SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended DECEMBER 31, 2002 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ____________
Commission file number: 000-13091
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
RHODE ISLAND 05-0404671
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 BROAD STREET
WESTERLY, RHODE ISLAND 02891
(Address of principal executive offices) (Zip Code)
|
Registrant's telephone number, including area code: 401-348-1200
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0625 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). [X] Yes [ ] No
The aggregate market value of voting stock held by non-affiliates of the registrant was $298,479,217 at June 30, 2002 which includes $32,422,109 held by The Washington Trust Company under trust agreements and other instruments.
The number of shares of the registrant's common stock, $.0625 par value per share, outstanding as of February 24, 2003 was 13,068,211.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated March 20, 2003 for the Annual Meeting of Shareholders to be held April 29, 2003 are incorporated by reference into Part III of this Form 10-K.
FORM 10-K
WASHINGTON TRUST BANCORP, INC.
For the Year Ended December 31, 2002
TABLE OF CONTENTS
Description
Part I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
Part II
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Part III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions
Item 14 Controls and Procedures
Item 15 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
Signatures
Certifications
|
This report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation's (as hereinafter defined) actual results, performance or achievements could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general national or regional economic conditions, changes in interest rates, reductions in the market value of trust and investment assets under management, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in the size and nature of the Corporation's competition, changes in loan default and charge-off rates and changes in the assumptions used in making such forward-looking statements.
PART I
ITEM 1. BUSINESS
Washington Trust Bancorp, Inc.
Washington Trust Bancorp, Inc. (the "Bancorp") is a publicly-owned, registered
bank holding company, organized in 1984 under the laws of the state of Rhode
Island, whose subsidiaries are permitted to engage in banking and other
financial services and businesses. The Bancorp conducts its business through its
wholly owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode
Island chartered commercial bank. The deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits.
The Bancorp was formed in 1984 under a plan of reorganization in which outstanding common shares of the Bank were exchanged for common shares of the Corporation.
The accounting and reporting policies of the Bancorp and the Bank, (together, the "Corporation" or "Washington Trust") are in accordance with accounting principles generally accepted in the United States of America and conform to general practices of the banking industry. At December 31, 2002, the Corporation had total assets of $1.7 billion, total deposits of $1.1 billion and total shareholders' equity of $128.7 million.
The Corporation's Internet address is www.washtrust.com. On the same day that the Bancorp files its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments thereto, the Bancorp makes such reports available free of charge through the Corporation's website.
The Washington Trust Company
The Bank was originally chartered in 1800 as the Washington Bank and is the
oldest banking institution headquartered in its market area and is among the
oldest banks in the United States. Its current corporate charter dates to 1902.
See the discussion under "Market Area and Competition" for further information.
The Bank provides a broad range of financial services, including:
Residential mortgages Internet banking services Commercial loans Commercial and consumer demand deposits Construction loans Savings, NOW and money market deposits Consumer installment loans Certificates of deposit Home equity lines of credit Retirement accounts Merchant credit card services Cash management services Automated teller machines (ATMs) Safe deposit boxes Telephone banking services Trust and investment management services |
The Bank owns and operates ATMs located throughout its market area that provide an important customer delivery channel for banking transactions. The Bank is a member of various ATM networks, including Cirrus, MasterCard, NYCE and PLUS. The Bank also has access to the American Express, Cashstream, Discover and Visa Networks.
Data processing for most of the Bank's deposit and loan accounts and other applications are conducted internally, using owned equipment. Application software is primarily obtained through purchase or licensing agreements.
The Bank's primary source of income is net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing deposits and other borrowed funds. Sources of noninterest income include fees for management of customer investment portfolios, trusts and estates, service charges on deposit accounts, merchant processing fees, net gains on loan sales and other banking-related fees. Noninterest expenses include the provision for loan losses, salaries and employee benefits, occupancy, equipment, merchant processing, outsourced services, advertising and promotion and other administrative expenses.
The Bank's loan portfolio is concentrated among borrowers in southern New England, primarily Rhode Island, and to a lesser extent in Connecticut and Massachusetts. The Bank provides a variety of commercial and retail lending products. The Bank generally underwrites its residential mortgages based upon secondary market standards. Loans are originated both for sale in the secondary market as well as for portfolio. The Bank sells loans with servicing released and retained.
The Bank provides trust and investment management services as trustee under wills and trust agreements; as executor or administrator of estates; as a provider of agency, custodial and management investment services to individuals and institutions; and as a trustee for employee benefit plans. In 2000, the Corporation acquired Phoenix Investment Management Company, Inc. ("Phoenix"), an independent investment advisory firm located in Providence, Rhode Island. Phoenix operates under its own name as a division of the Bank. Phoenix provides investment advisory services including asset allocation analysis and equity, fixed income and balanced portfolio management. The total market value of trust and investment management assets under administration, including Phoenix, amounted to $1.5 billion and $1.6 billion as of December 31, 2002 and 2001, respectively.
The following is a summary of recurring sources of income, which excludes net realized gains on securities and the 1999 net gain on the sale of the credit card portfolio, as a percentage of total income (net interest income plus recurring noninterest income) during the past five years:
2002 2001 2000 1999 1998
--------------------------------------------------------------------------------
Net interest income 66% 65% 67% 67% 67%
Trust and investment management 15 17 19 17 17
Other noninterest income 19 18 14 16 16
--------------------------------------------------------------------------------
Total income 100% 100% 100% 100% 100%
--------------------------------------------------------------------------------
|
On April 16, 2002, the Corporation completed the acquisition of First Financial Corp., the parent company of First Bank and Trust Company, a Rhode Island-chartered community bank. The results of First Financial Corp.'s operations have been included in the Corporation's Consolidated Statements of Income since that date. First Financial Corp. was headquartered in Providence, Rhode Island and its subsidiary, First Bank and Trust Company, operated banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The Corporation closed the Richmond and North Kingstown branches and consolidated them into existing Bank branches in May 2002.
Market Area and Competition
The Bank's market area includes Washington County and a portion of Providence
County in Rhode Island, as well as a portion of New London County in
Connecticut. The Bank operates sixteen banking offices in these Rhode Island and
Connecticut counties. The locations of the banking offices are as follows:
Westerly, RI (three locations) (1) Wakefield, RI (1) Richmond, RI (1) North Kingstown, RI (1) Charlestown, RI (1) Cranston, RI (2) New Shoreham (Block Island), RI (1) Providence, RI (two locations) (2) (3) Narragansett, RI (two locations) (1) Mystic, CT (three locations) (1) Located in Washington County. (2) Located in Providence County. |
(3) The Bank has a full service branch and a trust/investment management office located in Providence, RI.
The Bank's banking offices in Charlestown and on Block Island are the only bank facilities in those Rhode Island communities.
Subject to the approval of state and federal regulators, the Corporation expects to open a full-service Bank branch office in Warwick, Rhode Island, in the second quarter of 2003, which will expand the Bank's market area into Kent County.
The Bank faces strong competition from branches of major Rhode Island and regional commercial banks, local branches of certain Connecticut banks, as well as various credit unions, savings institutions and, to some extent, finance companies. The principal methods of competition are through interest rates, financing terms and other customer conveniences.
The Bank had 53% of total deposits reported by all financial institutions for Washington County communities in which the Bank operates ten of its banking offices as of June 30, 2002. The closest competitor held 25%, and the second closest competitor held 10% of total deposits in the same Washington County communities. The Corporation believes that being the largest commercial banking institution headquartered within this market area provides a competitive advantage over other financial institutions. With the April 2002 acquisition of First Financial Corp., the Bank added two locations in Providence County.
The Bank has a marketing department that is responsible for the review of existing products and services and the development of new products and services.
Employees
As of December 31, 2002 the Corporation had 443 employees, of which 388 were
full-time and 55 were part-time.
Supervision and Regulation
General - The business in which the Corporation is engaged is subject to
extensive supervision, regulation, and examination by various bank regulatory
authorities and other agencies of federal and state government. The supervisory
and regulatory activities of these authorities are often intended primarily for
the protection of customers or are aimed at carrying out broad public policy
goals that may not be directly related to the financial services provided by the
Corporation, nor intended for the protection of the Bancorp's shareholders. To
the extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. Proposals to change regulations and laws
that affect the banking industry are frequently raised at the federal and state
level. The potential impact on the Corporation of any future revisions to the
supervisory or regulatory structure cannot be determined.
The Bancorp and the Bank are required by various authorities to file extensive periodic reports of financial and other information and such other reports that the regulatory and supervisory authorities may require. The Corporation is also subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended.
As a registered bank holding company, the Bancorp is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), and the State of Rhode Island, Department of Business Regulation, Division of Banking (the "Division"). The BHC Act requires that the Bancorp obtain prior approval of the Federal Reserve Board to acquire substantially all of the assets of a bank, to acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank or merging or consolidating with any bank holding company. Provided that the Bancorp does not become a "financial holding company" under the Gramm-Leach-Bliley Act (as discussed below), the BHC Act also requires that the Bancorp obtain prior approval of the Federal Reserve Board to acquire more than 5% of the voting shares of certain nonbank entities and restricts the activities of the Bancorp to those closely related to banking. The Federal Reserve Board has the authority to issue orders to bank holding companies to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the Federal Reserve Board. The Federal Reserve Board is also empowered to assess civil money penalties against companies or individuals who violate the BHC Act or orders or regulations thereunder, to order termination of ownership and control of a non-banking subsidiary by a bank holding company. Federal law also regulates transactions between the Bancorp and the Bank, including loans or extensions of credit.
The Bank is subject to the supervision of, and examination by, the Federal Deposit Insurance Corporation (the "FDIC"), the Division and the State of Connecticut, Department of Banking, in which the Bank has established branches. The Bank is also subject to various Rhode Island and Connecticut business and banking regulations.
The Bank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund - member institutions. The FDIC has established a risk-based assessment system under which institutions are classified, and generally pay premiums according to their perceived risk to the federal deposit insurance funds.
Transactions with Affiliates - The Federal Reserve Board recently adopted a
final rule, which will become effective April 1, 2003, to implement
comprehensively Sections 23A and 23B of the Federal Reserve Act. This new rule,
among other requirements, specifies that derivative transactions are subject to
Section 23B (including use of daily marks and two way collateralization) but
generally not to Section 23A, except that derivatives in which the bank provides
credit protection to a nonaffiliated on behalf of an affiliate will be treated
as a guarantee for purposes of Section 23A. The new rule also requires banks to
establish policies and procedures to monitor credit exposure to affiliates. The
Federal Reserve Board has stated that it intends to propose future regulations
to treat derivatives that are the functional equivalent of a loan to an
affiliate as subject to Section 23A.
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") - Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.
FDICIA established five capital tiers, ranging from "well-capitalized" to "critically undercapitalized." A depository institution is well-capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well-capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. At December 31, 2002, the Bank's capital ratios placed it in the well-capitalized category. Reference is made to Note 17 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's regulatory capital requirements.
Another primary purpose of FDICIA was to recapitalize the Bank Insurance Fund ("BIF"). The FDIC adopted a risk-related premium system for the assessment period beginning January 1, 1993. Under this new system, each institution's assessment rate is based on its capital ratios in combination with a supervisory evaluation of the risk the institution poses to the BIF. Banks deemed to be well-capitalized and who pose the lowest risk to the BIF will pay the lowest assessment rates, while undercapitalized banks, which present the highest risk, will pay the highest rates.
FDICIA contained other significant provisions that require the federal banking regulators to establish standards for safety and soundness for depository institutions and their holding companies in three areas: (i) operational and managerial; (ii) asset quality, earnings and stock valuation; and (iii) management compensation. The legislation also required that risk-based capital requirements contain provisions for interest rate risk, credit risk and risks of nontraditional activities. FDICIA also imposed expanded accounting and audit reporting requirements for depository institutions. In addition, FDICIA imposed numerous restrictions on state-chartered banks, including those that generally limit investments and activities to those permitted to national banks, and contains several consumer banking law provisions.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act") - The Interstate Act permits adequately capitalized bank holding companies to acquire banks in any state subject to certain concentration limits and other conditions. The Interstate Act also authorizes the interstate merger of banks. In addition, among other things, the Interstate Act permits banks to establish new branches on an interstate basis provided that the law of the host state specifically authorizes such action. Rhode Island and Connecticut, the two states in which the Corporation conducts banking operations, have adopted legislation to "opt in" to interstate merger and branching provisions that effectively eliminated state law barriers.
Gramm-Leach-Bliley Act - The Gramm-Leach-Bliley Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit bank holding companies that qualify and elect to be treated as financial holding companies to engage in a range of financial activities broader than would be permissible for traditional bank holding companies, such as the Bancorp, that have not elected to be treated as financial holding companies. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Generally, the Gramm-Leach-Bliley Act and its implementing regulations:
o repeal historical restrictions on, and eliminate many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers;
o permit investment in non-financial enterprises, subject to significant operational, holding period and other restrictions;
o provide a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies;
o broaden the activities that may be conducted by national banks (and derivatively state banks), banking subsidiaries of bank holding companies, and their financial subsidiaries;
o require all financial institutions to provide notice of their privacy policies at specified times to their retail customers and consumers of their financial products or services, and permit retail customers and consumers, under certain circumstances, to prohibit financial institutions from sharing certain nonpublic personal information pertaining to them by opting out of such sharing;
o establish guidelines for safeguarding the security, confidentiality and integrity of customer information;
o adopt a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank ("FHLB") system;
o modify the laws governing the implementation of the Community Reinvestment Act of 1977 ("CRA"); and
o address a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.
In order to elect to become a financial holding company and engage in a broader array of activities, a bank holding company, such as the Bancorp, must meet certain tests and file an election form with the Federal Reserve Board. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities each of the bank holding company's banks must have been rated "satisfactory" or better in its most recent federal CRA evaluation. Furthermore, a bank holding company that elects to be treated as a financial holding company may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the Federal Reserve Board, which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. At this time, the Bancorp has no immediate plans to become a financial holding company.
Customer Information Security - The Federal Reserve Board, the FDIC and other bank regulatory agencies have adopted final guidelines (the "Guidelines") for safeguarding confidential customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information; and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.
Privacy - The Gramm-Leach-Bliley Act requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires the financial institution to explain to consumers its policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, the financial institution is prohibited from disclosing such information except as provided in its policies and procedures.
USA Patriot Act - The USA Patriot Act of 2001 (the "Patriot Act"), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act, as implemented by various federal regulatory agencies, requires financial institutions, including the Bank, to implement new policies and procedures or amend existing policies or procedures with respect to, among other matters, anti-money laundering compliance, suspicious activity and currency transaction reporting and due diligence on customers. The Patriot Act also permits information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and requires the Federal Reserve Board to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHC Act or the Bank Merger Act.
Dividend Restrictions - The Bancorp's revenues consist of cash dividends paid to it by the Bank. Such payments are restricted pursuant to various state and federal regulatory limitations. Reference is made to Note 17 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's ability to pay dividends.
Capital Guidelines - Regulatory guidelines have been established that require bank holding companies and banks to maintain minimum ratios of capital to risk-adjusted assets. Banks are required to have minimum core capital (Tier 1) of 4% and total risk-adjusted capital (Tier 1 and Tier 2) of 8%. For the Corporation, Tier 1 capital is essentially equal to shareholders' equity excluding the net unrealized gain (loss) on securities available for sale. Tier 2 capital consists of a portion of the allowance for loan losses (limited to 1.25% of total risk-weighted assets). As of December 31, 2002, the Corporation's net risk-weighted assets amounted to $928.8 million, its Tier 1 capital ratio was 10.13% and its total risk-based capital ratio was 11.55%.
The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the risk-based capital guidelines) divided by average assets (net of intangible assets and excluding the effects of accounting for securities available for sale under SFAS No. 115). The minimum leverage ratio is 3% for bank holding companies that do not anticipate significant growth and that have well-diversified risk (including no undue interest rate risk), excellent asset quality, high liquidity and strong earnings. Other bank holding companies are expected to have ratios of at least 4 - 5%, depending on their particular condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstances or risk profile of a given bank holding company. The Corporation's Tier 1 leverage ratio was 5.63% as of December 31, 2002. The Federal Reserve Board has not advised the Corporation of any specific minimum Tier 1 leverage capital ratio applicable to it.
Disclosure Controls and Procedures - The Sarbanes-Oxley Act of 2002 and related rulemaking by the Securities and Exchange Commission ("SEC"), which effect sweeping corporate disclosure and financial reporting reform, generally require public companies to focus on their disclosure controls and procedures. As a result thereof, public companies, such as the Bancorp, now must have disclosure controls and procedures in place and make certain disclosures about them in their periodic SEC filings (i.e., Forms 10-K and 10-Q) and their chief executive officers and chief financial officers must certify in these filings that they are responsible for developing and evaluating disclosure controls and procedures and disclose the results of an evaluation conducted by them within the 90-day period preceding the filing of the relevant form, among other things. We are monitoring the status of other related ongoing rulemaking by the SEC and other regulatory entities. Currently, management believes that we are in compliance with the rulemaking promulgated to date.
Risk Factors
In addition to the other information contained or incorporated by reference in
this Annual Report on Form 10-K, you should consider the following factors
relating to the business of the Corporation.
Interest Rate Volatility May Reduce Our Profitability Significant changes in market interest rates may adversely affect both our profitability and our financial condition. Our profitability depends in part on the difference between rates earned on loans and investments and rates paid on deposits and other interest-bearing liabilities. Since market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. (See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for additional discussion on interest rate risk.)
Changes in the Market Value of Trust and Investment Management Assets under Administration May Reduce Our Profitability Trust and investment management fees provide an important source of total revenues. These fees are primarily dependent on the market value of trust and investment management assets under administration. These assets primarily consist of marketable securities. Reductions in the market value of these assets could reduce the level of fees that we earn.
Our Allowance for Loan Losses May Not Be Adequate to Cover Actual Loan Losses We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for potential losses based on a number of factors. If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses, which would have an adverse effect on our operating results, and may also cause us to increase the allowance in the future. Further, our net income would decrease if we had to add additional amounts to our allowance for loan losses. In addition to general real estate and economic factors, the following factors could affect our ability to collect our loans and require us to increase the allowance in the future:
o Regional credit concentration - We are exposed to real estate and economic factors in southern New England, primarily Rhode Island and to a lesser extent Connecticut and Massachusetts, because virtually our entire loan portfolio is concentrated among borrowers in these markets. Further, because a substantial portion of our loan portfolio is secured by real estate in this area, including most consumer loans and those commercial loans not specifically classified as commercial mortgages, the value of our collateral is also subject to regional real estate market conditions.
o Industry concentration - A portion of our loan portfolio consists of loans to the hospitality and tourism industry. Loans to companies in this industry may have a somewhat higher risk of loss than some other industries because these businesses are seasonal, with a substantial portion of commerce concentrated in the summer season. Accordingly, the ability of borrowers to meet their repayment terms is more dependent on economic, climate and other conditions and may be subject to a higher degree of volatility from year to year.
We May Not Be Able to Compete Effectively Against Larger Financial Institutions in Our Increasingly Competitive Industry The financial services industry in our market has experienced both significant concentration and deregulation. This means that we compete with larger financial institutions, both from banks and from other financial institutions, for loans and deposits as well as other sources of funding in the communities we serve, and we will likely face even greater competition in the future as a result of recent federal legislative changes. Many of our competitors have significantly greater resources and lending limits than we have. As a result of those greater resources, the large financial institutions that we compete with may be able to provide a broader range of services to their customers and may be able to afford newer and more sophisticated technology. Our long-term success depends on the ability of the Bank to compete successfully with other financial institutions in their service areas.
In addition, as we strive to compete with other financial institutions, we may expand into new areas, and there is no assurance that we will be successful in these efforts. An example of our expansion is the Phoenix acquisition. Although we believe that the business and management of Phoenix represent a significant expansion of our business in the investment management area, there is no assurance that our expansion into this area will be successful.
Limited Trading Activity in Our Common Stock Could Cause the Price of Our Shares
to Decline
While our common stock is listed and traded on the Nasdaq National Market, there
has only been limited trading activity in our common stock. The average daily
trading volume of our common stock over the twelve-month period ended December
31, 2002 was approximately 14,037 shares. Accordingly, sales of a significant
number of shares of common stock may adversely affect the market price of our
common stock.
Allowance for Loan Losses
The Corporation uses a methodology to systematically measure the amount of
estimated loan loss exposure inherent in the loan portfolio for purposes of
establishing a sufficient allowance for loan losses. The methodology includes
three elements: identification of specific loan losses, general loss allocations
for certain loan types based on credit grade and loss experience factors, and
general loss allocations for other environmental factors. The methodology
includes an analysis of individual loans deemed to be impaired in accordance
with accounting principles generally accepted in the United States of America,
(SFAS No. 114). Other individual commercial loans and commercial mortgage loans
are evaluated using an internal rating system and the application of loss
allocation factors. The loan rating system and the related loss allocation
factors take into consideration parameters including the borrower's financial
condition, the borrower's debt service coverage, the borrower's performance with
respect to loan terms and the adequacy of collateral. Portfolios of more
homogeneous populations of loans including residential mortgages and consumer
loans are analyzed as groups taking into account delinquency ratios and other
indicators, the Corporation's historical loss experience and comparison to
industry standards of loss allocation factors for each type of credit product.
Finally, an additional unallocated allowance is maintained based on a judgmental
process whereby management considers qualitative and quantitative assessments of
other environmental factors. For example, virtually our entire loan portfolio is
concentrated among borrowers in southern New England, primarily Rhode Island,
and to a lesser extent in Connecticut and Massachusetts and a substantial
portion of the portfolio is collateralized by real estate in this area,
including most consumer loans and those commercial loans not specifically
classified as commercial mortgages. A portion of the commercial loans and
commercial mortgage loans are to borrowers in the hospitality and tourism
industry. Further, economic conditions which may affect the ability of borrowers
to meet debt service requirements are considered including interest rates and
energy costs. Results of regulatory examinations, historical loss ranges,
portfolio composition including a trend toward somewhat larger credit
relationships, and other changes in the portfolio are also considered. The
allowance for loan losses is management's best estimate of the probable loan
losses incurred as of the balance sheet date. The allowance is increased by
provisions charged to earnings and by recoveries of amounts previously charged
off, and is reduced by charge-offs on loans.
The Corporation's Audit Committee of the Board of Directors is responsible for oversight of the loan review process. This process includes review of the Bank's procedures for determining the adequacy of the allowance for loan losses, administration of its internal credit rating systems and the reporting and monitoring of credit granting standards.
GUIDE 3 STATISTICAL DISCLOSURES
The following tables contain additional consolidated statistical data about the Corporation, to be read in conjunction with the Notes to the Consolidated Financial Statements.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
A. Average balance sheets are presented under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Nonaccrual loans are included in average loan balances. Average balances are based upon daily averages.
B. An analysis of net interest earnings, including interest earned and paid, average yields and costs, and net yield on interest-earning assets, is presented under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Interest income is reported on the fully taxable-equivalent basis. Tax exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Interest on nonaccrual loans is included in the analysis of net interest earnings to the extent that such interest income has been recognized in the Consolidated Statements of Income. See Guide 3 Statistical Disclosures - Item III.C.1.
C. An analysis of rate/volume changes in interest income and interest expense is presented under the caption "Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. The net change attributable to both volume and rate has been allocated proportionately.
II. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
A. The carrying amounts of securities as of the dates indicated are presented in the following tables:
(Dollars in thousands)
December 31, 2002 2001 2000 --------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $77,973 $66,715 $87,084 Mortgage-backed securities 386,747 300,050 240,856 Corporate bonds 66,435 64,149 38,565 Corporate stocks 22,401 23,042 20,106 --------------------------------------------------------------------------- Total securities available for sale $553,556 $453,956 $386,611 --------------------------------------------------------------------------- (Dollars in thousands) December 31, 2002 2001 2000 --------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $3,000 $8,311 $35,135 Mortgage-backed securities 220,711 146,702 66,715 States and political subdivisions 18,566 20,092 23,065 --------------------------------------------------------------------------- Total securities held to maturity $242,277 $175,105 $124,915 --------------------------------------------------------------------------- |
B. Maturities of debt securities as of December 31, 2002 are presented in the following tables. Mortgage-backed securities are included based on their weighted average maturities, adjusted for anticipated prepayments. Yields on tax exempt obligations are not computed on a tax equivalent basis.
(Dollars in thousands) Due in After 1 Year After 5 Years
1 Year but within but within After
or Less 5 Years 10 Years 10 Years Totals
------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury obligations and
obligations of U.S.
government-sponsored agencies:
Amortized cost $28,958 $47,895 $- $- $76,853
Weighted average yield 4.04% 5.47% - - 4.93%
Mortgage-backed securities:
Amortized cost 98,935 162,701 56,723 59,802 378,161
Weighted average yield 5.05% 4.45% 3.44% 2.81% 4.19%
Corporate bonds:
Amortized cost 12,589 25,356 4,709 22,363 65,017
Weighted average yield 4.95% 4.76% 3.28% 2.48% 3.90%
------------------------------------------------------------------------------------------------------------
Total debt securities:
Amortized cost $140,482 $235,952 $61,432 $82,165 $520,031
Weighted average yield 4.83% 4.69% 3.42% 2.72% 4.27%
------------------------------------------------------------------------------------------------------------
Fair value $144,816 $242,215 $62,215 $81,909 $531,155
------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Due in After 1 Year After 5 Years
1 Year but within but within After
or Less 5 Years 10 Years 10 Years Totals
------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and
obligations of U.S
government-sponsored agencies:
Amortized cost $- $3,000 $- $- $3,000
Weighted average yield - 7.13% - - 7.13%
Mortgage-backed securities:
Amortized cost 79,875 113,528 22,722 4,586 220,711
Weighted average yield 5.81% 5.64% 5.25% 4.77% 5.64%
States and political
subdivisions:
Amortized cost 3,928 14,638 - - 18,566
Weighted average yield 4.21% 4.04% - - 4.08%
------------------------------------------------------------------------------------------------------------
Total debt securities:
Amortized cost $83,803 $131,166 $22,722 $4,586 $242,277
Weighted average yield 5.73% 5.50% 5.25% 4.77% 5.54%
------------------------------------------------------------------------------------------------------------
Fair value $86,708 $135,649 $23,391 $4,698 $250,446
------------------------------------------------------------------------------------------------------------
|
C. Not applicable.
III. LOAN PORTFOLIO
A. The following table sets forth the composition of the Corporation's loan portfolio for each of the past five years:
(Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------------------------
Commercial:
Mortgages $197,814 $118,999 $121,817 $113,719 $87,132
Construction and development 10,337 1,930 2,809 2,902 2,855
Other (1) 174,018 139,704 115,202 115,739 113,372
--------------------------------------------------------------------------------------------------------------
Total commercial 382,169 260,633 239,828 232,360 203,359
Residential real estate:
Mortgages 269,548 223,681 236,595 212,719 191,101
Homeowner construction 11,338 11,678 14,344 12,995 15,052
--------------------------------------------------------------------------------------------------------------
Total residential real estate 280,886 235,359 250,939 225,714 206,153
--------------------------------------------------------------------------------------------------------------
Consumer 132,071 109,653 106,388 90,951 87,458
--------------------------------------------------------------------------------------------------------------
Total loans $795,126 $605,645 $597,155 $549,025 $496,970
--------------------------------------------------------------------------------------------------------------
(1) Loans to businesses and individuals, a substantial portion of which
are fully or partially collateralized by real estate.
|
B. An analysis of the maturity and interest rate sensitivity of Real Estate Construction and Other Commercial loans as of December 31, 2002 follows:
(Dollars in thousands)
One Year One to Five After Five
Matures in: or Less Years Years Totals
--------------------------------------------------------------------------------------------------------------
Construction and development (1) $4,374 $8,627 $8,674 $21,675
Commercial - other 69,115 71,175 33,728 174,018
--------------------------------------------------------------------------------------------------------------
$73,489 $79,802 $42,402 $195,693
--------------------------------------------------------------------------------------------------------------
(1) Includes homeowner construction and commercial construction and
development. Maturities of homeowner construction loans are included
based on their contractual conventional mortgage repayment terms
following the completion of construction.
|
Sensitivity to changes in interest rates for all such loans due after one year is as follows:
(Dollars in thousands) Floating or
Predetermined Adjustable
Rates Rates Totals
---------------------------------------------------------------------------
Principal due after one year $68,677 $53,527 $122,204
---------------------------------------------------------------------------
|
C. Risk Elements Reference is made to the caption "Asset Quality" included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Included therein is a discussion of the Corporation's credit review and accounting practices, as well as information relevant to nonperforming assets at December 31, 2002.
1. Nonaccrual, Past Due and Restructured Loans
a)Nonaccrual loans as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
----------------------------------------------------------------------
$4,177 $3,827 $3,434 $3,798 $5,846
----------------------------------------------------------------------
|
Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but not collected on such loans is reversed against current period income. Cash receipts on nonaccrual loans are recorded as interest income or as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower had demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible.
For the year ended December 31, 2002, the gross interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $312 thousand. Interest recognized on these loans amounted to approximately $182 thousand.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2002.
b)Loans contractually past due 90 days or more and still accruing for the dates indicated were as follows:
(Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
----------------------------------------------------------------------
$ - $ - $393 $120 $235
----------------------------------------------------------------------
|
c)Restructured accruing loans for the dates indicated were as follows:
(Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
----------------------------------------------------------------------
$ - $ - $ - $446 $ -
----------------------------------------------------------------------
|
Restructured accruing loans include those for which concessions, such as reduction of interest rates other than normal market rate adjustments or deferral of principal or interest payments, have been granted due to a borrower's financial condition. Interest on restructured loans is accrued at the reduced rate.
2. Potential Problem Loans Potential problem loans consist of certain accruing commercial loans that were less than 90 days past due at December 31, 2002, but were identified by management of the Bank as potential problem loans. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve as a result of collection efforts, while the credit quality of other loans may deteriorate, resulting in some amount of losses. These loans are not included in the analysis of nonaccrual, past due and restructured loans in Section III.C.1 above. At December 31, 2002, potential problem loans amounted to approximately $260 thousand. The Corporation's loan policy provides guidelines for the review of such loans in order to facilitate collection.
Depending on future events, these potential problem loans, and others not currently identified, could be classified as nonperforming in the future.
3. Foreign Outstandings None.
4. Loan Concentrations The Corporation has no concentration of loans that exceed 10% of its total loans except as disclosed by types of loan in Section III.A.
