examination by, the FDIC, the State of Rhode Island and the State of Connecticut, in which the Bank has established branches. The Bank is also subject to various Rhode Island and Connecticut business and banking regulations.
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) - Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.
FDICIA established five capital tiers, ranging from "well-capitalized" to "critically undercapitalized". A depository institution is well-capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well-capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. At December 31, 2000, the Bank's capital ratios placed it in the well-capitalized category. Reference is made to Note 15 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's regulatory capital requirements.
Another primary purpose of FDICIA was to recapitalize the Bank Insurance Fund (BIF). The FDIC adopted a risk-related premium system for the assessment period beginning January 1, 1993. Under this new system, each institution's assessment rate is based on its capital ratios in combination with a supervisory evaluation of the risk the institution poses to the BIF. Banks deemed to be well-capitalized and who pose the lowest risk to the BIF will pay the lowest assessment rates, while undercapitalized banks, which present the highest risk, will pay the highest rates.
FDICIA contained other significant provisions that require the federal banking regulators to establish standards for safety and soundness for depository institutions and their holding companies in three areas: (i) operational and managerial; (ii) asset quality, earnings and stock valuation; and (iii) management compensation. The legislation also required that risk-based capital requirements contain provisions for interest rate risk, credit risk and risks of nontraditional activities. FDICIA also imposed expanded accounting and audit reporting requirements for depository institutions. In addition, FDICIA imposed numerous restrictions on state-chartered banks, including those that generally limit investments and activities to those permitted to national banks, and contains several consumer banking law provisions.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act) - The Interstate Act permits adequately capitalized bank holding companies to acquire banks in any state subject to certain concentration limits and other conditions. The Interstate Act also authorizes the interstate merger of banks. In addition, among other things, the Interstate Act permits banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state. Both Rhode Island and Connecticut, the two states in which the Corporation conducts banking operations, have adopted legislation to "opt in" to interstate merger and branching provisions that effectively eliminated state law barriers.
Gramm-Leach-Bliley Act - The Gramm-Leach-Bliley Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system, such as the Corporation, to engage in a full range of financial activities through a new entity known as a financial holding company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In sum, the Gramm-Leach-Bliley Act permits bank holding companies that qualify and elect to be treated as a financial holding company to engage in a significantly broader range of financial activities than the activities previously permitted for bank holding companies.
Generally, the Gramm-Leach-Bliley Act and its implementing regulations:
o repeal historical restrictions on, and eliminate many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers;
o permit investment in non-financial enterprises, subject to significant operational, holding period and other restrictions;
o provide a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies;
o broaden the activities that may be conducted by national banks (and derivatively state banks), banking subsidiaries of bank holding companies, and their financial subsidiaries;
o require all financial institutions to provide notice of their privacy policies at specified times to their retail customers and consumers of their financial products or services, and permit retail customers and consumers, under certain circumstances, to prohibit financial institutions from sharing certain nonpublic personal information pertaining to them by opting out of such sharing;
o establish guidelines for safeguarding the security, confidentiality and integrity of customer information;
o adopt a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank ("FHLB") system;
o modify the laws governing the implementation of the Community Reinvestment Act of 1977 ("CRA"); and
o address a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.
In order to elect to become a financial holding company and engage in the new activities, a bank holding company, such as the Corporation, must meet certain tests and file an election form with the Federal Reserve Board, which generally is acted on within thirty days. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities each of the bank holding company's banks must have been rated "satisfactory" or better in its most recent federal CRA evaluation. Furthermore, a bank holding company that elects to be treated as a financial holding company may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the Federal Reserve Board which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. At this time, the Corporation has no immediate plans to become a financial holding company.
Dividend Restrictions - The Corporation's revenues consist of cash dividends paid to it by the Bank. Such payments are restricted pursuant to various state and federal regulatory limitations. Reference is made to Note 15 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's ability to pay dividends.
Capital Guidelines - Regulatory guidelines have been established that require bank holding companies and banks to maintain minimum ratios of capital to risk-adjusted assets. Banks are required to have minimum core capital (Tier 1) of 4% and total risk-adjusted capital (Tier 1 and Tier 2) of 8%. For the Corporation, Tier 1 capital is essentially equal to shareholders' equity excluding the net unrealized gain (loss) on securities available for sale. Tier 2 capital consists of a portion of the allowance for loan losses (limited to 1.25% of total risk-weighted assets). As of December 31, 2000, the Corporation's net risk-weighted assets amounted to $663.7 million, its Tier 1 capital ratio was 12.70% and its total risk-based capital ratio was 14.35%.
The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the risk-based capital guidelines) divided by average assets (net of intangible assets and excluding the effects of accounting for securities available for sale under SFAS No. 115). The minimum leverage ratio is 3% for bank holding companies that do not anticipate significant growth and that have well-diversified risk (including no undue interest rate risk), excellent asset quality, high liquidity and strong earnings. Other bank holding companies are expected to have ratios of at least 4 - 5%, depending on their particular condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstances or risk profile of a given bank holding company. The Corporation's Tier 1 leverage ratio was 7.08% as of December 31, 2000. The Federal Reserve Board has not advised the Corporation of any specific minimum Tier 1 leverage capital ratio applicable to it.
Risk Factors: In addition to the other information contained or incorporated by reference in this Annual Report on Form 10-K, you should consider the following factors relating to the business of the Corporation.
Interest Rate Volatility May Reduce Our Profitability Significant changes in market interest rates may adversely affect both our profitability and our financial condition. Our profitability depends in part on the difference between rates earned on loans and investments and rates paid on deposits and other interest-bearing liabilities. Since market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. (See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for additional discussion on interest rate risk.)
Changes in the Market Value of Trust and Investment Management Assets under Administration May Reduce Our Profitability Trust and investment management fees provide an important source of total revenues. These fees are primarily dependent on the market value of trust and investment management assets under administration. These assets primarily consist of marketable securities. Reductions in the market value of these assets could reduce the level of fees that we earn.
Our Allowance for Loan Losses May Not Be Adequate to Cover Actual Loan Losses We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for potential losses based on a number of factors. If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses, which would have an adverse effect on our operating results, and may also cause us to increase the allowance in the future. Further, our net income would decrease if we had to add additional amounts to our allowance for loan losses. In addition to general real estate and economic factors, the following factors could affect our ability to collect our loans and require us to increase the allowance in the future:
o Regional credit concentration - We are exposed to real estate and economic factors in Rhode Island and southeastern Connecticut because virtually all of our loan portfolio is concentrated among borrowers in these markets. Further, because a substantial portion of our loan portfolio is secured by real estate in this area, including most consumer loans and those commercial loans not specifically classified as commercial mortgages, the value of our collateral is also subject to regional real estate market conditions.
o Industry concentration - A portion of our loan portfolio consists of loans to the hospitality and tourism industry. Loans to companies in this industry may have a somewhat higher risk of loss than some other industries because these businesses are seasonal, with a substantial portion of commerce concentrated in the summer season. Accordingly, the ability of borrowers to meet their repayment terms is more dependent on economic, climate and other conditions and may be subject to a higher degree of volatility from year to year.
We May Not Be Able to Compete Effectively Against Larger Financial Institutions in Our Increasingly Competitive Industry.
The financial services industry in our market has experienced both significant concentration and deregulation. This means that we compete with larger financial institutions, both from banks and from other financial institutions, for loans and deposits as well as other sources of funding in the communities we serve, and we will likely face even greater competition in the future as a result of recent federal legislative changes. Many of our competitors have significantly greater resources and lending limits than we have. As a result of those greater resources, the large financial institutions that we compete with may be able to provide a broader range of services to their customers and may be able to afford newer and more sophisticated technology. Our long-term success depends on the ability of the Bank to compete successfully with other financial institutions in their service areas.
In addition, as we strive to compete with other financial institutions, we may expand into new areas, and there is no assurance that we will be successful in these efforts. An example of our expansion is the Phoenix acquisition. Although we believe that the business and management of Phoenix represent a significant expansion of our business in the investment management area, there is no assurance that our expansion into this area will be successful.
Limited Trading Activity in Our Common Stock Could Cause the Price of Our Shares to Decline While our common stock is listed and traded on the Nasdaq National Market, there has only been limited trading activity in our common stock. The average daily trading volume of our common stock over the twelve-month period ended December 31, 2000 was approximately 8,903 shares. Accordingly, sales of a significant number of shares of common stock may adversely affect the market price of our common stock.
Allowance for Loan Losses The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses (ALL). The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other environmental factors. The methodology includes an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114. Other individual commercial and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration the borrower's financial condition, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the Corporation's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional unallocated allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. For example, most of the loan portfolio is concentrated among borrowers in southern Rhode Island and southeastern Connecticut and a substantial portion of the portfolio is collateralized by real estate in this area, including most consumer loans and those commercial loans not specifically classified as commercial mortgages. A portion of the commercial and commercial mortgage loans are to borrowers in the hospitality and tourism industry and this concentration has been increasing in recent years. Economic conditions which may affect the ability of borrowers to meet debt service requirements are considered including interest rates and energy costs. Results of regulatory examinations, historical loss ranges, portfolio composition including a trend toward somewhat larger credit relationships, and other changes in the portfolio are also considered. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans.
GUIDE 3 STATISTICAL DISCLOSURES
The following tables contain additional consolidated statistical data about the Corporation and the Bank, to be read in conjunction with the Notes to the Consolidated Financial Statements.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
A. Average balance sheets are presented under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Nonaccrual loans are included in average loan balances. Average balances are based upon daily averages.
B. An analysis of net interest earnings, including interest earned and paid, average yields and costs, and net yield on interest-earning assets, is presented under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Interest income is reported on the fully taxable-equivalent basis. Tax exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Interest on nonaccrual loans is included in the analysis of net interest earnings to the extent that such interest income has been recognized in the Consolidated Statements of Income. See Guide 3 Statistical Disclosures - Item III.C.1.
C. An analysis of rate/volume changes in interest income and interest expense is presented under the caption "Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. The net change attributable to both volume and rate has been allocated proportionately.
II. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
A. The carrying amounts of securities as of the dates indicated are presented in the following tables:
(Dollars in thousands)
December 31, 2000 1999 1998 --------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $87,084 $86,310 $118,348 Mortgage-backed securities 240,856 189,086 145,806 Corporate bonds 38,565 33,684 27,503 Corporate stocks 20,106 21,351 28,184 --------------------------------------------------------------------------- Total securities available for sale $386,611 $330,431 $319,841 ---------------------------------------------------------------------------
(Dollars in thousands)
December 31, 2000 1999 1998 --------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $35,135 $28,231 $21,987 Mortgage-backed securities 66,715 62,209 46,088 States and political subdivisions 23,065 25,932 27,572 --------------------------------------------------------------------------- Total securities held to maturity $124,915 $116,372 $95,647 ---------------------------------------------------------------------------
B. Maturities of debt securities as of December 31, 2000 are presented in the following tables. Mortgage-backed securities are included based on their weighted average maturities, adjusted for anticipated prepayments. Yields on tax exempt obligations are not computed on a tax equivalent basis.
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:
B. An analysis of the maturity and interest rate sensitivity of Real Estate Construction and Other Commercial loans as of December 31, 2000 follows:
Sensitivity to changes in interest rates for all such loans due after one year is as follows:
(Dollars in thousands) Floating or Predetermined Adjustable Rates Rates Totals --------------------------------------------------------------------------- Principal due after one year $51,025 $36,675 $87,700 ---------------------------------------------------------------------------
C. Risk Elements Reference is made to the caption "Asset Quality" included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Included therein is a discussion of the Corporation's credit review and accounting practices, as well as information relevant to nonperforming assets at December 31, 2000.
1. Nonaccrual, Past Due and Restructured Loans a) Nonaccrual loans as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 2000 1999 1998 1997 1996 --------------------------------------------------------------------------- $3,434 $3,798 $5,846 $7,644 $8,197 ---------------------------------------------------------------------------
Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but not collected on such loans is reversed against current period income. Cash receipts on nonaccrual loans are recorded as interest income or as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower had demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible.
For the year ended December 31, 2000, the gross interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $411 thousand. Interest recognized on these loans amounted to approximately $250 thousand.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2000.
b) Loans contractually past due 90 days or more and still accruing for the dates indicated were as follows:
(Dollars in thousands)
December 31, 2000 1999 1998 1997 1996 --------------------------------------------------------------------------- $393 $120 $235 $651 $1,517 ---------------------------------------------------------------------------
c) Restructured accruing loans for the dates indicated were as follows:
(Dollars in thousands)
December 31, 2000 1999 1998 1997 1996 --------------------------------------------------------------------------- $ - $446 $ - $ - $ - ---------------------------------------------------------------------------
Restructured accruing loans include those for which concessions, such as reduction of interest rates other than normal market rate adjustments or deferral of principal or interest payments, have been granted due to a borrower's financial condition. Interest on restructured loans is accrued at the reduced rate.
