-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eo7AB8QCIs5KR/EAz44d2HqArUnZOwrOyDNp4o0qDiUg/kjdrLJZe2Gi9ZZkmDJR 0MWqEGulS6SpFj9gOfN6Vg== 0000737468-98-000003.txt : 19980319 0000737468-98-000003.hdr.sgml : 19980319 ACCESSION NUMBER: 0000737468-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON TRUST BANCORP INC CENTRAL INDEX KEY: 0000737468 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 050404671 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13091 FILM NUMBER: 98568393 BUSINESS ADDRESS: STREET 1: 23 BROAD ST CITY: WESTERLY STATE: RI ZIP: 02891 BUSINESS PHONE: 4013481200 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (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, 1997 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 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) 401-348-1200 (Registrant's telephone number, including area code) 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant was $200,976,024 at February 27, 1998 which includes $18,949,253 held by The Washington Trust Company under trust agreements and other instruments. The number of shares of common stock of the registrant outstanding as of February 27, 1998 was 6,659,086. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement dated March 18, 1998 for the Annual Meeting of Shareholders to be held April 28, 1998 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, 1997 TABLE OF CONTENTS Page Description Number 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 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 Item 13 Certain Relationships and Related Transactions Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K Signatures This report contains forward-looking information, including statements regarding the Corporation's plans, objectives, expectations and intentions. The Corporation's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, (i) changes in the economy in the geographic region served by the Corporation; (ii) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Corporation must comply; (iii) the effect of changes in accounting policies and practices; (iv) the effect on the Corporation's competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as nonbank providers of various financial services; and (v) the effect of changes in interest rates. PART I ITEM 1. BUSINESS Washington Trust Bancorp, Inc. Washington Trust Bancorp, Inc. (the "Corporation" or "Washington Trust") is a publicly-owned, registered bank holding company, organized in 1984 under the laws of the state of Rhode Island, whose subsidiaries are permitted to engage in banking and other financial services and businesses. The Corporation conducts its business through its wholly-owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The Corporation was formed in 1984 under a plan of reorganization in which outstanding common shares of The Washington Trust Company were exchanged for common shares of Washington Trust Bancorp, Inc. At December 31, 1997 the Corporation had total consolidated assets of $814.4 million, deposits of $530.9 million and equity capital of $67.2 million. The Washington Trust Company The Washington Trust Company was originally chartered in 1800 as the Washington Bank and is the oldest banking institution headquartered in its market area. Its current corporate charter dates to 1902. See discussion under "Market Area and Competition" for further information. The Bank provides a broad range of financial services, including: Residential mortgages Commercial and consumer demand deposits Commercial loans Savings, NOW and money market deposits Construction loans Certificates of deposit Consumer installment loans Retirement accounts Home equity lines of credit Cash management services VISA and Mastercard accounts Safe deposit boxes Merchant credit card services Trust and investment services Automated teller machines (ATMs) are located at each of the Bank's banking offices. The Bank is a member of various ATM networks. Data processing for most of the Bank's deposit and loan accounts and other applications is conducted internally, using owned equipment. Application software is primarily obtained through purchase or licensing agreements. The Bank's Trust and Investment Department provides fiduciary services as trustee under wills and trust agreements; as executor or administrator of estates; as a provider of agency and custodial investment services to individuals and institutions; and as a trustee for employee benefit plans. The market value of total trust assets amounted to $643.6 million as of December 31, 1997. 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 and other banking-related fees. Noninterest expenses include the provision for loan losses, salaries and employee benefits, occupancy, equipment, office supplies, merchant processing, deposit taxes and assessments, advertising and promotion and other administrative expenses. The following is a summary of the relative amounts of income producing functions as a percentage of gross operating income during the past five years: 1997 1996 1995 1994 1993 -------------------------------------------------------------------------- Interest and fees on: Residential real estate loans 22% 27% 29% 31% 33% Commercial and other loans 27 30 33 32 30 Consumer loans 9 10 10 9 8 -------------------------------------------------------------------------- Total loan income 58 67 72 72 71 Interest and dividends on securities 27 18 13 13 13 Trust revenue 7 7 7 7 7 Other noninterest income 8 8 8 8 9 -------------------------------------------------------------------------- Gross operating income 100% 100% 100% 100% 100% -------------------------------------------------------------------------- The percentage of gross income derived from interest and fees on loans was 58% in 1997, down from a five-year high of 72% in 1995, primarily due to a higher level of securities as a percentage of total assets. (See the caption "Securities" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.) Market Area and Competition The Bank's market area includes Washington County and a portion of Kent County in southern Rhode Island, as well as a portion of New London County in southeastern Connecticut. The Bank operates eleven banking offices in these Rhode Island and Connecticut counties. The locations of the banking offices are as follows: Westerly, RI (3 locations) Charlestown, RI Narragansett, RI Richmond, RI North Kingstown, RI New Shoreham (Block Island), RI Mystic, CT (3 locations) The Bank's banking offices in Charlestown and on Block Island are the only bank facilities in those Rhode Island communities. The Bank plans to open a financial services branch office during the first quarter of 1998 in New London, Connecticut, which will offer trust and investment management, commercial lending and residential mortgage origination. 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 32% of total deposits reported by all financial institutions for communities in which the Bank operates banking offices as of June 30, 1997. The closest competitor held 24%, and the second closest competitor held 14% of total deposits in the same communities. The Corporation believes that being the largest commercial banking institution headquartered within the market area provides a competitive advantage over other financial institutions. The Bank has a marketing department which is responsible for the review of existing products and services and the development of new products and services. Employees As of December 31, 1997 the Corporation employed approximately 287 full-time and 60 part-time employees, an increase of 11.8% in full-time equivalent employees over 1996. The increase in employees is primarily attributable to the opening of five banking offices in 1997. Management believes that its employee relations are good. Supervision and Regulation General - The business in which the Corporation and the Bank are engaged is subject to extensive supervision, regulation, and examination by various bank regulatory authorities and other agencies of federal and state government. The supervisory and regulatory activities of these authorities are often intended primarily for the protection of customers or are aimed at carrying out broad public policy goals that may not be directly related to the financial services provided by the Corporation and the Bank, nor intended for the protection of the Corporation's shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Proposals to change regulations and laws which affect the banking industry are frequently raised at the federal and state level. The potential impact on the Corporation of any future revisions to the supervisory or regulatory structure cannot be determined. The Corporation and the Bank are required by various authorities to file extensive periodic reports of financial and other information and such other reports as the regulatory and supervisory authorities may require. The Corporation is also subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended. The Corporation is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a bank holding company, the activities of the Corporation are regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The BHC Act requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire control over a bank or certain nonbank entities and restricts the activities of the Corporation to those closely related to banking. Federal law also regulates transactions between the Corporation and the Bank, including loans or extensions of credit. The Bank is subject to the supervision of, and examination by, the FDIC, the State of Rhode Island and the State of Connecticut, in which the Bank has established branches. The Bank is also subject to various Rhode Island and Connecticut business and banking regulations. Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) - Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers, ranging from "well-capitalized" to "critically undercapitalized". A depository institution is well-capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well-capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. At December 31, 1997, the Bank's capital ratios placed it in the well-capitalized category. Reference is made to Note 15 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's regulatory capital requirements. Another primary purpose of FDICIA was to recapitalize the Bank Insurance Fund (BIF). The FDIC adopted a risk-related premium system for the assessment period beginning January 1, 1993. Under this new system, each institution's assessment rate is based on its capital ratios in combination with a supervisory evaluation of the risk the institution poses to the BIF. Banks deemed to be well-capitalized and who pose the lowest risk to the BIF will pay the lowest assessment rates, while undercapitalized banks, who 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 which 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, subject to the right of individual states to "opt in" or "opt out" of this authority prior to such date. In addition, among other things, the Interstate Act permits banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state. Both Rhode Island and Connecticut, the two states in which the Corporation conducts banking operations, have adopted legislation to "opt in" to interstate merger and branching provisions that effectively eliminated state law barriers. Dividend Restrictions - The Corporation's revenues consist of cash dividends paid to it by the Bank. Such payments are restricted pursuant to various state and federal regulatory limitations. Reference is made to Note 15 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's ability to pay dividends. Capital Guidelines - Regulatory guidelines have been established that require bank holding companies and banks to maintain minimum ratios of capital to risk-adjusted assets. Banks are required to have minimum core capital (Tier 1) of 4% and total risk-adjusted capital (Tier 1 and Tier 2) of 8%. For the Corporation, Tier 1 capital is essentially equal to shareholders' equity excluding the net unrealized gain 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, 1997, net risk-weighted assets amounted to $448.8 million, the Tier 1 capital ratio was 13.13% and the total risk-based capital ratio was 14.39%. 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 banking organizations 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 banking organizations 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 banking organization. The Corporation's Tier 1 leverage ratio was 7.47% as of December 31, 1997. The Federal Reserve has not advised the Corporation of any specific minimum Tier 1 leverage capital ratio applicable to it. GUIDE 3 STATISTICAL DISCLOSURES The following tables contain additional consolidated statistical data about the Corporation and the Bank. 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 by assuming a 34% marginal federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. 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, 1997 1996 1995 -------------------------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $ 90,592 $ 49,102 $ 37,878 Mortgage-backed securities 122,532 128,504 30,026 Corporate bonds 2,000 - - Corporate stocks 22,242 20,711 17,648 -------------------------------------------------------------------------------------------- Total securities available for sale $237,366 $198,317 $ 85,552 -------------------------------------------------------------------------------------------- (Dollars in thousands) December 31, 1997 1996 1995 -------------------------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $ 23,932 $ - $ - Mortgage-backed securities 10,695 12,344 13,947 States and political subdivisions 17,180 15,582 14,926 -------------------------------------------------------------------------------------------- Total securities held to maturity $ 51,807 $ 27,926 $ 28,873 --------------------------------------------------------------------------------------------
During the fourth quarter of 1995, the Corporation transferred a pool of debt securities with a book value of $37.1 million, consisting primarily of U.S. Treasury and government agency obligations and mortgage-backed securities, from the held-to-maturity category to the available-for-sale category. The transfer was made in response to a special report issued by the Financial Accounting Standards Board which allowed enterprises a one-time opportunity to reassess the appropriateness of their securities classifications under SFAS No. 115. B. Maturities of debt securities as of December 31, 1997 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) After 1 year After 5 years Due in 1 year but within 5 but within 10 After Securities Available for Sale or less years years 10 years Totals ----------------------------------------------------------------------------------------------------------- U.S. Treasury obligations and obligations of U.S. government-sponsored agencies: Amortized cost $12,346 $68,520 $8,273 $493 $89,632 Weighted average yield 6.34% 6.49% 6.78% 12.75% 6.53% Mortgage-backed securities: Amortized cost 1,559 7,525 13,139 99,505 121,728 Weighted average yield 6.01% 6.01% 6.01% 6.18% 6.15% Corporate bonds: Amortized cost - 1,985 - - 1,985 Weighted average yield - 6.18% - - 6.18% ----------------------------------------------------------------------------------------------------------- Total debt securities: Amortized cost $13,905 $78,030 $21,412 $99,998 $213,345 Weighted average yield 6.30% 6.44% 6.30% 6.22% 6.31% ----------------------------------------------------------------------------------------------------------- Fair value $13,948 $78,670 $21,630 $100,876 $215,124 ----------------------------------------------------------------------------------------------------------- (Dollars in thousands) After 1 year After 5 years Due in 1 year but within 5 but within 10 After Securities Held to Maturity or less years years 10 years Totals ----------------------------------------------------------------------------------------------------------- U.S. Treasury obligations and obligations of U.S. government-sponsored agencies: Amortized cost $ - $22,932 $1,000 $ - $23,932 Weighted average yield - 6.94% 6.65% - 6.93% Mortgage-backed securities: Amortized cost 436 2,105 3,673 4,481 10,695 Weighted average yield 7.43% 7.43% 7.43% 7.43% 7.43% States and political subdivisions: Amortized cost 3,866 10,122 3,192 - 17,180 Weighted average yield 4.05% 4.42% 4.39% - 4.33% ----------------------------------------------------------------------------------------------------------- Total debt securities: Amortized cost $4,302 $35,159 $7,865 $4,481 $51,807 Weighted average yield 4.39% 6.25% 6.10% 7.43% 6.17% ----------------------------------------------------------------------------------------------------------- Fair value $4,325 $35,586 $8,036 $4,639 $52,586 -----------------------------------------------------------------------------------------------------------
7C. 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, 1997 1996 1995 1994 1993 ------------------------------------------------------------------------------------------------------------ Commercial: Mortgages $62,264 $66,224 $58,838 $56,014 $49,194 Construction and development 3,539 4,174 5,968 12,090 10,719 Other 127,956 109,485 96,831 103,335 103,722 ------------------------------------------------------------------------------------------------------------ Total commercial 193,759 179,883 161,637 171,439 163,635 Residential real estate: Mortgages 181,790 171,423 167,511 170,367 153,507 Homeowner construction 6,097 4,631 3,071 6,934 6,120 ------------------------------------------------------------------------------------------------------------ Total residential real estate 187,887 176,054 170,582 177,301 159,627 ------------------------------------------------------------------------------------------------------------ Consumer 74,264 63,056 54,240 45,186 34,100 ------------------------------------------------------------------------------------------------------------ Total Loans $455,910 $418,993 $386,459 $393,926 $357,362 ------------------------------------------------------------------------------------------------------------
B. An analysis of the maturity and interest rate sensitivity of Real Estate Construction and Other Commercial loans as of December 31, 1997 follows:
