-----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, QPStDKQAK0oBiBiBkCTyfdIaijp8t6kLDewpv7Wr+mL9Q3ijCHOeIfw+JEDO3lH7 kAs/ANnq2/rfMqcTwjd+ag== 0000737468-01-000002.txt : 20010319 0000737468-01-000002.hdr.sgml : 20010319 ACCESSION NUMBER: 0000737468-01-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010316 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: 1569905 BUSINESS ADDRESS: STREET 1: 23 BROAD ST CITY: WESTERLY STATE: RI ZIP: 02891 BUSINESS PHONE: 4013481200 10-K 1 0001.txt FORM 10-K FOR WASHINGTON TRUST BANCORP, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2000 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 the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant was $175,583,346 at February 27, 2001 which includes $21,840,577 held by The Washington Trust Company under trust agreements and other instruments. The number of shares of the registrant's common stock, $.0625 par value per share, outstanding as of February 27, 2001 was 12,019,617. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement dated March 20, 2001 for the Annual Meeting of Shareholders to be held April 24, 2001 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, 2000 TABLE OF CONTENTS Description Part I Item 1 Business Item 2 Properties Item 3 Legal Proceedings Item 4 Submission of Matters to a Vote of Security Holders Executive Officers of the Registrant Part II Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters Item 6 Selected Financial Data Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures about Market Risk Item 8 Financial Statements and Supplementary Data Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 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 certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation's (as hereinafter defined) actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general national or regional economic conditions, changes in interest rates, reductions in the market value of trust and investment management assets under administration, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in the size and nature of the Corporation's competition, changes in loan default and charge-off rates, risk of an adverse action in pending litigation and changes in the assumptions used in making such forward-looking statements. PART I ITEM 1. BUSINESS Washington Trust Bancorp, Inc. Washington Trust Bancorp, Inc. (the "Corporation" or "Washington Trust") is a publicly-owned, registered bank holding company, organized in 1984 under the laws of the state of Rhode Island, whose subsidiaries are permitted to engage in banking and other financial services and businesses. The Corporation conducts its business through its wholly owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The Corporation was formed in 1984 under a plan of reorganization in which outstanding common shares of The Washington Trust Company were exchanged for common shares of Washington Trust Bancorp, Inc. At December 31, 2000 the Corporation had total assets of $1.218 billion, total deposits of $735.7 million and total shareholders' equity of $89.2 million. On June 26, 2000, the Corporation completed its acquisition of Phoenix Investment Management Company, Inc. ("Phoenix"), an independent investment advisory firm located in Providence, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the acquisition was effected by means of merger of Phoenix with and into the Bank, the wholly owned subsidiary of the Corporation. The acquisition of Phoenix was a tax-free reorganization accounted for as a pooling of interests. Accordingly, the consolidated financial statements and other financial information of the Corporation have been restated to reflect the acquisition at the beginning of the earliest period presented. For the year ended December 31, 1999, Phoenix's investment management revenues totaled $3.4 million. The Washington Trust Company The Bank was originally chartered in 1800 as the Washington Bank and is the oldest banking institution headquartered in its market area. Its current corporate charter dates to 1902. See discussion under "Market Area and Competition" for further information. The Bank provides a broad range of financial services, including: Residential mortgages Internet banking services Commercial loans Commercial and consumer demand deposits Construction loans Savings, NOW and money market deposits Consumer installment loans Certificates of deposit Home equity lines of credit Retirement accounts Merchant credit card services Cash management services Automated teller machines (ATMs) Safe deposit boxes Telephone banking services Trust and investment management services Automated teller machines (ATMs) are located throughout the Bank's market area. The Bank is a member of various ATM networks. Data processing for most of the Bank's deposit and loan accounts and other applications are conducted internally, using owned equipment. Application software is primarily obtained through purchase or licensing agreements. The Bank's primary source of income is net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing deposits and other borrowed funds. Sources of noninterest income include fees for management of customer investment portfolios, trusts and estates, service charges on deposit accounts, merchant processing fees, gains and fees from mortgage banking activities and other banking-related fees. Noninterest expenses include the provision for loan losses, salaries and employee benefits, occupancy, equipment, merchant processing, office supplies, advertising and promotion and other administrative expenses. The Bank's lending activities are conducted primarily in southern Rhode Island and southeastern Connecticut. The Bank provides a variety of commercial and retail lending products. The Bank generally underwrites its residential mortgages based upon secondary market standards. Loans are originated both for sale in the secondary market as well as for portfolio. Most secondary market loans are sold with servicing released, however, prior to the fourth quarter of 1999, the Corporation primarily sold loans with servicing retained. The Bank provides trust and investment management services as trustee under wills and trust agreements; as executor or administrator of estates; as a provider of agency, custodial and management investment services to individuals and institutions; and as a trustee for employee benefit plans. In January 2000, the Bank opened a trust and investment management office in Providence, Rhode Island. In June 2000, the Corporation acquired Phoenix, an independent investment advisory firm located in Providence, Rhode Island. Phoenix operates under its own name as a division of the Bank. Phoenix provides investment advisory services including asset allocation analysis and equity, fixed income and balanced portfolio management. The total market value of assets under administration amounted to $1.7 billion as of December 31, 2000. The following is a summary of recurring sources of income, which excludes net gains on sales of securities and the 1999 net gain on sale of the credit card portfolio, as a percentage of total income (net interest income plus recurring noninterest income) during the past five years: 2000 1999 1998 1997 1996 --------------------------------------------------------------------------- Net interest income 67% 67% 67% 69% 72% Trust and investment management 19 17 17 18 16 Other noninterest income 14 16 16 13 12 --------------------------------------------------------------------------- Total income 100% 100% 100% 100% 100% --------------------------------------------------------------------------- Market Area and Competition The Bank's market area includes Washington County and a portion of Kent County in southern Rhode Island, as well as a portion of New London County in southeastern Connecticut. The Bank operates thirteen banking offices in these Rhode Island and Connecticut counties. The locations of the banking offices are as follows: Westerly, RI (3 locations) Charlestown, RI Wakefield, RI Narragansett, RI (2 locations) Richmond, RI North Kingstown, RI New Shoreham (Block Island), RI Mystic, CT (3 locations) The Bank's banking offices in Charlestown and on Block Island are the only bank facilities in those Rhode Island communities. The Bank faces strong competition from branches of major Rhode Island and regional commercial banks, local branches of certain Connecticut banks, as well as various credit unions, savings institutions and, to some extent, finance companies. The principal methods of competition are through interest rates, financing terms and other customer conveniences. The Bank had 38% of total deposits reported by all financial institutions for communities in which the Bank operates banking offices as of June 30, 2000. The closest competitor held 25%, and the second closest competitor held 13% of total deposits in the same communities. The Corporation believes that being the largest commercial banking institution headquartered within the market area provides a competitive advantage over other financial institutions. The Bank has a marketing department that is responsible for the review of existing products and services and the development of new products and services. Employees As of December 31, 2000 the Corporation had 370 employees, of which 332 were full-time and 38 were part-time. Supervision and Regulation General - The business in which the Corporation and the Bank are engaged is subject to extensive supervision, regulation, and examination by various bank regulatory authorities and other agencies of federal and state government. The supervisory and regulatory activities of these authorities are often intended primarily for the protection of customers or are aimed at carrying out broad public policy goals that may not be directly related to the financial services provided by the Corporation and the Bank, nor intended for the protection of the Corporation's shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Proposals to change regulations and laws that affect the banking industry are frequently raised at the federal and state level. The potential impact on the Corporation of any future revisions to the supervisory or regulatory structure cannot be determined. The Corporation and the Bank are required by various authorities to file extensive periodic reports of financial and other information and such other reports that the regulatory and supervisory authorities may require. The Corporation is also subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended. The Corporation is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a bank holding company, the activities of the Corporation are regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The BHC Act requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire control over a bank. Provided that the Corporation does not become a "financial holding company" under the Gramm-Leach-Bliley Act (as discussed below), the BHC Act also requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire certain nonbank entities and restricts the activities of the Corporation to those closely related to banking. Federal law also regulates transactions between the Corporation and the Bank, including loans or extensions of credit. The Bank is subject to the supervision of, and examination by, the FDIC, the State of Rhode Island and the State of Connecticut, in which the Bank has established branches. The Bank is also subject to various Rhode Island and Connecticut business and banking regulations. Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) - Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers, ranging from "well-capitalized" to "critically undercapitalized". A depository institution is well-capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well-capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. At December 31, 2000, the Bank's capital ratios placed it in the well-capitalized category. Reference is made to Note 15 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's regulatory capital requirements. Another primary purpose of FDICIA was to recapitalize the Bank Insurance Fund (BIF). The FDIC adopted a risk-related premium system for the assessment period beginning January 1, 1993. Under this new system, each institution's assessment rate is based on its capital ratios in combination with a supervisory evaluation of the risk the institution poses to the BIF. Banks deemed to be well-capitalized and who pose the lowest risk to the BIF will pay the lowest assessment rates, while undercapitalized banks, which present the highest risk, will pay the highest rates. FDICIA contained other significant provisions that require the federal banking regulators to establish standards for safety and soundness for depository institutions and their holding companies in three areas: (i) operational and managerial; (ii) asset quality, earnings and stock valuation; and (iii) management compensation. The legislation also required that risk-based capital requirements contain provisions for interest rate risk, credit risk and risks of nontraditional activities. FDICIA also imposed expanded accounting and audit reporting requirements for depository institutions. In addition, FDICIA imposed numerous restrictions on state-chartered banks, including those that generally limit investments and activities to those permitted to national banks, and contains several consumer banking law provisions. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act) - The Interstate Act permits adequately capitalized bank holding companies to acquire banks in any state subject to certain concentration limits and other conditions. The Interstate Act also authorizes the interstate merger of banks. In addition, among other things, the Interstate Act permits banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state. Both Rhode Island and Connecticut, the two states in which the Corporation conducts banking operations, have adopted legislation to "opt in" to interstate merger and branching provisions that effectively eliminated state law barriers. Gramm-Leach-Bliley Act - The Gramm-Leach-Bliley Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system, such as the Corporation, to engage in a full range of financial activities through a new entity known as a financial holding company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In sum, the Gramm-Leach-Bliley Act permits bank holding companies that qualify and elect to be treated as a financial holding company to engage in a significantly broader range of financial activities than the activities previously permitted for bank holding companies. Generally, the Gramm-Leach-Bliley Act and its implementing regulations: o repeal historical restrictions on, and eliminate many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; o permit investment in non-financial enterprises, subject to significant operational, holding period and other restrictions; o provide a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; o broaden the activities that may be conducted by national banks (and derivatively state banks), banking subsidiaries of bank holding companies, and their financial subsidiaries; o require all financial institutions to provide notice of their privacy policies at specified times to their retail customers and consumers of their financial products or services, and permit retail customers and consumers, under certain circumstances, to prohibit financial institutions from sharing certain nonpublic personal information pertaining to them by opting out of such sharing; o establish guidelines for safeguarding the security, confidentiality and integrity of customer information; o adopt a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank ("FHLB") system; o modify the laws governing the implementation of the Community Reinvestment Act of 1977 ("CRA"); and o address a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. In order to elect to become a financial holding company and engage in the new activities, a bank holding company, such as the Corporation, must meet certain tests and file an election form with the Federal Reserve Board, which generally is acted on within thirty days. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities each of the bank holding company's banks must have been rated "satisfactory" or better in its most recent federal CRA evaluation. Furthermore, a bank holding company that elects to be treated as a financial holding company may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the Federal Reserve Board which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. At this time, the Corporation has no immediate plans to become a financial holding company. Dividend Restrictions - The Corporation's revenues consist of cash dividends paid to it by the Bank. Such payments are restricted pursuant to various state and federal regulatory limitations. Reference is made to Note 15 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's ability to pay dividends. Capital Guidelines - Regulatory guidelines have been established that require bank holding companies and banks to maintain minimum ratios of capital to risk-adjusted assets. Banks are required to have minimum core capital (Tier 1) of 4% and total risk-adjusted capital (Tier 1 and Tier 2) of 8%. For the Corporation, Tier 1 capital is essentially equal to shareholders' equity excluding the net unrealized gain (loss) on securities available for sale. Tier 2 capital consists of a portion of the allowance for loan losses (limited to 1.25% of total risk-weighted assets). As of December 31, 2000, the Corporation's net risk-weighted assets amounted to $663.7 million, its Tier 1 capital ratio was 12.70% and its total risk-based capital ratio was 14.35%. The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the risk-based capital guidelines) divided by average assets (net of intangible assets and excluding the effects of accounting for securities available for sale under SFAS No. 115). The minimum leverage ratio is 3% for bank holding companies that do not anticipate significant growth and that have well-diversified risk (including no undue interest rate risk), excellent asset quality, high liquidity and strong earnings. Other bank holding companies are expected to have ratios of at least 4 - 5%, depending on their particular condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstances or risk profile of a given bank holding company. The Corporation's Tier 1 leverage ratio was 7.08% as of December 31, 2000. The Federal Reserve Board has not advised the Corporation of any specific minimum Tier 1 leverage capital ratio applicable to it. Risk Factors: In addition to the other information contained or incorporated by reference in this Annual Report on Form 10-K, you should consider the following factors relating to the business of the Corporation. Interest Rate Volatility May Reduce Our Profitability Significant changes in market interest rates may adversely affect both our profitability and our financial condition. Our profitability depends in part on the difference between rates earned on loans and investments and rates paid on deposits and other interest-bearing liabilities. Since market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. (See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for additional discussion on interest rate risk.) Changes in the Market Value of Trust and Investment Management Assets under Administration May Reduce Our Profitability Trust and investment management fees provide an important source of total revenues. These fees are primarily dependent on the market value of trust and investment management assets under administration. These assets primarily consist of marketable securities. Reductions in the market value of these assets could reduce the level of fees that we earn. Our Allowance for Loan Losses May Not Be Adequate to Cover Actual Loan Losses We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for potential losses based on a number of factors. If our assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses, which would have an adverse effect on our operating results, and may also cause us to increase the allowance in the future. Further, our net income would decrease if we had to add additional amounts to our allowance for loan losses. In addition to general real estate and economic factors, the following factors could affect our ability to collect our loans and require us to increase the allowance in the future: o Regional credit concentration - We are exposed to real estate and economic factors in Rhode Island and southeastern Connecticut because virtually all of our loan portfolio is concentrated among borrowers in these markets. Further, because a substantial portion of our loan portfolio is secured by real estate in this area, including most consumer loans and those commercial loans not specifically classified as commercial mortgages, the value of our collateral is also subject to regional real estate market conditions. o Industry concentration - A portion of our loan portfolio consists of loans to the hospitality and tourism industry. Loans to companies in this industry may have a somewhat higher risk of loss than some other industries because these businesses are seasonal, with a substantial portion of commerce concentrated in the summer season. Accordingly, the ability of borrowers to meet their repayment terms is more dependent on economic, climate and other conditions and may be subject to a higher degree of volatility from year to year. We May Not Be Able to Compete Effectively Against Larger Financial Institutions in Our Increasingly Competitive Industry. The financial services industry in our market has experienced both significant concentration and deregulation. This means that we compete with larger financial institutions, both from banks and from other financial institutions, for loans and deposits as well as other sources of funding in the communities we serve, and we will likely face even greater competition in the future as a result of recent federal legislative changes. Many of our competitors have significantly greater resources and lending limits than we have. As a result of those greater resources, the large financial institutions that we compete with may be able to provide a broader range of services to their customers and may be able to afford newer and more sophisticated technology. Our long-term success depends on the ability of the Bank to compete successfully with other financial institutions in their service areas. In addition, as we strive to compete with other financial institutions, we may expand into new areas, and there is no assurance that we will be successful in these efforts. An example of our expansion is the Phoenix acquisition. Although we believe that the business and management of Phoenix represent a significant expansion of our business in the investment management area, there is no assurance that our expansion into this area will be successful. Limited Trading Activity in Our Common Stock Could Cause the Price of Our Shares to Decline While our common stock is listed and traded on the Nasdaq National Market, there has only been limited trading activity in our common stock. The average daily trading volume of our common stock over the twelve-month period ended December 31, 2000 was approximately 8,903 shares. Accordingly, sales of a significant number of shares of common stock may adversely affect the market price of our common stock. Allowance for Loan Losses The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses (ALL). The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other environmental factors. The methodology includes an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114. Other individual commercial and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration the borrower's financial condition, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the Corporation's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional unallocated allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. For example, most of the loan portfolio is concentrated among borrowers in southern Rhode Island and southeastern Connecticut and a substantial portion of the portfolio is collateralized by real estate in this area, including most consumer loans and those commercial loans not specifically classified as commercial mortgages. A portion of the commercial and commercial mortgage loans are to borrowers in the hospitality and tourism industry and this concentration has been increasing in recent years. Economic conditions which may affect the ability of borrowers to meet debt service requirements are considered including interest rates and energy costs. Results of regulatory examinations, historical loss ranges, portfolio composition including a trend toward somewhat larger credit relationships, and other changes in the portfolio are also considered. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans. GUIDE 3 STATISTICAL DISCLOSURES The following tables contain additional consolidated statistical data about the Corporation and the Bank, to be read in conjunction with the Notes to the Consolidated Financial Statements. I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL A. Average balance sheets are presented under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Nonaccrual loans are included in average loan balances. Average balances are based upon daily averages. B. An analysis of net interest earnings, including interest earned and paid, average yields and costs, and net yield on interest-earning assets, is presented under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Interest income is reported on the fully taxable-equivalent basis. Tax exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Interest on nonaccrual loans is included in the analysis of net interest earnings to the extent that such interest income has been recognized in the Consolidated Statements of Income. See Guide 3 Statistical Disclosures - Item III.C.1. C. An analysis of rate/volume changes in interest income and interest expense is presented under the caption "Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)" of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. The net change attributable to both volume and rate has been allocated proportionately. II. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY A. The carrying amounts of securities as of the dates indicated are presented in the following tables: (Dollars in thousands) December 31, 2000 1999 1998 --------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $87,084 $86,310 $118,348 Mortgage-backed securities 240,856 189,086 145,806 Corporate bonds 38,565 33,684 27,503 Corporate stocks 20,106 21,351 28,184 --------------------------------------------------------------------------- Total securities available for sale $386,611 $330,431 $319,841 --------------------------------------------------------------------------- (Dollars in thousands) December 31, 2000 1999 1998 --------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $35,135 $28,231 $21,987 Mortgage-backed securities 66,715 62,209 46,088 States and political subdivisions 23,065 25,932 27,572 --------------------------------------------------------------------------- Total securities held to maturity $124,915 $116,372 $95,647 --------------------------------------------------------------------------- B. Maturities of debt securities as of December 31, 2000 are presented in the following tables. Mortgage-backed securities are included based on their weighted average maturities, adjusted for anticipated prepayments. Yields on tax exempt obligations are not computed on a tax equivalent basis.
