ITEM 1. BUSINESS
Washington Trust Bancorp, Inc. Washington Trust Bancorp, Inc. (the "Corporation" or "Washington Trust") is a publicly-owned, registered bank holding company, organized in 1984 under the laws of the state of Rhode Island, whose subsidiaries are permitted to engage in banking and other financial services and businesses. The Corporation conducts its business through its wholly owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits.
The Corporation was formed in 1984 under a plan of reorganization in which outstanding common shares of the Bank were exchanged for common shares of the Corporation. At December 31, 2001 the Corporation had total assets of $1.362 billion, total deposits of $816.9 million and total shareholders' equity of $97.9 million.
The Washington Trust Company The Bank was originally chartered in 1800 as the Washington Bank and is the oldest banking institution headquartered in its market area and is among the oldest banks in the United States. Its current corporate charter dates to 1902. See the discussion under "Market Area and Competition" for further information.
The Bank provides a broad range of financial services, including:
Residential mortgages Internet banking services Commercial loans Commercial and consumer demand deposits Construction loans Savings, NOW and money market deposits Consumer installment loans Certificates of deposit Home equity lines of credit Retirement accounts Merchant credit card services Cash management services Automated teller machines (ATMs) Safe deposit boxes Telephone banking services Trust and investment management services
The Bank's ATMs are located throughout its market area. The Bank is a member of various ATM networks, such as NYCE, PLUS, Cirrus and Cashstream.
Data processing for most of the Bank's deposit and loan accounts and other applications are conducted internally, using owned equipment. Application software is primarily obtained through purchase or licensing agreements.
The Bank's primary source of income is net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing deposits and other borrowed funds. Sources of noninterest income include fees for management of customer investment portfolios, trusts and estates, service charges on deposit accounts, merchant processing fees, gains and fees from mortgage banking activities and other banking-related fees. Noninterest expenses include the provision for loan losses, salaries and employee benefits, occupancy, equipment, merchant processing, office supplies, advertising and promotion and other administrative expenses.
The Bank's lending activities are conducted primarily in southern Rhode Island and southeastern Connecticut. The Bank provides a variety of commercial and retail lending products. The Bank generally underwrites its residential mortgages based upon secondary market standards. Loans are originated both for sale in the secondary market as well as for portfolio. Most secondary market loans are sold with servicing released, however, prior to the fourth quarter of 1999, the Corporation primarily sold loans with servicing retained.
The Bank provides trust and investment management services as trustee under wills and trust agreements; as executor or administrator of estates; as a provider of agency, custodial and management investment services to individuals and institutions; and as a trustee for employee benefit plans. In 2000, the Corporation acquired Phoenix Investment Management Company, Inc. ("Phoenix"), an independent investment advisory firm located in Providence, Rhode Island. Phoenix operates under its own name as a division of the Bank. Phoenix provides investment advisory services including asset allocation analysis and equity, fixed income and balanced portfolio management. The total market value of trust and investment management assets under administration, including Phoenix, amounted to $1.6 billion as of December 31, 2001.
The following is a summary of recurring sources of income, which excludes net gains on sales of securities and the 1999 net gain on sale of the credit card portfolio, as a percentage of total income (net interest income plus recurring noninterest income) during the past five years:
2001 2000 1999 1998 1997 --------------------------------------------------------------------------- Net interest income 65% 67% 67% 67% 69% Trust and investment management 17 19 17 17 18 Other noninterest income 18 14 16 16 13 --------------------------------------------------------------------------- Total income 100% 100% 100% 100% 100% ---------------------------------------------------------------------------
On November 13, 2001, the Corporation announced that it had signed a definitive agreement to acquire First Financial Corp., a bank holding company and parent of First Bank and Trust Company, a Rhode Island-chartered community bank. First Financial Corp., with assets of $185.2 million at December 31, 2001, is headquartered in Providence, Rhode Island. First Bank and Trust Company operates banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The acquisition, which is expected to be completed in the second quarter of 2002, is subject to certain customary conditions including approval by First Financial Corp.'s shareholders as well as state and federal banking regulators.
Market Area and Competition The Bank's market area includes Washington County and a portion of Kent County in southern Rhode Island, as well as a portion of New London County in southeastern Connecticut. The Bank operates thirteen banking offices in these Rhode Island and Connecticut counties. The locations of the banking offices are as follows:
Westerly, RI (3 locations) Charlestown, RI Wakefield, RI Narragansett, RI (2 locations) Richmond, RI North Kingstown, RI New Shoreham (Block Island), RI Mystic, CT (3 locations)
The Bank's banking offices in Charlestown and on Block Island are the only bank facilities in those Rhode Island communities.
On August 29, 2001, the Corporation announced its intention to build a full-service branch office in Warwick, Rhode Island. The branch is subject to the approval of local authorities, as well as state and federal regulators. The branch is expected to open in the fall of 2002.
The Bank faces strong competition from branches of major Rhode Island and regional commercial banks, local branches of certain Connecticut banks, as well as various credit unions, savings institutions and, to some extent, finance companies. The principal methods of competition are through interest rates, financing terms and other customer conveniences. The Bank had 38% of total deposits reported by all financial institutions for communities in which the Bank operates banking offices as of June 30, 2001. The closest competitor held 25%, and the second closest competitor held 12% of total deposits in the same communities. The Corporation believes that being the largest commercial banking institution headquartered within the market area provides a competitive advantage over other financial institutions. The Bank has a marketing department that is responsible for the review of existing products and services and the development of new products and services.
Employees As of December 31, 2001 the Corporation had 403 employees, of which 351 were full-time and 52 were part-time.
Supervision and Regulation General - The business in which the Corporation and the Bank are engaged is subject to extensive supervision, regulation, and examination by various bank regulatory authorities and other agencies of federal and state government. The supervisory and regulatory activities of these authorities are often intended primarily for the protection of customers or are aimed at carrying out broad public policy goals that may not be directly related to the financial services provided by the Corporation and the Bank, nor intended for the protection of the Corporation's shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Proposals to change regulations and laws that affect the banking industry are frequently raised at the federal and state level. The potential impact on the Corporation and the Bank of any future revisions to the supervisory or regulatory structure cannot be determined.
The Corporation and the Bank are required by various authorities to file extensive periodic reports of financial and other information and such other reports that the regulatory and supervisory authorities may require. The Corporation is also subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended.
The Corporation is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a bank holding company, the activities of the Corporation are regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), and the State of Rhode Island, Department of Business Regulation, Division of Banking (the "Division"). The BHC Act requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire substantially all of the assets of a bank, to acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank or merging or consolidating with any bank holding company. Provided that the Corporation does not become a "financial holding company" under the Gramm-Leach-Bliley Act (as discussed below), the BHC Act also requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire more than 5% of the voting shares of certain nonbank entities and restricts the activities of the Corporation to those closely related to banking. The Federal Reserve Board has the authority to issue orders to bank holding companies to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the Federal Reserve Board. The Federal Reserve Board is also empowered to assess civil money penalties against companies or individuals who violate the BHC Act or orders or regulations thereunder, to order termination of ownership and control of a non-banking subsidiary by a bank holding company. Federal law also regulates transactions between the Corporation and the Bank, including loans or extensions of credit.
The Bank is subject to the supervision of, and examination by, the Federal Deposit Insurance Corporation (the "FDIC"), the Division and the State of Connecticut, in which the Bank has established branches. The Bank is also subject to various Rhode Island and Connecticut business and banking regulations.
The Bank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund - member institutions. The FDIC has established a risk-based assessment system under which institutions are classified, and generally pay premiums according to their perceived risk to the federal deposit insurance funds.
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) - Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.
FDICIA established five capital tiers, ranging from "well-capitalized" to "critically undercapitalized". A depository institution is well-capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well-capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. At December 31, 2001, the Bank's capital ratios placed it in the well-capitalized category. Reference is made to Note 15 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's regulatory capital requirements.
Another primary purpose of FDICIA was to recapitalize the Bank Insurance Fund (BIF). The FDIC adopted a risk-related premium system for the assessment period beginning January 1, 1993. Under this new system, each institution's assessment rate is based on its capital ratios in combination with a supervisory evaluation of the risk the institution poses to the BIF. Banks deemed to be well-capitalized and who pose the lowest risk to the BIF will pay the lowest assessment rates, while undercapitalized banks, which present the highest risk, will pay the highest rates.
FDICIA contained other significant provisions that require the federal banking regulators to establish standards for safety and soundness for depository institutions and their holding companies in three areas: (i) operational and managerial; (ii) asset quality, earnings and stock valuation; and (iii) management compensation. The legislation also required that risk-based capital requirements contain provisions for interest rate risk, credit risk and risks of nontraditional activities. FDICIA also imposed expanded accounting and audit reporting requirements for depository institutions. In addition, FDICIA imposed numerous restrictions on state-chartered banks, including those that generally limit investments and activities to those permitted to national banks, and contains several consumer banking law provisions.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act) - The Interstate Act permits adequately capitalized bank holding companies to acquire banks in any state subject to certain concentration limits and other conditions. The Interstate Act also authorizes the interstate merger of banks. In addition, among other things, the Interstate Act permits banks to establish new branches on an interstate basis provided that the law of the host state specifically authorizes such action. Both Rhode Island and Connecticut, the two states in which the Corporation conducts banking operations, have adopted legislation to "opt in" to interstate merger and branching provisions that effectively eliminated state law barriers.
Gramm-Leach-Bliley Act - The Gramm-Leach-Bliley Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit bank holding companies that qualify and elect to be treated as financial holding companies to engage in a range of financial activities broader than would be permissible for traditional bank holding companies, such as the Corporation, that have not elected to be treated as financial holding companies. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Generally, the Gramm-Leach-Bliley Act and its implementing regulations:
o repeal historical restrictions on, and eliminate many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers;
o permit investment in non-financial enterprises, subject to significant operational, holding period and other restrictions;
o provide a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies;
o broaden the activities that may be conducted by national banks (and derivatively state banks), banking subsidiaries of bank holding companies, and their financial subsidiaries;
o require all financial institutions to provide notice of their privacy policies at specified times to their retail customers and consumers of their financial products or services, and permit retail customers and consumers, under certain circumstances, to prohibit financial institutions from sharing certain nonpublic personal information pertaining to them by opting out of such sharing;
o establish guidelines for safeguarding the security, confidentiality and integrity of customer information;
o adopt a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank ("FHLB") system;
o modify the laws governing the implementation of the Community Reinvestment Act of 1977 ("CRA"); and
o address a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.
In order to elect to become a financial holding company and engage in a broader array of activities, a bank holding company, such as the Corporation, must meet certain tests and file an election form with the Federal Reserve Board. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities each of the bank holding company's banks must have been rated "satisfactory" or better in its most recent federal CRA evaluation. Furthermore, a bank holding company that elects to be treated as a financial holding company may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the Federal Reserve Board which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. At this time, the Corporation has no immediate plans to become a financial holding company.
Customer Information Security - The Federal Reserve Board, the FDIC and other bank regulatory agencies have adopted final guidelines (the "Guidelines") for safeguarding confidential customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information; and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.
Privacy - The Gramm-Leach Bliley Act requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires the financial institution to explain to consumers its policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, the financial institution is prohibited form disclosing such information except as provided in its policies and procedures.
USA Patriot Act - The USA Patriot Act of 2001 (the "Patriot Act"), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandates or will require financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering; suspicious activities and currency transaction reporting; and currency crimes.
Dividend Restrictions - The Corporation's revenues consist of cash dividends paid to it by the Bank. Such payments are restricted pursuant to various state and federal regulatory limitations. Reference is made to Note 15 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's ability to pay dividends.
Capital Guidelines - Regulatory guidelines have been established that require bank holding companies and banks to maintain minimum ratios of capital to risk-adjusted assets. Banks are required to have minimum core capital (Tier 1) of 4% and total risk-adjusted capital (Tier 1 and Tier 2) of 8%. For the Corporation, Tier 1 capital is essentially equal to shareholders' equity excluding the net unrealized gain (loss) on securities available for sale. Tier 2 capital consists of a portion of the allowance for loan losses (limited to 1.25% of total risk-weighted assets). As of December 31, 2001, the Corporation's net risk-weighted assets amounted to $718.9 million, its Tier 1 capital ratio was 12.63% and its total risk-based capital ratio was 14.22%.
The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the risk-based capital guidelines) divided by average assets (net of intangible assets and excluding the effects of accounting for securities available for sale under SFAS No. 115). The minimum leverage ratio is 3% for bank holding companies that do not anticipate significant growth and that have well-diversified risk (including no undue interest rate risk), excellent asset quality, high liquidity and strong earnings. Other bank holding companies are expected to have ratios of at least 4 - 5%, depending on their particular condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstances or risk profile of a given bank holding company. The Corporation's Tier 1 leverage ratio was 6.84% as of December 31, 2001. The Federal Reserve Board has not advised the Corporation of any specific minimum Tier 1 leverage capital ratio applicable to it.
Risk Factors In addition to the other information contained or incorporated by reference in this Annual Report on Form 10-K, you should consider the following factors relating to the business of the Corporation.
Interest Rate Volatility May Reduce Our Profitability Significant changes in market interest rates may adversely affect both our profitability and our financial condition. Our profitability depends in part on the difference between rates earned on loans and investments and rates paid on deposits and other interest-bearing liabilities. Since market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. (See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for additional discussion on interest rate risk.)
Changes in the Market Value of Trust and Investment Management Assets under Administration May Reduce Our Profitability Trust and investment management fees provide an important source of total revenues. These fees are primarily dependent on the market value of trust and investment management assets under administration. These assets primarily consist of marketable securities. Reductions in the market value of these assets could reduce the level of fees that we earn.
Our Allowance for Loan Losses May Not Be Adequate to Cover Actual Loan Losses. We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for potential losses based on a number of factors. If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses, which would have an adverse effect on our operating results, and may also cause us to increase the allowance in the future. Further, our net income would decrease if we had to add additional amounts to our allowance for loan losses. In addition to general real estate and economic factors, the following factors could affect our ability to collect our loans and require us to increase the allowance in the future:
o Regional credit concentration - We are exposed to real estate and economic factors in Rhode Island and southeastern Connecticut because virtually all of our loan portfolio is concentrated among borrowers in these markets. Further, because a substantial portion of our loan portfolio is secured by real estate in this area, including most consumer loans and those commercial loans not specifically classified as commercial mortgages, the value of our collateral is also subject to regional real estate market conditions.
o Industry concentration - A portion of our loan portfolio consists of loans to the hospitality and tourism industry. Loans to companies in this industry may have a somewhat higher risk of loss than some other industries because these businesses are seasonal, with a substantial portion of commerce concentrated in the summer season. Accordingly, the ability of borrowers to meet their repayment terms is more dependent on economic, climate and other conditions and may be subject to a higher degree of volatility from year to year.