(Dollars in thousands) One Year One to five After five Matures in: or Less Years Years Total ------------------------------------------------------------------------------------------------------------ Construction and development (1) $1,826 $898 $6,912 $9,636 Commercial - other 40,660 57,232 30,064 127,956 ------------------------------------------------------------------------------------------------------------ $42,486 $58,130 $36,976 $137,592 ------------------------------------------------------------------------------------------------------------ (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 $33,268 $61,838 $95,106 -------------------------------------------------------------------------- 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, 1997. 1. Nonaccrual, Past Due and Restructured Loans a) Nonaccrual loans as of the dates indicated were as follows: (Dollars in thousands) December 31, 1997 1996 1995 1994 1993 -------------------------------------------------------------------------- $7,335 $7,542 $8,574 $10,912 $16,244 -------------------------------------------------------------------------- Loans, with the exception of credit card loans and 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, 1997, 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 $800 thousand. Interest recognized on these loans amounted to approximately $552 thousand. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 1997. b) Loans contractually past due 90 days or more and still accruing for the dates indicated were as follows: (Dollars in thousands) December 31, 1997 1996 1995 1994 1993 -------------------------------------------------------------------------- $644 $1,447 $256 $ 24 $22 -------------------------------------------------------------------------- c) Restructured accruing loans for the dates indicated were as follows: (Dollars in thousands) December 31, 1997 1996 1995 1994 1993 -------------------------------------------------------------------------- $ - $ - $ - $365 $ - -------------------------------------------------------------------------- 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, 1997, 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, 1997, potential problem loans amounted to approximately $800 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 which 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 available for future credit losses inherent in the loan portfolio. 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 provisions charged to earnings are added to the allowance to bring it to the desired level. Loss experience on loans is presented in the following table for the years indicated: Analysis of the Allowance for Loan Losses ---------------------------------------------
(Dollars in thousands) December 31, 1997 1996 1995 1994 1993 ----------------------------------------------------------------------------------------------------------- Balance at beginning of year $8,495 $7,785 $9,328 $9,090 $7,872 Charge-offs Commercial: Mortgages 233 321 796 405 928 Construction and development - 15 526 9 - Other 740 415 1,451 512 374 Residential: Mortgages 144 146 301 159 203 Homeowner construction - - - - - Consumer 345 376 342 251 379 ----------------------------------------------------------------------------------------------------------- Total charge-offs 1,462 1,273 3,416 1,336 1,884 ----------------------------------------------------------------------------------------------------------- Recoveries Commercial: Mortgages 93 31 14 22 84 Construction and development 7 - - 11 21 Other 232 628 217 189 175 Residential: Mortgages 13 10 114 21 2 Homeowner construction - - - - - Consumer 57 114 128 74 45 ----------------------------------------------------------------------------------------------------------- Total recoveries 402 783 473 317 327 ----------------------------------------------------------------------------------------------------------- Net charge-offs 1,060 490 2,943 1,019 1,557 Additions charged to earnings 1,400 1,200 1,400 1,257 2,775 ----------------------------------------------------------------------------------------------------------- Balance at end of year $8,835 $8,495 $7,785 $9,328 $9,090 ----------------------------------------------------------------------------------------------------------- Net charge-offs to average loans .24% .12% .75% .27% .45% -----------------------------------------------------------------------------------------------------------
B. The following table presents the allocation of the allowance for loan losses: Allocation of Allowance for Loan Losses -------------------------------------------
(Dollars in thousands) December 31, 1997 1996 1995 1994 1993 ------------------------------------------------------------------------------------------------------------ Commercial: Mortgages $1,172 $1,189 $1,640 $1,365 $1,246 % of these loans to all loans 13.5% 15.8% 15.2% 14.2% 13.8% Construction and development 36 49 134 276 150 % of these loans to all loans .8% 1.0% 1.5% 3.1% 3.0% Other 2,488 2,448 2,246 2,870 2,891 % of these loans to all loans 28.8% 26.1% 25.1% 26.2% 29.0% Residential: Mortgages 1,086 1,230 1,066 1,135 1,136 % of these loans to all loans 39.5% 40.9% 43.4% 43.2% 43.0% Homeowner construction 36 33 20 44 34 % of these loans to all loans 1.3% 1.1% .8% 1.8% 1.7% Consumer 1,019 1,085 911 862 561 % of these loans to all loans 16.1% 15.1% 14.0% 11.5% 9.5% Unallocated 2,998 2,461 1,768 2,776 3,072 ----------------------------------------------------------------------------------------------------------- $8,835 $8,495 $7,785 $9,328 $9,090 100.0% 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) 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Amount Rate Paid Amount Rate Paid Amount Rate Paid --------------------------------------------------------------------------------------------------------- Demand deposits $70,234 - $62,464 - $55,189 - Savings deposits: Regular 92,756 2.47% 90,829 2.70% 92,739 2.69% NOW 59,558 1.04% 56,732 1.30% 55,831 1.39% Money market 24,848 2.41% 27,004 2.24% 30,096 2.23% --------------------------------------------------------------------------------------------------------- Total savings 177,162 1.98% 174,565 2.18% 178,666 2.21% Time deposits 261,665 5.48% 232,007 5.38% 224,169 5.25% --------------------------------------------------------------------------------------------------------- Total deposits $509,061 3.50% $469,036 3.47% $458,024 3.43% ---------------------------------------------------------------------------------------------------------
B. Not Applicable C. Not Applicable D. The maturity schedule of time deposits in amounts of $100 thousand or more at December 31, 1997 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 Total -------------------------------------------------------------------------------------------------------- $37,960 5,087 8,814 7,409 $59,270 --------------------------------------------------------------------------------------------------------
E. Not applicable VI. RETURN ON EQUITY AND ASSETS 1997 1996 1995 -------------------------------------------------------------------------- Return on average assets 1.17% 1.44% 1.44% Return on average shareholders' equity 14.27% 14.95% 15.47% Dividend payout ratio 38.24% 36.55% 33.97% Average equity to average total assets 8.22% 9.61% 9.31% VII. SHORT-TERM BORROWINGS The following is a summary of amounts relating to short-term borrowings which consist primarily of securities sold under repurchase agreements generally maturing within 90 days: (Dollars in thousands) Years ended December 31, 1997 1996 1995 -------------------------------------------------------------------------- Balance at end of year $20,337 $14,000 $ - Maximum amount outstanding at any month-end 26,820 14,000 - Average amount outstanding 14,773 3,260 93 Weighted average interest rate during the year 5.64% 5.59% 5.88% Weighted average interest rate at end of year 5.58% 5.68% - 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 Expiration Date Location Description - ----------------------------------------------------------------------------------------------------------------- 23 Broad Street, Westerly, RI Corporate headquarters Own 1200 Main Street, Wyoming, RI Branch office Own 126 Franklin Street, Westerly, RI Branch office Own Ocean Avenue, New Shoreham (Block Island), RI (1) Branch office Lease / 2001 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 Olde Mystic Village, 27 Coogan Boulevard, Mystic, CT Branch office Lease / 2003 McQuades Marketplace, Main Street, Westerly, RI (1) Supermarket branch Lease / 2001 McQuades Marketplace, 10 Clara Drive, Mystic, CT (1) Supermarket branch Lease / 2001 A & P Super Market, Route 1, Mystic, CT (1) Supermarket branch Lease / 2002 2 Union Plaza, New London, CT (1) Limited Financial services branch Lease / 2004 5 Ledward Avenue, Westerly, RI (1) Operations facility Lease / 1999 2 Crosswinds Drive, Westerly, RI (1) (2) Operations facility Lease / 2002 (1) Lease may be extended by the Corporation beyond the indicated expiration date (2) Corporation has option to purchase during initial lease term
ITEM 3. LEGAL PROCEEDINGS On January 28, 1997, a suit was filed against the Bank in the Superior Court of Washington County, Rhode Island by Maxson Automatic Machinery Company ("Maxson"), a corporate customer, and Maxson's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by Maxson's former president and treasurer. The suit alleges that the Bank wrongly permitted this individual, while an officer of Maxson, to divert funds from Maxson's account at the Bank for his personal benefit. The claims against the Bank are based upon theories of breach of fiduciary duties, negligence, breach of contract, unjust enrichment and conversion. The suit seeks recovery for losses directly related to the embezzlement of approximately $3.1 million, as well as consequential damages amounting to approximately $2.6 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. Additionally, the Bank has filed counterclaims against Maxson and its principal shareholder as well as claims against the officer responsible for the embezzlement. The Bank intends to vigorously defend the suit as well as to vigorously pursue its counterclaims. Management and legal counsel are unable to form an opinion regarding the outcome of this matter. Consequently, no loss provision has been recorded. The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation. ITEM 4. 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 year ended December 31, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of all executive officers of the Corporation and the Bank with their titles, ages, and length of service, followed by certain biographical information.
Years of Name Title Age service --------------------------------------------------------------------------------------------------------------- John C. Warren President and Chief Executive Officer of the Corporation and the 52 2 Bank David V. Devault, CPA Vice President, Treasurer and Chief Financial Officer of the Corporation Senior Vice President, Treasurer and Chief Financial Officer of 43 11 the Bank Harvey C. Perry II Vice President and Secretary of the Corporation Senior Vice President and Secretary of the Bank 48 23 Stephen M. Bessette Senior Vice President - Retail Lending, of the Bank 50 1 Vernon F. Bliven Senior Vice President - Human Resources, of the Bank 48 25 Robert G. Cocks, Jr. Senior Vice President - Commercial Lending, of the Bank 53 5 Louis W. Gingerella, Jr. Senior Vice President - Credit Administration, of the Bank 45 7 B. Michael Rauh, Jr. Senior Vice President - Retail Banking, of the Bank 38 6
John C. Warren joined the Bank and the Corporation in 1996 as President and Chief Operating Officer. In 1997, he was elected President and Chief Executive Officer of the Bank and the Corporation. He served as President and Chief Executive Officer of Sterling Bancshares Corporation from 1990 to 1994 and as Chairman from 1993 to 1994. David V. Devault joined the Bank in 1986 as Controller. He was elected Vice President and Chief Financial Officer of the Corporation and the Bank in 1987. He was elected Senior Vice President and Chief Financial Officer of the Bank in 1990. In 1997, he was also elected Treasurer of the Bank and the Corporation. Prior to joining the Bank he was a Senior Manager with the firm of KPMG Peat Marwick LLP. Harvey C. Perry II joined the Bank in 1974 and was elected Assistant Trust Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982. He was elected Vice President and Secretary of the Corporation and the Bank in 1984, and Senior Vice President and Secretary of the Bank in 1990. Stephen M. Bessette joined the Bank in February 1997 as Senior Vice President - Retail Lending. Prior to joining the Bank he held the position of Executive Vice President at Ameristone Mortgage Corporation since June 1995. From February 1993 to May 1995 he held the position of President at New England Pacific Mortgage Company, Inc. He was Executive Vice President at Old Stone Development Corporation from May 1990 to January 1993. 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. Robert G. Cocks, Jr. joined the Bank in 1992 as Senior Vice President - Lending. Prior to joining the Bank he served as Executive Vice President at Bay Bank South from 1987 to 1991. From 1991 to 1992 he worked as an independent consultant. Louis W. Gingerella, Jr. joined the Bank in 1990 as Vice President - Credit Administration. He was elected Senior Vice President - Credit Administration in 1992. Prior to joining the Bank he held the position of Senior Vice President with Bank of New England since 1988. B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and was promoted in 1993 to Senior Vice President - Retail Banking. Prior to joining the Bank he was Executive Vice President with the advertising agency of Chaffee & Partners since 1989. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Corporation's common stock has traded on the Nasdaq National Market since May 1996. Previously, the Corporation's stock traded on the Nasdaq Small-Cap Market since June 1992, and had been listed on the Nasdaq Over-The-Counter Market system since June 1987. The quarterly common stock price ranges and dividends paid per share for the years ended December 31, 1997 and 1996 are presented in the following table. The stock prices are based on the high and low sales prices during the respective quarter. Stock price and dividend amounts for 1996 and for the first, second and third quarters of 1997 have been restated to reflect 3-for-2 stock splits paid in the form of stock dividends on November 19, 1997 and on October 15, 1996.
1997 Quarters 1 2 3 4 -------------------------------------------------------------------------------------- Stock prices: High $21.33 $20.33 $22.00 $35.75 Low 18.33 17.00 19.33 21.17 Cash dividend declared per share $.13 $.13 $.13 $.14 1996 Quarters 1 2 3 4 -------------------------------------------------------------------------------------- Stock prices: High $13.55 $16.22 $18.22 $22.67 Low 12.22 13.00 15.78 17.78 Cash dividend declared per share $.12 $.12 $.12 $.12
The Corporation will continue to review future common stock dividends based on profitability, financial resources and economic conditions. The Corporation (including the Bank prior to 1984) has recorded consecutive quarterly dividends for over one hundred years. The Corporation's primary source of funds for dividends paid to shareholders is the receipt of dividends from the Bank. A discussion of the restrictions on the advance of funds or payment of dividends to the Corporation is included in Note 15 to the Consolidated Financial Statements. At February 27, 1998 there were 1,629 holders of record of the Corporation's common stock. ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA SELECTED OPERATING DATA AND FINANCIAL RATIOS: (Dollars in thousands) At or for the years ended December 31, 1997 1996 1995 1994 1993 -------------------------------------------------------------------------------------------------------------- Operating Results: Interest income $57,779 $45,806 $42,286 $36,662 $34,928 Interest expense 29,477 19,667 17,015 13,589 14,179 -------------------------------------------------------------------------------------------------------------- Net interest income 28,302 26,139 25,271 23,073 20,749 Provision for loan losses 1,400 1,200 1,400 1,257 2,774 -------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 26,902 24,939 23,871 21,816 17,975 Noninterest income 10,212 8,320 7,203 6,922 6,429 -------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 37,114 33,259 31,074 28,738 24,404 Noninterest expense 24,385 20,536 19,355 19,447 17,672 -------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting 12,729 12,723 11,719 9,291 6,732 change Income tax expense 3,642 4,298 4,031 3,026 2,255 -------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 9,087 8,425 7,688 6,265 4,477 Cumulative effect of change in accounting for income taxes - - - - 305 -------------------------------------------------------------------------------------------------------------- Net income $9,087 $8,425 $7,688 $6,265 $4,782 -------------------------------------------------------------------------------------------------------------- Per share information ($): (1) Earnings per share: (2) Basic 1.38 1.30 1.21 .99 .76 Diluted 1.33 1.25 1.17 .97 .76 Cash dividends declared .53 .47 .41 .33 .26 Book value 10.20 9.08 8.25 7.21 6.09 Market value - closing stock price 35.00 20.67 12.89 9.67 7.33 Performance Ratios (%): Return on average assets 1.17 1.44 1.44 1.25 1.01 Return on average shareholders' 14.27 14.95 15.47 14.11 12.92 equity Dividend payout ratio 38.24 36.55 33.96 33.02 34.30 Asset Quality Ratios (%): Nonperforming loans to total loans 1.61 1.80 2.22 2.77 4.55 Nonperforming assets to total assets .96 1.24 1.88 2.51 4.03 Allowance for loan losses to nonaccrual 120.45 112.64 90.80 85.48 55.96 loans Allowance for loan losses to total loans 1.94 2.03 2.01 2.37 2.54 Net charge-offs to average loans .24 .12 .75 .27 .45 Capital Ratios (%): Total equity to total assets 8.25 8.55 9.67 8.88 7.89 Tier 1 leverage capital ratio 7.47 8.62 8.99 8.45 7.84 Total risk-based capital ratio 14.39 14.93 15.34 13.82 13.12 (1) Adjusted to reflect the 3-for-2 stock splits paid on November 19, 1997, October 15, 1996 and August 31, 1994 (2) Including $.05 per share accounting change in 1993