D. Other Interest-Bearing Assets
None.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The allowance for loan losses is management's best estimate of probable credit losses in the loan portfolio that have been incurred as of the balance sheet date. The level of the allowance is based on management's ongoing review of the growth and composition of the loan portfolio, net charge-off experience, current and expected economic conditions, and other pertinent factors. Loans (or portions thereof) deemed to be uncollectible are charged against the allowance and recoveries of amounts previously charged off are added to the allowance. Loss experience on loans is presented in the following table for the years indicated:
(Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
------------------------------------ ------------- ------------- ------------- ------------- -------------
Balance at beginning of year $13,593 $13,135 $12,349 $10,966 $9,335
Charge-offs:
Commercial:
Mortgages 27 122 61 170 -
Construction and development - - - 119 -
Other 284 121 144 304 322
Residential:
Mortgages 29 - 65 - 14
Homeowner construction - - - 23 -
Consumer 157 190 413 351 317
------------------------------------ ------------- ------------- ------------- ------------- -------------
Total charge-offs 497 433 683 967 653
------------------------------------ ------------- ------------- ------------- ------------- -------------
Recoveries:
Commercial:
Mortgages 72 - 53 44 51
Construction and development - - - - -
Other - 273 157 202 270
Residential:
Mortgages - 15 46 135 9
Homeowner construction - - - 1 -
Consumer 90 53 63 128 75
------------------------------------ ------------- ------------- ------------- ------------- -------------
Total recoveries 162 341 319 510 405
------------------------------------ ------------- ------------- ------------- ------------- -------------
Net charge-offs 335 92 364 457 248
Allowance on acquired loans 1,829 - - - -
Additions charged to earnings 400 550 1,150 1,840 1,879
------------------------------------ ------------- ------------- ------------- ------------- -------------
Balance at end of year $15,487 $13,593 $13,135 $12,349 $10,966
------------------------------------ ------------- ------------- ------------- ------------- -------------
Net charge-offs to average loans .05% .02% .06% .09% .05%
------------------------------------ ------------- ------------- ------------- ------------- -------------
|
B. The following table presents the allocation of the allowance for loan losses:
(Dollars in thousands)
December 31, 2002 2001 2000 1999 1998
------------------------------------ ------------- ------------- ------------- ------------- -------------
Commercial:
Mortgages $3,161 $2,195 $2,316 $1,920 $1,604
% of these loans to all loans 24.9% 19.6% 20.4% 20.7% 17.5%
Construction and development 243 33 55 56 45
% of these loans to all loans 1.3% .3% .5% .5% .6%
Other 2,832 3,024 2,250 1,979 2,142
% of these loans to all loans 21.9% 23.1% 19.3% 21.1% 22.8%
Residential:
Mortgages 1,457 1,230 1,286 1,165 1,108
% of these loans to all loans 33.9% 36.9% 39.6% 38.7% 38.5%
Homeowner construction 61 64 78 71 87
% of these loans to all loans 1.4% 2.0% 2.4% 2.4% 3.0%
Consumer 1,305 1,222 1,295 1,155 1,189
% of these loans to all loans 16.6% 18.1% 17.8% 16.6% 17.6%
Unallocated 6,428 5,825 5,855 6,003 4,791
------------------------------------ ------------- ------------- ------------- ------------- -------------
Balance at end of year $15,487 $13,593 $13,135 $12,349 $10,966
100.0% 100.0% 100.0% 100.0% 100.0%
------------------------------------ ------------- ------------- ------------- ------------- -------------
|
V. DEPOSITS
A. Average deposit balances outstanding and the average rates paid thereon are presented in the following table:
(Dollars in thousands) 2002 2001 2000
------------------------ -------------------------- --------------------------- --------------------------
Average Average Average Average Average Average
Amount Rate Paid Amount Rate Paid Amount Rate Paid
------------------------ --------------- ---------- --------------- ----------- --------------- ----------
Demand deposits $149,382 - $114,844 - $106,741 -
Savings deposits:
Regular 218,144 1.72% 128,765 1.74% 129,208 2.18%
NOW 106,188 .53% 88,097 .62% 79,782 .73%
Money market 75,216 1.70% 72,498 3.22% 31,590 3.11%
------------------------ --------------- ---------- --------------- ----------- --------------- ----------
Total savings 399,548 1.40% 289,360 1.77% 240,580 1.82%
Time deposits 454,239 3.69% 360,167 5.24% 351,961 5.64%
------------------------ --------------- ---------- --------------- ----------- --------------- ----------
Total deposits $1,003,169 2.23% $764,371 3.14% $699,282 3.46%
------------------------ --------------- ---------- --------------- ----------- --------------- ----------
|
B. Not Applicable.
C. Not Applicable.
D. The maturity schedule of time deposits in amounts of $100 thousand or more at December 31, 2002 was as follows:
(Dollars in thousands) Over 3 Over 6
3 months through through Over 12
Time remaining until maturity or less 6 months 12 months months Totals
-----------------------------------------------------------------------------------------------------------
$71,795 $25,040 $29,945 $51,882 $178,662
-----------------------------------------------------------------------------------------------------------
|
E. Not Applicable
VI. RETURN ON EQUITY AND ASSETS
2002 2001 2000
------------------------------------------------------------------------------------------------------------
Return on average assets 1.07% 1.01% 1.14%
Return on average assets - operating basis (1) 1.09% 1.20% 1.20%
Return on average shareholders' equity 14.25% 13.86% 16.14%
Return on average shareholders' equity - operating basis (1) 14.60% 16.54% 16.98%
Dividend payout ratio (2) 42.11% 40.63% 41.74%
Average equity to average total assets 7.50% 7.28% 7.05%
(1) Performance ratios measured with operating basis net income. A
reconciliation of operating basis net income and financial results
presented in accordance with accounting principles generally accepted in
the United States of America is provided below.
(2) Represents the ratio of historical per share dividends declared by the
Bancorp to diluted earnings per share, on an operating basis, restated as a
result of the June 2000 acquisition Phoenix, which was accounted for under
the pooling of interests method.
|
The following table presents a reconciliation of financial results presented in accordance with accounting principles generally accepted in the United States of America and operating basis results.
(Dollars in thousands)
2002 2001 2000
--------------------------------------------------------------------------------------------------------
Net income $16,757 $13,108 $13,209
Nonoperating items, net of tax
Acquisition costs 417 - 1,101
Litigation settlement, net of insurance recovery - 2,538 -
Pro-forma income taxes on pre-acquisition earnings
of acquired company - - (413)
--------------------------------------------------------------------------------------------------------
Total nonoperating items 417 2,538 688
--------------------------------------------------------------------------------------------------------
Net income - operating basis $17,174 $15,646 $13,897
--------------------------------------------------------------------------------------------------------
|
VII. SHORT-TERM BORROWINGS
Not Applicable.
ITEM 2. PROPERTIES
The Corporation conducts its business from its corporate headquarters and other properties listed below all of which are considered to be in good condition and adequate for the purposes for which they are used.
The following table sets forth certain information relating to bank premises owned or used by the Corporation in conducting its business:
Own/Lease
Location Description Expiration Date
----------------------------------------------------------------------------------------------------------------------
23 Broad Street, Westerly, RI Corporate headquarters Own
1200 Main Street, Wyoming (Richmond), RI Branch office Own
126 Franklin Street, Westerly, RI Branch office Own
Ocean Avenue, New Shoreham (Block Island), RI Branch office Lease / 2006 (1)
4137 Old Post Road, Charlestown, RI Branch office Own
20 Point Judith Road, Narragansett, RI Branch office Own
7625 Post Road, North Kingstown, RI Branch office Own
730 Kingstown Road, Wakefield, RI Branch office Lease / 2005 (1)
885 Boston Neck Road, Narragansett, RI Branch office Own
Olde Mistick Village, 27 Coogan Boulevard, Mystic, CT Branch office Lease / 2003
180 Washington Street, Providence RI Branch office Own
645 Reservoir Avenue, Cranston, RI Branch office Own & Lease (2)
McQuades Marketplace, Main Street, Westerly, RI Supermarket branch Lease / 2007 (1)
McQuades Marketplace, 10 Clara Drive, Mystic, CT Supermarket branch Lease / 2003 (1)
A & P Super Market, Route 1, Mystic, CT Supermarket branch Lease / 2005 (1)
66 South Main Street, Providence, RI Trust and investment services office Lease / 2004 (1)
5 Ledward Avenue, Westerly, RI Operations facility Lease / 2003 (1)
2 Crosswind Road, Westerly, RI Operations facility Own
(1) Lease may be extended by the Corporation beyond the indicated expiration
date.
(2) Owned building on leased land. Lease expiration date is May 2009.
|
In addition to the facilities listed above, the Bank has four owned offsite-ATMs in leased spaces. The terms of these leases are negotiated annually.
ITEM 3. LEGAL PROCEEDINGS
Reed & Lundy Matter - In June 1999 a lawsuit was filed against First Bank and
Trust Company ("First Bank") in Providence County (Rhode Island) Superior Court
by Read & Lundy, Inc. and its principal, Cliff McFarland (collectively, the
Plaintiffs). The Bank was substituted as defendant in June 2002 following the
acquisition of First Financial Corp., the parent company of First Bank. The
original complaint alleged claims for breach of contract, tortious interference
with contractual relations, and civil conspiracy arising out of First Bank's
1996 loan to a third party company. The Plaintiffs allege that the loan to the
third party enabled that company to compete unlawfully with Read & Lundy and
thereby diminished Read & Lundy's profitability. The complaint was amended in
December 2001 to add a claim for violation of the Rhode Island Trade Secrets
Act.
In December 2002, a judgment in the favor of the Bank and a dismissal of this lawsuit was rendered on all counts by way of summary judgment motion. In December 2002, the Plaintiffs appealed the judgment.
The Plaintiffs had previously filed a suit in the same court in 1996 against the third party company and its founder. The Bank is not a party to this suit. In September 2001, judgment was entered against the third party company and its founder in favor of the Plaintiffs for approximately $1.6 million in compensatory and punitive damages, including pre-judgment interest.
The Plaintiffs contend that the Bank as an alleged co-conspirator of the third party company is liable for this entire amount, none of which has been collected from the third party company. The Plaintiffs are also seeking additional compensatory damages and other costs allegedly arising after the third party trial. Including interest, it is estimated that the amount of the claim against the Bank is approximately $2.0 million.
Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious defenses in this litigation. The discovery phase of the case has been completed and the Bank filed a motion for summary judgment on all counts. As discussed above, in December 2002, a judgment in favor of the Bank and a dismissal of the suit was rendered on all counts by way of summary judgment motion. In December 2002, the Plaintiffs appealed the judgment. Because of the uncertainties surrounding the outcome of the litigation no assurance can be given that the litigation will be resolved in favor of the Bank. Management and legal counsel are unable to estimate the amount of loss, if any, that may be incurred with respect to this litigation. Consequently, no loss provision has been recorded.
A second claim ancillary to this litigation was brought by the Plaintiffs in March 2002. The Bank has also been substituted for First Bank in these proceedings. In this matter, the Plaintiffs brought a motion seeking enforcement of a prejudgment writ of attachment obtained in 1997 by the Plaintiffs against funds held by First Bank as collateral for the loan to the third party company. In 1999, First Bank had applied these funds as an offset to that loan. In August 2002, judgment against the Bank was rendered on this motion requiring the Bank to make the funds available for attachment by the Plaintiffs. This judgment is under appeal to the Rhode Island Supreme Court. As of September 30, 2002, the Corporation has recorded a liability for the judgment award of $273 thousand in connection with this matter. As a pre-acquisition contingency, the offset to the liability has been recognized as a portion of the purchase price of First Financial Corp.
Kiepler Matter - On February 20, 2001, a suit was filed against the Bank in its capacity as trustee of the Walfred M. Nyman Trust (the "Nyman Trust") in the United States District Court for the District of Rhode Island (the "District Court") by Beverly Kiepler ("Kiepler"), as beneficiary of the Nyman Trust, for damages which the Nyman Trust allegedly incurred as a result of the Bank's failure to file suit against Robert C. Nyman, Kenneth J. Nyman and Keith Johnson (the "Co-Defendants") for their wrongful dilution of the stock value of Nyman Manufacturing Company ("Nyman Mfg."), an asset of the Nyman Trust. The amount of damages to the Nyman Trust caused by the alleged dilution was approximately $1.3 million, based on the number of shares of Nyman Mfg. that were held by the Nyman Trust. Kiepler has alleged that the Bank breached its fiduciary duty by failing to join a suit brought by Kiepler in her individual capacity as a shareholder of Nyman Mfg., against the Co-Defendants.
This case is being vigorously contested by management. Management believes that the Bank did not breach its fiduciary duties and that the allegations by Kiepler are without merit. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision for this lawsuit has been recorded.
Maxson Matter - On May 11, 2001, the Bank entered into an agreement with Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders to settle a lawsuit for claims based upon theories of breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constructive fraud. Under the terms of the agreement, which did not involve an admission of wrongdoing, the Bank agreed to pay $4.8 million to the plaintiffs. The cost of this settlement was recorded in the consolidated financial statements as of and for the quarter ended March 31, 2001. Net of the related income tax effect, the cost of the settlement amounted to $3.3 million. In connection with this matter, in August 2001, and in December 2001, the Bank received settlements from insurance carriers in the amounts of $775 thousand ($553 thousand net of tax) and $400 thousand ($252 thousand net of tax), respectively. The recoveries were recorded as reductions of the litigation settlement cost included in other noninterest expenses. No further insurance recoveries are expected.
The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of all executive officers of the Bancorp and the Bank
with their titles, ages, and length of service, followed by certain biographical
information.
Years of
Name Title Age Service
----------------------------------------------------------------------------------------------------------------
John C. Warren Chairman and Chief Executive Officer of the Bancorp and the Bank 57 7
John F. Treanor President and Chief Operating Officer of the Bancorp and the Bank 55 4
David V. Devault Executive Vice President, Treasurer and Chief Financial Officer
of the Bancorp and the Bank; Secretary of the Bank 48 16
Harvey C. Perry II Senior Vice President and Secretary of the Bancorp; 53 28
Senior Vice President - Director of Non-Profit Resources of the
Bank
Dennis L. Algiere Senior Vice President - Compliance and Community Affairs, of the 42 8
Bank
Stephen M. Bessette Senior Vice President - Retail Lending, of the Bank 55 6
Vernon F. Bliven Senior Vice President - Human Resources, of the Bank 53 30
Elizabeth B. Eckel Senior Vice President - Marketing, of the Bank 42 11
William D. Gibson Senior Vice President - Credit Administration, of the Bank 56 4
Barbara J. Perino, CPA Senior Vice President - Operations and Technology, of the Bank 41 14
B. Michael Rauh, Jr. Senior Vice President - Retail Banking, of the Bank 43 11
James M. Vesey Senior Vice President and Chief Credit Officer, of the Bank 55 4
|
John C. Warren joined the Bancorp and the Bank in 1996 as President and Chief Operating Officer. In 1997, he was elected President and Chief Executive Officer. In 1999, he was elected Chairman and Chief Executive Officer of the Bancorp and the Bank.
John F. Treanor joined the Bancorp and the Bank and the Corporation in April 1999 as President and Chief Operating Officer. He served as Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer of SIS Bancorp, Inc. from 1994 to 1999.
David V. Devault joined the Bank in 1986 as Controller. He was elected Vice President and Chief Financial Officer of the Bancorp and the Bank in 1987. He was elected Senior Vice President and Chief Financial Officer of the Bancorp and the Bank in 1990. In 1997, he was also elected Treasurer of the Bancorp and the Bank. In 1998, he was elected Executive Vice President, Treasurer and Chief Financial Officer of the Bancorp and the Bank. He was appointed to the position of Secretary of the Bank in 2002.
Harvey C. Perry II joined the Bank in 1974 and was elected Assistant Trust Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982. He was elected Vice President and Secretary of the Bancorp and the Bank in 1984, and Senior Vice President and Secretary of the Bancorp and the Bank in 1990. In 2002, he was appointed Senior Vice President - Director of Non-Profit Resources of the Bank.
Dennis L. Algiere joined the Bank in April 1995 as Compliance Officer. He was named Vice President - Compliance in December 1996 and was promoted to Senior Vice President - Compliance and Community Affairs in September 2001.
Stephen M. Bessette joined the Bank in February 1997 as Senior Vice President - Retail Lending. Prior to joining the Bank he held the position of Executive Vice President at Ameristone Mortgage Corporation since June 1995.
Vernon F. Bliven joined the Bank in 1972 and was elected Assistant Vice President in 1980, Vice President in 1986 and Senior Vice President - Human Resources in 1993.
Elizabeth B. Eckel joined the Bank in 1991 as Director of Advertising and Public Relations. In 1995, she was named Vice President - Marketing. She was promoted to Senior Vice President - Marketing in 2000.
William D. Gibson joined the Bank in March 1999 as Senior Vice President - Credit Administration. Prior to joining the Bank, he served as Senior Vice President of Credit Review and Senior Vice President of Credit and Loan Administration of Citizens Bank since October 1977.
Barbara J. Perino joined the Bank in 1988 as Financial Accounting Officer. She was named Controller in 1989 and Vice President - Controller in 1992. In 1998, she was promoted to Senior Vice President - Operations and Technology.
B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and was promoted in 1993 to Senior Vice President - Retail Banking.
James M. Vesey joined the Bank in 1998 as Senior Vice President - Commercial Lending. In 2000, he was named Senior Vice President and Chief Credit Officer. Prior to joining the Bank he held the position of Senior Vice President and Director of Business Banking at Citizens Bank since December 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Bancorp's common stock has traded on the Nasdaq National Market since May 1996. Previously, the Bancorp's stock traded on the Nasdaq Small-Cap Market since June 1992, and had been listed on the Nasdaq Over-The-Counter Market system since June 1987.
The quarterly common stock price ranges and dividends paid per share for the years ended December 31, 2002 and 2001 are presented in the following table. The stock prices are based on the high and low sales prices during the respective quarter.
2002 Quarters 1 2 3 4
----------------------------------------------------------------------------
Stock prices:
High $19.72 $24.11 $23.83 $21.20
Low 18.00 19.05 19.12 19.10
Cash dividend declared per share $.14 $.14 $.14 $.14
2001 Quarters 1 2 3 4
----------------------------------------------------------------------------
Stock prices:
High $17.75 $22.62 $22.14 $19.73
Low 13.75 16.35 16.69 17.76
Cash dividend declared per share $.13 $.13 $.13 $.13
|
The Bancorp will continue to review future common stock dividends based on profitability, financial resources and economic conditions. The Bancorp (including the Bank prior to 1984) has recorded consecutive quarterly dividends for over one hundred years.
The Bancorp's primary source of funds for dividends paid to shareholders is the receipt of dividends from the Bank. A discussion of the restrictions on the advance of funds or payment of dividends to the Bancorp is included in Note 17 to the Consolidated Financial Statements.
At February 24, 2003 there were 2,202 holders of record of the Bancorp's common stock.
Equity Compensation Plan Information
The following table provides information as of December 31, 2002 regarding
shares of common stock of the Bancorp that may be issued under our existing
equity compensation plans, including the 1988 Amended and Restated Stock Option
Plan (the "1988 Plan"), the 1997 Equity Incentive Plan (the "1997 Plan") and the
Nonqualified Deferred Compensation Plan (the "Deferred Compensation Plan"). The
table does not include information about the proposed 2003 Plan which has been
submitted for shareholder approval at the annual meeting and no grants have been
made under the 2003 Plan.
Equity Compensation Plan Information
------------------------------------------------------------------------------------------------------------
Plan category Number of securities
remaining available for
Number of securities to Weighted Average future issuance under
be issued upon exercise exercise price of equity compensation plan
of outstanding options, outstanding options, (excluding securities
warrants and rights (1) warrants and rights referenced in column (a))
------------------------------ ------------------------- ----------------------- ---------------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders (2) 1,149,739 $15.61 186,438
Equity compensation plans
not approved by security
holders (3) 6,446 N/A (4) 18,554
------------------------------ ------------------------- ----------------------- ---------------------------
Total 1,156,185 $15.61 204,992
------------------------------ ------------------------- ----------------------- ---------------------------
(1) Does not include any restricted stock as such shares are already
reflected in the Bancorp's outstanding shares.
(2) Consists of the 1988 Plan and the 1997 Plan.
(3) Consists of the Deferred Compensation Plan which is described below.
(4) Does not include information about the phantom stock units outstanding
under the Deferred Compensation Plan as such units do not have any
exercise price.
|
The Deferred Compensation Plan
The Deferred Compensation Plan was established as of January 1, 1999. The
Deferred Compensation Plan has not been approved by our shareholders.
The Deferred Compensation Plan allows our directors and officers to defer a portion of their compensation. The deferred compensation is contributed to a rabbi trust. The trustee of the rabbi trust invests the assets of the trust in shares of selected mutual funds as well as shares of the Bancorp's common stock pursuant to the directions of the plan participants. All shares of the Bancorp's common stock are purchased in the open market.
ITEM 6. SELECTED FINANCIAL DATA
The following tables represent selected consolidated financial data as of and
for the years ended December 31, 2002, 2001, 2000, 1999 and 1998. The selected
consolidated financial data is derived from the Corporation's Consolidated
Financial Statements that have been audited by KPMG LLP. The selected
consolidated financial data set forth below does not purport to be complete and
should be read in conjunction with, and are qualified in their entirety by, the
more detailed information including the Consolidated Financial Statements and
related Notes, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," appearing elsewhere herein.
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED OPERATING DATA AND FINANCIAL RATIOS: (Dollars in thousands)
At or for the years ended December 31, 2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------------------------------
Financial Results:
Interest income $87,339 $87,527 $85,099 $73,002 $67,226
Interest expense 43,057 48,160 47,231 37,394 34,658
---------------------------------------------------------------------------------------------------------------
Net interest income 44,282 39,367 37,868 35,608 32,568
Provision for loan losses 400 550 1,150 1,840 1,879
---------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 43,882 38,817 36,718 33,768 30,689
Noninterest income 23,258 21,485 19,712 18,826 16,517
---------------------------------------------------------------------------------------------------------------
Net interest and noninterest income 67,140 60,302 56,430 52,594 47,206
Noninterest expense 42,990 41,653 37,548 35,329 30,793
---------------------------------------------------------------------------------------------------------------
Income before income taxes 24,150 18,649 18,882 17,265 16,413
Income tax expense 7,393 5,541 5,673 4,754 4,235
---------------------------------------------------------------------------------------------------------------
Net income $16,757 $13,108 $13,209 $12,511 $12,178
---------------------------------------------------------------------------------------------------------------
Net income - operating basis (1) $17,174 $15,646 $13,897 $12,759 $11,510
---------------------------------------------------------------------------------------------------------------
Per share information ($):
Earnings per share:
Basic 1.32 1.09 1.10 1.05 1.04
Basic - operating basis (1) 1.35 1.30 1.16 1.07 .98
Diluted 1.30 1.07 1.09 1.03 1.01
Diluted - operating basis (1) 1.33 1.28 1.15 1.06 .95
Cash dividends declared (3) .56 .52 .48 .44 .40
Book value 9.87 8.15 7.43 6.55 6.66
Market value - closing stock price 19.53 19.00 14.00 17.75 21.50
Performance Ratios (%):
Return on average assets 1.07 1.01 1.14 1.19 1.31
Return on average assets - operating basis (2) 1.09 1.20 1.20 1.21 1.24
Return on average shareholders' equity 14.25 13.86 16.14 15.73 16.09
Return on average shareholders'
equity - operating basis (2) 14.60 16.54 16.98 16.04 15.21
Dividend payout ratio (4) 42.11 40.63 41.74 41.51 42.11
Asset Quality Ratios (%):
Nonperforming loans to total loans .53 .63 .58 .69 1.18
Nonperforming assets to total assets .24 .28 .28 .35 .61
Allowance for loan losses to nonaccrual loans 370.78 355.20 382.50 325.15 187.59
Allowance for loan losses to total loans 1.95 2.24 2.20 2.25 2.21
Net charge-offs to average total loans .05 .02 .06 .09 .05
Capital Ratios (%):
Total equity to total assets 7.37 7.19 7.32 7.07 7.87
Tier 1 leverage capital ratio 5.63 6.84 7.08 7.22 7.37
Total risk-based capital ratio 11.55 14.22 14.35 14.38 14.87
(1) A reconciliation of operating basis net income and financial results
presented in accordance with accounting principles generally accepted in
the United States of America is provided on the following page.
(2) Ratios measured with operating basis net income.
(3) Represents historical per share dividends declared by the Bancorp.
(4) Represents the ratio of historical per share dividends declared by the
Bancorp to diluted earnings per share, on an operating basis, restated as a
result of the 1999 and 2000 acquisitions of Pier Bank Inc. and Phoenix,
respectively, which were accounted for under the pooling of interests
method.
|
The following table presents a reconciliation of financial results presented in accordance with accounting principles generally accepted in the United States of America and operating basis results.
(Dollars in thousands)
For the years ended December 31, 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
Net income $16,757 $13,108 $13,209 $12,511 $12,178
Nonoperating items, net of tax
Acquisition costs 417 - 1,101 1,300 -
Litigation settlement, net of
insurance recovery - 2,538 - - -
Pro-forma income taxes on
pre-acquisition earnings of
acquired company - - (413) (767) (668)
Net gain on sale of credit card portfolio - - - (285) -
----------------------------------------------------------------------------------------------------------------
Total nonoperating items 417 2,538 688 248 668
----------------------------------------------------------------------------------------------------------------
Net income - operating basis $17,174 $15,646 $13,897 $12,759 $11,510
----------------------------------------------------------------------------------------------------------------
|
SELECTED BALANCE SHEET DATA: (Dollars in thousands) December 31, 2002 2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------------- Financial Condition: Cash and cash equivalents $51,048 $50,899 $43,860 $44,520 $34,654 Total securities 795,833 629,061 511,526 446,803 415,488 FHLB stock 24,582 23,491 19,558 17,627 16,583 Net loans 779,639 592,052 584,020 536,676 486,004 Goodwill and other intangibles 25,260 669 799 928 1,057 Other 69,299 66,057 58,304 59,051 41,364 --------------------------------------------------------------------------------------------------------------- Total assets $1,745,661 $1,362,229 $1,218,067 $1,105,605 $995,150 --------------------------------------------------------------------------------------------------------------- Deposits $1,110,493 $816,876 $735,684 $660,753 $627,763 FHLB advances 480,080 431,490 377,362 352,548 264,106 Other borrowings 9,183 2,087 3,227 4,209 15,033 Other liabilities 17,184 13,839 12,608 9,928 9,897 Shareholders' equity 128,721 97,937 89,186 78,167 78,351 --------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,745,661 $1,362,229 $1,218,067 $1,105,605 $995,150 --------------------------------------------------------------------------------------------------------------- Asset Quality: Nonaccrual loans $4,177 $3,827 $3,434 $3,798 $5,846 Other real estate owned, net 86 30 9 49 243 --------------------------------------------------------------------------------------------------------------- Total nonperforming assets $4,263 $3,857 $3,443 $3,847 $6,089 --------------------------------------------------------------------------------------------------------------- |
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
2002 Q1 Q2 Q3 Q4 Year
-----------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $10,981 $12,823 $12,958 $12,814 $49,576
Income from securities 8,188 9,307 9,342 8,734 35,571
Dividends on corporate stock and FHLB stock 483 497 500 493 1,973
Interest on federal funds sold and other
short-term investments 62 46 63 48 219
-----------------------------------------------------------------------------------------------------------------
Total interest income 19,714 22,673 22,863 22,089 87,339
-----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 971 1,182 1,773 1,672 5,598
Time deposits 4,123 4,340 4,161 4,152 16,776
FHLB advances 5,219 5,510 4,963 4,904 20,596
Other 17 20 28 22 87
-----------------------------------------------------------------------------------------------------------------
Total interest expense 10,330 11,052 10,925 10,750 43,057
-----------------------------------------------------------------------------------------------------------------
Net interest income 9,384 11,621 11,938 11,339 44,282
Provision for loan losses 100 100 100 100 400
-----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 9,284 11,521 11,838 11,239 43,882
-----------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,565 2,667 2,468 2,471 10,171
Service charges on deposit accounts 827 975 986 999 3,787
Merchant processing fees 446 776 1,221 559 3,002
Net gains on loan sales 516 398 608 1,362 2,884
Income from bank-owned life insurance 288 285 291 291 1,155
Net gains (losses) on sales of securities 291 381 (52) 58 678
Other income 295 303 507 476 1,581
-----------------------------------------------------------------------------------------------------------------
Total noninterest income 5,228 5,785 6,029 6,216 23,258
-----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,575 6,008 6,047 6,163 23,793
Net occupancy 625 670 675 724 2,694
Equipment 785 798 887 863 3,333
Merchant processing costs 357 614 965 455 2,391
Legal, audit and professional fees 173 221 815 684 1,893
Advertising and promotion 240 436 271 233 1,180
Outsourced services 261 266 245 305 1,077
Amortization of intangibles 32 189 220 210 651
Acquisition related expenses - 605 - - 605
Other 1,116 1,667 1,204 1,386 5,373
-----------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,164 11,474 11,329 11,023 42,990
-----------------------------------------------------------------------------------------------------------------
Income before income taxes 5,348 5,832 6,538 6,432 24,150
Income tax expense 1,604 1,808 2,027 1,954 7,393
-----------------------------------------------------------------------------------------------------------------
Net income $3,744 $4,024 $4,511 $4,478 $16,757
-----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 12,044.9 12,858.7 13,032.9 13,038.0 12,737.3
Weighted average shares outstanding - diluted 12,174.6 13,065.1 13,254.3 13,225.8 12,932.4
Per share information:
Basic earnings per share $.31 $.31 $.35 $.34 $1.32
Diluted earnings per share $.31 $.31 $.34 $.34 $1.30
Cash dividends declared per share $.14 $.14 $.14 $.14 $.56
|
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands)
2001 Q1 Q2 Q3 Q4 Year
-----------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $13,161 $12,659 $12,846 $11,952 $50,618
Income from securities 8,390 8,691 8,752 8,155 33,988
Dividends on corporate stock and FHLB stock 617 582 591 537 2,327
Interest on federal funds sold and other
short-term investments 203 180 134 77 594
-----------------------------------------------------------------------------------------------------------------
Total interest income 22,371 22,112 22,323 20,721 87,527
-----------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 1,368 1,386 1,300 1,073 5,127
Time deposits 5,175 4,872 4,573 4,246 18,866
FHLB advances 6,225 6,529 5,971 5,343 24,068
Other 28 25 23 23 99
-----------------------------------------------------------------------------------------------------------------
Total interest expense 12,796 12,812 11,867 10,685 48,160
-----------------------------------------------------------------------------------------------------------------
Net interest income 9,575 9,300 10,456 10,036 39,367
Provision for loan losses 200 150 100 100 550
-----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 9,375 9,150 10,356 9,936 38,817
-----------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust and investment management 2,573 2,735 2,620 2,480 10,408
Service charges on deposit accounts 866 920 894 834 3,514
Merchant processing fees 341 650 1,099 552 2,642
Net gains on loan sales 209 627 352 870 2,058
Income from bank-owned life insurance 272 279 287 296 1,134
Net gains (losses) on sales of securities 5 403 - (60) 348
Other income 323 355 401 302 1,381
-----------------------------------------------------------------------------------------------------------------
Total noninterest income 4,589 5,969 5,653 5,274 21,485
-----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,191 5,168 5,326 5,160 20,845
Net occupancy 723 629 652 628 2,632
Equipment 825 809 760 981 3,375
Merchant processing costs 270 530 872 452 2,124
Legal, audit and professional fees 312 524 235 265 1,336
Advertising and promotion 204 275 311 447 1,237
Outsourced services 232 254 213 276 975
Amortization of intangibles 32 32 32 33 129
Litigation settlement cost, net of recovery 4,800 - (775) (400) 3,625
Other 1,159 1,153 1,378 1,285 5,375
-----------------------------------------------------------------------------------------------------------------
Total noninterest expense 13,748 9,774 9,004 9,127 41,653
-----------------------------------------------------------------------------------------------------------------
Income before income taxes 216 5,345 7,005 6,083 18,649
Income tax expense 62 1,545 2,163 1,771 5,541
-----------------------------------------------------------------------------------------------------------------
Net income $154 $3,800 $4,842 $4,312 $13,108
-----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 12,012.2 12,031.3 12,056.9 12,055.7 12,039.2
Weighted average shares outstanding - diluted 12,123.2 12,237.8 12,270.1 12,215.7 12,202.5
Per share information:
Basic earnings per share $.01 $.32 $.40 $.36 $1.09
Diluted earnings per share $.01 $.31 $.40 $.35 $1.07
Cash dividends declared per share $.13 $.13 $.13 $.13 $.52
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains statements that are "forward-looking statements." We may
also make written or oral forward-looking statements in other documents we file
with the Securities and Exchange Commission, in our annual reports to
shareholders, in press releases and other written materials, and in oral
statements made by our officers, directors or employees. You can identify
forward-looking statements by the use of the words "believe," "expect,"
"anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and
other expressions which predict or indicate future events and trends and which
do not relate to historical matters. You should not rely on forward-looking
statements, because they involve known and unknown risks, uncertainties and
other factors, some of which are beyond the control of the Corporation. These
risks, uncertainties and other factors may cause the actual results, performance
or achievements of the Corporation to be materially different from the
anticipated future results, performance or achievements expressed or implied by
the forward-looking statements.
Some of the factors that might cause these differences include the following:
changes in general national or regional economic conditions, changes in interest
rates, reductions in the market value of trust and investment assets under
management, reductions in deposit levels necessitating increased borrowing to
fund loans and investments, changes in the size and nature of the Corporation's
competition, changes in loan defaults and charge-off rates and changes in the
assumptions used in making such forward-looking statements. In addition, the
factors described under "Risk Factors" in Item 1 of this report may result in
these differences. You should carefully review all of these factors, and you
should be aware that there may be other factors that could cause these
differences. These forward-looking statements were based on information, plans
and estimates at the date of this report, and we do not promise to update any
forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
Recent Events
Subject to the approval of state and federal regulators, the Corporation expects
to open a full service branch office in Warwick, Rhode Island in the second
quarter 2003, which will expand the Bank's market area into Kent County.