We May Not Be Able to Compete Effectively Against Larger Financial Institutions in Our Increasingly Competitive Industry The financial services industry in our market has experienced both significant concentration and deregulation. This means that we compete with larger financial institutions, both from banks and from other financial institutions, for loans and deposits as well as other sources of funding in the communities we serve, and we will likely face even greater competition in the future as a result of recent federal legislative changes. Many of our competitors have significantly greater resources and lending limits than we have. As a result of those greater resources, the large financial institutions that we compete with may be able to provide a broader range of services to their customers and may be able to afford newer and more sophisticated technology. Our long-term success depends on the ability of the Bank to compete successfully with other financial institutions in their service areas.
In addition, as we strive to compete with other financial institutions, we may expand into new areas, and there is no assurance that we will be successful in these efforts. An example of our expansion is the Phoenix acquisition. Although we believe that the business and management of Phoenix represent a significant expansion of our business in the investment management area, there is no assurance that our expansion into this area will be successful.
Limited Trading Activity in Our Common Stock Could Cause the Price of Our Shares to Decline. While our common stock is listed and traded on the Nasdaq National Market, there has only been limited trading activity in our common stock. The average daily trading volume of our common stock over the twelve-month period ended December 31, 2001 was approximately 14,005 shares. Accordingly, sales of a significant number of shares of common stock may adversely affect the market price of our common stock.
Risk Factors Relating to the Acquisition of First Financial Corp.
Washington Trust may be unable to successfully integrate First Financial's operations and retain key First Financial employees. The merger involves the integration of two companies that previously operated independently. The difficulties of combining the companies' operations include:
o integrating personnel with diverse business backgrounds; o combining different corporate cultures; and o retaining key employees.
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of Washington Trust's business and the loss of key personnel. The integration of the two companies will require the experience and expertise of certain key employees who are expected to be retained by Washington Trust. We cannot assure you, however, that Washington Trust will be successful in retaining these employees for the time period necessary to successfully integrate our operations with those of Washington Trust. The diversion of management's attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies' operations could have an adverse effect on the business and results of operations of the combined company.
If the merger is not completed, Washington Trust will have incurred substantial expenses without realizing the expected benefits. Washington Trust has incurred substantial expenses in connection with the proposed merger. The completion of the merger depends on the satisfaction of several conditions and the receipt of regulatory approvals. We cannot guarantee that these conditions will be met. If the merger is not completed, Washington Trust expects to incur approximately $700,000 to $900,000 in merger related expenses. These expenses could have a material adverse impact on the financial condition of Washington Trust because it would not have realized the expected benefits of the merger.
Unanticipated costs relating to the merger could reduce Washington Trust's future earnings per share. Washington Trust believes that it has reasonably estimated the likely costs of integrating the operations of First Financial into Washington Trust, and the incremental costs of operating as a combined company. However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses or unexpected future operating expenses such as increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on the results of operations and financial condition of Washington Trust after the merger. If unexpected costs are incurred, the merger could have a significant dilutive effect on Washington Trust's earnings per share. In other words, if the merger is completed, Washington Trust believes that the earnings per share of Washington Trust common stock could be less than it would have been if the merger had not been completed.
Allowance for Loan Losses The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses (ALL). The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other environmental factors. The methodology includes an analysis of individual loans deemed to be impaired in accordance with generally accepted accounting principles. Other individual commercial and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration parameters including the borrower's financial condition, the borrower's debt service coverage, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the Corporation's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional unallocated allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. For example, most of the loan portfolio is concentrated among borrowers in southern Rhode Island and southeastern Connecticut and a substantial portion of the portfolio is collateralized by real estate in this area, including most consumer loans and those commercial loans not specifically classified as commercial mortgages. A portion of the commercial and commercial mortgage loans are to borrowers in the hospitality and tourism industry and this concentration has been increasing in recent years. Further, economic conditions which may affect the ability of borrowers to meet debt service requirements are considered including interest rates and energy costs. Results of regulatory examinations, historical loss ranges, portfolio composition including a trend toward somewhat larger credit relationships, and other changes in the portfolio are also considered. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans.
GUIDE 3 STATISTICAL DISCLOSURES
The following tables contain additional consolidated statistical data about the Corporation and the Bank, to be read in conjunction with the Notes to the Consolidated Financial Statements.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
A. Average balance sheets are presented under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Nonaccrual loans are included in average loan balances. Average balances are based upon daily averages.
B. An analysis of net interest earnings, including interest earned and paid, average yields and costs, and net yield on interest-earning assets, is presented under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Interest income is reported on the fully taxable-equivalent basis. Tax exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Interest on nonaccrual loans is included in the analysis of net interest earnings to the extent that such interest income has been recognized in the Consolidated Statements of Income. See Guide 3 Statistical Disclosures - Item III.C.1.
C. An analysis of rate/volume changes in interest income and interest expense is presented under the caption "Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. The net change attributable to both volume and rate has been allocated proportionately.
II. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
A. The carrying amounts of securities as of the dates indicated are presented in the following tables:
(Dollars in thousands)
December 31, 2001 2000 1999 --------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $66,715 $87,084 $86,310 Mortgage-backed securities 300,050 240,856 189,086 Corporate bonds 64,149 38,565 33,684 Corporate stocks 23,042 20,106 21,351 --------------------------------------------------------------------------- Total securities available for sale $453,956 $386,611 $330,431 ---------------------------------------------------------------------------
(Dollars in thousands)
December 31, 2001 2000 1999 --------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $8,311 $35,135 $28,231 Mortgage-backed securities 146,702 66,715 62,209 States and political subdivisions 20,092 23,065 25,932 --------------------------------------------------------------------------- Total securities held to maturity $175,105 $124,915 $116,372 ---------------------------------------------------------------------------
B. Maturities of debt securities as of December 31, 2001 are presented in the following tables. Mortgage-backed securities are included based on their weighted average maturities, adjusted for anticipated prepayments. Yields on tax exempt obligations are not computed on a tax equivalent basis.
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, 2001 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 $63,992 $28,081 $92,073 ---------------------------------------------------------------------------
C. Risk Elements Reference is made to the caption "Asset Quality" included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Included therein is a discussion of the Corporation's credit review and accounting practices, as well as information relevant to nonperforming assets at December 31, 2001.
1. Nonaccrual, Past Due and Restructured Loans
a) Nonaccrual loans as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 2001 2000 1999 1998 1997 ------------------------------------------------------------------------ $3,827 $3,434 $3,798 $5,846 $7,644 ------------------------------------------------------------------------
Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but not collected on such loans is reversed against current period income. Cash receipts on nonaccrual loans are recorded as interest income or as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower had demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible.
For the year ended December 31, 2001, the gross interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $435 thousand. Interest recognized on these loans amounted to approximately $209 thousand.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2001.
b) Loans contractually past due 90 days or more and still accruing for the dates indicated were as follows:
(Dollars in thousands)
December 31, 2001 2000 1999 1998 1997 ------------------------------------------------------------------------ $ - $393 $120 $235 $651 ------------------------------------------------------------------------
c) Restructured accruing loans for the dates indicated were as follows:
(Dollars in thousands)
December 31, 2001 2000 1999 1998 1997 ------------------------------------------------------------------------ $ - $ - $446 $ - $ - ------------------------------------------------------------------------
Restructured accruing loans include those for which concessions, such as reduction of interest rates other than normal market rate adjustments or deferral of principal or interest payments, have been granted due to a borrower's financial condition. Interest on restructured loans is accrued at the reduced rate.
2. Potential Problem Loans Potential problem loans consist of certain accruing commercial loans that were less than 90 days past due at December 31, 2001, but were identified by management of the Bank as potential problem loans. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve as a result of collection efforts, while the credit quality of other loans may deteriorate, resulting in some amount of losses. These loans are not included in the analysis of nonaccrual, past due and restructured loans in Section III.C.1 above. At December 31, 2001, potential problem loans amounted to approximately $98 thousand. The Corporation's loan policy provides guidelines for the review of such loans in order to facilitate collection.
Depending on future events, these potential problem loans, and others not currently identified, could be classified as nonperforming in the future.
3. Foreign Outstandings None
4. Loan Concentrations The Corporation has no concentration of loans that exceed 10% of its total loans except as disclosed by types of loan in Section III.A.
D. Other Interest-Bearing Assets None
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is management's best estimate of probable credit losses in the loan portfolio that have been incurred as of the balance sheet date. The level of the allowance is based on management's ongoing review of the growth and composition of the loan portfolio, net charge-off experience, current and expected economic conditions, and other pertinent factors. Loans (or portions thereof) deemed to be uncollectible are charged against the allowance and recoveries of amounts previously charged off are added to the allowance. Loss experience on loans is presented in the following table for the years indicated:
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, 2001 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 alleged that the Bank erred in permitting this individual, while an officer of Maxson, to transfer funds from Maxson's account at the Bank for his personal benefit. The claims against the Bank were based upon theories of breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constructive fraud.
On May 11, 2001, the Bank entered into an agreement with the plaintiffs to settle the suit. Under the terms of the agreement, which did not involve an admission of wrongdoing, the Bank agreed to pay $4.8 million to the plaintiffs. The cost of this settlement was recorded in the consolidated financial statements as of and for the quarter ended March 31, 2001. Net of the related income tax effect, the cost of the settlement amounted to $3.3 million. In August 2001, the Bank received a settlement from an insurance carrier in the amount of $775 thousand ($553 thousand net of tax) in connection with this matter. In December 2001, the Bank received a settlement from another insurance carrier in the amount of $400 thousand ($252 thousand net of tax) in connection with this matter. The recoveries were recorded as reductions of the litigation settlement cost included in other noninterest expenses. No further insurance recoveries are expected.
The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of all executive officers of the Corporation and the Bank with their titles, ages, and length of service, followed by certain biographical information.
John C. Warren joined the Bank and the Corporation in 1996 as President and Chief Operating Officer. In 1997, he was elected President and Chief Executive Officer. In 1999, he was elected Chairman and Chief Executive Officer of the Corporation and the Bank.
John F. Treanor joined the Bank and the Corporation in April 1999 as President and Chief Operating Officer. He served as Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer of SIS Bancorp, Inc. from 1994 to 1999.
David V. Devault joined the Bank in 1986 as Controller. He was elected Vice President and Chief Financial Officer of the Corporation and the Bank in 1987. He was elected Senior Vice President and Chief Financial Officer of the Corporation and the Bank in 1990. In 1997, he was also elected Treasurer of the Corporation and the Bank. In 1998, he was elected Executive Vice President, Treasurer and Chief Financial Officer of the Corporation and the Bank.
Harvey C. Perry II joined the Bank in 1974 and was elected Assistant Trust Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982. He was elected Vice President and Secretary of the Corporation and the Bank in 1984, and Senior Vice President and Secretary of the Corporation and the Bank in 1990.
Stephen M. Bessette joined the Bank in February 1997 as Senior Vice President - Retail Lending. Prior to joining the Bank he held the position of Executive Vice President at Ameristone Mortgage Corporation since June 1995.
Vernon F. Bliven joined the Bank in 1972 and was elected Assistant Vice President in 1980, Vice President in 1986 and Senior Vice President - Human Resources in 1993.
Elizabeth B. Eckel joined the Bank in 1991 as Director of Advertising and Public Relations. In 1995, she was named Vice President - Marketing. She was promoted to Senior Vice President - Marketing in 2000.
William D. Gibson joined the Bank in March 1999 as Senior Vice President - Credit Administration. Prior to joining the Bank, he served as Senior Vice President of Credit Review and Senior Vice President of Credit and Loan Administration of Citizens Bank since October 1977.
Joseph E. LaPlume joined the Bank in August 1999 as Senior Vice President and Regional Manager. He was named Senior Vice President, Business Services in 2001. Prior to joining the Bank he served as President and Chief Executive Officer of Pier Bank since November 1993.
Barbara J. Perino joined the Bank in 1988 as Financial Accounting Officer. She was named Controller in 1989 and Vice President - Controller in 1992. In 1998 she was promoted to Senior Vice President - Operations and Technology.
B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and was promoted in 1993 to Senior Vice President - Retail Banking.
James M. Vesey joined the Bank in 1998 as Senior Vice President - Commercial Lending. In 2000, he was named Senior Vice President and Chief Credit Officer. Prior to joining the Bank he held the position of Senior Vice President and Director of Business Banking at Citizens Bank since December 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock has traded on the Nasdaq National Market since May 1996. Previously, the Corporation's stock traded on the Nasdaq Small-Cap Market since June 1992, and had been listed on the Nasdaq Over-The-Counter Market system since June 1987.
The quarterly common stock price ranges and dividends paid per share for the years ended December 31, 2001 and 2000 are presented in the following table. The stock prices are based on the high and low sales prices during the respective quarter.
2001 Quarters 1 2 3 4 ---------------------------------------------------------------------------- Stock prices: High $17.75 $22.62 $22.14 $19.73 Low 13.75 16.35 16.69 17.76
Cash dividend declared per share $.13 $.13 $.13 $.13
2000 Quarters 1 2 3 4 ---------------------------------------------------------------------------- Stock prices: High $17.50 $15.94 $15.63 $14.63 Low 13.88 14.50 14.50 13.38
Cash dividend declared per share $.12 $.12 $.12 $.12
The Corporation will continue to review future common stock dividends based on profitability, financial resources and economic conditions. The Corporation (including the Bank prior to 1984) has recorded consecutive quarterly dividends for over one hundred years.
The Corporation's primary source of funds for dividends paid to shareholders is the receipt of dividends from the Bank. A discussion of the restrictions on the advance of funds or payment of dividends to the Corporation is included in Note 15 to the Consolidated Financial Statements.
At February 26, 2002 there were 2,080 holders of record of the Corporation's common stock.
ITEM 6.