(Dollars in thousands) Due in After 1 Year After 5 Years 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 $19,414 $33,608 $26,270 $6,871 $86,163 Weighted average yield 6.48% 6.70% 6.89% 6.97% 6.73% Mortgage-backed securities: Amortized cost 38,914 111,942 47,152 42,428 240,436 Weighted average yield 7.11% 7.12% 7.17% 7.24% 7.15% Corporate bonds: Amortized cost 801 18,805 1,063 18,417 39,086 Weighted average yield 6.53% 6.95% 9.08% 7.77% 7.39% ------------------------------------------------------------------------------------------------------------ Total debt securities: Amortized cost $59,129 $164,355 $74,485 $67,716 $365,685 Weighted average yield 6.89% 7.01% 7.10% 7.36% 7.07% ------------------------------------------------------------------------------------------------------------ Fair value $59,199 $165,409 $75,057 $66,840 $366,505 ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Due in After 1 Year After 5 Years 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 $8,673 $21,702 $4,760 $ - $35,135 Weighted average yield 7.08% 6.67% 6.37% - 6.73% Mortgage-backed securities: Amortized cost 11,388 31,055 17,256 7,016 66,715 Weighted average yield 6.68% 6.67% 6.67% 6.81% 6.69% States and political subdivisions: Amortized cost 3,405 11,412 8,248 - 23,065 Weighted average yield 4.37% 4.29% 4.24% - 4.28% ------------------------------------------------------------------------------------------------------------ Total debt securities: Amortized cost $23,466 $64,169 $30,264 $7,016 $124,915 Weighted average yield 6.50% 6.25% 5.96% 6.81% 6.26% ------------------------------------------------------------------------------------------------------------ Fair value $23,553 $64,460 $30,316 $7,039 $125,368 ------------------------------------------------------------------------------------------------------------
C. Not applicable. III. LOAN PORTFOLIO A. The following table sets forth the composition of the Corporation's loan portfolio for each of the past five years:
(Dollars in thousands) December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------- Commercial: Mortgages $121,817 $113,719 $87,132 $76,483 $77,482 Construction and development 2,809 2,902 2,855 5,508 5,314 Other 115,202 115,739 113,372 129,258 110,491 ------------------------------------------------------------------------------------------------------------- Total commercial 239,828 232,360 203,359 211,249 193,287 Residential real estate: Mortgages 236,595 212,719 191,101 188,729 177,450 Homeowner construction 14,344 12,995 15,052 8,414 6,977 ------------------------------------------------------------------------------------------------------------- Total residential real estate 250,939 225,714 206,153 197,143 184,427 ------------------------------------------------------------------------------------------------------------- Consumer 106,388 90,951 87,458 81,394 68,198 ------------------------------------------------------------------------------------------------------------- Total loans $597,155 $549,025 $496,970 $489,786 $445,912 -------------------------------------------------------------------------------------------------------------
B. An analysis of the maturity and interest rate sensitivity of Real Estate Construction and Other Commercial loans as of December 31, 2000 follows:
(Dollars in thousands) One Year One to Five After Five Matures in: or Less Years Years Totals ------------------------------------------------------------------------------------------------------------- Construction and development (1) $2,199 $5,498 $9,456 $17,153 Commercial - other 42,456 46,355 26,391 115,202 ------------------------------------------------------------------------------------------------------------- $44,655 $51,853 $35,847 $132,355 ------------------------------------------------------------------------------------------------------------- (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 $51,025 $36,675 $87,700 --------------------------------------------------------------------------- C. Risk Elements Reference is made to the caption "Asset Quality" included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Included therein is a discussion of the Corporation's credit review and accounting practices, as well as information relevant to nonperforming assets at December 31, 2000. 1. Nonaccrual, Past Due and Restructured Loans a) Nonaccrual loans as of the dates indicated were as follows: (Dollars in thousands) December 31, 2000 1999 1998 1997 1996 --------------------------------------------------------------------------- $3,434 $3,798 $5,846 $7,644 $8,197 --------------------------------------------------------------------------- Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but not collected on such loans is reversed against current period income. Cash receipts on nonaccrual loans are recorded as interest income or as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower had demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible. For the year ended December 31, 2000, the gross interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $411 thousand. Interest recognized on these loans amounted to approximately $250 thousand. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2000. b) Loans contractually past due 90 days or more and still accruing for the dates indicated were as follows: (Dollars in thousands) December 31, 2000 1999 1998 1997 1996 --------------------------------------------------------------------------- $393 $120 $235 $651 $1,517 --------------------------------------------------------------------------- c) Restructured accruing loans for the dates indicated were as follows: (Dollars in thousands) December 31, 2000 1999 1998 1997 1996 --------------------------------------------------------------------------- $ - $446 $ - $ - $ - --------------------------------------------------------------------------- Restructured accruing loans include those for which concessions, such as reduction of interest rates other than normal market rate adjustments or deferral of principal or interest payments, have been granted due to a borrower's financial condition. Interest on restructured loans is accrued at the reduced rate. 2. Potential Problem Loans Potential problem loans consist of certain accruing commercial loans that were less than 90 days past due at December 31, 2000, but were identified by management of the Bank as potential problem loans. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve as a result of collection efforts, while the credit quality of other loans may deteriorate, resulting in some amount of losses. These loans are not included in the analysis of nonaccrual, past due and restructured loans in Section III.C.1 above. At December 31, 2000, potential problem loans amounted to approximately $209 thousand. The Corporation's loan policy provides guidelines for the review of such loans in order to facilitate collection. Depending on future events, these potential problem loans, and others not currently identified, could be classified as nonperforming in the future. 3. Foreign Outstandings: None 4. Loan Concentrations: The Corporation has no concentration of loans that exceed 10% of its total loans except as disclosed by types of loan in Section III.A. D. Other Interest-Bearing Assets: None IV. SUMMARY OF LOAN LOSS EXPERIENCE A. The allowance for loan losses is management's best estimate of probable credit losses in the loan portfolio that have been incurred as of the balance sheet date. The level of the allowance is based on management's ongoing review of the growth and composition of the loan portfolio, net charge-off experience, current and expected economic conditions, and other pertinent factors. Loans (or portions thereof) deemed to be uncollectible are charged against the allowance and recoveries of amounts previously charged off are added to the allowance. Loss experience on loans is presented in the following table for the years indicated:
(Dollars in thousands) December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------ Balance at beginning of year $12,349 $10,966 $9,335 $9,009 $8,322 Charge-offs Commercial: Mortgages 61 170 - 248 330 Construction and development - 119 - - 15 Other 144 304 322 740 415 Residential: Mortgages 65 - 14 174 166 Homeowner construction - 23 - - - Consumer 413 351 317 360 395 ------------------------------------------------------------------------------------------------------------ Total charge-offs 683 967 653 1,522 1,321 ------------------------------------------------------------------------------------------------------------ Recoveries Commercial: Mortgages 53 44 51 110 33 Construction and development - - - 7 - Other 157 202 270 233 628 Residential: Mortgages 46 135 9 13 13 Homeowner construction - 1 - - - Consumer 63 128 75 61 116 ------------------------------------------------------------------------------------------------------------ Total recoveries 319 510 405 424 790 ------------------------------------------------------------------------------------------------------------ Net charge-offs 364 457 248 1,098 531 Additions charged to earnings 1,150 1,840 1,879 1,424 1,218 ------------------------------------------------------------------------------------------------------------ Balance at end of year $13,135 $12,349 $10,966 $9,335 $9,009 ------------------------------------------------------------------------------------------------------------ Net charge-offs to average loans .06% .09% .05% .23% .13% ------------------------------------------------------------------------------------------------------------
B. The following table presents the allocation of the allowance for loan losses:
(Dollars in thousands) December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------- Commercial: Mortgages $2,316 $1,920 $1,604 $1,368 $1,410 % of these loans to all loans 20.4% 20.7% 17.5% 15.6% 17.4% Construction and development 55 56 45 72 61 % of these loans to all loans .5% .5% .6% 1.1% 1.2% Other 2,250 1,979 2,142 2,461 2,452 % of these loans to all loans 19.3% 21.1% 22.8% 26.4% 24.8% Residential: Mortgages 1,286 1,165 1,108 1,127 1,273 % of these loans to all loans 39.6% 38.7% 38.5% 38.6% 39.8% Homeowner construction 78 71 87 50 50 % of these loans to all loans 2.4% 2.4% 3.0% 1.7% 1.5% Consumer 1,295 1,155 1,189 1,117 1,173 % of these loans to all loans 17.8% 16.6% 17.6% 16.6% 15.3% Unallocated 5,855 6,003 4,791 3,140 2,590 ------------------------------------------------------------------------------------------------------------- Balance at end of year $13,135 $12,349 $10,966 $9,335 $9,009 100.0% 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) 2000 1999 1998 ----------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Amount Rate Paid Amount Rate Paid Amount Rate Paid ----------------------------------------------------------------------------------------------------------- Demand deposits $106,741 - $97,716 - $83,100 - Savings deposits: Regular 129,208 2.18% 128,218 2.19% 112,914 2.39% NOW 79,782 .73% 75,167 .93% 67,617 .94% Money market 31,590 3.11% 25,547 2.11% 23,969 2.12% ----------------------------------------------------------------------------------------------------------- Total savings 240,580 1.82% 228,932 1.77% 204,500 1.87% Time deposits 351,961 5.64% 318,281 4.99% 309,094 5.42% ----------------------------------------------------------------------------------------------------------- Total deposits $699,282 3.46% $644,929 3.09% $596,694 3.45% -----------------------------------------------------------------------------------------------------------
B. Not Applicable C. Not Applicable D. The maturity schedule of time deposits in amounts of $100 thousand or more at December 31, 2000 was as follows:
(Dollars in thousands) Over 3 Over 6 3 months through through Over 12 Time remaining until maturity or less 6 months 12 months months Totals -------------------------------------------------------------------------------------------------------------- $78,567 $7,943 $11,657 $24,690 $122,857 --------------------------------------------------------------------------------------------------------------
E. Not Applicable VI. RETURN ON EQUITY AND ASSETS
2000 1999 1998 ------------------------------------------------------------------------------------------------------------ Return on average assets 1.14% 1.19% 1.31% Return on average assets - operating basis (1) 1.20% 1.21% 1.24% Return on average shareholders' equity 16.14% 15.73% 16.09% Return on average shareholders' equity - operating basis (1) 16.98% 16.04% 15.21% Dividend payout ratio (2) 41.74% 41.51% 42.11% Average equity to average total assets 7.05% 7.55% 8.17% (1) Excludes second quarter 2000 and third quarter 1999 acquisition related expenses of $1.1 million and $1.3 million, respectively, after income taxes. Excludes third quarter 1999 net gain on sale of credit card portfolio of $285 thousand, after income taxes. Also includes a pro forma income tax provision on pre-acquisition earnings of Phoenix, which operated as a sub-S corporation prior to the acquisition. The pro forma income tax provision amounted to $413 thousand and $767 thousand for the years ended December 31, 2000 and 1999, respectively. (2) Represents the ratio of historical per share dividends declared by the Corporation to diluted earnings per share, on an operating basis, restated for the pooling effect of the Corporation, Pier Bank and Phoenix.
VII. SHORT-TERM BORROWINGS Not Applicable ITEM 2. PROPERTIES The Corporation conducts its business from its corporate headquarters and other properties listed below all of which are considered to be in good condition and adequate for the purposes for which they are used. The following table sets forth certain information relating to bank premises owned or used by the Corporation in conducting its business:
Own/Lease Location Description Expiration Date - ------------------------------------------------------------------------------------------------------------------- 23 Broad Street, Westerly, RI Corporate headquarters Own 1200 Main Street, Wyoming (Richmond), RI Branch office Own 126 Franklin Street, Westerly, RI Branch office Own Ocean Avenue, New Shoreham (Block Island), RI Branch office Lease / 2001 (1) 4137 Old Post Road, Charlestown, RI Branch office Own 20 Point Judith Road, Narragansett, RI Branch office Own 7625 Post Road, North Kingstown, RI Branch office Own 730 Kingstown Road, Wakefield, RI Branch office Lease / 2005 (1) 885 Boston Neck Road, Narragansett, RI Branch office Own Olde Mistick Village, 27 Coogan Boulevard, Mystic, CT Branch office Lease / 2003 McQuades Marketplace, Main Street, Westerly, RI Supermarket branch Lease / 2002 (1) McQuades Marketplace, 10 Clara Drive, Mystic, CT Supermarket branch Lease / 2002 (1) A & P Super Market, Route 1, Mystic, CT Supermarket branch Lease / 2002 (1) 66 South Main Street, Providence, RI Trust and investment services office Lease / 2004 (1) 5 Ledward Avenue, Westerly, RI Operations facility Lease / 2001 (1) 2 Crosswinds Drive, Westerly, RI Operations facility Own (1) Lease may be extended by the Corporation beyond the indicated expiration date.
ITEM 3. LEGAL PROCEEDINGS On January 28, 1997, a suit was filed against the Bank in the Superior Court of Washington County, Rhode Island by Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by Maxson's former president, treasurer and fifty percent shareholder, which allegedly occurred between 1986 and 1995. The suit alleges that the Bank erred in permitting this individual, while an officer of Maxson, to transfer funds from Maxson's account at the Bank for his personal benefit. The claims against the Bank are based upon theories of breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constructive fraud. Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious affirmative defenses in this litigation. Additionally, the Bank has filed counterclaims against Maxson and its shareholders as well as claims against the former Maxson officer allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The discovery phase of the case has been completed, though the parties are attempting to resolve several discovery disputes. The Bank has also filed several motions, all of which seek dismissal of one or more of the plaintiffs' claims and/or exclusion of portions of the plaintiffs' evidence. The court began hearing argument on the motions on March 8, 2001, and has expressed a desire to hear further argument. There is currently no scheduled trial date. During discovery, the plaintiffs have offered various theories and amounts of alleged damages, ranging from $5.0 million to $12.7 million, plus interest thereon. The plaintiffs have also filed a motion to amend the complaint to add a claim for punitive damages. The court has deferred ruling on whether to permit this amendment. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision has been recorded. The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2000. EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of all executive officers of the Corporation and the Bank with their titles, ages, and length of service, followed by certain biographical information.
Years of Name Title Age Service -------------------------------------------------------------------------------------------------------------------- John C. Warren Chairman and Chief Executive Officer of the Corporation and the Bank 55 5 John F. Treanor President and Chief Operating Officer of the Corporation and the Bank 53 2 David V. Devault, CPA Executive Vice President, Treasurer and Chief Financial Officer of the Corporation and the Bank 46 14 Harvey C. Perry II Senior Vice President and Secretary of the Corporation and the Bank 51 26 Stephen M. Bessette Senior Vice President - Retail Lending of the Bank 53 4 Vernon F. Bliven Senior Vice President - Human Resources of the Bank 51 28 Elizabeth B. Eckel Senior Vice President - Marketing of the Bank 40 9 William D. Gibson Senior Vice President - Credit Administration of the Bank 54 2 Joseph E. LaPlume Senior Vice President and Regional Manager of the Bank 55 1 Barbara J. Perino, CPA Senior Vice President - Operations and Technology of the Bank 39 12 B. Michael Rauh, Jr. Senior Vice President - Retail Banking of the Bank 41 9 James M. Vesey Senior Vice President and Chief Credit Officer of the Bank 52 2
John C. Warren joined the Bank and the Corporation in 1996 as President and Chief Operating Officer. In 1997, he was elected President and Chief Executive Officer. In 1999, he was elected Chairman and Chief Executive Officer of the Corporation and the Bank. John F. Treanor joined the Bank and the Corporation in April 1999 as President and Chief Operating Officer. He served as Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer of SIS Bancorp, Inc. from 1994 to 1999. David V. Devault joined the Bank in 1986 as Controller. He was elected Vice President and Chief Financial Officer of the Corporation and the Bank in 1987. He was elected Senior Vice President and Chief Financial Officer of the Corporation and the Bank in 1990. In 1997, he was also elected Treasurer of the Corporation and the Bank. In 1998, he was elected Executive Vice President, Treasurer and Chief Financial Officer of the Corporation and the Bank. Harvey C. Perry II joined the Bank in 1974 and was elected Assistant Trust Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982. He was elected Vice President and Secretary of the Corporation and the Bank in 1984, and Senior Vice President and Secretary of the Corporation and the Bank in 1990. Stephen M. Bessette joined the Bank in February 1997 as Senior Vice President - Retail Lending. Prior to joining the Bank he held the position of Executive Vice President at Ameristone Mortgage Corporation since June 1995. Vernon F. Bliven joined the Bank in 1972 and was elected Assistant Vice President in 1980, Vice President in 1986 and Senior Vice President - Human Resources in 1993. Elizabeth B. Eckel joined the Bank in 1991 as Director of Advertising and Public Relations. In 1995, she was named Vice President - Marketing. She was promoted to Senior Vice President - Marketing in 2000. William D. Gibson joined the Bank in March 1999 as Senior Vice President - Credit Administration. Prior to joining the Bank, he served as Senior Vice President of Credit Review and Senior Vice President of Credit and Loan Administration of Citizens Bank since October 1977. Joseph E. LaPlume joined the Bank in August 1999 as Senior Vice President and Regional Manager. Prior to joining the Bank he served as President and Chief Executive Officer of Pier Bank since November 1993. Barbara J. Perino joined the Bank in 1988 as Financial Accounting Officer. She was named Controller in 1989 and Vice President - Controller in 1992. In 1998 she was promoted to Senior Vice President - Operations and Technology. B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and was promoted in 1993 to Senior Vice President - Retail Banking. James M. Vesey joined the Bank in 1998 as Senior Vice President - Commercial Lending. In 2000, he was named Senior Vice President and Chief Credit Officer. Prior to joining the Bank he held the position of Senior Vice President and Director of Business Banking at Citizens Bank since December 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Corporation's common stock has traded on the Nasdaq National Market since May 1996. Previously, the Corporation's stock traded on the Nasdaq Small-Cap Market since June 1992, and had been listed on the Nasdaq Over-The-Counter Market system since June 1987. The quarterly common stock price ranges and dividends paid per share for the years ended December 31, 2000 and 1999 are presented in the following table. The stock prices are based on the high and low sales prices during the respective quarter. 2000 Quarters 1 2 3 4 ---------------------------------------------------------------------------- Stock prices: High 17.50 $15.94 $15.63 $14.63 Low 13.88 14.50 14.50 13.38 Cash dividend declared per share $.12 $.12 $.12 $.12 1999 Quarters 1 2 3 4 ---------------------------------------------------------------------------- Stock prices: High $21.88 $20.38 $18.00 $19.00 Low 16.50 15.75 14.75 15.25 Cash dividend declared per share $.11 $.11 $.11 $.11 The Corporation will continue to review future common stock dividends based on profitability, financial resources and economic conditions. The Corporation (including the Bank prior to 1984) has recorded consecutive quarterly dividends for over one hundred years. The Corporation's primary source of funds for dividends paid to shareholders is the receipt of dividends from the Bank. A discussion of the restrictions on the advance of funds or payment of dividends to the Corporation is included in Note 15 to the Consolidated Financial Statements. At February 27, 2001 there were 2,081 holders of record of the Corporation's common stock. ITEM 6. 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, 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------------------------------------- Financial Results: Interest income $85,099 $73,002 $67,226 $61,402 $48,613 Interest expense 47,231 37,394 34,658 31,159 20,941 --------------------------------------------------------------------------------------------------------------- Net interest income 37,868 35,608 32,568 30,243 27,672 Provision for loan losses 1,150 1,840 1,879 1,424 1,218 --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 36,718 33,768 30,689 28,819 26,454 Noninterest income 19,712 18,826 16,517 14,525 11,127 --------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 56,430 52,594 47,206 43,344 37,581 Noninterest expense 37,548 35,329 30,793 27,988 23,671 --------------------------------------------------------------------------------------------------------------- Income before income taxes 18,882 17,265 16,413 15,356 13,910 Income tax expense 5,673 4,754 4,235 3,884 4,457 --------------------------------------------------------------------------------------------------------------- Net income $13,209 $12,511 $12,178 $11,472 $9,453 --------------------------------------------------------------------------------------------------------------- Per share information ($): (1) Earnings per share: Basic 1.10 1.05 1.04 .99 .83 Basic - operating basis (2) 1.16 1.07 .98 .92 .80 Diluted 1.09 1.03 1.01 .96 .81 Diluted - operating basis (2) 1.15 1.06 .95 .89 .78 Cash dividends declared (3) .48 .44 .40 .35 .31 Book value 7.43 6.55 6.66 6.20 5.54 Market value - closing stock price 14.00 17.75 21.50 23.33 13.78 Performance Ratios (%): Return on average assets 1.14 1.19 1.31 1.40 1.53 Return on average assets - operating basis (2) 1.20 1.21 1.24 1.30 1.48 Return on average shareholders' equity 16.14 15.73 16.09 16.85 15.80 Return on average shareholders' equity - operating basis (2) 16.98 16.04 15.21 15.64 15.27 Dividend payout ratio (4) 41.74 41.51 42.11 39.33 39.74 Asset Quality Ratios (%): Nonperforming loans to total loans .58 .69 1.18 1.56 1.84 Nonperforming assets to total assets .28 .35 .61 .99 1.33 Allowance for loan losses to nonaccrual loans 382.50 325.15 187.59 122.12 109.91 Allowance for loan losses to total loans 2.20 2.25 2.21 1.91 2.02 Net charge-offs to average loans .06 .09 .05 .23 .13 Capital Ratios (%): Total equity to total assets 7.32 7.07 7.87 8.37 8.68 Tier 1 leverage capital ratio 7.08 7.22 7.37 7.61 8.78 Total risk-based capital ratio 14.35 14.38 14.87 14.37 14.98 (1) Adjusted to reflect the 3-for-2 stock splits paid on August 3, 1998 and November 19, 1997. (2) Excludes second quarter 2000 and third quarter 1999 acquisition related expenses of $1.1 million and $1.3 million, respectively, after income taxes. Excludes third quarter 1999 net gain on sale of credit card portfolio of $285 thousand, after income taxes. Also includes a pro forma income tax provision on pre-acquisition earnings of Phoenix, which operated as a sub-S corporation prior to the acquisition. The pro forma income tax provision amounted to $413 thousand and $767 thousand for the twelve-month periods ended December 31, 2000 and 1999, respectively. (3) Represents historical per share dividends declared by the Corporation. (4) Represents the ratio of historical per share dividends declared by the Corporation to diluted earnings per share, on an operating basis, restated for the pooling effect of the Corporation, Pier Bank and Phoenix.