Critical Accounting Policies
Accounting policies involving significant judgments and assumptions by
management, which have, or could have, a material impact on the carrying value
of certain assets and impact income, are considered critical accounting
policies. The Corporation considers the following to be its critical accounting
policies: allowance for loan losses and review of goodwill and intangible assets
for impairment. There have been no significant changes in the methods or
assumptions used in the accounting policies that require material estimates and
assumptions.
Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses necessarily
involves a high degree of judgment. The Corporation uses a methodology to
systematically measure the amount of estimated loan loss exposure inherent in
the loan portfolio for purposes of establishing a sufficient allowance for loan
losses. The methodology includes three elements: identification of specific loan
losses, general loss allocations for certain loan types based on credit grade
and loss experience factors, and general loss allocations for other
environmental factors. The methodology includes an analysis of individual loans
deemed to be impaired in accordance with accounting principles generally
accepted in the United States of America (SFAS 114). Other individual commercial
loans and commercial mortgage loans are evaluated using an internal rating
system and the application of loss allocation factors. The loan rating system
and the related loss allocation factors take into consideration parameters
including the borrower's financial condition, the borrower's performance with
respect to loan terms and the adequacy of collateral. Portfolios of more
homogeneous populations of loans including residential mortgages and consumer
loans are analyzed as groups taking into account delinquency ratios and other
indicators, the Corporation's historical loss experience and comparison to
industry standards of loss allocation factors for each type of credit product.
Finally, an additional unallocated allowance is maintained based on a judgmental
process whereby management considers qualitative and quantitative assessments of
other environmental factors. For example, virtually our entire loan portfolio is
concentrated among borrowers in southern New England, primarily Rhode Island and
to a lesser extent in Connecticut and Massachusetts, and a substantial portion
of the portfolio is collateralized by real estate in this area, including most
consumer loans and those commercial loans not specifically classified as
commercial mortgages. A portion of the commercial loans and commercial mortgage
loans are to borrowers in the hospitality and tourism industry. Further,
economic conditions which may affect the ability of borrowers to meet debt
service requirements are considered including interest rates and energy costs.
Results of regulatory examinations, historical loss ranges, portfolio
composition including a trend toward somewhat larger credit relationships, and
other changes in the portfolio are also considered.
The Corporation's Audit Committee of the Board of Directors is responsible for oversight of the loan review process. This process includes review of the Bank's procedures for determining the adequacy of the allowance for loan losses, administration of its internal credit rating systems and the reporting and monitoring of credit granting standards.
Accounting for Acquisitions and Review of Goodwill for Impairment In April 2002, the Corporation completed its acquisition of First Financial Corp. which was accounted for under the purchase method of accounting. For acquisitions accounted for under the purchase method, the Corporation is required to record assets acquired and liabilities assumed at their fair value, which in many instances involves estimates based on third party, internal or other valuation techniques. In addition, purchase acquisitions typically result in goodwill or other intangible assets, which are subject to ongoing periodic impairment tests. Goodwill is evaluated for impairment using market value comparisons for similar institutions. The valuation technique contains estimates as to the comparability of the selected market information to the specifics of the Corporation. Furthermore, the determination of which intangible assets have finite lives is subjective, as is the determination of the amortization period for such intangible assets. In connection with the acquisition of First Financial Corp., the Corporation has recorded $22.6 million of goodwill and $2.7 million of intangible assets as of December 31, 2002.
Financial Overview
Net income for the year ended December 31, 2002 amounted to $16.8 million, or
$1.30 per diluted share, compared to $13.1 million, or $1.07 per diluted share,
for 2001. The Corporation's rates of return on average assets and average equity
for 2002 were 1.07% and 14.25%, respectively. Comparable amounts for the year
2001 were 1.01% and 13.86%, respectively.
In 2002, the Corporation completed the acquisition of First Financial Corp., and recorded acquisition-related expenses of $417 thousand after tax ($.03 per diluted share). The acquisition was accounted for as a purchase in accordance with SFAS No. 141 "Business Combinations" and the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets" were also applied. In 2001, the Corporation recorded a litigation settlement expense, net of insurance recovery, of $2.5 million after tax ($.21 per diluted share). Results excluding the acquisition-related expenses and litigation settlement expense, net of taxes, are referred to herein as "operating."
The following table presents a reconciliation of financial results presented in accordance with accounting principles generally accepted in the United States of America and operating basis results:
(Dollars in thousands)
December 31, 2002 2001 --------------------------------------------------------------------------- Net income $16,757 $13,108 Nonoperating items, net of tax Acquisitions costs 417 - Litigation settlement, net of insurance recovery - 2,538 --------------------------------------------------------------------------- Total nonoperating items 417 2,538 --------------------------------------------------------------------------- Net income - operating basis $17,174 $15,646 --------------------------------------------------------------------------- |
Operating net income for the year 2002 amounted to $17.2 million, or $1.33 per diluted share, up 9.8% on a dollar basis and 3.9% on a diluted per share basis from $15.6 million, or $1.28 per share, reported for 2001. The Corporation's rates of return on average assets and average equity, on an operating basis, for 2002 were 1.09% and 14.60%, respectively. Comparable amounts for the year 2001 were 1.20% and 16.54%, respectively.
For the year ended December 31, 2002, net interest income (the difference between interest earned on loans and securities and interest paid on deposits and other borrowings) amounted to $44.3 million, up 12.5% from $39.4 million for 2001. Although net interest income has increased, the net interest margin in 2002 amounted to 3.10%, down from 3.30% in 2001, and has been affected by the significant decline in market interest rates. The decrease in the net interest margin reflects a decline in yields on loans and securities, which has been offset somewhat by lower funding costs of interest-bearing deposits and FHLB advances. The Corporation expects that these conditions affecting net interest income will continue for the near term. (See additional discussion under the caption "Net Interest Income.")
For the years ended December 31, 2002 and 2001, the Corporation's provision for loan losses amounted to $400 thousand and $550 thousand, respectively. The provision decreased due to management's belief that the allowance for loan losses is at a reasonable level based on its current evaluation. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance for loan losses increased from $13.6 million at December 31, 2001 to $15.5 million at December 31, 2002 due to the $1.8 million allowance on acquired loans and the 2002 provision and recoveries, net of charge-offs.
Other noninterest income (noninterest income excluding net realized gains on securities) amounted to $22.6 million for the year 2002, up from the 2001 amount of $21.1 million. The growth in noninterest income was primarily attributable to increases in gains on loan sales and service fees, and was offset in part by declines in trust and investment management income.
The Corporation recognized net realized gains on securities amounting to $678 thousand and $348 thousand in 2002 and 2001, respectively. Included in net realized gains on securities in 2002 were $459 thousand in loss write-downs on certain equity securities deemed to be other than temporarily impaired based on an analysis of the financial condition and operating outlook of the issuers.
For the year 2002, total operating noninterest expense (total noninterest expense excluding acquisition-related expenses and litigation settlement cost, net of recovery) amounted to $42.4 million, up 11.5% over the comparable 2001 amount. The increase was primarily attributable to normal growth and higher operating costs resulting from the April 2002 acquisition of First Financial Corp. Included in other noninterest expense for the twelve months ended December 31, 2002 and 2001 were contributions of appreciated equity securities to the Corporation's charitable foundation amounting to $403 thousand and $353 thousand, respectively. These transactions resulted in realized securities gains of $381 thousand and $351 thousand, respectively, for the same periods.
Total consolidated assets amounted to $1.746 billion at December 31, 2002, up 28.1% from the December 31, 2001 balance of $1.362 billion. Average assets rose 20.7% during 2002 and amounted to $1.569 billion. The growth in assets was mainly attributable to the April 2002 purchase of First Financial Corp. and purchases of investment securities. During 2002, total loans increased $189.5 million, or 31.3%, including $115.5 million acquired from First Financial Corp. Total securities increased $166.8 million, or 26.5%, in 2002. Purchases of securities were funded primarily with deposit growth. Total deposits amounted to $1.110 billion, up $293.6 million, or 35.9%, from the December 31, 2001 balance. Included in the deposit balance increase were $137.7 million of deposits acquired from First Financial Corp. FHLB advances totaled $480.1 million at December 31, 2002, up $48.6 million, or 11.3%, from the prior year balance.
Nonaccrual loans as a percentage of total loans at December 31, 2002 amounted to .53%, down from .63% at December 31, 2001. Nonperforming assets (nonaccrual loans and property acquired through foreclosure) totaled $4.3 million or .24% of total assets at December 31, 2002, compared to $3.9 million or .28% of total assets at December 31, 2001.
Total shareholders' equity amounted to $128.7 million at December 31, 2002, up $30.8 million, or 31.4%, from the prior year balance. This increase is attributable to common stock issued in connection with the First Financial Corp. acquisition. (See additional discussion under the caption "Acquisitions" below and Note 2 to the Corporation's Consolidated Financial Statements for additional information regarding the acquisition.) Included in shareholders' equity at December 31, 2002 was accumulated other comprehensive income on securities available for sale, net of tax, of $9.3 million compared to $6.4 million in accumulated other comprehensive income associated with net unrealized gains on securities available for sale and the interest rate floor contract at December 31, 2001. (See Note 17 to the Corporation's Consolidated Financial Statements for additional discussion on shareholders' equity.)
Book value per share as of December 31, 2002 and 2001 amounted to $9.87 and $8.15, respectively.
Liquidity
Liquidity is the ability of a financial institution to meet maturing liability
obligations and customer loan demand. Washington Trust's primary source of
liquidity is customer deposits. Customer deposits (time, savings and demand
deposits) funded approximately 64.0% of total average assets in 2002. Other
sources of funding include discretionary use of purchased liabilities (i.e.,
FHLB term advances and federal funds purchased), cash flows from the
Corporation's securities portfolios and loan repayments. In addition, securities
designated as available for sale may be sold in response to short-term or
long-term liquidity needs.
The Corporation's Asset/Liability Committee ("ALCO") establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained well within target ranges established by the ALCO during 2002. Net loans as a percentage of total assets amounted to 44.7% at December 31, 2002, compared to 43.5% at December 31, 2001. Total securities as a percentage of total assets amounted to 45.6% at December 31, 2002, down from 46.2% at December 31, 2001. These changes resulted primarily from loans acquired, purchases of debt securities and the 28.1% increase in total assets in 2002.
For the year ended December 31, 2002, net cash provided by financing activities was $180.1 million. Proceeds from FHLB advances totaled $717.2 million, while repayments of FHLB advances totaled $690.7 million in 2002. Additionally, $156.4 million was generated from overall growth in deposits, excluding amounts acquired from First Financial Corp. Net cash used in investing activities was $200.4 million in 2002, the majority of which was used to purchase securities. In addition, as a result of the acquisition of First Financial Corp., the Corporation acquired $34.5 million in cash, net of the payment made for the acquisition. A substantial portion of the First Financial Corp. investment portfolio was liquidated prior to the April 16, 2002 acquisition date. In 2002 and 2001, the Corporation expended $3.4 million in each year to upgrade and expand equipment and premises in order to support its operations. Net cash provided by operating activities amounted to $20.4 million in 2002, $16.8 million of which was generated by net income. (See the Consolidated Statements of Cash Flows for further information about sources and uses of cash.)
Acquisitions
On April 16, 2002, the Corporation completed the acquisition of First Financial
Corp., the parent company of First Bank and Trust Company, a Rhode
Island-chartered community bank. The results of First Financial Corp.'s
operations have been included in the Corporation's Consolidated Statements of
Income since that date. First Financial Corp. was headquartered in Providence,
Rhode Island and its subsidiary, First Bank and Trust Company, operated banking
offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The
Corporation closed the Richmond and North Kingstown branches and consolidated
them into existing Bank branches in May 2002. Pursuant to the Agreement and Plan
of Merger dated November 12, 2001, the acquisition was effected by means of the
merger of First Financial Corp. with and into the Bancorp and the merger of
First Bank and Trust Company with and into the Bank. The acquisition was
accounted for as a purchase in accordance with SFAS No. 141 "Business
Combinations" and the provisions of SFAS No. 142 "Goodwill and Other Intangible
Assets" were also applied. The Corporation acquired assets totaling $204.8
million, including goodwill of $21.6 million, and liabilities amounting to
$166.7 million. In accordance with accounting principles generally accepted in
the United States of America, the Corporation also capitalized $968 thousand of
business combination costs (primarily legal, accounting and investment advisor
fees) to goodwill, which resulted in the recording of goodwill totaling $22.6
million. The Corporation expects that some adjustments of the fair values
assigned to the assets acquired and liabilities assumed at April 16, 2002 may be
subsequently recorded, although such adjustments are not expected to be
material.
On June 26, 2000, the Corporation completed its acquisition of Phoenix, an independent investment advisory firm located in Providence, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the acquisition was effected by means of merger of Phoenix with and into the Bank. For the year ended December 31, 1999, Phoenix's investment management revenues totaled $3.4 million. Expenses directly attributable to the 2000 acquisition of Phoenix amounted to $1.1 million, after income taxes, and were charged to earnings at the date of combination. Acquisition related expenses primarily consisted of legal and investment advisory fees. The acquisition of Phoenix was a tax-free reorganization and was accounted for under the pooling of interests method. Accordingly, the consolidated financial statements and other financial information of the Corporation have been restated to present the combined financial condition and results of operations as if the combination had been in effect for all periods presented.
Net Interest Income
Net interest income is the primary source of Washington Trust's operating
income. The level of net interest income is affected by the volume of average
interest-earning assets and interest-bearing liabilities, market interest rates
and other factors. The following discussion presents net interest income on a
fully taxable equivalent (FTE) basis by adjusting income and yields on
tax-exempt loans and securities to be comparable to taxable loans and
securities.
FTE net interest income increased $4.9 million, or 12.1%, from 2001 to 2002. The increase was primarily due to growth in interest-earning assets and lower cost of funds on interest-bearing liabilities.
The net interest margins (FTE net interest income as a percentage of average interest-earning assets) for 2002 and 2001 were 3.10% and 3.30%, respectively. The interest rate spread decreased slightly from 2.77% in 2001 to 2.71% in 2002. Earning asset yields declined 118 basis points during 2002, while the cost of interest-bearing liabilities decreased 112 basis points. The significant decline in market interest rates has adversely affected the net interest margin. The decrease in the net interest margin reflects a decline in yields on loans and securities offset somewhat by lower funding costs of interest-bearing deposits and FHLB advances. The Corporation expects that these conditions affecting net interest income will continue for the near term.
The yield on interest-earning assets amounted to 6.05% in 2002, down from 7.23% in 2001. Average interest-earning assets amounted to $1.461 billion or 19.2% over the comparable 2001 amount of $1.225 billion. The growth in average interest-earning assets was due to growth in securities and loans.
Total average securities rose $135.3 million, or 22.0%, in 2002, mainly due to purchases of taxable debt securities. The FTE rate of return on securities was 5.14% in 2002, down from 6.13% in 2001. The decrease in yields on securities reflects a combination of lower yields on variable rate securities tied to short-term interest rates and lower marginal rates on investment purchases during 2002 relative to the prior year.
Average loans amounted to $709.5 million in 2002, up $100.4 million, or 16.5%, from 2001. The FTE rate of return on total loans was 7.01% in 2002, compared to 8.34% in 2001. This decline is primarily due to lower marginal yields on floating and adjustable rate loans in 2002 as compared to the prior year and a decline in yields on new loan originations. Average commercial loans rose 35.2% to $341.4 million while the yield on commercial loans declined 174 basis points to 7.51%. Included in interest income on commercial loans was $229 thousand of depreciation in the value of the interest rate floor contract through the termination of the contract in May 2002. Appreciation in the value of the interest rate floor contract in 2001 amounted to $642 thousand. (See Note 9 to the Consolidated Financial Statements for additional information regarding the interest rate floor contract.) Average residential real estate loans amounted to $246.9 million, down 2.0% from the prior year level. This decrease was primarily a result of heavy residential mortgage refinancing activity, spurred by a low interest rate environment, which increased the amount of loans sold into the secondary market. The yield on residential real estate loans decreased 78 basis points from the prior year, amounting to 6.88%. Average consumer loans rose 15.6% over the prior year and amounted to $121.1 million. The yield on consumer loans declined 191 basis points from the prior year to 5.88%, primarily due to a decline in the yield on home equity lines.
Average interest-bearing liabilities increased 19.2% to $1.288 billion at December 31, 2002. Due to lower rates paid on both borrowed funds and deposits, the Corporation's total cost of funds on interest-bearing liabilities amounted to 3.34% in 2002, a decrease of 112 basis points from the prior year yield level.
Average savings deposits increased 38.1% to $399.6 million in 2002. The rate paid on savings deposits for 2002 was 1.40%, compared to 1.77% in 2001. Average time deposits increased $94.1 million with a decrease of 155 basis points in the rate paid. In addition, average demand deposits, an interest-free source of funding, increased 30.1% from 2001 to $149.4 million in 2002.
Average FHLB advances increased by $2.5 million from 2001 and amounted to $431.0 million. The average rate paid on FHLB advances in 2002 was 4.78%, a decrease of 84 basis points from the prior year.
Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis) The following table presents average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income) are included in amounts presented for loans.
Years ended December 31, 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------
Assets:
Residential real estate loans $246,915 16,989 6.88 $251,774 19,279 7.66 $240,410 18,777 7.81
Commercial and other loans 341,434 25,632 7.51 252,501 23,344 9.25 230,772 21,946 9.51
Consumer loans 121,110 7,122 5.88 104,767 8,164 7.79 98,479 8,826 8.96
---------------------------------------------------------------------------------------------------------------------
Total loans 709,459 49,743 7.01 609,042 50,787 8.34 569,661 49,549 8.70
Federal funds sold and other
short-term investments 14,477 219 1.52 15,088 594 3.94 13,247 837 6.32
Taxable debt securities 674,095 34,746 5.15 540,955 33,057 6.11 456,434 30,992 6.79
Nontaxable debt securities 19,544 1,267 6.48 21,765 1,430 6.57 25,050 1,652 6.60
Corporate stocks and FHLB stock 43,491 2,379 5.47 38,480 2,705 7.03 33,848 3,157 9.33
---------------------------------------------------------------------------------------------------------------------
Total securities 751,607 38,611 5.14 616,288 37,786 6.13 528,579 36,638 6.93
---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,461,066 88,354 6.05 1,225,330 88,573 7.23 1,098,240 86,187 7.85
---------------------------------------------------------------------------------------------------------------------
Cash and due from banks 29,069 19,759 18,362
Allowance for loan losses (15,016) (13,556) (12,881)
Premises and equipment, net 23,741 22,869 22,774
Other 69,803 44,924 34,715
---------------------------------------------------------------------------------------------------------------------
Total assets $1,568,663 $1,299,326 $1,161,210
---------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders'
Equity:
Savings deposits $399,548 5,598 1.40 $289,360 5,127 1.77 $240,580 4,383 1.82
Time deposits 454,239 16,776 3.69 360,167 18,866 5.24 351,961 19,841 5.64
FHLB advances 431,000 20,596 4.78 428,519 24,068 5.62 370,642 22,886 6.17
Other 3,539 87 2.46 2,570 99 3.86 2,003 121 6.03
---------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,288,326 43,057 3.34 1,080,616 48,160 4.46 965,186 47,231 4.89
---------------------------------------------------------------------------------------------------------------------
Demand deposits 149,382 114,844 106,741
Other liabilities 13,364 9,294 7,445
Shareholders' equity 117,591 94,572 81,838
---------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,568,663 $1,299,326 $1,161,210
---------------------------------------------------------------------------------------------------------------------
Net interest income $45,297 $40,413 $38,956
---------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.71 2.77 2.96
Net interest margin 3.10 3.30 3.55
---------------------------------------------------------------------------------------------------------------------
|
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency for the years indicated:
(Dollars in thousands)
Years ended December 31, 2002 2001 2000 -------------------------------------------------------------------------------- Commercial and other loans $167 $169 $126 Nontaxable debt securities 442 499 576 Corporate stocks and FHLB stock 406 378 386 |
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)
2002/2001 2001/2000 2000/1999
----------------------------------------------------------------------------------------------------------------------
Net Net Net
(Dollars in thousands) Volume Rate Change Volume Rate Change Volume Rate Change
----------------------------------------------------------------------------------------------------------------------
Interest on:
Interest-earning assets:
Residential real estate loans ($498) (1,840) (2,338) $875 (373) 502 $2,053 37 2,090
Commercial and other loans 8,197 (4,374) 3,823 1,785 (618) 1,167 1,079 302 1,381
Consumer loans 1,244 (3,773) (2,529) 750 (1,181) (431) 815 305 1,120
Federal funds sold and
other short-term investments (24) (351) (375) 105 (348) (243) 145 174 319
Taxable debt securities 8,136 (6,445) 1,691 5,366 (3,301) 2,065 3,730 2,830 6,560
Nontaxable debt securities (146) (19) (165) (216) (6) (222) (125) (9) (134)
Corporate stocks and FHLB stock 352 (678) (326) 394 (846) (452) 325 438 763
----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 17,261 (17,480) (219) 9,059 (6,673) 2,386 8,022 4,077 12,099
----------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 1,952 (1,481) 471 867 (123) 744 210 130 340
Time deposits 4,928 (7,018) (2,090) 454 (1,429) (975) 1,778 2,192 3,970
FHLB advances 139 (3,611) (3,472) 3,369 (2,187) 1,182 3,589 2,442 6,031
Other 38 (50) (12) 30 (52) (22) (608) 104 (504)
----------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 7,057 (12,160) (5,103) 4,720 (3,791) 929 4,969 4,868 9,837
----------------------------------------------------------------------------------------------------------------------
Net interest income $10,204 (5,320) 4,884 $4,339 (2,882) 1,457 $3,053 (791) 2,262
----------------------------------------------------------------------------------------------------------------------
|
Noninterest Income
Noninterest income is an important source of revenue for Washington Trust. For
the year ended December 31, 2002, recurring noninterest income, which excludes
net realized gains on securities, accounted for 33.8% of total revenues (net
interest income plus recurring noninterest income). Washington Trust's primary
sources of recurring noninterest income are trust and investment management
revenues, servicing of deposit accounts, merchant credit card processing fees
and net gains on loan sales. Also included in noninterest income are earnings
generated from bank-owned life insurance ("BOLI") purchased in 1999.
Revenue from trust and investment management services continues to be the largest component of noninterest income. Trust and investment management revenue represented 43.7% of noninterest income. For the year ended December 31, 2002, trust and investment management revenues totaled $10.2 million, down slightly from the $10.4 million reported for 2001, reflecting the financial market declines. The market value of trust and investment management assets under administration amounted to $1.524 billion and $1.578 billion at December 31, 2002 and 2001, respectively.
Service charges on deposit accounts rose 7.8% to $3.8 million in 2002. Growth in the Corporation's total deposit base, as well as changes in the fee structures of various deposit products during the year, were contributing factors in this increase.
Net gains on loan sales totaled $2.9 million in 2002, up $826 thousand, or 40.1%, from 2001. Included in net gains on loan sales are net gains on sales of fixed rate residential mortgages, changes in the fair value of commitments to originate and commitments to sell fixed rate residential mortgages, net gains on sales of the guaranteed portion of SBA loan originations in 2002 and capitalization of loan servicing rights. As a result of the decline in interest rates, the Corporation experienced heavy residential mortgage activity, predominantly refinancing, which increased the amount of residential mortgage loans sold into the secondary market. The Corporation expects this activity to continue through the first quarter of 2003, however this level of activity may not be sustainable in future periods. The capitalization of loan servicing rights amounted to of $152 thousand and $35 thousand in 2002 and 2001, respectively. Changes in the fair value of commitments totaled $(154) thousand and $86 thousand in 2002 and 2001, respectively.
The Corporation sells residential mortgage loans with servicing released and retained. In addition, the Corporation began selling the guaranteed portion of SBA loan originations with servicing retained in 2002. Loan servicing fee income amounted to $135 thousand for the year ended December 31, 2002, compared to the prior year amount of $400 thousand. Due to accelerated prepayments, the Corporation recorded $177 thousand of valuation adjustments on loan servicing rights in 2002. The decline in loan servicing rights was primarily attributable to these valuation adjustments recorded as reductions in servicing fees. Servicing income, excluding valuation adjustments and amortization, as a percentage of average loans serviced amounted to 34 basis points in 2002, compared to 30 basis points in 2001. The balance of serviced loans at December 31, 2002 amounted to $121.3 million, compared to $146.7 million at December 31, 2001.
In the second quarter of 1999, the Corporation purchased $18.0 million of BOLI as a financing tool for employee benefits. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. Noninterest income included $1.2 million and $1.1 million of earnings on BOLI for the years ended December 31, 2002 and 2001, respectively. (See additional discussion on BOLI under the caption "Financial Condition".)
Noninterest Expense
Noninterest expenses, excluding acquisition related expenses and net litigation
settlement costs, totaled $42.4 million in 2002, up $4.4 million from the prior
year. This increase was primarily attributable to normal growth and higher
operating costs resulting from the April 2002 acquisition of First Financial
Corp.
Salaries and benefit expense, the largest component of total noninterest expense, amounted to $23.8 million for 2002, up 14.1% from the $20.8 million reported for 2001.
Legal, audit and professional fees totaled $1.9 million compared to $1.3 million in 2001. Included in legal, audit and professional fees in 2002 are approximately $831 thousand in costs associated with a special consulting project in connection with trust and investment management services. The Corporation does not consider the amounts incurred in connection with this project to be recurring costs.
Amortization of intangibles totaled $651 thousand in 2002 compared to $129 thousand in 2002. (See Note 8 to the Consolidated Financial Statements for additional information regarding intangible assets.)
Total equipment costs for 2002 amounted to $3.3 million, down $42 thousand from the corresponding 2001 amount. In 2001, the Corporation recorded impairment adjustments of $107 thousand, respectively, resulting from remeasurements of the useful lives of technology equipment.
Income Taxes
Income tax expense amounted to $7.4 million and $5.5 million in 2002 and 2001,
respectively. The Corporation's effective tax rate was 30.6% in 2002, compared
to a rate of 29.7% in 2001. The increase in the effective tax rate was primarily
due to the effect of the 2001 litigation settlement, net of insurance recovery,
on the 2001 tax rate. These rates differed from the federal rate of 35.0% due to
the benefits of tax-exempt income, the dividends received deduction and income
from BOLI.
The Corporation's net deferred tax asset amounted to $1.2 million and $1.4 million at December 31, 2002 and 2001, respectively. Primary sources of recovery of deferred tax assets are future taxable income and the reversal of deferred tax liabilities. (See Note 14 to the Consolidated Financial Statements for additional information regarding income taxes.)
Financial Condition
Securities
Securities are designated as either available for sale or held to maturity at
the time of purchase. Securities available for sale may be sold in response to
changes in market conditions, prepayment risk, rate fluctuations, liquidity, or
capital requirements. Securities available for sale are reported at fair value,
with any unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of tax, until realized.
Securities designated as held to maturity are part of the Corporation's
portfolio of long-term interest-earning assets. These securities are classified
as long-term because the Corporation has the intent and ability to hold them
until maturity. Securities held to maturity are reported at amortized cost.
The transition provisions of SFAS No. 133 provided that at the date of initial application an entity may transfer any security classified as "held to maturity" to "available for sale" or "trading." On January 1, 2001, the Corporation transferred held to maturity securities with an amortized cost of $43.6 million and an estimated fair value of $42.6 million into the available for sale category. The transition adjustment amounted to an unrealized loss, net of tax, of $367 thousand and was reported in other comprehensive income.
Securities Available for Sale
The amortized cost of securities available for sale at December 31, 2002
amounted to $539.1 million, an increase of $95.3 million over the 2001 amount.
This increase was due primarily to purchases of mortgage-backed securities.
At December 31, 2002, the net unrealized gains on securities available for sale amounted to $14.4 million, an increase of $4.3 million from the comparable 2001 amount. This increase was attributable to the effects of decreases in medium and long-term rates that occurred during 2002. (See Note 4 to the Consolidated Financial Statements for detail of unrealized gains and losses associated with securities available for sale.)
Securities Held to Maturity
The amortized cost of securities held to maturity increased $67.2 million, to
$242.3 million at December 31, 2002. This increase is primarily attributable to
purchases of mortgage-backed securities. The net unrealized gains on securities
held to maturity amounted to $8.2 million at December 31, 2002 compared to $2.5
million in net unrealized gains at December 31, 2001.
Federal Home Loan Bank Stock
The Corporation is required to maintain a level of investment in FHLB stock that
currently is based on the level of its FHLB advances. As of December 31, 2002
and 2001, the Corporation's investment in FHLB stock totaled $24.6 million and
$23.5 million, respectively. The Gramm-Leach-Bliley Act required the FHLB to
issue new capitalization requirements. The requirements were approved for
issuance in May 2002.
Loans
During 2002, total loans increased 31.3% to $795.1 million, including $115.5
million in loans acquired from First Financial Corp. in April 2002.
Residential real estate loans were impacted by the refinancing of fixed rate residential loans being sold into the secondary market. In 2002, average residential real estate loans decreased $4.9 million. The Bank purchased a total of $52.6 million of residential mortgages from other financial institutions in 2002, more than half of which were purchased in the fourth quarter of 2002. As of December 31, 2002, total residential real estate loans amounted to $280.9 million, up $45.5 million, or 19.3%, from the 2001 balance of $235.4 million. Total commercial loans increased $121.5 million to $382.2 million at December 31, 2002. Consumer loans were up $22.4 million, or 20.4%, in 2002. The increase in consumer loans was mainly due to growth in home equity lines.
Goodwill and Other Intangibles
The second quarter 2002 acquisition of First Financial Corp. resulted in the
recording of goodwill of $22.6 million. Included in this amount were $968
thousand of business combination costs (primarily legal, accounting and
investment advisor fees) capitalized in accordance with accounting principles
generally accepted in the United States of America. In accordance with the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
acquired in business combinations after June 30, 2001 will not be amortized.
At December 31, 2002 and December 31, 2001, the Corporation had other intangible assets with carrying values of $2.7 million and $669 thousand, respectively. In conjunction with the 2002 First Financial Corp. acquisition, the Corporation recorded core deposit intangibles of $1.8 million with an average useful life of ten years. Amortization expense associated with these other intangible assets, amounted to $650 thousand and $129 thousand for 2002 and 2001, respectively.
Other Assets
Other assets totaled $32.5 million at December 31, 2002, compared to $29.1
million at December 31, 2001. Included in other assets is BOLI, which amounted
to $22.0 million and $20.9 million at December 31, 2002 and 2001, respectively.
The Corporation purchased $18.0 million of BOLI in 1999 as a financing tool for
employee benefits. The Corporation expects to benefit from the BOLI contracts as
a result of the tax-free growth in cash surrender value and death benefits that
are expected to be generated over time. The purchase of the life insurance
policy results in an interest sensitive asset on the Corporation's consolidated
balance sheet that provides monthly tax-free income to the Corporation. The
largest risk to the BOLI program is credit risk of the insurance carriers. To
mitigate this risk, annual financial condition reviews are completed on all
carriers. BOLI is included in other assets on the Corporation's consolidated
balance sheets at its cash surrender value. Increases in BOLI's cash surrender
value are reported as other income in the Corporation's consolidated statements
of income.
Deposits
Total deposits at December 31, 2002 amounted to $1.110 billion, up 35.9% from
the prior year balance of $816.9 million. Included in this amount are $137.7
million of deposits acquired from First Financial Corp. Demand deposits rose
16.9% to $157.5 million. Savings deposits rose 48.7% to $471.4 million. Time
deposits totaled $481.6 million at December 31, 2002, compared to $365.1 million
at December 31, 2001.
Borrowings
Washington Trust uses advances from the Federal Home Loan Bank of Boston as well
as other borrowings as part of its overall funding strategy. The additional FHLB
advances and other borrowings were used to meet short-term liquidity needs, to
fund loan growth and to purchase securities. Total FHLB advances amounted to
$480.1 million at December 31, 2002, up from $431.5 million one year earlier.