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 assets under management, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in the size and nature of the Corporation's competition, changes in loan defaults and charge-off rates, unanticipated difficulties in completing the merger with First Financial Corp. and integrating First Financial's operations, unanticipated costs relating to the merger and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1 of this report may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
Recent Events On August 29, 2001, the Corporation announced its intention to build a full-service branch office in Warwick, Rhode Island. The branch is subject to the approval of local authorities, as well as state and federal regulators. The branch is expected to open in the fall of 2002.
On November 13, 2001, the Corporation announced that it had signed a definitive agreement to acquire First Financial Corp., parent of First Bank and Trust Company, a Rhode Island-chartered community bank. First Financial Corp., with assets of $185.2 million at December 31, 2001, is headquartered in Providence, Rhode Island. First Bank and Trust Company operates banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. In the merger, each share of First Financial Corp. common stock will be converted into a combination of $16.00 in cash and shares of Washington Trust Bancorp, Inc. common stock based on an exchange ratio. Based on a Washington Trust stock price of $18.00, First Financial Corp. shareholders would receive 0.889 shares of Washington Trust common stock (with a value of $16.00) for a combination of cash and stock initially valued at $32.00 per share and an aggregate transaction value of approximately $39 million. However, the actual number and value of Washington Trust Bancorp, Inc. common stock to be issued to First Financial Corp. shareholders will be based on an exchange formula using the average closing price of Washington Trust Bancorp, Inc. common stock during the 15 trading days prior to receiving final regulatory approval, within a range of 0.842 per share and 0.941 per share. At December 31, 2001, First Financial Corp. had 1,213,741 shares outstanding. The purchase, which is expected to be completed in the second quarter of 2002, is subject to certain customary conditions including approval by First Financial Corp.'s shareholders as well as state and federal banking regulators. Upon consummation of this event, the provisions of SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets" will be applied.
Financial Overview Washington Trust recorded net income of $13.1 million, or $1.07 per diluted share, for 2001, as compared to $13.2 million, or $1.09 per diluted share, for 2000. The Corporation's rates of return on average assets and average equity for 2001 were 1.01% and 13.86%, respectively. Comparable amounts for the year 2000 were 1.14% and 16.14%, respectively.
In 2001, the Corporation recorded a litigation settlement expense, net of insurance recovery, of $2.5 million, after income taxes. In 2000, the Corporation completed the acquisition of Phoenix and recorded acquisition-related expenses of $1.1 million, after income taxes. The acquisition was accounted for under the pooling of interests method. Results excluding the litigation settlement expense, net of taxes, and acquisition-related expenses, net of taxes, are referred to herein as "operating". Operating basis earnings also include a pro forma tax provision for pre-acquisition earnings of Phoenix, which operated as a sub-S corporation prior to the acquisition.
Operating earnings for the year 2001 amounted to $15.6 million, an increase of 12.6% from $13.9 million reported for 2000. Diluted earnings per share, on an operating basis, amounted to $1.28 for 2001, up from $1.15 per share in 2000. The Corporation's rates of return on average assets and average equity, on an operating basis, for 2001 were 1.20% and 16.54%, respectively. Comparable amounts for the year 2000 were 1.20% and 16.98%, respectively.
For the year ended December 31, 2001, net interest income (the difference between interest earned on loans and securities and interest paid on deposits and other borrowings) amounted to $39.4 million, up 4.0% over the 2000 amount. The net interest margin for the year 2001 amounted to 3.30%, compared to 3.55% in 2000. The decrease in the net interest margin was primarily due to the decline in yields on loans and securities offset somewhat by lower funding costs of interest-bearing deposits, FHLB advances and other borrowed funds. Other noninterest income (noninterest income excluding net gains on sales of securities) amounted to $21.1 million for the year 2001, up 11.5% from $19.0 million in 2000. The increase was primarily due to growth in revenues from mortgage banking activities.
For the year 2001, total operating noninterest expense (total noninterest expense excluding litigation settlement and acquisition-related expenses) amounted to $38.0 million, up 4.1% over the comparable 2000 amount. The increase was primarily attributable to higher salaries and benefits expense. Included in other noninterest expense for the twelve months ended December 31, 2001 and 2000 were contributions of appreciated equity securities to the Corporation's charitable foundation amounting to $353 thousand and $424 thousand, respectively. These transactions resulted in realized securities gains of $351 thousand and $310 thousand, respectively, for the same periods.
Total consolidated assets amounted to $1.362 billion at December 31, 2001, up 11.8% from the December 31, 2000 balance of $1.218 billion. Average assets rose 11.9% during 2001 and amounted to $1.299 billion. The growth in assets was primarily attributable to purchases of securities and growth in the loan portfolio. Increases in FHLB advances as well as an 11.0% increase in total deposits funded the growth in assets. Total deposits amounted to $816.9 million and $735.7 million at December 31, 2001 and 2000, respectively. FHLB advances totaled $431.5 million at December 31, 2001, up 14.3% from the prior year balance of $377.4 million.
Nonperforming assets (nonaccrual loans and property acquired through foreclosure) amounted to $3.9 million or .28% of total assets at December 31, 2001, compared to $3.4 million or .28% of total assets at December 31, 2000. The Corporation's loan loss provision was $550 thousand and $1.2 million in 2001 and 2000, respectively.
Total shareholders' equity amounted to $97.9 million at December 31, 2001, compared to $89.2 million at December 31, 2000. Included in shareholders' equity at December 31, 2001 was accumulated other comprehensive income on securities available for sale and the interest rate floor contract, net of tax, of $6.4 million compared to $4.0 million in accumulated other comprehensive income associated with net unrealized gains on securities available for sale at December 31, 2000.
Book value per share as of December 31, 2001 and 2000 amounted to $8.15 and $7.43, respectively.
Liquidity Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. Washington Trust's primary source of liquidity is customer deposits. Customer deposits (time, savings and demand deposits) funded approximately 58.8% of total average assets in 2001. Other sources of funding include discretionary use of purchased liabilities (i.e., FHLB term advances and federal funds purchased), cash flows from the Corporation's securities portfolios and loan repayments. In addition, securities designated as available for sale may be sold in response to short-term or long-term liquidity needs.
The Corporation's Asset/Liability Committee ("ALCO") establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained well within target ranges established by the ALCO during 2001. Net loans as a percentage of total assets amounted to 43.5% at December 31, 2001, compared to 47.9% at December 31, 2000. Total securities as a percentage of total assets amounted to 46.2% at December 31, 2001, up from 42.0% at December 31, 2000. These changes resulted primarily from purchases of debt securities and the 11.8% increase in total assets in 2001.
For the year ended December 31, 2001, net cash provided by financing activities was $127.6 million. Proceeds from FHLB advances totaled $1.217 billion, while repayments of FHLB advances totaled $1.163 billion in 2001. Additionally, $81.2 million was generated from overall growth in deposits. Net cash used in investing activities was $130.1 million in 2001, the majority of which was used to purchase securities. In addition, the Corporation expended $3.4 million to upgrade and expand equipment and premises in order to support its operations. Net cash provided by operating activities amounted to $9.5 million in 2001, $13.1 million of which was generated by net income. (See the Consolidated Statements of Cash Flows for further information about sources and uses of cash.)
Acquisitions On June 26, 2000, the Corporation completed its acquisition of Phoenix, an independent investment advisory firm located in Providence, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the acquisition was effected by means of merger of Phoenix with and into the Bank, the wholly owned subsidiary of the Corporation. For the year ended December 31, 1999, Phoenix's investment management revenues totaled $3.4 million. Expenses directly attributable to the 2000 acquisition of Phoenix amounted to $1.1 million, after income taxes, and were charged to earnings at the date of combination. Acquisition related expenses primarily consisted of legal and investment advisory fees.
On August 25, 1999, the Corporation completed the acquisition of Pier Bank, a Rhode Island chartered community bank headquartered in South Kingstown, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999, the acquisition was effected by means of the merger of Pier Bank with and into the Bank, the wholly owned subsidiary of the Corporation. The conversion of customer deposit and loan accounts took place on September 24, 1999. Expenses directly attributable to the merger amounted to $1.3 million, net of income taxes, and were charged to earnings at the date of combination. Acquisition expenses consisted of professional fees, data processing/integration costs, write-down of assets and severance obligations. Asset write-downs amounted to $126 thousand and consisted of fixed assets, primarily obsolete technology equipment, abandoned in connection with the acquisition.
The acquisitions were tax-free reorganizations and were accounted for under the pooling of interests method. Accordingly, the consolidated financial statements and other financial information of the Corporation have been restated to present the combined financial condition and results of operations as if the combination had been in effect for all periods presented.
Net Interest Income Net interest income is the primary source of Washington Trust's operating income. The level of net interest income is affected by the volume of average interest-earning assets and interest-bearing liabilities, market interest rates and other factors. The following discussion presents net interest income on a fully taxable equivalent (FTE) basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities.
FTE net interest income increased $1.5 million, or 3.7%, from 2000 to 2001, due primarily to the growth in interest-earning assets. The net interest margins (FTE net interest income as a percentage of average interest-earning assets) for 2001 and 2000 were 3.30% and 3.55%, respectively. The interest rate spread declined 19 basis points to 2.77% in 2001. Earning asset yields declined 62 basis points during 2001, while the cost of interest-bearing liabilities decreased 43 basis points, thereby narrowing the net interest spread. The decline in yields on loans and securities offset somewhat by lower funding costs of interest-bearing deposits, FHLB advances and other borrowed funds was primarily responsible for the decrease in the net interest margin.
FTE interest income totaled $88.6 million in 2001, up from $86.2 million in 2000. The yield on interest-earning assets amounted to 7.23% in 2001, down from 7.85% in 2000. Average interest-earning assets amounted to $1.225 billion or 11.6% over the comparable 2000 amount. The growth in average interest-earning assets was due to growth in securities and loans. Total average securities rose $87.7 million, or 16.6%, in 2001, mainly due to purchases of taxable debt securities. The FTE rate of return on securities was 6.13% in 2001, down from 6.93% in 2000. The decrease in yield reflects a combination of lower yields on variable rate securities tied to short-term interest rates and lower marginal rates on investment purchases during 2001 relative to the prior year.
Average loans amounted to $609.0 million in 2001, up $39.3 million, or 6.9%, from 2000. The FTE rate of return on total loans was 8.34% in 2001, compared to 8.70% in 2000. This decline is primarily due to lower marginal yields on floating and adjustable rate loans in 2001 as compared to the prior year and a decline in yields on new loan originations. Average residential real estate loans amounted to $251.8 million, up 4.7% from the prior year level. The yield on residential real estate loans amounted to 7.66%, down 15 basis points from the prior year yield. Average commercial loans rose 9.4% to $252.5 million in 2001. The yield on commercial loans amounted to 9.25%, a decrease of 26 basis points from the prior year yield of 9.51%. Included in interest income on commercial loans was $642 thousand of appreciation in the value of the interest rate floor contract for 2001. Average consumer loans rose 6.4% in 2001 to $104.7 million. The yield on consumer loans amounted to 7.79%, down from 8.96% in 2000 primarily due to a decline in the yield on home equity lines.
Average interest-bearing liabilities increased 12.0% to $1.081 billion at December 31, 2001. Due to lower interest rates in 2001, the Corporation's total cost of funds on interest-bearing liabilities amounted to 4.46% in 2001, a decrease of 43 basis points from the prior year yield level. Average savings deposits increased 20.3% to $289.4 million in 2001 from the comparable 2000 amount. The rate paid on savings deposits for 2001 was 1.77%, compared to 1.82% in 2000. Average time deposits increased $8.2 million with a decrease of 40 basis points in the rate paid. In addition, average demand deposits, an interest-free source of funding, increased 7.6% from 2000 to $114.8 million in 2001.
Average FHLB advances increased by $57.9 million, or 15.6%, from 2000 and amounted to $428.5 million. This increase was used primarily to fund the purchase of securities. The average rate paid on FHLB advances in 2001 was 5.62%, a decrease of 55 basis points from the prior year.
Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis) The following table presents average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income) are included in amounts presented for loans.
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency for the years indicated:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999 - --------------------------------------------------------------------------------
Commercial and other loans $169 $126 $130 Nontaxable debt securities 499 576 605 Corporate stocks and FHLB stock 378 386 351
Noninterest Income Noninterest income is an important source of revenue for the Corporation. For the year ended December 31, 2001, recurring noninterest income, which excludes net gains on sales of securities and the 1999 nonrecurring net gain on the sale of the credit card portfolio, accounted for 34.9% of total revenues (net interest income plus recurring noninterest income). Washington Trust's primary sources of recurring noninterest income are trust and investment management revenues, servicing of deposit accounts, merchant credit card processing fees and mortgage banking activities. Also included in noninterest income are earnings generated from bank-owned life insurance ("BOLI") purchased in 1999.
Revenue from trust and investment management services continues to be the largest component of noninterest income. Trust and investment management revenue represented 48.4% of noninterest income and amounted to $10.4 million in 2001, down slightly from the $10.5 million reported in 2000. This decrease is primarily attributable to financial market declines.
Service charges on deposit accounts rose 6.6% to $3.5 million in 2001. Changes in the fee structures of various deposit products during the year, as well as growth in the Corporation's total deposit base, were contributing factors in this increase.
Revenue from mortgage banking activities associated with the originations of loans for the secondary market totaled $2.1 million in 2001, up from $585 thousand in 2000, due to increased loan sales resulting from strong mortgage refinancing activity in a low interest rate environment. Mortgage banking activities include the capitalization of mortgage servicing rights of $35 thousand and $27 thousand in 2001 and 2000, respectively.
Most secondary market loans had previously been sold with servicing retained, however, in the fourth quarter of 1999, the Corporation began selling substantially all residential mortgage loans with servicing released. Mortgage servicing fee income amounted to $400 thousand for the year ended December 31, 2001, compared to the prior year amount of $450 thousand. Servicing income, excluding valuation adjustments and amortization, as a percentage of average loans serviced was 30 basis points in 2001 and in 2000. The balance of serviced loans at December 31, 2001 amounted to $146.7 million, compared to $180.6 million at December 31, 2000.
In the second quarter of 1999, the Corporation purchased $18.0 million of BOLI as a financing tool for employee benefits. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. Included in other income was $1.1 million and $1.0 million of earnings on BOLI for the years ended December 31, 2001 and 2000, respectively. (See additional discussion on BOLI under the caption "Financial Condition".)