SELECTED BALANCE SHEET DATA: (Dollars in thousands) December 31, 1997 1996 1995 1994 1993 --------------------------------------------------------------------------------------------------------------- Financial Condition: Cash and cash equivalents $26,128 $18,990 $28,651 $18,405 $21,650 Total securities 289,173 226,243 114,425 86,106 86,762 Federal Home Loan Bank stock 16,444 11,683 2,995 2,907 1,973 Net loans 447,075 410,498 378,674 384,598 348,272 Other 35,573 27,532 22,914 23,664 28,672 --------------------------------------------------------------------------------------------------------------- Total assets $814,393 $694,946 $547,659 $515,680 $487,329 --------------------------------------------------------------------------------------------------------------- Deposits $530,926 $476,561 $467,854 $440,731 $423,375 Short-term borrowings 20,337 14,000 - - - Federal Home Loan Bank advances 187,001 138,493 20,951 23,522 20,500 Other liabilities 8,925 6,465 5,917 5,644 4,991 Shareholders' equity 67,204 59,427 52,937 45,783 38,463 --------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $814,393 $694,946 $547,659 $515,680 $487,329 --------------------------------------------------------------------------------------------------------------- Asset Quality: Nonaccrual loans $7,335 $7,542 $8,574 $10,912 $16,244 Other real estate owned, net 497 1,090 1,705 2,007 3,412 --------------------------------------------------------------------------------------------------------------- Total nonperforming assets $7,832 $8,632 $10,279 $12,919 $19,656 ---------------------------------------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands) 1997 Q1 Q2 Q3 Q4 Year - --------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $9,274 $9,712 $9,954 $10,150 $39,090 Income from securities 4,140 4,736 4,824 4,613 18,313 Interest on federal funds sold and other short-term investments 61 70 128 117 376 - --------------------------------------------------------------------------------------------------------------- Total interest income 13,475 14,518 14,906 14,880 57,779 - --------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 860 860 895 894 3,509 Time deposits 3,276 3,493 3,776 3,784 14,329 Federal Home Loan Bank advances 2,345 2,825 2,812 2,800 10,782 Other 300 228 126 203 857 - --------------------------------------------------------------------------------------------------------------- Total interest expense 6,781 7,406 7,609 7,681 29,477 - --------------------------------------------------------------------------------------------------------------- Net interest income 6,694 7,112 7,297 7,199 28,302 Provision for loan losses 300 300 400 400 1,400 - --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,394 6,812 6,897 6,799 26,902 - --------------------------------------------------------------------------------------------------------------- Noninterest income: Trust revenue 1,088 1,223 1,056 1,103 4,470 Service charges on deposit accounts 553 623 611 641 2,428 Merchant processing fees 116 165 483 230 994 Net gains on sales of securities 254 373 56 50 733 Net gains on loan sales 72 62 209 189 532 Other income 249 256 246 304 1,055 - --------------------------------------------------------------------------------------------------------------- Total noninterest income 2,332 2,702 2,661 2,517 10,212 - --------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 2,953 3,203 3,241 3,244 12,641 Net occupancy 383 426 457 711 1,977 Equipment 464 506 535 621 2,126 Merchant processing costs 86 169 370 148 773 Office supplies 156 230 139 159 684 Advertising and promotion 122 190 195 169 676 Other 1,327 1,428 1,158 1,595 5,508 - --------------------------------------------------------------------------------------------------------------- Total noninterest expense 5,491 6,152 6,095 6,647 24,385 - --------------------------------------------------------------------------------------------------------------- Income before income taxes 3,235 3,362 3,463 2,669 12,729 Income tax expense 1,084 1,101 1,099 358 3,642 - --------------------------------------------------------------------------------------------------------------- Net income $2,151 $2,261 $2,364 $2,311 $9,087 - --------------------------------------------------------------------------------------------------------------- Earnings per share - basic $.33 $.34 $.36 $.35 $1.38 Earnings per share - diluted $.32 $.33 $.35 $.34 $1.33 Cash dividends declared per share $.13 $.13 $.13 $.14 $.53
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands) 1996 Q1 Q2 Q3 Q4 Year - --------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $8,837 $8,977 $9,149 $9,143 $36,106 Income from securities 1,857 1,868 2,643 3,123 9,491 Interest on federal funds sold and other short-term investments 85 55 40 29 209 - --------------------------------------------------------------------------------------------------------------- Total interest income 10,779 10,900 11,832 12,295 45,806 - --------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 968 948 965 916 3,797 Time deposits 3,077 3,100 3,117 3,184 12,478 Federal Home Loan Bank advances 335 467 919 1,468 3,189 Other 8 40 41 114 203 - --------------------------------------------------------------------------------------------------------------- Total interest expense 4,388 4,555 5,042 5,682 19,667 - --------------------------------------------------------------------------------------------------------------- Net interest income 6,391 6,345 6,790 6,613 26,139 Provision for loan losses 300 300 300 300 1,200 - --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,091 6,045 6,490 6,313 24,939 - --------------------------------------------------------------------------------------------------------------- Noninterest income: Trust revenue 876 1,016 904 961 3,757 Service charges on deposit accounts 493 554 553 568 2,168 Merchant processing fees 94 144 405 174 817 Net gains (losses) on sales of securities 198 (50) 118 102 368 Net gains on loan sales 29 46 66 79 220 Other income 208 285 256 241 990 - --------------------------------------------------------------------------------------------------------------- Total noninterest income 1,898 1,995 2,302 2,125 8,320 - --------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 2,705 2,778 2,880 2,809 11,172 Net occupancy 328 307 310 355 1,300 Equipment 365 372 388 412 1,537 Merchant processing costs 67 146 298 126 637 Office supplies 142 102 136 154 534 Advertising and promotion 65 153 161 232 611 Other 1,178 1,207 1,100 1,260 4,745 - --------------------------------------------------------------------------------------------------------------- Total noninterest expense 4,850 5,065 5,273 5,348 20,536 - --------------------------------------------------------------------------------------------------------------- Income before income taxes 3,139 2,975 3,519 3,090 12,723 Income tax expense 1,130 948 1,198 1,022 4,298 - --------------------------------------------------------------------------------------------------------------- Net income $2,009 $2,027 $2,321 $2,068 $8,425 - --------------------------------------------------------------------------------------------------------------- Earnings per share - basic $.31 $.31 $.36 $.32 $1.30 Earnings per share - diluted $.30 $.30 $.34 $.30 $1.25 Cash dividends declared per share $.12 $.12 $.12 $.12 $.47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Overview Washington Trust recorded net income of $9.1 million for 1997, an increase of 7.9% over the $8.4 million of net income recorded in 1996. Diluted earnings per share amounted to $1.33 for 1997, up 6.4% from $1.25 per share earned on net income in 1996. Washington Trust's rates of return on average assets and average equity ("ROA" and "ROE") for 1997 were 1.17% and 14.27%, respectively. ROA and ROE for the year ended December 31, 1996 amounted to 1.44% and 14.95%, respectively. Total assets amounted to $814.4 million at December 31, 1997, up 17.2% from the December 31, 1996 balance of $694.9 million. Average assets rose 32.3% during 1997 and amounted to $775.1 million, up from the comparable 1996 amount of $586.0 million. The growth in assets was primarily attributable to purchases of securities under the Corporation's investment program and loan growth resulting from the expansion of the Corporation's market area. The growth in assets was funded by increases in Federal Home Loan Bank ("FHLB") advances as well as an 11.4% increase in total deposits. Total deposits amounted to $530.9 million and $476.6 million at December 31, 1997 and 1996, respectively. FHLB advances totaled $187.0 million at December 31, 1997, up 35.0% from the prior year balance of $138.5 million. Total shareholders' equity amounted to $67.2 million at December 31, 1997, up 13.1% from the December 31, 1996 amount of $59.4 million. Included in shareholders' equity at December 31, 1997 and 1996 was $7.1 million and $4.5 million, respectively, attributable to unrealized gains on securities available for sale, net of tax. Book value per share as of December 31, 1997 and 1996 amounted to $10.20 and $9.08, respectively. Nonperforming assets (nonaccrual loans and property acquired through foreclosure) amounted to $7.8 million or .96% of total assets at December 31, 1997, down from $8.6 million, or 1.24% of total assets at December 31, 1996. The Corporation's loan loss provision was $1.4 million and $1.2 million in 1997 and 1996, respectively. For the year ended December 31, 1997, net interest income (the difference between interest earned on loans and securities and interest paid on deposits and other borrowings) amounted to $28.3 million, up by 8.3% over the 1996 amount. The net interest margin for the year ended December 31, 1997 amounted to 4.07%, compared to 4.99% in 1996. Other noninterest income (noninterest income excluding net gains on sales of securities available for sale) amounted to $9.5 million for the year ended December 31, 1997, up 19.2% from $8.0 million in 1996. Total noninterest expense amounted to $24.4 million in 1997, up by 18.7% from the 1996 amount of $20.5 million. The increase was primarily attributable to increased staffing levels, occupancy costs and depreciation expense resulting from branch expansion and other capital investments. Branch Expansion During 1997, the Corporation expanded its market area and opened five additional branch offices, increasing the total number of branch offices to eleven. In February 1997, the Corporation opened a new branch in North Kingstown, Rhode Island. This branch is a full service banking office, offering deposit and loan services for businesses and consumers, as well as trust and investment services. The Corporation also acquired a branch of a Connecticut bank, including its deposits of approximately $8.2 million, in March 1997. This branch, located in Mystic, Connecticut, was the Corporation's first branch office located in Connecticut. During the second quarter of 1997, the Corporation opened two branches in local supermarkets, one of which is located in Mystic, Connecticut, the other in Westerly, Rhode Island. An additional supermarket branch located in Mystic, Connecticut was opened by the Corporation in November 1997. The supermarket branches are full service banking offices offering extended service hours. 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 by $2.3 million or 8.6% from 1996 to 1997, due primarily to the growth in interest-earning assets. The interest rate spread declined by 84 basis points to 3.49% in 1997, while the net interest margin (FTE net interest income as a percentage of average interest-earning assets) fell from 4.99% in 1996 to 4.07% in 1997. Earning asset yields fell 45 basis points during 1997, while the cost of interest-bearing liabilities rose 39 basis points, thereby narrowing the net interest spread. Growth in the securities portfolios, lower yields on loans, and increases in interest-bearing sources of funding relative to noninterest-bearing sources of funding (i.e., demand deposits and shareholders' equity), as well as interest expense associated with increases in FHLB advances, were primarily responsible for the decrease in the net interest margin. FTE interest income totaled $59.1 million in 1997, up from $47.0 million in 1996. The yield on interest-earning assets was 8.12% in 1997, down from 8.57% in 1996. Average interest-earning assets increased by $180.6 million or 32.9% in 1997, most of which was attributable to increases in securities. Total average securities rose by $140.9 million or 94.4% in 1997. The growth in average taxable debt securities resulted primarily from an investment securities purchase program which began in the third quarter of 1996. The securities purchased under this program were funded with Federal Home Loan Bank advances with similar repricing or maturity characteristics in order to enhance net interest income and returns on equity, while limiting interest rate risk. The majority of growth in net interest income in 1997 was attributable to this investment program. The FTE rate of return on securities was 6.86% in 1997, down from 7.23% in 1996. The decrease in yield reflects lower marginal rates on investment purchases during 1997 relative to the prior year. Average loans amounted to $438.3 million in 1997, up 9.9% from $398.7 million in 1996, with all loan categories showing balance increases. The FTE rate of return on total loans was 8.95% in 1997, down slightly from 9.08% in 1996, due primarily to lower yields on new loan originations. Yields on all categories of loans were down slightly from the prior year. The yield on residential real estate loans amounted to 8.20% in 1997, compared to 8.23% for 1996. Average residential mortgages rose 3.2% in 1997 and amounted to $180.5 million. The yields on commercial loans amounted to 9.55% and 9.77% in 1997 and 1996, respectively. Average commercial loans amounted to $189.9 million in 1997, up 14.0% over prior year levels. Average consumer loans grew 18.7% in 1997 to $67.9 million. The yield on consumer loans amounted to 9.31% in 1997, down from 9.68% in 1996. The decline in loan yields on commercial and consumer loans is attributable more to increasingly competitive loan pricing than to fluctuations in interest rates. Average interest-bearing liabilities rose by 37.3% during 1997, due primarily to higher levels of FHLB advances. Interest expense amounted to $29.5 million, up 49.9% from 1996. The increase was mainly due to increased FHLB advances outstanding, as well as higher rates paid on time deposits. The rate paid on interest-bearing liabilities rose from 4.24% in 1996 to 4.63% in 1997 primarily due to increased levels of FHLB advances. Average Federal Home Loan Bank advances increased by $129.2 million from 1996 and amounted to $182.8 million in 1997. The advances were used primarily to match fund the purchase of securities under the Corporation's investment purchase program. The average rate paid on Federal Home Loan Bank advances for 1997 was 5.90%, a decrease of 5 basis points from the prior year. Average savings deposits increased by 1.5% from 1996 and fell 20 basis points in the rate paid, while average time deposits grew 12.8% in 1997 with an increase of 10 basis points in the rate paid. These factors offset the benefit of an increase in average demand deposits, an interest-free source of funding. Average demand deposits increased by 12.4% from 1996 and amounted to $70.2 million in 1997. 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 by assuming a 34% federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. 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, 1997 1996 1995 ------------------------------------------------------------------------------------------------------------------------ Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------------------------------------ Assets: Residential real estate loans $180,545 14,796 8.20 $174,964 14,391 8.23 $175,248 14,589 8.32 Commercial and other loans 189,929 18,133 9.55 166,566 16,271 9.77 168,060 16,286 9.69 Consumer loans 67,855 6,317 9.31 57,188 5,535 9.68 48,922 4,916 10.05 ------------------------------------------------------------------------------------------------------------------------ Total loans 438,329 39,246 8.95 398,718 36,197 9.08 392,230 35,791 9.12 Federal funds sold and other short term investments 6,921 376 5.44 3,927 209 5.32 14,770 855 5.79 Taxable debt securities 239,612 16,141 6.74 111,553 7,661 6.87 69,168 4,540 6.56 Nontaxable debt securities 15,789 1,042 6.60 15,794 1,033 6.54 11,148 743 6.67 Corporate stocks and FHLB stock 27,976 2,343 8.37 18,075 1,889 10.45 11,046 1,201 10.87 ------------------------------------------------------------------------------------------------------------------------ Total securities 290,298 19,902 6.86 149,349 10,792 7.23 106,132 7,339 6.91 ------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 728,627 59,148 8.12 548,067 46,989 8.57 498,362 43,130 8.65 ------------------------------------------------------------------------------------------------------------------------ Cash and due from banks 15,673 15,627 13,866 Allowance for loan losses (8,715) (8,291) (8,740) Premises and equipment, net 20,791 15,850 14,784 Other 18,759 14,759 15,641 ------------------------------------------------------------------------------------------------------------------------ Total assets $775,135 $586,012 $533,913 ------------------------------------------------------------------------------------------------------------------------ Liabilities and Shareholders' Equity: Savings deposits $177,162 3,509 1.98 $174,565 3,797 2.18 $178,666 3,946 2.21 Time deposits 261,665 14,329 5.48 232,007 12,478 5.38 224,169 11,770 5.25 FHLB advances 182,781 10,782 5.90 53,604 3,189 5.95 20,603 1,274 6.19 Other 15,250 857 5.62 3,650 203 5.56 420 25 5.91 ------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 636,858 29,477 4.63 463,826 19,667 4.24 423,858 17,015 4.01 ------------------------------------------------------------------------------------------------------------------------ Demand deposits 70,234 62,464 55,189 Other liabilities 4,365 3,381 5,172 Shareholders' equity 63,678 56,341 49,694 ------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $775,135 $586,012 $533,913 ------------------------------------------------------------------------------------------------------------------------ Net interest income $29,671 $27,322 $26,115 ------------------------------------------------------------------------------------------------------------------------ Interest rate spread 3.49 4.33 4.64 Net interest margin 4.07 4.99 5.24 -----------------------------------------------------------------------------------------------------------------------
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, 1997 1996 1995 - -------------------------------------------------------------------------------- Commercial and other loans $156 $91 $87 Taxable debt securities (1) 434 254 197 Nontaxable debt securities 366 368 283 Corporate stocks and FHLB stock 413 470 277 (1)Represents adjustment for U.S. Treasury and government agency obligations which are exempt from state income taxes only.