(See Note 12 to the Consolidated Financial Statements for additional information
about borrowings.)
Asset Quality
Nonperforming Assets
Nonperforming assets include nonaccrual loans and other real estate owned.
Nonperforming assets were .24% of total assets at December 31, 2002, down from
.28% at December 31, 2001. Nonaccrual loans as a percentage of total loans
declined from .63% at the end of 2001 to .53% at December 31, 2002.
Approximately $2.0 million, or 47.4% of total nonaccrual loans, were less than
90 days past due at December 31, 2002.
The following table presents nonperforming assets and related ratios:
(Dollars in thousands)
December 31, 2002 2001
---------------------------------------------------------------------------
Nonaccrual loans:
Residential real estate $1,202 $1,161
Commercial and other:
Mortgages 1,356 1,472
Construction and development - -
Other 1,354 509
Consumer 265 685
---------------------------------------------------------------------------
Total nonaccrual loans 4,177 3,827
Other real estate owned, net 86 30
---------------------------------------------------------------------------
Total nonperforming assets $4,263 $3,857
---------------------------------------------------------------------------
Nonaccrual loans as a percentage of total loans .53% .63%
Nonperforming assets as a percentage of total assets .24% .28%
|
Nonaccrual Loans
Loans, with the exception of certain well-secured residential mortgage loans,
are placed on nonaccrual status and interest recognition is suspended when such
loans are 90 days or more past due with respect to principal and/or interest.
Well-secured residential mortgage loans are permitted to remain on accrual
status provided that full collection of principal and interest is assured. Loans
are also placed on nonaccrual status when, in the opinion of management, full
collection of principal and interest is doubtful. Interest previously accrued,
but uncollected, is reversed against current period income. Subsequent cash
receipts on nonaccrual loans are recognized as interest income, or recorded as a
reduction of principal if full collection of the loan is doubtful or if
impairment of the collateral is identified.
Nonaccrual loans are returned to accrual status when the obligation has performed in accordance with the contract terms for a reasonable period of time and the ultimate collectibility of the contractual principal and interest is no longer doubtful.
There were no accruing loans 90 days or more past due at December 31, 2002 and 2001.
(Dollars in thousands)
December 31, 2002 2001 --------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $2,198 $2,195 Nonaccrual loans less than 90 days past due 1,979 1,632 --------------------------------------------------------------------------- Total nonaccrual loans $4,177 $3,827 --------------------------------------------------------------------------- |
Restructured Loans
Loans are considered restructured when the Corporation has granted concessions
to a borrower due to the borrower's financial condition that it otherwise would
not have considered. These concessions include modifications of the terms of the
debt such as reduction of the stated interest rate other than normal market rate
adjustments, extension of maturity dates, or reduction of principal balance or
accrued interest. The decision to restructure a loan, versus aggressively
enforcing the collection of the loan, may benefit the Corporation by increasing
the ultimate probability of collection. Included in nonaccrual loans at December
31, 2002 and 2001, are loans whose terms have been restructured amounting to $51
thousand and $85 thousand, respectively. There were no significant commitments
to lend additional funds to borrowers whose loans had been restructured.
Other Real Estate Owned
Other real estate owned ("OREO") is comprised of properties acquired through
foreclosure and other legal means, and loans determined to be substantively
repossessed. A loan is considered to be substantively repossessed when the
Corporation has taken possession of the collateral, but has not completed legal
foreclosure proceedings. OREO is carried at the lower of cost or fair value
minus estimated costs to sell. A valuation allowance is maintained for declines
in market value and estimated selling costs.
The balance of OREO amounted to $86 thousand at December 31, 2002, up from the prior year amount of $30 thousand. Increases in OREO resulted from foreclosures and repossessions that exceeded the level of sales of foreclosed properties and repossessed assets. During 2002, proceeds from sales of foreclosed properties and repossessed assets amounted to $61 thousand. Washington Trust occasionally provides financing to facilitate the sales of some of these properties. Financing is generally provided at market rates with credit terms similar to those available to other borrowers.
Allowance for Loan Losses
The Corporation uses a methodology to systematically measure the amount of
estimated loan loss exposure inherent in the loan portfolio for purposes of
establishing a sufficient allowance for loan losses. See additional discussion
regarding allowance for loan losses under the caption "Critical Accounting
Policies".
The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans.
The allowance for loan losses amounted to $15.5 million, or 1.95% of total loans, at December 31, 2002, compared to $13.6 million, or 2.24%, at December 31, 2001.
The following table reflects the activity in the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2002 2001 ------------------------------------------------------------------------- Beginning balance $13,593 $13,135 Charge-offs, net of recoveries: Residential: Real estate (29) 15 Construction - - Commercial: Mortgages 46 (122) Construction and development - - Other (285) 152 Consumer (67) (137) ------------------------------------------------------------------------- Net charge-offs (335) (92) Allowance on acquired loans 1,829 - Provision for loan losses 400 550 ------------------------------------------------------------------------- Ending balance $15,487 $13,593 ------------------------------------------------------------------------- Allowance for loan losses to nonaccrual loans 370.78% 355.20% Allowance for loan losses to total loans 1.95% 2.24% ------------------------------------------------------------------------- |
Capital Resources
Total shareholders' equity increased $30.8 million, or 31.4%, during 2002 and
amounted to $128.7 million at December 31, 2002. This increase was principally
attributable to common stock issued in connection with the acquisition of First
Financial Corp. (See Note 2 to the Consolidated Financial Statements for
additional discussion of the acquisition.) Capital growth also resulted from
earnings retention of $9.6 million and a $2.9 million increase in accumulated
other comprehensive income due to an increase in unrealized gains on securities.
Stock option exercises increased shareholders' equity by $519 thousand in 2002.
Cash dividends declared per share amounted to $.56 and $.52 in 2002 and 2001,
respectively. Common stock shares repurchased amounted to $853 thousand at
December 31, 2002, compared to $1.0 million at December 31, 2001. The
Corporation authorized a stock repurchase of up to 250,000 shares of common
stock in September 2001. (See Note 17 to the Consolidated Financial Statements
for additional discussion of the stock repurchase plan.)
The ratio of total equity to total assets amounted to 7.37% at December 31, 2002, compared to 7.19% at December 31, 2001. Book value per share at December 31, 2002 amounted to $9.87, a 21.1% increase from the year-earlier amount of $8.15 per share.
The Corporation is subject to various regulatory capital requirements. The Corporation is categorized as well-capitalized under the regulatory framework for prompt corrective action. (See Note 17 to the Consolidated Financial Statements for additional discussion of capital requirements.)
Litigation
Reed & Lundy Matter - In June 1999 a lawsuit was filed against First Bank and
Trust Company ("First Bank") in Providence County (Rhode Island) Superior Court
by Read & Lundy, Inc. and its principal, Cliff McFarland (collectively, the
Plaintiffs). The Bank was substituted as defendant in June 2002 following the
acquisition of First Financial Corp., the parent company of First Bank. The
original complaint alleged claims for breach of contract, tortious interference
with contractual relations, and civil conspiracy arising out of First Bank's
1996 loan to a third party company. The Plaintiffs allege that the loan to the
third party enabled that company to compete unlawfully with Read & Lundy and
thereby diminished Read & Lundy's profitability. The complaint was amended in
December 2001 to add a claim for violation of the Rhode Island Trade Secrets
Act.
In December 2002, a judgment in the favor of the Bank and a dismissal of this lawsuit was rendered on all counts by way of summary judgment motion. In December 2002, the Plaintiffs appealed the judgment.
The Plaintiffs had previously filed a suit in the same court in 1996 against the third party company and its founder. The Bank is not a party to this suit. In September 2001, judgment was entered against the third party company and its founder in favor of the Plaintiffs for approximately $1.6 million in compensatory and punitive damages, including pre-judgment interest.
The Plaintiffs contend that the Bank as an alleged co-conspirator of the third party company is liable for this entire amount, none of which has been collected from the third party company. The Plaintiffs are also seeking additional compensatory damages and other costs allegedly arising after the third party trial. Including interest, it is estimated that the amount of the claim against the Bank is approximately $2.0 million.
Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious defenses in this litigation. The discovery phase of the case has been completed and the Bank filed a motion for summary judgment on all counts. As discussed above, in December 2002, a judgment in favor of the Bank and a dismissal of the suit was rendered on all counts by way of summary judgment motion. In December 2002, the Plaintiffs appealed the judgment. Because of the uncertainties surrounding the outcome of the litigation no assurance can be given that the litigation will be resolved in favor of the Bank. Management and legal counsel are unable to estimate the amount of loss, if any, that may be incurred with respect to this litigation. Consequently, no loss provision has been recorded.
A second claim ancillary to this litigation was brought by the Plaintiffs in March 2002. The Bank has also been substituted for First Bank in these proceedings. In this matter, the Plaintiffs brought a motion seeking enforcement of a prejudgment writ of attachment obtained in 1997 by the Plaintiffs against funds held by First Bank as collateral for the loan to the third party company. In 1999, First Bank had applied these funds as an offset to that loan. In August 2002, judgment against the Bank was rendered on this motion requiring the Bank to make the funds available for attachment by the Plaintiffs. This judgment is under appeal to the Rhode Island Supreme Court. As of September 30, 2002, the Corporation has recorded a liability for the judgment award of $273 thousand in connection with this matter. As a pre-acquisition contingency, the offset to the liability has been recognized as a portion of the purchase price of First Financial Corp.
Kiepler Matter - On February 20, 2001, a suit was filed against the Bank in its capacity as trustee of the Walfred M. Nyman Trust (the "Nyman Trust") in the United States District Court for the District of Rhode Island (the "District Court") by Beverly Kiepler ("Kiepler"), as beneficiary of the Nyman Trust, for damages which the Nyman Trust allegedly incurred as a result of the Bank's failure to file suit against Robert C. Nyman, Kenneth J. Nyman and Keith Johnson (the "Co-Defendants") for their wrongful dilution of the stock value of Nyman Manufacturing Company ("Nyman Mfg."), an asset of the Nyman Trust. The amount of damages to the Nyman Trust caused by the alleged dilution was approximately $1.3 million, based on the number of shares of Nyman Mfg. that were held by the Nyman Trust. Kiepler has alleged that the Bank breached its fiduciary duty by failing to join a suit brought by Kiepler in her individual capacity as a shareholder of Nyman Mfg., against the Co-Defendants.
This case is being vigorously contested by management. Management believes that the Bank did not breach its fiduciary duties and that the allegations by Kiepler are without merit. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision for this lawsuit has been recorded.
Maxson Matter - On May 11, 2001, the Bank entered into an agreement with Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders to settle a lawsuit for claims based upon theories of breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constructive fraud. Under the terms of the agreement, which did not involve an admission of wrongdoing, the Bank agreed to pay $4.8 million to the plaintiffs. The cost of this settlement was recorded in the consolidated financial statements as of and for the quarter ended March 31, 2001. Net of the related income tax effect, the cost of the settlement amounted to $3.3 million. In connection with this matter, in August 2001, and in December 2001, the Bank received settlements from insurance carriers in the amounts of $775 thousand ($553 thousand net of tax) and $400 thousand ($252 thousand net of tax), respectively. The recoveries were recorded as reductions of the litigation settlement cost included in other noninterest expenses. No further insurance recoveries are expected.
Recent Accounting Developments
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities and is
effective for financial statements issued for all fiscal years beginning after
June 15, 2002. The adoption of this pronouncement is not expected to have a
material impact on the Corporation's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business." The changes in this Statement improve
financial reporting by requiring that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and by broadening the presentation of discontinued operations to
include more disposal transactions. The provisions of SFAS No. 144 were
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The adoption
of this pronouncement did not have a material impact on the Corporation's
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, and SFAS No. 44, Accounting for Intangible Assets of Motor Carriers." In addition, this Statement amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of this pronouncement did not have a material impact on the Corporation's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issues No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a liability for cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this pronouncement is not expected to have a material impact on the Corporation's financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9." This Statement amended SFAS No. 72 to exclude from its scope most acquisitions of financial institutions and to require that such transactions be accounted for in accordance with SFAS No. 141 and, under certain circumstances, previously recognized SFAS No. 72 intangible assets be reclassified to goodwill. In addition, this Statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include in its scope long-term customer-relationship intangible assets of financial institutions. The Corporation adopted SFAS No. 147 effective October 1, 2002. No material reclassifications or adjustments to goodwill and other intangible assets were necessary.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." This Statement amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock-based compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Additionally, this Statement amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The amendments to SFAS No. 123 are effective for financial statements for fiscal years ending after December 15, 2002. The amendment to Opinion No. 28 shall be effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002.
Comparison of 2001 with 2000
Washington Trust recorded net income of $13.1 million, or $1.07 per diluted
share, for 2001. Net income for 2000 amounted to $13.2 million, or $1.09 per
diluted share. The Corporation's rates of return on average assets and average
equity for 2001 were 1.01% and 13.86%, respectively. Comparable amounts for the
year 2000 were 1.14% and 16.14%, respectively.
In 2001, the Corporation recorded a litigation settlement expense, net of insurance recovery, of $2.5 million, after income taxes. In the second quarter of 2000, the Corporation completed the acquisition of Phoenix and recorded acquisition-related expenses of $1.1 million, after income taxes. The acquisition was accounted for under the pooling of interests method, and accordingly, financial data for all prior periods were restated to reflect the acquisition at the beginning of each period presented. Results excluding the litigation settlement expense, net of taxes, and acquisition-related expenses, net of taxes, are referred to herein as "operating." Operating basis earnings also include a pro forma tax provision for the pre-acquisition earnings of Phoenix, which operated as a sub-S corporation prior to the acquisition.
The following table presents a reconciliation of financial results presented in accordance with accounting principles generally accepted in the United States of America and operating basis results:
(Dollars in thousands) December 31, 2001 2000 ------------------------------------------------------------------------------------------------------------ Net income $13,108 $13,209 Nonoperating items, net of tax Acquisitions costs - 1,101 Litigation settlement, net of insurance recovery 2,538 - Pro-forma income taxes on pre-acquisition earnings of acquired company - (413) ------------------------------------------------------------------------------------------------------------ Total nonoperating items 2,538 688 ------------------------------------------------------------------------------------------------------------ Net income - operating basis $15,646 $13,897 ------------------------------------------------------------------------------------------------------------ |
Operating net income for 2001 amounted to $15.6 million, an increase of 12.6% from the $13.9 million reported for 2000. Diluted earnings per share, on an operating basis, amounted to $1.28 for 2001, up from $1.15 per share in 2000. The Corporation's rates of return on average assets and average equity, on an operating basis for 2001, were 1.20% and 16.54%, respectively. Comparable amounts for 2000 were 1.20% and 16.98%.
For the year ended December 31, 2001, net interest income (the difference between interest earned on loans and securities and interest paid on deposits and other borrowings) amounted to $39.4 million, up 4.0% from $37.9 million in 2000. Fully taxable equivalent net interest income increased $1.5 million, or 3.7%, from 2000 to 2001, primarily due to the growth in interest-earning assets. The net interest margins for 2001 and 2000 were 3.30% and 3.55%, respectively. The decrease in the net interest margin was primarily due to the decline in yields on loans and securities offset somewhat by lower funding costs of interest-bearing deposits, FHLB advances and other borrowed funds.
Other noninterest income (noninterest income excluding net realized gains on securities) totaled $21.1 million for 2001, an increase of 11.5% from the $19.0 million reported for 2000. The increase was primarily due to growth in net gains on loan sales. Trust and investment management income, the largest component of noninterest income, totaled $10.4 million for 2001, down slightly from the $10.5 million reported in 2000. The decrease in Trust and investment management income is mainly attributable to financial market declines. Net gains on loan sales totaled $2.1 million in 2001, up from $585 thousand in 2000, due to increased loan sales resulting from strong mortgage refinancing activity in a low interest rate environment.
Operating noninterest expenses (excluding litigation settlement costs, net of insurance recovery and acquisition-related expenses) amounted to $38.0 million for 2001, up $4.1% from 2000. This increase was primarily attributable to higher salaries and benefit expense. Legal, audit and professional fees totaled $1.3 million in 2001, down $547 thousand from the corresponding 2000 amount. The decrease was mainly due to the reduction in legal defense costs associated with the settlement of a litigation matter in May 2001. Total equipment costs for 2001 amounted to $3.4 million, down $217 thousand from the corresponding 2000 amount. In 2001 and 2000, the Corporation recorded impairment adjustments of $107 thousand and $293 thousand, respectively, resulting from remeasurements of the useful lives of technology equipment.
Total consolidated assets amounted to $1.362 billion at December 31, 2002, up 11.8% from the December 31, 2000 balance of $1.218 billion. Average assets rose 11.9% in 2001 and amounted to $1.299 billion. Asset growth was primarily attributable to purchases of securities and growth in the loan portfolio. Increases in FHLB advances as well as an 11.0% increase in total deposits funded the growth in assets. Total deposits amounted to $816.9 million and $735.7 million at December 31, 2001 and 2000, respectively. FHLB advances totaled $431.5 million at December 31, 2001, up 14.3% from the prior year balance of $377.4 million.
Nonperforming assets amounted to $3.9 million or .28% of total assets at December 31, 2001, compared to $3.4 million or .28% of total assets at December 31, 2000. The Corporation's loan loss provision was $550 thousand and $1.2 million in 2001 and 2000, respectively. Net loan charge-offs amounted to $92 thousand in 2001, down from $364 thousand in 2000. The allowance for loan losses represented 2.24% of total loans at December 31, 2001 compared to 2.20% in 2000.
Total shareholders' equity amounted to $97.9 million at December 31, 2001, compared to $89.2 million at December 31, 2000. Capital growth resulted primarily from $6.8 million of earnings retention and a $2.4 million increase in accumulated other comprehensive income due to an increase in unrealized gains on securities. Book value per share as of December 31, 2001 amounted to $8.15, up 9.7% from the $7.43 per share amount in 2000. The ratio of capital to assets was 7.2% and 7.3% at December 31, 2001 and 2000, respectively. Dividends declared per share amounted to $.52 in 2001, up 8.3% from the prior year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
Interest rate risk is one of the major market risks faced by the Corporation.
The ALCO is responsible for establishing policy guidelines on liquidity and
acceptable exposure to interest rate risk. The objective of the ALCO is to
manage assets and funding sources to produce results that are consistent with
Washington Trust's liquidity, capital adequacy, growth, risk and profitability
goals.
The ALCO manages the Corporation's interest rate risk using income simulation to measure interest rate risk inherent in the Corporation's on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 60-month period. The simulations assume that the size and general composition of the Corporation's balance sheet remain constant over the 60-month simulation horizon and take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. Non-contractual savings deposits are classified as short-term (three months or less) for both maturity and repricing purposes. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency.
The ALCO reviews simulation results to determine whether the negative exposure of net interest income to changes in interest rates remains within established tolerance levels over a 24-month horizon, and to develop appropriate strategies to manage this exposure. In addition, the ALCO reviews 60-month horizon results to assess longer-term risk inherent in the balance sheet. As of December 31, 2002 and December 31, 2001, net interest income simulation indicated exposure to changing interest rates over a 24-month horizon to a degree that remained within tolerance levels established by the Corporation. The Corporation defines maximum unfavorable net interest income exposure to be a change of no more than 5% in net interest income over the first 12 months and no more than 10% over the second 12 months of the simulation horizon.
The following table summarizes the effect that interest rate shifts would have on net interest income for a 24-month period using the Corporation's on and off-balance sheet financial instruments as of December 31, 2002. Interest rates are assumed to shift by a parallel 200 basis points upward, 100 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their historical insensitivity to rate changes. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. The asymmetric rate shift scenarios presented below reflect the fact that given the low level of interest rates at December 31, 2002, a parallel rate decline of 200 basis points is extremely unlikely to occur, as this would effectively reduce many interest rates to zero. It should be noted that the rate scenarios used do not necessarily reflect the ALCO's view of the "most likely" change in interest rates over the next 24 months. Furthermore, since a static balance sheet is assumed, the results do not reflect the anticipated future net interest income of the Corporation for the same period. In addition, since income simulations assume that the Corporation's balance sheet will remain static over the 60-month simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts. The following table presents these 24-month net interest income simulation results:
(Dollars in thousands) Rate Scenarios
-----------------------------------------------------------
Flat Down 100 Up 100 Up 200
Rates Basis Points Basis Points Basis Points
------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Fixed rate mortgage-backed securities $47,596 $43,814 $49,609 $51,758
Adjustable rate mortgage-backed securities 10,736 8,761 12,833 14,789
Callable securities 5,138 4,725 5,472 6,089
Other securities 11,347 10,795 12,926 14,516
Fixed rate mortgages 19,345 18,715 19,866 20,340
Adjustable rate mortgages 13,357 12,664 13,932 14,615
Other fixed rate loans 46,005 45,311 46,778 46,668
Other adjustable rate loans 21,677 19,456 24,027 26,369
------------------------------------------------------------------------------------------------------------------
Total interest income 175,200 164,241 185,443 195,144
------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Core savings deposits 9,150 7,747 11,137 12,706
Time deposits 27,568 25,355 31,441 34,192
FHLB advances 36,150 33,628 38,569 41,751
Other borrowings 347 171 395 537
------------------------------------------------------------------------------------------------------------------
Total interest expense 73,215 66,901 81,542 89,185
------------------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 2002 $101,986 $97,340 $103,901 $105,958
------------------------------------------------------------------------------------------------------------------
Net interest income results as of December 31, 2001 $82,986 $79,903 $87,126 $86,329
------------------------------------------------------------------------------------------------------------------
|
The ALCO estimates that the negative exposure of net interest income to falling rates results from the difficulty of reducing rates paid on core savings deposits significantly below current levels. If rates were to fall and remain low for a sustained period, core savings deposit rates would likely not fall as fast as other market rates, while asset yields would decline as current asset holdings mature or reprice. The pace of asset cash flows would also be likely to increase in a falling rate environment due to more rapid mortgage-related prepayments and redemption of callable securities. While the ALCO reviews simulation assumptions to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk since the repricing, maturity and prepayment characteristics of financial instruments may change to a different degree than estimated. Specifically, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income. Changes in prepayment speeds can also affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. The sensitivity of core savings deposits to fluctuations in interest rates could also differ from the ALCO's simulation assumptions, and could result in changes in both liability mix and interest expense that differ from those used to estimate interest rate risk exposure.
The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure which may not be captured by income simulation, but which might result in changes to the Corporation's capital position. Results are calculated using industry-standard analytical techniques and securities data. The following table summarizes the potential change in market value of the Corporation's available for sale debt securities as of December 31, 2002 and 2001 resulting from immediate 200 basis point parallel rate shifts:
(Dollars in thousands)
Falling Rising
Security Type Rates Rates
--------------------------------------------------------------------------------------------------------
U.S. Treasury and government-sponsored agency securities (noncallable) $776 $(721)
U.S. government-sponsored agency securities (callable) 906 (962)
Corporate securities 635 (463)
Mortgage-backed securities 9,734 (2,408)
--------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 2002 $12,049 $(4,554)
--------------------------------------------------------------------------------------------------------
Total change in market value as of December 31, 2001 $4,434 $(16,803)
--------------------------------------------------------------------------------------------------------
|
The Corporation also monitors the potential change in market value of its available for sale debt securities using "value at risk" analysis. The anticipated maximum market value reduction for the bank's available for sale securities portfolio at December 31, 2002, including both debt and equity securities, was 4.4%, assuming a one-year time horizon and a 5% probability of occurrence for "value at risk" analysis.
On occasion, the Corporation has supplemented its interest rate risk management strategies with off-balance sheet transactions. Such transactions are intended to hedge specifically identified risks inherent in the Corporation's balance sheet, and not to produce speculative profits. The Corporation has written policy guidelines that designate limits on the notional value of off-balance sheet transactions and require periodic evaluation of risks associated with these transactions, including counterparty credit risk.
On May 7, 2002, the Corporation terminated a five-year interest rate floor contract with a notional amount of $20.0 million that was to mature in February 2003. The floor contract was intended to function as a hedge against reductions in interest income realized from prime-based loans and entitled the Corporation to receive payment from a counterparty if the three-month LIBOR rate fell below 5.50%. In connection with the early termination, the Corporation agreed to a final payment from the counterparty of $606 thousand. The Corporation recognized the fair value of this derivative as an asset on the balance sheet and changes in fair value were recorded in current earnings. (See Note 9 to the Consolidated Financial Statements for additional information regarding the interest rate floor contract.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are contained herein.
Description
Independent Auditors' Report
Management's Responsibility for Financial Statements
Consolidated Balance Sheets
December 31, 2002 and 2001
Consolidated Statements of Income
For the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows For the Years Ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Independent Auditors' Report
[GRAPHIC OF AUDITORS' LOGO OMITTED]
The Board of Directors and Shareholders
Washington Trust Bancorp, Inc.:
We have audited the consolidated financial statements of Washington Trust Bancorp, Inc. and subsidiary (the "Corporation") as listed in the accompanying index. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ending December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Providence, Rhode Island
January 14, 2003
Management's Responsibility for Financial Statements
Scope of Responsibility - Management prepares the accompanying financial statements and related information and is responsible for their integrity and objectivity. The statements were prepared in conformity with United States accounting principles generally accepted in the United States of America. These financial statements include amounts that are based on management's estimates and judgments. We believe that these statements present fairly the corporation's financial position and results of operations and that the other information contained in the annual report is consistent with the financial statements.
Internal Controls - We maintain and rely on systems of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized and recorded. We continually monitor these internal accounting controls, modifying and improving them as business conditions and operations change. Our internal audit department also independently reviews and evaluates these controls. We recognize the inherent limitations in all internal control systems and believe that our systems provide an appropriate balance between the costs and benefits desired. We believe our systems of internal accounting controls provide reasonable assurance that errors or irregularities that would be material to the financial statements are prevented or detected in the normal course of business.
Independent Auditors - Our independent auditors, KPMG LLP, have audited the consolidated financial statements. Their audit was conducted in accordance with auditing standards generally accepted in the United States of America, which includes the consideration of our internal controls to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management.
Audit Committee - The audit committee of the board of directors, composed solely of outside directors, assists the board of directors in overseeing management's discharge of its financial reporting responsibilities. The committee meets with management, our director of internal audit and representatives of KPMG LLP to discuss significant changes to financial reporting principles and policies and internal controls and procedures proposed or contemplated by management, our internal auditors or KPMG LLP. Additionally, the committee assists the board of directors in the selection, evaluation and, if applicable, replacement of our independent auditors; and in the evaluation of the independence of the independent auditors. Both internal audit and KPMG LLP have access to the audit committee without management's presence.
Code of Ethics - We recognize our responsibility for maintaining a strong ethical climate. This responsibility is addressed in the company's written code of ethics.
John C. Warren David V. Devault ----------------------- ------------------------------------- John C. Warren David V. Devault Chairman and Executive Vice President, Chief Executive Officer Treasurer and Chief Financial Officer |
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED BALANCE SHEETS December 31, 2002 2001 ------------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $39,298 $30,399 Federal funds sold and other short-term investments 11,750 20,500 Mortgage loans held for sale 4,566 7,710 Securities: Available for sale, at fair value 553,556 453,956 Held to maturity, at cost; fair value $250,446 in 2002 and $177,595 in 2001 242,277 175,105 ------------------------------------------------------------------------------------------------------------------- Total securities 795,833 629,061 Federal Home Loan Bank stock, at cost 24,582 23,491 Loans 795,126 605,645 Less allowance for loan losses 15,487 13,593 ------------------------------------------------------------------------------------------------------------------- Net loans 779,639 592,052 Premises and equipment, net 24,415 22,102 Accrued interest receivable 7,773 7,124 Goodwill and other intangibles 25,260 669 Other assets 32,545 29,121 ------------------------------------------------------------------------------------------------------------------- Total assets $1,745,661 $1,362,229 ------------------------------------------------------------------------------------------------------------------- Liabilities: Deposits: Demand $157,539 $134,783 Savings 471,354 316,953 Time 481,600 365,140 ------------------------------------------------------------------------------------------------------------------- Total deposits 1,110,493 816,876 Dividends payable 1,825 1,569 Federal Home Loan Bank advances 480,080 431,490 Other borrowings 9,183 2,087 Accrued expenses and other liabilities 15,359 12,270 ------------------------------------------------------------------------------------------------------------------- Total liabilities 1,616,940 1,264,292 ------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares in 2002 and 2001; issued 13,086,795 shares in 2002 and 12,065,283 shares in 2001 818 754 Paid-in capital 28,767 10,696 Retained earnings 90,717 81,114 Unamortized employee restricted stock (24) - Accumulated other comprehensive income 9,294 6,416 Treasury stock, at cost; 44,361 shares in 2002 and 54,102 shares in 2001 (851) (1,043) ------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 128,721 97,937 ------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,745,661 $1,362,229 ------------------------------------------------------------------------------------------------------------------- |
The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands, CONSOLIDATED STATEMENTS OF INCOME except per share amounts) Years ended December 31, 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $49,576 $50,618 $49,423 Interest on securities 35,571 33,988 32,068 Dividends on corporate stock and Federal Home Loan Bank stock 1,973 2,327 2,771 Interest on federal funds sold and other short-term investments 219 594 837 ------------------------------------------------------------------------------------------------------------------- Total interest income 87,339 87,527 85,099 ------------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 5,598 5,127 4,383 Time deposits 16,776 18,866 19,841 Federal Home Loan Bank advances 20,596 24,068 22,886 Other 87 99 121 ------------------------------------------------------------------------------------------------------------------- Total interest expense 43,057 48,160 47,231 ------------------------------------------------------------------------------------------------------------------- Net interest income 44,282 39,367 37,868 Provision for loan losses 400 550 1,150 ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 43,882 38,817 36,718 ------------------------------------------------------------------------------------------------------------------- Noninterest income: Trust and investment management 10,171 10,408 10,544 Service charges on deposit accounts 3,787 3,514 3,297 Merchant processing fees 3,002 2,642 2,144 Net gains on loan sales 2,884 2,058 585 Income from bank-owned life insurance 1,155 1,134 1,047 Net realized gains on securities 678 348 760 Other income 1,581 1,381 1,335 ------------------------------------------------------------------------------------------------------------------- Total noninterest income 23,258 21,485 19,712 ------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 23,793 20,845 19,750 Net occupancy 2,694 2,632 2,601 Equipment 3,333 3,375 3,592 Merchant processing costs 2,391 2,124 1,707 Legal, audit and professional fees 1,893 1,336 1,883 Advertising and promotion 1,180 1,237 1,196 Outsourced services 1,077 975 776 Amortization of intangibles 651 129 129 Acquisition related expenses 605 - 1,035 Litigation settlement cost, net of insurance recovery - 3,625 - Other 5,373 5,375 4,879 ------------------------------------------------------------------------------------------------------------------- Total noninterest expense 42,990 41,653 37,548 ------------------------------------------------------------------------------------------------------------------- Income before income taxes 24,150 18,649 18,882 Income tax expense 7,393 5,541 5,673 ------------------------------------------------------------------------------------------------------------------- Net income $16,757 $13,108 $13,209 ------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding - basic 12,737.3 12,039.2 11,976.9 Weighted average shares outstanding - diluted 12,932.4 12,202.5 12,102.6 Per share information: Basic earnings per share $1.32 $1.09 $1.10 Diluted earnings per share $1.30 $1.07 $1.09 Cash dividends declared per share $.56 $.52 $.48 |
The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unamortized Accumulated
Employee Other
Common Paid-in Retained Restricted Comprehensive Treasury
Stock Capital Earnings Stock Income (Loss) Stock Total
-------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $745 $9,927 $67,686 $ - $(191) $ - $78,167
Net income 13,209 13,209
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of $1,919 income tax expense 4,712 4,712
Reclassification adjustments (494) (494)
-------------
Comprehensive income 17,427
Cash dividends declared (6,630) (6,630)
Shares issued 5 217 222
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $750 $10,144 $74,265 $ - $4,027 $ - $89,186
-------------------------------------------------------------------------------------------------------------------------
Net income 13,108 13,108
Cumulative effect of change in
accounting principle, net of tax (391) (391)
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of $1,499 income tax expense 3,000 3,000
Reclassification adjustments (220) (220)
-------------
Comprehensive income 15,497
Cash dividends declared (6,259) (6,259)
Shares issued 4 552 17 573
Shares repurchased (1,060) (1,060)
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $754 $10,696 $81,114 $ - $6,416 $(1,043) $97,937
-------------------------------------------------------------------------------------------------------------------------
Net income 16,757 16,757
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of $1,629 income tax expense 3,310 3,310
Reclassification adjustments (432) (432)
-------------
Comprehensive income 19,635
Cash dividends declared (7,154) (7,154)
Issuance of employee restricted stock 1 (25) 24 -
Amortization of employee restricted stock 1 1
Shares issued (185) 704 519
Shares issued for acquisition 64 18,255 18,319
Shares repurchased (536) (536)
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $818 $28,767 $90,717 $(24) $9,294 $(851) $128,721
-------------------------------------------------------------------------------------------------------------------------
|
Disclosure of Reclassification Amount: Years ended December 31, 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------------- Reclassification adjustment for net gains included in net income $(678) $(348) $(760) Income tax effect on net gains 237 122 266 Reclassification adjustment for amortization of unrealized loss on interest rate floor contract included in net income 13 10 - Income tax effect on interest rate floor contract amortization (4) (4) - ------------------------------------------------------------------------------------------------------------------------- Net reclassification adjustments $(432) $(220) $(494) ------------------------------------------------------------------------------------------------------------------------- |
The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $16,757 $13,108 $13,209
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 400 550 1,150
Depreciation of premises and equipment 2,988 3,036 3,323
Amortization of premium in excess of (less than)
accretion of discount on debt securities 1,983 489 (149)
Deferred income tax benefit (1,262) (644) (681)
Increase in bank-owned life insurance cash surrender value (1,155) (1,134) (1,047)
Depreciation (appreciation) of derivative instruments 384 (712) -
Net amortization of intangibles 510 129 129
Net realized gains on securities (678) (348) (760)
Net gains on loan sales (2,647) (1,686) (322)
Proceeds from sales of loans 126,382 98,198 23,769
Loans originated for sale (120,587) (102,583) (23,437)
(Increase) decrease in accrued interest receivable (175) 676 (1,790)
(Increase) decrease in other assets (1,981) (930) 186
(Decrease) Increase in accrued expenses and other liabilities (733) 807 2,857
Other, net 248 517 1,075
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,434 9,473 17,512
---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Securities available for sale:
Purchases (307,083) (160,774) (128,227)
Proceeds from sales 29,964 238 40,288
Maturities and principal repayments 187,549 140,145 38,507
Securities held to maturity:
Purchases (152,157) (131,570) (22,745)
Maturities and principal repayments 84,447 37,841 14,235
Purchases of Federal Home Loan Bank stock - (3,933) (1,931)
Principal collected on loans (under) over loan originations (12,507) 6,394 (48,756)
Purchases of loans (62,433) (15,151) -
Proceeds from sales of other real estate owned 61 151 95
Purchases of premises and equipment (3,400) (3,416) (1,813)
Proceeds from sale of premises and equipment 638 - -
Cash acquired, net of payment made for acquisition 34,506 - -
---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (200,415) (130,075) (110,347)
----------------------------------------------------------------------- -------------- ---------------- -------------
Cash flows from financing activities:
Net increase in deposits 156,420 81,192 74,931
Net increase (decrease) in other borrowings 4,242 (1,140) (982)
Proceeds from Federal Home Loan Bank advances 717,200 1,217,000 404,500
Repayment of Federal Home Loan Bank advances (690,695) (1,162,872) (379,686)
Purchase of treasury stock (536) (670) -
Net effect of common stock transactions 397 266 (201)
Cash dividends paid (6,898) (6,135) (6,387)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 180,130 127,641 92,175
---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 149 7,039 (660)
Cash and cash equivalents at beginning of year 50,899 43,860 44,520
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $51,048 $50,899 $43,860
---------------------------------------------------------------------------------------------------------------------
Noncash Investing and Financing Activities:
Net transfers from loans to other real estate owned $84 $187 $109
Loans charged off 497 433 683
Loans made to facilitate the sale of other real estate owned - - 60
Increase in unrealized gain on securities available for sale,
net of tax 2,878 2,389 4,218
Increase in paid-in capital resulting from tax benefits on
stock option exercises 123 307 423
|
In conjunction with the April 16, 2002 acquisition of First Financial Corp., assets were acquired and liabilities were assumed as follows:
Fair value of assets acquired $204,762 - - Less liabilities assumed 166,708 - - Supplemental Disclosures: Interest payments $42,955 $48,859 $45,970 Income tax payments 8,607 5,632 5,838 |
The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
General
The Bancorp is a publicly owned, registered bank holding company, organized
under the laws of the State of Rhode Island. The Bancorp provides a complete
product line of financial services through the Bank. The Bank was originally
chartered in 1800 and provides a variety of financial services including
commercial, residential and consumer lending, retail and commercial deposit
products and trust and investment management services through its branch offices
in Rhode Island and Connecticut. The deposits of the Bank are insured by the
FDIC, subject to regulatory limits.