SELECTED BALANCE SHEET DATA: (Dollars in thousands) December 31, 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------------------------------------- Financial Condition: Cash and cash equivalents $43,860 $44,520 $34,654 $31,547 $23,184 Total securities 511,526 446,803 415,488 293,949 229,970 FHLB stock 19,558 17,627 16,583 16,444 11,683 Net loans 584,020 536,676 486,004 480,451 436,903 Other 59,103 59,979 42,421 39,027 30,808 ----------------------------------------------------------------------------------------------------------------- Total assets $1,218,067 $1,105,605 $995,150 $861,418 $732,548 ----------------------------------------------------------------------------------------------------------------- Deposits $735,684 $660,753 $627,763 $572,803 $509,797 FHLB advances 377,362 352,548 264,106 187,001 138,493 Other borrowings 3,227 4,209 15,033 20,337 14,000 Other liabilities 12,608 9,928 9,897 9,218 6,694 Shareholders' equity 89,186 78,167 78,351 72,059 63,564 ----------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,218,067 $1,105,605 $995,150 $861,418 $732,548 ----------------------------------------------------------------------------------------------------------------- Asset Quality: Nonaccrual loans $3,434 $3,798 $5,846 $7,644 $8,197 Other real estate owned, net 9 49 243 888 1,574 ----------------------------------------------------------------------------------------------------------------- Total nonperforming assets $3,443 $3,847 $6,089 $8,532 $9,771 -----------------------------------------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands) 2000 Q1 (1) Q2 Q3 Q4 Year - ---------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $11,650 $12,132 $12,669 $12,972 $49,423 Income from securities 7,407 7,898 8,322 8,441 32,068 Dividends on corporate stock and FHLB stock 671 670 715 715 2,771 Interest on federal funds sold and other short-term investments 160 218 252 207 837 - ---------------------------------------------------------------------------------------------------------------- Total interest income 19,888 20,918 21,958 22,335 85,099 - ---------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 996 998 1,087 1,302 4,383 Time deposits 4,448 4,778 5,187 5,428 19,841 FHLB advances 5,251 5,772 5,886 5,977 22,886 Other 25 41 30 25 121 - ---------------------------------------------------------------------------------------------------------------- Total interest expense 10,720 11,589 12,190 12,732 47,231 - ---------------------------------------------------------------------------------------------------------------- Net interest income 9,168 9,329 9,768 9,603 37,868 Provision for loan losses 350 350 250 200 1,150 - ---------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 8,818 8,979 9,518 9,403 36,718 - ---------------------------------------------------------------------------------------------------------------- Noninterest income: Trust and investment management 2,514 2,805 2,657 2,568 10,544 Service charges on deposit accounts 796 806 842 853 3,297 Merchant processing fees 272 536 906 430 2,144 Income from bank-owned life insurance 242 259 271 275 1,047 Mortgage banking activities 121 134 139 191 585 Net gains on sales of securities 384 374 - 2 760 Other income 432 240 594 69 1,335 - ---------------------------------------------------------------------------------------------------------------- Total noninterest income 4,761 5,154 5,409 4,388 19,712 - ---------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 4,956 5,050 4,885 4,859 19,750 Net occupancy 636 630 617 718 2,601 Equipment 800 937 1,082 773 3,592 Legal, audit and professional fees 478 405 434 566 1,883 Merchant processing costs 225 421 712 349 1,707 Advertising and promotion 357 348 278 213 1,196 Office supplies 173 185 140 143 641 Acquisition related expenses - 1,035 - - 1,035 Other 1,284 1,422 1,450 987 5,143 - ---------------------------------------------------------------------------------------------------------------- Total noninterest expense 8,909 10,433 9,598 8,608 37,548 - ---------------------------------------------------------------------------------------------------------------- Income before income taxes 4,670 3,700 5,329 5,183 18,882 Income tax expense 1,238 1,308 1,585 1,542 5,673 - ---------------------------------------------------------------------------------------------------------------- Net income $3,432 $2,392 $3,744 $3,641 $13,209 - ---------------------------------------------------------------------------------------------------------------- Basic earnings per share $.29 $.20 $.31 $.30 $1.10 Diluted earnings per share $.28 $.20 $.31 $.30 $1.09 Cash dividends declared per share (2) $.12 $.12 $.12 $.12 $.48 (1) Amounts have been restated as a result of the second quarter 2000 acquisition of Phoenix and differ from those reported in the previously filed Quarterly Report on Form 10-Q. (2) Represents historical per share dividends declared by the Corporation.
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands) 1999 (1) Q1 Q2 Q3 Q4 Year - ---------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $10,808 $11,078 $11,420 $11,522 $44,828 Income from securities 6,108 6,207 6,518 6,780 25,613 Dividends on corporate stock and FHLB stock 535 518 486 504 2,043 Interest on federal funds sold and other short-term investments 159 128 131 100 518 - ---------------------------------------------------------------------------------------------------------------- Total interest income 17,610 17,931 18,555 18,906 73,002 - ---------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 946 1,004 1,053 1,040 4,043 Time deposits 3,888 3,945 3,986 4,052 15,871 FHLB advances 3,846 4,027 4,257 4,725 16,855 Other 219 254 121 31 625 - ---------------------------------------------------------------------------------------------------------------- Total interest expense 8,899 9,230 9,417 9,848 37,394 - ---------------------------------------------------------------------------------------------------------------- Net interest income 8,711 8,701 9,138 9,058 35,608 Provision for loan losses 482 458 450 450 1,840 - ---------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 8,229 8,243 8,688 8,608 33,768 - ---------------------------------------------------------------------------------------------------------------- Noninterest income: Trust and investment management 2,242 2,322 2,324 2,426 9,314 Service charges on deposit accounts 758 794 777 840 3,169 Merchant processing fees 250 393 599 293 1,535 Income from bank-owned life insurance - 196 238 242 676 Mortgage banking activities 498 378 295 205 1,376 Net gains (losses) on sales of securities 262 122 (4) 298 678 Net gain on sale of credit card portfolio - - 438 - 438 Other income 359 478 405 398 1,640 - ---------------------------------------------------------------------------------------------------------------- Total noninterest income 4,369 4,683 5,072 4,702 18,826 - ---------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 4,440 4,552 4,608 4,694 18,294 Net occupancy 601 624 652 617 2,494 Equipment 741 792 801 788 3,122 Legal, audit and professional fees 216 258 292 313 1,079 Merchant processing costs 158 299 537 319 1,313 Advertising and promotion 195 328 205 263 991 Office supplies 170 171 164 227 732 Acquisition related expenses - - 1,552 - 1,552 Other 1,699 1,313 1,218 1,522 5,752 - ---------------------------------------------------------------------------------------------------------------- Total noninterest expense 8,220 8,337 10,029 8,743 35,329 - ---------------------------------------------------------------------------------------------------------------- Income before income taxes 4,378 4,589 3,731 4,567 17,265 Income tax expense 1,205 1,244 1,229 1,076 4,754 - ---------------------------------------------------------------------------------------------------------------- Net income $3,173 $3,345 $2,502 $3,491 $12,511 - ---------------------------------------------------------------------------------------------------------------- Basic earnings per share $.27 $.28 $.21 $.29 $1.05 Diluted earnings per share $.26 $.28 $.21 $.28 $1.03 Cash dividends declared per share (2) $.11 $.11 $.11 $.11 $.44 (1) Amounts have been restated as a result of the second quarter 2000 acquisition of Phoenix and differ from those reported in the Annual Report on Form 10-K for the year ended December 31, 1999. (2) Represents historical per share dividends declared by the Corporation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This report contains statements that are "forward-looking statements". We may also make written or oral forward-looking statements in other documents we file with the Securities and Exchange Commission, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Corporation. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Corporation to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: changes in general national or regional economic conditions, changes in interest rates, reductions in the market value of trust and investment management assets under administration, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in the size and nature of the Corporation's competition, changes in loan defaults and charge-off rates, risk of an adverse action in pending litigation, and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1 of this report may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Financial Overview Washington Trust recorded net income of $13.2 million, or $1.09 per diluted share, for 2000. In the second quarter of 2000, the Corporation completed the acquisition of Phoenix and recorded acquisition-related expenses of $1.1 million, after income taxes. During the third quarter of 1999, the Corporation completed its acquisition of Pier Bank and also recognized a nonrecurring gain on the sale of its credit card loan portfolio. 1999 results included acquisition related expenses of $1.3 million, net of income taxes, and the loan sale gain, net of expenses and related income taxes, of $285 thousand. The acquisitions were accounted for under the pooling of interests method and accordingly, the consolidated financial statements for the Corporation have been restated to reflect the acquisitions at the beginning of each period presented. Substantially all of Phoenix related revenues have been recorded as trust and investment management revenue in noninterest income. Results excluding acquisition-related expenses, net of taxes, and the loan sale gain, net of taxes, are referred to herein as "operating". Operating basis earnings also include a pro forma tax provision for pre-acquisition earnings of Phoenix, which operated as a sub-S corporation prior to the acquisition. Operating earnings for the year 2000 amounted to $13.9 million, an increase of 8.9% from $12.8 million reported for 1999. Diluted earnings per share, on an operating basis, amounted to $1.15 for 2000, up from $1.06 per share in 1999. The Corporation's rates of return on average assets and average equity, on an operating basis, for 2000 were 1.20% and 16.98%, respectively. Comparable amounts for the year 1999 were 1.21% and 16.04%, respectively. For the year ended December 31, 2000, net interest income (the difference between interest earned on loans and securities and interest paid on deposits and other borrowings) amounted to $37.9 million, up 6.3% over the 1999 amount. The net interest margin for the year 2000 amounted to 3.55%, compared to 3.71% in 1999. Other noninterest income (noninterest income excluding net gains on sales of securities and the nonrecurring 1999 loan sale gain) amounted to $19.0 million for the year 2000, up 7.0% from $17.7 million in 1999. The increase was primarily due to growth in revenues for trust and investment management services, offset in part by a decline in revenue from mortgage banking activities. For the year 2000, total operating noninterest expense (total noninterest expense excluding acquisition-related expenses) amounted to $36.5 million, up 8.1% over the comparable 1999 amount. The increase was primarily attributable to higher salaries and benefits expense, increases in legal, audit and professional fees, and higher equipment costs. Included in other noninterest expense for the twelve months ended December 31, 2000 and 1999 were contributions of appreciated equity securities to the Corporation's charitable foundation amounting to $424 thousand and $270 thousand, respectively. These transactions resulted in realized securities gains of $310 thousand and $262 thousand, respectively, for the same periods. Total consolidated assets amounted to $1.218 billion at December 31, 2000, up 10.2% from the December 31, 1999 balance of $1.106 billion. Average assets rose 10.3% during 2000 and amounted to $1.161 billion. The growth in assets was primarily attributable to purchases of securities and growth in the loan portfolio. Increases in FHLB advances as well as an 11.3% increase in total deposits funded the growth in assets. Total deposits amounted to $735.7 million and $660.8 million at December 31, 2000 and 1999, respectively. FHLB advances totaled $377.4 million at December 31, 2000, up 7.0% from the prior year balance of $352.5 million. Nonperforming assets (nonaccrual loans and property acquired through foreclosure) amounted to $3.4 million or .28% of total assets at December 31, 2000, compared to $3.8 million or .35% of total assets at December 31, 1999. The Corporation's loan loss provision was $1.2 million and $1.8 million in 2000 and 1999, respectively. Total shareholders' equity amounted to $89.2 million at December 31, 2000, compared to $78.2 million at December 31, 1999. Included in shareholders' equity at December 31, 2000 was net unrealized gains on securities available for sale, net of tax, of $4.0 million compared to net unrealized losses of $191 thousand at December 31, 1999. Book value per share as of December 31, 2000 and 1999 amounted to $7.43 and $6.55, respectively. Liquidity Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. Washington Trust's primary source of liquidity is customer deposits. Customer deposits (time, savings and demand deposits) funded approximately 60.2% of total average assets in 2000. Other sources of funding include discretionary use of purchased liabilities (i.e., FHLB term advances and federal funds purchased), cash flows from the Corporation's securities portfolios and loan repayments. In addition, securities designated as available for sale may be sold in response to short-term or long-term liquidity needs. The Corporation's Asset/Liability Committee ("ALCO") establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained well within target ranges established by the ALCO during 2000. Net loans as a percentage of total assets amounted to 47.9% at December 31, 2000, compared to 48.5% at December 31, 1999. Total securities as a percentage of total assets amounted to 42.0% at December 31, 2000, up from 40.4% at December 31, 1999. These changes resulted primarily from the 10.2% increase in total assets in 2000. For the year ended December 31, 2000, net cash provided by financing activities was $92.2 million. Proceeds from FHLB advances totaled $404.5 million, while repayments of FHLB advances totaled $379.7 million in 2000. Additionally, $74.9 million was generated from overall growth in deposits. Net cash used in investing activities was $110.3 million in 2000, the majority of which was used to purchase securities. While the Corporation does not have any significant capital commitments, it expects to continue to expend funds to upgrade and expand equipment and premises to support its operations. Net cash provided by operating activities amounted to $17.5 million in 2000, $13.2 million of which was generated by net income. (See the Consolidated Statements of Cash Flows for further information about sources and uses of cash.) Acquisitions On June 26, 2000, the Corporation completed its acquisition of Phoenix, an independent investment advisory firm located in Providence, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the acquisition was effected by means of merger of Phoenix with and into the Bank, the wholly owned subsidiary of the Corporation. For the year ended December 31, 1999, Phoenix's investment management revenues totaled $3.4 million. Expenses directly attributable to the 2000 acquisition of Phoenix amounted to $1.1 million, after income taxes, and were charged to earnings at the date of combination. Acquisition related expenses primarily consisted of legal and investment advisory fees. On August 25, 1999, the Corporation completed the acquisition of Pier Bank, a Rhode Island chartered community bank headquartered in South Kingstown, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999, the acquisition was effected by means of the merger of Pier Bank with and into the Bank, the wholly owned subsidiary of the Corporation. The conversion of customer deposit and loan accounts took place on September 24, 1999. Expenses directly attributable to the merger amounted to $1.3 million, net of income taxes, and were charged to earnings at the date of combination. Acquisition expenses consisted of professional fees, data processing/integration costs, write-down of assets and severance obligations. Asset write-downs amounted to $126 thousand and consisted of fixed assets, primarily obsolete technology equipment, abandoned in connection with the acquisition. The acquisitions were tax-free reorganizations and were accounted for under the pooling of interests method. Accordingly, the consolidated financial statements and other financial information of the Corporation have been restated to present the combined financial condition and results of operations as if the combination had been in effect for all periods presented. Net Interest Income Net interest income is the primary source of Washington Trust's operating income. The level of net interest income is affected by the volume of average interest-earning assets and interest-bearing liabilities, market interest rates and other factors. The following discussion presents net interest income on a fully taxable equivalent (FTE) basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities. FTE net interest income increased $2.3 million, or 6.2%, from 1999 to 2000, due primarily to the growth in interest-earning assets. The net interest margins (FTE net interest income as a percentage of average interest-earning assets) for 2000 and 1999 were 3.55% and 3.71%, respectively. The interest rate spread declined 23 basis points to 2.96% in 2000. Earning asset yields rose 36 basis points during 2000, while the cost of interest-bearing liabilities increased 59 basis points, thereby narrowing the net interest spread. Higher cost of funds associated with FHLB advances and time deposits were primarily responsible for the decrease in the net interest margin. FTE interest income totaled $86.2 million in 2000, up from $74.1 million in 1999. The yield on interest-earning assets amounted to 7.85% in 2000, up from 7.49% in 1999. Average interest-earning assets amounted to $1.098 billion or 11.0% over the comparable 1999 amount. The growth in average interest-earning assets was primarily due to growth in securities and loans. Total average securities rose $61.9 million, or 13.3%, in 2000, mainly due to purchases of taxable debt securities. The FTE rate of return on securities was 6.93% in 2000, up from 6.24% in 1999. The increase in yield reflects higher marginal rates on investment purchases during 2000 relative to the prior year. Average loans amounted to $569.7 million in 2000, up $46.9 million, or 9.0%, in 2000. The FTE rate of return on total loans was 8.70% in 2000, up from 8.60% in 1999, due primarily to higher yields on new loan originations. Average residential real estate loans amounted to $240.4 million, up 12.3% from the prior year level. The yield on residential real estate loans amounted to 7.81%, up slightly from the prior year. Average commercial loans rose 5.2% to $230.8 million in 2000. The yield on commercial loans amounted to 9.51%, an increase of 14 basis points from the prior year yield of 9.37%. Average consumer loans rose 10.3% in 2000 to $98.5 million. The yield on consumer loans amounted to 8.96%, up 33 basis points from 8.63% in 1999. As a result of higher levels of FHLB advances and increases in time deposits, average interest-bearing liabilities increased 11.0% to $965.2 million at December 31, 2000, and interest expense increased 26.3% and totaled $47.2 million in 2000. The rate paid on interest-bearing liabilities rose 59 basis points to 4.89% in 2000 primarily due to higher interest rates. Average FHLB advances increased by $61.0 million, or 19.7%, from 1999 and amounted to $370.6 million in 2000. The advances were used primarily to match fund the purchase of securities. The average rate paid on FHLB advances for 2000 was 6.17%, an increase of 73 basis points from the prior year. Average time deposits increased by $33.7 million, or 10.6%, from 1999 and rose 65 basis points in the rate paid. Average savings deposits grew 5.1% to $240.6 million in 2000. The rate paid on savings deposits for 2000 amounted to 1.82%, compared to 1.77% for 1999. In addition, average demand deposits, an interest-free source of funding, increased 9.2% from 1999 and amounted to $106.7 million in 2000. Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis) The following table presents average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income) are included in amounts presented for loans.
Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------------------------------ Assets: Residential real estate loans $240,410 18,777 7.81 $214,124 16,687 7.79 $199,347 16,347 8.20 Commercial and other loans 230,772 21,946 9.51 219,393 20,564 9.37 207,787 20,072 9.66 Consumer loans 98,479 8,826 8.96 89,292 7,707 8.63 83,882 7,587 9.05 ------------------------------------------------------------------------------------------------------------------ Total loans 569,661 49,549 8.70 522,809 44,958 8.60 491,016 44,006 8.96 Federal funds sold and other short-term investments 13,247 837 6.32 10,635 518 4.88 12,000 650 5.41 Taxable debt securities 456,434 30,992 6.79 399,058 24,432 6.12 315,177 19,706 6.25 Nontaxable debt securities 25,050 1,652 6.60 26,945 1,786 6.63 22,533 1,435 6.37 Corporate stocks and FHLB 33,848 3,157 9.33 30,041 2,394 7.97 30,265 2,409 7.96 stock ------------------------------------------------------------------------------------------------------------------ Total securities 528,579 36,638 6.93 466,679 29,130 6.24 379,975 24,200 6.37 ------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 1,098,240 86,187 7.85 989,488 74,088 7.49 870,991 68,206 7.83 ------------------------------------------------------------------------------------------------------------------ Cash and due from banks 18,362 18,625 17,007 Allowance for loan losses (12,881) (11,767) (10,194) Premises and equipment, net 22,774 24,167 23,733 Other 34,715 32,578 25,187 ------------------------------------------------------------------------------------------------------------------ Total assets $1,161,210 $1,053,091 $926,724 ------------------------------------------------------------------------------------------------------------------ Liabilities and Shareholders' Equity: Savings deposits $240,580 4,383 1.82 $228,932 4,043 1.77 $204,500 3,834 1.87 Time deposits 351,961 19,841 5.64 318,281 15,871 4.99 309,094 16,744 5.42 FHLB advances 370,642 22,886 6.17 309,594 16,855 5.44 228,295 13,213 5.79 Other 2,003 121 6.03 12,383 625 5.05 15,626 867 5.55 ------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 965,186 47,231 4.89 869,190 37,394 4.30 757,515 34,658 4.58 ------------------------------------------------------------------------------------------------------------------ Demand deposits 106,741 97,716 83,100 Other liabilities 7,445 6,315 7,980 Shareholders' equity 81,838 79,870 78,129 ------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $1,161,210 $1,053,091 $926,724 ------------------------------------------------------------------------------------------------------------------ Net interest income $38,956 $36,694 $33,548 ------------------------------------------------------------------------------------------------------------------ Interest rate spread 2.96 3.19 3.25 Net interest margin 3.55 3.71 3.85 ------------------------------------------------------------------------------------------------------------------ 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, 2000 1999 1998 - -------------------------------------------------------------------------------- Commercial and other loans $126 $130 $137 Nontaxable debt securities 576 605 485 Corporate stocks and FHLB stock 386 351 358
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis) 2000/1999 1999/1998 1998/1997 ------------------------------------------------------------------------------------------------------------------- Net Net Net (Dollars in thousands) Volume Rate Change Volume Rate Change Volume Rate Change ------------------------------------------------------------------------------------------------------------------- Interest on: Interest-earning assets: Residential real estate loans $2,053 37 2,090 $1,176 (835) 341 $681 (148) 533 Commercial and other loans 1,079 302 1,381 1,099 (606) 493 308 21 329 Consumer loans 815 305 1,120 476 (358) 118 906 (237) 669 Federal funds sold and other short-term investments 145 174 319 (35) (97) (132) 150 (1) 149 Taxable debt securities 3,730 2,830 6,560 5,145 (420) 4,725 4,538 (1,426) 3,112 Nontaxable debt securities (125) (9) (134) 290 62 352 431 (44) 387 Corporate stocks and FHLB stock 325 438 763 (18) 3 (15) 184 (117) 67 ------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 8,022 4,077 12,099 8,133 (2,251) 5,882 7,198 (1,952) 5,246 ------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings deposits 210 130 340 440 (231) 209 359 (302) 57 Time deposits 1,778 2,192 3,970 487 (1,360) (873) 1,215 (209) 1,006 FHLB advances 3,589 2,442 6,031 4,466 (824) 3,642 2,638 (207) 2,431 Other (608) 104 (504) (168) (74) (242) 15 (10) 5 ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 4,969 4,868 9,837 5,225 (2,489) 2,736 4,227 (728) 3,499 ------------------------------------------------------------------------------------------------------------------- Net interest income $3,053 (791) 2,262 $2,908 238 3,146 $2,971 (1,224) 1,747 -------------------------------------------------------------------------------------------------------------------
Noninterest Income Noninterest income is an important source of revenue for the Corporation. For the year ended December 31, 2000, recurring noninterest income, which excludes net gains on sales of securities and the nonrecurring net gain on the sale of the credit card portfolio, accounted for 33% of total revenues (net interest income plus recurring noninterest income). Washington Trust's primary sources of recurring noninterest income are trust and investment management revenues, servicing of deposit accounts, merchant credit card processing fees and mortgage banking activities. Also included in noninterest income are earnings generated from bank-owned life insurance ("BOLI") purchased in 1999. Revenue from trust and investment management services continues to be the largest component of noninterest income. Trust and investment management revenue represented 53.5% of noninterest income and amounted to $10.5 million in 2000, up by 13.2% from the $9.3 million reported in 1999. This increase is primarily attributable to the increase in the number of accounts under management. Service charges on deposit accounts rose 4.0% to $3.3 million in 2000. Changes in the fee structures of various deposit products during the year, as well as growth in the Corporation's total deposit base, were contributing factors in this increase. Revenue from mortgage banking activities associated with the originations of loans for the secondary market totaled $585 thousand in 2000, down from $1.4 million in 1999, due to decreased loan sales resulting from lower mortgage refinancing activity. Mortgage banking activities include the capitalization of mortgage servicing rights of $27 thousand and $313 thousand in 2000 and 1999, respectively. Most secondary market loans had previously been sold with servicing retained, however, in the fourth quarter of 1999, the Corporation began selling substantially all residential mortgage loans with servicing released. Mortgage servicing fee income amounted to $450 thousand for the year ended December 31, 2000, compared to the prior year amount of $426 thousand. Due to increases in interest rates, a lower amount of valuation adjustments on mortgage servicing rights was required in 2000 than in 1999. Servicing income, excluding valuation adjustments and amortization, as a percentage of average loans serviced was 30 basis points in 2000 and in 1999. The balance of serviced loans at December 31, 2000 amounted to $180.6 million, compared to $193.9 million at December 31, 1999. In the second quarter of 1999, the Corporation purchased $18.0 million of BOLI as a financing tool for employee benefits. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. Included in other income was $1.0 million and $676 thousand of earnings on BOLI for the years ended December 31, 2000 and 1999, respectively. (See additional discussion on BOLI under the caption "Financial Condition".) Noninterest Expense Total noninterest expense, excluding acquisition related expenses, rose 8.1% to $36.5 million in 2000. This increase was primarily attributable to higher salaries and benefit expense, increases in legal, audit and professional fees and higher equipment costs. Legal, audit and professional fees totaled $1.9 million, up $804 thousand from the corresponding 1999 amount. The increase was primarily due to legal costs associated with an ongoing litigation matter. These costs are expected to continue through the second quarter of 2001. At this time, management of the Corporation is not able to determine whether such costs will continue beyond the second quarter of 2001. Total equipment costs for 2000 amounted to $3.6 million, up $470 thousand from the corresponding 1999 amount. In 2000, the Corporation recorded an impairment adjustment of $293 thousand resulting from a remeasurement of the useful lives of technology equipment. Income Taxes Income tax expense amounted to $5.7 million and $4.8 million in 2000 and 1999, respectively. The Corporation's effective tax rate was 30.0% in 2000, compared to a rate of 27.5% in 1999. These rates differed from the federal rate of 35.0% due to the benefits of tax-exempt income and the dividends received deduction as well as the results of the tax planning strategies designed to reduce income taxes and the effect of the second quarter 2000 acquisition of Phoenix. Phoenix operated as a sub-S corporation prior to the acquisition. The acquisition was a tax-free reorganization accounted for as a pooling of interests. The Corporation's net deferred tax asset amounted to $2.1 million and $3.5 million at December 31, 2000 and 1999, respectively. In addition to future taxable income and the reversal of deferred tax liabilities, a primary source of recovery of deferred tax assets is taxes paid in prior years available for carryback. (See Note 12 to the Consolidated Financial Statements for additional information regarding income taxes.) Financial Condition Securities Securities are designated as either available for sale or held to maturity at the time of purchase. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Securities designated as held to maturity are part of the Corporation's portfolio of long-term interest-earning assets. These securities are classified as long-term because the Corporation has the intent and ability to hold them until maturity. Securities held to maturity are reported at amortized cost. Securities Available for Sale The amortized cost of securities available for sale at December 31, 2000 amounted to $380.0 million, an increase of $50.3 million over the 1999 amount. This increase was due primarily to purchases of mortgage-backed securities. At December 31, 2000, the net unrealized gains on securities available for sale amounted to $6.6 million, an increase of $5.9 million from the comparable 1999 amount. This increase was attributable to the effects of reductions in medium and long-term bond rates that occurred during 2000. (See Note 3 to the Consolidated Financial Statements for detail of unrealized gains and losses associated with securities available for sale.) Securities Held to Maturity The amortized cost of securities held to maturity increased $8.5 million, to $124.9 million at December 31, 2000. This increase is primarily attributable to purchases of obligations of U.S. government-sponsored agencies and mortgage-backed securities. The net unrealized gains on securities held to maturity amounted to $453 thousand at December 31, 2000 compared to $3.5 million in net unrealized losses at December 31, 1999. Federal Home Loan Bank Stock The Corporation is required to maintain a level of investment in FHLB stock that currently is based on the level of its FHLB advances. As of December 31, 2000 and 1999, the Corporation's investment in FHLB stock totaled $19.6 million and $17.6 million, respectively. The Gramm-Leach-Bliley Act requires the FHLB to issue new capitalization requirements to be implemented by May 2002. Loans Total loans amounted to $597.2 million at December 31, 2000, up $48.2 million, or 8.8%, from the December 31, 1999 amount of $549.0 million. The increase in total loans was led by growth in the residential and consumer loan portfolios. Total residential real estate loans increased $25.2 million, or 11.2%, in 2000. Consumer loans were up $15.4 million, or 17.0%, in 2000. The increase in consumer loans was mainly due to growth in home equity loans and lines. Total commercial loans increased $7.5 million, or 3.2%, in 2000, with the largest increase occurring in the commercial mortgage portfolio. Other Assets Other assets totaled $28.0 million at December 31, 2000, compared to $28.9 million at December 31, 1999. Included in other assets is BOLI, which amounted to $19.7 million and $18.7 million at December 31, 2000 and 1999, respectively. The Corporation purchased $18.0 million of BOLI in 1999 as a financing tool for employee benefits. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. The purchase of the life insurance policy results in an interest sensitive asset on the Corporation's consolidated balance sheet that provides monthly tax-free income to the Corporation. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed on all carriers. BOLI is included in other assets on the Corporation's consolidated balance sheets at its cash surrender value. Increases in BOLI's cash surrender value are reported as other income in the Corporation's consolidated statements of income. Deposits Total deposits at December 31, 2000 amounted to $735.7 million, up 11.3% from the prior year balance of $660.8 million. Demand deposits rose 10.4% to $113.0 million. Savings deposits rose 10.2% to $259.3 million. Time deposits totaled $363.4 million at December 31, 2000, compared to $323.0 million at December 31, 1999. The $40.4 million increase in time deposits was primarily attributable to increases in consumer and commercial certificates of deposits. Borrowings Washington Trust uses advances from the Federal Home Loan Bank of Boston as well as other borrowings as part of its overall funding strategy. The additional FHLB advances and other borrowings were used to meet short-term liquidity needs, to fund loan growth and to purchase securities. Total advances amounted to $377.4 million at December 31, 2000, up from $352.5 million one year earlier. (See Note 10 to the Consolidated Financial Statements for additional information about borrowings.) Asset Quality Nonperforming Assets Nonperforming assets include nonaccrual loans and other real estate owned. Nonperforming assets declined to .28% of total assets at December 31, 2000 compared to .35% of total assets at December 31, 1999. Nonaccrual loans as a percentage of total loans fell from .69% at the end of 1999 to .58% at December 31, 2000. Approximately $1.8 million, or 53.2% of total nonaccrual loans, were less than 90 days past due at December 31, 2000. The following table presents nonperforming assets and related ratios: (Dollars in thousands) December 31, 2000 1999 --------------------------------------------------------------------------- Nonaccrual loans: Residential real estate $796 $1,015 Commercial and other: Mortgages 1,076 702 Construction and development - 95 Other 1,018 1,242 Consumer 544 744 --------------------------------------------------------------------------- Total nonaccrual loans 3,434 3,798 Other real estate owned, net 9 49 --------------------------------------------------------------------------- Total nonperforming assets $3,443 $3,847 --------------------------------------------------------------------------- Nonaccrual loans as a percentage of total loans .58% .69% Nonperforming assets as a percentage of total assets .28% .35% Nonaccrual Loans Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more past due with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but uncollected, is reversed against current period income. Subsequent cash receipts on nonaccrual loans are recognized as interest income, or recorded as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified. Nonaccrual loans are returned to accrual status when the obligation has performed in accordance with the contract terms for a reasonable period of time and the ultimate collectibility of the contractual principal and interest is no longer doubtful. Included in accruing loans 90 days or more past due at December 31, 2000 are residential mortgages amounting to $346 thousand which are considered well-collateralized and in the process of collection and therefore are deemed to have no loss exposure. (Dollars in thousands) December 31, 2000 1999 --------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $1,608 $1,902 Nonaccrual loans less than 90 days past due 1,826 1,896 --------------------------------------------------------------------------- Total nonaccrual loans $3,434 $3,798 --------------------------------------------------------------------------- Accruing loans 90 days or more past due, primarily all residential mortgages (1) $393 $120 --------------------------------------------------------------------------- (1) Not included in nonperforming assets Restructured Loans Loans are considered restructured when the Corporation has granted concessions to a borrower due to the borrower's financial condition that it otherwise would not have considered. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. Included in nonaccrual loans at December 31, 2000 and 1999, are loans whose terms have been restructured amounting to $118 thousand and $142 thousand, respectively. There were no commitments to lend additional funds to borrowers whose loans had been restructured. Other Real Estate Owned Other real estate owned ("OREO") is comprised of properties acquired through foreclosure and other legal means, and loans determined to be substantively repossessed. A loan is considered to be substantively repossessed when the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings. OREO is carried at the lower of cost or fair value minus estimated costs to sell. A valuation allowance is maintained for declines in market value and estimated selling costs. The balance of OREO amounted to $9 thousand at December 31, 2000, down from the prior year amount of $49 thousand. Decreases in OREO resulted from sales of foreclosed properties and repossessed assets that exceeded the level of foreclosures and repossessions. During 2000, proceeds from sales of foreclosed properties and repossessed assets amounted to $95 thousand. Washington Trust has provided financing to facilitate the sales of some of these properties. Financing is generally provided at market rates with credit terms similar to those available to other borrowers. Allowance for Loan Losses The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses (ALL). The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other environmental factors. The methodology includes an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114. Other individual commercial and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration the borrower's financial condition, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the Corporation's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional unallocated allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. For example, most of the loan portfolio is concentrated among borrowers in southern Rhode Island and southeastern Connecticut and a substantial portion of the portfolio is collateralized by real estate in this area, including most consumer loans and those commercial loans not specifically classified as commercial mortgages. A portion of the commercial and commercial mortgage loans are to borrowers in the hospitality and tourism industry and this concentration has been increasing in recent years. Economic conditions which may affect the ability of borrowers to meet debt service requirements are considered including interest rates and energy costs. Results of regulatory examinations, historical loss ranges, portfolio composition including a trend toward somewhat larger credit relationships, and other changes in the portfolio are also considered. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans. The allowance for loan losses amounted to $13.1 million, or 2.20% of total loans, at December 31, 2000, compared to $12.3 million, or 2.25%, at December 31, 1999. The following table reflects the activity in the allowance for loan losses: (Dollars in thousands) Years ended December 31, 2000 1999 ------------------------------------------------------------------------- Beginning balance $12,349 $10,966 Charge-offs, net of recoveries: Residential: Real estate (19) 135 Construction - (22) Commercial: Mortgages (8) (126) Construction and development - (119) Other 13 (102) Consumer (350) (223) ------------------------------------------------------------------------- Net charge-offs (364) (457) Provision for loan losses 1,150 1,840 ------------------------------------------------------------------------- Ending balance $13,135 $12,349 ------------------------------------------------------------------------- Allowance for loan losses to nonaccrual loans 382.50% 325.15% Allowance for loan losses to total loans 2.20% 2.25% ------------------------------------------------------------------------- Capital Resources Total shareholders' equity increased $11.0 million during 2000 and amounted to $89.2 million at December 31, 2000. The overall increase was mainly attributable to earnings retention of $6.6 million. Capital growth also resulted from a $4.2 million increase in accumulated other comprehensive income due to unrealized gains on securities. Stock option exercises increased shareholders' equity by $222 thousand in 2000. Cash dividends declared per share amounted to $.48 and $.44 in 2000 and 1999, respectively. The ratio of total equity to total assets amounted to 7.3% at December 31, 2000, compared to 7.1% at December 31, 1999. Book value per share at December 31, 2000 amounted to $7.43, a 13.4% increase from the year-earlier amount of $6.55 per share. The Corporation and the Bank are subject to various regulatory capital requirements. The Corporation and the Bank are categorized as well-capitalized under the regulatory framework for prompt corrective action. (See Note 15 to the Consolidated Financial Statements for additional discussion of capital requirements.) Litigation The Bank is party to a lawsuit filed by a former corporate customer and the customer's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by an officer and fifty percent shareholder of the customer. Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious affirmative defenses in this litigation. Additionally, the Bank has filed counterclaims against the customer and its shareholders, as well as claims against the individual allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The discovery phase of the case has been completed, though the parties are attempting to resolve several discovery disputes. The Bank has also filed several motions, all of which seek dismissal of one or more of the plaintiffs' claims and/or exclusion of portions of the plaintiffs' evidence. The court began hearing argument on the motions on March 8, 2001, and has expressed a desire to hear further argument. There is currently no scheduled trial date. During discovery, the plaintiffs have offered various theories and amounts of alleged damages, ranging from $5.0 million to $12.7 million, plus interest thereon. The plaintiffs have also filed a motion to amend the complaint to add a claim for punitive damages. The court has deferred ruling on whether to permit this amendment. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision for this lawsuit has been recorded. Recent Accounting Developments Accounting for Derivative Instruments and Hedging Activities Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" standardizes the accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires a corporation to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. This Statement defines conditions and criteria to be used in designating a derivative as a specific type of hedging instrument. SFAS No. 133 also explains the accounting for changes in the fair value of a derivative, which depends on the intended use and the resulting designation. Under this Statement, a corporation is required to establish at the inception of the hedge the method to be used for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the corporation's approach to managing risk. The Corporation adopted SFAS No. 133 effective January 1, 2001. The adoption of this standard did not have a material impact on the financial position and earnings of the Corporation. Comparison of 1999 with 1998 Washington Trust recorded net income of $12.5 million, or $1.03 per diluted share, for 1999. Net income for 1998 amounted to $12.2 million, or $1.01 per diluted share. Operating earnings for the fiscal year 1999 amounted to $12.8 million, an increase of 10.9% from $11.5 million earned in 1998. Diluted earnings per share, on an operating basis, amounted to $1.06 for 1999, up from $.95 per share in 1998. The Corporation's rates of return on average assets and average equity, on an operating basis, for 1999 were 1.21% and 16.04%, respectively. Comparable amounts for 1998 were 1.24% and 15.21%. Fully taxable equivalent net interest income increased $3.1 million or 9.4% from 1999 to 1998 due primarily to growth in interest-earning assets and lower costs of funds. The net interest margins for 1999 and 1998 were 3.71% and 3.85%, respectively. The interest rate spread declined 6 basis points to 3.19% in 1999. Earning asset yields fell 34 basis points during 1999, while the cost of interest-bearing liabilities declined 28 basis points, thereby narrowing the net interest spread. Growth in the securities portfolios as well as interest expense associated with the increases in FHLB advances, were primarily responsible for the decrease in the net interest margin. Noninterest income totaled $18.8 million and $16.5 million for 1999 and 1998, respectively. The $2.3 million increase resulted primarily from growth in revenues for trust and investment management services and income from BOLI, offset in part by a decline in revenue from mortgage banking activities. Trust and investment management revenue totaled $9.3 million for 1999, up 12.0% from 1998. BOLI was purchased during the second quarter of 1999 as a financing tool for employee benefits. Income from BOLI amounted to $676 thousand in 1999. Also included in other income was a $438 thousand net gain on sale of the credit card portfolio that occurred in the third quarter of 1999. Operating noninterest expenses (excluding acquisition related expenses) amounted to $33.8 million for 1999, up $3.0 million from 1998. The increase was primarily attributable to higher salaries and benefits expense and equipment costs. Equipment costs rose 13.0% over the prior year period due primarily to depreciation expense associated with 1998 investments in technology. Total assets rose $110.5 million or 11.1% to $1.106 billion at December 31, 1999. Average assets amounted to $1.053 billion in 1999, up 13.6% from the prior year. Asset growth was primarily attributable to a $52.1 million increase in total loans and a $31.3 increase in the carrying value of securities. Included in other assets is BOLI, which amounted to $18.7 million at December 31, 1999. Increases in FHLB advances as well as total deposits funded the growth in assets. Average interest-bearing liabilities amounted to $869.2 million at December 31, 1999, up 14.7% from December 31, 1998. Nonperforming assets amounted to $3.8 million or .35% of total assets at December 31, 1999, down from $6.1 million or .61% at December 31,1998. The Corporation's loan loss provision was $1.8 million and $1.9 million in 1999 and 1998, respectively. Net loan charge-offs amounted to $457 thousand in 1999, up from $248 thousand in 1998. The allowance for loan losses represented 2.25% of total loans at December 31, 1999 compared to 2.21% at December 31, 1998. Shareholders' equity amounted to $78.2 million at December 31, 1999, compared to $78.4 million at December 31, 1998. The decline was mainly attributable to reductions in net unrealized gains on securities of $7.6 million. Capital growth resulted from $6.1 million of earnings retention and $941 thousand from stock option exercises. Book value per share amounted to $6.55 at December 31, 1999, down slightly from the year-earlier amount of $6.66 per share. The ratio of capital to assets was 7.1% and 7.9% at December 31, 1999 and 1998, respectively. Dividends paid per share amounted to $.44 in 1999, up 10.0% from the prior year. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity Interest rate risk is one of the major market risks faced by the Corporation. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. The objective of the ALCO is to manage assets and funding sources to produce results which are consistent with Washington Trust's liquidity, capital adequacy, growth, risk and profitability goals. The ALCO manages the Corporation's interest rate risk using income simulation to measure interest rate risk inherent in the Corporation's on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 60-month period. The simulations assume that the size and general composition of the Corporation's balance sheet remain constant over the 60-month simulation horizon and take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. Non-contractual savings deposits are classified as short-term (three months or less) for both maturity and repricing purposes. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency. The ALCO reviews simulation results to determine whether the negative exposure of net interest income to changes in interest rates remains within established tolerance levels over a 24-month horizon, and to develop appropriate strategies to manage this exposure. In addition, the ALCO reviews 60-month horizon results to assess longer-term risk inherent in the balance sheet. As of December 31, 2000 and December 31, 1999, net interest income simulation indicated exposure to changing interest rates over a 24-month horizon to a degree that remained within tolerance levels established by the Corporation. The Corporation defines maximum unfavorable net interest income exposure to be a change of no more than 5% in net interest income over the first 12 months and no more than 10% over the second 12 months of the simulation horizon. The following table summarizes the effect that interest rate shifts would have on net interest income for a 24-month period using the Corporation's on and off-balance sheet financial instruments as of December 31, 2000. Interest rates are assumed to shift by a parallel 200 basis points over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their historical insensitivity to rate changes. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenario used does not necessarily reflect the ALCO's view of the "most likely" change in interest rates over the next 24 months. Furthermore, since a static balance sheet is assumed, the results do not reflect the anticipated future net interest income of the Corporation for the same period. The following table presents these 24-month net interest income simulation results:
(Dollars in thousands) Flat Falling Rising Rates Rates Rates ---------------------------------------------------------------------------------------------------------- Interest-earning assets: Fixed rate mortgage-backed securities $18,307 $17,236 $18,741 Adjustable rate mortgage-backed securities 24,141 20,432 27,563 Callable securities 8,644 7,847 9,130 Other securities 22,449 19,964 24,779 Fixed rate mortgages 21,664 20,400 22,442 Adjustable rate mortgages 16,219 15,377 17,060 Other fixed rate loans 35,770 34,221 37,317 Other adjustable rate loans 29,625 25,970 33,272 Interest rate floor contracts (net of premium amortization) (120) 144 (120) ---------------------------------------------------------------------------------------------------------- Total interest income 176,699 161,591 190,184 ---------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Core savings deposits 10,848 9,788 11,012 Time deposits 40,481 34,852 48,031 FHLB advances 47,341 42,988 51,888 Other borrowings 382 292 471 ---------------------------------------------------------------------------------------------------------- Total interest expense 99,052 87,920 111,402 ---------------------------------------------------------------------------------------------------------- Net interest income results as of December 31, 2000 $77,647 $73,671 $78,782 ---------------------------------------------------------------------------------------------------------- Net interest income results as of December 31, 1999 $72,038 $73,447 $68,158 ----------------------------------------------------------------------------------------------------------
The ALCO estimates that the negative exposure of net interest income to falling rates results from the difficulty of reducing rates paid on deposits given the current level of interest rates. If rates were to fall sharply and remain at low levels for a sustained period, retail deposit rates would likely fall by a limited amount, while rates earned on assets would drop more rapidly. While the ALCO reviews simulation assumptions to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk since the repricing, maturity and prepayment characteristics of financial instruments, especially core savings deposits, may change to a different degree than estimated. In addition, since income simulations assume that the Corporation's balance sheet will remain static over the 60-month simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts. The Corporation also monitors the potential change in market value of its available for sale debt securities in parallel rate shifts of up to 200 basis points. The purpose is to determine market value exposure which may not be captured by income simulation, but which might result in changes to the Corporation's capital position. Results are calculated using industry-standard analytical techniques and securities data. The following table summarizes the potential change in market value of the Corporation's available for sale debt securities as of December 31, 2000 and 1999 resulting from immediate 200 basis point parallel rate shifts:
(Dollars in thousands) Falling Rising Rates Rates --------------------------------------------------------------------------------------------------------- Security Type: U.S. Treasury and government-sponsored agency securities (noncallable) $1,560 $(1,421) U.S. government-sponsored agency securities (callable) 755 (1,560) Corporate securities 807 (842) Fixed rate mortgage-backed securities 358 (4,803) Adjustable rate mortgage-backed securities 3,501 (2,227) Fixed rate collateralized mortgage obligations 21 (251) Adjustable rate collateralized mortgage obligations 171 (2,146) --------------------------------------------------------------------------------------------------------- Total change in market value as of December 31, 2000 $7,173 $(13,250) --------------------------------------------------------------------------------------------------------- Total change in market value as of December 31, 1999 $7,795 $(14,149) ---------------------------------------------------------------------------------------------------------
The Corporation also monitors the potential change in market value of its available for sale debt securities using "value at risk" analysis. The anticipated maximum market value reduction for the bank's available for sale securities portfolio at December 31, 2000, including both debt and equity securities, was 3.5%, assuming a one-year time horizon and a 5% probability of occurrence for "value at risk" analysis. At December 31, 2000, gap analysis showed that the Corporation's cumulative one-year gap was a negative $128.9 million, or 11.2% of earning assets. The following table details the amounts of interest-earning assets and interest-bearing liabilities at December 31, 2000 that are expected to mature or reprice in each of the time periods presented. To the extent applicable, amounts of assets and liabilities that mature or reprice within a particular period were determined in accordance with their contractual terms. Fixed rate mortgages, mortgage-backed securities and consumer installment loans have been allocated based on expected amortization and prepayment rates using standard industry assumptions. Savings, NOW and money market deposit accounts, which have no contractual term and are subject to immediate repricing, are presented in the under three-month category. Management believes that gap analysis has substantial limitations as a measure of interest rate risk, as it does not address the effect of changes in interest rates nor the magnitude of resulting changes in net interest income. For this reason, the ALCO does not use gap analysis to establish interest rate risk targets or assess interest rate risk exposure. The following table summarizes the Corporation's gap analysis as of December 31, 2000:
(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 $159,862 $47,398 $76,632 $197,432 $117,470 Debt securities 145,938 43,527 73,870 171,778 56,306 Other 21,400 - - - 39,665 ---------------------------------------------------------------------------------------------------------------- Total interest-earning assets 327,200 90,925 150,502 369,210 213,441 Interest-bearing liabilities: Deposits 401,667 48,088 61,707 111,196 14 FHLB advances 71,424 52,868 58,500 164,933 29,637 Other borrowings 3,227 - - - - ---------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 476,318 100,956 120,207 276,129 29,651 ---------------------------------------------------------------------------------------------------------------- Interest sensitivity gap per period $(149,118) $(10,031) $30,295 $93,081 $183,790 ---------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap $(149,118) $(159,149) $(128,854) $(35,773) $148,017 ---------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap - 1999 $(160,584) $(215,036) $(244,217) $(63,744) $117,447 ----------------------------------------------------------------------------------------------------------------
On occasion, the Corporation has supplemented its interest rate risk management strategies with off-balance sheet transactions. Such transactions are intended to hedge specifically identified risks inherent in the Corporation's balance sheet, and not to produce speculative profits. The Corporation has written policy guidelines that designate limits on the notional value of off-balance sheet transactions and require periodic evaluation of risks associated with these transactions, including counterparty credit risk. During 1995, the Corporation entered into interest rate floor contracts with a notional principal amount of $50 million and a five-year term maturing in February 2000. During 1998, the Corporation entered into additional floor contracts with a notional principal amount of $20 million and a five-year term maturing in March 2003. These contracts are intended to function as a hedge against reductions in interest income realized from prime-based loans. These contracts were purchased for a total premium of $1.2 million, which is amortized over the life of the contracts. The Corporation receives payment for these contracts if certain interest rates fall below specified levels. During 2000, the Corporation recorded premium amortization, net of income, of $67 thousand on its floor contracts. (See Note 7 to the Consolidated Financial Statements for additional information regarding the floor contracts.) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are contained herein. Description Independent Auditors' Report Consolidated Balance Sheets December 31, 2000 and 1999 Consolidated Statements of Income For the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows For the Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements INDEPENDENT AUDITORS' REPORT [firm logo here][KPMG] The Board of Directors and Shareholders Washington Trust Bancorp, Inc.: We have audited the consolidated financial statements of Washington Trust Bancorp, Inc. and subsidiary (the "Corporation") as listed in the accompanying index. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ending December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Providence, Rhode Island January 15, 2001
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED BALANCE SHEETS December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $22,460 $27,091 Federal funds sold and other short-term investments 21,400 17,429 Mortgage loans held for sale 1,639 1,647 Securities: Available for sale, at fair value 386,611 330,431 Held to maturity, at cost; fair value $125,368 in 2000 and $112,868 in 1999 124,915 116,372 - ------------------------------------------------------------------------------------------------------------------- Total securities 511,526 446,803 Federal Home Loan Bank stock, at cost 19,558 17,627 Loans 597,155 549,025 Less allowance for loan losses 13,135 12,349 - ------------------------------------------------------------------------------------------------------------------- Net loans 584,020 536,676 Premises and equipment, net 21,710 23,442 Accrued interest receivable 7,800 6,010 Other assets 27,954 28,880 - ------------------------------------------------------------------------------------------------------------------- Total assets $1,218,067 $1,105,605 - ------------------------------------------------------------------------------------------------------------------- Liabilities: Deposits: Demand $113,012 $102,384 Savings 259,309 235,395 Time 363,363 322,974 - ------------------------------------------------------------------------------------------------------------------- Total deposits 735,684 660,753 Dividends payable 1,445 1,202 Federal Home Loan Bank advances 377,362 352,548 Other borrowings 3,227 4,209 Accrued expenses and other liabilities 11,163 8,726 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 1,128,881 1,027,438 - ------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares in 2000 and 1999; issued 12,006,809 shares in 2000 and 11,925,571 shares in 1999 750 745 Paid-in capital 10,144 9,927 Retained earnings 74,265 67,686 Accumulated other comprehensive income (loss) 4,027 (191) - ------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 89,186 78,167 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,218,067 $1,105,605 - -------------------------------------------------------------------------------------------------------------------
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, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $49,423 $44,828 $43,869 Interest on securities 32,068 25,613 20,656 Dividends on corporate stock and Federal Home Loan Bank stock 2,771 2,043 2,051 Interest on federal funds sold and other short-term investments 837 518 650 - -------------------------------------------------------------------------------------------------------------------- Total interest income 85,099 73,002 67,226 - -------------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 4,383 4,043 3,834 Time deposits 19,841 15,871 16,744 Federal Home Loan Bank advances 22,886 16,855 13,213 Other 121 625 867 - -------------------------------------------------------------------------------------------------------------------- Total interest expense 47,231 37,394 34,658 - -------------------------------------------------------------------------------------------------------------------- Net interest income 37,868 35,608 32,568 Provision for loan losses 1,150 1,840 1,879 - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 36,718 33,768 30,689 - -------------------------------------------------------------------------------------------------------------------- Noninterest income: Trust and investment management 10,544 9,314 8,315 Service charges on deposit accounts 3,297 3,169 2,955 Merchant processing fees 2,144 1,535 1,221 Income from bank-owned life insurance 1,047 676 - Mortgage banking activities 585 1,376 2,218 Net gains on sales of securities 760 678 504 Net gain on sale of credit card portfolio - 438 - Other income 1,335 1,640 1,304 - -------------------------------------------------------------------------------------------------------------------- Total noninterest income 19,712 18,826 16,517 - -------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 19,750 18,294 16,550 Net occupancy 2,601 2,494 2,412 Equipment 3,592 3,122 2,763 Legal, audit and professional fees 1,883 1,079 1,027 Merchant processing costs 1,707 1,313 1,005 Advertising and promotion 1,196 991 799 Office supplies 641 732 774 Acquisition related expenses 1,035 1,552 - Other 5,143 5,752 5,463 - -------------------------------------------------------------------------------------------------------------------- Total noninterest expense 37,548 35,329 30,793 - -------------------------------------------------------------------------------------------------------------------- Income before income taxes 18,882 17,265 16,413 Income tax expense 5,673 4,754 4,235 - -------------------------------------------------------------------------------------------------------------------- Net income $13,209 $12,511 $12,178 - -------------------------------------------------------------------------------------------------------------------- Per share information: Basic earnings per share $1.10 $1.05 $1.04 Diluted earnings per share $1.09 $1.03 $1.01 Cash dividends declared per share (1) $.48 $.44 $.40 (1) Represents historical per share dividends declared by Washington Trust Bancorp, Inc.