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis) 1997/1996 1996/1995 1995/1994 -------------------------------------------------------------------------------------------------------------------------- Net Net Net (Dollars in thousands) Volume Rate Change Volume Rate Change Volume Rate Change -------------------------------------------------------------------------------------------------------------------------- Interest on: Interest-earning assets: Residential real estate loans $458 (53) 405 $(24) (174) (198) $372 744 1,116 Commercial and other loans 2,238 (376) 1,862 (145) 130 (15) 118 2,205 2,323 Consumer loans 1,000 (218) 782 806 (187) 619 1,046 102 1,148 Federal funds sold and other short term investments 162 5 167 (581) (65) (646) 434 165 599 Taxable debt securities 8,591 (111) 8,480 2,913 208 3,121 28 331 359 Nontaxable debt securities - 9 9 304 (14) 290 155 26 181 Corporate stocks and FHLB stock 699 (245) 454 1,009 (321) 688 348 (96) 252 -------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 13,148 (989) 12,159 4,282 (423) 3,859 2,501 3,477 5,978 -------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings deposits 56 (344) (288) (90) (59) (149) (400) 11 (389) Time deposits 1,620 231 1,851 417 291 708 1,921 1,932 3,853 FHLB advances 7,620 (27) 7,593 1,965 (50) 1,915 (99) 95 (4) Other 654 - 654 180 (2) 178 (56) 22 (34) -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 9,950 (140) 9,810 2,472 180 2,652 1,366 2,060 3,426 -------------------------------------------------------------------------------------------------------------------------- Net interest income $3,198 (849) 2,349 $1,810 (603) 1,207 $1,135 1,417 2,552 --------------------------------------------------------------------------------------------------------------------------
Noninterest Income Noninterest income is an important source of revenue for the Corporation. For the year ended December 31, 1997, noninterest income, excluding net gains on sales of securities, accounted for 13.9% of gross revenue. Washington Trust generates recurring noninterest income by charging for trust-related services such as management of customer investment portfolios, trusts and estates, and by assessing fees for servicing deposit accounts, servicing residential mortgages sold in the secondary market, and processing merchant credit card activity. Revenue from trust-related services continues to be the largest component of noninterest income. Trust revenue represented 43.8% of noninterest income and amounted to $4.5 million in 1997, up by 19.0% from the $3.8 million reported in 1996. This increase in trust revenue is primarily attributable to the increase in assets under management, which amounted to $643.6 million at December 31, 1997, up from $538.6 million in 1996. Service charges on deposit accounts rose 12.0% to $2.4 million in 1997. Changes in the fee structures of various deposit products during the year, as well as growth in the Corporation's total deposit base, were contributing factors in this increase. Net gains on loan sales totaled $532 thousand for the year ended December 31, 1997, up from net gains of $220 thousand during 1996, due to increased loan sales in 1997. Gains on loan sales include the capitalization of mortgage servicing rights of $216 thousand and $153 thousand in 1997 and 1996, respectively. The Corporation retains servicing rights on substantially all residential mortgage loans sold. Mortgage servicing fee income amounted to $338 thousand for the year ended December 31, 1997, down slightly from the prior year amount. Servicing income as a percentage of average loans serviced was 32 basis points in 1997, down from 36 basis points in the prior year due to the amortization of capitalized mortgage servicing rights. The balance of serviced loans at December 31, 1997 amounted to $119.5 million, compared to $101.3 million at December 31, 1996. Noninterest Expense Total noninterest expense rose 18.7% to $24.4 million in 1997. This increase was primarily attributable to higher salaries and to increases in occupancy, equipment and other costs associated with Washington Trust's branch expansion efforts. Occupancy costs totaled $2.0 million in 1997, up 52.1% from the 1996 amount of $1.3 million. Included in net occupancy expense was an impairment write-down of approximately $220 thousand which was recorded in the fourth quarter of 1997. Depreciation expense associated with equipment purchases in 1997 amounted to $1.4 million, up 53.8% over the comparable 1996 amount. Foreclosed property costs and expenses associated with credit and collection efforts were down in 1997 due to the decline in the number of foreclosed properties and the level of nonperforming loans. (See discussion under "Asset Quality" for additional information.) Foreclosed property costs in 1997 fell 25.2% from the prior year, while credit and collection cost were down 28.0% from 1996 levels. Income Taxes Income tax expense amounted to $3.6 million and $4.3 million in 1997 and 1996, respectively. The Corporation's effective tax rate was 28.6% in 1997, down from the 1996 rate of 33.8% due to the implementation of tax planning strategies designed to reduce income taxes. These rates differed from the federal rate of 34.0% due to the benefits of tax-exempt income and the dividends received deduction as well as the effect of state income taxes. During the fourth quarter of 1997, the Corporation recorded a one-time tax benefit of $293 thousand resulting from the implementation of tax planning strategies. The Corporation had a net deferred tax liability amounting to $2.0 million and $285 thousand at December 31, 1997 and 1996, respectively. The increase in the net liability was primarily attributable to the increase in unrealized gains on securities available for sale. A significant portion of the Corporation's gross deferred tax asset is expected to be realized for tax purposes within a five year period from future taxable income and the reversal of existing deferred tax liabilities. (See Note 12 to the Consolidated Financial Statements for additional information regarding income taxes.) Financial Condition Securities Securities are designated as either available for sale or held to maturity at the time of purchase. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Securities designated as held to maturity are part of the Corporation's portfolio of long-term interest-earning assets. These securities are classified as long-term because the Corporation has the intent and ability to hold them until maturity. Securities held to maturity are reported at amortized cost. Securities Available for Sale The amortized cost of securities available for sale at December 31, 1997 amounted to $225.7 million, an increase of $34.9 million over the 1996 amount. This increase is mainly attributable to purchases of U.S. Treasury and U.S. government-sponsored agency obligations under an investment program which began in the second quarter of 1996. At December 31, 1997, the net unrealized gains on securities available for sale amounted to $11.7 million, an increase of $4.2 million over the comparable 1996 amount. This increase is attributable to both the rise in the equity markets and the effect of decreases in medium and long-term bond rates that occurred during 1997. (See Note 3 to the Consolidated Financial Statements for detail of unrealized gains and losses associated with securities available for sale.) Securities Held to Maturity The amortized cost of securities held to maturity increased by $23.9 million, to $51.8 million at December 31, 1997. This increase is attributable to purchases of U.S. government-sponsored agency obligations. The net unrealized gain on securities held to maturity amounted to $779 thousand at December 31, 1997, up by $590 thousand from the 1996 amount of $189 thousand. This increase is attributable to the decline in medium and long-term bond rates that occurred since December 31, 1996. Federal Home Loan Bank Stock The Corporation is required to maintain a level of investment in FHLB stock which is based on the level of its FHLB advances. As a result of the increase in FHLB advances during 1997, the Corporation increased its investment in FHLB stock from $11.7 million at December 31, 1996 to $16.4 million at December 31, 1997. Loans Total loans amounted to $455.9 million at December 31, 1997, up by $36.9 million, or 8.8%, from the December 31, 1996 amount of $419.0 million. Total residential real estate loans increased by $11.8 million, or 6.7%, in 1997. Declining interest rates in 1997 created a refinancing environment that lead to growth in 15-year fixed rate mortgage originations. Total commercial loans increased by $13.9 million, or 7.7%, in 1997. The opening of additional branches and expansion of the Corporation's market area during 1997 contributed to the increase in commercial loans. Strong consumer loan growth continued in 1997. Consumer loans were up by $11.2 million, or 17.8%, in 1997, with the largest increase occurring in the home equity line of credit portfolio. In response to consumer demand, the Corporation channeled its marketing strategies to competitive home equity line of credit products resulting in the increase. At December 31, 1997, credit card loans amounted to $5.2 million, or 1.1% of total loans, compared to $4.7 million, or 1.1% of total loans, at December 31, 1996. Deposits Total deposits at December 31, 1997 amounted to $530.9 million, up 11.4% from the prior year balance of $476.6 million. The increase in deposits is attributable to the additional branch offices opened in 1997, as well as growth in time deposits in denominations of $100 thousand or more which increased by $19.5 million in 1997. All categories of deposits increased over prior year levels. Time deposits rose by 12.1% to $270.6 million, savings deposits (regular savings, NOW and money market accounts) rose by 8.8% to $185.1 and total demand deposits rose by 15.8% to $75.3 million. Borrowings Washington Trust uses advances from the Federal Home Loan Bank of Boston as well as other short-term borrowings as part of its overall funding strategy. The additional FHLB advances and short-term borrowings were used to meet short-term liquidity needs, to fund loan growth and to purchase securities under the investment program initiated in 1996. Total advances amounted to $187.0 million at December 31, 1997, up from $138.5 million one year earlier. (See Note 10 to the Consolidated Financial Statements for additional information about borrowings.) Asset Quality Nonperforming Assets Nonperforming assets include nonaccrual loans and other real estate owned. Nonperforming assets declined to .96% of total assets at December 31, 1997, compared to 1.24% of total assets at December 31, 1996. Nonaccrual loans as a percentage of total loans fell from 1.80% at the end of 1996 to 1.61% at December 31, 1997. Approximately $3.2 million, or 44.3% of total nonaccrual loans, were less than 90 days past due at December 31, 1997 The following table presents nonperforming assets and related ratios: (Dollars in thousands) December 31, 1997 1996 -------------------------------------------------------------------------- Nonaccrual loans: Residential real estate $1,290 $2,067 Commercial and other: Mortgages 1,977 2,133 Construction and development - 80 Other 3,616 2,881 Consumer 452 381 -------------------------------------------------------------------------- Total nonaccrual loans 7,335 7,542 Other real estate owned, net 497 1,090 -------------------------------------------------------------------------- Total nonperforming assets $7,832 $8,632 -------------------------------------------------------------------------- Nonaccrual loans as a percentage of total loans 1.61% 1.80% Nonperforming assets as a percentage of total assets .96% 1.24% Nonaccrual Loans Loans, with the exception of credit card loans and 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. Credit card loans remain on accruing status after becoming 90 days or more past due, but are generally charged off after becoming 180 days past due. Nonaccrual loans are returned to accrual status when the obligation has performed in accordance with the contract terms for a reasonable period of time and the ultimate collectibility of the contractual principal and interest is no longer doubtful. Included in accruing loans 90 days or more past due at December 31, 1997 are residential mortgages amounting to $623 thousand which are considered well-collateralized and in the process of collection and therefore are deemed to have no loss exposure.
(Dollars in thousands) December 31, 1997 1996 ----------------------------------------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $4,089 $3,099 Nonaccrual loans less than 90 days past due 3,246 4,443 ----------------------------------------------------------------------------------------------------------- Total nonaccrual loans $7,335 $7,542 ----------------------------------------------------------------------------------------------------------- Accruing loans 90 days or more past due, primarily all residential mortgages (1) $644 $1,447 ----------------------------------------------------------------------------------------------------------- (1) Not included in nonperforming assets
Restructured Loans Loans are considered restructured when the Corporation has granted concessions to a borrower due to the borrower's financial condition that it otherwise would not have considered. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. Included in nonaccrual loans at December 31, 1997, are loans amounting to $1.0 million whose terms have been restructured. There were no commitments to lend additional funds to borrowers whose loans had been restructured. Other Real Estate Owned Other real estate owned ("OREO") is comprised of properties acquired through foreclosure and other legal means, and loans determined to be substantively repossessed. A loan is considered to be substantively repossessed when the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings. OREO is carried at the lower of cost or fair value minus estimated costs to sell. A valuation allowance is maintained for potential declines in market value, known declines in market value, and estimated selling costs. The balance of OREO amounted to $497 thousand at December 31, 1997, down from the prior year amount of $1.1 million, as sales of foreclosed properties exceeded the level of foreclosures. During 1997, sales of foreclosed properties amounted to $1.6 million. Washington Trust has provided financing to facilitate the sales of some of these properties. Financing is generally provided at market rates with credit terms similar to those available to other borrowers. Allowance for Loan Losses Washington Trust assesses the quality of its loans by performing ongoing reviews of its portfolio to determine potential loss exposure and to assess delinquency trends. During this review, management gives consideration to such factors as overall borrower relationship, delinquency trends, credit and collateral quality, prior loss experience, current and expected economic conditions, and other pertinent factors. As a result of this process, charge-offs and other potential problem loans are identified and loan loss allowances are established. The following table reflects the activity in the allowance for loan losses: (Dollars in thousands) Years ended December 31, 1997 1996 ------------------------------------------------------------------------ Beginning balance $8,495 $7,785 Charge-offs, net of recoveries: Residential real estate (131) (136) Commercial: Mortgages (140) (290) Construction and development 7 (15) Other (508) 213 Consumer (288) (262) ------------------------------------------------------------------------ Net charge-offs (1,060) (490) Provision for loan losses 1,400 1,200 ------------------------------------------------------------------------ Ending balance $8,835 $8,495 ------------------------------------------------------------------------ Allowance for loan losses to nonaccrual loans 120.45% 112.64% Allowance for loan losses to total loans 1.94% 2.03% ------------------------------------------------------------------------ The provision for loan losses amounted to $1.4 million in 1997, up from $1.2 million in 1996. The provision amount is determined by management to maintain the allowance at a level which is deemed appropriate. Interest Rate Sensitivity and Liquidity Interest rate risk is one of the major market risks faced by the Corporation. The Corporation's Asset/Liability Committee ("ALCO") is responsible for establishing policy guidelines on acceptable exposure to interest rate risk and liquidity. The objective of the ALCO is to manage assets and funding sources to produce results which are consistent with Washington Trust's liquidity, capital adequacy, growth, risk and profitability goals. The ALCO establishes and monitors guidelines for proper origination and matching of assets and funding sources, and determines asset/liability origination and pricing strategies to meet its goals. The ALCO meets regularly to review the economic environment and the volume, mix and maturity of assets and liabilities, and implements appropriate changes in strategy that will manage the Corporation's exposure to interest rate risk and liquidity risk. 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 24-month period. The ALCO uses both parallel rate shocks of up to 200 basis points and Monte Carlo rate simulations based on the historical volatility of interest rates to perform income simulations. The simulations assume that the composition of the Corporation's balance sheet remains constant over the 24-month simulation horizon, and take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instrument classes which may vary under different interest rate scenarios. Prepayment estimates for the Corporation's loans are based on historical experience. Call options and prepayment characteristics for securities are calculated using industry-standard pricing and prepayment analytics. 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. As of December 31, 1997, net interest income simulation indicated greater negative exposure to falling interest rates to a degree that remains within tolerance levels established by the Corporation. The Corporation defines maximum unfavorable net interest income exposure to be a change of no more than 4% in net interest income over a 2-year 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, 1997. Interest rates are assumed to shift by 200 basis points over a 12-month period, except for core savings deposits, which are assumed to shift by only 100 basis points due to their historical insensitivity to rate changes. Further, core savings are assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenario used does not necessarily reflect the ALCO's view of the "most likely" change in interest rates over the next 24 months. Furthermore, since a static balance sheet is assumed, the results do not reflect the anticipated future net interest income of the Corporation for the same period. The following table presents these 24 month net interest income simulation results:
(Dollars in thousands) Flat Falling Rising Rates Rates Rates --------------------------------------------------------------------------------------------------------- Interest-earning assets: Fixed rate mortgage-backed securities $2,298 $2,190 $2,329 Adjustable rate mortgage-backed securities 14,251 10,480 17,697 Callable securities 10,334 9,655 10,702 Other securities 13,329 12,106 14,579 Fixed rate mortgages 19,505 18,398 20,031 Adjustable rate mortgages 10,121 8,595 11,706 Other fixed rate loans 18,268 17,979 18,555 Other adjustable rate loans 32,370 28,310 36,431 Interest rate floor contracts (net of premium amortization) 117 1,557 (327) --------------------------------------------------------------------------------------------------------- Total interest income 120,593 109,270 131,703 --------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Core savings deposits 7,008 5,531 9,046 Time deposits 28,511 23,777 33,253 Short-term borrowings 2,284 1,683 2,884 Federal Home Loan Bank advances 21,926 18,175 25,678 --------------------------------------------------------------------------------------------------------- Total interest expense 59,729 49,166 70,861 --------------------------------------------------------------------------------------------------------- Net interest income $60,684 $60,104 $60,842 ---------------------------------------------------------------------------------------------------------
The ALCO estimates that the negative exposure of net interest income to falling rates would result from historically smaller reductions in rates paid on deposits and increased cash flows from the Corporation's mortgage loans and investment securities portfolio, which would be reinvested at lower marginal rates as rates fall, assuming a static balance sheet. Conversely, net interest income should increase as rates rise because adjustable-rate assets will reset upward in yield, while rates paid on deposits would not rise to the same extent, based on historical experience. 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. In addition, since income simulations assume that the Corporation's balance sheet will remain static over the 24-month simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts. The Corporation also monitors the potential change in market value of its available for sale debt securities in parallel rate shifts of up to 200 basis points. The purpose is to determine market value exposure which may not be captured by income simulation, but which might result in changes to the Corporation's capital position. Results are calculated using industry-standard modeling analytics and securities data. The Corporation uses the results to manage the effect of market value changes on the Corporation's capital position. The following table summarizes the potential change in market value of the Corporation's available for sale debt securities as of December 31, 1997 resulting from immediate 200 basis point parallel rate shifts:
(Dollars in thousands) Falling Rising Rates Rates -------------------------------------------------------------------------------------------------------- Security Type: U.S. Treasury and Government-sponsored Agency securities (noncallable) $ 1,857 $ (1,718) U.S. Government-sponsored Agency securities (callable) 850 (2,000) Corporate securities 108 (102) Fixed rate mortgage-backed securities 47 (201) Adjustable rate mortgage-backed securities 1,614 (1,303) Adjustable rate collateralized mortgage obligations (145) (1,607) -------------------------------------------------------------------------------------------------------- Total change in market value of available for sale debt securities $ 4,331 $ (6,931) --------------------------------------------------------------------------------------------------------