Noninterest Expense Total recurring noninterest expense, which excludes acquisition related expenses and net litigation settlement costs, rose 4.1% to $38.0 million in 2001. This increase was primarily attributable to higher salaries and benefit expense. Legal, audit and professional fees totaled $1.3 million, down $547 thousand from the corresponding 2000 amount. The decrease was primarily due to the reduction in legal defense costs associated with the settlement of a litigation matter in May 2001. Total equipment costs for 2001 amounted to $3.4 million, down $217 thousand from the corresponding 2000 amount. In 2001 and 2000, the Corporation recorded impairment adjustments of $107 thousand and $293 thousand, respectively, resulting from remeasurements of the useful lives of technology equipment.
Income Taxes Income tax expense amounted to $5.5 million and $5.7 million in 2001 and 2000, respectively. The Corporation's effective tax rate was 29.7% in 2001, compared to a rate of 30.0% in 2000. These rates differed from the federal rate of 35.0% due to the benefits of tax-exempt income and the dividends received deduction as well as the results of the tax planning strategies designed to reduce income taxes and the effect of the second quarter 2000 acquisition of Phoenix. Phoenix operated as a sub-S corporation prior to the acquisition. The acquisition was a tax-free reorganization accounted for as a pooling of interests.
The Corporation's net deferred tax asset amounted to $1.4 million and $2.1 million at December 31, 2001 and 2000, respectively. Primary sources of recovery of deferred tax assets are future taxable income and the reversal of deferred tax liabilities. (See Note 12 to the Consolidated Financial Statements for additional information regarding income taxes.)
Financial Condition Securities Securities are designated as either available for sale or held to maturity at the time of purchase. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Securities designated as held to maturity are part of the Corporation's portfolio of long-term interest-earning assets. These securities are classified as long-term because the Corporation has the intent and ability to hold them until maturity. Securities held to maturity are reported at amortized cost.
The transition provisions of SFAS No. 133 provided that at the date of initial application an entity may transfer any security classified as "held to maturity" to "available for sale" or "trading." On January 1, 2001, the Corporation transferred held to maturity securities with an amortized cost of $43.6 million and an estimated fair value of $42.6 million into the available for sale category. The transition adjustment amounted to an unrealized loss, net of tax, of $367 thousand and was reported in other comprehensive income.
Securities Available for Sale The amortized cost of securities available for sale at December 31, 2001 amounted to $443.8 million, an increase of $63.8 million over the 2000 amount. This increase was due primarily to purchases of mortgage-backed securities.
At December 31, 2001, the net unrealized gains on securities available for sale amounted to $10.2 million, an increase of $3.6 million from the comparable 2000 amount. This increase was attributable to the effects of reductions in medium and long-term bond rates that occurred during 2001. (See Note 3 to the Consolidated Financial Statements for detail of unrealized gains and losses associated with securities available for sale.)
Securities Held to Maturity The amortized cost of securities held to maturity increased $50.2 million, to $175.1 million at December 31, 2001. This increase is primarily attributable to purchases of mortgage-backed securities. The net unrealized gains on securities held to maturity amounted to $2.5 million at December 31, 2001 compared to $453 thousand in net unrealized gains at December 31, 2000.
Federal Home Loan Bank Stock The Corporation is required to maintain a level of investment in FHLB stock that currently is based on the level of its FHLB advances. As of December 31, 2001 and 2000, the Corporation's investment in FHLB stock totaled $23.5 million and $19.6 million, respectively. The Gramm-Leach-Bliley Act requires the FHLB to issue new capitalization requirements to be implemented by May 2002.
Loans Total loans amounted to $605.6 million at December 31, 2001, up $8.5 million, or 1.4%, from the December 31, 2000 amount of $597.2 million. The increase in total loans was led by growth in the commercial and consumer loan portfolios.
Total residential real estate loans decreased $15.6 million, or 6.2%, in 2001 due to refinancings sold into the secondary market. Consumer loans were up $3.3 million, or 3.1%, in 2001. The increase in consumer loans was mainly due to growth in home equity lines. Total commercial loans increased $20.8 million, or 8.7%, in 2001, with the largest increase occurring in the other commercial loans portfolio.
Other Assets Other assets totaled $29.8 million at December 31, 2001, compared to $28.0 million at December 31, 2000. Included in other assets is BOLI, which amounted to $20.9 million and $19.7 million at December 31, 2001 and 2000, respectively. The Corporation purchased $18.0 million of BOLI in 1999 as a financing tool for employee benefits. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. The purchase of the life insurance policy results in an interest sensitive asset on the Corporation's consolidated balance sheet that provides monthly tax-free income to the Corporation. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed on all carriers. BOLI is included in other assets on the Corporation's consolidated balance sheets at its cash surrender value. Increases in BOLI's cash surrender value are reported as other income in the Corporation's consolidated statements of income.
Deposits Total deposits at December 31, 2001 amounted to $816.9 million, up 11.0% from the prior year balance of $735.7 million. Demand deposits rose 19.3% to $134.8 million. Savings deposits rose 22.2% to $317.0 million. Time deposits totaled $365.1 million at December 31, 2001, compared to $363.4 million at December 31, 2000.
Borrowings Washington Trust uses advances from the Federal Home Loan Bank of Boston as well as other borrowings as part of its overall funding strategy. The additional FHLB advances and other borrowings were used to meet short-term liquidity needs, to fund loan growth and to purchase securities. Total advances amounted to $431.5 million at December 31, 2001, up from $377.4 million one year earlier. (See Note 10 to the Consolidated Financial Statements for additional information about borrowings.)
Asset Quality Nonperforming Assets Nonperforming assets include nonaccrual loans and other real estate owned. Nonperforming assets were .28% of total assets at December 31, 2001 and 2000. Nonaccrual loans as a percentage of total loans increased from .58% at the end of 2000 to .63% at December 31, 2001. Approximately $1.6 million, or 42.6% of total nonaccrual loans, were less than 90 days past due at December 31, 2001.
The following table presents nonperforming assets and related ratios:
(Dollars in thousands)
December 31, 2001 2000 --------------------------------------------------------------------------- Nonaccrual loans: Residential real estate $1,161 $796 Commercial and other: Mortgages 1,472 1,076 Construction and development - - Other 509 1,018 Consumer 685 544 --------------------------------------------------------------------------- Total nonaccrual loans 3,827 3,434 Other real estate owned, net 30 9 --------------------------------------------------------------------------- Total nonperforming assets $3,857 $3,443 ---------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .63% .58% Nonperforming assets as a percentage of total assets .28% .28%
Nonaccrual Loans Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more past due with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but uncollected, is reversed against current period income. Subsequent cash receipts on nonaccrual loans are recognized as interest income, or recorded as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified.
Nonaccrual loans are returned to accrual status when the obligation has performed in accordance with the contract terms for a reasonable period of time and the ultimate collectibility of the contractual principal and interest is no longer doubtful.
There are no accruing loans 90 days or more past due at December 31, 2001. Included in accruing loans 90 days or more past due at December 31, 2000 were residential mortgages amounting to $393 thousand which were considered well-collateralized and in the process of collection and therefore were deemed to have no loss exposure.
(Dollars in thousands)
December 31, 2001 2000 --------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $2,195 $1,608 Nonaccrual loans less than 90 days past due 1,632 1,826 --------------------------------------------------------------------------- Total nonaccrual loans $3,827 $3,434 --------------------------------------------------------------------------- Accruing loans 90 days or more past due, primarily all residential mortgages (1) $ - $393 --------------------------------------------------------------------------- (1) Not included in nonperforming assets
Restructured Loans Loans are considered restructured when the Corporation has granted concessions to a borrower due to the borrower's financial condition that it otherwise would not have considered. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. Included in nonaccrual loans at December 31, 2001 and 2000, are loans whose terms have been restructured amounting to $28 thousand and $118 thousand, respectively. There were no commitments to lend additional funds to borrowers whose loans had been restructured.
Other Real Estate Owned Other real estate owned ("OREO") is comprised of properties acquired through foreclosure and other legal means, and loans determined to be substantively repossessed. A loan is considered to be substantively repossessed when the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings. OREO is carried at the lower of cost or fair value minus estimated costs to sell. A valuation allowance is maintained for declines in market value and estimated selling costs.
The balance of OREO amounted to $30 thousand at December 31, 2001, up from the prior year amount of $9 thousand. Increases in OREO resulted from foreclosures and repossessions that exceeded the level of sales of foreclosed properties and repossessed assets. During 2001, proceeds from sales of foreclosed properties and repossessed assets amounted to $151 thousand. Washington Trust occasionally provides financing to facilitate the sales of some of these properties. Financing is generally provided at market rates with credit terms similar to those available to other borrowers.
Allowance for Loan Losses The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses (ALL). The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other environmental factors. The methodology includes an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114. Other individual commercial loans and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration the borrower's financial condition, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the Corporation's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional unallocated allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. For example, most of the loan portfolio is concentrated among borrowers in southern Rhode Island and southeastern Connecticut and a substantial portion of the portfolio is collateralized by real estate in this area, including most consumer loans and those commercial loans not specifically classified as commercial mortgages. A portion of the commercial and commercial mortgage loans are to borrowers in the hospitality and tourism industry and this concentration has been increasing in recent years. Economic conditions which may affect the ability of borrowers to meet debt service requirements are considered including interest rates and energy costs. Results of regulatory examinations, historical loss ranges, portfolio composition including a trend toward somewhat larger credit relationships, and other changes in the portfolio are also considered.
The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans.
The allowance for loan losses amounted to $13.6 million, or 2.24% of total loans, at December 31, 2001, compared to $13.1 million, or 2.20%, at December 31, 2000.
The following table reflects the activity in the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2001 2000 ------------------------------------------------------------------------- Beginning balance $13,135 $12,349 Charge-offs, net of recoveries: Residential: Real estate 15 (19) Construction - - Commercial: Mortgages (122) (8) Construction and development - - Other 152 13 Consumer (137) (350) ------------------------------------------------------------------------- Net charge-offs (92) (364) Provision for loan losses 550 1,150 ------------------------------------------------------------------------- Ending balance $13,593 $13,135 ------------------------------------------------------------------------- Allowance for loan losses to nonaccrual loans 355.20% 382.50% Allowance for loan losses to total loans 2.24% 2.20% -------------------------------------------------------------------------
Capital Resources Total shareholders' equity increased $8.8 million during 2001 and amounted to $97.9 million at December 31, 2001. The overall increase was mainly attributable to earnings retention of $6.8 million. Capital growth also resulted from a $2.4 million increase in accumulated other comprehensive income due to an increase in unrealized gains on securities. Stock option exercises increased shareholders' equity by $573 thousand in 2001. Cash dividends declared per share amounted to $.52 and $.48 in 2001 and 2000, respectively. Common stock shares repurchased amounted to $1.1 million at December 31, 2001. The Corporation authorized a stock repurchase of up to 250,000 shares of common stock in September 2001. (See Note 15 to the Consolidated Financial Statements for additional discussion of the stock repurchase plan).
The ratio of total equity to total assets amounted to 7.2% at December 31, 2001, compared to 7.3% at December 31, 2000. Book value per share at December 31, 2001 amounted to $8.15, a 9.7% increase from the year-earlier amount of $7.43 per share.
The Corporation and the Bank are subject to various regulatory capital requirements. The Corporation and the Bank are categorized as well-capitalized under the regulatory framework for prompt corrective action. (See Note 15 to the Consolidated Financial Statements for additional discussion of capital requirements.)
Litigation In January 1997, a suit was filed against the Washington Trust Bancorp Inc.'s bank subsidiary (the "Bank") in the Superior Court of Washington County, Rhode Island by Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by Maxson's former president, treasurer and fifty percent shareholder, which allegedly occurred between 1986 and 1995. The suit alleged that the Bank erred in permitting this individual, while an officer of Maxson, to transfer funds from Maxson's account at the Bank for his personal benefit.
On May 11, 2001, the Bank entered into an agreement with the plaintiffs to settle the suit. Under the terms of the agreement, which does not involve an admission of wrongdoing, the Bank agreed to pay $4.8 million to the plaintiffs. The cost of this settlement was recorded in the consolidated financial statements as of and for the quarter ended March 31, 2001. Net of the related income tax effect, the cost of the settlement amounted to $3.3 million. In August 2001, the Bank received a settlement from an insurance carrier in the amount of $775 thousand ($553 thousand net of tax) in connection with this matter. In December 2001, the Bank received a settlement from another insurance carrier in the amount of $400 thousand ($252 thousand net of tax) in connection with this matter. The recoveries were recorded as reductions of the litigation settlement cost included in other noninterest expenses. No further insurance recoveries are expected.
Recent Accounting Developments In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations. SFAS 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using one method - the purchase method. Therefore, this Statement eliminates the use of the pooling-of-interests method for accounting for business combinations. The provisions of SFAS 141 apply to all business combinations initiated after June 30, 2001, and also apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001.
The adoption of the foregoing pronouncements is not expected to have a material impact on the Corporation's financial statements with respect to any business combinations which occurred prior to 2002. SFAS Nos. 141 and 142 will be applied to the acquisition of First Financial Corp., which is expected to be completed in the second quarter of 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities and is effective for financial statements issued for all fiscal years beginning after June 15, 2002. The adoption of this pronouncement is not expected to have a material impact on the Corporation's financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This Statement established a single accounting model to be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, broadened the presentation of discontinued operations to include more disposal transactions, and resolves significant implementation issues related to SFAS No. 121. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The provisions of this Statement are to be applied prospectively. The adoption of this pronouncement is not expected to have a material impact on the Corporation's financial statements.
Comparison of 2000 with 1999 Washington Trust recorded net income of $13.2 million, or $1.09 per diluted share, for 2000. Net income for 1999 amounted to $12.5 million, or $1.03 per diluted share.
In the second quarter of 2000, the Corporation completed the acquisition of Phoenix Investment Management Company, Inc. and recorded acquisition-related expenses of $1.1 million, after income taxes. During the third quarter of 1999, the Corporation completed its acquisition of Pier Bank and also recognized a nonrecurring gain on the sale of its credit card loan portfolio. 1999 results include acquisition-related expenses of $1.3 million, net of income taxes, and the loan sale gain, net of taxes, of $285 thousand. These acquisitions were accounted for under the pooling of interests method, and accordingly, financial data for all prior periods were restated to reflect the acquisitions at the beginning of each period presented. Operating basis earnings exclude acquisition-related expenses, net of taxes, and the loan sale gain, net of taxes. Operating earnings also include a pro forma tax provision for the pre-acquisition earnings of Phoenix, which operated as a sub-S corporation prior to the acquisition.