2. Potential Problem Loans Potential problem loans consist of certain accruing commercial loans that were less than 90 days past due at December 31, 2000, but were identified by management of the Bank as potential problem loans. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve as a result of collection efforts, while the credit quality of other loans may deteriorate, resulting in some amount of losses. These loans are not included in the analysis of nonaccrual, past due and restructured loans in Section III.C.1 above. At December 31, 2000, potential problem loans amounted to approximately $209 thousand. The Corporation's loan policy provides guidelines for the review of such loans in order to facilitate collection.
Depending on future events, these potential problem loans, and others not currently identified, could be classified as nonperforming in the future.
3. Foreign Outstandings: None
4. Loan Concentrations: The Corporation has no concentration of loans that exceed 10% of its total loans except as disclosed by types of loan in Section III.A.
D. Other Interest-Bearing Assets: None
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is management's best estimate of probable credit losses in the loan portfolio that have been incurred as of the balance sheet date. The level of the allowance is based on management's ongoing review of the growth and composition of the loan portfolio, net charge-off experience, current and expected economic conditions, and other pertinent factors. Loans (or portions thereof) deemed to be uncollectible are charged against the allowance and recoveries of amounts previously charged off are added to the allowance. Loss experience on loans is presented in the following table for the years indicated:
B. The following table presents the allocation of the allowance for loan losses:
V. DEPOSITS
A. Average deposit balances outstanding and the average rates paid thereon are presented in the following table:
B. Not Applicable
C. Not Applicable
D. The maturity schedule of time deposits in amounts of $100 thousand or more at December 31, 2000 was as follows:
E. Not Applicable
VI. RETURN ON EQUITY AND ASSETS
VII. SHORT-TERM BORROWINGS
Not Applicable
ITEM 2.
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:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On January 28, 1997, a suit was filed against the Bank in the Superior Court of Washington County, Rhode Island by Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by Maxson's former president, treasurer and fifty percent shareholder, which allegedly occurred between 1986 and 1995. The suit alleges that the Bank erred in permitting this individual, while an officer of Maxson, to transfer funds from Maxson's account at the Bank for his personal benefit. The claims against the Bank are based upon theories of breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constructive fraud.
Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious affirmative defenses in this litigation. Additionally, the Bank has filed counterclaims against Maxson and its shareholders as well as claims against the former Maxson officer allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The discovery phase of the case has been completed, though the parties are attempting to resolve several discovery disputes. The Bank has also filed several motions, all of which seek dismissal of one or more of the plaintiffs' claims and/or exclusion of portions of the plaintiffs' evidence. The court began hearing argument on the motions on March 8, 2001, and has expressed a desire to hear further argument. There is currently no scheduled trial date. During discovery, the plaintiffs have offered various theories and amounts of alleged damages, ranging from $5.0 million to $12.7 million, plus interest thereon. The plaintiffs have also filed a motion to amend the complaint to add a claim for punitive damages. The court has deferred ruling on whether to permit this amendment. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision has been recorded.
The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of all executive officers of the Corporation and the Bank with their titles, ages, and length of service, followed by certain biographical information.
John C. Warren joined the Bank and the Corporation in 1996 as President and Chief Operating Officer. In 1997, he was elected President and Chief Executive Officer. In 1999, he was elected Chairman and Chief Executive Officer of the Corporation and the Bank.
John F. Treanor joined the Bank and the Corporation in April 1999 as President and Chief Operating Officer. He served as Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer of SIS Bancorp, Inc. from 1994 to 1999.
David V. Devault joined the Bank in 1986 as Controller. He was elected Vice President and Chief Financial Officer of the Corporation and the Bank in 1987. He was elected Senior Vice President and Chief Financial Officer of the Corporation and the Bank in 1990. In 1997, he was also elected Treasurer of the Corporation and the Bank. In 1998, he was elected Executive Vice President, Treasurer and Chief Financial Officer of the Corporation and the Bank.
Harvey C. Perry II joined the Bank in 1974 and was elected Assistant Trust Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982. He was elected Vice President and Secretary of the Corporation and the Bank in 1984, and Senior Vice President and Secretary of the Corporation and the Bank in 1990.
Stephen M. Bessette joined the Bank in February 1997 as Senior Vice President - Retail Lending. Prior to joining the Bank he held the position of Executive Vice President at Ameristone Mortgage Corporation since June 1995.
Vernon F. Bliven joined the Bank in 1972 and was elected Assistant Vice President in 1980, Vice President in 1986 and Senior Vice President - Human Resources in 1993.
Elizabeth B. Eckel joined the Bank in 1991 as Director of Advertising and Public Relations. In 1995, she was named Vice President - Marketing. She was promoted to Senior Vice President - Marketing in 2000.
William D. Gibson joined the Bank in March 1999 as Senior Vice President - Credit Administration. Prior to joining the Bank, he served as Senior Vice President of Credit Review and Senior Vice President of Credit and Loan Administration of Citizens Bank since October 1977.
Joseph E. LaPlume joined the Bank in August 1999 as Senior Vice President and Regional Manager. Prior to joining the Bank he served as President and Chief Executive Officer of Pier Bank since November 1993.
Barbara J. Perino joined the Bank in 1988 as Financial Accounting Officer. She was named Controller in 1989 and Vice President - Controller in 1992. In 1998 she was promoted to Senior Vice President - Operations and Technology.
B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and was promoted in 1993 to Senior Vice President - Retail Banking.
James M. Vesey joined the Bank in 1998 as Senior Vice President - Commercial Lending. In 2000, he was named Senior Vice President and Chief Credit Officer. Prior to joining the Bank he held the position of Senior Vice President and Director of Business Banking at Citizens Bank since December 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock has traded on the Nasdaq National Market since May 1996. Previously, the Corporation's stock traded on the Nasdaq Small-Cap Market since June 1992, and had been listed on the Nasdaq Over-The-Counter Market system since June 1987.
The quarterly common stock price ranges and dividends paid per share for the years ended December 31, 2000 and 1999 are presented in the following table. The stock prices are based on the high and low sales prices during the respective quarter.
2000 Quarters 1 2 3 4 ---------------------------------------------------------------------------- Stock prices: High 17.50 $15.94 $15.63 $14.63 Low 13.88 14.50 14.50 13.38
Cash dividend declared per share $.12 $.12 $.12 $.12
1999 Quarters 1 2 3 4 ---------------------------------------------------------------------------- Stock prices: High $21.88 $20.38 $18.00 $19.00 Low 16.50 15.75 14.75 15.25
Cash dividend declared per share $.11 $.11 $.11 $.11
The Corporation will continue to review future common stock dividends based on profitability, financial resources and economic conditions. The Corporation (including the Bank prior to 1984) has recorded consecutive quarterly dividends for over one hundred years.
The Corporation's primary source of funds for dividends paid to shareholders is the receipt of dividends from the Bank. A discussion of the restrictions on the advance of funds or payment of dividends to the Corporation is included in Note 15 to the Consolidated Financial Statements.
At February 27, 2001 there were 2,081 holders of record of the Corporation's common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements This report contains statements that are "forward-looking statements". We may also make written or oral forward-looking statements in other documents we file with the Securities and Exchange Commission, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Corporation. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Corporation to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
Some of the factors that might cause these differences include the following: changes in general national or regional economic conditions, changes in interest rates, reductions in the market value of trust and investment management assets under administration, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in the size and nature of the Corporation's competition, changes in loan defaults and charge-off rates, risk of an adverse action in pending litigation, and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1 of this report may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
Financial Overview Washington Trust recorded net income of $13.2 million, or $1.09 per diluted share, for 2000. In the second quarter of 2000, the Corporation completed the acquisition of Phoenix and recorded acquisition-related expenses of $1.1 million, after income taxes. During the third quarter of 1999, the Corporation completed its acquisition of Pier Bank and also recognized a nonrecurring gain on the sale of its credit card loan portfolio. 1999 results included acquisition related expenses of $1.3 million, net of income taxes, and the loan sale gain, net of expenses and related income taxes, of $285 thousand. The acquisitions were accounted for under the pooling of interests method and accordingly, the consolidated financial statements for the Corporation have been restated to reflect the acquisitions at the beginning of each period presented. Substantially all of Phoenix related revenues have been recorded as trust and investment management revenue in noninterest income. Results excluding acquisition-related expenses, net of taxes, and the loan sale gain, net of taxes, are referred to herein as "operating". Operating basis earnings also include a pro forma tax provision for pre-acquisition earnings of Phoenix, which operated as a sub-S corporation prior to the acquisition.
Operating earnings for the year 2000 amounted to $13.9 million, an increase of 8.9% from $12.8 million reported for 1999. Diluted earnings per share, on an operating basis, amounted to $1.15 for 2000, up from $1.06 per share in 1999. The Corporation's rates of return on average assets and average equity, on an operating basis, for 2000 were 1.20% and 16.98%, respectively. Comparable amounts for the year 1999 were 1.21% and 16.04%, respectively.
For the year ended December 31, 2000, net interest income (the difference between interest earned on loans and securities and interest paid on deposits and other borrowings) amounted to $37.9 million, up 6.3% over the 1999 amount. The net interest margin for the year 2000 amounted to 3.55%, compared to 3.71% in 1999. Other noninterest income (noninterest income excluding net gains on sales of securities and the nonrecurring 1999 loan sale gain) amounted to $19.0 million for the year 2000, up 7.0% from $17.7 million in 1999. The increase was primarily due to growth in revenues for trust and investment management services, offset in part by a decline in revenue from mortgage banking activities.
For the year 2000, total operating noninterest expense (total noninterest expense excluding acquisition-related expenses) amounted to $36.5 million, up 8.1% over the comparable 1999 amount. The increase was primarily attributable to higher salaries and benefits expense, increases in legal, audit and professional fees, and higher equipment costs. Included in other noninterest expense for the twelve months ended December 31, 2000 and 1999 were contributions of appreciated equity securities to the Corporation's charitable foundation amounting to $424 thousand and $270 thousand, respectively. These transactions resulted in realized securities gains of $310 thousand and $262 thousand, respectively, for the same periods.
Total consolidated assets amounted to $1.218 billion at December 31, 2000, up 10.2% from the December 31, 1999 balance of $1.106 billion. Average assets rose 10.3% during 2000 and amounted to $1.161 billion. The growth in assets was primarily attributable to purchases of securities and growth in the loan portfolio. Increases in FHLB advances as well as an 11.3% increase in total deposits funded the growth in assets. Total deposits amounted to $735.7 million and $660.8 million at December 31, 2000 and 1999, respectively. FHLB advances totaled $377.4 million at December 31, 2000, up 7.0% from the prior year balance of $352.5 million.
Nonperforming assets (nonaccrual loans and property acquired through foreclosure) amounted to $3.4 million or .28% of total assets at December 31, 2000, compared to $3.8 million or .35% of total assets at December 31, 1999. The Corporation's loan loss provision was $1.2 million and $1.8 million in 2000 and 1999, respectively.
Total shareholders' equity amounted to $89.2 million at December 31, 2000, compared to $78.2 million at December 31, 1999. Included in shareholders' equity at December 31, 2000 was net unrealized gains on securities available for sale, net of tax, of $4.0 million compared to net unrealized losses of $191 thousand at December 31, 1999.
Book value per share as of December 31, 2000 and 1999 amounted to $7.43 and $6.55, respectively.
Liquidity Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. Washington Trust's primary source of liquidity is customer deposits. Customer deposits (time, savings and demand deposits) funded approximately 60.2% of total average assets in 2000. Other sources of funding include discretionary use of purchased liabilities (i.e., FHLB term advances and federal funds purchased), cash flows from the Corporation's securities portfolios and loan repayments. In addition, securities designated as available for sale may be sold in response to short-term or long-term liquidity needs.
The Corporation's Asset/Liability Committee ("ALCO") establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained well within target ranges established by the ALCO during 2000. Net loans as a percentage of total assets amounted to 47.9% at December 31, 2000, compared to 48.5% at December 31, 1999. Total securities as a percentage of total assets amounted to 42.0% at December 31, 2000, up from 40.4% at December 31, 1999. These changes resulted primarily from the 10.2% increase in total assets in 2000.