During 1997, the Corporation purchased approximately $50 million in securities (primarily adjustable rate mortgage-backed securities which reprice in one year or less) to enhance net interest income and returns on equity. These securities were match funded with approximately $50 million in Federal Home Loan Bank advances. The decision to match fund these purchases limits the impact on the Corporation's interest rate risk profile by ensuring that repricing and cash flow characteristics of both assets and liabilities are similar. Interest rate risk exposure resulting from these purchases is incorporated in the Corporation's interest income simulation and market value analyses. The Corporation also uses gap analysis to provide a general overview of the Corporation's interest rate risk profile. At December 31, 1997, the Corporation's cumulative one-year gap was a negative $163.2 million, or 13.9% of earning assets. The following table details the amounts of interest-earning assets and interest-bearing liabilities at December 31, 1997 that are expected to mature or reprice in each of the time periods presented. To the extent applicable, amounts of assets and liabilities which mature or reprice within a particular period were determined in accordance with their contractual terms. Fixed rate mortgages, mortgage-backed securities and consumer installment loans have been allocated based on expected amortization and prepayment rates using standard industry assumptions. Savings, NOW and money market deposit accounts, which have no contractual term and are subject to immediate repricing, are presented in the under three-month category. Management believes that gap analysis has significant shortcomings as a measure of interest rate risk, as it does not address the effect of changes in interest rates nor the magnitude of resulting changes in net interest income. For this reason, the ALCO does not use gap analysis to establish interest rate risk targets. The following table summarizes the Corporation's gap analysis as of December 31, 1997:
(Dollars in thousands) 3 months 3 to 6 6 months 1 to 5 Over or less months to 1 year years 5 years --------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans $128,160 $45,540 $83,514 $101,838 $100,336 Debt securities 81,403 30,706 44,140 95,433 15,249 Other 13,430 - - - 38,686 --------------------------------------------------------------------------------------------------------------- Total interest-earning assets 222,993 76,246 127,654 197,271 154,271 Interest-bearing liabilities: Deposits 291,680 45,882 64,432 53,518 131 Short-term borrowings 20,337 - - - - Federal Home Loan Bank advances 72,500 48,288 47,000 11,062 8,151 --------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 384,517 94,170 111,432 64,580 8,282 --------------------------------------------------------------------------------------------------------------- Interest sensitivity gap per period $(161,524) $(17,924) $16,222 $132,691 $145,989 --------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap $(161,524) $(179,448) $(163,226) $(30,535) $115,454 --------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap - 1996 $(124,006) $(114,652) $(66,867) $(44,916) $95,459 ---------------------------------------------------------------------------------------------------------------
The Corporation supplements 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 which designate limits on the notional value of off-balance sheet transactions and require periodic evaluation of risks associated with these transactions, including counterparty credit risk. During 1995, the Corporation entered into interest rate floor contracts with a notional principal amount of $50 million and a five-year term maturing in February 2000. These contracts are intended to function as a hedge against reductions in interest income realized from prime-based loans. These contracts were purchased for a premium of $916 thousand, which is being amortized over the life of the contracts. The Corporation receives payment for these contracts if certain interest rates fall below specified levels. During 1997, the Corporation recorded income, net of premium amortization, of $92 thousand on its floor contracts. (See Note 7 to the Consolidated Financial Statements for additional information regarding the floor contracts.) 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 56.6% of total average assets in 1997. Other sources of funding include discretionary use of purchased liabilities (i.e., Federal Home Loan Bank term advances, securities sold under agreements to repurchase 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 ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained well within target ranges established by the ALCO during 1997. Net loans as a percentage of total assets fell to 54.9% at December 31, 1997, compared to 59.1% at December 31, 1996. Total securities as a percentage of total assets rose to 35.5% at December 31, 1997, up from 32.6% at December 31, 1996. These changes resulted primarily from planned growth related to the investment securities purchase program. For the year ended December 31, 1997, net cash provided by financing activities was $97.3 million. Proceeds from FHLB advances totaled $468.6 million, while repayments of FHLB advances totaled $420.1 million in 1997. Additionally, $46.2 million in deposits were generated primarily from branch expansion and growth of larger time deposits. Net cash used in investing activities was $101.1 million in 1997, the majority of which was used to purchase securities under the investment securities purchase program and for loan originations. In addition, approximately $5.1 million was used for additions to premises and equipment. While the Corporation does not have any significant capital commitments, it expects to continue to expend funds to upgrade and expand equipment and premises to support its operations. Net cash provided by operating activities amounted to $11.0 million in 1997, $9.1 million of which was generated by net income. (See the Consolidated Statements of Cash Flows for further information about sources and uses of cash.) Capital Resources Total shareholders' equity rose 13.1% during 1997 and amounted to $67.2 million at December 31, 1997. Capital growth resulted from $5.6 million of earnings retention and $1.2 million from stock option exercises. On November 19, 1997, the Corporation paid a stock split in the form of a three-for-two stock dividend. Additionally, cash dividends declared per share rose by 12.8% in 1997 for a total of $.53 per share. The ratio of total equity to total assets amounted to 8.3% at December 31, 1997, compared to 8.6% at December 31, 1996. The reduction in this ratio was due primarily to the growth in assets resulting from the investment securities purchase program. Book value rose to $10.20 per share at December 31, 1997, up from the year-earlier amount of $9.08 per share. The Corporation and the Bank are subject to various regulatory capital requirements. The Corporation and the Bank are categorized as well-capitalized under the regulatory framework for prompt corrective action. (See Note 15 to the Consolidated Financial Statements for additional discussion of capital requirements.) Litigation As discussed under Note 14 to the Corporation's Consolidated Financial Statements, the Bank is party to a lawsuit filed by a corporate customer and the customer's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by an officer of the customer. The suit seeks recovery from the Bank for losses directly related to the embezzlement of approximately $3.1 million, as well as consequential damages amounting to approximately $2.6 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. Additionally, the Bank has filed counterclaims against the customer and its principal shareholder, as well as claims against the officer responsible for the embezzlement. The Bank intends to vigorously defend the suit, as well as to vigorously pursue its counterclaims. Because of the numerous uncertainties which surround the litigation, management is 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. Year 2000 Compliance Many existing computer programs use only two digits to identify a year in the date field. This could cause many computer applications to fail or create erroneous results by or at the year 2000. The Corporation is currently evaluating the extent to which modifications of its existing computer systems will be necessary prior to the year 2000, as well as the ability of third party vendors to comply, in order to remain functional. The Corporation expects to complete the implementation of necessary modifications before the year 2000 and does not believe that the costs associated with these changes will have a material effect on the Corporation's results of operations or financial condition. Recent Accounting Developments Reporting Comprehensive Income Effective January 1, 1998, the Corporation will adopt Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". This Statement establishes standards for reporting and display of comprehensive income, which is defined as all changes in equity, except for those resulting from investments by and distribution to shareholders. SFAS No. 130 classifies net income as a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. This Statement also requires that comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Reporting Segments of an Enterprise and Related Information SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", is effective for financial statements of public business enterprises for periods beginning after December 15, 1997. This Statement provides reporting standards for financial and descriptive information on reportable operating segments. An operating segment is defined as a component of an enterprise for which separate financial information is available and reviewed regularly by the chief operating decision maker in order to make decisions about resources to be allocated to the segment and also to evaluate the segment's performance. SFAS No. 131 requires a corporation to disclose certain balance sheet and income statement information by operating segment, as well as provide a reconciliation of operating segment information to the corporation's consolidated balances. Disclosures about Pensions and Other Postretirement Benefits Effective January 1, 1998, the Corporation will adopt SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment of SFAS Nos. 87, 88 and 106". SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures required by SFAS Nos. 87, 88 and 106. The adoption of this pronouncement also requires restatement of disclosures for earlier periods. Comparison of 1996 with 1995 Washington Trust recorded net income of $8.4 million in 1996, a 9.6% increase over the $7.7 million of net income recorded in 1995. Diluted earnings per share amounted to $1.25 for 1996, up from $1.17 per share earned in 1995. ROA and ROE amounted to 1.44% and 14.95%, respectively in 1996. Comparable amounts for 1995 were 1.44% and 15.47%. Fully taxable equivalent net interest income rose 4.6% over the 1995 amount. The interest rate spread declined 31 basis points to 4.33% in 1996, while the net interest margin fell from 5.24% in 1995 to 4.99% in 1996. Growth in the securities portfolios and increases in interest-bearing sources of funding relative to noninterest-bearing sources of funding (i.e., demand deposits and shareholders' equity), as well as interest expense associated with increases in FHLB advances, were primarily responsible for the decrease in the net interest margin. The yield on total interest-earning assets amounted to 8.57% in 1996, down from 8.65% in 1995. The Corporation's cost of funds rose 23 basis points in 1996 to 4.24% due to changes in deposit mix as well as increases in volume. The rate of interest paid on time deposits rose 13 basis points, which resulted in a shift of funds from lower yielding savings deposits to the time deposit category. Total assets rose $147.3 million or 26.9% during 1996 to $694.9 million at December 31, 1996. Average assets amounted to $586.0 million in 1996, up 9.8% over the prior year. Asset growth was primarily attributable to an increase of $112.8 million in securities available for sale. Total securities available for sale amounted to $198.3 million at the end of 1996. Total loans increased by 8.4% in 1996 and amounted to $419.0 million at December 31, 1996. All categories of loans, except for commercial construction and development, exhibited increases over 1995 levels. Nonperforming assets declined to 1.24% of total assets at December 31, 1996, down from 1.88% of total assets at December 31,1995. The Corporation's loan loss provision amounted to $1.2 million in 1996, compared to $1.4 million in 1995. Net loan charge-offs amounted to $490 thousand in 1996, down from $2.9 million in 1995. Shareholders' equity rose by 12.3% in 1996. Approximately $5.3 million of this increase was attributable to earnings retention and $1.3 million from stock option exercises. Book value per share rose to $9.08 at December 31, 1996, up from the year-earlier amount of $8.25 per share. The ratio of capital to assets was 8.6% and 9.7% at December 31, 1996 and 1995, respectively. Dividends paid per share amounted to $.47 in 1996, up 14.6% from the prior year. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are contained herein. Page Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements INDEPENDENT AUDITORS' REPORT {firm logo here} KPMG Peat Marwick LLP 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 audit. We conducted our audits in accordance with generally accepted auditing standards. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ending December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP Providence, Rhode Island January 12, 1998
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED BALANCE SHEETS December 31, 1997 1996 - ----------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $12,925 $17,442 Federal funds sold and other short-term investments 13,203 1,548 Mortgage loans held for sale 3,772 744 Securities: Available for sale, at fair value 237,366 198,317 Held to maturity, at cost; fair value $52,586 in 1997 and $28,115 in 1996 51,807 27,926 - ----------------------------------------------------------------------------------------------------- Total securities 289,173 226,243 Federal Home Loan Bank stock, at cost 16,444 11,683 Loans 455,910 418,993 Less allowance for loan losses 8,835 8,495 - ----------------------------------------------------------------------------------------------------- Net loans 447,075 410,498 Premises and equipment, net 21,821 19,040 Accrued interest receivable 4,896 4,160 Other real estate owned, net 497 1,090 Other assets 4,587 2,498 - ----------------------------------------------------------------------------------------------------- Total assets $814,393 $694,946 - ----------------------------------------------------------------------------------------------------- Liabilities: Deposits: Demand $75,282 $65,014 Savings 185,073 170,172 Time 270,571 241,375 - ----------------------------------------------------------------------------------------------------- Total deposits 530,926 476,561 Dividends payable 927 785 Short-term borrowings 20,337 14,000 Federal Home Loan Bank advances 187,001 138,493 Accrued expenses and other liabilities 7,998 5,680 - ----------------------------------------------------------------------------------------------------- Total liabilities 747,189 635,519 - ----------------------------------------------------------------------------------------------------- Commitments and contingencies Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares in 1997 and 10 million shares in 1996; issued 6,601,947 shares in 1997 and 4,362,631 shares in 1996 413 273 Paid-in capital 3,705 3,764 Retained earnings 56,360 50,886 Net unrealized gain on securities available for sale 7,059 4,504 Treasury stock, at cost; 14,205 shares in 1997 (333) - - ----------------------------------------------------------------------------------------------------- Total shareholders' equity 67,204 59,427 - ----------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $814,393 $694,946 - -----------------------------------------------------------------------------------------------------
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 Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $39,090 $36,106 $35,704 Interest on securities 16,383 8,072 4,803 Dividends on corporate stock and Federal Home Loan Bank stock 1,930 1,419 924 Interest on federal funds sold and other short-term investments 376 209 855 - ------------------------------------------------------------------------------------------------------------------- Total interest income 57,779 45,806 42,286 - ------------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 3,509 3,797 3,946 Time deposits 14,329 12,478 11,770 Federal Home Loan Bank advances 10,782 3,189 1,280 Other 857 203 19 - ------------------------------------------------------------------------------------------------------------------- Total interest expense 29,477 19,667 17,015 - ------------------------------------------------------------------------------------------------------------------- Net interest income 28,302 26,139 25,271 Provision for loan losses 1,400 1,200 1,400 - ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 26,902 24,939 23,871 - ------------------------------------------------------------------------------------------------------------------- Noninterest income: Trust revenue 4,470 3,757 3,255 Service charges on deposit accounts 2,428 2,168 1,951 Merchant processing fees 994 817 731 Net gains on sales of securities 733 368 496 Net gains (losses) on loan sales 532 220 (136) Other income 1,055 990 906 - ------------------------------------------------------------------------------------------------------------------- Total noninterest income 10,212 8,320 7,203 - ------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 12,641 11,172 10,223 Net occupancy 1,977 1,300 1,222 Equipment 2,126 1,537 1,292 Deposit taxes and assessments 172 274 769 Merchant processing costs 773 637 529 Office supplies 684 534 462 Advertising and promotion 676 611 538 Other 5,336 4,471 4,320 - ------------------------------------------------------------------------------------------------------------------- Total noninterest expense 24,385 20,536 19,355 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 12,729 12,723 11,719 Income tax expense 3,642 4,298 4,031 - ------------------------------------------------------------------------------------------------------------------- Net income $9,087 $8,425 $7,688 - ------------------------------------------------------------------------------------------------------------------- Earnings per share - basic $1.38 $1.30 $1.21 Earnings per share - diluted $1.33 $1.25 $1.17 Cash dividends declared per share $.53 $.47 $.41
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 Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Common Stock Balance at beginning of year $273 $180 $180 Shares issued for stock option plan and other purposes 2 2 - 3-for-2 stock split in the form of a 50% stock dividend 138 91 - - ------------------------------------------------------------------------------------------------------------------ Balance at end of year 413 273 180 - ------------------------------------------------------------------------------------------------------------------ Paid-in Capital Balance at beginning of year 3,764 3,071 2,929 Shares issued for dividend reinvestment plan, stock option plan and other purposes (59) 693 142 - ------------------------------------------------------------------------------------------------------------------ Balance at end of year 3,705 3,764 3,071 - ------------------------------------------------------------------------------------------------------------------ Retained Earnings Balance at beginning of year 50,886 45,631 40,554 Net income 9,087 8,425 7,688 Cash dividends declared (3,475) (3,079) (2,611) 3-for-2 stock split in the form of a 50% stock dividend (138) (91) - - ------------------------------------------------------------------------------------------------------------------ Balance at end of year 56,360 50,886 45,631 - ------------------------------------------------------------------------------------------------------------------ Net Unrealized Gain on Securities Available for Sale Balance at beginning of year 4,504 4,382 2,802 Valuation adjustments, net of related income taxes 2,555 122 1,580 - ------------------------------------------------------------------------------------------------------------------ Balance at end of year 7,059 4,504 4,382 - ------------------------------------------------------------------------------------------------------------------ Treasury Stock Balance at beginning of year - (327) (682) Shares issued for dividend reinvestment plan, stock option plan and other purposes 1,256 567 355 Shares repurchased (1,589) (240) - - ------------------------------------------------------------------------------------------------------------------ Balance at end of year (333) - (327) - ------------------------------------------------------------------------------------------------------------------ Total Shareholders' Equity $67,204 $59,427 $52,937 - ------------------------------------------------------------------------------------------------------------------