Operating earnings for 2000 amounted to $13.9 million, an increase of 8.9% from the $12.8 million reported for 1999. Diluted earnings per share, on an operating basis, amounted to $1.15 for 2000, up from $1.06 per share in 1999. The Corporation's rates of return on average assets and average equity, on an operating basis, were 1.20% and 16.98% for 2000, respectively. Comparable amounts for 1999 were 1.21% and 16.04%.
Fully taxable equivalent net interest income increased $2.3 million, or 6.2%, from 1999 to 2000, primarily due to the growth in interest-earning assets. The net interest margins for 2000 and 1999 were 3.55% and 3.71%, respectively. The interest rate spread declined 23 basis points to 2.96% in 2000. Earning asset yields rose 36 basis points during 2000, while the cost of interest-bearing liabilities increased 59 basis points, thereby narrowing the net interest spread. Higher costs of funds associated with FHLB advances and time deposits were primarily responsible for the decrease in the net interest margin.
Recurring noninterest income, which excludes net gains on sales of securities and the 1999 net gain on the sale of the credit card portfolio, totaled $19.0 million and $17.7 million for 2000 and 1999, respectively. The $1.3 million increase resulted primarily from growth in revenues for trust and investment management services, offset in part by a decline in revenue from mortgage banking activities. Trust and investment management income totaled $10.5 million for 2000, up 13.2% from the $9.3 million reported in 1999. Revenue from mortgage banking activities associated with the originations of loans for the secondary market totaled $585 thousand in 2000, down from $1.4 million in 1999, due to decreased loan sales resulting from lower mortgage refinancing activity.
Operating noninterest expenses (excluding acquisition-related expenses) amounted to $36.5 million for 2000, up $2.7 million from 1999. This increase was primarily attributable to higher salaries and benefit expense, increases in legal, audit and professional fees and higher equipment costs. Legal, audit and professional fees totaled $1.9 million in 2000, up $804 thousand from 1999. The increase was mainly due to legal defense costs associated with a long-standing lawsuit settled in 2001. Total equipment costs for 2000 amounted to $3.6 million, up $470 thousand from the corresponding 1999 amount. In 2000, the Corporation recorded an impairment adjustment of $293 thousand resulting from a remeasurement of the useful lives of technology equipment.
Total assets rose $112.5 million, or 10.2% to $1.218 billion at December 31, 2000. Average assets amounted to $1.161 billion in 2000, up 10.3% from the prior year. Asset growth was primarily attributable a $64.7 million increase in the carrying value of securities and a $47.3 million increase in the loan portfolio. Increases in FHLB advances as well as an 11.3% increase in total deposits funded the growth in assets. Average interest-bearing liabilities amounted to $965.2 million at December 31, 2000, up 11.0% from 1999.
Nonperforming assets amounted to $3.4 million or .28% of total assets at December 31, 2000, down from $3.8 million or .35% of total assets at December 31, 1999. The Corporation's loan loss provision was $1.2 million and $1.8 million in 2000 and 1999, respectively. Net loan charge-offs amounted to $364 thousand in 2000, down from $457 thousand in 1999. The allowance for loan losses represented 2.20% of total loans at December 31, 2000 compared to 2.25% in 1999.
Shareholder's equity amounted to $89.2 million at December 31, 2000, compared to $78.2 million at December 31, 1999. Capital growth resulted primarily from $6.6 million of earnings retention and a $4.2 million increase in accumulated other comprehensive income due to unrealized gains on securities. Book value per share as of December 31, 2000 amounted to $7.43, up 13.4% from the $6.55 per share amount in 1999. The ratio of capital to assets was 7.3% and 7.1% at December 31, 2000 and 1999, respectively. Dividends paid per share amounted to $.48 in 2000, up 9.1% from the prior year.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity Interest rate risk is one of the major market risks faced by the Corporation. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. The objective of the ALCO is to manage assets and funding sources to produce results which are consistent with Washington Trust's liquidity, capital adequacy, growth, risk and profitability goals.
The ALCO manages the Corporation's interest rate risk using income simulation to measure interest rate risk inherent in the Corporation's on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 60-month period. The simulations assume that the size and general composition of the Corporation's balance sheet remain constant over the 60-month simulation horizon and take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. Non-contractual savings deposits are classified as short-term (three months or less) for both maturity and repricing purposes. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency.
The ALCO reviews simulation results to determine whether the negative exposure of net interest income to changes in interest rates remains within established tolerance levels over a 24-month horizon, and to develop appropriate strategies to manage this exposure. In addition, the ALCO reviews 60-month horizon results to assess longer-term risk inherent in the balance sheet. As of December 31, 2001 and December 31, 2000, net interest income simulation indicated exposure to changing interest rates over a 24-month horizon to a degree that remained within tolerance levels established by the Corporation. The Corporation defines maximum unfavorable net interest income exposure to be a change of no more than 5% in net interest income over the first 12 months and no more than 10% over the second 12 months of the simulation horizon.
The following table summarizes the effect that interest rate shifts would have on net interest income for a 24-month period using the Corporation's on and off-balance sheet financial instruments as of December 31, 2001. Interest rates are assumed to shift by a parallel 200 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their historical insensitivity to rate changes. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. The asymmetric rate shift scenarios presented below reflect the fact that given the low level of interest rates at December 31, 2001, a parallel rate decline of 200 basis points is extremely unlikely to occur, as this would effectively reduce many interest rates to zero. It should be noted that the rate scenarios used do not necessarily reflect the ALCO's view of the "most likely" change in interest rates over the next 24 months. Furthermore, since a static balance sheet is assumed, the results do not reflect the anticipated future net interest income of the Corporation for the same period. The following table presents these 24-month net interest income simulation results:
The ALCO estimates that the negative exposure of net interest income to falling rates results from the difficulty of reducing rates paid on core savings deposits given the current level of interest rates. If rates were to fall and remain low for a sustained period, core savings deposit rates might not be reduced much below current levels, while rates earned on assets would decline as current assets mature or reprice. While the ALCO reviews simulation assumptions to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk since the repricing, maturity and prepayment characteristics of financial instruments, especially core savings deposits, may change to a different degree than estimated. In addition, since income simulations assume that the Corporation's balance sheet will remain static over the 60-month simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.
The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure which may not be captured by income simulation, but which might result in changes to the Corporation's capital position. Results are calculated using industry-standard analytical techniques and securities data. The following table summarizes the potential change in market value of the Corporation's available for sale debt securities as of December 31, 2001 and 2000 resulting from immediate 200 basis point parallel rate shifts:
The Corporation also monitors the potential change in market value of its available for sale debt securities using "value at risk" analysis. The anticipated maximum market value reduction for the bank's available for sale securities portfolio at December 31, 2001, including both debt and equity securities, was 3.7%, assuming a one-year time horizon and a 5% probability of occurrence for "value at risk" analysis.
At December 31, 2001, gap analysis showed that the Corporation's cumulative one-year gap was a negative $135.9 million, or 10.6% of earning assets. The following table details the amounts of interest-earning assets and interest-bearing liabilities at December 31, 2001 that are expected to mature or reprice in each of the time periods presented. To the extent applicable, amounts of assets and liabilities that mature or reprice within a particular period were determined in accordance with their contractual terms. Fixed rate mortgages, mortgage-backed securities and consumer installment loans have been allocated based on expected amortization and prepayment rates using assumptions based on recent historical performance. Savings, NOW and money market deposit accounts, which have no contractual term and are subject to immediate repricing, are presented in the under three-month category. Management believes that gap analysis has substantial limitations as a measure of interest rate risk, as it does not address the effect of changes in interest rates nor the magnitude of resulting changes in net interest income. For this reason, the ALCO does not use gap analysis to establish interest rate risk targets or assess interest rate risk exposure.
The following table summarizes the Corporation's gap analysis as of December 31, 2001:
On occasion, the Corporation has supplemented its interest rate risk management strategies with off-balance sheet transactions. Such transactions are intended to hedge specifically identified risks inherent in the Corporation's balance sheet, and not to produce speculative profits. The Corporation has written policy guidelines that designate limits on the notional value of off-balance sheet transactions and require periodic evaluation of risks associated with these transactions, including counterparty credit risk.
During 1998, the Corporation entered into an interest rate floor contract with a notional principal amount of $20 million and a five-year term maturing in February 2003. This contract is intended to function as a hedge against reductions in interest income realized from prime-based loans. The Corporation receives payment for this contract if certain interest rates fall below specified levels. Effective January 1, 2001 with the adoption of SFAS No. 133, the Corporation recognized the fair value of this derivative, amounting to $97 thousand, as an asset on the balance sheet. At December 31, 2001, the carrying value of the interest rate floor contract amounted to $739 thousand and is reported in other assets. (See Note 7 to the Consolidated Financial Statements for additional information regarding the floor contract.)
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are contained herein.
Description
Independent Auditors' Report
Consolidated Balance Sheets December 31, 2001 and 2000
Consolidated Statements of Income For the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows For the Years Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Washington Trust Bancorp, Inc.:
We have audited the consolidated financial statements of Washington Trust Bancorp, Inc. and subsidiary (the "Corporation") as listed in the accompanying index. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ending December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Providence, Rhode Island January 15, 2002
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, 2001 and 2000
General Washington Trust Bancorp, Inc. (the "Corporation") is a publicly owned, registered bank holding company, organized under the laws of the State of Rhode Island. The Corporation provides a complete product line of financial services through its wholly owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The Bank was originally chartered in 1800 and provides a variety of financial services including commercial, residential and consumer lending, retail and commercial deposit products and trust and investment management services through its branch offices in Rhode Island and Connecticut. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits.
The activities of the Corporation and the Bank are subject to the regulatory supervision of the Board of Governors of the Federal Reserve System ("Federal Reserve Board") and the FDIC, respectively. Both companies are also subject to various Rhode Island and Connecticut business and banking regulations.
On November 13, 2001, the Corporation announced that it had signed a definitive agreement to acquire First Financial Corp., a bank holding company and parent of First Bank and Trust Company, a Rhode Island-chartered community bank. First Financial Corp., with assets of $185.2 million at December 31, 2001, is headquartered in Providence, Rhode Island. First Bank and Trust Company operates banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The acquisition, which is expected to be completed in the second quarter of 2002, is subject to certain customary conditions including approval by First Financial Corp.'s shareholders as well as state and federal banking regulators.
On June 26, 2000, the Corporation completed the acquisition of Phoenix Investment Management Company, Inc. ("Phoenix"), an independent investment advisory firm. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the Corporation issued 1,010,808 shares of its common stock to the shareholders of Phoenix. For the years ended December 31, 1999 and 1998, investment management revenues of Phoenix totaled $3.4 million and $3.1 million, respectively. Net income of Phoenix for 1999 and 1998 amounted to $1.9 million and $1.7 million, respectively. Dividends paid to Phoenix shareholders totaled $1.8 million for 1999 and $1.7 million for 1998. Expenses directly attributable to the second quarter 2000 acquisition of Phoenix amounted to $1.1 million, after income taxes, and primarily consisted of legal and investment advisory fees.
On August 25, 1999, the Corporation completed the acquisition of Pier Bank, a Rhode Island chartered community bank headquartered in South Kingstown, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999, the Corporation issued 746,345 shares of its common stock to the shareholders of Pier Bank. At December 31, 1998, Pier Bank had total assets of $59.4 million and total shareholders' equity of $4.5 million. For the year ended December 31, 1998, Pier Bank's net income amounted to $459 thousand. Expenses directly attributable to the third quarter 1999 acquisition of Pier Bank amounted to $1.3 million, net of income taxes, and consisted mainly of professional fees, data processing/integration costs, write-down of assets and severance obligations. Pier Bank asset write-downs amounted to $126 thousand and consisted of fixed assets, primarily obsolete technology equipment, abandoned in connection with the acquisition.
Acquisition related expenses were charged to earnings at the dates of combination. The acquisitions were accounted for under the pooling of interests method and, accordingly, the financial statements and other financial information of the Corporation have been restated to reflect the acquisitions at the beginning of the earliest period presented.
(1) Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of the Corporation and the Bank. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification.
The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practices of the banking industry. The Corporation has one reportable operating segment. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to change is the determination of the allowance for loan losses.
Securities Securities Available for Sale - The Corporation designates securities that it intends to use as part of its asset/liability strategy or that may be sold as a result of changes in market conditions, changes in prepayment risk, rate fluctuations, liquidity or capital requirements as available for sale. The determination to classify such securities as available for sale is made at the time of purchase.
Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Any decline in fair value below the amortized cost basis of an individual security deemed to be other than temporary is recognized as a realized loss in the accounting period in which the determination is made. The fair value of the security at the time of the write-down becomes the new cost basis of the security.
Realized gains or losses from sales of equity securities are determined using the average cost method, while other realized gains and losses are determined using the specific identification method.
Securities Held to Maturity - The determination to classify debt securities in the held-to-maturity category is made at the time of purchase and is based on management's intent and ability to hold the securities until maturity. Debt securities in the held-to-maturity portfolio are stated at cost, adjusted for amortization of premium and accretion of discount.
Federal Home Loan Bank Stock The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston. As a requirement of membership, the Bank must own a minimum amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank may redeem FHLB stock in excess of the minimum required. In addition, the FHLB may require members to redeem stock in excess of the requirement. FHLB stock is redeemable at par, which equals cost. Since no market exists for these shares, they are valued at par.
Mortgage Banking Activities Mortgage Loans Held for Sale - Residential mortgage loans originated for sale are classified as held for sale. These loans are specifically identified and are carried at the lower of aggregate cost, net of unamortized deferred loan origination fees and costs, or market. Forward commitments to sell residential mortgage loans are contracts that the Corporation enters into for the purpose of reducing the market risk associated with originating loans for sale should interest rates change. Forward commitments are recorded at fair market value and are reported in other assets. Market value is estimated based on outstanding investor commitments or, in the absence of such information, current investor yield requirements.
Mortgage Servicing Rights - Rights to service mortgage loans for others are recognized as an asset, including rights acquired through both purchases and originations. The total cost of originated mortgage loans that are sold with servicing rights retained is allocated between the mortgage servicing rights and the loans without the mortgage servicing rights based on their relative fair values. Capitalized mortgage servicing rights are included in other assets and are amortized as an offset to other income over the period of estimated net servicing income. They are periodically evaluated for impairment based on their fair value. Impairment is measured on an aggregated basis according to interest rate band and period of origination. The fair value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost. Any impairment is recognized as a charge to earnings through a valuation allowance.