For the year ended December 31, 2000, net cash provided by financing activities was $92.2 million. Proceeds from FHLB advances totaled $404.5 million, while repayments of FHLB advances totaled $379.7 million in 2000. Additionally, $74.9 million was generated from overall growth in deposits. Net cash used in investing activities was $110.3 million in 2000, the majority of which was used to purchase securities. While the Corporation does not have any significant capital commitments, it expects to continue to expend funds to upgrade and expand equipment and premises to support its operations. Net cash provided by operating activities amounted to $17.5 million in 2000, $13.2 million of which was generated by net income. (See the Consolidated Statements of Cash Flows for further information about sources and uses of cash.)
Acquisitions On June 26, 2000, the Corporation completed its acquisition of Phoenix, an independent investment advisory firm located in Providence, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the acquisition was effected by means of merger of Phoenix with and into the Bank, the wholly owned subsidiary of the Corporation. For the year ended December 31, 1999, Phoenix's investment management revenues totaled $3.4 million. Expenses directly attributable to the 2000 acquisition of Phoenix amounted to $1.1 million, after income taxes, and were charged to earnings at the date of combination. Acquisition related expenses primarily consisted of legal and investment advisory fees.
On August 25, 1999, the Corporation completed the acquisition of Pier Bank, a Rhode Island chartered community bank headquartered in South Kingstown, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999, the acquisition was effected by means of the merger of Pier Bank with and into the Bank, the wholly owned subsidiary of the Corporation. The conversion of customer deposit and loan accounts took place on September 24, 1999. Expenses directly attributable to the merger amounted to $1.3 million, net of income taxes, and were charged to earnings at the date of combination. Acquisition expenses consisted of professional fees, data processing/integration costs, write-down of assets and severance obligations. Asset write-downs amounted to $126 thousand and consisted of fixed assets, primarily obsolete technology equipment, abandoned in connection with the acquisition.
The acquisitions were tax-free reorganizations and were accounted for under the pooling of interests method. Accordingly, the consolidated financial statements and other financial information of the Corporation have been restated to present the combined financial condition and results of operations as if the combination had been in effect for all periods presented.
Net Interest Income Net interest income is the primary source of Washington Trust's operating income. The level of net interest income is affected by the volume of average interest-earning assets and interest-bearing liabilities, market interest rates and other factors. The following discussion presents net interest income on a fully taxable equivalent (FTE) basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities.
FTE net interest income increased $2.3 million, or 6.2%, from 1999 to 2000, due primarily to the growth in interest-earning assets. The net interest margins (FTE net interest income as a percentage of average interest-earning assets) for 2000 and 1999 were 3.55% and 3.71%, respectively. The interest rate spread declined 23 basis points to 2.96% in 2000. Earning asset yields rose 36 basis points during 2000, while the cost of interest-bearing liabilities increased 59 basis points, thereby narrowing the net interest spread. Higher cost of funds associated with FHLB advances and time deposits were primarily responsible for the decrease in the net interest margin.
FTE interest income totaled $86.2 million in 2000, up from $74.1 million in 1999. The yield on interest-earning assets amounted to 7.85% in 2000, up from 7.49% in 1999. Average interest-earning assets amounted to $1.098 billion or 11.0% over the comparable 1999 amount. The growth in average interest-earning assets was primarily due to growth in securities and loans. Total average securities rose $61.9 million, or 13.3%, in 2000, mainly due to purchases of taxable debt securities. The FTE rate of return on securities was 6.93% in 2000, up from 6.24% in 1999. The increase in yield reflects higher marginal rates on investment purchases during 2000 relative to the prior year.
Average loans amounted to $569.7 million in 2000, up $46.9 million, or 9.0%, in 2000. The FTE rate of return on total loans was 8.70% in 2000, up from 8.60% in 1999, due primarily to higher yields on new loan originations. Average residential real estate loans amounted to $240.4 million, up 12.3% from the prior year level. The yield on residential real estate loans amounted to 7.81%, up slightly from the prior year. Average commercial loans rose 5.2% to $230.8 million in 2000. The yield on commercial loans amounted to 9.51%, an increase of 14 basis points from the prior year yield of 9.37%. Average consumer loans rose 10.3% in 2000 to $98.5 million. The yield on consumer loans amounted to 8.96%, up 33 basis points from 8.63% in 1999.
As a result of higher levels of FHLB advances and increases in time deposits, average interest-bearing liabilities increased 11.0% to $965.2 million at December 31, 2000, and interest expense increased 26.3% and totaled $47.2 million in 2000. The rate paid on interest-bearing liabilities rose 59 basis points to 4.89% in 2000 primarily due to higher interest rates. Average FHLB advances increased by $61.0 million, or 19.7%, from 1999 and amounted to $370.6 million in 2000. The advances were used primarily to match fund the purchase of securities. The average rate paid on FHLB advances for 2000 was 6.17%, an increase of 73 basis points from the prior year.
Average time deposits increased by $33.7 million, or 10.6%, from 1999 and rose 65 basis points in the rate paid. Average savings deposits grew 5.1% to $240.6 million in 2000. The rate paid on savings deposits for 2000 amounted to 1.82%, compared to 1.77% for 1999. In addition, average demand deposits, an interest-free source of funding, increased 9.2% from 1999 and amounted to $106.7 million in 2000.
Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis) The following table presents average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income) are included in amounts presented for loans.
Noninterest Income Noninterest income is an important source of revenue for the Corporation. For the year ended December 31, 2000, recurring noninterest income, which excludes net gains on sales of securities and the nonrecurring net gain on the sale of the credit card portfolio, accounted for 33% of total revenues (net interest income plus recurring noninterest income). Washington Trust's primary sources of recurring noninterest income are trust and investment management revenues, servicing of deposit accounts, merchant credit card processing fees and mortgage banking activities. Also included in noninterest income are earnings generated from bank-owned life insurance ("BOLI") purchased in 1999.
Revenue from trust and investment management services continues to be the largest component of noninterest income. Trust and investment management revenue represented 53.5% of noninterest income and amounted to $10.5 million in 2000, up by 13.2% from the $9.3 million reported in 1999. This increase is primarily attributable to the increase in the number of accounts under management.
Service charges on deposit accounts rose 4.0% to $3.3 million in 2000. Changes in the fee structures of various deposit products during the year, as well as growth in the Corporation's total deposit base, were contributing factors in this increase.
Revenue from mortgage banking activities associated with the originations of loans for the secondary market totaled $585 thousand in 2000, down from $1.4 million in 1999, due to decreased loan sales resulting from lower mortgage refinancing activity. Mortgage banking activities include the capitalization of mortgage servicing rights of $27 thousand and $313 thousand in 2000 and 1999, respectively.
Most secondary market loans had previously been sold with servicing retained, however, in the fourth quarter of 1999, the Corporation began selling substantially all residential mortgage loans with servicing released. Mortgage servicing fee income amounted to $450 thousand for the year ended December 31, 2000, compared to the prior year amount of $426 thousand. Due to increases in interest rates, a lower amount of valuation adjustments on mortgage servicing rights was required in 2000 than in 1999. Servicing income, excluding valuation adjustments and amortization, as a percentage of average loans serviced was 30 basis points in 2000 and in 1999. The balance of serviced loans at December 31, 2000 amounted to $180.6 million, compared to $193.9 million at December 31, 1999.
In the second quarter of 1999, the Corporation purchased $18.0 million of BOLI as a financing tool for employee benefits. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. Included in other income was $1.0 million and $676 thousand of earnings on BOLI for the years ended December 31, 2000 and 1999, respectively. (See additional discussion on BOLI under the caption "Financial Condition".)
Noninterest Expense Total noninterest expense, excluding acquisition related expenses, rose 8.1% to $36.5 million in 2000. This increase was primarily attributable to higher salaries and benefit expense, increases in legal, audit and professional fees and higher equipment costs. Legal, audit and professional fees totaled $1.9 million, up $804 thousand from the corresponding 1999 amount. The increase was primarily due to legal costs associated with an ongoing litigation matter. These costs are expected to continue through the second quarter of 2001. At this time, management of the Corporation is not able to determine whether such costs will continue beyond the second quarter of 2001. Total equipment costs for 2000 amounted to $3.6 million, up $470 thousand from the corresponding 1999 amount. In 2000, the Corporation recorded an impairment adjustment of $293 thousand resulting from a remeasurement of the useful lives of technology equipment.
Income Taxes Income tax expense amounted to $5.7 million and $4.8 million in 2000 and 1999, respectively. The Corporation's effective tax rate was 30.0% in 2000, compared to a rate of 27.5% in 1999. These rates differed from the federal rate of 35.0% due to the benefits of tax-exempt income and the dividends received deduction as well as the results of the tax planning strategies designed to reduce income taxes and the effect of the second quarter 2000 acquisition of Phoenix. Phoenix operated as a sub-S corporation prior to the acquisition. The acquisition was a tax-free reorganization accounted for as a pooling of interests.
The Corporation's net deferred tax asset amounted to $2.1 million and $3.5 million at December 31, 2000 and 1999, respectively. In addition to future taxable income and the reversal of deferred tax liabilities, a primary source of recovery of deferred tax assets is taxes paid in prior years available for carryback. (See Note 12 to the Consolidated Financial Statements for additional information regarding income taxes.)
Financial Condition Securities Securities are designated as either available for sale or held to maturity at the time of purchase. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Securities designated as held to maturity are part of the Corporation's portfolio of long-term interest-earning assets. These securities are classified as long-term because the Corporation has the intent and ability to hold them until maturity. Securities held to maturity are reported at amortized cost.
Securities Available for Sale The amortized cost of securities available for sale at December 31, 2000 amounted to $380.0 million, an increase of $50.3 million over the 1999 amount. This increase was due primarily to purchases of mortgage-backed securities.
At December 31, 2000, the net unrealized gains on securities available for sale amounted to $6.6 million, an increase of $5.9 million from the comparable 1999 amount. This increase was attributable to the effects of reductions in medium and long-term bond rates that occurred during 2000. (See Note 3 to the Consolidated Financial Statements for detail of unrealized gains and losses associated with securities available for sale.)
Securities Held to Maturity The amortized cost of securities held to maturity increased $8.5 million, to $124.9 million at December 31, 2000. This increase is primarily attributable to purchases of obligations of U.S. government-sponsored agencies and mortgage-backed securities. The net unrealized gains on securities held to maturity amounted to $453 thousand at December 31, 2000 compared to $3.5 million in net unrealized losses at December 31, 1999.
Federal Home Loan Bank Stock The Corporation is required to maintain a level of investment in FHLB stock that currently is based on the level of its FHLB advances. As of December 31, 2000 and 1999, the Corporation's investment in FHLB stock totaled $19.6 million and $17.6 million, respectively. The Gramm-Leach-Bliley Act requires the FHLB to issue new capitalization requirements to be implemented by May 2002.
Loans Total loans amounted to $597.2 million at December 31, 2000, up $48.2 million, or 8.8%, from the December 31, 1999 amount of $549.0 million. The increase in total loans was led by growth in the residential and consumer loan portfolios.
Total residential real estate loans increased $25.2 million, or 11.2%, in 2000. Consumer loans were up $15.4 million, or 17.0%, in 2000. The increase in consumer loans was mainly due to growth in home equity loans and lines. Total commercial loans increased $7.5 million, or 3.2%, in 2000, with the largest increase occurring in the commercial mortgage portfolio.
Other Assets Other assets totaled $28.0 million at December 31, 2000, compared to $28.9 million at December 31, 1999. Included in other assets is BOLI, which amounted to $19.7 million and $18.7 million at December 31, 2000 and 1999, respectively. The Corporation purchased $18.0 million of BOLI in 1999 as a financing tool for employee benefits. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. The purchase of the life insurance policy results in an interest sensitive asset on the Corporation's consolidated balance sheet that provides monthly tax-free income to the Corporation. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed on all carriers. BOLI is included in other assets on the Corporation's consolidated balance sheets at its cash surrender value. Increases in BOLI's cash surrender value are reported as other income in the Corporation's consolidated statements of income.
Deposits Total deposits at December 31, 2000 amounted to $735.7 million, up 11.3% from the prior year balance of $660.8 million. Demand deposits rose 10.4% to $113.0 million. Savings deposits rose 10.2% to $259.3 million. Time deposits totaled $363.4 million at December 31, 2000, compared to $323.0 million at December 31, 1999. The $40.4 million increase in time deposits was primarily attributable to increases in consumer and commercial certificates of deposits.