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, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $9,087 $8,425 $7,688 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,400 1,200 1,400 Provision for valuation of other real estate owned 42 303 172 Depreciation of premises and equipment 2,103 1,448 1,331 Amortization of net deferred loan fees and costs (149) (150) (541) Amortization of premium in excess of accretion of discount on debt securities 957 292 100 Deferred income tax expense - 157 763 Net gains on sales of securities (733) (368) (496) Net (gains) losses on sales of other real estate owned (69) (351) 15 Net (gains) losses on loan sales (532) (220) 136 Proceeds from sales of loans 32,115 18,331 15,968 Loans originated for sale (32,532) (18,399) (16,219) Increase in accrued interest receivable (736) (621) (307) Decrease (increase) in other assets (841) 70 (924) Increase in accrued expenses and other liabilities 652 530 133 Other, net 216 (5) (394) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 10,980 10,642 8,825 - ------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Securities available for sale: Purchases (144,043) (168,325) (38,362) Proceeds from sales 63,600 35,683 16,469 Maturities and principal repayments 45,352 20,222 10,165 Securities held to maturity: Purchases (29,060) (4,475) (22,331) Maturities and principal repayments 5,166 5,356 8,770 Purchases of Federal Home Loan Bank stock (4,761) (8,688) (88) Loan originations (over) under principal collected on loans (39,973) (33,168) 5,152 Purchase of loans (324) - - Proceeds from sales of other real estate owned 1,032 993 310 Purchases of premises and equipment (5,122) (5,872) (1,222) Purchase of deposits, net of premium paid 7,014 - - - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (101,119) (158,274) (21,137) - ------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase in deposits 46,155 8,707 27,123 Net increase in short-term borrowings 6,337 14,000 - Proceeds from Federal Home Loan Bank advances 468,600 226,240 17,565 Repayment of Federal Home Loan Bank advances (420,092) (108,698) (20,136) Purchase of treasury stock (1,589) (240) - Proceeds from issuance of common stock 1,199 942 496 Cash dividends paid (3,333) (2,980) (2,490) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 97,277 137,971 22,558 - ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 7,138 (9,661) 10,246 Cash and cash equivalents at beginning of year 18,990 28,651 18,405 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $26,128 $18,990 $28,651 - ------------------------------------------------------------------------------------------------------------------ Noncash Investing and Financing Activities: Net transfers from loans to other real estate owned $809 $1,279 $666 Loans charged off 1,462 1,273 3,416 Loans made to facilitate the sale of OREO 412 915 855 Transfer of securities from the held-to-maturity to the available-for-sale category - - 37,131 Change in net unrealized gain on securities 2,555 122 1,580 Stock issued in settlement of directors' retirement plan - 320 - Supplemental Disclosures: Interest payments 17,036 8,195 7,366 Income tax payments 4,002 4,007 3,018
The accompanying notes are an integral part of these consolidated financial statements. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS General Washington Trust Bancorp, Inc. (the "Corporation") is a publicly-owned, registered bank holding company, organized under the laws of the State of Rhode Island. The Corporation provides a complete product line of financial services through its wholly-owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The Bank was originally chartered in 1800 and provides a variety of financial services including commercial, residential and consumer lending, retail and commercial deposit products and trust services through its branch offices in Rhode Island and Connecticut. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The activities of the Corporation and the Bank are subject to the regulatory supervision of the Federal Reserve Board and the FDIC, respectively. Both companies are subject to various Rhode Island and Connecticut business and banking regulations. (1) Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of the Corporation and the Bank. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification. The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. A material estimate which is particularly susceptible to change is the determination of the allowance for loan losses. Securities Securities Available for Sale The Corporation designates securities that it intends to use as part of its asset/liability strategy or that may be sold as a result of changes in market conditions, changes in prepayment risk, rate fluctuations, liquidity or capital requirements as available for sale. The determination to classify such securities as available for sale is made at the time of purchase. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Any decline in fair value below the amortized cost basis of an individual security deemed to be other than temporary is recognized as a realized loss in the accounting period in which the determination is made. The fair value of the security at the time of the write-down becomes the new cost basis of the security. Realized gains or losses from sales of equity securities are determined using the average cost method, while other realized gains and losses are determined using the specific identification method. Securities Held to Maturity The determination to classify debt securities in the held-to-maturity category is made at the time of purchase and is based on management's intent and ability to hold the securities until maturity. Debt securities in the held-to-maturity portfolio are stated at cost, adjusted for amortization of premium and accretion of discount (calculated on a method that approximates the interest method). Federal Home Loan Bank Stock The Bank is a member of the Federal Home Loan Bank of Boston ("FHLB"). As a requirement of membership, the Bank must own a minimum amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank may redeem FHLB stock in excess of the minimum required. In addition, the FHLB may require members to redeem stock in excess of the requirement. FHLB stock is redeemable at par, which equals cost. Since no market exists for these shares, they are valued at par. Mortgage Banking Activities Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost, net of unamortized deferred loan origination fees and costs, or market. Unrealized losses, if any, are charged to current period earnings. Mortgage Servicing Rights Rights to service mortgage loans for others are recognized as an asset, including rights acquired through both purchases and originations. The total cost of originated mortgage loans that are sold with servicing rights retained is allocated between the mortgage servicing rights and the loans without the mortgage servicing rights based on their relative fair values. Capitalized mortgage servicing rights are included in other assets and are amortized as an offset to other income over the period of estimated net servicing income. They are periodically evaluated for impairment based on their fair value. 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 credit card loans and 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 allowance for loan losses is available for future credit losses inherent in the loan portfolio. 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 provisions charged to earnings are added to the allowance to bring it to the desired level. While management believes that the allowance for loan losses is adequate, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies periodically review the Corporation's allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. Expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses. Other Real Estate Owned (OREO) Other real estate owned consists of property acquired through foreclosure and loans determined to be substantively repossessed. Real estate loans that are substantively repossessed include only those loans for which the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings. OREO is stated at the lower of cost or fair value minus estimated costs to sell at the date of acquisition or classification to OREO status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure is charged to the allowance for loan losses. A valuation allowance is maintained for known specific and potential market declines 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 Effective January 1, 1997, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on an approach that focuses on control, whereby after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS Statement No. 125" deferred certain provisions of SFAS No. 125 due to logistical issues concerning implementation. The adoption of SFAS No. 125 and SFAS No. 127 did not have an effect on the Corporation's financial statements. Interest Rate Risk Management Agreements The Corporation uses off-balance sheet financial instruments from time to time as part of its interest rate risk management strategy. Interest rate swap and floor agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Corporation does not enter into agreements for trading or speculative purposes. Therefore, these agreements are not marked to market. The net amounts to be paid or received on outstanding interest rate risk management agreements are recognized on the accrual basis as an adjustment to the related interest income or expense over the life of the agreements. Premiums paid for interest rate floor agreements are amortized as an adjustment to interest income over the term of the agreements. Unamortized premiums are included in other assets. Gains or losses resulting from the termination of interest rate swap and floor agreements on qualifying hedges of existing assets or liabilities are deferred and amortized over the remaining lives of the related assets/liabilities as an adjustment to the yield. Unamortized deferred gains/losses on terminated interest rate swap and floor agreements are included in the underlying assets/liabilities hedged. Deposit Taxes and Assessments Deposit taxes and assessments consist of amounts assessed to members of the Bank Insurance Fund by the FDIC and deposit taxes imposed by the State of Rhode Island. These amounts are calculated based on levels of bank deposits using rates established by the respective regulatory authorities. Pension Costs Costs associated with defined benefit plans are accounted for in accordance with SFAS No. 87, "Employers' Accounting for Pensions". Stock-Based Compensation The Corporation measures compensation cost for stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net income and earnings per share computed using the fair value based method of accounting for these plans as required by SFAS No. 123. Income Taxes Income tax expense is determined based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Earnings Per Share For 1997, the Corporation adopted SFAS No. 128, "Earnings per Share". This Statement specifies the computation, presentation, and disclosure requirements for earnings per share (EPS). SFAS No. 128 simplifies the standards for computing EPS previously found in APB Opinion No. 15 and makes them comparable to international EPS standards. The Statement replaces the presentation of primary EPS with basic EPS, requires dual presentation of basic and diluted EPS on the face of the statement of income, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The adoption of this pronouncement also requires restatement of all prior year EPS data presented. 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. (2) Cash and Due From Banks The Bank is required to maintain certain average reserve balances with the Federal Reserve. Such reserve balances amounted to $5,641 and $7,797 at December 31, 1997 and 1996, respectively. (3) Securities Securities are summarized as follows:
Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains Losses Value --------------------------------------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $89,632 $1,000 $(40) $90,592 Mortgage-backed securities 121,728 865 (61) 122,532 Corporate bonds 1,985 15 - 2,000 Corporate stocks 12,319 9,976 (53) 22,242 --------------------------------------------------------------------------------------------------------- Total securities available for sale 225,664 11,856 (154) 237,366 --------------------------------------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 23,932 245 (4) 24,173 Mortgage-backed securities 10,695 377 - 11,072 States and political subdivisions 17,180 161 - 17,341 --------------------------------------------------------------------------------------------------------- Total securities held to maturity 51,807 783 (4) 52,586 --------------------------------------------------------------------------------------------------------- Total securities $277,471 $12,639 $(158) $289,952 --------------------------------------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair December 31, 1996 Cost Gains Losses Value --------------------------------------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $48,713 $501 $(112) $49,102 Mortgage-backed securities 129,232 144 (872) 128,504 Corporate stocks 12,865 7,919 (73) 20,711 --------------------------------------------------------------------------------------------------------- Total securities available for sale 190,810 8,564 (1,057) 198,317 --------------------------------------------------------------------------------------------------------- Securities Held to Maturity: Mortgage-backed securities 12,344 185 - 12,529 States and political subdivisions 15,582 48 (44) 15,586 --------------------------------------------------------------------------------------------------------- Total securities held to maturity 27,926 233 (44) 28,115 --------------------------------------------------------------------------------------------------------- Total securities $218,736 $8,797 $(1,101) $226,432 ---------------------------------------------------------------------------------------------------------
Included in corporate stocks at December 31, 1997 are preferred stocks, which are callable at the discretion of the issuer, with an amortized cost of $6,848 and a fair value of $7,292. Call features on these stocks range from two months to nine 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.
Weighted Amortized Fair Average December 31, 1997 Cost Value Yield ----------------------------------------------------------------------------------------- Securities Available for Sale: Due in 1 year or less $13,905 $13,948 6.30% After 1 but within 5 years 78,030 78,670 6.44% After 5 but within 10 years 21,412 21,630 6.30% After 10 years 99,998 100,876 6.22% ----------------------------------------------------------------------------------------- Total debt securities available for sale 213,345 215,124 6.31% ----------------------------------------------------------------------------------------- Securities Held to Maturity: Due in 1 year or less 4,302 4,325 4.39% After 1 but within 5 years 35,159 35,586 6.25% After 5 but within 10 years 7,865 8,036 6.10% After 10 years 4,481 4,639 7.43% ----------------------------------------------------------------------------------------- Total debt securities held to maturity 51,807 52,586 6.17% ----------------------------------------------------------------------------------------- Total debt securities $265,152 $267,710 6.28% -----------------------------------------------------------------------------------------
At December 31, 1997, the Corporation owned debt securities with an aggregate carrying value of $34,498 which are callable at the discretion of the issuers. Primarily all of these securities are U.S. Treasury and government-sponsored agency obligations, included in the available-for-sale category. Final maturities of these securities range from three to thirteen years with call features ranging from one month to eight years. The following is a summary of amounts relating to sales of securities available for sale: Years ended December 31, 1997 1996 1995 ------------------------------------------------------------------------ Proceeds from sales $63,600 $35,683 $16,469 ------------------------------------------------------------------------ Realized gains $1,252 $626 $1,029 Realized losses (519) (258) (533) ------------------------------------------------------------------------ Net realized gains $733 $368 $496 ------------------------------------------------------------------------ Securities available for sale with a fair value of $29,127 and $41,965 were pledged to secure public deposits and for other purposes at December 31, 1997 and 1996, respectively. (4) Loans The following is a summary of loans:
December 31, 1997 1996 ---------------------------------------------------------------------------- Commercial and other: Mortgages (1) $62,264 $66,224 Construction and development (2) 3,539 4,174 Other (3) 127,956 109,485 ---------------------------------------------------------------------------- Total commercial and other 193,759 179,883 Residential real estate: Mortgages 181,790 171,423 Homeowner construction 6,097 4,631 ---------------------------------------------------------------------------- Total residential real estate 187,887 176,054 Consumer 74,264 63,056 ---------------------------------------------------------------------------- Total loans $455,910 $418,993 ---------------------------------------------------------------------------- (1) Amortizing mortgages, primarily secured by income producing property (2) Loans for construction of residential and commercial properties and for land development (3) Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate
Concentrations of Credit Risk The Corporation's lending activities are primarily conducted in southern Rhode Island and southeastern Connecticut. The Corporation grants single family and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. In addition, loans are granted for the construction of residential homes, commercial real estate properties, and for land development. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation's market area. Nonaccrual Loans The balance of loans on nonaccrual status as of December 31, 1997 and 1996 was $7,335 and $7,542, respectively. Interest income that would have been recognized had these loans been performing at originally contracted rates was approximately $800 in 1997 and $843 in 1996. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $552 in 1997 and $495 in 1996. Included in nonaccrual loans at December 31, 1997 and 1996 are loans amounting to $1,041 and $1,879, respectively, whose terms have been restructured. Impaired Loans Impaired loans consist of all nonaccrual commercial loans. The following is a summary of impaired loans: December 31, 1997 1996 ------------------------------------------------------------------------ Impaired loans requiring an allowance $5,131 $4,523 Impaired loans not requiring an allowance 363 572 ------------------------------------------------------------------------ Total recorded investment in impaired loans $5,494 $5,095 ------------------------------------------------------------------------ Years ended December 31, 1997 1996 ------------------------------------------------------------------------ Average recorded investment in impaired loans $5,436 $3,674 ------------------------------------------------------------------------ Interest income recognized on impaired loans $399 $267 ------------------------------------------------------------------------ Mortgage Servicing Activities At December 31, 1997 and 1996, mortgage loans sold to others and serviced by the Corporation on a fee basis under various agreements amounted to $119,471 and $101,261, respectively. Loans serviced for others are not included in the Consolidated Balance Sheets. The balance of capitalized mortgage servicing rights as of December 31, 1997 and 1996 was $293 and $126, respectively. Loans to Related Parties At December 31, 1997, 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 1997 was as follows: Balance at December 31, 1996 $2,671 Additions 716 Reductions (1,489) ------------------------------------------------------------------------ Balance at December 31, 1997 $1,898 ------------------------------------------------------------------------ (5) Allowance for Loan Losses The following is an analysis of the allowance for loan losses:
Years ended December 31, 1997 1996 1995 ------------------------------------------------------------------------------------------ Balance at beginning of year $8,495 $7,785 $9,328 Provision charged to expense 1,400 1,200 1,400 Recoveries of loans previously charged off 402 783 473 Loans charged off (1,462) (1,273) (3,416) ------------------------------------------------------------------------------------------ Balance at end of year $8,835 $8,495 $7,785 ------------------------------------------------------------------------------------------
Included in the allowance for loan losses at December 31, 1997, 1996 and 1995 was an allowance for impaired loans amounting to $916, $867 and $953, respectively. (6) Premises and Equipment The following is a summary of premises and equipment: December 31, 1997 1996 ------------------------------------------------------------------------ Land and improvements $1,884 $1,878 Premises and improvements 21,122 18,165 Furniture, fixtures and equipment 14,394 12,498 ------------------------------------------------------------------------ 37,400 32,541 Less accumulated depreciation 15,579 13,501 ------------------------------------------------------------------------ Total premises and equipment, net $21,821 $19,040 ------------------------------------------------------------------------ (7) Financial Instruments With Off-Balance Sheet Risk and Derivative Financial Instruments The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation's exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees and interest rate swaps and floors. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:
December 31, 1997 1996 --------------------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Commercial loans $20,444 $22,903 Home equity lines 20,526 13,982 Credit card lines 17,959 17,009 Other loans 8,506 7,472 Standby letters of credit 1,175 1,743 Financial instruments whose notional amounts exceed the amount of credit risk: Interest rate floor contracts 50,000 50,000
Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each borrower's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the borrower. Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Interest Rate Risk Management Agreements The Corporation uses interest rate swaps and floors from time to time as part of its interest rate risk management strategy. Swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g. fixed-rate for variable-rate payments) computed on a notional principal amount. A floor is a purchased contract that entitles the Corporation to receive payment from a counterparty if a rate index falls below a contractual rate. The amount of the payment is the difference between the contractual floor rate and the rate index multiplied by the notional principal amount of the contract. If the rate index does not fall below the contractual floor rate, no payment is received. The credit risk associated with swap and floor transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and thus, are not a measure of the Corporation's potential loss exposure. During 1995, the Corporation entered into interest rate floor contracts with a total notional amount of $50,000 which mature in February 2000. The purpose of the floor contracts is to offset the risk of future reductions in interest earned on certain floating rate loans. The Corporation receives payment under contracts with a total notional value of $30,000 when the prime rate falls below 9.0% and on the remaining $20,000 when 3-month LIBOR at quarterly resetting dates is below 6.1875%. The prime rate and 3-month LIBOR applicable to the outstanding floor contracts at December 31, 1997 were 8.5% and 5.8125%, respectively. At December 31, 1997, the fair value, or the value to the Corporation of terminating the contracts, was $663. The remaining unamortized premium for these contracts, included in other assets, amounted to $395 at December 31, 1997. The Corporation has not terminated any interest rate swap agreements or floor contracts and there are no unamortized deferred gains or losses. (8) Other Real Estate Owned An analysis of the composition of OREO follows: December 31, 1997 1996 ----------------------------------------------------------------------- Residential real estate $492 $142 Commercial real estate - 659 Land 81 494 ----------------------------------------------------------------------- 573 1,295 Valuation allowance (76) (205) ----------------------------------------------------------------------- Other real estate owned, net $497 $1,090 ----------------------------------------------------------------------- An analysis of the activity relating to OREO follows: Years ended December 31, 1997 1996 ----------------------------------------------------------------------- Balance at beginning of year $1,295 $2,115 Net transfers from loans 809 1,279 Sales (1,553) (2,134) Other 22 35 ----------------------------------------------------------------------- 573 1,295 Valuation allowance (76) (205) ----------------------------------------------------------------------- Other real estate owned, net $497 $1,090 ----------------------------------------------------------------------- The following is an analysis of activity relating to the OREO valuation allowance: Years ended December 31, 1997 1996 1995 ----------------------------------------------------------------------- Balance at beginning of year $205 $410 $570 Provision charged to expense 42 303 172 Sales (131) (458) (301) Selling expenses incurred (40) (50) (31) ----------------------------------------------------------------------- Balance at end of year $76 $205 $410 ----------------------------------------------------------------------- Net realized gains (losses) on dispositions of properties amounted to $69, $351 and ($15) in 1997, 1996 and 1995, respectively. These amounts are included in other noninterest expense in the Consolidated Statements of Income. (9) Time Certificates of Deposit Scheduled maturities of time certificates of deposit at December 31, 1997 were as follows: Years ending December 31: 1998 $213,062 1999 41,897 2000 10,765 2001 3,015 2002 1,702 2003 and thereafter 130 ----------------------------------------------------------------------- Balance at December 31, 1997 $270,571 ----------------------------------------------------------------------- The aggregate amount of time certificates of deposit in denominations of $100 or more was $59,270 and $39,782 at December 31, 1997 and 1996, respectively. (10) Borrowings Short-Term Borrowings Short-term borrowings consist primarily of securities sold under repurchase agreements which 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 obligation to repurchase such securities are reflected as a liability. The following is a summary of amounts relating to short-term borrowings:
Years ended December 31, 1997 1996 1995 -------------------------------------------------------------------------------------------------------- Maximum amount outstanding at any month-end $26,820 $14,000 $- -------------------------------------------------------------------------------------------------------- Average amount outstanding $14,773 $3,260 $93 --------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Advances The following table presents scheduled maturities and weighted average interest rates paid on Federal Home Loan Bank advances outstanding at December 31, 1997:
Weighted Average Rate Amount --------------------------------------------------------------------------------------------- Years ending December 31: 1998 5.83% $168,158 1999 6.34% 8,208 2000 6.66% 761 2001 6.71% 819 2002 6.65% 2,689 2003 and thereafter 6.74% 6,366 ---------------------------------------------------------------------------------------------- Balance at December 31, 1997 $187,001 ----------------------------------------------------------------------------------------------
In addition to the outstanding advances, the Bank also has access to an unused line of credit amounting to $13,927 at December 31, 1997. Under agreement with the FHLB, the Bank is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances. Qualified collateral may consist of residential mortgage loans, U.S. government or agency securities, and amounts maintained on deposit at the FHLB. The Bank maintains qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at December 31, 1997. (11) Employee Benefits Pension Plan The Corporation's noncontributory defined benefit pension plan covers substantially all full-time employees. Benefits are based on an employee's years of service and highest 3-year compensation. The plan is funded on a current basis, in compliance with the requirements of the Employee Retirement Income Security Act. The following table presents the Plan's funded status:
October 1, 1997 1996 --------------------------------------------------------------------------------------------------------- Vested accumulated benefit obligation $(8,497) $(7,191) Nonvested accumulated benefit obligation (672) (566) Effect of future compensation increases (2,543) (1,915) --------------------------------------------------------------------------------------------------------- Projected benefit obligation (11,712) (9,672) Plan assets at fair value (1) 14,392 11,494 --------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $2,680 $1,822 --------------------------------------------------------------------------------------------------------- (1) Primarily listed stocks and fixed income securities The assumptions used in determining the projected benefit obligation were as follows: Discount rate 7.25% 7.50% Rate of increase in compensation levels 5.00% 5.00%
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:
October 1, 1997 1996 -------------------------------------------------------------------------------------------------------- Unrecognized net gain $2,163 $1,539 Unrecognized prior service cost (351) (384) Unrecognized net transition asset being amortized over 21 years 61 67 Prepaid pension cost 807 600 -------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $2,680 $1,822 --------------------------------------------------------------------------------------------------------
The assumptions used and the components of net pension cost for the years ended December 31, 1997, 1996 and 1995 include the following:
Years ended December 31, 1997 1996 1995 -------------------------------------------------------------------------------------------------------- Assumptions used: Discount rate 7.50% 7.00% 8.00% Rate of increase in compensation levels 5.00% 5.00% 6.00% Expected long term rate of return on plan assets 8.00% 8.00% 8.75% Net pension cost: Service cost; benefits earned during this period $373 $407 $345 Interest cost on projected benefit obligation 739 679 654 Actual return on plan assets (2,824) (1,165) (1,694) Net amortization and deferral 2,025 447 1,002 -------------------------------------------------------------------------------------------------------- Net periodic pension cost $313 $368 $307 --------------------------------------------------------------------------------------------------------
Supplemental Pension Plan The Corporation has a nonqualified retirement plan to provide supplemental retirement benefits to certain employees, as defined in the plan. The projected benefit obligation for this plan amounted to $699 and $698 at December 31, 1997 and 1996, respectively. The expense of this plan amounted to $110 and $120 in 1997 and 1996, respectively. The actuarial assumptions used for this supplemental plan are the same as those used for the Corporation's regular pension plan. Accrued and unpaid benefits under this plan are an unfunded obligation of the Bank. The accrued pension liability related to this plan amounted to $270 and $211 at December 31, 1997 and 1996, respectively. Savings and Profit Sharing Plan The Corporation has a qualified savings and profit sharing plan. The plan provides a specified match of employee contributions for substantially all full-time employees. In addition, full-time employees, excluding those key employees participating in the Short-Term Incentive Plan, are eligible for an annual benefit pursuant to a formula based on return on equity. Total employer matching contributions under this plan amounted to $223, $198 and $186 in 1997, 1996 and 1995, respectively. The amount of the profit sharing benefit was $286, $245 and $239 for 1997, 1996 and 1995, respectively. Short-Term Incentive Plan The Corporation's nonqualified Short-Term Incentive Plan rewards key employees for their contributions to the Corporation's success. This plan provides for annual payments up to a maximum percentage of each participant's base salary, which percentages vary among participants. Payment amounts are based on the achievement of target levels of return on equity and/or the achievement of individual objectives. Participants in this plan are not eligible to receive benefits provided under the profit sharing component of the Savings and Profit Sharing Plan. The expense of the Short-Term Incentive Plan amounted to $640, $597 and $501 in 1997, 1996 and 1995, respectively. Directors' Retainer Continuation Plan The Corporation has a nonqualified plan which provides retirement benefits to non-officer directors. On October 1, 1996, the provisions of the plan were terminated for active directors and the accrued benefit was settled through the issuance of common stock (Note 15). The benefits provided under this plan continue for retired directors. The plan pays the regular quarterly retainer in effect at the time of departure for as many quarters as the director served with the Corporation or the Bank. The expense of this plan is included in other noninterest expense and amounted to $36, $63 and $101 for 1997, 1996 and 1995, respectively. Accrued and unpaid benefits under this plan are an unfunded obligation of the Bank. The accrued liability related to this plan amounted to $263 and $261 at December 31, 1997 and 1996, respectively. (12) Income Taxes The components of income tax expense were as follows:
Years ended December 31, 1997 1996 1995 ------------------------------------------------------------------------------------------------------- Current expense: Federal $3,405 $3,322 $2,760 State 237 819 508 ------------------------------------------------------------------------------------------------------- Total current expense 3,642 4,141 3,268 ------------------------------------------------------------------------------------------------------- Deferred expense (benefit): Federal 445 181 762 State (445) (24) 169 Change in valuation allowance for deferred tax assets - - (168) ------------------------------------------------------------------------------------------------------- Total deferred expense - 157 763 ------------------------------------------------------------------------------------------------------- Total income tax expense $3,642 $4,298 $4,031 -------------------------------------------------------------------------------------------------------
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:
Years ended December 31, 1997 1996 1995 ------------------------------------------------------------------------------------------------------- Tax expense at Federal statutory rate $4,328 $4,326 $3,984 Increase (decrease) in taxes resulting from: Tax-exempt income (282) (237) (187) Dividends received deduction (253) (282) (168) State tax, net of Federal income tax benefit (137) 553 446 Effect of change in state tax rate - (43) - Change in valuation allowance for deferred tax assets - - (168) Other (14) (19) 124 ------------------------------------------------------------------------------------------------------- Total income tax expense $3,642 $4,298 $4,031 -------------------------------------------------------------------------------------------------------
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 1997 and 1996 are as follows: December 31, 1997 1996 ----------------------------------------------------------------------- Gross deferred tax assets: Allowance for loan losses $2,890 $3,285 Deferred loan origination fees 249 486 Interest on nonaccrual loans 270 413 Other 838 762 ----------------------------------------------------------------------- Gross deferred tax assets 4,247 4,946 ----------------------------------------------------------------------- Gross deferred tax liabilities: Securities available for sale (3,987) (3,003) Premises and equipment (1,093) (1,206) Deferred loan origination costs (643) (620) Pension (264) (227) Other (210) (175) ----------------------------------------------------------------------- Gross deferred tax liabilities (6,197) (5,231) ----------------------------------------------------------------------- Net deferred tax liability $(1,950) $ (285) ----------------------------------------------------------------------- In addition to future taxable income, a primary source of recovery of deferred tax assets is taxes paid in prior years available for carryback. (13) Operating Leases At December 31, 1997, the Corporation was committed to rent premises used in banking operations under noncancellable operating leases. Rental expense under the operating leases amounted to $131, $47 and $40 for 1997, 1996 and 1995, respectively. The minimum annual lease payments under the terms of these leases, exclusive of renewal provisions, are as follows: Years ending December 31: 1998 $311 1999 321 2000 324 2001 310 2002 211 Thereafter 116 ----------------------------------------------------------------------- $1,593 ----------------------------------------------------------------------- (14) Litigation On January 28, 1997, a suit was filed against the Bank by a corporate customer and the customer's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by the customer's former president and treasurer. The suit alleges that the Bank wrongly permitted this individual, while an officer of the customer, to divert funds from the customer's account at the Bank for his personal benefit. The claims against the Bank are based upon theories of breach of fiduciary duties, negligence, breach of contract, unjust enrichment and conversion. The suit seeks recovery for losses directly related to the embezzlement of approximately $3,100, as well as consequential damages amounting to approximately $2,600. 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. Additionally, the Bank has filed counterclaims against the customer and its principal shareholder, as well as claims against the officer responsible for the embezzlement. The Bank intends to vigorously defend the suit, as well as to vigorously pursue its counterclaims. Management and legal counsel are unable to form an opinion regarding the outcome of this matter. Consequently, no loss provision for this lawsuit has been recorded. The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation. (15) Shareholders' Equity Stock Splits A 3-for-2 stock split, in the form of a stock dividend, was paid on November 19, 1997 to shareholders of record on November 5, 1997. A 3-for-2 stock split on shares of common stock was also paid on October 15, 1996 to shareholders of record on October 1, 1996. The par value of the common stock remained unchanged at $.0625 per share. Cash payments were made in lieu of issuing fractional shares. All share and per share amounts in the consolidated financial statements and related notes have been restated to reflect these stock splits. Stock Repurchase Plan In December 1997, the Corporation's Board of Directors approved a program to repurchase up to 150,000, or approximately 2.3%, of its outstanding common shares. This plan replaces the June 1996 authorization to repurchase 130,500 shares. The Corporation plans to hold the repurchased shares as treasury stock to be used for general corporate purposes. As of December 31, 1997, there were no shares repurchased under the December 1997 plan. During the year ended December 31, 1997 and 1996, approximately 76,720 shares and 14,625 shares were repurchased under the June 1996 plan at a total cost of $1,589 and $240, respectively. Rights On August 15, 1996, the Corporation declared a dividend of one common share purchase right (a "Right") for each share of common stock payable on September 3, 1996 to shareholders of record on that date. Such Rights also apply to new issuances of shares after that date. Each Right entitles the registered holder to purchase from the Corporation one share of its common stock at a price of $53.33 per share, subject to adjustment. The Rights are not exercisable or separable from the common stock until the earlier of 10 days after a person or group (an "Acquiring Person") acquires beneficial ownership of 15% or more of the outstanding common shares or announces a tender offer to do so. The Rights, which expire on August 31, 2006, may be redeemed by the Corporation at any time prior to the acquisition by an Acquiring Person of beneficial ownership of 15% or more of the common stock at a price of $.001 per Right. In the event that any party becomes an Acquiring Person, each holder of a Right, other than Rights owned by the Acquiring Person, will have the right to receive upon exercise that number of common shares having a market value of two times the purchase price of the Right. In the event that, at any time after any party becomes an Acquiring Person, the Corporation is acquired in a merger or other business combination transaction or 50% or more of its assets or earning power are sold, each holder of a Right will have the right to purchase that number of shares of the acquiring company having a market value of two times the purchase price of the Right. Dividends The primary source of funds for dividends paid by the Corporation is dividends received from the Bank. The Corporation and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans, and advances from the Bank to the Corporation. Generally the Bank has the ability to pay dividends to the parent subject to minimum regulatory capital requirements. Under the most restrictive of these requirements, the Bank could have declared aggregate additional dividends of $25,593 as of December 31, 1997. Stock Option Plans The Corporation's 1997 Equity Incentive Plan (the "1997 Plan") permits the granting of options and other equity incentives to key employees, directors, advisors, and consultants. Up to 675,000 shares of the Corporation's common stock may be used from authorized but unissued shares, treasury stock, or shares available from expired awards. As of December 31, 1997, only options have been granted under the 1997 Plan and the exercise price of each option is the fair market value on the date of the grant. Options are designated either as non-qualified or as incentive options. In general, the option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof. Awards may be granted at any time until April 29, 2007. The 1988 Amended and Restated Stock Option Plan (the "1988 Plan") provided for the granting of options to directors, officers and key employees. The 1988 Plan permitted options to be granted at any time until December 31, 1997. The 1988 Plan provided for shares of the Corporation's common stock to be used from authorized but unissued shares, treasury stock, or shares available from expired options. Options were designated either as non-qualified or as incentive options. The exercise price of options granted was equal to the fair market value on the date of grant. In general, the option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof. The 1988 Plan permitted options to be granted with stock appreciation rights (SARs), however, no options under the 1988 Plan were 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 1997, 1996 and 1995:
Years ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price - ----------------------------------------------------------------------------------------------------------------- Outstanding at January 1 737,351 $8.60 800,185 $7.69 803,074 $7.26 Granted 159,578 $22.00 98,242 $14.43 88,894 $11.29 Exercised (140,548) $7.58 (158,604) $7.60 (88,288) $7.46 Cancelled (2,514) $15.48 (2,472) $9.57 (3,495) $7.08 - ----------------------------------------------------------------------------------------------------------------- Outstanding at December 31 753,867 $11.60 737,351 $8.60 800,185 $7.69 - ----------------------------------------------------------------------------------------------------------------- Exercisable at December 31 571,936 $9.06 598,700 $7.68 650,608 $7.24 - -----------------------------------------------------------------------------------------------------------------
The weighted average exercise price and remaining contractual life for options outstanding at December 31, 1997 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 - ----------------------------------------------------------------------------------------------------------------- $4.07 to $7.37 268,068 3.5 years $5.97 268,068 $5.97 $8.07 to $11.44 231,273 5.5 years $9.81 216,669 $9.71 $13.28 to $18.25 181,676 8.8 years $15.87 74,686 $15.15 $27.38 72,850 9.9 years $27.38 12,513 $27.38 - ----------------------------------------------------------------------------------------------------------------- Total 753,867 6.0 years $11.60 571,936 $9.06 - -----------------------------------------------------------------------------------------------------------------
As discussed in Note 1, the Corporation accounts for its stock option plan using the intrinsic value based method prescribed by APB Opinion No. 25, and in addition, is required to disclose pro forma net income and earnings per share using the fair value based method prescribed by SFAS No. 123. Accordingly, no compensation cost for these plans has been recognized in the Consolidated Statements of Income for 1997, 1996 and 1995. In determining the pro forma disclosures required by SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents pro forma net income and earnings per share assuming the stock option plan was accounted for using the fair value method prescribed by SFAS No. 123, the weighted average assumptions used and the grant date fair value of options granted in 1997, 1996 and 1995:
Years ended December 31, 1997 1996 1995 ----------------------------------------------------------------------------------------------------------- Net income As reported $9,087 $8,425 $7,688 Pro forma $8,783 $8,306 $7,625 Earnings per share - basic As reported $1.38 $1.30 $1.21 Pro forma $1.34 $1.28 $1.20 Earnings per share - diluted As reported $1.33 $1.25 $1.17 Pro forma $1.29 $1.24 $1.16 Weighted average fair value $4.31 $2.59 $2.13 Expected life 8.4 years 6.3 years 6.6 years Risk-free interest rate 6.3% 6.6% 6.5% Expected volatility 21.2% 17.2% 15.6% Expected dividend yield 4.25% 4.0% 4.0% The pro forma effect on net income and earnings per share for 1997, 1996 and 1995 is not representative of the pro forma effect on net income and earnings per share for future years because it does not reflect compensation cost for options granted prior to January 1, 1995.