Portfolio Loans - Loans held in portfolio are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs. Interest income is accrued on a level yield basis based on principal amounts outstanding. Deferred loan origination fees and costs are amortized as an adjustment to yield over the life of the related loans.
Nonaccrual Loans - Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent cash receipts on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible.
Impaired Loans - A loan is impaired when it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Corporation considers all nonaccrual commercial loans to be impaired. Impairment is measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impairment is measured based on the fair value of the collateral if it is determined that foreclosure is probable.
Restructured Loans - Restructured loans include those for which concessions such as reduction of interest rates other than normal market rate adjustments, or deferral of principal or interest payments have been granted due to a borrower's financial condition. Subsequent cash receipts on restructured loans are applied to the outstanding principal balance of the loan, or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan.
Allowance for Loan Losses The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses (ALL). The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other environmental factors. The methodology includes an analysis of individual loans deemed to be impaired in accordance with generally accepted accounting principles. Other individual commercial and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration the borrower's financial condition, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the Corporation's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other factors including regional credit concentration, industry concentration, results of regulatory examinations, historical loss ranges, portfolio composition, economic conditions such as interest rates and energy costs and other changes in the portfolio. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans.
While management believes that the allowance for loan losses is adequate, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies periodically review the Corporation's allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination.
Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. Expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses. The estimated useful lives of premises and improvements range from five to fifty years. For furniture, fixtures and equipment, the estimated useful lives range from two to twenty years.
Other Real Estate Owned (OREO) Other real estate owned consists of property acquired through foreclosure and loans determined to be substantively repossessed. Real estate loans that are substantively repossessed include only those loans for which the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings.
OREO is stated at the lower of cost or fair value minus estimated costs to sell at the date of acquisition or classification to OREO status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure is charged to the allowance for loan losses. A valuation allowance is maintained for declines in market value and for estimated selling expenses. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in foreclosed property costs.
Transfers and Servicing of Assets and Extinguishments of Liabilities The Corporation accounts and reports for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. This approach distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. After a transfer of financial assets, the Corporation recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. This financial components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the Corporation accounts for a transfer as a secured borrowing with a pledge of collateral.
Pension Costs The Corporation accounts for pension benefits using the net periodic benefit cost method, which recognizes the compensation cost of an employee's pension benefit over that employee's approximate service period.
Stock-Based Compensation The Corporation measures compensation cost for stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net income and earnings per share computed using the fair value based method of accounting for these plans as required by SFAS No. 123.
Income Taxes Income tax expense is determined based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Earnings Per Share (EPS) Diluted EPS is computed by dividing net income by the average number of common shares and common stock equivalents outstanding. Common stock equivalents arise from the assumed exercise of outstanding stock options, if dilutive. The computation of basic EPS excludes common stock equivalents from the denominator.
Comprehensive Income Comprehensive income is defined as all changes in equity, except for those resulting from investments by and distribution to shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income.
Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and other short-term investments. Generally, federal funds are sold on an overnight basis.
Derivative Instruments and Hedging Activities Effective January 1, 2001, the Corporation adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 sets accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recognized on the balance sheet at fair value. The Corporation recognized an after-tax loss of $391 thousand from the cumulative effect of adoption of this accounting standard.
The Corporation uses interest rate contracts (swaps and floors) from time to time as part of its interest rate risk management strategy. Interest rate swap and floor agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Corporation does not enter into derivative instruments for any purpose other than cash flow hedging purposes. That is, the Corporation does not enter into derivative instruments for trading or speculative purposes.
By using derivative financial instruments to hedge exposures to changes in interest rates, the Corporation exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Corporation, which creates credit risk for the Corporation. When the fair value of a derivative contract is negative, the Corporation owes the counterparty and, therefore, it does not possess credit risk. The Corporation minimizes the credit risk in derivative instruments by entering into transactions with highly rated counterparties that management believes to be creditworthy.
Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
The net amounts to be paid or received on outstanding interest rate contracts are recognized on the accrual basis as an adjustment to the related interest income or expense over the life of the agreements. Changes in fair value of interest rate contracts are recorded in current earnings. Gains or losses resulting from the termination of interest rate swap and floor agreements on qualifying hedges of existing assets or liabilities are deferred and amortized over the remaining lives of the related assets/liabilities as an adjustment to the yield. Unamortized deferred gains/losses on terminated interest rate swap and floor agreements are included in the underlying assets/liabilities hedged.
Prior to the adoption of SFAS No. 133, the Corporation recognized the amount of unamortized premiums paid for interest rate floor agreements as the carrying value of these contracts. Unamortized premiums were reported in other assets and amounted to $133 thousand at December 31, 2000. Premiums paid for interest rate floor agreements were amortized as an adjustment to interest income over the term of the agreements.
(2) Cash and Due from Banks The Bank is required to maintain certain average reserve balances with the Federal Reserve Board. Such reserve balances amounted to $8.4 million and $6.4 million at December 31, 2001 and 2000, respectively.
(3) Securities Securities are summarized as follows:
Included in corporate stocks at December 31, 2001 are preferred stocks, which are callable at the discretion of the issuer, with an amortized cost of $11.4 million and a fair value of $11.2 million. Call features on these stocks range from three months to six years.
The contractual maturities and weighted average yields of debt securities are summarized below. Weighted average yields are computed on a fully taxable basis. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments.
(Dollars in thousands) Weighted Amortized Fair Average December 31, 2001 Cost Value Yield ------------------------------------------------------------------------- Securities Available for Sale: Due in 1 year or less $88,162 $89,325 5.77% After 1 but within 5 years 219,130 223,222 5.65% After 5 but within 10 years 75,759 76,898 4.35% After 10 years 42,980 41,469 3.33% ------------------------------------------------------------------------- Total debt securities available for sale 426,031 430,914 5.21% ------------------------------------------------------------------------- Securities Held to Maturity: Due in 1 year or less 26,026 26,335 6.54% After 1 but within 5 years 91,979 93,482 6.20% After 5 but within 10 years 41,516 42,017 6.32% After 10 years 15,584 15,761 6.47% ------------------------------------------------------------------------- Total debt securities held to maturity 175,105 177,595 6.30% ------------------------------------------------------------------------- Total debt securities $601,136 $608,509 5.53% -------------------------------------------------------------------------
The transition provisions of SFAS No. 133 also provide that at the date of initial application an entity may transfer any security classified as "held to maturity" to "available for sale" or "trading." On January 1, 2001, the Corporation transferred held to maturity securities with an amortized cost of $43.6 million and an estimated fair value of $42.6 million into the available for sale category. The transition adjustment amounted to an unrealized loss, net of tax, of $367 thousand and was reported in other comprehensive income.
At December 31, 2001, the Corporation owned debt securities with an aggregate carrying value of $41.3 million that are callable at the discretion of the issuers. The majority of these securities are U.S. Treasury and government-sponsored agency obligations, included in both the available for sale and held to maturity categories. Final maturities of these securities range from thirty-three months to twenty-eight years with call features ranging from one month to five years.
The following is a summary of amounts relating to sales of securities available for sale:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------- Proceeds from sales $238 $40,288 $81,398 ------------------------------------------------------------------------- Realized gains $522 $1,358 $2,213 Realized losses (174) (598) (1,535) ------------------------------------------------------------------------- Net realized gains $348 $760 $678 -------------------------------------------------------------------------
Securities available for sale and held to maturity with a fair value of $394.4 million and $65.3 million were pledged to secure Treasury Tax and Loan deposits, borrowings and public deposits at December 31, 2001 and 2000, respectively. The increase in securities pledged is primarily attributable to new collateral practices for FHLB borrowings issued in 2001. (See Note 10 to the Consolidated Financial Statements for additional discussion of FHLB borrowings). In addition, securities available for sale and held to maturity with a fair value of $28.4 million and $31.2 million were collateralized for the discount window at the Federal Reserve Bank at December 31, 2001 and 2000, respectively. There were no borrowings with the Federal Reserve Bank at either date.
Included in other noninterest expense for the twelve months ended December 31, 2001, 2000 and 1999 were contributions of appreciated equity securities to the Corporation's charitable foundation amounting to $353 thousand, $424 thousand and $270 thousand, respectively. These transactions resulted in realized securities gains of $351 thousand, $310 thousand and $262 thousand, respectively, for the same periods.
(4) Loans The following is a summary of loans:
(Dollars in thousands)
December 31, 2001 2000 ------------------------------------------------------------------------- Commercial and other: Mortgages (1) $118,999 $121,817 Construction and development (2) 1,930 2,809 Other (3) 139,704 115,202 ------------------------------------------------------------------------- Total commercial and other 260,633 239,828 Residential real estate: Mortgages (4) 223,681 236,595 Homeowner construction 11,678 14,344 ------------------------------------------------------------------------- Total residential real estate 235,359 250,939 Consumer 109,653 106,388 ------------------------------------------------------------------------- Total loans $605,645 $597,155 -------------------------------------------------------------------------
(1) Amortizing mortgages, primarily secured by income producing property (2) Loans for construction of residential and commercial properties and for land development (3) Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate (4) A substantial portion of these loans is used as qualified collateral for FHLB borrowings (See Note 10 to the Consolidated Financial Statements for additional discussion of FHLB borrowings).
Concentrations of Credit Risk The Corporation's lending activities are primarily conducted in southern Rhode Island and southeastern Connecticut. The Corporation grants single family and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. In addition, loans are granted for the construction of residential homes, commercial real estate properties, and for land development. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation's market area.
Nonaccrual Loans The balance of loans on nonaccrual status as of December 31, 2001 and 2000 was $3.8 million and $3.4 million, respectively. Interest income that would have been recognized had these loans been current in accordance with their original terms was approximately $435 thousand in 2001 and $411 thousand in 2000. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $209 thousand in 2001 and $250 thousand in 2000. Included in nonaccrual loans at December 31, 2001 and 2000 are loans amounting to $28 thousand and $118 thousand, respectively, whose terms have been restructured.
Impaired Loans Impaired loans consist of all nonaccrual commercial loans. The following is a summary of impaired loans:
(Dollars in thousands)
December 31, 2001 2000 ------------------------------------------------------------------------- Impaired loans requiring an allowance $786 $813 Impaired loans not requiring an allowance 1,222 1,301 ------------------------------------------------------------------------- Total recorded investment in impaired loans $2,008 $2,114 -------------------------------------------------------------------------
(Dollars in thousands)
Years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------- Average recorded investment in impaired loans $2,188 $2,056 $3,418 ------------------------------------------------------------------------- Interest income recognized on impaired loans $122 $191 $351 -------------------------------------------------------------------------
Mortgage Servicing Activities At December 31, 2001 and 2000, mortgage loans sold to others and serviced by the Corporation on a fee basis under various agreements amounted to $146.7 million and $180.6 million, respectively. Loans serviced for others are not included in the Consolidated Balance Sheets.
The following is a summary of capitalized mortgage servicing rights:
(Dollars in thousands)
December 31, 2001 2000 1999 ------------------------------------------------------------------------- Balance at beginning of year $905 $996 $808 Additions 35 27 313 Amortization (110) (118) (125) ------------------------------------------------------------------------- Balance at end of year $830 $905 $996 -------------------------------------------------------------------------
Capitalized mortgage servicing rights are periodically evaluated for impairment. As of December 31, 2001 and 2000, the balance of the valuation allowance amounted to $320 thousand.
Loans to Related Parties The Corporation has made loans in the ordinary course of business to certain directors and executive officers including their immediate families and their affiliated companies. Such loans were made under normal interest rate and collateralization terms. Activity related to these loans in 2001 and 2000 was as follows:
(Dollars in thousands)
December 31, 2001 2000 ------------------------------------------------------------------------- Balance at beginning of year $2,591 $2,279 Additions 2,371 2,061 Reductions (1,688) (1,749) ------------------------------------------------------------------------- Balance at end of year $3,274 $2,591 -------------------------------------------------------------------------
(5) Allowance for Loan Losses The following is an analysis of the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------- Balance at beginning of year $13,135 $12,349 $10,966 Provision charged to expense 550 1,150 1,840 Recoveries of loans previously charged off 341 319 510 Loans charged off (433) (683) (967) ------------------------------------------------------------------------- Balance at end of year $13,593 $13,135 $12,349 -------------------------------------------------------------------------
Included in the allowance for loan losses at December 31, 2001, 2000 and 1999 was an allowance for impaired loans amounting to $163 thousand, $209 thousand and $475 thousand, respectively.
(6) Premises and Equipment The following is a summary of premises and equipment:
(Dollars in thousands)
December 31, 2001 2000 ------------------------------------------------------------------------- Land and improvements $2,105 $2,099 Premises and improvements 25,358 25,114 Furniture, fixtures and equipment 20,027 19,319 ------------------------------------------------------------------------- 47,490 46,532 Less accumulated depreciation 25,388 24,822 ------------------------------------------------------------------------- Total premises and equipment, net $22,102 $21,710 -------------------------------------------------------------------------
(7) Financial Instruments With Off-Balance Sheet Risk and Derivative Financial Instruments The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation's exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees, interest rate swaps and floors and commitments to originate and commitments to sell fixed rate mortgage loans. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:
Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each borrower's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the borrower.
Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Interest Rate Risk Management Agreements The Corporation uses interest rate swaps and floors from time to time as part of its interest rate risk management strategy. Swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. A floor is a purchased contract that entitles the Corporation to receive payment from a counterparty if a rate index falls below a contractual rate. The amount of the payment is the difference between the contractual floor rate and the rate index multiplied by the notional principal amount of the contract. If the rate index does not fall below the contractual floor rate, no payment is received. The credit risk associated with swap and floor transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and thus, are not a measure of the Corporation's potential loss exposure.
In March 1998, the Corporation entered into a five-year interest rate floor contract with a notional amount of $20 million that matures in February 2003. The floor contract entitles the Corporation to receive payment from counterparts if the three-month LIBOR rate falls below 5.50%. The purpose of the floor contracts is to offset the risk of future reductions in interest earned on certain floating rate loans. The 3-month LIBOR applicable to the outstanding floor contract at December 31, 2001 was 1.88%. Effective January 1, 2001 with the adoption of SFAS No. 133, the Corporation recognized the fair value of this derivative as an asset on the balance sheet, which amounted to $97 thousand. At December 31, 2001 the carrying value of the interest rate floor contract amounted to $739 thousand and is reported in other assets. Changes in fair value of the interest rate contract are recorded in current earnings. Included in interest income for the year ended December 31, 2001 was $642 thousand of appreciation in value of the interest rate floor contract.