Borrowings Washington Trust uses advances from the Federal Home Loan Bank of Boston as well as other borrowings as part of its overall funding strategy. The additional FHLB advances and other borrowings were used to meet short-term liquidity needs, to fund loan growth and to purchase securities. Total advances amounted to $377.4 million at December 31, 2000, up from $352.5 million one year earlier. (See Note 10 to the Consolidated Financial Statements for additional information about borrowings.)
Asset Quality Nonperforming Assets Nonperforming assets include nonaccrual loans and other real estate owned. Nonperforming assets declined to .28% of total assets at December 31, 2000 compared to .35% of total assets at December 31, 1999. Nonaccrual loans as a percentage of total loans fell from .69% at the end of 1999 to .58% at December 31, 2000. Approximately $1.8 million, or 53.2% of total nonaccrual loans, were less than 90 days past due at December 31, 2000.
The following table presents nonperforming assets and related ratios:
(Dollars in thousands)
December 31, 2000 1999 --------------------------------------------------------------------------- Nonaccrual loans: Residential real estate $796 $1,015 Commercial and other: Mortgages 1,076 702 Construction and development - 95 Other 1,018 1,242 Consumer 544 744 --------------------------------------------------------------------------- Total nonaccrual loans 3,434 3,798 Other real estate owned, net 9 49 --------------------------------------------------------------------------- Total nonperforming assets $3,443 $3,847 ---------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .58% .69% Nonperforming assets as a percentage of total assets .28% .35%
Nonaccrual Loans Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more past due with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but uncollected, is reversed against current period income. Subsequent cash receipts on nonaccrual loans are recognized as interest income, or recorded as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified.
Nonaccrual loans are returned to accrual status when the obligation has performed in accordance with the contract terms for a reasonable period of time and the ultimate collectibility of the contractual principal and interest is no longer doubtful.
Included in accruing loans 90 days or more past due at December 31, 2000 are residential mortgages amounting to $346 thousand which are considered well-collateralized and in the process of collection and therefore are deemed to have no loss exposure.
(Dollars in thousands)
December 31, 2000 1999 --------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $1,608 $1,902 Nonaccrual loans less than 90 days past due 1,826 1,896 --------------------------------------------------------------------------- Total nonaccrual loans $3,434 $3,798 --------------------------------------------------------------------------- Accruing loans 90 days or more past due, primarily all residential mortgages (1) $393 $120 --------------------------------------------------------------------------- (1) Not included in nonperforming assets
Restructured Loans Loans are considered restructured when the Corporation has granted concessions to a borrower due to the borrower's financial condition that it otherwise would not have considered. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. Included in nonaccrual loans at December 31, 2000 and 1999, are loans whose terms have been restructured amounting to $118 thousand and $142 thousand, respectively. There were no commitments to lend additional funds to borrowers whose loans had been restructured.
Other Real Estate Owned Other real estate owned ("OREO") is comprised of properties acquired through foreclosure and other legal means, and loans determined to be substantively repossessed. A loan is considered to be substantively repossessed when the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings. OREO is carried at the lower of cost or fair value minus estimated costs to sell. A valuation allowance is maintained for declines in market value and estimated selling costs.
The balance of OREO amounted to $9 thousand at December 31, 2000, down from the prior year amount of $49 thousand. Decreases in OREO resulted from sales of foreclosed properties and repossessed assets that exceeded the level of foreclosures and repossessions. During 2000, proceeds from sales of foreclosed properties and repossessed assets amounted to $95 thousand. Washington Trust has provided financing to facilitate the sales of some of these properties. Financing is generally provided at market rates with credit terms similar to those available to other borrowers.
Allowance for Loan Losses The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses (ALL). The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other environmental factors. The methodology includes an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114. Other individual commercial and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration the borrower's financial condition, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the Corporation's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional unallocated allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. For example, most of the loan portfolio is concentrated among borrowers in southern Rhode Island and southeastern Connecticut and a substantial portion of the portfolio is collateralized by real estate in this area, including most consumer loans and those commercial loans not specifically classified as commercial mortgages. A portion of the commercial and commercial mortgage loans are to borrowers in the hospitality and tourism industry and this concentration has been increasing in recent years. Economic conditions which may affect the ability of borrowers to meet debt service requirements are considered including interest rates and energy costs. Results of regulatory examinations, historical loss ranges, portfolio composition including a trend toward somewhat larger credit relationships, and other changes in the portfolio are also considered.
The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans.
The allowance for loan losses amounted to $13.1 million, or 2.20% of total loans, at December 31, 2000, compared to $12.3 million, or 2.25%, at December 31, 1999.
The following table reflects the activity in the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2000 1999 ------------------------------------------------------------------------- Beginning balance $12,349 $10,966 Charge-offs, net of recoveries: Residential: Real estate (19) 135 Construction - (22) Commercial: Mortgages (8) (126) Construction and development - (119) Other 13 (102) Consumer (350) (223) ------------------------------------------------------------------------- Net charge-offs (364) (457) Provision for loan losses 1,150 1,840 ------------------------------------------------------------------------- Ending balance $13,135 $12,349 ------------------------------------------------------------------------- Allowance for loan losses to nonaccrual loans 382.50% 325.15% Allowance for loan losses to total loans 2.20% 2.25% -------------------------------------------------------------------------
Capital Resources Total shareholders' equity increased $11.0 million during 2000 and amounted to $89.2 million at December 31, 2000. The overall increase was mainly attributable to earnings retention of $6.6 million. Capital growth also resulted from a $4.2 million increase in accumulated other comprehensive income due to unrealized gains on securities. Stock option exercises increased shareholders' equity by $222 thousand in 2000. Cash dividends declared per share amounted to $.48 and $.44 in 2000 and 1999, respectively.
The ratio of total equity to total assets amounted to 7.3% at December 31, 2000, compared to 7.1% at December 31, 1999. Book value per share at December 31, 2000 amounted to $7.43, a 13.4% increase from the year-earlier amount of $6.55 per share.
The Corporation and the Bank are subject to various regulatory capital requirements. The Corporation and the Bank are categorized as well-capitalized under the regulatory framework for prompt corrective action. (See Note 15 to the Consolidated Financial Statements for additional discussion of capital requirements.)
Litigation The Bank is party to a lawsuit filed by a former corporate customer and the customer's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by an officer and fifty percent shareholder of the customer. Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious affirmative defenses in this litigation. Additionally, the Bank has filed counterclaims against the customer and its shareholders, as well as claims against the individual allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The discovery phase of the case has been completed, though the parties are attempting to resolve several discovery disputes. The Bank has also filed several motions, all of which seek dismissal of one or more of the plaintiffs' claims and/or exclusion of portions of the plaintiffs' evidence. The court began hearing argument on the motions on March 8, 2001, and has expressed a desire to hear further argument. There is currently no scheduled trial date. During discovery, the plaintiffs have offered various theories and amounts of alleged damages, ranging from $5.0 million to $12.7 million, plus interest thereon. The plaintiffs have also filed a motion to amend the complaint to add a claim for punitive damages. The court has deferred ruling on whether to permit this amendment. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision for this lawsuit has been recorded.
Recent Accounting Developments Accounting for Derivative Instruments and Hedging Activities Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" standardizes the accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires a corporation to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. This Statement defines conditions and criteria to be used in designating a derivative as a specific type of hedging instrument. SFAS No. 133 also explains the accounting for changes in the fair value of a derivative, which depends on the intended use and the resulting designation. Under this Statement, a corporation is required to establish at the inception of the hedge the method to be used for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the corporation's approach to managing risk. The Corporation adopted SFAS No. 133 effective January 1, 2001. The adoption of this standard did not have a material impact on the financial position and earnings of the Corporation.
Comparison of 1999 with 1998 Washington Trust recorded net income of $12.5 million, or $1.03 per diluted share, for 1999. Net income for 1998 amounted to $12.2 million, or $1.01 per diluted share.
Operating earnings for the fiscal year 1999 amounted to $12.8 million, an increase of 10.9% from $11.5 million earned in 1998. Diluted earnings per share, on an operating basis, amounted to $1.06 for 1999, up from $.95 per share in 1998. The Corporation's rates of return on average assets and average equity, on an operating basis, for 1999 were 1.21% and 16.04%, respectively. Comparable amounts for 1998 were 1.24% and 15.21%.
Fully taxable equivalent net interest income increased $3.1 million or 9.4% from 1999 to 1998 due primarily to growth in interest-earning assets and lower costs of funds. The net interest margins for 1999 and 1998 were 3.71% and 3.85%, respectively. The interest rate spread declined 6 basis points to 3.19% in 1999. Earning asset yields fell 34 basis points during 1999, while the cost of interest-bearing liabilities declined 28 basis points, thereby narrowing the net interest spread. Growth in the securities portfolios as well as interest expense associated with the increases in FHLB advances, were primarily responsible for the decrease in the net interest margin.
Noninterest income totaled $18.8 million and $16.5 million for 1999 and 1998, respectively. The $2.3 million increase resulted primarily from growth in revenues for trust and investment management services and income from BOLI, offset in part by a decline in revenue from mortgage banking activities. Trust and investment management revenue totaled $9.3 million for 1999, up 12.0% from 1998. BOLI was purchased during the second quarter of 1999 as a financing tool for employee benefits. Income from BOLI amounted to $676 thousand in 1999. Also included in other income was a $438 thousand net gain on sale of the credit card portfolio that occurred in the third quarter of 1999. Operating noninterest expenses (excluding acquisition related expenses) amounted to $33.8 million for 1999, up $3.0 million from 1998. The increase was primarily attributable to higher salaries and benefits expense and equipment costs. Equipment costs rose 13.0% over the prior year period due primarily to depreciation expense associated with 1998 investments in technology.
Total assets rose $110.5 million or 11.1% to $1.106 billion at December 31, 1999. Average assets amounted to $1.053 billion in 1999, up 13.6% from the prior year. Asset growth was primarily attributable to a $52.1 million increase in total loans and a $31.3 increase in the carrying value of securities. Included in other assets is BOLI, which amounted to $18.7 million at December 31, 1999. Increases in FHLB advances as well as total deposits funded the growth in assets. Average interest-bearing liabilities amounted to $869.2 million at December 31, 1999, up 14.7% from December 31, 1998.
Nonperforming assets amounted to $3.8 million or .35% of total assets at December 31, 1999, down from $6.1 million or .61% at December 31,1998. The Corporation's loan loss provision was $1.8 million and $1.9 million in 1999 and 1998, respectively. Net loan charge-offs amounted to $457 thousand in 1999, up from $248 thousand in 1998. The allowance for loan losses represented 2.25% of total loans at December 31, 1999 compared to 2.21% at December 31, 1998.
Shareholders' equity amounted to $78.2 million at December 31, 1999, compared to $78.4 million at December 31, 1998. The decline was mainly attributable to reductions in net unrealized gains on securities of $7.6 million. Capital growth resulted from $6.1 million of earnings retention and $941 thousand from stock option exercises. Book value per share amounted to $6.55 at December 31, 1999, down slightly from the year-earlier amount of $6.66 per share. The ratio of capital to assets was 7.1% and 7.9% at December 31, 1999 and 1998, respectively. Dividends paid per share amounted to $.44 in 1999, up 10.0% from the prior year.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity Interest rate risk is one of the major market risks faced by the Corporation. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. The objective of the ALCO is to manage assets and funding sources to produce results which are consistent with Washington Trust's liquidity, capital adequacy, growth, risk and profitability goals.
The ALCO manages the Corporation's interest rate risk using income simulation to measure interest rate risk inherent in the Corporation's on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 60-month period. The simulations assume that the size and general composition of the Corporation's balance sheet remain constant over the 60-month simulation horizon and take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. Non-contractual savings deposits are classified as short-term (three months or less) for both maturity and repricing purposes. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency.
The ALCO reviews simulation results to determine whether the negative exposure of net interest income to changes in interest rates remains within established tolerance levels over a 24-month horizon, and to develop appropriate strategies to manage this exposure. In addition, the ALCO reviews 60-month horizon results to assess longer-term risk inherent in the balance sheet. As of December 31, 2000 and December 31, 1999, net interest income simulation indicated exposure to changing interest rates over a 24-month horizon to a degree that remained within tolerance levels established by the Corporation. The Corporation defines maximum unfavorable net interest income exposure to be a change of no more than 5% in net interest income over the first 12 months and no more than 10% over the second 12 months of the simulation horizon.