Dividend Reinvestment Under the Amended and Restated Dividend Reinvestment and Stock Purchase Plan, 405,000 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, 1997, a total of 1,623,266 common stock shares were reserved for issuance under the 1988 Amended and Restated Stock Option Plan, the 1997 Equity Incentive Plan and the Amended and Restated Dividend Reinvestment and Stock Purchase Plan. Regulatory Capital Requirements The Corporation and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the FDIC, respectively. These requirements were established to more accurately assess the credit risk inherent in the assets and off-balance sheet activities of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 1997, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1997, 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, 1997 and 1996, as well as the corresponding minimum regulatory amounts and ratios:
To Be Well Capitalized Under Prompt For Capital Adequacy Corrective Action Actual Purposes Provisions ----------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------- As of December 31, 1997: Total Capital (to Risk-Weighted Assets): Consolidated $64,573 14.39% $35,901 8.00% $44,876 10.00% Bank $62,812 14.00% $35,901 8.00% $44,876 10.00% Tier 1 Capital (to Risk-Weighted Assets): Consolidated $58,924 13.13% $17,950 4.00% $26,925 6.00% Bank $57,163 12.74% $17,950 4.00% $26,925 6.00% Tier 1 Capital (to Average Assets): (1) Consolidated $58,924 7.47% $31,570 4.00% $39,462 5.00% Bank $57,163 7.24% $31,570 4.00% $39,462 5.00% As of December 31, 1996: Total Capital (to Risk-Weighted Assets): Consolidated $59,931 14.93% $32,102 8.00% $40,128 10.00% Bank $58,030 14.46% $32,102 8.00% $40,128 10.00% Tier 1 Capital (to Risk-Weighted Assets): Consolidated $54,872 13.67% $16,051 4.00% $24,077 6.00% Bank $52,971 13.20% $16,051 4.00% $24,077 6.00% Tier 1 Capital (to Average Assets): (1) Consolidated $54,872 8.62% $25,469 4.00% $31,837 5.00% Bank $52,971 8.32% $25,469 4.00% $31,837 5.00% (1) Leverage ratio
(16) Earnings per Share
Years ended December 31, 1997 1996 1995 -------------------------------------------------------------------------------------------------------- Basic Diluted Basic Diluted Basic Diluted ----------------------------------------------------------------- Net income $9,087 $9,087 $8,425 $8,425 $7,688 $7,688 Share amounts, in thousands: Average outstanding 6,574.6 6,574.6 6,490.4 6,490.4 6,374.2 6,374.2 Common stock equivalents - 254.9 - 232.0 - 171.8 -------------------------------------------------------------------------------------------------------- Weighted average outstanding 6,574.6 6,829.5 6,490.4 6,722.4 6,374.2 6,546.0 -------------------------------------------------------------------------------------------------------- Earnings per share $1.38 $1.33 $1.30 $1.25 $1.21 $1.17 --------------------------------------------------------------------------------------------------------
(17) Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Corporation disclose estimated fair values of its financial instruments. Fair value estimates are made as of a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any pricing adjustments that could result from the sale of the Corporation's entire holding of a particular financial instrument. Because no quoted market exists for a portion of the financial instruments, fair value estimates are based on subjective judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. Changes in assumptions could significantly affect the estimates of fair value. Fair value estimates, methods, and assumptions are set forth as follows: Cash and Securities The carrying amount of short-term instruments such as cash and federal funds sold is used as an estimate of fair value. The fair value of securities available for sale and held to maturity is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. No market exists for shares of the Federal Home Loan Bank of Boston. Such stock may be redeemed at par upon termination of FHLB membership and is therefore valued at par, which equals cost. Mortgage Loans Held for Sale The fair value of mortgage loans held for sale is estimated using the quoted market prices for sales of similar loans on the secondary market. Loans Fair values are estimated for categories of loans with similar financial characteristics. Loans are segregated by type and are then further segmented into fixed rate and adjustable rate interest terms to determine their fair value. The fair value of fixed rate commercial and consumer loans is calculated by discounting scheduled cash flows through the estimated maturity of the loan using interest rates offered at December 31, 1997 and 1996 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, 1997 and 1996. The discounted values of cash flows using the rates currently offered for deposits of similar remaining maturities were used to estimate the fair value of certificates of deposit. Securities Sold Under Agreements to Repurchase The carrying amount of securities sold under repurchase agreements approximates fair value. Federal Home Loan Bank Advances Rates currently available to the Corporation for advances with similar terms and remaining maturities are used to estimate fair value of existing advances. Off-Balance Sheet Instruments The fair values of interest rate swap agreements and floor contracts generally reflect the estimated amounts that the Corporation would receive or pay to terminate the contracts. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The following table presents the fair values of the Corporation's financial instruments:
December 31, 1997 1996 ------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------------------------------------------------------ Financial Assets On-balance sheet: Cash and cash equivalents $26,128 $26,128 $18,990 $18,990 Mortgage loans held for sale 3,772 3,828 744 744 Securities available for sale 237,366 237,366 198,317 198,317 Securities held to maturity 51,807 52,586 27,926 28,115 Federal Home Loan Bank stock 16,444 16,444 11,683 11,683 Loans, net of allowance for loan losses 447,075 456,626 410,498 414,839 Accrued interest receivable 4,896 4,896 4,160 4,160 Off-balance sheet financial instruments relating to assets: Interest rate floor contracts 395 663 580 1,174 Financial Liabilities On-balance sheet: Noninterest bearing demand deposits $75,282 $75,282 $65,014 $65,014 Non-term savings accounts 185,073 185,073 170,172 170,172 Certificates of deposit 270,571 271,629 241,375 242,220 Short term borrowings 20,337 20,337 14,000 14,000 Federal Home Loan Bank advances 187,001 187,173 138,493 138,536 Accrued interest payable 2,715 2,715 2,144 2,144 Other off-balance sheet financial instruments, consisting largely of loan commitments and letters of credit, contain provisions for fees, conditions and term periods which are consistent with customary market practices. Accordingly, the fair value amounts (considered to be the discounted present value of the remaining contractual fees over the unexpired commitment period) would not be material and therefore are not disclosed.
(18) Parent Company Financial Statements The following are parent company only financial statements of Washington Trust Bancorp, Inc. reflecting the investment in the bank subsidiary on the equity basis of accounting. The Statements of Changes in Shareholders' Equity for the parent company only are identical to the Consolidated Statements of Changes in Shareholders' Equity and are therefore not presented.
Statements of Income Years ended December 31, 1997 1996 1995 ----------------------------------------------------------------------------------------------- Dividends from bank subsidiary $3,750 $3,000 $2,832 Other expense 40 - - ----------------------------------------------------------------------------------------------- Net income before income taxes and undistributed earnings of subsidiary 3,710 3,000 2,832 Income tax benefit 14 - - ----------------------------------------------------------------------------------------------- Income before undistributed earnings of subsidiary 3,724 3,000 2,832 Equity in undistributed earnings of subsidiary 5,363 5,425 4,856 ----------------------------------------------------------------------------------------------- Net income $9,087 $8,425 $7,688 -----------------------------------------------------------------------------------------------
Balance Sheets December 31, 1997 1996 -------------------------------------------------------------------------------------------------------- Assets: Cash on deposit with bank subsidiary $1,388 $1,937 Investment in bank subsidiary at equity value 65,443 57,525 Dividend receivable from bank subsidiary 1,200 750 Due from bank subsidiary 100 - -------------------------------------------------------------------------------------------------------- Total assets $68,131 $60,212 -------------------------------------------------------------------------------------------------------- Liabilities: Dividends payable $927 $785 -------------------------------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares in 1997 and 10 million shares in 1996; issued 6,601,947 shares in 1997 and 4,362,631 shares in 1996 413 273 Paid-in capital 3,705 3,764 Retained earnings 56,360 50,886 Net unrealized gain on securities available for sale 7,059 4,504 Treasury stock, at cost (333) - -------------------------------------------------------------------------------------------------------- Total shareholders' equity 67,204 59,427 -------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $68,131 $60,212 --------------------------------------------------------------------------------------------------------
Statements of Cash Flows Years ended December 31, 1997 1996 1995 -------------------------------------------------------------------------------------------------------- Cash flow from operating activities: Net income $9,087 $8,425 $7,688 Adjustments to reconcile net income to net cash provided by operating activities: Equity effect of undistributed earnings of subsidiary (5,363) (5,425) (4,856) (Increase) decrease in dividend receivable (450) 90 (288) (Increase) decrease in due from bank subsidiary (100) - 9 -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,174 3,090 2,553 -------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Purchase of treasury stock (1,589) (240) - Proceeds from issuance of common stock 1,199 1,262 496 Cash dividends paid (3,333) (2,980) (2,490) --------------------------------------------------------------------------------------------------------- Net cash used in financing activities (3,723) (1,958) (1,994) --------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash (549) 1,132 559 Cash at beginning of year 1,937 805 246 -------------------------------------------------------------------------------------------------------- Cash at end of year $1,388 $1,937 $805 --------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Required information regarding directors is presented under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 18, 1998 prepared for the Annual Meeting of Shareholders to be held April 28, 1998 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 18, 1998 prepared for the Annual Meeting of Shareholders to be held April 28, 1998, 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 18, 1998 prepared for the Annual Meeting of Shareholders to be held April 28, 1998, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item appears under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 18, 1998 prepared for the Annual Meeting of Shareholders to be held April 28, 1998, 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 18, 1998 prepared for the Annual Meeting of Shareholders to be held April 28, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The financial statements of the Registrant required in response to this Item are listed in response to Part II, Item 8 of this Report. 2. Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-K and all other schedules to the consolidated financial statements of the Registrant have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto. (b) The following reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1997: On October 16, 1997, a Form 8-K was filed which reported that the Registrant's Board of Directors approved a 3-for-2 stock split on shares of common stock. The stock split, in the form of a stock dividend, was paid on November 19, 1997 to shareholders of record as of November 5, 1997. On December 22, 1997, a Form 8-K was filed which reported that the Registrant's Board of Directors approved a program to repurchase up to 150,000 shares of its common stock, or approximately 2.3% of its outstanding shares, in the open market or in private transactions, based upon market conditions. (c) Exhibit Index. Exhibit Number -------------- 3.a Restated Articles of Incorporation of the Registrant - Filed as Exhibit 3.(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (1) 3.b Amendment to Restated Articles of Incorporation - Filed as Exhibit 3.i to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1) 3.c Amended and Restated By-Laws of the Corporation - Filed herewith. 4 Rights Agreement between the Registrant and The Washington Trust Company dated as of August 15, 1996 (including Form of Right Certificate attached thereto as Exhibit A) - Filed as Exhibit 1 to the Registrant's Registration Statement on Form 8-A (File No. 000-13091) filed with the Commission on August 16, 1996. (1) 10.a Supplemental Pension Benefit and Profit Sharing Plan - Filed as Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (1) (2) 10.b Short Term Incentive Plan Description - Filed herewith. (2) 10.c Plan for Deferral of Directors' Fees - Filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (1) (2) 10.d Amended and Restated 1988 Stock Option Plan - Filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (1) (2) 10.e Vote of the Board of Directors of the Corporation which constitutes the 1996 Directors' Stock Plan - Filed as Exhibit 99.2 to the Registrant's Registration Statement on Form S-8 ( File No. 333-13167) filed with the Commission on October 1, 1996. (1) (2) 10.f The Registrant's 1997 Equity Incentive Plan - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1) (2) 10.g Change in Control Agreements with Executive Officers - Filed as Exhibit 10.b to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1) (2) 21 Subsidiaries of the Registrant - Filed as Exhibit 21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (1) 23 Consent of Independent Auditors - Filed herewith. 27 Financial Data Schedule ------------------ (1) Not filed herewith. In accordance with Rule 12b-32 promulgated pursuant to the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Commission, which are incorporated by reference herein. (2) Management contract or compensatory plan or arrangement (d) Financial Statement Schedules. None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WASHINGTON TRUST BANCORP, INC. -------------------------------- (Registrant) Date: February 19, 1998 By John C. Warren --------------------------- ------------------------------------ John C. Warren President, Chief Executive Officer and Director (principal executive officer) Date: February 19, 1998 By David V. Devault --------------------------- ------------------------------------ David V. Devault 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: February 19, 1998 Gary P. Bennett --------------------------- ------------------------------------ Gary P. Bennett, Director Date: February 19, 1998 Steven J. Crandall --------------------------- ------------------------------------ Steven J. Crandall, Director Date: February 19, 1998 Richard A. Grills --------------------------- ------------------------------------ Richard A. Grills, Director Date: February 19, 1998 Larry J. Hirsch --------------------------- ------------------------------------ Larry J. Hirsch, Director Date: February 19, 1998 Katherine W. Hoxsie --------------------------- ------------------------------------ Katherine W. Hoxsie, Director Date: --------------------------- ------------------------------------ Mary E. Kennard, Director Date: February 19, 1998 Joseph J. Kirby --------------------------- ------------------------------------ Joseph J. Kirby, Director Date: February 19, 1998 James W. McCormick, Jr. --------------------------- ------------------------------------ James W. McCormick, Jr., Director Date: --------------------------- ------------------------------------ Brendan P. O'Donnell, Director Date: February 19, 1998 Victor J. Orsinger II --------------------------- ------------------------------------ Victor J. Orsinger II, Director Date: February 19, 1998 Anthony J. Rose, Jr. --------------------------- ------------------------------------ Anthony J. Rose, Jr., Director Date: February 19, 1998 James P. Sullivan --------------------------- ------------------------------------ James P. Sullivan, Director Date: February 19, 1998 Neil H. Thorp --------------------------- ------------------------------------ Neil H. Thorp, Director EX-3 2 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 II OFFICES I. 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. II. 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 III MEETINGS OF STOCKHOLDERS III. 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. IV. 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. V. 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. VI. 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. VII. 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. VIII. 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 IX. 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. X. 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. XI. 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. XII. 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. XIII. 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. XIV. 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. XV. 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. XVI. 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. XVII. 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. XVIII. 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. XIX. 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. XX. 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. XXI. 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. XXII. 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 XXIII. 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. XXIV. 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. XXV. 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. XXVI. 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. XXVII. 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. XXVIII. 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. XXIX. 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. XXX. 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. XXXI. 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. XXXII. 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 XXXIII. 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. XXXIV. 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 XXXV. 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. XXXVI. 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. XXXVII. 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. XXXVIII. 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. XXXIX. 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. XL. 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. XLI. 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. XLII. 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. XLIII. 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. XLIV. 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. XLV. 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. XLVI. 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. XLVII. 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. XLVIII. 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 XLIX. 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. L. 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. LI. 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. LII. 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 LIII. 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. LIV. 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 LV. 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. LVI. 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 LVII. 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. LVIII. 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. LIX. 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. LX. 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. LXI. 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. EX-10 3 EXHIBIT 10.4 Short-Term Incentive Plan Description The following is a description of a 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. EX-23 4 EXHIBIT 23 Accountants' Consent The Board of Directors Washington Trust Bancorp, Inc.: We consent to incorporation by reference in the registration statement (Nos. 33-23048 and 333-13167) on Form S-8 and in the registration statement (Nos. 33-28065 and 333-13821) on Form S-3 of Washington Trust Bancorp, Inc. of our report dated January 12, 1998, relating to the consolidated balance sheets of Washington Trust Bancorp, Inc. and Subsidiary as of December 31, 1997 and 1996 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, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Washington Trust Bancorp, Inc. KPMG PEAT MARWICK LLP Providence, Rhode Island March 17, 1998 EX-27 5
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF WASHINGTON TRUST BANCORP, INC. AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 12,925 0 13,203 0 237,366 51,807 52,586 455,910 8,835 814,393 530,926 20,337 195,926 0 0 0 413 66,791 814,393 39,090 18,313 376 57,779 17,838 29,477 28,302 1,400 733 24,385 12,729 12,729 0 0 9,087 1.38 1.33 4.07 7,335 644 0 800 8,495 1,462 402 8,835 8,835 0 2,998
-----END PRIVACY-ENHANCED MESSAGE-----