The activities of the Bancorp and the Bank are subject to the regulatory supervision of the Federal Reserve Board and the FDIC, respectively. Both companies are also subject to various Rhode Island business and banking regulations. The Bank is subject to various Connecticut business and banking regulations.
(1) Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of the Bancorp and the Bank. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification.
The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America and to general practices of the banking industry. The Corporation has one reportable operating segment. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change are the determination of the allowance for loan losses and the review of goodwill for impairment.
Securities
Securities Available for Sale - The Corporation designates securities that it
intends to use as part of its asset/liability strategy or that may be sold as a
result of changes in market conditions, changes in prepayment risk, rate
fluctuations, liquidity or capital requirements as available for sale. The
determination to classify such securities as available for sale is made at the
time of purchase.
Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Any decline in fair value below the amortized cost basis of an individual security deemed to be other than temporary is recognized as a realized loss in the accounting period in which the determination is made. The fair value of the security at the time of the write-down becomes the new cost basis of the security.
Realized gains or losses from sales of equity securities are determined using the average cost method, while other realized gains and losses are determined using the specific identification method.
Securities Held to Maturity - The determination to classify debt securities in the held-to-maturity category is made at the time of purchase and is based on management's intent and ability to hold the securities until maturity. Debt securities in the held-to-maturity portfolio are stated at cost, adjusted for amortization of premium and accretion of discount.
Federal Home Loan Bank Stock
The Bank is a member of the FHLB of Boston. As a requirement of membership, the
Bank must own a minimum amount of FHLB stock, calculated periodically based
primarily on its level of borrowings from the FHLB. The Bank may redeem FHLB
stock in excess of the minimum required. In addition, the FHLB may require
members to redeem stock in excess of the requirement. FHLB stock is redeemable
at par, which equals cost. Since no market exists for these shares, they are
valued at par.
Mortgage Banking Activities
Mortgage Loans Held for Sale - Residential mortgage loans originated for sale
are classified as held for sale. These loans are specifically identified and are
carried at the lower of aggregate cost, net of unamortized deferred loan
origination fees and costs, or market. Forward commitments to sell residential
mortgage loans are contracts that the Corporation enters into for the purpose of
reducing the market risk associated with originating loans for sale should
interest rates change. Forward commitments are recorded at fair market value and
are reported in other assets. Market value is estimated based on outstanding
investor commitments or, in the absence of such information, current investor
yield requirements.
Loan Servicing Rights - Rights to service loans for others are recognized as an asset, including rights acquired through both purchases and originations. The total cost of originated loans that are sold with servicing rights retained is allocated between the loan servicing rights and the loans without the servicing rights based on their relative fair values. Capitalized loan servicing rights are included in other assets and are amortized as an offset to other income over the period of estimated net servicing income. They are periodically evaluated for impairment based on their fair value. Impairment is measured on an aggregated basis according to interest rate band and period of origination. The fair value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost. Any impairment is recognized as a charge to earnings through a valuation allowance.
Portfolio Loans - Loans held in portfolio are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs. Interest income is accrued on a level yield basis based on principal amounts outstanding. Deferred loan origination fees and costs are amortized as an adjustment to yield over the life of the related loans.
Nonaccrual Loans - Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent cash receipts on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible.
Impaired Loans - A loan is impaired when it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Corporation considers all nonaccrual commercial loans to be impaired. Impairment is measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impairment is measured based on the fair value of the collateral if it is determined that foreclosure is probable.
Restructured Loans - Restructured loans include those for which concessions such as reduction of interest rates other than normal market rate adjustments, or deferral of principal or interest payments have been granted due to a borrower's financial condition. Subsequent cash receipts on restructured loans are applied to the outstanding principal balance of the loan, or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan.
Allowance for Loan Losses
The Corporation uses a methodology to systematically measure the amount of
estimated loan loss exposure inherent in the loan portfolio for purposes of
establishing a sufficient allowance for loan losses. The methodology includes
three elements: identification of specific loan losses, general loss allocations
for certain loan types based on credit grade and loss experience factors, and
general loss allocations for other environmental factors. The methodology
includes an analysis of individual loans deemed to be impaired in accordance
with accounting principles generally accepted in the United States of America
(SFAS 114). Other individual commercial and commercial mortgage loans are
evaluated using an internal rating system and the application of loss allocation
factors. The loan rating system and the related loss allocation factors take
into consideration parameters including the borrower's financial condition, the
borrower's performance with respect to loan terms and the adequacy of
collateral. Portfolios of more homogeneous populations of loans including
residential mortgages and consumer loans are analyzed as groups taking into
account delinquency ratios and other indicators, the Corporation's historical
loss experience and comparison to industry standards of loss allocation factors
for each type of credit product. Finally, an additional allowance is maintained
based on a judgmental process whereby management considers qualitative and
quantitative assessments of other factors including regional credit
concentration, industry concentration, results of regulatory examinations,
historical loss ranges, portfolio composition, economic conditions such as
interest rates and energy costs and other changes in the portfolio. The
allowance for loan losses is management's best estimate of the probable loan
losses incurred as of the balance sheet date. The allowance is increased by
provisions charged to earnings and by recoveries of amounts previously charged
off, and is reduced by charge-offs on loans.
While management believes that the allowance for loan losses is adequate, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies periodically review the Corporation's allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation for financial reporting purposes is calculated on the straight-line
method over the estimated useful lives of assets. Expenditures for major
additions and improvements are capitalized while the costs of current
maintenance and repairs are charged to operating expenses. The estimated useful
lives of premises and improvements range from five to fifty years. For
furniture, fixtures and equipment, the estimated useful lives range from two to
twenty years.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired for transactions accounted for using purchase accounting.
Goodwill and intangible assets that are not amortized are tested for impairment,
based on their fair values, at least annually. An intangible asset that is
subject to amortization is also reviewed for impairment based on its fair value.
Any impairment is recognized as a charge to earnings and the adjusted carrying
amount of the intangible asset becomes its new accounting basis. The remaining
useful life of an intangible asset that is being amortized is also evaluated
each reporting period to determine whether events and circumstances warrant a
revision to the remaining period of amortization.
Effective January 1, 2002, the Corporation adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." As of the date of adoption, the Corporation had unamortized identifiable intangible assets totaling $669 thousand. No material reclassifications or adjustments to the useful lives of finite-lived intangible assets were made as a result of adopting the new standards.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9." This Statement amended SFAS No. 72 to exclude from its scope most acquisitions of financial institutions and to require that such transactions be accounted for in accordance with SFAS No. 141 and, under certain circumstances, previously recognized SFAS No. 72 intangible assets be reclassified to goodwill. In addition, this Statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include in its scope long-term customer-relationship intangible assets of financial institutions. The Corporation adopted SFAS No. 147 effective October 1, 2002. No material reclassifications or adjustments to goodwill and other intangible assets were necessary.
Other Real Estate Owned (OREO)
Other real estate owned consists of property acquired through foreclosure and
loans determined to be substantively repossessed. Real estate loans that are
substantively repossessed include only those loans for which the Corporation has
taken possession of the collateral, but has not completed legal foreclosure
proceedings.
OREO is stated at the lower of cost or fair value minus estimated costs to sell at the date of acquisition or classification to OREO status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure is charged to the allowance for loan losses. A valuation allowance is maintained for declines in market value and for estimated selling expenses. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in foreclosed property costs.
Transfers and Servicing of Assets and Extinguishments of Liabilities The Corporation accounts and reports for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. This approach distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. After a transfer of financial assets, the Corporation recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. This financial components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the Corporation accounts for a transfer as a secured borrowing with a pledge of collateral.
Pension Costs
The Corporation accounts for pension benefits using the net periodic benefit
cost method, which recognizes the compensation cost of an employee's pension
benefit over that employee's approximate service period.
Stock-Based Compensation
The Corporation measures compensation cost for stock-based compensation plans
using the intrinsic value based method prescribed by Accounting Principles Board
("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net
income and earnings per share computed using the fair value based method of
accounting for these plans as required by SFAS No. 123 and SFAS No. 148.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." This Statement amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock-based compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Additionally, this Statement amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The amendments to SFAS No. 123 are effective for financial statements for fiscal years ending after December 15, 2002. The amendment to Opinion No. 28 shall be effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002.
In determining the pro forma disclosures required by SFAS No. 123 and SFAS No. 148, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents pro forma net income and earnings per share assuming the stock option plan was accounted for using the fair value method prescribed by SFAS No. 123 and SFAS No. 148, the weighted average assumptions used and the grant date fair value of options granted in 2002, 2001 and 2000:
(Dollars in thousands, except per share amounts)
Years ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------
Net income As reported $16,757 $13,108 $13,209
Less:
Total stock-based compensation
determined under fair value
method for all awards, net of tax (1,143) (923) (808)
------------------------------------------------------------------------------------------------------------
Pro forma $15,614 $12,185 $12,401
Basic earnings per share As reported $1.32 $1.09 $1.10
Pro forma $1.23 $1.01 $1.04
Diluted earnings per share As reported $1.30 $1.07 $1.09
Pro forma $1.21 $1.00 $1.02
Weighted average fair value $6.92 $5.27 $5.01
Expected life 6.4 years 9.0 years 9.3 years
Risk-free interest rate 4.98% 5.32% 6.39%
Expected volatility 36.2% 33.0% 32.6%
Expected dividend yield 2.7% 3.8% 3.9%
|
The pro forma effect on net income and earnings per share for 2002, 2001 and 2000 is not representative of the pro forma effect on net income and earnings per share for future years because it does not reflect compensation cost for options granted prior to January 1, 1995.
Income Taxes
Income tax expense is determined based on the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Earnings Per Share (EPS)
Diluted EPS is computed by dividing net income by the average number of common
shares and common stock equivalents outstanding. Common stock equivalents arise
from the assumed exercise of outstanding stock options, if dilutive. The
computation of basic EPS excludes common stock equivalents from the denominator.
Comprehensive Income
Comprehensive income is defined as all changes in equity, except for those
resulting from investments by and distribution to shareholders. Net income is a
component of comprehensive income, with all other components referred to in the
aggregate as other comprehensive income.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold, and other short-term
investments. Generally, federal funds are sold on an overnight basis.
Guarantees
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
considers standby letters of credit a guarantee of the Corporation. Standby
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Under the standby letters of credit, the Corporation is
required to make payments to the beneficiary of the letters of credit upon
request by the beneficiary contingent upon the customer's failure to perform
under the terms of the underlying contract with the beneficiary.
Derivative Instruments and Hedging Activities Effective January 1, 2001, the Corporation adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 sets accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recognized on the balance sheet at fair value. The Corporation recognized an after-tax loss of $391 thousand from the cumulative effect of adoption of this accounting standard.
The Corporation uses interest rate contracts (swaps and floors) from time to time as part of its interest rate risk management strategy. Interest rate swap and floor agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Corporation does not enter into derivative instruments for any purpose other than cash flow hedging purposes. That is, the Corporation does not enter into derivative instruments for trading or speculative purposes.
By using derivative financial instruments to hedge exposures to changes in interest rates, the Corporation exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Corporation, which creates credit risk for the Corporation. When the fair value of a derivative contract is negative, the Corporation owes the counterparty and, therefore, it does not possess credit risk. The Corporation minimizes the credit risk in derivative instruments by entering into transactions with highly rated counterparties that management believes to be creditworthy.
Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
The net amounts to be paid or received on outstanding interest rate contracts are recognized on the accrual basis as an adjustment to the related interest income or expense over the life of the agreements. Changes in fair value of interest rate contracts are recorded in current earnings. Gains or losses resulting from the termination of interest rate swap and floor agreements on qualifying hedges of existing assets or liabilities are deferred and amortized over the remaining lives of the related assets/liabilities as an adjustment to the yield. Unamortized deferred gains/losses on terminated interest rate swap and floor agreements are included in the underlying assets/liabilities hedged.
Prior to the adoption of SFAS No. 133, the Corporation recognized the amount of unamortized premiums paid for interest rate floor agreements as the carrying value of these contracts. Premiums paid for interest rate floor agreements were amortized as an adjustment to interest income over the term of the agreements.
(2) Acquisitions and Mergers On April 16, 2002, the Corporation completed the acquisition of First Financial Corp., the parent company of First Bank and Trust Company, a Rhode Island-chartered community bank. The results of First Financial Corp.'s operations have been included in the Corporation's Consolidated Statements of Income since that date. First Financial Corp. was headquartered in Providence, Rhode Island and its subsidiary, First Bank and Trust Company, operated banking offices in Providence, Cranston, Richmond and North Kingstown, Rhode Island. The Corporation closed the Richmond and North Kingstown branches and consolidated them into existing Bank branches in May 2002. Pursuant to the Agreement and Plan of Merger dated November 12, 2001, the acquisition was effected by means of the merger of First Financial Corp. with and into the Bancorp and the merger of First Bank and Trust Company with and into the Bank. The acquisition was accounted for as a purchase in accordance with SFAS No. 141 "Business Combinations" and the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets" were also applied.
The Bancorp issued 1,021,512 common shares and paid $19.4 million in cash to the First Financial Corp. shareholders in connection with the acquisition. The total purchase price of First Financial Corp. was $38.1 million. Shareholders of First Financial common stock received 0.842 of a Bancorp share plus $16.00 in cash for each share of First Financial common stock, with cash paid in lieu of fractional shares.
The following table summarizes the fair values of the assets acquired and liabilities assumed for First Financial Corp. at the date of acquisition. The Corporation expects that some adjustments of the fair values assigned to the assets acquired and liabilities assumed at April 16, 2002 may be subsequently recorded, although such adjustments are not expected to be material. A substantial portion of the First Financial Corp. investment portfolio was liquidated prior to April 16, 2002.
(Dollars in thousands) April 16,
2002
-------------------------------------------------------------------------
Assets:
Cash and due from banks $43,034
Short-term investments 11,208
Investments 6,521
Federal Home Loan Bank stock 1,091
Net loans 113,703
Premises and equipment, net 2,539
Accrued interest receivable 474
Goodwill 21,620
Other assets 4,572
-------------------------------------------------------------------------
Total assets acquired $204,762
-------------------------------------------------------------------------
Liabilities:
Deposits $137,729
Federal Home Loan Bank advances 22,303
Other borrowings 2,854
Accrued expenses and other liabilities 3,822
-------------------------------------------------------------------------
Total liabilities acquired $166,708
-------------------------------------------------------------------------
Net assets acquired $38,054
-------------------------------------------------------------------------
|
On June 26, 2000, the Corporation completed the acquisition of Phoenix Investment Management Company, Inc. ("Phoenix"), an independent investment advisory firm. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the Bancorp issued 1,010,808 shares of its common stock to the shareholders of Phoenix. For the years ended December 31, 1999 and 1998, investment management revenues of Phoenix totaled $3.4 million and $3.1 million, respectively. Net income of Phoenix for 1999 and 1998 amounted to $1.9 million and $1.7 million, respectively. Dividends paid to Phoenix shareholders totaled $1.8 million for 1999 and $1.7 million for 1998. Expenses directly attributable to the second quarter 2000 acquisition of Phoenix amounted to $1.1 million, after income taxes, and primarily consisted of legal and investment advisory fees. The expenses were charged to earnings at the date of combination. The acquisition was accounted for under the pooling of interests method and accordingly, the financial statements and other financial information of the Corporation have been restated to reflect the acquisition at the beginning of the earliest period presented.
(3) Cash and Due from Banks The Bank is required to maintain certain average reserve balances with the Federal Reserve Board. Such reserve balances amounted to $12.2 million and $8.4 million at December 31, 2002 and 2001, respectively.
(4) Securities Securities are summarized as follows:
(Dollars in thousands)
Amortized Unrealized Unrealized Fair
December 31, 2002 Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $74,852 $3,121 $- $77,973
Mortgage-backed securities 378,162 8,830 (245) 386,747
Corporate bonds 67,018 1,386 (1,969) 66,435
Corporate stocks 19,077 4,459 (1,135) 22,401
----------------------------------------------------------------------------------------------------------
Total securities available for sale 539,109 17,796 (3,349) 553,556
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 3,000 13 - 3,013
Mortgage-backed securities 220,711 7,199 - 227,910
States and political subdivisions 18,566 957 - 19,523
----------------------------------------------------------------------------------------------------------
Total securities held to maturity 242,277 8,169 - 250,446
----------------------------------------------------------------------------------------------------------
Total securities $781,386 $25,965 $(3,349) $804,002
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies $64,368 $2,348 $(1) $66,715
Mortgage-backed securities 296,729 4,411 (1,090) 300,050
Corporate bonds 64,934 1,130 (1,915) 64,149
Corporate stocks 17,752 5,938 (648) 23,042
----------------------------------------------------------------------------------------------------------
Total securities available for sale 443,783 13,827 (3,654) 453,956
----------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies 8,311 307 - 8,618
Mortgage-backed securities 146,702 1,753 (48) 148,407
States and political subdivisions 20,092 485 (7) 20,570
----------------------------------------------------------------------------------------------------------
Total securities held to maturity 175,105 2,545 (55) 177,595
----------------------------------------------------------------------------------------------------------
Total securities $618,888 $16,372 $(3,709) $631,551
----------------------------------------------------------------------------------------------------------
|
Included in corporate stocks at December 31, 2002 are preferred stocks, which are callable at the discretion of the issuer, with an amortized cost of $11.5 million and a fair value of $11.3 million. Call features on these stocks range from three months to six years.
The contractual maturities and weighted average yields of debt securities are summarized below. Weighted average yields are computed on a fully taxable basis. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments.
(Dollars in thousands) Weighted
Amortized Fair Average
December 31, 2002 Cost Value Yield
---------------------------------------------------------------------------------------------------------
Securities Available for Sale:
Due in 1 year or less $140,482 $144,816 4.83%
After 1 but within 5 years 235,953 242,215 4.69%
After 5 but within 10 years 61,432 62,215 3.42%
After 10 years 82,165 81,909 2.72%
---------------------------------------------------------------------------------------------------------
Total debt securities available for sale 520,032 531,155 4.27%
---------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
Due in 1 year or less 83,803 86,708 5.73%
After 1 but within 5 years 131,166 135,649 5.50%
After 5 but within 10 years 22,722 23,391 5.25%
After 10 years 4,586 4,698 4.77%
---------------------------------------------------------------------------------------------------------
Total debt securities held to maturity 242,277 250,446 5.54%
---------------------------------------------------------------------------------------------------------
Total debt securities $762,309 $781,601 4.67%
---------------------------------------------------------------------------------------------------------
|
The transition provisions of SFAS No. 133 also provide that at the date of initial application an entity may transfer any security classified as "held to maturity" to "available for sale" or "trading." On January 1, 2001, the Corporation transferred held to maturity securities with an amortized cost of $43.6 million and an estimated fair value of $42.6 million into the available for sale category. The transition adjustment amounted to an unrealized loss, net of tax, of $367 thousand and was reported in other comprehensive income.
At December 31, 2002, the Corporation owned debt securities with an aggregate carrying value of $89.6 million that are callable at the discretion of the issuers. The majority of these securities are U.S. Treasury and government-sponsored agency obligations, included in both the available for sale and held to maturity categories. Final maturities of these securities range from twenty-five months to twenty-nine years with call features ranging from one month to five years.
The following is a summary of amounts relating to sales of securities available for sale:
(Dollars in thousands) Years ended December 31, 2002 2001 2000 --------------------------------------------------------------------------------------------------------- Proceeds from sales $29,964 $238 $40,288 --------------------------------------------------------------------------------------------------------- Realized gains $1,137 $522 $1,358 Realized losses - (174) (598) Other than temporary write-downs (459) - - --------------------------------------------------------------------------------------------------------- Net realized gains $678 $348 $760 --------------------------------------------------------------------------------------------------------- |
Included in net realized gains on securities in 2002 were $459 thousand in loss write-downs on certain equity securities deemed to be other than temporarily impaired based on an analysis of the financial condition and operating outlook of the issuers.
Included in other noninterest expense for the twelve months ended December 31, 2002, 2001 and 2000 were contributions of appreciated equity securities to the Corporation's charitable foundation amounting to $403 thousand, $353 thousand and $424 thousand, respectively. These transactions resulted in realized securities gains of $381 thousand, $351 thousand and $310 thousand, respectively, for the same periods.
Securities available for sale and held to maturity with a fair value of $559.7 million and $394.4 million were pledged to secure borrowings, Treasury Tax and Loan deposits and public deposits at December 31, 2002 and 2001, respectively. (See Note 12 to the Consolidated Financial Statements for additional discussion of FHLB borrowings). In addition, securities available for sale and held to maturity with a fair value of $27.6 million and $28.4 million were collateralized for the discount window at the Federal Reserve Bank at December 31, 2002 and 2001, respectively. There were no borrowings with the Federal Reserve Bank at either date.
(5) Loans The following is a summary of loans:
(Dollars in thousands)
December 31, 2002 2001 ------------------------------------------------------------------------- Commercial and other: Mortgages (1) $197,814 $118,999 Construction and development (2) 10,337 1,930 Other (3) 174,018 139,704 ------------------------------------------------------------------------- Total commercial and other 382,169 260,633 Residential real estate: Mortgages (4) 269,548 223,681 Homeowner construction 11,338 11,678 ------------------------------------------------------------------------- Total residential real estate 280,886 235,359 Consumer 132,071 109,653 ------------------------------------------------------------------------- Total loans (5) $795,126 $605,645 ------------------------------------------------------------------------- |
(1) Amortizing mortgages, primarily secured by income producing property
(2) Loans for construction of residential and commercial properties
and for land development
(3) Loans to businesses and individuals, a substantial portion of
which are fully or partially collateralized by real estate
(4) A substantial portion of these loans is used as qualified collateral
for FHLB borrowings (See Note 12 to the Consolidated Financial
Statements for additional discussion of FHLB borrowings).
(5) Net of $478 thousand and $788 thousand of unearned income and
unamortized loan origination and other fees net of costs at December
31, 2002 and 2001, respectively. Includes $1.1 million and $132
thousand of net purchased premium at December 31, 2002 and 2001,
respectively
Concentrations of Credit Risk
The Corporation's loan portfolio is concentrated among borrowers in southern New
England, primarily Rhode Island, and to a lesser extent in Connecticut and
Massachusetts. The Corporation grants single family and multi-family residential
loans, commercial real estate loans, commercial loans, and a variety of consumer
loans. In addition, loans are granted for the construction of residential homes,
commercial real estate properties, and for land development. The ability of
single family residential and consumer borrowers to honor their repayment
commitments is generally dependent on the level of overall economic activity
within the market area and real estate values. The ability of commercial
borrowers to honor their repayment commitments is dependent on the general
economy as well as the health of the real estate economic sector in the
Corporation's market area.
Nonaccrual Loans
The balance of loans on nonaccrual status as of December 31, 2002 and 2001 was
$4.2 million and $3.8 million, respectively. Interest income that would have
been recognized had these loans been current in accordance with their original
terms was approximately $312 thousand in 2002 and $435 thousand in 2001.
Interest income attributable to these loans included in the Consolidated
Statements of Income amounted to approximately $182 thousand in 2002 and $209
thousand in 2001. Included in nonaccrual loans at December 31, 2002 and 2001 are
loans amounting to $51 thousand and $85 thousand, respectively, whose terms have
been restructured.
Impaired Loans
Impaired loans consist of all nonaccrual commercial loans. The following is a
summary of impaired loans:
(Dollars in thousands)
December 31, 2002 2001 --------------------------------------------------------------- Impaired loans requiring an allowance $716 $786 Impaired loans not requiring an allowance 1,994 1,222 --------------------------------------------------------------- Total recorded investment in impaired loans $2,710 $2,008 --------------------------------------------------------------- (Dollars in thousands) Years ended December 31, 2002 2001 2000 ------------------------------------------------------------------------- Average recorded investment in impaired loans $2,219 $2,188 $2,056 ------------------------------------------------------------------------- Interest income recognized on impaired loans $100 $122 $191 ------------------------------------------------------------------------- |
Loan Servicing Activities
At December 31, 2002 and 2001, mortgage loans and other loans sold to others and
serviced by the Corporation on a fee basis under various agreements amounted to
$121.3 million and $146.7 million, respectively. Loans serviced for others are
not included in the Consolidated Balance Sheets.
The following is a summary of capitalized loan servicing rights:
(Dollars in thousands)
December 31, 2002 2001 2000 ------------------------------------------------------------------------- Balance at beginning of year $830 $90 $996 Additions 152 35 27 Acquired loan servicing rights (1) 453 - - Amortization (176) (110) (118) ------------------------------------------------------------------------- Balance at end of year $1,259 $830 $905 ------------------------------------------------------------------------- |
(1) The acquired loan servicing rights have a weighted average amortization period of 15 years.
Capitalized loan servicing rights are periodically evaluated for impairment. Both amortization and impairment of loan servicing rights are recorded as reductions in loan servicing fees.
The following is an analysis of activity relating to the loan servicing rights valuation allowance:
(Dollars in thousands)
December 31, 2002 2001 2000 ------------------------------------------------------------------------- Balance at beginning of year $320 $320 $320 Provision charged to earnings 177 - - ------------------------------------------------------------------------- Balance at end of year $497 $320 $320 ------------------------------------------------------------------------- |
Estimated aggregate amortization expense related to loan servicing assets is as follows:
(Dollars in thousands)
-------------------------------------------------------------------------
Years ending December 31: 2003 $267
2004 200
2005 159
2006 133
2007 111
|
Loans to Related Parties
The Corporation has made loans in the ordinary course of business to certain
directors and executive officers including their immediate families and their
affiliated companies. Such loans were made under normal interest rate and
collateralization terms. Activity related to these loans in 2002 and 2001 was as
follows:
(Dollars in thousands)
December 31, 2002
-------------------------------------------------------------------------
Balance at beginning of year $3,274
Additions 12,488
Reductions (5,708)
-------------------------------------------------------------------------
Balance at end of year $10,054
-------------------------------------------------------------------------
(6) Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
(Dollars in thousands)
Years ended December 31, 2002 2001 2000
-------------------------------------------------------------------------
Balance at beginning of year $13,593 $13,135 $12,349
Allowance on acquired loans 1,829 - -
Provision charged to expense 400 550 1,150
Recoveries of loans previously charged off 162 341 319
Loans charged off (497) (433) (683)
-------------------------------------------------------------------------
Balance at end of year $15,487 $13,593 $13,135
-------------------------------------------------------------------------
|
Included in the allowance for loan losses at December 31, 2002, 2001 and 2000 was an allowance for impaired loans amounting to $29 thousand, $163 thousand and $209 thousand, respectively.
(7) Premises and Equipment The following is a summary of premises and equipment:
(Dollars in thousands)
December 31, 2002 2001
-------------------------------------------------------------------------
Land and improvements $3,880 $2,105
Premises and improvements 27,242 25,358
Furniture, fixtures and equipment 21,657 20,027
-------------------------------------------------------------------------
52,779 47,490
Less accumulated depreciation 28,364 25,388
-------------------------------------------------------------------------
Total premises and equipment, net $24,415 $22,102
-------------------------------------------------------------------------
|
(8) Goodwill and other intangibles The second quarter 2002 acquisition of First Financial Corp. resulted in the recording of goodwill of $22.6 million. Included in this amount were $968 thousand of business combination costs (primarily legal, accounting and investment advisor fees) capitalized in accordance with accounting principles generally accepted in the United States of America. In accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill acquired in business combinations after June 30, 2001 will not be amortized.