The following table summarizes the effect that interest rate shifts would have on net interest income for a 24-month period using the Corporation's on and off-balance sheet financial instruments as of December 31, 2000. Interest rates are assumed to shift by a parallel 200 basis points over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their historical insensitivity to rate changes. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenario used does not necessarily reflect the ALCO's view of the "most likely" change in interest rates over the next 24 months. Furthermore, since a static balance sheet is assumed, the results do not reflect the anticipated future net interest income of the Corporation for the same period. The following table presents these 24-month net interest income simulation results:
The ALCO estimates that the negative exposure of net interest income to falling rates results from the difficulty of reducing rates paid on deposits given the current level of interest rates. If rates were to fall sharply and remain at low levels for a sustained period, retail deposit rates would likely fall by a limited amount, while rates earned on assets would drop more rapidly. While the ALCO reviews simulation assumptions to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk since the repricing, maturity and prepayment characteristics of financial instruments, especially core savings deposits, may change to a different degree than estimated. In addition, since income simulations assume that the Corporation's balance sheet will remain static over the 60-month simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.
The Corporation also monitors the potential change in market value of its available for sale debt securities in parallel rate shifts of up to 200 basis points. The purpose is to determine market value exposure which may not be captured by income simulation, but which might result in changes to the Corporation's capital position. Results are calculated using industry-standard analytical techniques and securities data. The following table summarizes the potential change in market value of the Corporation's available for sale debt securities as of December 31, 2000 and 1999 resulting from immediate 200 basis point parallel rate shifts:
The Corporation also monitors the potential change in market value of its available for sale debt securities using "value at risk" analysis. The anticipated maximum market value reduction for the bank's available for sale securities portfolio at December 31, 2000, including both debt and equity securities, was 3.5%, assuming a one-year time horizon and a 5% probability of occurrence for "value at risk" analysis.
At December 31, 2000, gap analysis showed that the Corporation's cumulative one-year gap was a negative $128.9 million, or 11.2% of earning assets. The following table details the amounts of interest-earning assets and interest-bearing liabilities at December 31, 2000 that are expected to mature or reprice in each of the time periods presented. To the extent applicable, amounts of assets and liabilities that mature or reprice within a particular period were determined in accordance with their contractual terms. Fixed rate mortgages, mortgage-backed securities and consumer installment loans have been allocated based on expected amortization and prepayment rates using standard industry assumptions. Savings, NOW and money market deposit accounts, which have no contractual term and are subject to immediate repricing, are presented in the under three-month category. Management believes that gap analysis has substantial limitations as a measure of interest rate risk, as it does not address the effect of changes in interest rates nor the magnitude of resulting changes in net interest income. For this reason, the ALCO does not use gap analysis to establish interest rate risk targets or assess interest rate risk exposure.
The following table summarizes the Corporation's gap analysis as of December 31, 2000:
On occasion, the Corporation has supplemented its interest rate risk management strategies with off-balance sheet transactions. Such transactions are intended to hedge specifically identified risks inherent in the Corporation's balance sheet, and not to produce speculative profits. The Corporation has written policy guidelines that designate limits on the notional value of off-balance sheet transactions and require periodic evaluation of risks associated with these transactions, including counterparty credit risk.
During 1995, the Corporation entered into interest rate floor contracts with a notional principal amount of $50 million and a five-year term maturing in February 2000. During 1998, the Corporation entered into additional floor contracts with a notional principal amount of $20 million and a five-year term maturing in March 2003. These contracts are intended to function as a hedge against reductions in interest income realized from prime-based loans. These contracts were purchased for a total premium of $1.2 million, which is amortized over the life of the contracts. The Corporation receives payment for these contracts if certain interest rates fall below specified levels. During 2000, the Corporation recorded premium amortization, net of income, of $67 thousand on its floor contracts. (See Note 7 to the Consolidated Financial Statements for additional information regarding the floor contracts.)
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are contained herein.
Description
Independent Auditors' Report
Consolidated Balance Sheets December 31, 2000 and 1999
Consolidated Statements of Income For the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows For the Years Ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
[firm logo here][KPMG]
The Board of Directors and Shareholders Washington Trust Bancorp, Inc.:
We have audited the consolidated financial statements of Washington Trust Bancorp, Inc. and subsidiary (the "Corporation") as listed in the accompanying index. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ending December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Providence, Rhode Island January 15, 2001
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999
General Washington Trust Bancorp, Inc. (the "Corporation") is a publicly owned, registered bank holding company, organized under the laws of the State of Rhode Island. The Corporation provides a complete product line of financial services through its wholly owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The Bank was originally chartered in 1800 and provides a variety of financial services including commercial, residential and consumer lending, retail and commercial deposit products and trust and investment management services through its branch offices in Rhode Island and Connecticut. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits.
The activities of the Corporation and the Bank are subject to the regulatory supervision of the Board of Governors of the Federal Reserve System ("Federal Reserve Board") and the FDIC, respectively. Both companies are subject to various Rhode Island and Connecticut business and banking regulations.
On June 26, 2000, the Corporation completed its acquisition of Phoenix Investment Management Company, Inc. ("Phoenix"), an independent investment advisory firm. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the Corporation issued 1,010,808 shares of its common stock to the shareholders of Phoenix. For the years ended December 31, 1999 and 1998, investment management revenues of Phoenix totaled $3.4 million and $3.1 million, respectively. Net income of Phoenix for 1999 and 1998 amounted to $1.9 million and $1.7 million, respectively. Dividends paid to Phoenix shareholders totaled $1.8 million for 1999 and $1.7 million for 1998. Expenses directly attributable to the second quarter 2000 acquisition of Phoenix amounted to $1.1 million, after income taxes, and primarily consisted of legal and investment advisory fees.
On August 25, 1999, the Corporation completed its acquisition of Pier Bank, a Rhode Island chartered community bank headquartered in South Kingstown, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999, the Corporation issued 746,345 shares of its common stock to the shareholders of Pier Bank. At December 31, 1998, Pier Bank had total assets of $59.4 million and total shareholders' equity of $4.5 million. For the year ended December 31, 1998, Pier Bank's net income amounted to $459 thousand. Expenses directly attributable to the third quarter 1999 acquisition of Pier Bank amounted to $1.3 million, net of income taxes, and consisted mainly of professional fees, data processing/integration costs, write-down of assets and severance obligations. Pier Bank asset write-downs amounted to $126 thousand and consisted of fixed assets, primarily obsolete technology equipment, abandoned in connection with the acquisition.
Acquisition related expenses were charged to earnings at the dates of combination. The acquisitions were accounted for under the pooling of interests method and, accordingly, the financial statements and other financial information of the Corporation have been restated to reflect the acquisitions at the beginning of the earliest period presented.
(1) Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of the Corporation and the Bank. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification.
The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practices of the banking industry. The Corporation has one reportable operating segment. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to change is the determination of the allowance for loan losses.
Securities Securities Available for Sale The Corporation designates securities that it intends to use as part of its asset/liability strategy or that may be sold as a result of changes in market conditions, changes in prepayment risk, rate fluctuations, liquidity or capital requirements as available for sale. The determination to classify such securities as available for sale is made at the time of purchase.
Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Any decline in fair value below the amortized cost basis of an individual security deemed to be other than temporary is recognized as a realized loss in the accounting period in which the determination is made. The fair value of the security at the time of the write-down becomes the new cost basis of the security.
Realized gains or losses from sales of equity securities are determined using the average cost method, while other realized gains and losses are determined using the specific identification method.
Securities Held to Maturity The determination to classify debt securities in the held-to-maturity category is made at the time of purchase and is based on management's intent and ability to hold the securities until maturity. Debt securities in the held-to-maturity portfolio are stated at cost, adjusted for amortization of premium and accretion of discount (calculated on a method that approximates the interest method).
Federal Home Loan Bank Stock The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston. As a requirement of membership, the Bank must own a minimum amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank may redeem FHLB stock in excess of the minimum required. In addition, the FHLB may require members to redeem stock in excess of the requirement. FHLB stock is redeemable at par, which equals cost. Since no market exists for these shares, they are valued at par.
Mortgage Banking Activities Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost, net of unamortized deferred loan origination fees and costs, or market. Unrealized losses, if any, are charged to current period earnings.
Mortgage Servicing Rights Rights to service mortgage loans for others are recognized as an asset, including rights acquired through both purchases and originations. The total cost of originated mortgage loans that are sold with servicing rights retained is allocated between the mortgage servicing rights and the loans without the mortgage servicing rights based on their relative fair values. Capitalized mortgage servicing rights are included in other assets and are amortized as an offset to other income over the period of estimated net servicing income. They are periodically evaluated for impairment based on their fair value. Impairment is measured on an aggregated basis according to interest rate band and period of origination. The fair value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost. Any impairment is recognized as a charge to earnings through a valuation allowance.
Portfolio Loans Loans held in portfolio are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs. Interest income is accrued on a level yield basis based on principal amounts outstanding. Deferred loan origination fees and costs are amortized as an adjustment to yield over the life of the related loans.
Nonaccrual Loans Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent cash receipts on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible.
Impaired Loans A loan is impaired when it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Corporation considers all nonaccrual commercial loans to be impaired. Impairment is measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impairment is measured based on the fair value of the collateral if it is determined that foreclosure is probable.
Restructured Loans Restructured loans include those for which concessions such as reduction of interest rates other than normal market rate adjustments, or deferral of principal or interest payments have been granted due to a borrower's financial condition. Subsequent cash receipts on restructured loans are applied to the outstanding principal balance of the loan, or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan.
Allowance for Loan Losses The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses (ALL). The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other environmental factors. The methodology includes an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114. Other individual commercial and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration the borrower's financial condition, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the Corporation's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other factors including regional credit concentration, industry concentration, results of regulatory examinations, historical loss ranges, portfolio composition, economic conditions such as interest rates and energy costs and other changes in the portfolio. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans.
While management believes that the allowance for loan losses is adequate, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies periodically review the Corporation's allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination.
Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. Expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses.
Other Real Estate Owned (OREO) Other real estate owned consists of property acquired through foreclosure and loans determined to be substantively repossessed. Real estate loans that are substantively repossessed include only those loans for which the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings.
OREO is stated at the lower of cost or fair value minus estimated costs to sell at the date of acquisition or classification to OREO status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure is charged to the allowance for loan losses. A valuation allowance is maintained for declines in market value and for estimated selling expenses. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in foreclosed property costs.
Transfers and Servicing of Assets and Extinguishments of Liabilities The Corporation accounts and reports for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. This approach distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. After a transfer of financial assets, the Corporation recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. This financial components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the Corporation accounts for a transfer as a secured borrowing with a pledge of collateral.
Interest Rate Risk Management Agreements The Corporation uses off-balance sheet financial instruments from time to time as part of its interest rate risk management strategy. Interest rate swap and floor agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Corporation does not enter into agreements for trading or speculative purposes. Therefore, these agreements are not marked to market.
The net amounts to be paid or received on outstanding interest rate risk management agreements are recognized on the accrual basis as an adjustment to the related interest income or expense over the life of the agreements. Premiums paid for interest rate floor agreements are amortized as an adjustment to interest income over the term of the agreements. Unamortized premiums are included in other assets. Gains or losses resulting from the termination of interest rate swap and floor agreements on qualifying hedges of existing assets or liabilities are deferred and amortized over the remaining lives of the related assets/liabilities as an adjustment to the yield. Unamortized deferred gains/losses on terminated interest rate swap and floor agreements are included in the underlying assets/liabilities hedged.
Pension Costs The Corporation accounts for pension benefits using the net periodic benefit cost method, which recognizes the compensation cost of an employee's pension benefit over that employee's approximate service period.
Stock-Based Compensation The Corporation measures compensation cost for stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net income and earnings per share computed using the fair value based method of accounting for these plans as required by SFAS No. 123.
Income Taxes Income tax expense is determined based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Earnings Per Share (EPS) Diluted EPS is computed by dividing net income by the average number of common shares and common stock equivalents outstanding. Common stock equivalents arise from the assumed exercise of outstanding stock options, if dilutive. The computation of basic EPS excludes common stock equivalents from the denominator.
Comprehensive Income Comprehensive income is defined as all changes in equity, except for those resulting from investments by and distribution to shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income.
Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and other short-term investments. Generally, federal funds are sold on an overnight basis.
Derivative Instruments and Hedging Activities In 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for all derivative instruments, including certain derivative instruments embedded in other financial instruments, and for hedging activities. The standard requires an entity to record all derivatives, at fair value, as either assets or liabilities on the balance sheet. The change in a derivative's fair value is to be recorded either in current period earnings or other comprehensive income depending on whether the derivative qualifies for hedge accounting and the hedge classification. The Corporation adopted SFAS No. 133 effective January 1, 2001. The adoption of this standard did not have a material impact on the financial position and earnings of the Corporation.