The Corporation has not terminated any interest rate swap agreements or floor contracts and there are no unamortized deferred gains or losses.
Forward Loan Commitments Effective January 1, 2001, with the adoption of SFAS No. 133, the Corporation recognizes commitments to originate and commitments to sell fixed rate mortgage loans as derivative financial instruments. Accordingly, the Corporation recognizes the fair value of these commitments as an asset on the balance sheet. At December 31, 2001 the carrying value of these commitments amounted to $86 thousand and is reported in other assets. Changes in the fair value are recorded in current earnings and amounted to $86 thousand for the year ended December 31, 2001.
(8) Other Real Estate Owned Other real estate owned is included in other assets on the Corporation's consolidated balance sheets. An analysis of the composition of OREO follows:
(Dollars in thousands)
December 31, 2001 2000 ------------------------------------------------------------------------ Residential real estate $ - $ - Commercial real estate - - Repossessed assets 29 11 Land 37 37 ------------------------------------------------------------------------ 66 48 Valuation allowance (36) (39) ------------------------------------------------------------------------ Other real estate owned, net $30 $9 ------------------------------------------------------------------------
An analysis of the activity relating to OREO follows:
(Dollars in thousands)
Years ended December 31, 2001 2000 ------------------------------------------------------------------------ Balance at beginning of year $48 $143 Net transfers from loans 187 109 Sales (169) (154) Other - (50) ------------------------------------------------------------------------ 66 48 Valuation allowance (36) (39) ------------------------------------------------------------------------ Other real estate owned, net $30 $9 ------------------------------------------------------------------------
The following is an analysis of activity relating to the OREO valuation allowance:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------ Balance at beginning of year $39 $94 $69 Provision charged to expense 9 3 99 Sales (12) (8) (53) Selling expenses incurred - - (21) Other - (50) - ------------------------------------------------------------------------ Balance at end of year $36 $39 $94 ------------------------------------------------------------------------
Net realized gains on dispositions of properties amounted to $320, $44 thousand, and $39 thousand in 2001, 2000 and 1999, respectively. These amounts are included in other noninterest expense in the Consolidated Statements of Income.
(9) Time Certificates of Deposit Scheduled maturities of time certificates of deposit at December 31, 2001 were as follows:
(Dollars in thousands)
Years ending December 31: 2002 $274,305 2003 75,988 2004 7,464 2005 1,225 2006 6,152 2007 and thereafter 6 ------------------------------------------------------------------------ Balance at December 31, 2001 $365,140 ------------------------------------------------------------------------
The aggregate amount of time certificates of deposit in denominations of $100 thousand or more was $126.8 million and $122.9 million at December 31, 2001 and 2000, respectively.
(10) Borrowings
Federal Home Loan Bank Advances The following table presents maturities and weighted average interest rates paid on FHLB advances outstanding at December 31, 2001:
In addition to the outstanding advances, the Bank also has access to an unused line of credit amounting to $8.0 million at December 31, 2001. Under agreement with the FHLB, the Bank is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances. Qualified collateral may consist of residential mortgage loans, U.S. government or agency securities, U.S. government-sponsored agency securities, and amounts maintained on deposit at the FHLB. The Bank maintains qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at December 31, 2001.
Other Borrowings The following is a summary of other borrowings:
(Dollars in thousands)
December 31, 2001 2000 ------------------------------------------------------------------------ Treasury, Tax and Loan demand note balance $1,583 $2,813 Other 504 414 ------------------------------------------------------------------------ Other borrowings $2,087 $3,227 ------------------------------------------------------------------------
There were no securities sold under repurchase agreements outstanding at December 31, 2001 and 2000. Securities sold under repurchase agreements generally mature within 90 days. The securities underlying the agreements are held in safekeeping by the counterparty in the name of the Corporation and are repurchased when the agreement matures. Accordingly, these underlying securities are included in securities available for sale and the obligations to repurchase such securities are reflected as a liability. The following is a summary of amounts relating to securities sold under repurchase agreements:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------ Maximum amount outstanding at any month-end $ - $ - $23,525 Average amount outstanding $ - $ - $10,316 Weighted average rate - - 5.05%
(11) Employee Benefits Defined Benefit Pension Plans The Corporation's noncontributory tax-qualified defined benefit pension plan covers substantially all employees. Benefits are based on an employee's years of service and highest 3-year compensation. The plan is funded on a current basis, in compliance with the requirements of the Employee Retirement Income Security Act. The accrued benefit costs relating to the defined benefit pension plan amounted to $399 thousand at December 31, 2001. As of December 31, 2000, the plan's prepaid benefit costs amounted to $31 thousand.
The Corporation has a nonqualified retirement plan to provide supplemental retirement benefits to certain employees, as defined in the plan. The primary purpose of this plan is to restore benefits which would otherwise be provided by the level of the tax-qualified defined benefit pension plan but which are limited by the Internal Revenue Code. The accrued pension liability related to this plan amounted to $777 thousand and $534 thousand at December 31, 2001 and 2000, respectively. The actuarial assumptions used for this supplemental plan are the same as those used for the Corporation's tax-qualified pension plan. The projected benefit obligation for this plan amounted to $1.4 million at September 30, 2001 and 2000, respectively.
Additionally, in July 2001 the Corporation initiated a nonqualified retirement plan to provide supplemental retirement benefits to certain executives, as defined by the plan. The accrued pension liability of this plan amounted to $63 thousand at December 31, 2001. Using the same actuarial assumptions as the other aforementioned pension plans, the projected benefit obligation of this plan amounted to $700 thousand at September 30, 2001.
The following is a reconciliation of the benefit obligation, fair value of plan assets and funded status of the Corporation's defined benefit pension plans:
(Dollars in thousands)
Years ended September 30, 2001 2000 ------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of plan year $14,928 $13,823 Benefit obligation of executive plan at July 1, 2001 633 - Service cost 909 722 Interest cost 1,162 1,013 Actuarial loss 985 63 Benefits paid (731) (693) ------------------------------------------------------------------------- Benefit obligation at end of plan year $17,886 $14,928 ------------------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets at beginning of plan year $18,445 $17,780 Actual return on plan assets (260) 1,297 Employer contribution 61 61 Benefits paid (731) (693) ------------------------------------------------------------------------- Fair value of plan assets at end of plan year $17,515 $18,445 -------------------------------------------------------------------------
Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods. Unrecognized amounts to be amortized and the amounts included in the Consolidated Balance Sheets are as follows:
(Dollars in thousands) 2001 2000 ------------------------------------------------------------------------- Funded status at September 30, $(370) $3,517 Unrecognized transition asset (37) (43) Unrecognized prior service cost 1,047 533 Unrecognized net actuarial gain (1,879) (4,478) ------------------------------------------------------------------------- Accrued benefit cost at December 31, $(1,239) $(471) -------------------------------------------------------------------------
September 30, 2001 2000 ------------------------------------------------------------------------- Assumptions Used: Discount rate 7.25% 7.75% Expected return on plan assets 8.50% 8.50% Rate of compensation increase 4.75% 5.00%
The components of net pension cost include the following:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------- Components of Net Periodic Benefit Cost: Service cost $910 $722 $652 Interest cost 1,162 1,013 1,002 Expected return on plan assets (1,341) (1,229) (1,106) Amortization of transition asset (6) (6) (6) Amortization of prior service cost 119 87 75 Recognized net actuarial (gain) loss (47) (8) 11 ------------------------------------------------------------------------- Net periodic benefit cost $797 $579 $628 -------------------------------------------------------------------------
401(k) Plan The Corporation's 401(k) Plan provides a specified match of employee contributions for substantially all employees. Total employer matching contributions under this plan amounted to $358 thousand, $320 thousand and $275 thousand in 2001, 2000 and 1999, respectively.
Profit Sharing Plan The Corporation has a nonqualified profit sharing plan that rewards employees, excluding those key employees participating in the Annual Performance Plan, for their contributions to the Corporation's success. The annual profit sharing benefit is determined by a formula tied to net income and is subject to approval by the Corporation's Board of Directors each year. The amount of the profit sharing benefit was $410 thousand, $392 thousand and $333 thousand for 2001, 2000 and 1999, respectively.
Annual Performance Plan The Corporation's nonqualified Annual Performance Plan (formerly known as the Short-Term Incentive Plan) rewards key employees for their contributions to the Corporation's success. This plan provides for annual payments up to a maximum percentage of each participant's base salary, with percentages varying among participants. Payment amounts are based on the achievement of target levels of net income, earnings per share and return on equity and/or the achievement of individual objectives. Participants in this plan are not eligible to receive benefits provided under the Profit Sharing Plan. The expense of the Annual Performance Plan amounted to $1.4 million, $1.3 million and $969 thousand in 2001, 2000 and 1999, respectively.
Other Incentive Plans In connection with the acquisition of Phoenix, there are incentive compensation arrangements based on current and future year revenue goals. The expense recognized for these arrangements amounted to $153 thousand and $200 thousand in 2001 and 2000, respectively. In addition, the Corporation has other nonqualified incentive plans. Certain employees, who do not participate in the profit sharing plan or the Annual Performance Plan, participate in one of these plans. The incentives are based on a variety of plan specific factors, including general organizational profitability, product line results, and individual business development goals. The aggregate cost of these various plans amounted to $805 thousand, $963 thousand and $717 thousand in 2001, 2000 and 1999, respectively.
Directors' Retainer Continuation Plan The Corporation previously offered a nonqualified plan that provided retirement benefits to non-officer directors. In 1996, the provisions of the plan were terminated for active directors and the related accrued benefit was settled. The benefits provided under this plan continue for retired directors. The expense of this plan is included in other noninterest expense and amounted to $24 thousand for 2001, 2000 and 1999, respectively. Accrued and unpaid benefits under this plan are an unfunded obligation of the Bank. The accrued liability related to this plan amounted to $233 thousand and $241 thousand at December 31, 2001 and 2000, respectively.
Deferred Compensation Plan The Corporation's Nonqualified Deferred Compensation Plan provides supplemental retirement and tax benefits to directors and certain officers. The plan is funded primarily through pre-tax contributions made by the participants. The Corporation has recorded the assets and liabilities for the deferred compensation plan at the lower of cost or market in the consolidated balance sheets. The participants in the plan bear the risk of market fluctuations of the underlying assets. The accrued liability related to this plan amounted to $1.3 million and $1.2 million at December 31, 2001 and 2000, respectively, and is included in other liabilities on the accompanying consolidated balance sheets. The corresponding invested assets are reported in other assets.
(12) Income Taxes The components of income tax expense were as follows:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------ Current tax expense: Federal $6,164 $6,311 $5,446 State 22 43 49 ------------------------------------------------------------------------ Total current tax expense 6,186 6,354 5,495 ------------------------------------------------------------------------ Deferred tax benefit: Federal (645) (681) (741) State - - - ------------------------------------------------------------------------ Total deferred tax benefit (645) (681) (741) ------------------------------------------------------------------------ Total income tax expense $5,541 $5,673 $4,754 ------------------------------------------------------------------------
Total income tax expense varied from the amount determined by applying the Federal income tax rate to income before income taxes. The reasons for the differences were as follows:
(Dollars in thousands)
Years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------ Tax expense at Federal statutory rate $6,527 $6,609 $5,239 Increase (decrease) in taxes resulting from: Tax-exempt income (366) (377) (457) Acquisition related expenses - 89 268 Dividends received deduction (253) (259) (246) Bank-owned life insurance (397) (366) (237) State tax, net of Federal income tax benefit 14 28 32 Other 16 (51) 155 ------------------------------------------------------------------------ Total income tax expense $5,541 $5,673 $4,754 ------------------------------------------------------------------------
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 2001 and 2000 are as follows:
(Dollars in thousands)
December 31, 2001 2000 ------------------------------------------------------------------------ Gross deferred tax assets: Allowance for loan losses $4,663 $4,468 Deferred compensation 446 414 Deferred loan origination fees 300 317 Pension 140 - PierBank net operating loss carryover 208 250 Other 1,101 915 ------------------------------------------------------------------------ Gross deferred tax assets 6,858 6,364 ------------------------------------------------------------------------ Gross deferred tax liabilities: Securities available for sale (3,559) (2,315) Deferred loan origination costs (885) (862) Premises and equipment (455) (759) Pension - (11) Interest rate floor contract (219) - Other (329) (276) ------------------------------------------------------------------------ Gross deferred tax liabilities (5,447) (4,223) ------------------------------------------------------------------------ Net deferred tax asset $1,411 $2,141 ------------------------------------------------------------------------
Primary sources of recovery of deferred tax assets are future taxable income and the reversal of deferred tax liabilities.
(13) Operating Leases At December 31, 2001, the Corporation was committed to rent premises used in banking operations under noncancellable operating leases. Rental expense under the operating leases amounted to $520 thousand, $604 thousand and $478 thousand for 2001, 2000 and 1999, respectively. The minimum annual lease payments under the terms of these leases, exclusive of renewal provisions, are as follows:
(Dollars in thousands)
Years ending December 31: 2002 $405 2003 334 2004 293 2005 121 2006 41 ------------------------------------------------------------------------ Total minimum lease payments $1,194 ------------------------------------------------------------------------
(14) Litigation In January 1997, a suit was filed against the Bank in the Superior Court of Washington County, Rhode Island by Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by Maxson's former president, treasurer and fifty percent shareholder, which allegedly occurred between 1986 and 1995. The suit alleged that the Bank erred in permitting this individual, while an officer of Maxson, to transfer funds from Maxson's account at the Bank for his personal benefit. In May 2001, the Bank entered into an agreement with the plaintiffs to settle the suit. Under the terms of the agreement, which does not involve an admission of wrongdoing, the Bank agreed to pay $4.8 million to the plaintiffs. The cost of this settlement was recorded in the consolidated financial statements as of and for the quarter ended March 31, 2001. Net of the related income tax effect, the cost of the settlement amounted to $3.3 million. In August 2001, the Bank received a settlement from an insurance carrier in the amount of $775 thousand ($553 thousand net of tax) in connection with this matter. In December 2001, the Bank received a settlement from another insurance carrier in the amount of $400 thousand ($252 thousand net of tax) in connection with this matter. The recoveries were recorded as reductions of the litigation settlement cost included in other noninterest expenses.
The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation.