At December 31, 2002 and December 31, 2001, the Corporation had other intangible assets with carrying values of $2.7 million and $669 thousand, respectively. In conjunction with the 2002 First Financial Corp. acquisition, the Corporation recorded core deposit intangibles of $1.8 million with an average useful life of ten years. Amortization expense associated with these other intangible assets, amounted to $650 thousand and $129 thousand for 2002 and 2001, respectively.
The changes in the carrying value of goodwill and other intangible assets for the year ended December 31, 2002 are as follows:
(Dollars in thousands) Core Deposit Other Total
Goodwill Intangibles Intangibles Intangibles
----------------------------------------------------------------------------------------------------------
Balance at beginning of year $ - $669 $ - $669
Recorded during the period 22,588 1,801 852 25,241
Amortization expense - (461) (189) (650)
Impairment recognized - - - -
----------------------------------------------------------------------------------------------------------
Balance at end of year $22,588 $2,009 $663 $25,260
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Core Deposit Other Total
Estimated amortization expense Intangibles Intangibles Intangibles
----------------------------------------------------------------------------------------------------------
2003 $435 $284 $719
2004 359 284 643
2005 303 95 398
2006 261 - 261
2007 140 - 140
The components of intangible assets are as follows:
(Dollars in thousands)
Gross Carrying Accumulated
Intangible assets Amount Amortization Amount
----------------------------------------------------------------------------------------------------------
Core deposit intangibles $3,096 $1,087 $2,009
Other intangibles 852 189 663
----------------------------------------------------------------------------------------------------------
Total $3,948 $1,276 $2,672
----------------------------------------------------------------------------------------------------------
|
(9) Financial Instruments With Off-Balance Sheet Risk and Derivative Financial Instruments The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation's exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees, interest rate swaps and floors and commitments to originate and commitments to sell fixed rate mortgage loans. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:
(Dollars in thousands) December 31, 2002 2001 ---------------------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Commercial loans $51,434 $41,891 Home equity lines 71,692 52,583 Other loans 12,729 12,065 Standby letters of credit 2,440 2,303 Financial instruments whose notional amounts exceed the amount of credit risk: Interest rate floor contracts - 20,000 Forward loan commitments: Commitments to originate fixed rate mortgage loans to be sold 23,942 5,329 Commitments to sell fixed rate mortgage loans 28,536 13,093 |
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer as long as
there are no violations of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each borrower's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained is based on
management's credit evaluation of the borrower.
Standby Letters of Credit
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Under the standby letters of credit, the Corporation is
required to make payments to the beneficiary of the letters of credit upon
request by the beneficiary contingent upon the customer's failure to perform
under the terms of the underlying contract with the beneficiary. Standby letters
of credit extend up to three years. At December 31, 2002 and 2001, the maximum
potential amount of undiscounted future payments, not reduced by amounts that
may be recovered totaled $2.4 million and $2.3 million, respectively. At
December 31, 2002 and 2001, there was no liability to beneficiaries resulting
from standby letters of credit.
At December 31, 2002, a substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management's credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required.
Interest Rate Risk Management Agreements The Corporation uses interest rate swaps and floors from time to time as part of its interest rate risk management strategy. Swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. A floor is a purchased contract that entitles the Corporation to receive payment from a counterparty if a rate index falls below a contractual rate. The amount of the payment is the difference between the contractual floor rate and the rate index multiplied by the notional principal amount of the contract. If the rate index does not fall below the contractual floor rate, no payment is received. The credit risk associated with swap and floor transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and thus, are not a measure of the Corporation's potential loss exposure.
The Corporation was party to a five-year interest rate floor contract with a notional amount of $20.0 million that was to mature in February 2003. The floor contract entitled the Corporation to receive payment from a counterparty if the three-month LIBOR rate fell below 5.50%. The Corporation and the counterparty agreed to an early termination date of May 7, 2002 and the Corporation received a final payment from the counterparty of $606 thousand.
Effective January 1, 2001 with the adoption of SFAS No. 133, the Corporation recognized the fair value of this derivative as an asset on the balance sheet and changes in fair value were recorded in current earnings. The carrying value of the interest rate floor contract amounted to $739 thousand at December 31, 2001 and was reported in other assets. Included in interest income for the year ended December 31, 2002, was $229 thousand of depreciation in value through the termination date. Included in interest income for the year ended December 31, 2001 was $642 thousand of appreciation in value of the interest rate floor contract, respectively.
The Corporation has not terminated any interest rate swap agreements or floor contracts, other than disclosed above.
Forward Loan Commitments
Effective January 1, 2001, with the adoption of SFAS No. 133, the Corporation
recognizes commitments to originate and commitments to sell fixed rate mortgage
loans as derivative financial instruments. Accordingly, the Corporation
recognizes the fair value of these commitments as an asset on the balance sheet.
At December 31, 2002 and 2001, the carrying value of these commitments amounted
to $(45) thousand and $86 thousand, respectively, and is reported in other
assets. Changes in the fair value are recorded in current earnings and amounted
to $154 thousand for the year ended December 31, 2002 compared to $86 thousand
for the year ended December 31, 2001.
(10) Other Real Estate Owned Other real estate owned is included in other assets on the Corporation's consolidated balance sheets. An analysis of the composition of OREO follows:
(Dollars in thousands)
December 31, 2002 2001
------------------------------------------------------------------------
Residential real estate $84 $ -
Commercial real estate - -
Repossessed assets 11 29
Land - 37
------------------------------------------------------------------------
95 66
Valuation allowance (9) (36)
------------------------------------------------------------------------
Other real estate owned, net $86 $30
------------------------------------------------------------------------
An analysis of the activity relating to OREO follows:
(Dollars in thousands)
Years ended December 31, 2002 2001
------------------------------------------------------------------------
Balance at beginning of year $66 $48
Net transfers from loans 84 187
Sales (55) (169)
Other - -
------------------------------------------------------------------------
95 66
Valuation allowance (9) (36)
------------------------------------------------------------------------
Other real estate owned, net $86 $30
------------------------------------------------------------------------
|
The following is an analysis of activity relating to the OREO valuation allowance:
(Dollars in thousands)
Years ended December 31, 2002 2001 2000 ------------------------------------------------------------------------ Balance at beginning of year $36 $39 $94 Provision charged to expense 4 9 3 Sales (31) (12) (8) Selling expenses incurred - - - Other - - (50) ------------------------------------------------------------------------ Balance at end of year $9 $36 $39 ------------------------------------------------------------------------ |
Net realized gains on dispositions of properties amounted to $76 thousand, $320 dollars, and $44 thousand in 2002, 2001 and 2000, respectively. These amounts are included in other noninterest expense in the Consolidated Statements of Income.
(11) Time Certificates of Deposit Scheduled maturities of time certificates of deposit at December 31, 2002 were as follows:
(Dollars in thousands)
Years ending December 31: 2003 $318,941
2004 66,910
2005 20,933
2006 14,094
2007 53,913
2008 and thereafter 6,809
------------------------------------------------------------------------
Balance at December 31, 2002 $481,600
------------------------------------------------------------------------
|
The aggregate amount of time certificates of deposit in denominations of $100 thousand or more was $179.0 million and $126.8 million at December 31, 2002 and 2001, respectively.
(12) Borrowings Federal Home Loan Bank Advances The following table presents maturities and weighted average interest rates paid on FHLB advances outstanding at December 31, 2002:
(Dollars in thousands) Scheduled Redeemed at Weighted
Maturity Call Date (1) Average Rate (2)
--------------------------------------------------------------------------------------------------------------
Years ending December 31: 2003 $208,803 $259,440 3.32%
2004 92,643 92,643 4.35%
2005 42,525 47,525 4.12%
2006 34,081 34,081 4.57%
2007 22,537 32,537 4.80%
2008 and thereafter 79,491 13,854 5.29%
--------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $480,080 $480,080
--------------------------------------------------------------------------------------------------------------
(1)Callable FHLB advances are shown in the respective periods assuming
that the callable debt is redeemed at the call date while all other
advances are shown in the periods corresponding to their scheduled
maturity date.
(2)Weighted average rate based on scheduled maturity dates.
|
In addition to the outstanding advances, the Bank also has access to an unused line of credit amounting to $8.0 million at December 31, 2002. Under agreement with the FHLB, the Bank is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances. The FHLB maintains a security interest in various assets of the Bank including, but not limited to, residential mortgage loans, U.S. government or agency securities, U.S. government-sponsored agency securities, and amounts maintained on deposit at the FHLB. The Bank maintains qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at December 31, 2002. Included in the collateral were securities available for sale and held to maturity with a fair value of $540.0 million and $376.5 million that were specifically pledged to secure FHLB borrowings at December 31, 2002 and December 31, 2001, respectively. Unless there is an event of default under the agreement, the Corporation may use, encumber or dispose any portion of the collateral in excess of the amount required to secure FHLB borrowings, except for that collateral which has been specifically pledged.
Other Borrowings
The following is a summary of other borrowings:
(Dollars in thousands)
December 31, 2002 2001 ------------------------------------------------------------------------ Treasury, Tax and Loan demand note balance $8,283 $1,583 Other 900 504 ------------------------------------------------------------------------ Other borrowings $9,183 $2,087 ------------------------------------------------------------------------ |
There were no securities sold under repurchase agreements outstanding at December 31, 2002 and 2001. Securities sold under repurchase agreements generally mature within 90 days. The securities underlying the agreements are held in safekeeping by the counterparty in the name of the Corporation and are repurchased when the agreement matures. Accordingly, these underlying securities are included in securities available for sale and the obligations to repurchase such securities are reflected as a liability. The following is a summary of amounts relating to securities sold under repurchase agreements:
(Dollars in thousands) Years ended December 31, 2002 2001 2000 ------------------------------------------------------------------------------------------ Maximum amount outstanding at any month-end $2,864 $ - $ - Average amount outstanding $783 $ - $ - Weighted average rate 1.47% - - |
(13) Employee Benefits Defined Benefit Pension Plans The Corporation's noncontributory tax-qualified defined benefit pension plan covers substantially all employees. Benefits are based on an employee's years of service and highest 3-year compensation. The plan is funded on a current basis, in compliance with the requirements of the Employee Retirement Income Security Act. At December 31, 2002 and 2001, the accrued benefit costs relating to the defined benefit pension plan amounted to $733 thousand and $399 thousand, respectively.
The Corporation has a nonqualified retirement plan to provide supplemental retirement benefits to certain employees, as defined in the plan. The primary purpose of this plan is to restore benefits which would otherwise be provided by the level of the tax-qualified defined benefit pension plan but which are limited by the Internal Revenue Code. The accrued pension liability related to this plan amounted to $1.1 million and $777 thousand at December 31, 2002 and 2001, respectively. The actuarial assumptions used for this supplemental plan are the same as those used for the Corporation's tax-qualified pension plan. The projected benefit obligation for this plan amounted to $1.8 million at September 30, 2002 and $1.4 million at September 30, 2001.
Additionally, in July 2001 the Corporation initiated a nonqualified retirement plan to provide supplemental retirement benefits to certain executives, as defined by the plan. The accrued pension liability of this plan amounted to $189 thousand at December 31, 2002 and $63 thousand at December 31, 2001. Using the same actuarial assumptions as the other aforementioned pension plans, the projected benefit obligation of this plan amounted to $764 thousand and $700 thousand at September 30, 2002 and 2001, respectively.
As a result of the second quarter 2002 acquisition of First Financial Corp., the Corporation assumed a nonqualified executive retirement plan to provide supplemental retirement benefits to a former First Financial Corp. executive. The accrued pension liability of this plan amounted to $3.0 million at December 31, 2002. Using the same assumptions as the other aforementioned pension plans, the projected benefit obligation amounted to $3.1 million at September 30, 2002.
The nonqualified retirement plans provide for the designation of assets in rabbi trusts. At December 31, 2002 and 2001, assets designated for this purpose with the carrying value of $3.2 million and $492 thousand, respectively, are included in Other Assets in the Corporation's Consolidated Balance Sheets.
The following is a reconciliation of the benefit obligation, fair value of plan assets and funded status of the Corporation's defined benefit pension plans:
(Dollars in thousands) Qualified Non-Qualified
Pension Plan Retirement Plans
----------------------------------------------------------------------------------------------------------
Years ended September 30, 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of period $15,761 $13,565 $2,125 $1,363
Benefit obligation of executive plan at May 1,2002 - - 3,012 -
Benefit obligation of executive plan at July 1,2001 - - - 633
Service cost 1,029 793 174 116
Interest cost 1,119 1,025 287 137
Actuarial loss (gain) 1,230 1,048 251 (63)
Benefits paid (627) (670) (228) (61)
----------------------------------------------------------------------------------------------------------
Benefit obligation at end of period $18,512 $15,761 $5,621 $2,125
----------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of period $17,515 $18,445
Actual return on plan assets (367) (260)
Employer contribution 381 -
Benefits paid (627) (670)
------------------------------------------------------------------------------------
Fair value of plan assets at end of period $16,902 $17,515
------------------------------------------------------------------------------------
|
Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods. Unrecognized amounts to be amortized and the amounts included in the Consolidated Balance Sheets are as follows:
(Dollars in thousands) Qualified Non-Qualified
Pension Plan Retirement Plans
----------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------
Funded status $(1,610) $1,755 $(5,621) $(2,125)
Unrecognized transition asset (31) (37) - -
Unrecognized prior service cost 185 218 712 829
Unrecognized net actuarial loss (gain) 723 (2,335) 686 456
----------------------------------------------------------------------------------------------------------
Accrued benefit cost at December 31, $(733) $(399) $(4,223) $(840)
----------------------------------------------------------------------------------------------------------
|
The assumptions used in determining the benefit obligation were as follows:
Qualified Non-Qualified
Pension Plan Retirement Plans
----------------------------------------------------------------------------------------------------------
September 30, 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------
Assumptions Used:
Discount rate 6.75% 7.25% 6.75% 7.25%
Rate of compensation increase 4.25% 4.75% 4.25% 4.75%
|
The assumptions used and the components of net pension cost include the following:
(Dollars in thousands) Qualified Non-Qualified
Pension Plan Retirement Plans
----------------------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000 2002 2001 2000
----------------------------------------------------------------------------------------------------------
Assumptions Used:
Discount rate 7.25% 7.75% 7.50% 7.25% 7.75% 7.50%
Expected return on plan assets 8.50% 8.50% 8.50% - - -
Rate of compensation increase 4.75% 5.00% 5.00% 4.75% 5.00% 5.00%
Net pension cost:
Service cost $1,029 $793 $676 $174 $116 $46
Interest cost 1,119 1,025 933 287 137 80
Expected return on plan assets (1,446) (1,340) (1,229) - - -
Amortization of transition asset (6) (6) (6) - - -
Amortization of prior service cost 33 33 33 118 86 54
Recognized net actuarial (gain) loss (14) (75) (22) 19 28 14
----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $715 $430 $385 $598 $367 $194
----------------------------------------------------------------------------------------------------------
|
401(k) Plan
The Corporation's 401(k) Plan provides a specified match of employee
contributions for substantially all employees. Total employer matching
contributions under this plan amounted to $425 thousand, $358 thousand and $320
thousand in 2002, 2001 and 2000, respectively.
Profit Sharing Plan
The Corporation has a nonqualified profit sharing plan that rewards employees,
excluding those key employees participating in the Annual Performance Plan, for
their contributions to the Corporation's success. The annual profit sharing
benefit is determined by a formula tied to net income and is subject to approval
by the Corporation's Board of Directors each year. The amount of the profit
sharing benefit was $421 thousand, $410 thousand and $392 thousand for 2002,
2001 and 2000, respectively.
Annual Performance Plan
The Corporation's nonqualified Annual Performance Plan (formerly known as the
Short-Term Incentive Plan) rewards key employees for their contributions to the
Corporation's success. This plan provides for annual payments up to a maximum
percentage of each participant's base salary, with percentages varying among
participants. Payment amounts are based on the achievement of target levels of
net income, earnings per share and return on equity and/or the achievement of
individual objectives. Participants in this plan are not eligible to receive
benefits provided under the Profit Sharing Plan. The expense of the Annual
Performance Plan amounted to $1.3 million, $1.4 million and $1.3 million in
2002, 2001 and 2000, respectively.
Other Incentive Plans
In connection with the acquisition of Phoenix, there are incentive compensation
arrangements based on current and future year revenue goals. The expense
recognized for these arrangements amounted to $453 thousand, $153 thousand and
$200 thousand in 2002, 2001 and 2000, respectively. In addition, the Corporation
has other nonqualified incentive plans. Certain employees, who do not
participate in the profit sharing plan or the Annual Performance Plan,
participate in one of these plans. The incentives are based on a variety of plan
specific factors, including general organizational profitability, product line
results, and individual business development goals. The aggregate cost of these
various plans amounted to $1.3 million, $805 thousand and $963 thousand in 2002,
2001 and 2000, respectively.
Directors' Retainer Continuation Plan
The Corporation previously offered a nonqualified plan that provided retirement
benefits to non-officer directors. In 1996, the provisions of the plan were
terminated for active directors and the related accrued benefit was settled. The
benefits provided under this plan continue for retired directors. The expense of
this plan is included in other noninterest expense and amounted to $11 thousand
for 2002, and $24 thousand for 2001 and 2000, respectively. Accrued and unpaid
benefits under this plan are an unfunded obligation of the Bank. The accrued
liability related to this plan amounted to $212 thousand and $233 thousand at
December 31, 2002 and 2001, respectively.
Deferred Compensation Plan
The Nonqualified Deferred Compensation Plan provides supplemental retirement and
tax benefits to directors and certain officers. The plan is funded primarily
through pre-tax contributions made by the participants. The Corporation has
recorded the assets and liabilities for the deferred compensation plan at fair
value in the consolidated balance sheets. The participants in the plan bear the
risk of market fluctuations of the underlying assets. The accrued liability
related to this plan amounted to $1.2 million and $1.3 million at December 31,
2002 and 2001, respectively, and is included in other liabilities on the
accompanying consolidated balance sheets. The corresponding invested assets are
reported in other assets.
(14) Income Taxes The components of income tax expense were as follows:
(Dollars in thousands) Years ended December 31, 2002 2001 2000 -------------------------------------------------------------------------------------- Current tax expense: Federal $8,636 $6,164 $6,311 State 19 22 43 -------------------------------------------------------------------------------------- Total current tax expense 8,655 6,186 6,354 -------------------------------------------------------------------------------------- Deferred tax benefit: Federal (1,262) (645) (681) State - - - -------------------------------------------------------------------------------------- Total deferred tax benefit (1,262) (645) (681) -------------------------------------------------------------------------------------- Total income tax expense $7,393 $5,541 $5,673 -------------------------------------------------------------------------------------- |
Total income tax expense varied from the amount determined by applying the Federal income tax rate to income before income taxes. The reasons for the differences were as follows:
(Dollars in thousands) Years ended December 31, 2002 2001 2000 -------------------------------------------------------------------------------------- Tax expense at Federal statutory rate $8,453 $6,527 $6,609 Increase (decrease) in taxes resulting from: Tax-exempt income (349) (366) (377) Acquisition related expenses - - 89 Dividends received deduction (271) (253) (259) Bank-owned life insurance (404) (397) (366) State tax, net of Federal income tax benefit 12 14 28 Other (48) 16 (51) -------------------------------------------------------------------------------------- Total income tax expense $7,393 $5,541 $5,673 -------------------------------------------------------------------------------------- |
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 2002 and 2001 are as follows:
(Dollars in thousands)
December 31, 2002 2001 ------------------------------------------------------------------------ Gross deferred tax assets: Allowance for loan losses $5,156 $4,663 Supplemental retirement benefits 1,478 388 Deferred compensation 426 446 Deferred loan origination fees 389 300 Pension 256 140 Pier Bank net operating loss carryover 166 208 Other 947 713 ------------------------------------------------------------------------ Gross deferred tax assets 8,818 6,858 ------------------------------------------------------------------------ Gross deferred tax liabilities: Securities available for sale (5,057) (3,559) Deferred loan origination costs (1,057) (885) Premises and equipment (685) (455) Amortization of intangibles (426) - Interest rate floor contract - (219) Other (418) (329) ------------------------------------------------------------------------ Gross deferred tax liabilities (7,643) (5,447) ------------------------------------------------------------------------ Net deferred tax asset $1,175 $1,411 ------------------------------------------------------------------------ |
Primary sources of recovery of deferred tax assets are future taxable income and the reversal of deferred tax liabilities.
(15) Operating Leases At December 31, 2002, the Corporation was committed to rent premises used in banking operations under noncancellable operating leases. Rental expense under the operating leases amounted to $525 thousand, $520 thousand and $604 thousand for 2002, 2001 and 2000, respectively. The minimum annual lease payments under the terms of these leases, exclusive of renewal provisions, are as follows:
(Dollars in thousands)
Years ending December 31: 2003 $468
2004 383
2005 199
2006 61
2007 16
------------------------------------------------------------------------
Total minimum lease payments $1,127
------------------------------------------------------------------------
|
(16) Litigation Reed & Lundy Matter - In June 1999 a lawsuit was filed against First Bank and Trust Company ("First Bank") in Providence County (Rhode Island) Superior Court by Read & Lundy, Inc. and its principal, Cliff McFarland (collectively, the Plaintiffs). The Bank was substituted as defendant in June 2002 following the acquisition of First Financial Corp., the parent company of First Bank. The original complaint alleged claims for breach of contract, tortious interference with contractual relations, and civil conspiracy arising out of First Bank's 1996 loan to a third party company. The Plaintiffs allege that the loan to the third party enabled that company to compete unlawfully with Read & Lundy and thereby diminished Read & Lundy's profitability. The complaint was amended in December 2001 to add a claim for violation of the Rhode Island Trade Secrets Act.
In December 2002, a judgment in the favor of the Bank and a dismissal of this lawsuit was rendered on all counts by way of summary judgment motion. In December 2002, the Plaintiffs appealed the judgment.
The Plaintiffs had previously filed a suit in the same court in 1996 against the third party company and its founder. The Bank is not a party to this suit. In September 2001, judgment was entered against the third party company and its founder in favor of the Plaintiffs for approximately $1.6 million in compensatory and punitive damages, including pre-judgment interest.
The Plaintiffs contend that the Bank as an alleged co-conspirator of the third party company is liable for this entire amount, none of which has been collected from the third party company. The Plaintiffs are also seeking additional compensatory damages and other costs allegedly arising after the third party trial. Including interest, it is estimated that the amount of the claim against the Bank is approximately $2.0 million.
Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious defenses in this litigation. The discovery phase of the case has been completed and the Bank filed a motion for summary judgment on all counts. As discussed above, in December 2002, a judgment in favor of the Bank and a dismissal of the suit was rendered on all counts by way of summary judgment motion. In December 2002, the Plaintiffs appealed the judgment. Because of the uncertainties surrounding the outcome of the litigation no assurance can be given that the litigation will be resolved in favor of the Bank. Management and legal counsel are unable to estimate the amount of loss, if any, that may be incurred with respect to this litigation. Consequently, no loss provision has been recorded.
A second claim ancillary to this litigation was brought by the Plaintiffs in March 2002. The Bank has also been substituted for First Bank in these proceedings. In this matter, the Plaintiffs brought a motion seeking enforcement of a prejudgment writ of attachment obtained in 1997 by the Plaintiffs against funds held by First Bank as collateral for the loan to the third party company. In 1999, First Bank had applied these funds as an offset to that loan. In August 2002, judgment against the Bank was rendered on this motion requiring the Bank to make the funds available for attachment by the Plaintiffs. This judgment is under appeal to the Rhode Island Supreme Court. As of September 30, 2002, the Corporation has recorded a liability for the judgment award of $273 thousand in connection with this matter. As a pre-acquisition contingency, the offset to the liability has been recognized as a portion of the purchase price of First Financial Corp.
Kiepler Matter - On February 20, 2001, a suit was filed against the Bank in its capacity as trustee of the Walfred M. Nyman Trust (the "Nyman Trust") in the United States District Court for the District of Rhode Island (the "District Court") by Beverly Kiepler ("Kiepler"), as beneficiary of the Nyman Trust, for damages which the Nyman Trust allegedly incurred as a result of the Bank's failure to file suit against Robert C. Nyman, Kenneth J. Nyman and Keith Johnson (the "Co-Defendants") for their wrongful dilution of the stock value of Nyman Manufacturing Company ("Nyman Mfg."), an asset of the Nyman Trust. The amount of damages to the Nyman Trust caused by the alleged dilution was approximately $1.3 million, based on the number of shares of Nyman Mfg. that were held by the Nyman Trust. Kiepler has alleged that the Bank breached its fiduciary duty by failing to join a suit brought by Kiepler in her individual capacity as a shareholder of Nyman Mfg., against the Co-Defendants.
This case is being vigorously contested by management. Management believes that the Bank did not breach its fiduciary duties and that the allegations by Kiepler are without merit. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision for this lawsuit has been recorded.
Maxson Matter - On May 11, 2001, the Bank entered into an agreement with Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders to settle a lawsuit for claims based upon theories of breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constructive fraud. Under the terms of the agreement, which did not involve an admission of wrongdoing, the Bank agreed to pay $4.8 million to the plaintiffs. The cost of this settlement was recorded in the consolidated financial statements as of and for the quarter ended March 31, 2001. Net of the related income tax effect, the cost of the settlement amounted to $3.3 million. In connection with this matter, in August 2001, and in December 2001, the Bank received settlements from insurance carriers in the amounts of $775 thousand ($553 thousand net of tax) and $400 thousand ($252 thousand net of tax), respectively. The recoveries were recorded as reductions of the litigation settlement cost included in other noninterest expenses. No further insurance recoveries are expected.
The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation.
(17) Shareholders' Equity Stock Repurchase Plan In September 2001, the Bancorp's Board of Directors approved a stock repurchase plan authorizing up to 250,000, or 2.1%, of its outstanding common shares to be repurchased. The Bancorp plans to hold the repurchased shares as treasury stock to be used for general corporate purposes. At December 31, 2002 and 2001, 28,000 shares and 55,000 shares were repurchased under this plan with a total cost of $536 thousand and $1.1 million, respectively.
Rights
In August 1996, the Bancorp declared a dividend of one common share purchase
right (a "Right") for each share of common stock payable on September 3, 1996 to
shareholders of record on that date. Such Rights also apply to new issuances of
shares after that date. Each Right entitles the registered holder to purchase
from the Corporation one share of its common stock at a price of $35.56 per
share, subject to adjustment.
The Rights are not exercisable or separable from the common stock until the earlier of 10 days after a person or group (an "Acquiring Person") acquires beneficial ownership of 15% or more of the outstanding common shares or announces a tender offer to do so. The Rights, which expire on August 31, 2006, may be redeemed by the Bancorp at any time prior to the acquisition by an Acquiring Person of beneficial ownership of 15% or more of the common stock at a price of $.001 per Right. In the event that any party becomes an Acquiring Person, each holder of a Right, other than Rights owned by the Acquiring Person, will have the right to receive upon exercise that number of common shares having a market value of two times the purchase price of the Right. In the event that, at any time after any party becomes an Acquiring Person, the Corporation is acquired in a merger or other business combination transaction or 50% or more of its assets or earning power are sold, each holder of a Right will have the right to purchase that number of shares of the acquiring company having a market value of two times the purchase price of the Right.
Dividends
The primary source of funds for dividends paid by the Bancorp is dividends
received from the Bank. The Bancorp and the Bank are regulated enterprises and
their abilities to pay dividends are subject to regulatory review and
restriction. Certain regulatory and statutory restrictions exist regarding
dividends, loans, and advances from the Bank to the Bancorp. Generally the Bank
has the ability to pay dividends to the parent subject to minimum regulatory
capital requirements. Under the most restrictive of these requirements, the Bank
could have declared aggregate additional dividends of $25.1 million as of
December 31, 2002.
Stock Option Plans
The Bancorp's 1997 Equity Incentive Plan (the "1997 Plan") permits the granting
of options and other equity incentives to key employees, directors, advisors,
and consultants. Up to 1,012,500 shares of the Bancorp's common stock may be
used from authorized but unissued shares, treasury stock, or shares available
from expired awards. Options are designated either as non-qualified or as
incentive options. The exercise price of each option may not be less than the
fair market value on the date of the grant. In general, the option price is
payable in cash, by the delivery of shares of the Bancorp's common stock already
owned by the grantee, or a combination thereof. Awards may be granted at any
time until April 29, 2007. At December 31, 2002, restricted stock awards
outstanding amounted to 1,260 shares. The award vests in one-third increments
over a three-year period. Restrictions are removed at the end of each vesting
period. If participants are not employees at the end of the vesting periods,
unvested awards are forfeited. For the year ended December 31, 2002,
compensation expense related to restricted stock awards amounted to $1 thousand.
The 1988 Amended and Restated Stock Option Plan (the "1988 Plan") provided for the granting of options to directors, officers and key employees. The 1988 Plan permitted options to be granted at any time until December 31, 1997. The 1988 Plan provided for shares of the Bancorp's common stock to be used from authorized but unissued shares, treasury stock, or shares available from expired options. Options were designated either as non-qualified or as incentive options. The exercise price of options granted was equal to the fair market value on the date of grant. In general, the option price is payable in cash, by the delivery of shares of the Bancorp's common stock already owned by the grantee, or a combination thereof.
The 1997 Plan and the 1988 Plan permit options to be granted with stock appreciation rights ("SARs"), however, no options have been granted with SARs.
Options granted under the plans vest according to various terms at the end of ten years. The following table presents changes in options outstanding during 2002, 2001 and 2000:
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise Of Exercise of Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------------------------------------------------
Outstanding at January 1 980,059 $14.47 845,109 $13.05 806,380 $11.49
Granted 219,610 $20.07 206,695 $17.81 216,390 $15.27
Exercised (40,769) $11.68 (69,930) $7.03 (150,972) $7.21
Cancelled (9,161) $18.21 (1,815) $17.98 (26,689) $17.07
----------------------------------------------------------------------------------------------------------------
Outstanding at December 31 1,149,739 $15.61 980,059 $14.47 845,109 $13.05
----------------------------------------------------------------------------------------------------------------
Exercisable at December 31 849,739 $14.52 695,667 $13.47 615,487 $12.01
----------------------------------------------------------------------------------------------------------------
|
The weighted average exercise price and remaining contractual life for options outstanding at December 31, 2002 were as follows:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
----------------------------------------------------------------------------------------------------------------
$4.12 to $4.27 21,715 .4 years $4.12 21,715 $4.12
$4.28 to $6.40 21,567 1.4 years $5.56 21,567 $5.56
$6.41 to $8.53 76,125 1.9 years $7.10 76,125 $7.10
$8.54 to $10.67 78,323 3.3 years $9.53 78,323 $9.53
$10.68 to $12.80 95,304 4.2 years $11.65 95,304 $11.65
$12.81 to $14.93 5,250 7.6 years $14.73 3,750 $14.73
$14.94 to $17.07 208,491 7.2 years $15.35 165,735 $15.38
$17.08 to $19.20 381,638 7.1 years $17.82 294,740 $17.82
$19.21 to $21.33 261,326 8.5 years $20.14 92,480 $20.25
----------------------------------------------------------------------------------------------------------------
Total 1,149,739 6.4 years $15.61 849,739 $14.52
----------------------------------------------------------------------------------------------------------------
|
As discussed in Note 1, the Corporation accounts for its stock option plan using the intrinsic value based method prescribed by APB Opinion No. 25, and in addition, is required to disclose pro forma net income and earnings per share using the fair value based method prescribed by SFAS No. 123 and SFAS No. 148. Accordingly, no compensation cost for these plans has been recognized in the Consolidated Statements of Income for 2002, 2001 and 2000.
Dividend Reinvestment
Under the Amended and Restated Dividend Reinvestment and Stock Purchase Plan,
607,500 shares of common stock were originally reserved to be issued for
dividends reinvested and cash payments to the plan.
Reserved Shares
As of December 31, 2002, a total of 1,649,827 common stock shares were reserved
for issuance under the 1988 Plan, 1997 Plan and the Amended and Restated
Dividend Reinvestment and Stock Purchase Plan.