(2) Cash and Due from Banks The Bank is required to maintain certain average reserve balances with the Federal Reserve Board. Such reserve balances amounted to $6.4 million and $6.0 million at December 31, 2000 and 1999, respectively.
(3) Securities Securities are summarized as follows:
Included in corporate stocks at December 31, 2000 are preferred stocks, which are callable at the discretion of the issuer, with an amortized cost of $9.6 million and a fair value of $9.3 million. Call features on these stocks range from four months to seven years.
The contractual maturities and weighted average yields of debt securities are summarized below. Weighted average yields are computed on a fully taxable basis. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments.
(Dollars in thousands) Weighted Amortized Fair Average December 31, 2000 Cost Value Yield ------------------------------------------------------------------------- Securities Available for Sale: Due in 1 year or less $59,129 $59,199 6.89% After 1 but within 5 years 164,355 165,409 7.01% After 5 but within 10 years 74,485 75,057 7.10% After 10 years 67,716 66,840 7.36% ------------------------------------------------------------------------- Total debt securities available for sale 365,685 366,505 7.07% ------------------------------------------------------------------------- Securities Held to Maturity: Due in 1 year or less 23,466 23,553 6.50% After 1 but within 5 years 64,169 64,460 6.25% After 5 but within 10 years 30,264 30,316 5.96% After 10 years 7,016 7,039 6.81% ------------------------------------------------------------------------- Total debt securities held to maturity 124,915 125,368 6.26% ------------------------------------------------------------------------- Total debt securities $490,600 $491,873 6.87% -------------------------------------------------------------------------
At December 31, 2000, the Corporation owned debt securities with an aggregate carrying value of $62.5 million that are callable at the discretion of the issuers. The majority of these securities are U.S. Treasury and government-sponsored agency obligations, included in both the available for sale and held to maturity categories. Final maturities of these securities range from twenty-six months to thirty years with call features ranging from one month to seven years.
The following is a summary of amounts relating to sales of securities available for sale:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------- Proceeds from sales $40,288 $81,398 $95,666 ------------------------------------------------------------------------- Realized gains $1,358 $2,213 $1,161 Realized losses (598) (1,535) (657) ------------------------------------------------------------------------- Net realized gains $760 $678 $504 -------------------------------------------------------------------------
Securities available for sale and held to maturity with a fair value of $65.3 million and $46.9 million were pledged to secure Treasury Tax and Loan deposits, borrowings and public deposits at December 31, 2000 and 1999, respectively. In addition, securities available for sale and held to maturity with a fair value of $31.2 million and $52.0 million were collateralized for the discount window at the Federal Reserve Bank at December 31, 2000 and 1999, respectively. There were no borrowings with the Federal Reserve Bank at either date.
(4) Loans The following is a summary of loans:
(Dollars in thousands)
December 31, 2000 1999 ------------------------------------------------------------------------- Commercial and other: Mortgages (1) $121,817 $113,719 Construction and development (2) 2,809 2,902 Other (3) 115,202 115,739 ------------------------------------------------------------------------- Total commercial and other 239,828 232,360 Residential real estate: Mortgages 236,595 212,719 Homeowner construction 14,344 12,995 ------------------------------------------------------------------------- Total residential real estate 250,939 225,714 Consumer 106,388 90,951 ------------------------------------------------------------------------- Total loans $597,155 $549,025 -------------------------------------------------------------------------
(1) Amortizing mortgages, primarily secured by income producing property (2) Loans for construction of residential and commercial properties and for land development (3) Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate
Concentrations of Credit Risk The Corporation's lending activities are primarily conducted in southern Rhode Island and southeastern Connecticut. The Corporation grants single family and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. In addition, loans are granted for the construction of residential homes, commercial real estate properties, and for land development. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation's market area.
Nonaccrual Loans The balance of loans on nonaccrual status as of December 31, 2000 and 1999 was $3.4 million and $3.8 million, respectively. Interest income that would have been recognized had these loans been current in accordance with their original terms was approximately $411 thousand in 2000 and $447 thousand in 1999. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $250 thousand in 2000 and $217 thousand in 1999. Included in nonaccrual loans at December 31, 2000 and 1999 are loans amounting to $118 thousand and $142 thousand, respectively, whose terms have been restructured.
Impaired Loans Impaired loans consist of all nonaccrual commercial loans. The following is a summary of impaired loans:
(Dollars in thousands)
December 31, 2000 1999 ------------------------------------------------------------------------- Impaired loans requiring an allowance $813 $1,668 Impaired loans not requiring an allowance 1,301 371 ------------------------------------------------------------------------- Total recorded investment in impaired loans $2,114 $2,039 -------------------------------------------------------------------------
(Dollars in thousands)
Years ended December 31, 2000 1999 ------------------------------------------------------------------------- Average recorded investment in impaired loans $2,056 $3,418 ------------------------------------------------------------------------- Interest income recognized on impaired loans $191 $351 -------------------------------------------------------------------------
Mortgage Servicing Activities At December 31, 2000 and 1999, mortgage loans sold to others and serviced by the Corporation on a fee basis under various agreements amounted to $180.6 million and $193.9 million, respectively. Loans serviced for others are not included in the Consolidated Balance Sheets.
The following is a summary of capitalized mortgage servicing rights:
(Dollars in thousands)
December 31, 2000 1999 ------------------------------------------------------------------------- Balance at beginning of year $996 $808 Additions 27 313 Amortization (118) (125) ------------------------------------------------------------------------- Balance at end of year $905 $996 -------------------------------------------------------------------------
Capitalized mortgage servicing rights are periodically evaluated for impairment. As of December 31, 2000 and 1999, the balance of the valuation allowance amounted to $320 thousand.
Loans to Related Parties The Corporation has made loans in the ordinary course of business to certain directors and executive officers including their immediate families and their affiliated companies. Such loans were made under normal interest rate and collateralization terms. Activity related to these loans in 2000 and 1999 was as follows:
(Dollars in thousands)
December 31, 2000 1999 ------------------------------------------------------------------------- Balance at beginning of year $2,279 $2,455 Additions 2,061 1,406 Reductions (1,749) (1,582) ------------------------------------------------------------------------- Balance at end of year $2,591 $2,279 -------------------------------------------------------------------------
(5) Allowance for Loan Losses The following is an analysis of the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------- Balance at beginning of year $12,349 $10,966 $9,335 Provision charged to expense 1,150 1,840 1,879 Recoveries of loans previously charged off 319 510 405 Loans charged off (683) (967) (653) ------------------------------------------------------------------------- Balance at end of year $13,135 $12,349 $10,966 -------------------------------------------------------------------------
Included in the allowance for loan losses at December 31, 2000, 1999 and 1998 was an allowance for impaired loans amounting to $209 thousand, $475 thousand and $803 thousand, respectively.
(6) Premises and Equipment The following is a summary of premises and equipment:
(Dollars in thousands)
December 31, 2000 1999 ------------------------------------------------------------------------- Land and improvements $2,099 $2,245 Premises and improvements 25,114 24,624 Furniture, fixtures and equipment 19,319 18,456 ------------------------------------------------------------------------- 46,532 45,325 Less accumulated depreciation 24,822 21,883 ------------------------------------------------------------------------- Total premises and equipment, net $21,710 $23,442 -------------------------------------------------------------------------
(7) Financial Instruments With Off-Balance Sheet Risk and Derivative Financial Instruments The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation's exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees and interest rate swaps and floors. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:
Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each borrower's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the borrower.
Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Interest Rate Risk Management Agreements The Corporation uses interest rate swaps and floors from time to time as part of its interest rate risk management strategy. Swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. A floor is a purchased contract that entitles the Corporation to receive payment from a counterparty if a rate index falls below a contractual rate. The amount of the payment is the difference between the contractual floor rate and the rate index multiplied by the notional principal amount of the contract. If the rate index does not fall below the contractual floor rate, no payment is received. The credit risk associated with swap and floor transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and thus, are not a measure of the Corporation's potential loss exposure.
During 1995, the Corporation entered into interest rate floor contracts with a total notional amount of $50 million that matured in February 2000. The Corporation received payment under the 1995 contracts with a total notional value of $30 million when the prime rate fell below 9.0% and on the remaining $20 million when 3-month LIBOR at quarterly resetting dates was below 6.19%. In March 1998, the Corporation entered into a five-year interest rate floor contract with a notional amount of $20 million that matures in February 2003. The 1998 floor contract entitles the Corporation to receive payment from counterparts if the three-month LIBOR rate falls below 5.50%. The purpose of the floor contracts is to offset the risk of future reductions in interest earned on certain floating rate loans. The 3-month LIBOR applicable to the outstanding floor contract at December 31, 2000 was 6.40%. At December 31, 2000, the fair value, or the value to the Corporation of terminating the contracts, was $98 thousand. The remaining unamortized premium for these contracts, included in other assets, amounted to $133 thousand at December 31, 2000.
The Corporation has not terminated any interest rate swap agreements or floor contracts and there are no unamortized deferred gains or losses.
(8) Other Real Estate Owned Other real estate owned is included in other assets on the Corporation's consolidated balance sheets. An analysis of the composition of OREO follows:
(Dollars in thousands)
December 31, 2000 1999 ------------------------------------------------------------------------ Residential real estate $ - $43 Commercial real estate - 55 Repossessed assets 11 45 Land 37 - ------------------------------------------------------------------------ 48 143 Valuation allowance (39) (94) ------------------------------------------------------------------------ Other real estate owned, net $9 $49 ------------------------------------------------------------------------
An analysis of the activity relating to OREO follows:
(Dollars in thousands)
Years ended December 31, 2000 1999 ------------------------------------------------------------------------ Balance at beginning of year $143 $312 Net transfers from loans 109 576 Sales (154) (745) Other (50) - ------------------------------------------------------------------------ 48 143 Valuation allowance (39) (94) ------------------------------------------------------------------------ Other real estate owned, net $9 $49 ------------------------------------------------------------------------
The following is an analysis of activity relating to the OREO valuation allowance:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------ Balance at beginning of year $94 $69 $76 Provision charged to expense 3 99 14 Sales (8) (53) (1) Selling expenses incurred - (21) (20) Other (50) - - ------------------------------------------------------------------------ Balance at end of year $39 $94 $69 ------------------------------------------------------------------------
Net realized gains on dispositions of properties amounted to $44 thousand, $39 thousand, and $50 thousand in 2000, 1999 and 1998, respectively. These amounts are included in other noninterest expense in the Consolidated Statements of Income.
(9) Time Certificates of Deposit Scheduled maturities of time certificates of deposit at December 31, 2000 were as follows:
(Dollars in thousands)
Years ending December 31: 2001 $252,224 2002 99,243 2003 8,116 2004 3,015 2005 751 2006 and thereafter 14 ------------------------------------------------------------------------ Balance at December 31, 2000 $363,363 ------------------------------------------------------------------------
The aggregate amount of time certificates of deposit in denominations of $100 thousand or more was $122.9 million and $100.6 million at December 31, 2000 and 1999, respectively.
(10) Borrowings
Federal Home Loan Bank Advances The following table presents scheduled maturities and weighted average interest rates paid on FHLB advances outstanding at December 31, 2000:
(Dollars in thousands) Weighted Average Rate Amount -------------------------------------------------------------------------
Years ending December 31: 2001 6.43% $176,977 2002 6.37% 70,412 2003 6.29% 61,007 2004 6.27% 19,159 2005 6.38% 3,208 2006 and thereafter 5.95% 46,599 ------------------------------------------------------------------------- Balance at December 31, 2000 $377,362 -------------------------------------------------------------------------
Included in the outstanding amounts disclosed are callable advances totaling $42.5 million. Call features on these advances range from one to five years. In addition to the outstanding advances, the Bank also has access to an unused line of credit amounting to $8.0 million at December 31, 2000. Under agreement with the FHLB, the Bank is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances. Qualified collateral may consist of residential mortgage loans, U.S. government or agency securities, and amounts maintained on deposit at the FHLB. The Bank maintains qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at December 31, 2000.