(15) Shareholders' Equity Stock Repurchase Plan In September 2001, the Corporation's Board of Directors approved a stock repurchase plan authorizing up to 250,000, or 2.1%, of its outstanding common shares to be repurchased. The Corporation plans to hold the repurchased shares as treasury stock to be used for general corporate purposes. At December 31, 2001, 55,000 shares were repurchased under this plan with a total cost of $1.1 million.
Rights In August 1996, the Corporation declared a dividend of one common share purchase right (a "Right") for each share of common stock payable on September 3, 1996 to shareholders of record on that date. Such Rights also apply to new issuances of shares after that date. Each Right entitles the registered holder to purchase from the Corporation one share of its common stock at a price of $35.56 per share, subject to adjustment.
The Rights are not exercisable or separable from the common stock until the earlier of 10 days after a person or group (an "Acquiring Person") acquires beneficial ownership of 15% or more of the outstanding common shares or announces a tender offer to do so. The Rights, which expire on August 31, 2006, may be redeemed by the Corporation at any time prior to the acquisition by an Acquiring Person of beneficial ownership of 15% or more of the common stock at a price of $.001 per Right. In the event that any party becomes an Acquiring Person, each holder of a Right, other than Rights owned by the Acquiring Person, will have the right to receive upon exercise that number of common shares having a market value of two times the purchase price of the Right. In the event that, at any time after any party becomes an Acquiring Person, the Corporation is acquired in a merger or other business combination transaction or 50% or more of its assets or earning power are sold, each holder of a Right will have the right to purchase that number of shares of the acquiring company having a market value of two times the purchase price of the Right.
Dividends The primary source of funds for dividends paid by the Corporation is dividends received from the Bank. The Corporation and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans, and advances from the Bank to the Corporation. Generally the Bank has the ability to pay dividends to the parent subject to minimum regulatory capital requirements. Under the most restrictive of these requirements, the Bank could have declared aggregate additional dividends of $35.8 million as of December 31, 2001.
Stock Option Plans The Corporation's 1997 Equity Incentive Plan (the "1997 Plan") permits the granting of options and other equity incentives to key employees, directors, advisors, and consultants. Up to 1,012,500 shares of the Corporation's common stock may be used from authorized but unissued shares, treasury stock, or shares available from expired awards. Options are designated either as non-qualified or as incentive options. The exercise price of each option may not be less than the fair market value on the date of the grant. In general, the option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof. Awards may be granted at any time until April 29, 2007.
The 1988 Amended and Restated Stock Option Plan (the "1988 Plan") provided for the granting of options to directors, officers and key employees. The 1988 Plan permitted options to be granted at any time until December 31, 1997. The 1988 Plan provided for shares of the Corporation's common stock to be used from authorized but unissued shares, treasury stock, or shares available from expired options. Options were designated either as non-qualified or as incentive options. The exercise price of options granted was equal to the fair market value on the date of grant. In general, the option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof.
The 1997 Plan and the 1988 Plan permit options to be granted with stock appreciation rights ("SARs"), however, no options have been granted with SARs.
Options granted under the plans vest according to various terms at the end of ten years. The following table presents changes in options outstanding during 2001, 2000 and 1999:
The weighted average exercise price and remaining contractual life for options outstanding at December 31, 2001 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 2001, 2000 and 1999.
In determining the pro forma disclosures required by SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents pro forma net income and earnings per share assuming the stock option plan was accounted for using the fair value method prescribed by SFAS No. 123, the weighted average assumptions used and the grant date fair value of options granted in 2001, 2000 and 1999:
(Dollars in thousands, except per share amounts)
Years ended December 31, 2001 2000 1999 -------------------------------------------------------------------------- Net income As reported $13,108 $13,209 $12,511 Pro forma $12,185 $12,401 $11,942
Basic earnings per share As reported $1.09 $1.10 $1.05 Pro forma $1.01 $1.04 $1.01
Diluted earnings per share As reported $1.07 $1.09 $1.03 Pro forma $1.00 $1.02 $.99
Weighted average fair value $5.27 $5.01 $5.36 Expected life 9.0 years 9.3 years 9.0 years Risk-free interest rate 5.32% 6.39% 5.91% Expected volatility 33.0% 32.6% 32.8% Expected dividend yield 3.8% 3.9% 3.9%
The pro forma effect on net income and earnings per share for 2001, 2000 and 1999 is not representative of the pro forma effect on net income and earnings per share for future years because it does not reflect compensation cost for options granted prior to January 1, 1995.
Dividend Reinvestment Under the Amended and Restated Dividend Reinvestment and Stock Purchase Plan, 607,500 shares of common stock were originally reserved to be issued for dividends reinvested and cash payments to the plan.
Reserved Shares As of December 31, 2001, a total of 1,692,645 common stock shares were reserved for issuance under the 1988 Plan, 1997 Plan and the Amended and Restated Dividend Reinvestment and Stock Purchase Plan.
Regulatory Capital Requirements The Corporation and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the FDIC, respectively. These requirements were established to more accurately assess the credit risk inherent in the assets and off-balance sheet activities of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2001, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2001, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank's category.
The following table presents the Corporation's and the Bank's actual capital amounts and ratios at December 31, 2001 and 2000, as well as the corresponding minimum regulatory amounts and ratios:
(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 the estimated value to sell the loans using the quoted market prices for sales of similar loans on the secondary market.
Loans Fair values are estimated for categories of loans with similar financial characteristics. Loans are segregated by type and are then further segmented into fixed rate and adjustable rate interest terms to determine their fair value. The fair value of fixed rate commercial and consumer loans is calculated by discounting scheduled cash flows through the estimated maturity of the loan using interest rates offered at December 31, 2001 and 2000 that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Corporation's historical repayment experience. For residential mortgages, fair value is estimated by using quoted market prices for sales of similar loans on the secondary market, adjusted for servicing costs. The fair value of floating rate commercial and consumer loans approximates carrying value. The fair value of nonaccrual loans is calculated by discounting estimated cash flows, using a rate commensurate with the risk associated with the loan type or by other methods that give consideration to the value of the underlying collateral.
Deposit Liabilities The fair value of demand deposits, savings accounts, and certain money market accounts is equal to the amount payable on demand as of December 31, 2001 and 2000. The discounted values of cash flows using the rates currently offered for deposits of similar remaining maturities were used to estimate the fair value of certificates of deposit.
Securities Sold Under Agreements to Repurchase The carrying amount of securities sold under repurchase agreements approximates fair value.
Federal Home Loan Bank Advances Rates currently available to the Corporation for advances with similar terms and remaining maturities are used to estimate fair value of existing advances.
Derivative Financial Instruments The fair values of interest rate swap agreements and floor contracts generally reflect the estimated amounts that the Corporation would receive or pay to terminate the contracts. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For forward loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. Letters of credit contain provisions for fees, conditions and term periods that are consistent with customary market practices. Accordingly, the fair value amounts (considered to be the discounted present value of the remaining contractual fees over the unexpired commitment period) would not be material and therefore are not disclosed.
The following table presents the fair values of the Corporation's financial instruments:
(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.
(19) Acquisition of First Financial Corporation On November 13, 2001, the Corporation announced that it had signed a definitive agreement to acquire First Financial Corp., a bank holding company and parent of First Bank and Trust Company, a Rhode Island-chartered community bank. First Financial Corp., with assets of $185.2 million at December 31, 2001, is headquartered in Providence, Rhode Island. First Bank and Trust Company operates banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. In the merger, each share of First Financial Corp. common stock will be converted into a combination of $16.00 in cash and shares of Washington Trust Bancorp, Inc. common stock based on an exchange ratio. Based on a Washington Trust stock price of $18.00, First Financial Corp. shareholders would receive 0.889 shares of Washington Trust common stock (with a value of $16.00) for a combination of cash and stock initially valued at $32.00 per share and an aggregate transaction value of approximately $39 million. However, the actual number and value of Washington Trust Bancorp, Inc. common stock to be issued to First Financial Corp. shareholders will be based on an exchange formula using the average closing price of Washington Trust Bancorp, Inc. common stock during the 15 trading days prior to receiving final regulatory approval, within a range of 0.842 per share and 0.941 per share. At December 31, 2001, First Financial Corp. had 1,213,741 shares outstanding. The purchase, which is expected to be completed in the second quarter of 2002, is subject to certain customary conditions including approval by First Financial Corp.'s shareholders as well as state and federal banking regulators. Upon consummation of this event, the provisions of SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets" will be applied.
ITEM 9.
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, 2002 prepared for the Annual Meeting of Shareholders to be held April 23, 2002 and incorporated herein by reference.
Required information regarding executive officers of the Corporation is included in Part I under the caption "Executive Officers of the Registrant".
Information required with respect to compliance with Section 16(a) of the Exchange Act appears under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Corporation's Proxy Statement dated March 20, 2002 prepared for the Annual Meeting of Shareholders to be held April 23, 2002, which is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item appears under the caption "Compensation of Directors and Executive Officers - Executive Compensation" in the Corporation's Proxy Statement dated March 20, 2002 prepared for the Annual Meeting of Shareholders to be held April 23, 2002, which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item appears under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 20, 2002 prepared for the Annual Meeting of Shareholders to be held April 23, 2002, which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the caption "Indebtedness and Other Transactions" in the Corporation's Proxy Statement dated March 20, 2002 prepared for the Annual Meeting of Shareholders to be held April 23, 2002.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements of the Registrant required in response to this Item are listed in response to Part II, Item 8 of this Report.
2. Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-K and all other schedules to the consolidated financial statements of the Registrant have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto.
(b) There were no reports on Form 8-K filed during the quarter ended December 31, 2001.
(c) Exhibit Index.
Exhibit Number ---------
3.a Restated Articles of Incorporation of the Registrant - Filed as Exhibit 3.a to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1)
3.b Amendment to Restated Articles of Incorporation - Filed as Exhibit 3.i to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1)
3.c Amended and Restated By-Laws of the Corporation - Filed as Exhibit 3.c to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (1)
4 Rights Agreement between the Registrant and The Washington Trust Company dated as of August 15, 1996 (including Form of Right Certificate attached thereto as Exhibit A) - Filed as Exhibit 1 to the Registrant's Registration Statement on Form 8-A (File No. 000-13091) filed with the Commission on August 16, 1996. (1)
10.a Supplemental Pension Benefit and Profit Sharing Plan - Filed as Exhibit 10.a to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.b Short Term Incentive Plan Description - Filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (1) (2)
10.c Amended and Restated Nonqualified Deferred Compensation Plan - Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (File No. 333-72277) filed with the Commission on February 12, 1999. (1) (2)
10.d Amended and Restated 1988 Stock Option Plan - Filed as Exhibit 10.d to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.e Vote of the Board of Directors of the Corporation which constitutes the 1996 Directors' Stock Plan - Filed as Exhibit 99.2 to the Registrant's Registration Statement on Form S-8 (File No. 333-13167) filed with the Commission on October 1, 1996. (1) (2)
10.f The Registrant's 1997 Equity Incentive Plan - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1) (2)
10.g Revised Change in Control Agreements with Executive Officers - Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000. (1) (2)
10.h Change in Control Agreement with an Executive Officer - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (1) (2)
10.i Amendment to the Registrant's 1997 Equity Incentive Plan - Filed as Exhibit 10.b to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (1) (2)
10.j Amendment to the Registrant's Supplemental Pension Benefit and Profit Sharing Plan - Filed as Exhibit 10.j to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.k July 2000 Amendment to the Registrant's Supplemental Pension Benefit and Profit Sharing Plan - Filed as Exhibit 10.k to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.l Amendment to the Registrant's Nonqualified Deferred Compensation Plan - Filed as Exhibit 10.l to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.m Employment Agreement with an Executive Officer - Filed as Exhibit 10.m to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.n Amendment to Change in Control Agreement with Executive Officers - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001. (1) (2)
10.o Supplemental Executive Retirement Plan - Filed as Exhibit 10.b to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001. (1) (2)
21 Subsidiaries of the Registrant - Filed as Exhibit 21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (1)
23 Consent of Independent Accountants - Filed herewith.
---------
(1) Not filed herewith. In accordance with Rule 12b-32 promulgated pursuant to the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Commission, which are incorporated by reference herein.
(2) Management contract or compensatory plan or arrangement
(d) Financial Statement Schedules. None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WASHINGTON TRUST BANCORP, INC. ---------------------------------------------- (Registrant)
Date: March 5, 2002 By John C. Warren -------------------- ---------------------------------------------- John C. Warren Chairman, Chief Executive Officer and Director (principal executive officer)
Date: March 5, 2002 By David V. Devault -------------------- ---------------------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 5, 2002 Alcino G. Almeida -------------------- --------------------------------------------- Alcino G. Almeida, Director
Date: March 5, 2002 Gary P. Bennett -------------------- --------------------------------------------- Gary P. Bennett, Director
Date: March 5, 2002 Steven J. Crandall -------------------- --------------------------------------------- Steven J. Crandall, Director
Date: -------------------- --------------------------------------------- Richard A. Grills, Director
Date: March 5, 2002 Larry J. Hirsch -------------------- --------------------------------------------- Larry J. Hirsch, Director
Date: March 5, 2002 Katherine W. Hoxsie -------------------- --------------------------------------------- Katherine W. Hoxsie, Director
Date: March 5, 2002 Mary E. Kennard -------------------- --------------------------------------------- Mary E. Kennard, Director
Date: March 5, 2002 Joseph J. Kirby -------------------- --------------------------------------------- Joseph J. Kirby, Director
Date: March 5, 2002 Edward M. Mazze -------------------- --------------------------------------------- Edward M. Mazze, Director
Date: March 5, 2002 Victor J. Orsinger II -------------------- --------------------------------------------- Victor J. Orsinger II, Director
Date: March 5, 2002 H. Douglas Randall III -------------------- --------------------------------------------- H. Douglas Randall, III, Director
Date: March 5, 2002 Joyce Olson Resnikoff -------------------- --------------------------------------------- Joyce Olson Resnikoff, Director
Date: March 5, 2002 James P. Sullivan -------------------- --------------------------------------------- James P. Sullivan, Director
Date: March 5, 2002 Neil H. Thorp -------------------- --------------------------------------------- Neil H. Thorp, Director
Date: March 5, 2002 John F. Treanor -------------------- --------------------------------------------- John F. Treanor, Director
Date: March 5, 2002 John C. Warren -------------------- --------------------------------------------- John C. Warren, Director