Regulatory Capital Requirements
The Bancorp and the Bank are subject to various regulatory capital requirements
administered by the Federal Reserve Board and the FDIC, respectively. These
requirements were established to more accurately assess the credit risk inherent
in the assets and off-balance sheet activities of financial institutions.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2002, that the Corporation meets all capital adequacy requirements to which it is subject.
As of December 2002, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank's category.
The following table presents the Corporation's and the Bank's actual capital amounts and ratios at December 31, 2002 and 2001, as well as the corresponding minimum regulatory amounts and ratios:
To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
(Dollars in thousands) Actual Purposes Action Provisions
---------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------
As of December 31, 2002:
Total Capital (to Risk-Weighted Assets):
Consolidated $107,245 11.55% $74,302 8.00% $92,878 10.00%
Bank $105,105 11.32% $74,302 8.00% $92,878 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $94,091 10.13% $37,151 4.00% $55,727 6.00%
Bank $91,951 9.90% $37,151 4.00% $55,727 6.00%
Tier 1 Capital (to Average Assets): (1)
Consolidated $94,091 5.63% $66,802 4.00% $83,503 5.00%
Bank $91,951 5.50% $66,836 4.00% $83,544 5.00%
As of December 31, 2001:
Total Capital (to Risk-Weighted Assets):
Consolidated $102,226 14.22% $57,515 8.00% $71,893 10.00%
Bank $100,408 13.97% $57,515 8.00% $71,893 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $90,801 12.63% $28,757 4.00% $43,136 6.00%
Bank $88,983 12.38% $28,757 4.00% $43,136 6.00%
Tier 1 Capital (to Average Assets): (1)
Consolidated $90,801 6.84% $53,117 4.00% $66,396 5.00%
Bank $88,983 6.70% $53,139 4.00% $66,423 5.00%
(1) Leverage ratio
|
(18) Earnings per Share
(Dollars in thousands, except per share amounts)
Years ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
---------------------------------------------------------------
Net income $16,757 $16,757 $13,108 $13,108 $13,209 $13,209
Share amounts, in thousands:
Average outstanding 12,737.3 12,737.3 12,039.2 12,039.2 11,976.9 11,976.9
Common stock equivalents - 195.1 - 163.3 - 125.7
--------------------------------------------------------------------------------------------------------
Weighted average outstanding 12,737.3 12,932.4 12,039.2 12,202.5 11,976.9 12,102.6
--------------------------------------------------------------------------------------------------------
Earnings per share $1.32 $1.30 $1.09 $1.07 $1.10 $1.09
--------------------------------------------------------------------------------------------------------
|
(19) Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Corporation disclose estimated fair values of its financial instruments. Fair value estimates are made as of a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any pricing adjustments that could result from the sale of the Corporation's entire holding of a particular financial instrument. Because no quoted market exists for a portion of the financial instruments, fair value estimates are based on subjective judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. Changes in assumptions could significantly affect the estimates of fair value. Fair value estimates, methods, and assumptions are set forth as follows:
Cash and Securities
The carrying amount of short-term instruments such as cash and federal funds
sold is used as an estimate of fair value.
The fair value of securities available for sale and held to maturity is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. No market exists for shares of the FHLB of Boston. Such stock may be redeemed at par upon termination of FHLB membership and is therefore valued at par, which equals cost.
Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is the estimated value to sell
the loans using the quoted market prices for sales of similar loans on the
secondary market.
Loans
Fair values are estimated for categories of loans with similar financial
characteristics. Loans are segregated by type and are then further segmented
into fixed rate and adjustable rate interest terms to determine their fair
value. The fair value of fixed rate commercial and consumer loans is calculated
by discounting scheduled cash flows through the estimated maturity of the loan
using interest rates offered at December 31, 2002 and 2001 that reflect the
credit and interest rate risk inherent in the loan. The estimate of maturity is
based on the Corporation's historical repayment experience. For residential
mortgages, fair value is estimated by using quoted market prices for sales of
similar loans on the secondary market, adjusted for servicing costs. The fair
value of floating rate commercial and consumer loans approximates carrying
value. The fair value of nonaccrual loans is calculated by discounting estimated
cash flows, using a rate commensurate with the risk associated with the loan
type or by other methods that give consideration to the value of the underlying
collateral.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market
accounts is equal to the amount payable on demand as of December 31, 2002 and
2001. The discounted values of cash flows using the rates currently offered for
deposits of similar remaining maturities were used to estimate the fair value of
certificates of deposit.
Securities Sold Under Agreements to Repurchase The carrying amount of securities sold under repurchase agreements approximates fair value.
Federal Home Loan Bank Advances
Rates currently available to the Corporation for advances with similar terms and
remaining maturities are used to estimate fair value of existing advances.
Derivative Financial Instruments
The fair values of interest rate swap agreements and floor contracts generally
reflect the estimated amounts that the Corporation would receive or pay to
terminate the contracts. The fair value of commitments to extend credit is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For forward loan commitments, fair value
also considers the difference between current levels of interest rates and the
committed rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties. Letters of credit
contain provisions for fees, conditions and term periods that are consistent
with customary market practices. Accordingly, the fair value amounts (considered
to be the discounted present value of the remaining contractual fees over the
unexpired commitment period) would not be material and therefore are not
disclosed.
The following table presents the fair values of the Corporation's financial instruments:
(Dollars in thousands)
December 31, 2002 2001
--------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------------
Financial Assets
On-balance sheet:
Cash and cash equivalents $51,048 $51,048 $50,899 $50,899
Mortgage loans held for sale 4,566 4,713 7,747 7,710
Securities available for sale 553,556 553,556 453,956 453,956
Securities held to maturity 242,277 250,446 175,105 177,595
FHLB stock 24,582 24,582 23,491 23,491
Loans, net of allowance for loan losses 779,639 818,677 592,052 611,425
Accrued interest receivable 7,773 7,773 7,124 7,124
Bank-owned life insurance 22,013 22,013 20,857 20,857
Assets in rabbi trusts 3,237 3,237 492 492
Derivative financial instruments
relating to assets:
Interest rate floor contracts - - 739 739
Forward loan commitments (45) (45) 86 86
Financial Liabilities
On-balance sheet:
Noninterest bearing demand deposits $157,539 $157,539 $134,783 $134,783
Non-term savings accounts 471,354 471,354 316,953 316,953
Certificates of deposit 481,600 498,577 365,140 370,018
FHLB advances 480,080 513,979 431,490 453,740
Other borrowings 9,183 9,183 2,087 2,087
Accrued interest payable 3,986 3,986 3,885 3,885
|
(20) Parent Company Financial Statements The following are parent company only financial statements of the Corporation reflecting the investment in the Bank on the equity basis of accounting. The Statements of Changes in Shareholders' Equity for the parent company only are identical to the Consolidated Statements of Changes in Shareholders' Equity and are therefore not presented.
Balance Sheets
(Dollars in thousands)
December 31, 2002 2001
---------------------------------------------------------------------------------------------------------
Assets:
Cash on deposit with bank subsidiary 2,466 $898
Investment in bank subsidiary at equity value 126,580 96,118
Dividend receivable from bank subsidiary 1,500 2,880
---------------------------------------------------------------------------------------------------------
Total assets $130,546 $99,896
---------------------------------------------------------------------------------------------------------
Liabilities:
Dividends payable $1,825 $1,569
Accrued expenses and other liabilities - 390
---------------------------------------------------------------------------------------------------------
Total liabilities 1,825 1,959
---------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock of $.0625 par value; authorized 30 million shares
in 2002 and 2001; issued 13,086,795 shares in 2002
and 12,065,283 shares in 2001 818 754
Paid-in capital 28,769 10,696
Retained earnings 90,717 81,114
Unamortized employee restricted stock (24) -
Accumulated other comprehensive income 9,294 6,416
Treasury stock, at cost; 44,361 shares in 2002 and 54,102 shares in 2001 (853) (1,043)
---------------------------------------------------------------------------------------------------------
Total shareholders' equity 128,721 97,937
---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $130,546 $99,896
---------------------------------------------------------------------------------------------------------
|
Statements of Income
(Dollars in thousands)
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------
Dividends from bank subsidiary $26,742 $8,470 $5,198
Equity in undistributed earnings of subsidiary (9,985) 4,638 8,011
----------------------------------------------------------------------------------------------------------
Net income $16,757 $13,108 $13,209
----------------------------------------------------------------------------------------------------------
Statements of Cash Flows
(Dollars in thousands)
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------
Cash flow from operating activities:
Net income $16,757 $13,108 $13,209
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity effect of undistributed earnings of subsidiary 9,985 (4,638) (8,011)
Decrease (increase) in dividend receivable 1,380 (1,800) (240)
Other (390) - -
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,732 6,670 4,958
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of securities available for sale 521 - -
Cash paid for acquisition (19,648) - -
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (19,127) - -
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (536) (670) -
Net effect of common stock transactions 397 266 (201)
Cash dividends paid (6,898) (6,135) (6,387)
----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (7,037) (6,539) (6,588)
----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,568 131 (1,630)
Cash at beginning of year 898 767 2,397
----------------------------------------------------------------------------------------------------------
Cash at end of year $2,466 $898 $767
----------------------------------------------------------------------------------------------------------
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Required information regarding directors is presented under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 20, 2003 prepared for the Annual Meeting of Shareholders to be held April 29, 2002 and incorporated herein by reference.
Required information regarding executive officers of the Corporation is included in Part I under the caption "Executive Officers of the Registrant."
Information required with respect to compliance with Section 16(a) of the Exchange Act appears under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Corporation's Proxy Statement dated March 20, 2003 prepared for the Annual Meeting of Shareholders to be held April 29, 2003, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item appears under the caption "Compensation of Directors and Executive Officers - Executive Compensation" in the Corporation's Proxy Statement dated March 20, 2003 prepared for the Annual Meeting of Shareholders to be held April 29, 2003, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item appears under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 20, 2003 prepared for the Annual Meeting of Shareholders to be held April 29, 2003, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the caption "Indebtedness and Other Transactions" in the Corporation's Proxy Statement dated March 20, 2003 prepared for the Annual Meeting of Shareholders to be held April 29, 2003.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Corporation carried out an evaluation under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. We will review and update our disclosure controls and procedures on an ongoing basis, including our internal controls and procedures for financial reporting, and we may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
(b) Changes in internal controls.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. The financial statements of the Corporation required in response to this Item are listed in response to Part II, Item 8 of this Report.
2. Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-X and all other schedules to the consolidated financial statements of the Corporation have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto.
3. Exhibits. See Part (c) below.
(b) There were no reports on Form 8-K filed during the quarter ended December 31, 2002.
(c) Exhibit Index.
3.a Restated Articles of Incorporation of the Registrant - Filed as Exhibit 3.a to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1)
3.b Amendment to Restated Articles of Incorporation - Filed herewith.
3.c Amended and Restated By-Laws of the Corporation - Filed herewith.
4.a Amended and Restated Agreement, between the Registrant and Mellon Investor Services LLC, dated March 1, 2002 - Filed as Exhibit 4.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002. (1)
10.a Supplemental Pension Benefit and Profit Sharing Plan - Filed as Exhibit 10.a to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.b Short Term Incentive Plan Description - Filed herewith. (2)
10.c Amended and Restated Nonqualified Deferred Compensation Plan - Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (File No. 333-72277) filed with the Commission on February 12, 1999. (1) (2)
10.d Amended and Restated 1988 Stock Option Plan - Filed as Exhibit 10.d to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.e Vote of the Board of Directors of the Corporation which constitutes the 1996 Directors' Stock Plan - Filed herewith. (2)
10.f The Registrant's 1997 Equity Incentive Plan - Filed herewith. (2)
10.g Revised Change in Control Agreements with Executive Officers - Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000. (1) (2)
10.h Change in Control Agreement with an Executive Officer - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (1) (2)
10.i Amendment to the Registrant's 1997 Equity Incentive Plan - Filed as Exhibit 10.b to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (1) (2)
10.j Amendment to the Registrant's Supplemental Pension Benefit and Profit Sharing Plan - Filed as Exhibit 10.j to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.k July 2000 Amendment to the Registrant's Supplemental Pension Benefit and Profit Sharing Plan - Filed as Exhibit 10.k to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.l Amendment to the Registrant's Nonqualified Deferred Compensation Plan - Filed as Exhibit 10.l to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (1) (2)
10.m Amendment to Change in Control Agreement with an Executive Officer - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001. (1) (2)
10.n Supplemental Executive Retirement Plan - Filed as Exhibit 10.b to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001. (1) (2)
10.o Amendment to Change in Control Agreement with an Executive Officer - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002. (1) (2)
10.p Amendment to the Registrant's Trust Agreement Under The Washington Trust Company's Supplemental Pension Benefit and Profit Sharing Plan - Filed as Exhibit 10.b to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002. (1) (2)
10.q Noncompetition Agreement - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002. (1) (2)
21 Subsidiaries of the Registrant - Filed herewith
23 Consent of Independent Accountants - Filed herewith.
(1) Not filed herewith. In accordance with Rule 12b-32 promulgated pursuant to the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Commission, which are incorporated by reference herein.
(2) Management contract or compensatory plan or arrangement
(d) Financial Statement Schedules.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 18, 2003 By John C. Warren
-------------- ----------------------------------------------
John C. Warren
Chairman, Chief Executive Officer and Director
(principal executive officer)
Date: March 18, 2003 By David V. Devault
-------------- ----------------------------------------------
David V. Devault
Executive Vice President, Treasurer and
Chief Financial Officer
(principal financial and principal accounting
officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 18, 2003 Alcino G. Almeida
-------------------- ---------------------------------
Alcino G. Almeida, Director
Date: March 18, 2003 Gary P. Bennett
-------------------- ---------------------------------
Gary P. Bennett, Director
Date: March 18, 2003 Steven J. Crandall
-------------------- ---------------------------------
Steven J. Crandall, Director
Date: March 18, 2003 Richard A. Grills
-------------------- ---------------------------------
Richard A. Grills, Director
Date: March 18, 2003 Larry J. Hirsch
-------------------- ---------------------------------
Larry J. Hirsch, Director
Date: March 18, 2003 Katherine W. Hoxsie
-------------------- ---------------------------------
Katherine W. Hoxsie, Director
Date: March 18, 2003 Mary E. Kennard
-------------------- ---------------------------------
Mary E. Kennard, Director
Date: March 18, 2003 Edward M. Mazze
-------------------- ---------------------------------
Edward M. Mazze, Director
Date: March 18, 2003 Victor J. Orsinger II
-------------------- ---------------------------------
Victor J. Orsinger II, Director
Date: March 18, 2003 H. Douglas Randall III
-------------------- ---------------------------------
H. Douglas Randall, III, Director
Date:
-------------------- ---------------------------------
Joyce Olson Resnikoff, Director
Date: March 18, 2003 James P. Sullivan
-------------------- ---------------------------------
James P. Sullivan, Director
Date: March 18, 2003 Neil H. Thorp
-------------------- ---------------------------------
Neil H. Thorp, Director
Date: March 18, 2003 John F. Treanor
-------------------- ---------------------------------
John F. Treanor, Director
Date: March 18, 2003 John C. Warren
-------------------- ---------------------------------
John C. Warren, Director
|
CERTIFICATIONS
I, John C. Warren, Chairman and Chief Executive Officer of Washington Trust Bancorp, Inc. certify that:
1. I have reviewed this annual report on Form 10-K of Washington Trust Bancorp, Inc. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
(a) Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 18, 2003 By John C. Warren
-------------------- ----------------------------------
John C. Warren
Chairman, Chief Executive Officer
(principal executive officer)
|
CERTIFICATIONS
I, David V. Devault, Executive Vice President, Treasurer and Chief Financial Officer of Washington Trust Bancorp, Inc. certify that:
1. I have reviewed this annual report on Form 10-K of Washington Trust Bancorp, Inc. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
(a) Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 18, 2003 By David V. Devault
-------------------- ------------------------------------
David V. Devault
Executive Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting
officer)
|
Exhibit 3.c
AMENDED AND RESTATED BY-LAWS
of
Washington Trust Bancorp, Inc.
ARTICLE I
ARTICLES OF INCORPORATION AND PROVISIONS OF LAW
These by-laws, the powers of the Corporation and of its directors and stockholders and all matters concerning the conduct and regulation of the business of the Corporation shall be subject to such provisions in regard thereto, if any, as are provided by law or set forth in the Articles of Incorporation. All references herein to the Articles of Incorporation shall be construed to mean the Restated Articles of Incorporation of the Corporation as from time to time amended.
ARTICLE III
OFFICES
SECTION 2.01. Principal Office.
The principal office of the Corporation shall be located in Westerly, Rhode Island or such other place within or without the State of Rhode Island as may be determined by the Board of Directors from time to time.
SECTION 2.02. Other Offices.
The Corporation may also have an office or offices at such other place or places either within or without the State of Rhode Island as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 3.01. Place of Meetings.
All meetings of the stockholders of the Corporation shall be held at the principal office of the Corporation or at such other place, within or without the State of Rhode Island, as shall be fixed by the Board of Directors and specified in the respective notices or waivers of notice of said meetings.
SECTION 3.02. Annual Meetings.
The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may come before the meeting shall be held at eleven o'clock in the morning, local time, on the fourth Tuesday in April each year, if not a legal holiday, and, if a legal holiday, then on the next succeeding business day not a legal holiday. With respect to the annual meeting for any particular year the Board of Directors may, by resolution, fix a different day, time or place (within or without the State of Rhode Island) for the annual meeting. If such annual meeting is omitted by oversight or otherwise on the day herein provided therefor, a special meeting may be held in place thereof, and any business transacted or elections held at such special meeting shall have the same effect as if transacted or held at the annual meeting. The purposes for which an annual meeting is to be held, in addition to those prescribed by law or these by-laws, may be specified by a majority of the Board of Directors, the President or the Chairman of the Board or a stockholder or stockholders holding of record at least thirty-three and one-third percent (33-1/3%) in voting power of the outstanding shares of the Corporation entitled to vote at such meeting.
SECTION 3.03. Special Meetings.
A special meeting of the stockholders for any purpose or purposes, unless otherwise prescribed by statute, may be called at any time by the President or the Chairman of the Board, by order of the Board of Directors or by a stockholder or stockholders holding of record at least thirty-three and one-third percent (33-1/3%) in voting power of the outstanding shares of the Corporation entitled to vote at such meeting.
SECTION 3.04. Notice of Meetings.
Notice of each meeting of the stockholders shall be given to each stockholder of record entitled to vote at such meeting at least ten (10) days but not more than fifty (50) days before the day on which the meeting is to be held. Such notice shall be given by delivering a written or printed notice thereof personally or by mail. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the stockholder at the post office address of such stockholder as it appears upon the stock record books of the Corporation, or at such other address as such stockholder shall have provided to the Corporation for such purpose. No publication of any notice of a meeting of stockholders shall be required. Every such notice shall state the time and place of the meeting, and, in case of a special meeting, shall state the purpose or purposes thereof. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy or who shall waive notice thereof in the manner hereinafter provided. Notice of any adjourned meeting of the stockholders shall not be required to be given.
SECTION 3.05. Quorum.
At each meeting of the stockholders, a majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the shares so represented at such meeting, or, in the absence of all the stockholders entitled to vote, any officer entitled to preside or to act as secretary at such meeting, may adjourn the meeting from time to time without further notice. At any such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The absence from any meeting of stockholders holding a sufficient number of shares required for action on any given matter shall not prevent action at such meeting upon any other matter or matters which properly come before the meeting, if stockholders holding a sufficient number of shares required for action on such other matter or matters shall be present. The stockholders present or represented at any duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.
SECTION 3.06. Voting.
Each stockholder of the Corporation shall, whether the voting is by one or more classes voting separately or by two or more classes voting as one class, be entitled to one vote in person or by proxy for each share of the Corporation registered in the name of such stockholder on the books of the Corporation. The Corporation shall not vote directly or indirectly any shares held in its own name. Any vote of shares may be given by the stockholder entitled to vote such shares in person or by proxy appointed by an instrument in writing. At all meetings of the stockholders at which a quorum is present, all matters (except where other provision is made by law or by these by-laws) shall be decided by the affirmative vote of holders of a majority of the shares present in person or represented by proxy and entitled to vote thereat.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 4.01. General Powers.
The property, affairs and business of the Corporation shall be managed by the Board of Directors, and the Board shall have, and may exercise, all of the powers of the Corporation, except such as are conferred by these by-laws upon the stockholders.
SECTION 4.02. Number and Qualifications.
(a) The number of directors to constitute the Board of Directors shall be determined in accordance with the provisions of Article EIGHTH of the Articles of Incorporation.
(b) Only stockholders of record owning in their own right, free and unpledged, twenty (20) shares of the common stock of the Corporation shall be eligible to serve as directors.
(c) No person who shall have reached his seventieth (70th) birthday shall be eligible for election or reelection as a member of the Board of Directors.
SECTION 4.03. Classes, Election and Term.
The Board of Directors shall be divided into three classes, shall be elected and shall serve terms in accordance with the provisions of Article EIGHTH of the Articles of Incorporation.
SECTION 4.04. Quorum and Manner of Acting.
A majority of the total number of directors at the time in office shall constitute a quorum for the transaction of business at any meeting, and except as otherwise provided by the Articles of Incorporation or these by-laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn any meeting from time to time without further notice until a quorum be had. The directors shall act only as a Board, and the individual directors shall have no power as such.
SECTION 4.05. Place of Meetings.
The Board of Directors may hold its meetings at any place within or without the State of Rhode Island as it may from time to time determine or shall be specified or fixed in the respective notices or waivers of notice thereof.
SECTION 4.06. Annual Meeting.
The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual election of directors on the same day and at the same place at which such election of directors was held. Notice of such meeting need not be given. Such meeting may be held at any other time or place which shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors or in a consent and waiver of notice thereof signed by all the directors.
SECTION 4.07. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such places and at such times as the Board shall from time to time by vote determine. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day not a legal holiday. Notice of regular meetings need not be given.
SECTION 4.08. Special Meetings; Notice.
Special meetings of the Board of Directors shall be held whenever called by the President or Chairman of the Board or by not less than twenty-five percent (25%) of the members of the Board of Directors. Notice of each such meeting shall be given by, or at the order of, the Secretary or the person calling the meeting to each director by mailing the same addressed to the director's residence or usual place of business, or personally by delivery or by telegraph, cable or telephone, at least two (2) days before the day on which the meeting is to be held. If mailed, such notice shall be deemed to be delivered two (2) days following being deposited in the mail, with postage prepaid thereon. Every such notice shall state the time and place of the meeting but need not state the purpose thereof except as otherwise in these by-laws expressly provided.
SECTION 4.09. Presumption of Assent.
A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.
SECTION 4.10. Telephone Meetings.
Meetings of the Board of Directors, regular or special, may be held by means of a telephone conference circuit or similar communications equipment and connection to such circuit or equipment shall constitute presence at such meeting.
SECTION 4.11. Removal of Directors.
Any one or more directors may be removed at any time, but only in accordance with the provisions of Article EIGHTH of the Articles of Incorporation.
SECTION 4.12. Resignation.
(a) Any director of the Corporation who reaches his or her seventieth birthday while serving as a director shall be required to resign from the Board of Directors as of the next Annual Meeting of Shareholders of the Corporation following such director's seventieth birthday.
(b) Any director of the Corporation may resign at any time by giving written notice to the Board of Directors, to the Chairman of the Board or to the President or to the Secretary of the Corporation. The resignation of any director shall take effect at the time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
SECTION 4.13. Vacancies and Newly Created Directorships.
Vacancies and newly created directorships shall be filled only in accordance with the provisions of Article EIGHTH of the Articles of Incorporation.
SECTION 4.14. Compensation.
Each director, other than employee directors, in consideration of his serving as such, shall be entitled to receive from the Corporation such amount per annum or such fees for attendance at directors' meetings, or both, as the Board of Directors shall from time to time determine, together with reimbursement for the reasonable expenses incurred by him in connection with the performance of his duties; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation or its subsidiaries in any other capacity and receiving proper compensation therefor.
ARTICLE V
COMMITTEES
SECTION 5.01. Appointment.
The Board of Directors may designate three or more of its members to constitute an Executive Committee, a majority of which shall be non-employee directors. The designation of such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law.
SECTION 5.02. Authority.
Except as otherwise provided in the Articles of Incorporation, the Executive Committee, when the Board of Directors is not in session, shall have and may exercise all of the authority of the Board of Directors except to the extent, if any, that such authority shall be limited by the resolution appointing the Executive Committee and except also that the Executive Committee shall not have the authority of the Board of Directors in reference to amending the Articles of Incorporation, adopting a plan of merger or consolidation, recommending to the stockholders the sale, lease or other disposition of all or substantially all of the property and assets of the Corporation otherwise than in the usual and regular course of its business, recommending to the stockholders a voluntary dissolution of the Corporation or a revocation thereof, increasing the number of directors constituting the Board of Directors, filling any vacancies or newly created directorships on the Board of Directors, removing or electing any officer of the Corporation or amending the by-laws of the Corporation.
SECTION 5.03. Tenure and Qualifications.
Each member of the Executive Committee shall hold office until the next regular annual meeting of the Board of Directors following designation and until a successor is designated as a member of the Executive Committee and is elected and qualified or until the death or resignation or removal of such member in the manner herein provided.
SECTION 5.04. Meetings.
Regular meetings of the Executive Committee may be held without notice at such times and places as the Executive Committee may fix from time to time by resolution. Special meetings of the Executive Committee may be called by any member thereof upon not less than two (2) days' notice stating the place, date and hour of the meeting, which notice may be written or oral, and if mailed, shall be deemed to be delivered when deposited in the United States mail addressed to the member of the Executive Committee at such member's business address. Any member of the Executive Committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the Executive Committee need not state the business proposed to be transacted at the meeting.
SECTION 5.05. Telephone Meetings.
Meetings of the Executive Committee may be held by means of a telephone conference circuit or similar communications equipment and connection to such circuit or equipment shall constitute attendance at such meeting.
SECTION 5.06. Quorum.
A majority of the members of the Executive Committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the Executive Committee shall be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present.
SECTION 5.07. Vacancies.
Any vacancy in the Executive Committee may be filled by a resolution adopted by a majority of the full Board of Directors.
SECTION 5.08. Resignations and Removal.
Any member of the Executive Committee may be removed at any time with or without cause by the Board of Directors. Any member of the Executive Committee may resign from the Executive Committee at any time by giving written notice to the President, Chairman of the Board or Secretary of the Corporation, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
SECTION 5.09. Procedure.
The Executive Committee may elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these by-laws. It shall keep regular minutes of its proceedings and report the same to the Board of Directors for its information at the meeting thereof held next after the proceedings shall have been taken.
SECTION 5.10. Other Board Committees.
The Board of Directors may from time to time, by resolution passed by a majority of the whole Board, designate one or more committees in addition to the Executive Committee, each committee to consist of three or more of the directors of the Corporation. Any such committee, to the extent provided in the resolution or in the by-laws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation.
A majority of all the members of any such committee may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. The Board of Directors shall have power to change the members of any committee at any time, to fill vacancies and to discharge any such committee, either with or without cause, at any time.
ARTICLE VI
WAIVER OF NOTICE; WRITTEN CONSENT
SECTION 6.01. Waiver of Notice.
Notice of the time, place and purpose of any meeting of the stockholders, Board of Directors or any committee of the Board of Directors may be waived in writing by any stockholder or director either before or after such meeting. Attendance in person, or in case of a meeting of the stockholders, by proxy, at a meeting of the stockholders, Board of Directors or committee shall be deemed to constitute a waiver of notice thereof.
SECTION 6.02. Written Consent of Directors.
Unless otherwise restricted by the Articles of Incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors or any committee of the Board of Directors may be taken without a meeting if a consent in writing, setting forth the action so to be taken, shall be signed before or after such action by all of the directors, or all of the members of such committee, as the case may be. Such written consent shall be filed with the records of the Corporation.
ARTICLE VII
OFFICERS
SECTION 7.01. Number.
The officers of the Corporation shall be a President, one or more Vice Presidents (the number thereof and variations in title to be determined by the Board of Directors), a Secretary, a Treasurer, and such other officers as the Board of Directors may from time to time appoint, including a Chairman of the Board, one or more Assistant Secretaries and one or more Assistant Treasurers. One person may hold the offices and perform the duties of any two or more of said officers.
SECTION 7.02. Election, Qualifications and Term of Office.
Each officer shall be elected annually by the Board of Directors, or from time to time to fill any vacancy, and shall hold office until a successor shall have been duly elected and qualified, or until the death, resignation or removal of such officer in the manner hereinafter provided.
SECTION 7.03. Removal.
Any officer may be removed by the vote of a majority of the whole Board of Directors at a special meeting called for the purpose, whenever in the judgment of the Board of Directors the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the officer so removed. Election or appointment of an officer or agent shall not of itself create contract rights.
SECTION 7.04. Resignation.
Any officer may resign at any time by giving written notice to the Board of Directors, to the Chairman of the Board or to the President or the Secretary. Any such resignation shall take effect at the date of receipt of such notice or at any later time specified therein; and unless otherwise specified therein the acceptance of such resignation shall not be necessary to make it effective.
SECTION 7.05. Vacancies.
A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting.
SECTION 7.06. Chairman of the Board.
The Board of Directors may annually elect from among its members a Chairman of the Board. The Chairman of the Board may be the chief executive officer of the Corporation and shall preside at all meetings of the Board of Directors and stockholders. Subject to determination by the Board of Directors, the Chairman may have general executive powers and such specific powers and duties as from time to time may be conferred or assigned by the Board of Directors.
SECTION 7.07. The President.
The President may be the chief executive officer of the Corporation and, except as the Board of Directors shall otherwise determine, shall have general direction of the affairs of the Corporation. In addition, the President shall perform such other duties and have such other responsibilities as the Board of Directors may from time to time determine. In the absence of the Chairman of the Board, the President shall preside at all meetings of the Board of Directors and stockholders.
SECTION 7.08. The Vice Presidents.
The Vice President, or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe or as shall be assigned or delegated to such Vice President by the President or the Chairman of the Board.
SECTION 7.09. The Secretary.
The Secretary shall record or cause to be recorded in books provided for the purpose all the proceedings of the meetings of the Corporation, including the stockholders, the Board of Directors, Executive Committee and all other committees of the Board of Directors of which a secretary shall not have been appointed; shall see that all notices are duly given in accordance with the provisions of these by-laws and as required by law; shall be custodian of the records (other than financial) and of the seal of the Corporation; and in general, shall perform all duties incident to the office of the Secretary and such other duties as may, from time to time, be assigned by the Board of Directors or the President or the Chairman of the Board.
SECTION 7.10. The Assistant Secretaries.
At the request, or in the absence or disability, of the Secretary, the Assistant Secretary designated by the Secretary or the Board of Directors shall perform all the duties of the Secretary and, when so acting, shall have all the powers of the Secretary. The Assistant Secretaries shall perform such other duties as from time to time may be assigned to them by the Board of Directors, the President, the Chairman of the Board or the Secretary.
SECTION 7.11. The Treasurer.
The Treasurer shall have charge and custody of, and be responsible for, all funds and securities of the Corporation, and deposit all such funds to the credit of the Corporation in such banks, trust companies or other depositaries as shall be selected in accordance with the provisions of these by-laws; disburse the funds of the Corporation under the general control of the Board of Directors, based upon proper vouchers for such disbursements; receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; render a statement of the condition of the finances of the Corporation at all regular meetings of the Board of Directors, and a full financial report at the annual meeting of the stockholders, if called upon to do so; and render such further statements to the Board of Directors and the President and the Chairman of the Board as they may respectively require concerning all transactions as Treasurer or the financial condition of the Corporation. Unless such functions shall have been assigned to another officer by the Board of Directors, the Treasurer shall also have charge of the books and records of account of the Corporation, which shall be kept at such office or offices of the Corporation as the Board of Directors shall from time to time designate; be responsible for the keeping of correct and adequate records of the assets, liabilities, business and transactions of the Corporation; at all reasonable times exhibit the books and records of account to any of the directors of the Corporation upon application at the office of the Corporation where such books and records are kept; be responsible for the preparation and filing of all reports and returns relating to or based upon the books and records of the Corporation kept under the direction of the Treasurer; and in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Board of Directors or the President or the Chairman of the Board.