Other Borrowings The following is a summary of other borrowings:
(Dollars in thousands)
December 31, 2000 1999 ------------------------------------------------------------------------ Treasury, Tax and Loan demand note balance $2,813 $3,948 Other 414 261 ------------------------------------------------------------------------ Other borrowings $3,227 $4,209 ------------------------------------------------------------------------
There were no securities sold under repurchase agreements outstanding at December 31, 2000 and 1999. Securities sold under repurchase agreements generally mature within 90 days. The securities underlying the agreements are held in safekeeping by the counterparty in the name of the Corporation and are repurchased when the agreement matures. Accordingly, these underlying securities are included in securities available for sale and the obligations to repurchase such securities are reflected as a liability. The following is a summary of amounts relating to securities sold under repurchase agreements:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------ Maximum amount outstanding at any month-end $ - $23,525 $26,767 Average amount outstanding $ - $10,316 $13,323 Weighted average rate - 5.05% 5.56%
(11) Employee Benefits Defined Benefit Pension Plans The Corporation's noncontributory tax-qualified defined benefit pension plan covers substantially all employees. Benefits are based on an employee's years of service and highest 3-year compensation. The plan is funded on a current basis, in compliance with the requirements of the Employee Retirement Income Security Act. The prepaid benefit costs relating to the defined benefit pension plan amounted to $63 thousand and $448 thousand at December 31, 2000 and 1999, respectively.
The Corporation has a nonqualified retirement plan to provide supplemental retirement benefits to certain employees, as defined in the plan. The accrued pension liability related to this plan amounted to $534 thousand and $400 thousand at December 31, 2000 and 1999, respectively. The actuarial assumptions used for this supplemental plan are the same as those used for the Corporation's tax-qualified pension plan. The projected benefit obligation for this plan amounted to $1.4 million and $1.1 million at September 30, 2000 and 1999, respectively.
The following is a reconciliation of the benefit obligation, fair value of plan assets and funded status of the Corporation's defined benefit pension plans:
(Dollars in thousands)
Years ended September 30, 2000 1999 ------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of plan year $13,823 $14,479 Service cost 722 652 Interest cost 1,013 1,001 Amendments - 174 Actuarial loss (gain) 63 (1,801) Benefits paid (693) (682) ------------------------------------------------------------------------- Benefit obligation at end of plan year $14,928 $13,823 ------------------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets at beginning of plan year $17,780 $16,349 Actual return on plan assets 1,297 2,053 Employer contribution 61 60 Benefits paid (693) (682) ------------------------------------------------------------------------- Fair value of plan assets at end of plan year $18,445 $17,780 -------------------------------------------------------------------------
Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods. Unrecognized amounts to be amortized and the amounts included in the Consolidated Balance Sheets are as follows:
(Dollars in thousands)
2000 1999 ------------------------------------------------------------------------- Funded status at September 30, $3,517 $3,957 Unrecognized transition asset (43) (49) Unrecognized prior service cost 533 620 Unrecognized net actuarial gain (4,478) (4,480) ------------------------------------------------------------------------- (Accrued) prepaid benefit cost at December 31, $(471) $48 -------------------------------------------------------------------------
September 30, 2000 1999 ------------------------------------------------------------------------- Assumptions Used: Discount rate 7.75% 7.50% Expected return on plan assets 8.50% 8.50% Rate of compensation increase 5.00% 5.00%
The components of net pension cost include the following:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------- Components of Net Periodic Benefit Cost: Service cost $722 $652 $502 Interest cost 1,013 1,002 915 Expected return on plan assets (1,229) (1,106) (992) Amortization of transition asset (6) (6) (6) Amortization of prior service cost 87 75 75 Recognized net actuarial (gain) loss (8) 11 6 ------------------------------------------------------------------------- Net periodic benefit cost $579 $628 $500 -------------------------------------------------------------------------
401(k) Plan The Corporation's 401(k) Plan provides a specified match of employee contributions for substantially all employees. Total employer matching contributions under this plan amounted to $320 thousand, $275 thousand and $256 thousand in 2000, 1999 and 1998, respectively.
Profit Sharing Plan The Corporation has a nonqualified profit sharing plan that rewards employees, excluding those key employees participating in the Short-Term Incentive Plan, for their contributions to the Corporation's success. The annual profit sharing benefit is determined by a formula tied to return on equity and is subject to approval by the Corporation's Board of Directors each year. The amount of the profit sharing benefit was $392 thousand, $333 thousand and $322 thousand for 2000, 1999 and 1998, respectively.
Short-Term Incentive Plan The Corporation's nonqualified Short-Term Incentive Plan rewards key employees for their contributions to the Corporation's success. This plan provides for annual payments up to a maximum percentage of each participant's base salary, which percentages vary among participants. Payment amounts are based on the achievement of target levels of return on equity and/or the achievement of individual objectives. Participants in this plan are not eligible to receive benefits provided under the profit sharing component of the Savings and Profit Sharing Plan. The expense of the Short-Term Incentive Plan amounted to $1.3 million, $969 thousand and $688 thousand in 2000, 1999 and 1998, respectively.
Other Incentive Plans In connection with the acquisition of Phoenix, there are incentive compensation arrangements based on current and future year revenue goals. The expense recognized for these arrangements in 2000, applicable to the period subsequent to the June 26, 2000 acquisition date, amounted to $200 thousand. In addition, the Corporation has other nonqualified incentive plans. Certain employees, who do not participate in the profit sharing plan or the Short-Term Incentive Plan, participate in one of these plans. The incentives are based on a variety of plan specific factors, including general organizational profitability, product line result, and individual business development goals. The aggregate cost of these various plans amounted to $963 thousand, $717 thousand and $799 thousand in 2000, 1999 and 1998, respectively.
Directors' Retainer Continuation Plan The Corporation previously offered a nonqualified plan that provided retirement benefits to non-officer directors. In 1996, the provisions of the plan were terminated for active directors and the related accrued benefit was settled. The benefits provided under this plan continue for retired directors. The expense of this plan is included in other noninterest expense and amounted to $24 thousand, $24 thousand and $25 thousand for 2000, 1999 and 1998, respectively. Accrued and unpaid benefits under this plan are an unfunded obligation of the Bank. The accrued liability related to this plan amounted to $241 thousand and $248 thousand at December 31, 2000 and 1999, respectively.
Deferred Compensation Plan The Corporation's Nonqualified Deferred Compensation Plan provides supplemental retirement and tax benefits to directors and certain officers. The plan is funded primarily through pre-tax contributions made by the participants. The Corporation has recorded the assets and liabilities for the deferred compensation plan at the lower of cost or market in the consolidated balance sheets. The participants in the plan bear the risk of market fluctuations of the underlying assets. The accrued liability related to this plan amounted to $1.2 million and $953 thousand at December 31, 2000 and 1999, respectively, and is included in other liabilities on the accompanying consolidated balance sheets. The corresponding invested assets are reported in other assets.
(12) Income Taxes The components of income tax expense were as follows:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------ Current tax expense: Federal $6,311 $5,446 $4,564 State 43 49 50 ------------------------------------------------------------------------ Total current tax expense 6,354 5,495 4,614 ------------------------------------------------------------------------ Deferred tax benefit: Federal (681) (741) (371) State - - (8) ------------------------------------------------------------------------ Total deferred tax benefit (681) (741) (379) ------------------------------------------------------------------------ Total income tax expense $5,673 $4,754 $4,235 ------------------------------------------------------------------------
Total income tax expense varied from the amount determined by applying the Federal income tax rate to income before income taxes. The reasons for the differences were as follows:
(Dollars in thousands)
Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------ Tax expense at Federal statutory rate $6,609 $5,239 $5,052 Increase (decrease) in taxes resulting from: Tax-exempt income (377) (457) (401) Acquisition related expenses 89 268 - Dividends received deduction (259) (246) (261) Bank-owned life insurance (366) (237) - State tax, net of Federal income tax benefit 28 32 26 Other (51) 155 (181) ------------------------------------------------------------------------ Total income tax expense $5,673 $4,754 $4,235 ------------------------------------------------------------------------
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 2000 and 1999 are as follows:
(Dollars in thousands)
December 31, 2000 1999 ------------------------------------------------------------------------ Gross deferred tax assets: Allowance for loan losses $4,468 $4,211 Deferred compensation 414 242 Deferred loan origination fees 317 366 Net operating loss carryover 250 292 Other 915 987 ------------------------------------------------------------------------ Gross deferred tax assets 6,364 6,098 ------------------------------------------------------------------------ Gross deferred tax liabilities: Securities available for sale (2,315) (252) Deferred loan origination costs (862) (811) Premises and equipment (759) (1,060) Pension (11) (146) Other (276) (306) ------------------------------------------------------------------------ Gross deferred tax liabilities (4,223) (2,575) ------------------------------------------------------------------------ Net deferred tax asset $2,141 $3,523 ------------------------------------------------------------------------
In addition to future taxable income and the reversal of deferred tax liabilities, a primary source of recovery of deferred tax assets is taxes paid in prior years available for carryback.
(13) Operating Leases At December 31, 2000, the Corporation was committed to rent premises used in banking operations under noncancellable operating leases. Rental expense under the operating leases amounted to $604 thousand, $478 thousand and $526 thousand for 2000, 1999 and 1998, respectively. The minimum annual lease payments under the terms of these leases, exclusive of renewal provisions, are as follows:
(Dollars in thousands)
Years ending December 31: 2001 $418 2002 311 2003 246 2004 223 2005 51 ------------------------------------------------------------------------ $1,249 ------------------------------------------------------------------------
(14) Litigation On January 28, 1997, a suit was filed against the Bank in the Superior Court of Washington County, Rhode Island by Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by Maxson's former president, treasurer and fifty percent shareholder, which allegedly occurred between 1986 and 1995. The suit alleges that the Bank erred in permitting this individual, while an officer of Maxson, to transfer funds from Maxson's account at the Bank for his personal benefit. The claims against the Bank are based upon theories of breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constructive fraud.
Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious affirmative defenses in this litigation. Additionally, the Bank has filed counterclaims against Maxson and its shareholders as well as claims against the former Maxson officer allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The discovery phase of the case has been completed, though the parties are attempting to resolve several discovery disputes. The Bank has also filed several motions, all of which seek dismissal of one or more of the plaintiffs' claims and/or exclusion of portions of the plaintiffs' evidence. The court began hearing argument on the motions on March 8, 2001, and has expressed a desire to hear further argument. There is currently no scheduled trial date. During discovery, the plaintiffs have offered various theories and amounts of alleged damages, ranging from $5.0 million to $12.7 million, plus interest thereon. The plaintiffs have also filed a motion to amend the complaint to add a claim for punitive damages. The court has deferred ruling on whether to permit this amendment. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision has been recorded.
The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation.
(15) Shareholders' Equity Stock Splits A 3-for-2 stock split, in the form of a stock dividend, was paid on August 3, 1998 to shareholders of record on July 17, 1998. The par value of the common stock remained unchanged at $.0625 per share. Cash payments were made in lieu of issuing fractional shares. All share and per share amounts in the consolidated financial statements and related notes have been restated to reflect the stock split.
Stock Repurchase Plan In December 1997, the Corporation's Board of Directors approved a program to repurchase up to 225,000, or approximately 2.3%, of its outstanding common shares. This plan replaced the June 1996 authorization to repurchase 195,750 shares. The Corporation planned to hold the repurchased shares as treasury stock to be used for general corporate purposes. Approximately 139,274 shares were repurchased in 1998 at a total cost of $3.0 million. In April 1999, the Corporation's Board of Directors approved the termination of the Corporation's stock repurchase plan.
Rights On August 1996, the Corporation declared a dividend of one common share purchase right (a "Right") for each share of common stock payable on September 3, 1996 to shareholders of record on that date. Such Rights also apply to new issuances of shares after that date. Each Right entitles the registered holder to purchase from the Corporation one share of its common stock at a price of $35.56 per share, subject to adjustment.
The Rights are not exercisable or separable from the common stock until the earlier of 10 days after a person or group (an "Acquiring Person") acquires beneficial ownership of 15% or more of the outstanding common shares or announces a tender offer to do so. The Rights, which expire on August 31, 2006, may be redeemed by the Corporation at any time prior to the acquisition by an Acquiring Person of beneficial ownership of 15% or more of the common stock at a price of $.001 per Right. In the event that any party becomes an Acquiring Person, each holder of a Right, other than Rights owned by the Acquiring Person, will have the right to receive upon exercise that number of common shares having a market value of two times the purchase price of the Right. In the event that, at any time after any party becomes an Acquiring Person, the Corporation is acquired in a merger or other business combination transaction or 50% or more of its assets or earning power are sold, each holder of a Right will have the right to purchase that number of shares of the acquiring company having a market value of two times the purchase price of the Right.
Dividends The primary source of funds for dividends paid by the Corporation is dividends received from the Bank. The Corporation and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans, and advances from the Bank to the Corporation. Generally the Bank has the ability to pay dividends to the parent subject to minimum regulatory capital requirements. Under the most restrictive of these requirements, the Bank could have declared aggregate additional dividends of $36.3 million as of December 31, 2000.
Stock Option Plans The Corporation's 1997 Equity Incentive Plan (the "1997 Plan") permits the granting of options and other equity incentives to key employees, directors, advisors, and consultants. Up to 1,012,500 shares of the Corporation's common stock may be used from authorized but unissued shares, treasury stock, or shares available from expired awards. Options are designated either as non-qualified or as incentive options. The exercise price of each option may not be less than the fair market value on the date of the grant. In general, the option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof. Awards may be granted at any time until April 29, 2007.
The 1988 Amended and Restated Stock Option Plan (the "1988 Plan") provided for the granting of options to directors, officers and key employees. The 1988 Plan permitted options to be granted at any time until December 31, 1997. The 1988 Plan provided for shares of the Corporation's common stock to be used from authorized but unissued shares, treasury stock, or shares available from expired options. Options were designated either as non-qualified or as incentive options. The exercise price of options granted was equal to the fair market value on the date of grant. In general, the option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof.
The 1997 Plan and the 1988 Plan permit options to be granted with stock appreciation rights ("SARs"), however, no options have been granted with SARs.
Options granted under the plans vest according to various terms at the end of ten years. The following table presents changes in options outstanding during 2000, 1999 and 1998:
The weighted average exercise price and remaining contractual life for options outstanding at December 31, 2000 were as follows:
As discussed in Note 1, the Corporation accounts for its stock option plan using the intrinsic value based method prescribed by APB Opinion No. 25, and in addition, is required to disclose pro forma net income and earnings per share using the fair value based method prescribed by SFAS No. 123. Accordingly, no compensation cost for these plans has been recognized in the Consolidated Statements of Income for 2000, 1999 and 1998.
In determining the pro forma disclosures required by SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents pro forma net income and earnings per share assuming the stock option plan was accounted for using the fair value method prescribed by SFAS No. 123, the weighted average assumptions used and the grant date fair value of options granted in 2000, 1999 and 1998:
(Dollars in thousands, except per share amounts)
Years ended December 31, 2000 1999 1998 -------------------------------------------------------------------------- Net income As reported $13,209 $12,511 $12,178 Pro forma $12,401 $11,942 $11,838
Basic earnings per share As reported $1.10 $1.05 $1.04 Pro forma $1.04 $1.01 $1.01
Diluted earnings per share As reported $1.09 $1.03 $1.01 Pro forma $1.02 $.99 $.98
Weighted average fair value $5.01 $5.36 $5.40 Expected life 9.3 years 9.0 years 8.6 years Risk-free interest rate 6.39% 5.91% 6.04% Expected volatility 32.6% 32.8% 25.9% Expected dividend yield 3.9% 3.9% 4.0%
The pro forma effect on net income and earnings per share for 2000, 1999 and 1998 is not representative of the pro forma effect on net income and earnings per share for future years because it does not reflect compensation cost for options granted prior to January 1, 1995.
Dividend Reinvestment Under the Amended and Restated Dividend Reinvestment and Stock Purchase Plan, 607,500 shares of common stock were originally reserved to be issued for dividends reinvested and cash payments to the plan.
Reserved Shares As of December 31, 2000, a total of 1,764,691 common stock shares were reserved for issuance under the 1988 Plan, the 1997 Plan and the Amended and Restated Dividend Reinvestment and Stock Purchase Plan.
Regulatory Capital Requirements The Corporation and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the FDIC, respectively. These requirements were established to more accurately assess the credit risk inherent in the assets and off-balance sheet activities of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2000, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2000, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank's category.
The following table presents the Corporation's and the Bank's actual capital amounts and ratios at December 31, 2000 and 1999, as well as the corresponding minimum regulatory amounts and ratios:
(16) Earnings per Share
(17) Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Corporation disclose estimated fair values of its financial instruments. Fair value estimates are made as of a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any pricing adjustments that could result from the sale of the Corporation's entire holding of a particular financial instrument. Because no quoted market exists for a portion of the financial instruments, fair value estimates are based on subjective judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. Changes in assumptions could significantly affect the estimates of fair value. Fair value estimates, methods, and assumptions are set forth as follows:
Cash and Securities The carrying amount of short-term instruments such as cash and federal funds sold is used as an estimate of fair value.
The fair value of securities available for sale and held to maturity is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. No market exists for shares of the FHLB of Boston. Such stock may be redeemed at par upon termination of FHLB membership and is therefore valued at par, which equals cost.
Mortgage Loans Held for Sale The fair value of mortgage loans held for sale is estimated using the quoted market prices for sales of similar loans on the secondary market.
Loans Fair values are estimated for categories of loans with similar financial characteristics. Loans are segregated by type and are then further segmented into fixed rate and adjustable rate interest terms to determine their fair value. The fair value of fixed rate commercial and consumer loans is calculated by discounting scheduled cash flows through the estimated maturity of the loan using interest rates offered at December 31, 2000 and 1999 that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Corporation's historical repayment experience. For residential mortgages, fair value is estimated by using quoted market prices for sales of similar loans on the secondary market, adjusted for servicing costs. The fair value of floating rate commercial and consumer loans approximates carrying value. The fair value of nonaccrual loans is calculated by discounting estimated cash flows, using a rate commensurate with the risk associated with the loan type or by other methods that give consideration to the value of the underlying collateral.
Deposit Liabilities The fair value of demand deposits, savings accounts, and certain money market accounts is equal to the amount payable on demand as of December 31, 2000 and 1999. The discounted values of cash flows using the rates currently offered for deposits of similar remaining maturities were used to estimate the fair value of certificates of deposit.
Securities Sold Under Agreements to Repurchase The carrying amount of securities sold under repurchase agreements approximates fair value.
Federal Home Loan Bank Advances Rates currently available to the Corporation for advances with similar terms and remaining maturities are used to estimate fair value of existing advances.
Off-Balance Sheet Instruments The fair values of interest rate swap agreements and floor contracts generally reflect the estimated amounts that the Corporation would receive or pay to terminate the contracts. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.
The following table presents the fair values of the Corporation's financial instruments:
Other off-balance sheet financial instruments, consisting largely of loan commitments and letters of credit, contain provisions for fees, conditions and term periods that are consistent with customary market practices. Accordingly, the fair value amounts (considered to be the discounted present value of the remaining contractual fees over the unexpired commitment period) would not be material and therefore are not disclosed.
(18) Parent Company Financial Statements The following are parent company only financial statements of the Corporation reflecting the investment in the bank subsidiary on the equity basis of accounting. The Statements of Changes in Shareholders' Equity for the parent company only are identical to the Consolidated Statements of Changes in Shareholders' Equity and are therefore not presented.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Required information regarding directors is presented under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 20, 2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001 and incorporated herein by reference.
Required information regarding executive officers of the Corporation is included in Part I under the caption "Executive Officers of the Registrant".
Information required with respect to compliance with Section 16(a) of the Exchange Act appears under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Corporation's Proxy Statement dated March 20, 2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001, which is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item appears under the caption "Compensation of Directors and Executive Officers - Executive Compensation" in the Corporation's Proxy Statement dated March 20, 2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001, which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item appears under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 20, 2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001, which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the caption "Indebtedness and Other Transactions" in the Corporation's Proxy Statement dated March 20, 2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements of the Registrant required in response to this Item are listed in response to Part II, Item 8 of this Report.
2. Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-K and all other schedules to the consolidated financial statements of the Registrant have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto.
(b) There were no reports on Form 8-K filed during the quarter ended December 31, 2000.
(c) Exhibit Index.
Exhibit Number --------------------
3.a Restated Articles of Incorporation of the Registrant - Filed herewith.
3.b Amendment to Restated Articles of Incorporation - Filed as Exhibit 3.i to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1)
3.c Amended and Restated By-Laws of the Corporation - Filed as Exhibit 3.c to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (1)
4 Rights Agreement between the Registrant and The Washington Trust Company dated as of August 15, 1996 (including Form of Right Certificate attached thereto as Exhibit A) - Filed as Exhibit 1 to the Registrant's Registration Statement on Form 8-A (File No. 000-13091) filed with the Commission on August 16, 1996. (1)
10.a Supplemental Pension Benefit and Profit Sharing Plan - Filed herewith. (2)
10.b Short Term Incentive Plan Description - Filed as Exhibit 10.b to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (1) (2)
10.c Amended and Restated Nonqualified Deferred Compensation Plan - Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (File No. 333-72277) filed with the Commission on February 12, 1999. (1) (2)
10.d Amended and Restated 1988 Stock Option Plan - Filed herewith. (2)
10.e Vote of the Board of Directors of the Corporation which constitutes the 1996 Directors' Stock Plan - Filed as Exhibit 99.2 to the Registrant's Registration Statement on Form S-8 (File No. 333-13167) filed with the Commission on October 1, 1996. (1) (2)
10.f The Registrant's 1997 Equity Incentive Plan - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1) (2)
10.g Revised Change in Control Agreements with Executive Officers - Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000. (1) (2)
10.h Change in Control Agreement with an Executive Officer - Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (1) (2)
10.i Amendment to the Registrant's 1997 Equity Incentive Plan - Filed as Exhibit 10.b to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (1) (2)
10.j Amendment to the Registrant's Supplemental Pension Benefit and Profit Sharing Plan - Filed herewith. (2)
10.k Amendment to the Registrant's Supplemental Pension Benefit and Profit Sharing Plan - Filed herewith. (2)
10.l Amendment to the Registrant's Amended and Restated Nonqualified Deferred Compensation Plan - Filed herewith. (2)
10.m Employment Agreement with an Executive Officer - Filed herewith. (2)
21 Subsidiaries of the Registrant - Filed as Exhibit 21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (1)
23 Consent of Independent Accountants - Filed herewith.
--------------------
(1) Not filed herewith. In accordance with Rule 12b-32 promulgated pursuant to the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Commission, which are incorporated by reference herein.
(2) Management contract or compensatory plan or arrangement
(d) Financial Statement Schedules. None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WASHINGTON TRUST BANCORP, INC. ---------------------------------------------- (Registrant)
Date: March 9, 2001 By John C. Warren -------------------- ---------------------------------------------- John C. Warren Chairman, Chief Executive Officer and Director (principal executive officer)
Date: March 9, 2001 By David V. Devault -------------------- ---------------------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 9, 2001 Alcino G. Almeida -------------------- ---------------------------------------------- Alcino G. Almeida, Director
Date: March 9, 2001 Gary P. Bennett -------------------- ---------------------------------------------- Gary P. Bennett, Director
Date: March 9, 2001 Steven J. Crandall -------------------- ---------------------------------------------- Steven J. Crandall, Director
Date: March 9, 2001 Richard A. Grills -------------------- ---------------------------------------------- Richard A. Grills, Director
Date: March 9, 2001 Larry J. Hirsch -------------------- ---------------------------------------------- Larry J. Hirsch, Director
Date: March 9, 2001 Katherine W. Hoxsie -------------------- ---------------------------------------------- Katherine W. Hoxsie, Director
Date: -------------------- ---------------------------------------------- Mary E. Kennard, Director
Date: March 9, 2001 Joseph J. Kirby -------------------- ---------------------------------------------- Joseph J. Kirby, Director
Date: March 9, 2001 Edward M. Mazze -------------------- ---------------------------------------------- Edward M. Mazze, Director
Date: March 9, 2001 James W. McCormick, Jr. -------------------- ---------------------------------------------- James W. McCormick, Jr., Director
Date: March 9, 2001 Victor J. Orsinger II -------------------- ---------------------------------------------- Victor J. Orsinger II, Director
Date: March 9, 2001 H. Douglas Randall III -------------------- ---------------------------------------------- H. Douglas Randall, III, Director
Date: March 9, 2001 Joyce Olson Resnikoff -------------------- ---------------------------------------------- Joyce Olson Resnikoff, Director
Date: March 9, 2001 James P. Sullivan -------------------- ---------------------------------------------- James P. Sullivan, Director
Date: -------------------- ---------------------------------------------- Neil H. Thorp, Director
Date: March 9, 2001 John F. Treanor -------------------- ---------------------------------------------- John F. Treanor, Director
Date: March 9, 2001 John C. Warren -------------------- ---------------------------------------------- John C. Warren, Director