SECTION 7.12. The Assistant Treasurers.
At the request, or in the absence or disability, of the Treasurer, the Assistant Treasurer designated by the Treasurer or the Board of Directors shall perform all the duties of the Treasurer, and when so acting, shall have all the powers of the Treasurer. The Assistant Treasurers shall perform such other duties as from time to time may be assigned to them by the Board of Directors, the President or the Treasurer.
SECTION 7.13. General Powers.
Each officer shall, subject to these by-laws, have, in addition to the duties and powers herein set forth, such duties and powers as are commonly incident to the respective office, and such duties and powers as the Board of Directors shall from time to time designate.
SECTION 7.14. Bonding.
Any officer, employee, agent or factor shall give such bond with such surety or sureties for the faithful performance of his or her duties as the Board of Directors may, from time to time, require.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 8.01. Right to Indemnification.
Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative, or investigative (hereinafter, a "proceeding"), by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director, officer, employee or agent of the Corporation or, while a director, officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of any foreign or domestic corporation, partnership, joint venture, trust, other enterprise or employee benefit plan, whether the basis of such proceeding is alleged action (or failure to act) in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the Rhode Island General Laws, as the same shall exist from time to time (but, in the case of an amendment to said General Laws, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said General Laws permitted the Corporation to provide prior to such amendment) against all expenses, liability and loss (including judgments, penalties, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees) actually incurred by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person's heirs, executors and administrators; provided, however, that the Corporation shall indemnify any such person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Such right shall be a contract right and shall include the right to be paid by the Corporation for expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Rhode Island General Laws so require, the payment of such expenses incurred by a director, officer, employee or agent in such person's capacity as a director, officer, employee or agent of the Corporation (and not in any other capacity in which service was or is rendered by such person while a director, officer, employee or agent, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation by the indemnified party of a written affirmation of such party's good faith belief that such party has met the applicable standards of conduct and of an undertaking, by or on behalf of such party, to repay all amounts so advanced if it shall ultimately be determined that such party is not entitled to be indemnified under this Section 8.01 or otherwise. Determinations and authorizations of payment under this Section 8.01 shall be made in the same manner as the determination that indemnification is permissible.
SECTION 8.02. Right of Claimant to Bring Suit.
If a claim under Section 8.01 is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce the claim for expenses incurred in defending any proceeding in advance of its final disposition where the required written affirmation and undertaking has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Rhode Island General Laws for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense by clear and convincing evidence shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its stockholders or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors, its stockholders or independent legal counsel) that the claimant has not met such applicable standards of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standards of conduct.
SECTION 8.03. Non-Exclusivity of Rights.
The rights conferred on any person by Sections 8.01 and 8.02 of this Article VIII shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, by-laws, agreement, vote of stockholders or disinterested directors or otherwise.
SECTION 8.04. Insurance.
The Corporation may purchase and maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the Corporation, or who, while a director, officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of any foreign or domestic corporation, partnership, joint venture, trust, other enterprise or employee benefit plan, against any such expenses, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expenses, liability or loss under the Rhode Island General Laws.
ARTICLE IX
EXECUTION OF DOCUMENTS
SECTION 9.01. Contract, etc., How Executed.
Unless the Board of Directors shall otherwise determine, the (i) Chairman of the Board, President, any Vice President or the Treasurer and (ii) any other officer of the Corporation, acting jointly, may enter into any contract or execute any contract or other instrument, the execution of which is not otherwise specifically provided for, in the name and on behalf of the Corporation. The Board of Directors, except as in these by-laws otherwise provided, may authorize any other or additional officer or officers, agent or agents, of the Corporation to enter into any contract or execute and deliver any contract or other instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances. Unless authorized so to do by these by-laws or by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement, or to pledge its credit, or to render it liable pecuniarily for any purpose or to any amount.
SECTION 9.02. Checks, Drafts, etc.
All checks, drafts, bills of exchange or other orders for the payment of money, obligations, notes, or other evidences of indebtedness, bills of lading, warehouse receipts and insurance certificates of the Corporation, shall be signed or endorsed by such officer or officers, employee or employees, of the Corporation as shall from time to time be determined by resolution of the Board of Directors.
ARTICLE X
BOOKS AND RECORDS
SECTION 10.01. Place.
The books and records of the Corporation, including the stock record books, shall be kept at such places, within or without the State of Rhode Island, as may from time to time be determined by the Board of Directors.
SECTION 10.02. Addresses of Stockholders.
Each stockholder shall designate to the Secretary of the Corporation an address at which notices of meetings and all other corporate notices may be served upon or mailed, and if any stockholder shall fail to designate such address, corporate notices may, unless otherwise provided by law, be served by mail directed to the stockholder's last known post office address, or by transmitting a notice thereof to such address by telegraph, cable, or telephone.
ARTICLE XI
SHARES AND THEIR TRANSFER
SECTION 11.01. Certificates for Shares.
Every owner of shares of the Corporation shall be entitled to have a certificate certifying the number of shares owned by such owner in the Corporation and designating the class of shares to which such shares belong, which shall otherwise be in such form, in conformity to law, as the Board of Directors shall prescribe. Each such certificate shall be signed by such officer or officers as the Board of Directors may prescribe, or, if not so prescribed, by the Chairman of the Board or the President or a Vice President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation.
SECTION 11.02. Record.
A record shall be kept of the name of the person, firm or corporation owning the shares of the Corporation issued, the number of shares represented by each certificate, and the date thereof, and, in the case of cancellation, the date of cancellation. The person in whose name shares stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation.
SECTION 11.03. Transfer of Shares.
Transfers of shares of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by such holder's attorney thereunto authorized, and on the surrender of the certificate or certificates for such shares properly endorsed or accompanied by a properly executed stock power.
SECTION 11.04. Closing of Transfer Books; Record Dates.
Insofar as permitted by law, the Board of Directors may direct that the stock transfer books of the Corporation be closed for a period not exceeding sixty (60) days preceding the date of any meeting of stockholders or the date for the payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of shares of the Corporation shall go into effect, or for a period not exceeding sixty (60) days in connection with obtaining the consent of stockholders for any purpose; provided, however, that in lieu of closing the stock transfer books as aforesaid, the Board of Directors may, insofar as permitted by law, fix in advance a date, not exceeding sixty (60) days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment or rights, or the date when any change or conversion or exchange of shares of the Corporation shall go into effect, or a date in connection with obtaining such consent, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting or any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any change, conversion or exchange of shares of the Corporation, or to give such consent, and in each such case stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights or to give such consent, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any such record date fixed as aforesaid.
SECTION 11.05. Lost, Destroyed or Mutilated Certificates.
In case of the alleged loss or destruction or the mutilation of a certificate representing shares of the Corporation, a new certificate may be issued in place thereof, in the manner and upon such terms as the Board of Directors may prescribe.
ARTICLE XII
SEAL
The Board of Directors may provide for a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and the state and year of incorporation.
ARTICLE XIII
FISCAL YEAR
Except as from time to time otherwise provided by the Board of Directors, the fiscal year of the Corporation shall be the calendar year.
ARTICLE XIV
AMENDMENTS
These by-laws of the Corporation shall be subject to alteration or repeal, and new by-laws may be adopted only in accordance with the provisions of Article EIGHTH of the Articles of Incorporation.
EXHIBIT 21
Subsidiaries of the Registrant
Name of Subsidiary State of Incorporation ------------------ ---------------------- The Washington Trust Company of Westerly Rhode Island |
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Washington Trust Bancorp, Inc.:
We consent to incorporation by reference in the registration statements (Nos. 333-72277, 333-48315, 333-13167 and 33-23048) on Forms S-8, and in the registration statements (Nos. 333-13821, 33-28065 and 333-42502) on Forms S-3 of Washington Trust Bancorp, Inc. and subsidiary of our report dated January 14, 2003, relating to the consolidated balance sheets of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of Washington Trust Bancorp, Inc.
KPMG LLP
Providence, Rhode Island
March 18, 2003
Exhibit 3.b Filing Fee: $50 Corp. I.D. #16323
State of Rhode Island and Providence Plantations Office of the Secretary of State 100 North Main Street Providence, Rhode Island 02903-1335
PLEASE TAKE NOTICE that the corporation must be in good standing prior to filing
ORIGINAL ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
WASHINGTON TRUST BANCORP, INC.
Pursuant to the provisions of Section 7-1.1-56 of the General Laws, 1956, as amended, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation:
FIRST: The name of the corporation is Washington Trust Bancorp, Inc.
SECOND: The shareholders of the corporation on April 29, 1997, in the manner prescribed by Chapter 7-1.1 of the General Laws, 1956, as amended, adopted the following amendment(s) to the Articles of Incorporation:
FOURTH. Capital Stock. The aggregate number of shares which the Corporation shall have authority to issue is 30,000,000, par value $.0625 per share, all of which shares are to be a class designate as "Common Stock".
THIRD: The number of shares of the corporation outstanding at the time of such adoption was 4,372,302; and the number of shares entitled to vote thereon was 4,372,302.
FOURTH: The designation and number of outstanding shares of each class entitled to vote thereon as a class were as follows: (If inapplicable, insert
"none")
Class Number of Shares
----- ----------------
None
|
FIFTH: The number of shares voted for such amendment was 3,383,485.53; and the number of shares voted against such amendment was 198,050.74.
SIXTH: The number of shares of each class entitled to vote thereon as a class voted for and against such amendment, respectively, was: (If inapplicable,
insert "none")
Number of Shares Voted
----------------------
Class For Against
----- --- -------
None
|
SEVENTH: The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the amendment shall be effected, is as follows: (If no change, so state) No Change
EIGHTH: The manner in which such amendment effects a change in the amount of stated capital, and the amount of stated capital as changed by such amendment, are as follows: (If no change, so state) No Change
Dated: May 14, 1997
WASHINGTON TRUST BANCORP, INC.
STATE OF RHODE ISLAND )
) Sc.
COUNTY OF WASHINGTON )
|
At Westerly in said county on this 14th day of May, 1997, personally appeared before me John C. Warren, who, being by me first duly sworn, declared that he is the President of Washington Trust Bancorp, Inc., that he signed the foregoing document as President of the corporation, and that the statements therein contained are true.
(NOTARIAL SEAL)
STATE OF RHODE ISLAND )
) Sc.
COUNTY OF WASHINGTON )
|
At Westerly in said county on this 6th day of May, 1997, personally appeared before me Harvey C. Perry, II, who, being by me first duly sworn, declared that he is the Secretary of Washington Trust Bancorp, Inc., that he signed the foregoing document as Secretary of the corporation, and that the statements therein contained are true.
(NOTARIAL SEAL)
Exhibit 10.e
WASHINGTON TRUST BANCORP, INC.
THE WASHINGTON TRUST COMPANY
MEETING OF THE BOARD OF DIRECTORS
VOTED: That, pursuant to the recommendation of the Executive Committee, The
Washington Trust Company (the "Bank") and Washington Trust Bancorp,
Inc. (the "Corporation") terminate the Outside Directors' Retainer
Continuation Plan (the "Directors' Plan") and all benefits under the
Directors' Plan, provided that all retired Directors currently
receiving payments pursuant to the Plan will continue to receive such
payments in accordance with the terms and conditions of the Plan.
VOTED: That, pursuant to the further recommendation of the Executive
Committee, the Corporation, in consideration of the termination of the
Directors' Plan, adopt, and it hereby does adopt, the Washington Trust
Bancorp, Inc. 1996 Directors' Stock Plan (the "1996 Plan") pursuant to
which the Corporation shall issue to each of its non-employee
Directors that number of shares (the aggregate number of shares to be
issued, the "Shares") of common stock of the Corporation, $.0625 par
value (the "Common Stock"), as shall be calculated by dividing (i) the
amount that would be payable to each such Director under the terms of
the Directors' Plan if it were to remain in effect, and if such
Director were to leave service as a Director effective September 30,
1996, and if all other conditions for payment to each Director were
satisfied (as such amount shall be calculated by the Hay Group) by
(ii) the Average Stock Price. The "Average Stock Price" shall be the
average of the closing prices of Common Stock as reported by the
Nasdaq Stock Market for each day during the period beginning January
1, 1996 and ending on September 30, 1996.
VOTED: That the Shares shall be issued to the Directors, effective as of
October 1, 1996, and that each Director shall notify the Corporation
as to whether he or she elects to receive Restricted Stock or Common
Stock without restrictions. "Restricted Stock" shall be Common Stock
which shall be forfeited to the Corporation without payment of
consideration to the Director in the event that such Director resigns
from the Board of Directors without the approval of a majority of the
Board of Directors (excluding the Director leaving the Board). The
terms of such restriction shall terminate on September 30, 1999.
VOTED: That the Chairman of the Board, President, Treasurer and Secretary
be, and they hereby are, authorized and directed to issue on October
1, 1996 or as soon thereafter as practicable, pursuant to the 1996
Plan, stock certificates for that number of whole (i.e. not
fractional), fully paid and non-assessable shares of Common Stock or
Restricted Stock of the Corporation to which the Directors are
entitled under these resolutions.
VOTED: That The Washington Trust Company, the Corporation's transfer agent
and registrar (the "Transfer Agent"), be, and it hereby is, authorized
and directed to issue and record on its transfer books, stock
certificates representing such shares of Common Stock and Restricted
Stock payable pursuant to the 1996 Plan and register such stock
certificates representing such shares of Common Stock and Restricted
Stock.
VOTED: That the proper officers of the Corporation be, and each of them
hereby is, authorized for and on behalf of the Corporation, to execute
personally or by attorney-in-fact and to cause to be filed with the
Securities and Exchange Commission such new registration statement
under the Securities Act of 1933, as amended (the "Securities Act") as
any such officer shall deem necessary, for the registration of the
Shares, and thereafter to execute and cause to be filed any amended
registration statement or registration statements and amended
prospectus or prospectuses, or amendments or supplements to any of the
foregoing, and to cause such registration statements and any
amendments thereto to become effective in accordance with the
Securities Act of 1933, as amended (the "Securities Act"), and the
General Rules and Regulations of the Securities and Exchange
Commission thereunder.
VOTED: That the Chairman of the Board and Chief Executive Officer of the
Corporation be, and he hereby is, appointed as agent for service of
the Corporation with respect to said new registration statement with
all the powers and functions specified in the General Rules and
Regulations of the Securities and Exchange Commission under the
Securities Act.
VOTED: That the proper officers of the Corporation be, and each of them
acting singly hereby is, authorized, in the name and on behalf of the
Corporation, to take all such actions and to execute all such
documents as they may deem necessary or appropriate in connection with
the issuance of the Shares in order to comply with the Securities Act
and the Securities Exchange Act of 1934, as amended.
VOTED: That the Corporation apply to the Nasdaq National Market to list
thereon the Shares authorized by these resolutions and that the
appropriate officers of the Corporation be, and each of them hereby
is, authorized and directed to take such action on behalf of the
Corporation as such officers may deem necessary and appropriate to
effect the listing of such Shares on the Nasdaq National Market,
including the execution of a listing application therefore.
VOTED: That the Chairman of the Board, President and Treasurer of the
Corporation be, and each of them hereby is, authorized and directed to
take such action on behalf of the Corporation as such officers may
deem necessary and appropriate to effectuate the intent and purposes
of the foregoing resolutions.
|
Exhibit 10.f
WASHINGTON TRUST BANCORP, INC.
1997 EQUITY INCENTIVE PLAN
Section 1. Purpose
The purpose of the Washington Trust Bancorp, Inc. 1997 Equity Incentive Plan (the "Plan") is to attract and retain key employees, directors, advisors and consultants, to provide an incentive for them to assist Washington Trust Bancorp, Inc. (the "Corporation") to achieve long-range performance goals, and to enable them to participate in the long-term growth of the Corporation.
Section 2. Definitions
(a) "Affiliate" means any business entity in which the Corporation owns directly or indirectly 50% or more of the total combined voting power or has a significant financial interest as determined by the Committee.
(b) "Annual Meeting" means the annual meeting of shareholders or special meeting in lieu of annual meeting of shareholders at which one or more directors are elected.
(c) "Award" means any Option, Stock Appreciation Right, Performance or Award Share, or Restricted Stock awarded under the Plan.
(d) "Award Share" means a share of Common Stock awarded to an employee, director, advisor or consultant without payment therefor.
(e) "Board" means the Board of Directors of the Corporation.
(f) "Code" means the Internal Revenue Code of 1986, as amended from time to time.
(g) "Committee" means the Stock Option Committee of the Board, or such other committee of not less than three members of the Board appointed by the Board to administer the Plan, provided that the members of such Committee must be Non-Employee Directors as defined in Rule 16b-3(b) promulgated under the Securities Exchange Act of 1934, as amended.
(h) "Common Stock" or "Stock" means the Common Stock, par value $.0625 per share, of the Corporation.
(i) "Corporation" means Washington Trust Bancorp, Inc.
(j) "Designated Beneficiary" means the beneficiary designated by a Participant, in a manner determined by the Board, to receive amounts due or exercise rights of the Participant in the event of the Participant's death. In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate.
(k) "Fair Market Value" means, with respect to Common Stock or any other property, the fair market value of such property as determined by the Board in good faith or in the manner established by the Board from time to time.
(l) "Incentive Stock Option" means an option to purchase shares of Common Stock, awarded to a Participant under Section 6, which is intended to meet the requirements of Section 422 of the Code or any successor provision.
(m) "Nonqualified Stock Option" means an option to purchase shares of Common Stock, awarded to a Participant under Section 6 or Section 11, which is not intended to be an Incentive Stock Option.
(n) "Option" means an Incentive Stock Option or a Nonqualified Stock Option.
(o) "Participant" means a person selected by the Board to receive an Award under the Plan.
(p) "Performance Cycle" or "Cycle" means the period of time selected by the Board during which performance is measured for the purpose of determining the extent to which an award of Performance Shares has been earned.
(q) "Performance Shares" mean shares of Common Stock which may be earned by the achievement of performance goals, awarded to a Participant under Section 8.
(r) "Restricted Period" means the period of time selected by the Board during which an award of Restricted Stock may be forfeited to the Corporation.
(s) "Restricted Stock" means shares of Common Stock subject to forfeiture, awarded to a Participant under Section 9.
(t) "Stock Appreciation Right" or "SAR" means a right to receive any excess in value of shares of Common Stock over the reference price, awarded to a Participant under Section 7.
(u) "Stock Unit" means an award of Common Stock and/or other rights granted as units that are valued in whole or in part by reference to, or otherwise based on, the value of Common Stock, awarded to a Participant under Section 10.
Section 3. Administration
The Plan shall be administered by the Committee, which shall initially be the Stock Option Committee. The Board shall have authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time consider advisable, and to interpret the provisions of the Plan. The Board's decisions shall be final and binding. To the extent permitted by applicable law, the Board may delegate to the Committee the power to make Awards to Participants and all determinations under the Plan with respect thereto.
Section 4. Eligibility
All employees and, in the case of Awards other than Incentive Stock Options, directors, advisors and consultants of the Corporation or any Affiliate capable of contributing significantly to the successful performance of the Corporation, other than a person who has irrevocably elected not to be eligible, are eligible to be Participants in the Plan.
Section 5. Stock Available for Awards
(a) Subject to adjustment under subsection (b), Awards may be made under the Plan, of Options to acquire not in excess of 450,000 shares of Common Stock. Other Awards may be made as the Board may determine, provided that a maximum of 450,000 shares of Common Stock may be issued under this Plan. If any Award in respect of shares of Common Stock expires or is terminated unexercised or is forfeited for any reason or settled in a manner that results in fewer shares outstanding than were initially awarded, including without limitation the surrender of shares in payment for the Award or any tax obligation thereon, the shares subject to such Award or so surrendered, as the case may be, to the extent of such expiration, termination, forfeiture or decrease, shall again be available for award under the Plan, subject, however, in the case of Incentive Stock Options, to any limitation required under the Code. Common Stock issued through the assumption or substitution of outstanding grants from an acquired corporation shall not reduce the shares available for Awards under the Plan. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares.
(b) In the event that the Board determines that any stock dividend, extraordinary cash dividend, creation of a class of equity securities, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar transaction affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under the Plan, then the Board, subject, in the case of Incentive Stock Options, to any limitation required under the Code, shall equitably adjust any or all of (i) the number and kind of shares in respect of which Awards may be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards, and (iii) the award, exercise or conversion price with respect to any of the foregoing, and if considered appropriate, the Board may make provision for a cash payment with respect to an outstanding Award, provided that the number of shares subject to any Award shall always be a whole number.
Section 6. Stock Options
(a) Subject to the provisions of the Plan, the Board may award Incentive Stock
Options and Nonqualified Stock Options and determine the number of shares
to be covered by each Option, the option price therefor and the conditions
and limitations applicable to the exercise of the Option. The terms and
conditions of Incentive Stock Options shall be subject to and comply with
Section 422 of the Code, or any successor provision, and any regulations
thereunder.
(b) The Board shall establish the option price at the time each Option is awarded, which price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of award with respect to Incentive Stock Options.
(c) Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable Award or thereafter. The Board may impose such conditions with respect to the exercise of Options, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable.
(d) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Corporation. Such payment may be made in whole or in part in cash or, to the extent permitted by the Board at or after the award of the Option, by delivery of a note or shares of Common Stock owned by the optionholder, including Restricted Stock, valued at their Fair Market Value on the date of delivery, by the reduction of the shares of Common Stock that the optionholder would be entitled to receive upon exercise of the Option, such shares to be valued at their Fair Market Value on the date of exercise, less their option price (a so-called "cashless exercise"), or such other lawful consideration as the Board may determine. In addition, an optionholder may engage in a successive exchange (or series of exchanges) in which the shares of Common Stock that such optionholder is entitled to receive upon the exercise of an Option may be simultaneously utilized as payment for the exercise of an additional Option or Options.
(e) The Board may provide for the automatic award of an Option upon the delivery of shares to the Corporation in payment of an Option for up to the number of shares so delivered.
(f) In the case of Incentive Stock Options the following additional conditions shall apply:
(i) Such options shall be granted only to employees of the Corporation, and shall not be granted to any person who owns stock that possesses more than ten percent of the total combined voting power of all classes of stock of the Corporation or of its parent or subsidiary corporation (as those terms are defined in Section 422(b) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder), unless, at the time of such grant, the exercise price of such option is at least 110% of the fair market value of the stock that is subject to such option and the option shall not be exercisable more than five years after the date of grant;
(ii) Such options shall not be granted more than ten years from the effective date of the Plan and shall not be exercisable more than ten years from the date of grant;
(iii)Such options shall, by their terms, be transferable by the optionee only by the laws of descent and distribution, and shall be exercisable only by such employee during his lifetime.
Section 7. Stock Appreciation Rights
Subject to the provisions of the Plan, the Board may award SARs in tandem with an Option (at or after the award of the Option), or alone and unrelated to an Option. SARs in tandem with an Option shall terminate to the extent that the related Option is exercised, and the related Option shall terminate to the extent that the tandem SARs are exercised.
Section 8. Performance Shares
(a) Subject to the provisions of the Plan, the Board may award Performance Shares and determine the number of such shares for each Performance Cycle and the duration of each Performance Cycle. There may be more than one Performance Cycle in existence at any one time, and the duration of Performance Cycles may differ from each other. The payment value of Performance Shares shall be equal to the Fair Market Value of the Common Stock on the date the Performance Shares are earned or, in the discretion of the Board, on the date the Board determines that the Performance Shares have been earned.
(b) The Board shall establish performance goals for each Cycle, for the purpose of determining the extent to which Performance Shares awarded for such Cycle are earned, on the basis of such criteria and to accomplish such objectives as the Board may from time to time select. During any Cycle, the Board may adjust the performance goals for such Cycle as it deems equitable in recognition of unusual or non-recurring events affecting the Corporation, changes in applicable tax laws or accounting principles, or such other factors as the Board may determine.
(c) As soon as practicable after the end of a Performance Cycle, the Board shall determine the number of Performance Shares which have been earned on the basis of performance in relation to the established performance goals. The payment values of earned Performance Shares shall be distributed to the Participant or, if the Participant has died, to the Participant's Designated Beneficiary, as soon as practicable thereafter. The Board shall determine, at or after the time of award, whether payment values will be settled in whole or in part in cash or other property, including Common Stock or Awards.
Section 9. Restricted Stock
(a) Subject to the provisions of the Plan, the Board may award shares of Restricted Stock and determine the duration of the Restricted Period during which, and the conditions under which, the shares may be forfeited to the Corporation and the other terms and conditions of such Awards. Shares of Restricted Stock may be issued for no cash consideration or such minimum consideration as may be required by applicable law.
(b) Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Board, during the Restricted Period. Shares of Restricted Stock shall be evidenced in such manner as the Board may determine. Any certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Corporation. At the expiration of the restricted Period, the Corporation shall deliver such certificates to the Participant or if the Participant has died, to the Participant's Designated Beneficiary.
Section 10. Stock Units
(a) Subject to the provisions of the Plan, the Board may award Stock Units subject to such terms, restrictions, conditions, performance criteria, vesting requirements and payment rules as the Board shall determine.
(b) Shares of Common Stock awarded in connection with a Stock Unit Award shall be issued for no cash consideration or such minimum consideration as may be required by applicable law. Such shares of Common Stock may be designated as Award Shares by the Board.
Section 11. Options Granted to Non-Employee Directors
Unless otherwise determined by the Board, each director of the Corporation who is not an employee of the Corporation shall automatically be granted a Nonqualified Option covering 750 shares as of the date of each Annual Meeting of the Corporation after which such director will continue to serve as a director of the Corporation, beginning with the 1997 Annual Meeting and in lieu of options which would have been granted pursuant to Section 14 of the Corporation's Amended and Restated 1988 Stock Option Plan, the option price for which shall be the Fair Market Value of the Common Stock on such date and the expiration of which shall be the tenth anniversary thereof.
Each Nonqualified Option granted pursuant to this Section 11 may be exercised on and after the date that is one year after the date of grant.
In addition, the Board may provide for such other terms and conditions of the Options granted pursuant to this Section 11 as it may determine in its sole discretion and as shall be set forth in the applicable Option agreements, including, without limitation, acceleration of exercise upon a change of control, termination of the Options, and the effect on such Options of the death, retirement or other termination of service as a director of the option holder. Notwithstanding the foregoing, nothing herein shall preclude the Board from granting Options to such non-employee directors in addition to, or in substitution for, those provided for in this Section 11.
Section 12. General Provisions Applicable to Awards
(a) Documentation. Each Award under the Plan shall be evidenced by a written document delivered to the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Board considers necessary or advisable to achieve the purposes of the Plan or comply with applicable tax and regulatory laws and accounting principles.
(b) Board Discretion. Each type of Award may be made alone, in addition to or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Board need not treat Participants uniformly. Except as otherwise provided by the Plan or a particular Award, any determination with respect to an Award may be made by the Board at the time of award or at any time thereafter. Without limiting the foregoing, an Award may be made by the Board, in its discretion, to any 401(k), savings, pension, profit sharing or other similar plan of the Corporation in lieu of or in addition to any cash or other property contributed or to be contributed to such plan.
(c) Settlement. The Board shall determine whether Awards are settled in whole or in part in cash, Common Stock, other securities of the Corporation, Awards or other property. The Board may permit a Participant to defer all or any portion of a payment under the Plan, including the crediting of interest on deferred amounts denominated in cash and dividend equivalents on amounts denominated in Common Stock.
(d) Dividends and Cash Awards. In the discretion of the Board, any Award under
the Plan may provide the Participant with (i) dividends or dividend
equivalents payable currently or deferred with or without interest, and
(ii) cash payments in lieu of or in addition to an Award.
(e) Termination of Employment. The Board shall determine the effect on an Award of the disability, death, retirement or other termination of employment of a Participant and the extent to which, and the period during which, the Participant's legal representative, guardian or Designated Beneficiary may receive payment of an Award or exercise rights thereunder.
(f) Change in Control. In order to preserve a Participant's rights under an
Award in the event of a change in control of the Corporation, the Board in
its discretion may, at the time an Award is made or at any time thereafter,
take one or more of the following actions: (i) provide for the acceleration
of any time period relating to the exercise or realization of the Award,
(ii) provide for the purchase of the Award upon the Participant's request
for an amount of cash or other property that could have been received upon
the exercise or realization of the Award had the Award been currently
exercisable or payable, (iii) adjust the terms of the Award in a manner
determined by the Board to reflect the change in control, (iv) cause the
Award to be assumed, or new rights substituted therefor, by another entity,
or (v) make such other provision as the Board may consider equitable and in
the best interests of the Corporation.
(g) Withholding. The Participant shall pay to the Corporation, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. In the Board's discretion, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value on the date of delivery. The Corporation and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant.
(h) Amendment of Award. The Board may amend, modify or terminate any outstanding Award, including substituting therefor another Award of the same or a different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Nonqualified Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant.
Section 13. Miscellaneous
(a) No Right To Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment. The Corporation expressly reserves the right at any time to dismiss a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award.
(b) No Rights As Shareholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a shareholder with respect to any shares of Common Stock to be distributed under the Plan until he or she becomes the holder thereof. A Participant to whom Common Stock is awarded shall be considered the holder of the Stock at the time of the Award except as otherwise provided in the applicable Award.
(c) Effective Date. Subject to the approval of the shareholders of the Corporation, the Plan shall be effective on April 29, 1997. Prior to such approval, Awards may be made under the Plan expressly subject to such approval.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without shareholder approval if such approval is necessary to comply with any applicable tax requirement, any applicable rules or regulation of the Securities and Exchange Commission, including Rule 16(b)-3 (or any successor rule thereunder), or the rules and regulations of The Nasdaq Stock Market or any other exchange or stock market over which the Corporation's securities are listed.
(e) Governing Law. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of the State of Rhode Island.
(f) Indemnity. Neither the Board nor the Committee, nor any members of either, nor any employees of the Corporation or any parent, subsidiary, or other affiliate, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with their responsibilities with respect to this Plan, and the Corporation hereby agrees to indemnify the members of the Board, the members of the Committee, and the employees of the Corporation and its parent or subsidiaries in respect of any claim, loss, damage, or expense (including reasonable counsel fees) arising from any such act, omission, interpretation, construction or determination to the full extent permitted by law.
EXHIBIT 10.b
Short-Term Incentive Plan Description
The following is a description of the Corporation's Short-Term Incentive Plan (the "Incentive Plan") which provides for incentive bonuses to executive officers and all other officers of the Registrant and its subsidiary bank:
The Incentive Plan provides for the payment of additional cash compensation to officers based on the achievement by the Corporation of target levels of return on equity and/or the achievement of individual objectives by the Incentive Plan participants. Under the Incentive Plan, the Corporation's return on equity each year is measured against both expectations, as established by the Bank's Board of Directors at the beginning of the year, and the performance of a peer group of bank holding companies (the "Incentive Plan Peer Group") in order to provide objective links between performance and compensation. Generally, members are selected based on asset size, similarity in operating lines of business and listing on Nasdaq.
The total target payout for participants varies by level of responsibility and may range from 37% (for the Chief Executive Officer) to 5% of base salary. The portion of incentive based on the Corporation's return on equity performance also varies with level of responsibility and ranges from 100% (for the Chief Executive Officer) to as low as 30% of the incentive. The payout for the return on equity component of the incentive is determined by comparing the Corporation's return on equity for the year against a matrix of possible outcomes based on absolute return on equity and the Corporation's ranking within the Incentive Plan Peer Group. The possible outcomes range from no payout to a payout of 1.5 times the return on equity component target payout and this is applied to the return on equity incentive component for all participants. The target levels incorporated into the matrix are adjusted by the Board of Directors in connection with the establishment of the Corporation's annual business plan. In general, the target levels are adjusted to position the target payout factor at 1.0 for the return on equity component of the Incentive Plan.
The payout for the individual performance portion of the incentive is subjectively determined by each participant's supervisor. The payout of the individual performance incentive component is also adjusted by a profitability factor which is the ratio of the Corporation's net income for the year to the net income target in the business plan established at the beginning of the year. This adjustment factor may range from 80% to 120%, however, if net income for the year is less than 80% of the target, no payout will be made for the individual performance incentive component.