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 Accumulated Other Common Paid-in Retained Comprehensive Treasury Stock Capital Earnings Income (Loss) Stock Total - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2000 $745 $9,927 $67,686 $(191) $ - $78,167 Net income 13,209 13,209 Other comprehensive income, net of tax: Net unrealized gains on securities, net of reclassification adjustment 4,218 4,218 --------- Comprehensive income 17,427 Cash dividends declared (6,630) (6,630) Shares issued 5 217 222 - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $750 $10,144 $74,265 $4,027 $ - $89,186 - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1999 $737 $8,986 $61,581 $7,401 $(354) $78,351 Net income 12,511 12,511 Other comprehensive loss, net of tax: Net unrealized losses on securities, net of reclassification adjustment (7,592) (7,592) --------- Comprehensive income 4,919 Cash dividends declared (6,406) (6,406) Shares issued 8 1,319 12 1,339 Shares retired (378) 378 - Shares repurchased (36) (36) - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $745 $9,927 $67,686 $(191) $ - $78,167 - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1998 $523 $9,776 $55,373 $7,074 $(687) $72,059 Net income 12,178 12,178 Other comprehensive income, net of tax: Net unrealized gains on securities, net of reclassification adjustment 327 327 --------- Comprehensive income 12,505 Cash dividends declared (5,763) (5,763) Stock split in form of stock dividend 207 (207) - Shares issued 7 (790) 3,338 2,555 Shares repurchased (3,005) (3,005) - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $737 $8,986 $61,581 $7,401 $(354) $78,351 - ----------------------------------------------------------------------------------------------------------------------
Disclosure of Reclassification Amount: Years ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Net unrealized holding gains (losses) arising during the period $6,631 $(10,827) $1,025 Less: Income tax effect (1,919) 3,682 (381) Reclassification adjustment for net gains included in net income (760) (678) (504) Income tax effect on reclassification adjustment 266 231 187 - ----------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) on securities $4,218 $(7,592) $327 - -----------------------------------------------------------------------------------------------------------------------
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, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $13,209 $12,511 $12,178 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,150 1,840 1,879 Depreciation of premises and equipment 3,308 3,004 2,637 Accretion of discount (in excess of) less than amortization of premium on debt securities (149) 461 1,001 Deferred income tax benefit (681) (741) (379) Increase in bank-owned life insurance cash surrender value (1,047) (676) - Net gains on sales of securities (760) (678) (504) Net gains on loan sales (322) (695) (1,436) Net gain on sale of credit card portfolio - (438) - Proceeds from sale of credit card portfolio - 5,192 - Proceeds from sales of loans 23,769 47,627 89,533 Loans originated for sale (23,437) (42,785) (90,940) Increase in accrued interest receivable (1,790) (97) (741) Decrease (increase) in other assets 275 (1,424) 387 Increase in accrued expenses and other liabilities 2,912 1,432 629 Other, net 1,075 1,782 1,551 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 17,512 26,315 15,795 - --------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Securities available for sale: Purchases (128,227) (168,644) (232,273) Proceeds from sales 40,288 81,398 95,666 Maturities and principal repayments 38,507 65,379 58,621 Securities held to maturity: Purchases (22,745) (54,948) (52,582) Maturities and principal repayments 14,235 34,212 8,727 Purchases of Federal Home Loan Bank stock (1,931) (1,044) (139) Principal collected on loans under loan originations (48,756) (57,622) (7,289) Proceeds from sales of other real estate owned 95 513 1,381 Purchases of premises and equipment (1,813) (2,510) (3,861) Purchase of bank-owned life insurance - (18,000) - - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (110,347) (121,266) (131,749) - ---------------------------------------------------------------------------------------------------------------------
(Continued)
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years ended December 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 74,931 32,990 54,960 Net decrease in other borrowings (982) (10,824) (5,305) Proceeds from Federal Home Loan Bank advances 404,500 550,837 611,300 Repayment of Federal Home Loan Bank advances (379,686) (462,395) (534,195) Repayment of obligations under capital leases - (21) (21) Purchase of treasury stock - (36) (3,005) Net effect of common stock transactions (201) 475 1,012 Cash dividends paid (6,387) (6,209) (5,685) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 92,175 104,817 119,061 - --------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (660) 9,866 3,107 Cash and cash equivalents at beginning of year 44,520 34,654 31,547 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $43,860 $44,520 $34,654 - --------------------------------------------------------------------------------------------------------------------- Noncash Investing and Financing Activities: Net transfers from loans to other real estate owned $109 $576 $789 Loans charged off 683 967 653 Loans made to facilitate the sale of other real estate owned 60 180 61 Increase (decrease) in unrealized gain on securities available for sale, net of tax 4,218 (7,592) 327 Increase in paid-in capital resulting from tax benefits on stock option exercises 423 864 1,543 Supplemental Disclosures: Interest payments $45,970 $36,690 $34,761 Income tax payments 5,838 4,363 2,324
The accompanying notes are an integral part of these consolidated financial statements. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 General Washington Trust Bancorp, Inc. (the "Corporation") is a publicly owned, registered bank holding company, organized under the laws of the State of Rhode Island. The Corporation provides a complete product line of financial services through its wholly owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The Bank was originally chartered in 1800 and provides a variety of financial services including commercial, residential and consumer lending, retail and commercial deposit products and trust and investment management services through its branch offices in Rhode Island and Connecticut. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The activities of the Corporation and the Bank are subject to the regulatory supervision of the Board of Governors of the Federal Reserve System ("Federal Reserve Board") and the FDIC, respectively. Both companies are subject to various Rhode Island and Connecticut business and banking regulations. On June 26, 2000, the Corporation completed its acquisition of Phoenix Investment Management Company, Inc. ("Phoenix"), an independent investment advisory firm. Pursuant to the Agreement and Plan of Merger, dated April 24, 2000, the Corporation issued 1,010,808 shares of its common stock to the shareholders of Phoenix. For the years ended December 31, 1999 and 1998, investment management revenues of Phoenix totaled $3.4 million and $3.1 million, respectively. Net income of Phoenix for 1999 and 1998 amounted to $1.9 million and $1.7 million, respectively. Dividends paid to Phoenix shareholders totaled $1.8 million for 1999 and $1.7 million for 1998. Expenses directly attributable to the second quarter 2000 acquisition of Phoenix amounted to $1.1 million, after income taxes, and primarily consisted of legal and investment advisory fees. On August 25, 1999, the Corporation completed its acquisition of Pier Bank, a Rhode Island chartered community bank headquartered in South Kingstown, Rhode Island. Pursuant to the Agreement and Plan of Merger, dated February 22, 1999, the Corporation issued 746,345 shares of its common stock to the shareholders of Pier Bank. At December 31, 1998, Pier Bank had total assets of $59.4 million and total shareholders' equity of $4.5 million. For the year ended December 31, 1998, Pier Bank's net income amounted to $459 thousand. Expenses directly attributable to the third quarter 1999 acquisition of Pier Bank amounted to $1.3 million, net of income taxes, and consisted mainly of professional fees, data processing/integration costs, write-down of assets and severance obligations. Pier Bank asset write-downs amounted to $126 thousand and consisted of fixed assets, primarily obsolete technology equipment, abandoned in connection with the acquisition. Acquisition related expenses were charged to earnings at the dates of combination. The acquisitions were accounted for under the pooling of interests method and, accordingly, the financial statements and other financial information of the Corporation have been restated to reflect the acquisitions at the beginning of the earliest period presented. (1) Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of the Corporation and the Bank. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification. The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practices of the banking industry. The Corporation has one reportable operating segment. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to change is the determination of the allowance for loan losses. Securities Securities Available for Sale The Corporation designates securities that it intends to use as part of its asset/liability strategy or that may be sold as a result of changes in market conditions, changes in prepayment risk, rate fluctuations, liquidity or capital requirements as available for sale. The determination to classify such securities as available for sale is made at the time of purchase. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Any decline in fair value below the amortized cost basis of an individual security deemed to be other than temporary is recognized as a realized loss in the accounting period in which the determination is made. The fair value of the security at the time of the write-down becomes the new cost basis of the security. Realized gains or losses from sales of equity securities are determined using the average cost method, while other realized gains and losses are determined using the specific identification method. Securities Held to Maturity The determination to classify debt securities in the held-to-maturity category is made at the time of purchase and is based on management's intent and ability to hold the securities until maturity. Debt securities in the held-to-maturity portfolio are stated at cost, adjusted for amortization of premium and accretion of discount (calculated on a method that approximates the interest method). Federal Home Loan Bank Stock The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston. As a requirement of membership, the Bank must own a minimum amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank may redeem FHLB stock in excess of the minimum required. In addition, the FHLB may require members to redeem stock in excess of the requirement. FHLB stock is redeemable at par, which equals cost. Since no market exists for these shares, they are valued at par. Mortgage Banking Activities Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost, net of unamortized deferred loan origination fees and costs, or market. Unrealized losses, if any, are charged to current period earnings. Mortgage Servicing Rights Rights to service mortgage loans for others are recognized as an asset, including rights acquired through both purchases and originations. The total cost of originated mortgage loans that are sold with servicing rights retained is allocated between the mortgage servicing rights and the loans without the mortgage servicing rights based on their relative fair values. Capitalized mortgage servicing rights are included in other assets and are amortized as an offset to other income over the period of estimated net servicing income. They are periodically evaluated for impairment based on their fair value. Impairment is measured on an aggregated basis according to interest rate band and period of origination. The fair value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost. Any impairment is recognized as a charge to earnings through a valuation allowance. Portfolio Loans Loans held in portfolio are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs. Interest income is accrued on a level yield basis based on principal amounts outstanding. Deferred loan origination fees and costs are amortized as an adjustment to yield over the life of the related loans. Nonaccrual Loans Loans, with the exception of certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent cash receipts on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible. Impaired Loans A loan is impaired when it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Corporation considers all nonaccrual commercial loans to be impaired. Impairment is measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impairment is measured based on the fair value of the collateral if it is determined that foreclosure is probable. Restructured Loans Restructured loans include those for which concessions such as reduction of interest rates other than normal market rate adjustments, or deferral of principal or interest payments have been granted due to a borrower's financial condition. Subsequent cash receipts on restructured loans are applied to the outstanding principal balance of the loan, or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Allowance for Loan Losses The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses (ALL). The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other environmental factors. The methodology includes an analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114. Other individual commercial and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration the borrower's financial condition, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the Corporation's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other factors including regional credit concentration, industry concentration, results of regulatory examinations, historical loss ranges, portfolio composition, economic conditions such as interest rates and energy costs and other changes in the portfolio. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans. While management believes that the allowance for loan losses is adequate, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies periodically review the Corporation's allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. Expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses. Other Real Estate Owned (OREO) Other real estate owned consists of property acquired through foreclosure and loans determined to be substantively repossessed. Real estate loans that are substantively repossessed include only those loans for which the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings. OREO is stated at the lower of cost or fair value minus estimated costs to sell at the date of acquisition or classification to OREO status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure is charged to the allowance for loan losses. A valuation allowance is maintained for declines in market value and for estimated selling expenses. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in foreclosed property costs. Transfers and Servicing of Assets and Extinguishments of Liabilities The Corporation accounts and reports for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. This approach distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. After a transfer of financial assets, the Corporation recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. This financial components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the Corporation accounts for a transfer as a secured borrowing with a pledge of collateral. Interest Rate Risk Management Agreements The Corporation uses off-balance sheet financial instruments from time to time as part of its interest rate risk management strategy. Interest rate swap and floor agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Corporation does not enter into agreements for trading or speculative purposes. Therefore, these agreements are not marked to market. The net amounts to be paid or received on outstanding interest rate risk management agreements are recognized on the accrual basis as an adjustment to the related interest income or expense over the life of the agreements. Premiums paid for interest rate floor agreements are amortized as an adjustment to interest income over the term of the agreements. Unamortized premiums are included in other assets. Gains or losses resulting from the termination of interest rate swap and floor agreements on qualifying hedges of existing assets or liabilities are deferred and amortized over the remaining lives of the related assets/liabilities as an adjustment to the yield. Unamortized deferred gains/losses on terminated interest rate swap and floor agreements are included in the underlying assets/liabilities hedged. Pension Costs The Corporation accounts for pension benefits using the net periodic benefit cost method, which recognizes the compensation cost of an employee's pension benefit over that employee's approximate service period. Stock-Based Compensation The Corporation measures compensation cost for stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net income and earnings per share computed using the fair value based method of accounting for these plans as required by SFAS No. 123. Income Taxes Income tax expense is determined based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Earnings Per Share (EPS) Diluted EPS is computed by dividing net income by the average number of common shares and common stock equivalents outstanding. Common stock equivalents arise from the assumed exercise of outstanding stock options, if dilutive. The computation of basic EPS excludes common stock equivalents from the denominator. Comprehensive Income Comprehensive income is defined as all changes in equity, except for those resulting from investments by and distribution to shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and other short-term investments. Generally, federal funds are sold on an overnight basis. Derivative Instruments and Hedging Activities In 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for all derivative instruments, including certain derivative instruments embedded in other financial instruments, and for hedging activities. The standard requires an entity to record all derivatives, at fair value, as either assets or liabilities on the balance sheet. The change in a derivative's fair value is to be recorded either in current period earnings or other comprehensive income depending on whether the derivative qualifies for hedge accounting and the hedge classification. The Corporation adopted SFAS No. 133 effective January 1, 2001. The adoption of this standard did not have a material impact on the financial position and earnings of the Corporation. (2) Cash and Due from Banks The Bank is required to maintain certain average reserve balances with the Federal Reserve Board. Such reserve balances amounted to $6.4 million and $6.0 million at December 31, 2000 and 1999, respectively. (3) Securities Securities are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair December 31, 2000 Cost Gains Losses Value ---------------------------------------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $86,163 $1,162 $(241) $87,084 Mortgage-backed securities 240,436 1,462 (1,042) 240,856 Corporate bonds 39,086 348 (869) 38,565 Corporate stocks 14,314 6,494 (702) 20,106 ---------------------------------------------------------------------------------------------------------- Total securities available for sale 379,999 9,466 (2,854) 386,611 ---------------------------------------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 35,135 265 (121) 35,279 Mortgage-backed securities 66,715 685 (467) 66,933 States and political subdivisions 23,065 121 (30) 23,156 ---------------------------------------------------------------------------------------------------------- Total securities held to maturity 124,915 1,071 (618) 125,368 ---------------------------------------------------------------------------------------------------------- Total securities $504,914 $10,537 $(3,472) $511,979 ---------------------------------------------------------------------------------------------------------- (Dollars in thousands) Amortized Unrealized Unrealized Fair December 31, 1999 Cost Gains Losses Value ---------------------------------------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $87,558 $347 $(1,595) $86,310 Mortgage-backed securities 191,934 70 (2,918) 189,086 Corporate bonds 34,364 31 (711) 33,684 Corporate stocks 15,833 6,582 (1,064) 21,351 ---------------------------------------------------------------------------------------------------------- Total securities available for sale 329,689 7,030 (6,288) 330,431 ---------------------------------------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 28,231 - (895) 27,336 Mortgage-backed securities 62,209 54 (2,189) 60,074 States and political subdivisions 25,932 23 (497) 25,458 ---------------------------------------------------------------------------------------------------------- Total securities held to maturity 116,372 77 (3,581) 112,868 ---------------------------------------------------------------------------------------------------------- Total securities $446,061 $7,107 $(9,869) $443,299 ----------------------------------------------------------------------------------------------------------
Included in corporate stocks at December 31, 2000 are preferred stocks, which are callable at the discretion of the issuer, with an amortized cost of $9.6 million and a fair value of $9.3 million. Call features on these stocks range from four months to seven years. The contractual maturities and weighted average yields of debt securities are summarized below. Weighted average yields are computed on a fully taxable basis. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. (Dollars in thousands) Weighted Amortized Fair Average December 31, 2000 Cost Value Yield ------------------------------------------------------------------------- Securities Available for Sale: Due in 1 year or less $59,129 $59,199 6.89% After 1 but within 5 years 164,355 165,409 7.01% After 5 but within 10 years 74,485 75,057 7.10% After 10 years 67,716 66,840 7.36% ------------------------------------------------------------------------- Total debt securities available for sale 365,685 366,505 7.07% ------------------------------------------------------------------------- Securities Held to Maturity: Due in 1 year or less 23,466 23,553 6.50% After 1 but within 5 years 64,169 64,460 6.25% After 5 but within 10 years 30,264 30,316 5.96% After 10 years 7,016 7,039 6.81% ------------------------------------------------------------------------- Total debt securities held to maturity 124,915 125,368 6.26% ------------------------------------------------------------------------- Total debt securities $490,600 $491,873 6.87% ------------------------------------------------------------------------- At December 31, 2000, the Corporation owned debt securities with an aggregate carrying value of $62.5 million that are callable at the discretion of the issuers. The majority of these securities are U.S. Treasury and government-sponsored agency obligations, included in both the available for sale and held to maturity categories. Final maturities of these securities range from twenty-six months to thirty years with call features ranging from one month to seven years. The following is a summary of amounts relating to sales of securities available for sale: (Dollars in thousands) Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------- Proceeds from sales $40,288 $81,398 $95,666 ------------------------------------------------------------------------- Realized gains $1,358 $2,213 $1,161 Realized losses (598) (1,535) (657) ------------------------------------------------------------------------- Net realized gains $760 $678 $504 ------------------------------------------------------------------------- Securities available for sale and held to maturity with a fair value of $65.3 million and $46.9 million were pledged to secure Treasury Tax and Loan deposits, borrowings and public deposits at December 31, 2000 and 1999, respectively. In addition, securities available for sale and held to maturity with a fair value of $31.2 million and $52.0 million were collateralized for the discount window at the Federal Reserve Bank at December 31, 2000 and 1999, respectively. There were no borrowings with the Federal Reserve Bank at either date. (4) Loans The following is a summary of loans: (Dollars in thousands) December 31, 2000 1999 ------------------------------------------------------------------------- Commercial and other: Mortgages (1) $121,817 $113,719 Construction and development (2) 2,809 2,902 Other (3) 115,202 115,739 ------------------------------------------------------------------------- Total commercial and other 239,828 232,360 Residential real estate: Mortgages 236,595 212,719 Homeowner construction 14,344 12,995 ------------------------------------------------------------------------- Total residential real estate 250,939 225,714 Consumer 106,388 90,951 ------------------------------------------------------------------------- Total loans $597,155 $549,025 ------------------------------------------------------------------------- (1) Amortizing mortgages, primarily secured by income producing property (2) Loans for construction of residential and commercial properties and for land development (3) Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate Concentrations of Credit Risk The Corporation's lending activities are primarily conducted in southern Rhode Island and southeastern Connecticut. The Corporation grants single family and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. In addition, loans are granted for the construction of residential homes, commercial real estate properties, and for land development. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation's market area. Nonaccrual Loans The balance of loans on nonaccrual status as of December 31, 2000 and 1999 was $3.4 million and $3.8 million, respectively. Interest income that would have been recognized had these loans been current in accordance with their original terms was approximately $411 thousand in 2000 and $447 thousand in 1999. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $250 thousand in 2000 and $217 thousand in 1999. Included in nonaccrual loans at December 31, 2000 and 1999 are loans amounting to $118 thousand and $142 thousand, respectively, whose terms have been restructured. Impaired Loans Impaired loans consist of all nonaccrual commercial loans. The following is a summary of impaired loans: (Dollars in thousands) December 31, 2000 1999 ------------------------------------------------------------------------- Impaired loans requiring an allowance $813 $1,668 Impaired loans not requiring an allowance 1,301 371 ------------------------------------------------------------------------- Total recorded investment in impaired loans $2,114 $2,039 ------------------------------------------------------------------------- (Dollars in thousands) Years ended December 31, 2000 1999 ------------------------------------------------------------------------- Average recorded investment in impaired loans $2,056 $3,418 ------------------------------------------------------------------------- Interest income recognized on impaired loans $191 $351 ------------------------------------------------------------------------- Mortgage Servicing Activities At December 31, 2000 and 1999, mortgage loans sold to others and serviced by the Corporation on a fee basis under various agreements amounted to $180.6 million and $193.9 million, respectively. Loans serviced for others are not included in the Consolidated Balance Sheets. The following is a summary of capitalized mortgage servicing rights: (Dollars in thousands) December 31, 2000 1999 ------------------------------------------------------------------------- Balance at beginning of year $996 $808 Additions 27 313 Amortization (118) (125) ------------------------------------------------------------------------- Balance at end of year $905 $996 ------------------------------------------------------------------------- Capitalized mortgage servicing rights are periodically evaluated for impairment. As of December 31, 2000 and 1999, the balance of the valuation allowance amounted to $320 thousand. Loans to Related Parties The Corporation has made loans in the ordinary course of business to certain directors and executive officers including their immediate families and their affiliated companies. Such loans were made under normal interest rate and collateralization terms. Activity related to these loans in 2000 and 1999 was as follows: (Dollars in thousands) December 31, 2000 1999 ------------------------------------------------------------------------- Balance at beginning of year $2,279 $2,455 Additions 2,061 1,406 Reductions (1,749) (1,582) ------------------------------------------------------------------------- Balance at end of year $2,591 $2,279 ------------------------------------------------------------------------- (5) Allowance for Loan Losses The following is an analysis of the allowance for loan losses: (Dollars in thousands) Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------- Balance at beginning of year $12,349 $10,966 $9,335 Provision charged to expense 1,150 1,840 1,879 Recoveries of loans previously charged off 319 510 405 Loans charged off (683) (967) (653) ------------------------------------------------------------------------- Balance at end of year $13,135 $12,349 $10,966 ------------------------------------------------------------------------- Included in the allowance for loan losses at December 31, 2000, 1999 and 1998 was an allowance for impaired loans amounting to $209 thousand, $475 thousand and $803 thousand, respectively. (6) Premises and Equipment The following is a summary of premises and equipment: (Dollars in thousands) December 31, 2000 1999 ------------------------------------------------------------------------- Land and improvements $2,099 $2,245 Premises and improvements 25,114 24,624 Furniture, fixtures and equipment 19,319 18,456 ------------------------------------------------------------------------- 46,532 45,325 Less accumulated depreciation 24,822 21,883 ------------------------------------------------------------------------- Total premises and equipment, net $21,710 $23,442 ------------------------------------------------------------------------- (7) Financial Instruments With Off-Balance Sheet Risk and Derivative Financial Instruments The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation's exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees and interest rate swaps and floors. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:
(Dollars in thousands) December 31, 2000 1999 ---------------------------------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Commercial loans $32,145 $38,380 Home equity lines 45,876 38,428 Other loans 20,241 15,479 Standby letters of credit 2,246 500 Financial instruments whose notional amounts exceed the amount of credit risk: Interest rate floor contracts 20,000 70,000
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 million that matured in February 2000. The Corporation received payment under the 1995 contracts with a total notional value of $30 million when the prime rate fell below 9.0% and on the remaining $20 million when 3-month LIBOR at quarterly resetting dates was below 6.19%. In March 1998, the Corporation entered into a five-year interest rate floor contract with a notional amount of $20 million that matures in February 2003. The 1998 floor contract entitles the Corporation to receive payment from counterparts if the three-month LIBOR rate falls below 5.50%. The purpose of the floor contracts is to offset the risk of future reductions in interest earned on certain floating rate loans. The 3-month LIBOR applicable to the outstanding floor contract at December 31, 2000 was 6.40%. At December 31, 2000, the fair value, or the value to the Corporation of terminating the contracts, was $98 thousand. The remaining unamortized premium for these contracts, included in other assets, amounted to $133 thousand at December 31, 2000. The Corporation has not terminated any interest rate swap agreements or floor contracts and there are no unamortized deferred gains or losses. (8) Other Real Estate Owned Other real estate owned is included in other assets on the Corporation's consolidated balance sheets. An analysis of the composition of OREO follows: (Dollars in thousands) December 31, 2000 1999 ------------------------------------------------------------------------ Residential real estate $ - $43 Commercial real estate - 55 Repossessed assets 11 45 Land 37 - ------------------------------------------------------------------------ 48 143 Valuation allowance (39) (94) ------------------------------------------------------------------------ Other real estate owned, net $9 $49 ------------------------------------------------------------------------ An analysis of the activity relating to OREO follows: (Dollars in thousands) Years ended December 31, 2000 1999 ------------------------------------------------------------------------ Balance at beginning of year $143 $312 Net transfers from loans 109 576 Sales (154) (745) Other (50) - ------------------------------------------------------------------------ 48 143 Valuation allowance (39) (94) ------------------------------------------------------------------------ Other real estate owned, net $9 $49 ------------------------------------------------------------------------ The following is an analysis of activity relating to the OREO valuation allowance: (Dollars in thousands) Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------ Balance at beginning of year $94 $69 $76 Provision charged to expense 3 99 14 Sales (8) (53) (1) Selling expenses incurred - (21) (20) Other (50) - - ------------------------------------------------------------------------ Balance at end of year $39 $94 $69 ------------------------------------------------------------------------ Net realized gains on dispositions of properties amounted to $44 thousand, $39 thousand, and $50 thousand in 2000, 1999 and 1998, respectively. These amounts are included in other noninterest expense in the Consolidated Statements of Income. (9) Time Certificates of Deposit Scheduled maturities of time certificates of deposit at December 31, 2000 were as follows: (Dollars in thousands) Years ending December 31: 2001 $252,224 2002 99,243 2003 8,116 2004 3,015 2005 751 2006 and thereafter 14 ------------------------------------------------------------------------ Balance at December 31, 2000 $363,363 ------------------------------------------------------------------------ The aggregate amount of time certificates of deposit in denominations of $100 thousand or more was $122.9 million and $100.6 million at December 31, 2000 and 1999, respectively. (10) Borrowings Federal Home Loan Bank Advances The following table presents scheduled maturities and weighted average interest rates paid on FHLB advances outstanding at December 31, 2000: (Dollars in thousands) Weighted Average Rate Amount ------------------------------------------------------------------------- Years ending December 31: 2001 6.43% $176,977 2002 6.37% 70,412 2003 6.29% 61,007 2004 6.27% 19,159 2005 6.38% 3,208 2006 and thereafter 5.95% 46,599 ------------------------------------------------------------------------- Balance at December 31, 2000 $377,362 ------------------------------------------------------------------------- Included in the outstanding amounts disclosed are callable advances totaling $42.5 million. Call features on these advances range from one to five years. In addition to the outstanding advances, the Bank also has access to an unused line of credit amounting to $8.0 million at December 31, 2000. Under agreement with the FHLB, the Bank is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances. Qualified collateral may consist of residential mortgage loans, U.S. government or agency securities, and amounts maintained on deposit at the FHLB. The Bank maintains qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at December 31, 2000. Other Borrowings The following is a summary of other borrowings: (Dollars in thousands) December 31, 2000 1999 ------------------------------------------------------------------------ Treasury, Tax and Loan demand note balance $2,813 $3,948 Other 414 261 ------------------------------------------------------------------------ Other borrowings $3,227 $4,209 ------------------------------------------------------------------------ There were no securities sold under repurchase agreements outstanding at December 31, 2000 and 1999. Securities sold under repurchase agreements generally mature within 90 days. The securities underlying the agreements are held in safekeeping by the counterparty in the name of the Corporation and are repurchased when the agreement matures. Accordingly, these underlying securities are included in securities available for sale and the obligations to repurchase such securities are reflected as a liability. The following is a summary of amounts relating to securities sold under repurchase agreements: (Dollars in thousands) Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------ Maximum amount outstanding at any month-end $ - $23,525 $26,767 Average amount outstanding $ - $10,316 $13,323 Weighted average rate - 5.05% 5.56% (11) Employee Benefits Defined Benefit Pension Plans The Corporation's noncontributory tax-qualified defined benefit pension plan covers substantially all employees. Benefits are based on an employee's years of service and highest 3-year compensation. The plan is funded on a current basis, in compliance with the requirements of the Employee Retirement Income Security Act. The prepaid benefit costs relating to the defined benefit pension plan amounted to $63 thousand and $448 thousand at December 31, 2000 and 1999, respectively. The Corporation has a nonqualified retirement plan to provide supplemental retirement benefits to certain employees, as defined in the plan. The accrued pension liability related to this plan amounted to $534 thousand and $400 thousand at December 31, 2000 and 1999, respectively. The actuarial assumptions used for this supplemental plan are the same as those used for the Corporation's tax-qualified pension plan. The projected benefit obligation for this plan amounted to $1.4 million and $1.1 million at September 30, 2000 and 1999, respectively. The following is a reconciliation of the benefit obligation, fair value of plan assets and funded status of the Corporation's defined benefit pension plans: (Dollars in thousands) Years ended September 30, 2000 1999 ------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of plan year $13,823 $14,479 Service cost 722 652 Interest cost 1,013 1,001 Amendments - 174 Actuarial loss (gain) 63 (1,801) Benefits paid (693) (682) ------------------------------------------------------------------------- Benefit obligation at end of plan year $14,928 $13,823 ------------------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets at beginning of plan year $17,780 $16,349 Actual return on plan assets 1,297 2,053 Employer contribution 61 60 Benefits paid (693) (682) ------------------------------------------------------------------------- Fair value of plan assets at end of plan year $18,445 $17,780 ------------------------------------------------------------------------- Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods. Unrecognized amounts to be amortized and the amounts included in the Consolidated Balance Sheets are as follows: (Dollars in thousands) 2000 1999 ------------------------------------------------------------------------- Funded status at September 30, $3,517 $3,957 Unrecognized transition asset (43) (49) Unrecognized prior service cost 533 620 Unrecognized net actuarial gain (4,478) (4,480) ------------------------------------------------------------------------- (Accrued) prepaid benefit cost at December 31, $(471) $48 ------------------------------------------------------------------------- September 30, 2000 1999 ------------------------------------------------------------------------- Assumptions Used: Discount rate 7.75% 7.50% Expected return on plan assets 8.50% 8.50% Rate of compensation increase 5.00% 5.00% The components of net pension cost include the following: (Dollars in thousands) Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------- Components of Net Periodic Benefit Cost: Service cost $722 $652 $502 Interest cost 1,013 1,002 915 Expected return on plan assets (1,229) (1,106) (992) Amortization of transition asset (6) (6) (6) Amortization of prior service cost 87 75 75 Recognized net actuarial (gain) loss (8) 11 6 ------------------------------------------------------------------------- Net periodic benefit cost $579 $628 $500 ------------------------------------------------------------------------- 401(k) Plan The Corporation's 401(k) Plan provides a specified match of employee contributions for substantially all employees. Total employer matching contributions under this plan amounted to $320 thousand, $275 thousand and $256 thousand in 2000, 1999 and 1998, respectively. Profit Sharing Plan The Corporation has a nonqualified profit sharing plan that rewards employees, excluding those key employees participating in the Short-Term Incentive Plan, for their contributions to the Corporation's success. The annual profit sharing benefit is determined by a formula tied to return on equity and is subject to approval by the Corporation's Board of Directors each year. The amount of the profit sharing benefit was $392 thousand, $333 thousand and $322 thousand for 2000, 1999 and 1998, respectively. Short-Term Incentive Plan The Corporation's nonqualified Short-Term Incentive Plan rewards key employees for their contributions to the Corporation's success. This plan provides for annual payments up to a maximum percentage of each participant's base salary, which percentages vary among participants. Payment amounts are based on the achievement of target levels of return on equity and/or the achievement of individual objectives. Participants in this plan are not eligible to receive benefits provided under the profit sharing component of the Savings and Profit Sharing Plan. The expense of the Short-Term Incentive Plan amounted to $1.3 million, $969 thousand and $688 thousand in 2000, 1999 and 1998, respectively. Other Incentive Plans In connection with the acquisition of Phoenix, there are incentive compensation arrangements based on current and future year revenue goals. The expense recognized for these arrangements in 2000, applicable to the period subsequent to the June 26, 2000 acquisition date, amounted to $200 thousand. In addition, the Corporation has other nonqualified incentive plans. Certain employees, who do not participate in the profit sharing plan or the Short-Term Incentive Plan, participate in one of these plans. The incentives are based on a variety of plan specific factors, including general organizational profitability, product line result, and individual business development goals. The aggregate cost of these various plans amounted to $963 thousand, $717 thousand and $799 thousand in 2000, 1999 and 1998, respectively. Directors' Retainer Continuation Plan The Corporation previously offered a nonqualified plan that provided retirement benefits to non-officer directors. In 1996, the provisions of the plan were terminated for active directors and the related accrued benefit was settled. The benefits provided under this plan continue for retired directors. The expense of this plan is included in other noninterest expense and amounted to $24 thousand, $24 thousand and $25 thousand for 2000, 1999 and 1998, respectively. Accrued and unpaid benefits under this plan are an unfunded obligation of the Bank. The accrued liability related to this plan amounted to $241 thousand and $248 thousand at December 31, 2000 and 1999, respectively. Deferred Compensation Plan The Corporation's Nonqualified Deferred Compensation Plan provides supplemental retirement and tax benefits to directors and certain officers. The plan is funded primarily through pre-tax contributions made by the participants. The Corporation has recorded the assets and liabilities for the deferred compensation plan at the lower of cost or market in the consolidated balance sheets. The participants in the plan bear the risk of market fluctuations of the underlying assets. The accrued liability related to this plan amounted to $1.2 million and $953 thousand at December 31, 2000 and 1999, respectively, and is included in other liabilities on the accompanying consolidated balance sheets. The corresponding invested assets are reported in other assets. (12) Income Taxes The components of income tax expense were as follows: (Dollars in thousands) Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------ Current tax expense: Federal $6,311 $5,446 $4,564 State 43 49 50 ------------------------------------------------------------------------ Total current tax expense 6,354 5,495 4,614 ------------------------------------------------------------------------ Deferred tax benefit: Federal (681) (741) (371) State - - (8) ------------------------------------------------------------------------ Total deferred tax benefit (681) (741) (379) ------------------------------------------------------------------------ Total income tax expense $5,673 $4,754 $4,235 ------------------------------------------------------------------------ Total income tax expense varied from the amount determined by applying the Federal income tax rate to income before income taxes. The reasons for the differences were as follows: (Dollars in thousands) Years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------ Tax expense at Federal statutory rate $6,609 $5,239 $5,052 Increase (decrease) in taxes resulting from: Tax-exempt income (377) (457) (401) Acquisition related expenses 89 268 - Dividends received deduction (259) (246) (261) Bank-owned life insurance (366) (237) - State tax, net of Federal income tax benefit 28 32 26 Other (51) 155 (181) ------------------------------------------------------------------------ Total income tax expense $5,673 $4,754 $4,235 ------------------------------------------------------------------------ The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 2000 and 1999 are as follows: (Dollars in thousands) December 31, 2000 1999 ------------------------------------------------------------------------ Gross deferred tax assets: Allowance for loan losses $4,468 $4,211 Deferred compensation 414 242 Deferred loan origination fees 317 366 Net operating loss carryover 250 292 Other 915 987 ------------------------------------------------------------------------ Gross deferred tax assets 6,364 6,098 ------------------------------------------------------------------------ Gross deferred tax liabilities: Securities available for sale (2,315) (252) Deferred loan origination costs (862) (811) Premises and equipment (759) (1,060) Pension (11) (146) Other (276) (306) ------------------------------------------------------------------------ Gross deferred tax liabilities (4,223) (2,575) ------------------------------------------------------------------------ Net deferred tax asset $2,141 $3,523 ------------------------------------------------------------------------ In addition to future taxable income and the reversal of deferred tax liabilities, a primary source of recovery of deferred tax assets is taxes paid in prior years available for carryback. (13) Operating Leases At December 31, 2000, the Corporation was committed to rent premises used in banking operations under noncancellable operating leases. Rental expense under the operating leases amounted to $604 thousand, $478 thousand and $526 thousand for 2000, 1999 and 1998, respectively. The minimum annual lease payments under the terms of these leases, exclusive of renewal provisions, are as follows: (Dollars in thousands) Years ending December 31: 2001 $418 2002 311 2003 246 2004 223 2005 51 ------------------------------------------------------------------------ $1,249 ------------------------------------------------------------------------ (14) Litigation On January 28, 1997, a suit was filed against the Bank in the Superior Court of Washington County, Rhode Island by Maxson Automatic Machinery Company ("Maxson"), a former corporate customer, and Maxson's shareholders for damages which the plaintiffs allegedly incurred as a result of an embezzlement by Maxson's former president, treasurer and fifty percent shareholder, which allegedly occurred between 1986 and 1995. The suit alleges that the Bank erred in permitting this individual, while an officer of Maxson, to transfer funds from Maxson's account at the Bank for his personal benefit. The claims against the Bank are based upon theories of breach of fiduciary duty, negligence, breach of contract, unjust enrichment, conversion, failure to act in a commercially reasonable manner, and constructive fraud. Management believes, based on its review with counsel of the development of this matter to date, that the Bank has asserted meritorious affirmative defenses in this litigation. Additionally, the Bank has filed counterclaims against Maxson and its shareholders as well as claims against the former Maxson officer allegedly responsible for the embezzlement. The Bank is vigorously asserting its defenses and affirmative claims. The discovery phase of the case has been completed, though the parties are attempting to resolve several discovery disputes. The Bank has also filed several motions, all of which seek dismissal of one or more of the plaintiffs' claims and/or exclusion of portions of the plaintiffs' evidence. The court began hearing argument on the motions on March 8, 2001, and has expressed a desire to hear further argument. There is currently no scheduled trial date. During discovery, the plaintiffs have offered various theories and amounts of alleged damages, ranging from $5.0 million to $12.7 million, plus interest thereon. The plaintiffs have also filed a motion to amend the complaint to add a claim for punitive damages. The court has deferred ruling on whether to permit this amendment. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Bank may incur with respect to this litigation. Consequently, no loss provision has been recorded. The Corporation is involved in various other claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such other matters will not materially affect the consolidated financial position or results of operations of the Corporation. (15) Shareholders' Equity Stock Splits A 3-for-2 stock split, in the form of a stock dividend, was paid on August 3, 1998 to shareholders of record on July 17, 1998. The par value of the common stock remained unchanged at $.0625 per share. Cash payments were made in lieu of issuing fractional shares. All share and per share amounts in the consolidated financial statements and related notes have been restated to reflect the stock split. Stock Repurchase Plan In December 1997, the Corporation's Board of Directors approved a program to repurchase up to 225,000, or approximately 2.3%, of its outstanding common shares. This plan replaced the June 1996 authorization to repurchase 195,750 shares. The Corporation planned to hold the repurchased shares as treasury stock to be used for general corporate purposes. Approximately 139,274 shares were repurchased in 1998 at a total cost of $3.0 million. In April 1999, the Corporation's Board of Directors approved the termination of the Corporation's stock repurchase plan. Rights On August 1996, the Corporation declared a dividend of one common share purchase right (a "Right") for each share of common stock payable on September 3, 1996 to shareholders of record on that date. Such Rights also apply to new issuances of shares after that date. Each Right entitles the registered holder to purchase from the Corporation one share of its common stock at a price of $35.56 per share, subject to adjustment. The Rights are not exercisable or separable from the common stock until the earlier of 10 days after a person or group (an "Acquiring Person") acquires beneficial ownership of 15% or more of the outstanding common shares or announces a tender offer to do so. The Rights, which expire on August 31, 2006, may be redeemed by the Corporation at any time prior to the acquisition by an Acquiring Person of beneficial ownership of 15% or more of the common stock at a price of $.001 per Right. In the event that any party becomes an Acquiring Person, each holder of a Right, other than Rights owned by the Acquiring Person, will have the right to receive upon exercise that number of common shares having a market value of two times the purchase price of the Right. In the event that, at any time after any party becomes an Acquiring Person, the Corporation is acquired in a merger or other business combination transaction or 50% or more of its assets or earning power are sold, each holder of a Right will have the right to purchase that number of shares of the acquiring company having a market value of two times the purchase price of the Right. Dividends The primary source of funds for dividends paid by the Corporation is dividends received from the Bank. The Corporation and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans, and advances from the Bank to the Corporation. Generally the Bank has the ability to pay dividends to the parent subject to minimum regulatory capital requirements. Under the most restrictive of these requirements, the Bank could have declared aggregate additional dividends of $36.3 million as of December 31, 2000. Stock Option Plans The Corporation's 1997 Equity Incentive Plan (the "1997 Plan") permits the granting of options and other equity incentives to key employees, directors, advisors, and consultants. Up to 1,012,500 shares of the Corporation's common stock may be used from authorized but unissued shares, treasury stock, or shares available from expired awards. Options are designated either as non-qualified or as incentive options. The exercise price of each option may not be less than the fair market value on the date of the grant. In general, the option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof. Awards may be granted at any time until April 29, 2007. The 1988 Amended and Restated Stock Option Plan (the "1988 Plan") provided for the granting of options to directors, officers and key employees. The 1988 Plan permitted options to be granted at any time until December 31, 1997. The 1988 Plan provided for shares of the Corporation's common stock to be used from authorized but unissued shares, treasury stock, or shares available from expired options. Options were designated either as non-qualified or as incentive options. The exercise price of options granted was equal to the fair market value on the date of grant. In general, the option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof. The 1997 Plan and the 1988 Plan permit options to be granted with stock appreciation rights ("SARs"), however, no options have been granted with SARs. Options granted under the plans vest according to various terms at the end of ten years. The following table presents changes in options outstanding during 2000, 1999 and 1998:
Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------------------------------------------ Outstanding at January 1 806,380 $11.49 851,329 $8.90 1,128,584 $7.73 Granted 216,390 $15.27 160,104 $17.64 24,435 $21.33 Exercised (150,972) $7.21 (194,430) $4.95 (292,618) $5.22 Cancelled (25,258) $17.05 (10,623) $16.10 (9,072) $15.87 - ------------------------------------------------------------------------------------------------------------------ Outstanding at December 31 846,540 $13.05 806,380 $11.49 851,329 $8.90 - ------------------------------------------------------------------------------------------------------------------ Exercisable at December 31 616,918 $12.02 613,367 $9.73 682,249 $7.32 - ------------------------------------------------------------------------------------------------------------------
The weighted average exercise price and remaining contractual life for options outstanding at December 31, 2000 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 - ----------------------------------------------------------------------------------------------------------------- $2.13 to $4.27 64,843 1.7 years $3.57 64,843 $3.57 $4.28 to $6.40 21,723 3.4 years $5.56 21,723 $5.56 $6.41 to $8.53 93,107 3.9 years $7.04 93,107 $7.04 $8.54 to $10.67 90,143 5.2 years $9.54 90,143 $9.54 $10.68 to $12.80 104,904 6.2 years $11.65 104,904 $11.65 $12.81 to $14.93 7,100 9.6 years $14.75 1,775 $14.75 $14.94 to $17.07 224,000 9.3 years $15.36 53,230 $15.41 $17.08 to $19.20 193,456 7.7 years $17.83 139,929 $17.96 $19.21 to $21.33 47,264 7.0 years $20.42 47,264 $20.42 - ----------------------------------------------------------------------------------------------------------------- Total 846,540 6.7 years $13.05 616,918 $12.02 - -----------------------------------------------------------------------------------------------------------------
As discussed in Note 1, the Corporation accounts for its stock option plan using the intrinsic value based method prescribed by APB Opinion No. 25, and in addition, is required to disclose pro forma net income and earnings per share using the fair value based method prescribed by SFAS No. 123. Accordingly, no compensation cost for these plans has been recognized in the Consolidated Statements of Income for 2000, 1999 and 1998. In determining the pro forma disclosures required by SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents pro forma net income and earnings per share assuming the stock option plan was accounted for using the fair value method prescribed by SFAS No. 123, the weighted average assumptions used and the grant date fair value of options granted in 2000, 1999 and 1998: (Dollars in thousands, except per share amounts) Years ended December 31, 2000 1999 1998 -------------------------------------------------------------------------- Net income As reported $13,209 $12,511 $12,178 Pro forma $12,401 $11,942 $11,838 Basic earnings per share As reported $1.10 $1.05 $1.04 Pro forma $1.04 $1.01 $1.01 Diluted earnings per share As reported $1.09 $1.03 $1.01 Pro forma $1.02 $.99 $.98 Weighted average fair value $5.01 $5.36 $5.40 Expected life 9.3 years 9.0 years 8.6 years Risk-free interest rate 6.39% 5.91% 6.04% Expected volatility 32.6% 32.8% 25.9% Expected dividend yield 3.9% 3.9% 4.0% The pro forma effect on net income and earnings per share for 2000, 1999 and 1998 is not representative of the pro forma effect on net income and earnings per share for future years because it does not reflect compensation cost for options granted prior to January 1, 1995. Dividend Reinvestment Under the Amended and Restated Dividend Reinvestment and Stock Purchase Plan, 607,500 shares of common stock were originally reserved to be issued for dividends reinvested and cash payments to the plan. Reserved Shares As of December 31, 2000, a total of 1,764,691 common stock shares were reserved for issuance under the 1988 Plan, the 1997 Plan and the Amended and Restated Dividend Reinvestment and Stock Purchase Plan. Regulatory Capital Requirements The Corporation and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the FDIC, respectively. These requirements were established to more accurately assess the credit risk inherent in the assets and off-balance sheet activities of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2000, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2000, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank's category. The following table presents the Corporation's and the Bank's actual capital amounts and ratios at December 31, 2000 and 1999, as well as the corresponding minimum regulatory amounts and ratios:
(Dollars in thousands) To Be Well Capitalized Under Prompt For Capital Adequacy Corrective Action Actual Purposes Provisions ---------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------- As of December 31, 2000: Total Capital (to Risk-Weighted Assets): Consolidated $95,264 14.35% $53,093 8.00% $66,367 10.00% Bank $94,862 14.29% $53,093 8.00% $66,367 10.00% Tier 1 Capital (to Risk-Weighted Assets): Consolidated $84,302 12.70% $26,547 4.00% $39,820 6.00% Bank $83,900 12.64% $26,547 4.00% $39,820 6.00% Tier 1 Capital (to Average Assets): (1) Consolidated $84,302 7.08% $47,609 4.00% $59,511 5.00% Bank $83,900 7.05% $47,602 4.00% $59,502 5.00% As of December 31, 1999: Total Capital (to Risk-Weighted Assets): Consolidated $87,512 14.38% $48,694 8.00% $60,868 10.00% Bank $85,477 14.04% $48,694 8.00% $60,868 10.00% Tier 1 Capital (to Risk-Weighted Assets): Consolidated $77,362 12.71% $24,347 4.00% $36,521 6.00% Bank $75,327 12.38% $24,347 4.00% $36,521 6.00% Tier 1 Capital (to Average Assets): (1) Consolidated $77,362 7.22% $42,866 4.00% $53,583 5.00% Bank $75,327 7.03% $42,866 4.00% $53,583 5.00% (1) Leverage ratio
(16) Earnings per Share
(Dollars in thousands, except per share amounts) Years ended December 31, 2000 1999 1998 --------------------------------------------------------------------------------------------------------- Basic Diluted Basic Diluted Basic Diluted ---------------------------------------------------------------- Net income $13,209 $13,209 $12,511 $12,511 $12,178 $12,178 Share amounts, in thousands: Average outstanding 11,976.9 11,976.9 11,874.4 11,874.4 11,725.9 11,725.9 Common stock equivalents - 125.7 - 218.3 - 380.1 --------------------------------------------------------------------------------------------------------- Weighted average outstanding 11,976.9 12,102.6 11,874.4 12,092.7 11,725.9 12,106.0 --------------------------------------------------------------------------------------------------------- Earnings per share $1.10 $1.09 $1.05 $1.03 $1.04 $1.01 ---------------------------------------------------------------------------------------------------------
(17) Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Corporation disclose estimated fair values of its financial instruments. Fair value estimates are made as of a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any pricing adjustments that could result from the sale of the Corporation's entire holding of a particular financial instrument. Because no quoted market exists for a portion of the financial instruments, fair value estimates are based on subjective judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. Changes in assumptions could significantly affect the estimates of fair value. Fair value estimates, methods, and assumptions are set forth as follows: Cash and Securities The carrying amount of short-term instruments such as cash and federal funds sold is used as an estimate of fair value. The fair value of securities available for sale and held to maturity is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. No market exists for shares of the FHLB of Boston. Such stock may be redeemed at par upon termination of FHLB membership and is therefore valued at par, which equals cost. Mortgage Loans Held for Sale The fair value of mortgage loans held for sale is estimated using the quoted market prices for sales of similar loans on the secondary market. Loans Fair values are estimated for categories of loans with similar financial characteristics. Loans are segregated by type and are then further segmented into fixed rate and adjustable rate interest terms to determine their fair value. The fair value of fixed rate commercial and consumer loans is calculated by discounting scheduled cash flows through the estimated maturity of the loan using interest rates offered at December 31, 2000 and 1999 that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Corporation's historical repayment experience. For residential mortgages, fair value is estimated by using quoted market prices for sales of similar loans on the secondary market, adjusted for servicing costs. The fair value of floating rate commercial and consumer loans approximates carrying value. The fair value of nonaccrual loans is calculated by discounting estimated cash flows, using a rate commensurate with the risk associated with the loan type or by other methods that give consideration to the value of the underlying collateral. Deposit Liabilities The fair value of demand deposits, savings accounts, and certain money market accounts is equal to the amount payable on demand as of December 31, 2000 and 1999. The discounted values of cash flows using the rates currently offered for deposits of similar remaining maturities were used to estimate the fair value of certificates of deposit. Securities Sold Under Agreements to Repurchase The carrying amount of securities sold under repurchase agreements approximates fair value. Federal Home Loan Bank Advances Rates currently available to the Corporation for advances with similar terms and remaining maturities are used to estimate fair value of existing advances. Off-Balance Sheet Instruments The fair values of interest rate swap agreements and floor contracts generally reflect the estimated amounts that the Corporation would receive or pay to terminate the contracts. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The following table presents the fair values of the Corporation's financial instruments:
(Dollars in thousands) December 31, 2000 1999 -------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------------------------------------------------------------------------------------------------- Financial Assets On-balance sheet: Cash and cash equivalents $43,860 $43,860 $44,520 $44,520 Mortgage loans held for sale 1,639 1,639 1,647 1,647 Securities available for sale 386,611 386,611 330,431 330,431 Securities held to maturity 124,915 125,368 116,372 112,868 FHLB stock 19,558 19,558 17,627 17,627 Loans, net of allowance for loan losses 584,020 596,362 536,676 537,019 Accrued interest receivable 7,800 7,800 6,010 6,010 Off-balance sheet financial instruments relating to assets: Interest rate floor contracts 133 98 224 111 Financial Liabilities On-balance sheet: Noninterest bearing demand deposits $113,012 $113,012 $102,384 $102,384 Non-term savings accounts 259,309 259,309 235,395 235,395 Certificates of deposit 363,363 366,459 322,974 324,184 FHLB advances 377,362 379,149 352,548 347,568 Other borrowings 3,227 3,227 4,209 4,209 Accrued interest payable 4,503 4,503 3,322 3,322
Other off-balance sheet financial instruments, consisting largely of loan commitments and letters of credit, contain provisions for fees, conditions and term periods that are consistent with customary market practices. Accordingly, the fair value amounts (considered to be the discounted present value of the remaining contractual fees over the unexpired commitment period) would not be material and therefore are not disclosed. (18) Parent Company Financial Statements The following are parent company only financial statements of the Corporation reflecting the investment in the bank subsidiary on the equity basis of accounting. The Statements of Changes in Shareholders' Equity for the parent company only are identical to the Consolidated Statements of Changes in Shareholders' Equity and are therefore not presented.
(Dollars in thousands) Balance Sheets December 31, 2000 1999 --------------------------------------------------------------------------------------------------------- Assets: Cash on deposit with bank subsidiary $767 $2,397 Investment in bank subsidiary at equity value 88,784 76,132 Dividend receivable from bank subsidiary 1,080 840 Due from bank subsidiary - - --------------------------------------------------------------------------------------------------------- Total assets $90,631 $79,369 --------------------------------------------------------------------------------------------------------- Liabilities: Dividends payable $1,445 $1,202 --------------------------------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares in 2000 and 1999; issued 12,006,809 shares in 2000 and 11,925,571 shares in 1999 750 745 Paid-in capital 10,144 9,927 Retained earnings 74,265 67,686 Accumulated other comprehensive income (loss) 4,027 (191) --------------------------------------------------------------------------------------------------------- Total shareholders' equity 89,186 78,167 --------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $90,631 $79,369 ---------------------------------------------------------------------------------------------------------
(Dollars in thousands) Statements of Income Years ended December 31, 2000 1999 1998 ---------------------------------------------------------------------------------------------------------- Dividends from bank subsidiary $5,198 $5,860 $8,160 Equity in undistributed earnings of subsidiary 8,011 6,651 4,018 ---------------------------------------------------------------------------------------------------------- Net income $13,209 $12,511 $12,178 ----------------------------------------------------------------------------------------------------------
(Dollars in thousands) Statements of Cash Flows Years ended December 31, 2000 1999 1998 --------------------------------------------------------------------------------------------------------- Cash flow from operating activities: Net income $13,209 $12,511 $12,178 Adjustments to reconcile net income to net cash provided by operating activities: Equity effect of undistributed earnings of subsidiary (8,011) (6,651) (4,018) Decrease (increase) in dividend receivable (240) 360 - Other - - 77 --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,958 6,220 8,237 --------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Purchase of treasury stock - (36) (3,005) Net effect of common stock transactions (201) 475 1,012 Cash dividends paid (6,387) (6,209) (5,685) --------------------------------------------------------------------------------------------------------- Net cash used in financing activities (6,588) (5,770) (7,678) ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (1,630) 450 559 Cash at beginning of year 2,397 1,947 1,388 --------------------------------------------------------------------------------------------------------- Cash at end of year $767 $2,397 $1,947 ---------------------------------------------------------------------------------------------------------
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 20, 2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001 and incorporated herein by reference. Required information regarding executive officers of the Corporation is included in Part I under the caption "Executive Officers of the Registrant". Information required with respect to compliance with Section 16(a) of the Exchange Act appears under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Corporation's Proxy Statement dated March 20, 2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item appears under the caption "Compensation of Directors and Executive Officers - Executive Compensation" in the Corporation's Proxy Statement dated March 20, 2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item appears under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 20, 2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the caption "Indebtedness and Other Transactions" in the Corporation's Proxy Statement dated March 20, 2001 prepared for the Annual Meeting of Shareholders to be held April 24, 2001. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The financial statements of the Registrant required in response to this Item are listed in response to Part II, Item 8 of this Report. 2. Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-K and all other schedules to the consolidated financial statements of the Registrant have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto. (b) There were no reports on Form 8-K filed during the quarter ended December 31, 2000. (c) Exhibit Index. Exhibit Number -------------------- 3.a Restated Articles of Incorporation of the Registrant - Filed herewith. 3.b Amendment to Restated Articles of Incorporation - Filed as Exhibit 3.i to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1) 3.c Amended and Restated By-Laws of the Corporation - Filed as Exhibit 3.c to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (1) 4 Rights Agreement between the Registrant and The Washington Trust Company dated as of August 15, 1996 (including Form of Right Certificate attached thereto as Exhibit A) - Filed as Exhibit 1 to the Registrant's Registration Statement on Form 8-A (File No. 000-13091) filed with the Commission on August 16, 1996. (1) 10.a Supplemental Pension Benefit and Profit Sharing Plan - Filed herewith. (2) 10.b Short Term Incentive Plan Description - Filed as Exhibit 10.b to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (1) (2) 10.c Amended and Restated Nonqualified Deferred Compensation Plan - Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (File No. 333-72277) filed with the Commission on February 12, 1999. (1) (2) 10.d Amended and Restated 1988 Stock Option Plan - Filed herewith. (2) 10.e Vote of the Board of Directors of the Corporation which constitutes the 1996 Directors' Stock Plan - Filed as Exhibit 99.2 to the Registrant's Registration Statement on Form S-8 (File No. 333-13167) filed with the Commission on October 1, 1996. (1) (2) 10.f The Registrant's 1997 Equity Incentive Plan - Filed as Exhibit 10.a to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (1) (2) 10.g Revised Change in Control Agreements with Executive Officers - Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000. (1) (2) 10.h Change in Control Agreement with an Executive Officer - Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (1) (2) 10.i Amendment to the Registrant's 1997 Equity Incentive Plan - Filed as Exhibit 10.b to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (1) (2) 10.j Amendment to the Registrant's Supplemental Pension Benefit and Profit Sharing Plan - Filed herewith. (2) 10.k Amendment to the Registrant's Supplemental Pension Benefit and Profit Sharing Plan - Filed herewith. (2) 10.l Amendment to the Registrant's Amended and Restated Nonqualified Deferred Compensation Plan - Filed herewith. (2) 10.m Employment Agreement with an Executive Officer - Filed herewith. (2) 21 Subsidiaries of the Registrant - Filed as Exhibit 21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (1) 23 Consent of Independent Accountants - Filed herewith. -------------------- (1) Not filed herewith. In accordance with Rule 12b-32 promulgated pursuant to the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Commission, which are incorporated by reference herein. (2) Management contract or compensatory plan or arrangement (d) Financial Statement Schedules. None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WASHINGTON TRUST BANCORP, INC. ---------------------------------------------- (Registrant) Date: March 9, 2001 By John C. Warren -------------------- ---------------------------------------------- John C. Warren Chairman, Chief Executive Officer and Director (principal executive officer) Date: March 9, 2001 By David V. Devault -------------------- ---------------------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and principal accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 9, 2001 Alcino G. Almeida -------------------- ---------------------------------------------- Alcino G. Almeida, Director Date: March 9, 2001 Gary P. Bennett -------------------- ---------------------------------------------- Gary P. Bennett, Director Date: March 9, 2001 Steven J. Crandall -------------------- ---------------------------------------------- Steven J. Crandall, Director Date: March 9, 2001 Richard A. Grills -------------------- ---------------------------------------------- Richard A. Grills, Director Date: March 9, 2001 Larry J. Hirsch -------------------- ---------------------------------------------- Larry J. Hirsch, Director Date: March 9, 2001 Katherine W. Hoxsie -------------------- ---------------------------------------------- Katherine W. Hoxsie, Director Date: -------------------- ---------------------------------------------- Mary E. Kennard, Director Date: March 9, 2001 Joseph J. Kirby -------------------- ---------------------------------------------- Joseph J. Kirby, Director Date: March 9, 2001 Edward M. Mazze -------------------- ---------------------------------------------- Edward M. Mazze, Director Date: March 9, 2001 James W. McCormick, Jr. -------------------- ---------------------------------------------- James W. McCormick, Jr., Director Date: March 9, 2001 Victor J. Orsinger II -------------------- ---------------------------------------------- Victor J. Orsinger II, Director Date: March 9, 2001 H. Douglas Randall III -------------------- ---------------------------------------------- H. Douglas Randall, III, Director Date: March 9, 2001 Joyce Olson Resnikoff -------------------- ---------------------------------------------- Joyce Olson Resnikoff, Director Date: March 9, 2001 James P. Sullivan -------------------- ---------------------------------------------- James P. Sullivan, Director Date: -------------------- ---------------------------------------------- Neil H. Thorp, Director Date: March 9, 2001 John F. Treanor -------------------- ---------------------------------------------- John F. Treanor, Director Date: March 9, 2001 John C. Warren -------------------- ---------------------------------------------- John C. Warren, Director EX-3.(I) 2 0002.txt RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.a STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS Business Corporation Restated Articles of Incorporation of WASHINGTON TRUST BANCORP, INC. Pursuant to the provisions of Section 7-1.1-59 of the General Laws, 1956, as amended, the undersigned corporation adopts the following Restated Articles of Incorporation: FIRST. Name. The name of the Corporation is Washington Trust Bancorp, Inc. SECOND. Duration. The period of its duration is perpetual. THIRD. Purposes and Powers. The purposes for which the Corporation is organize are to act as a holding company whose subsidiaries will engage, as permitted by law, in banking and other financial services and businesses; and to transact and engage in, directly, through subsidiaries or otherwise, any other lawful business. The Corporation shall have power (a) To have perpetual succession by its corporate name unless a limited period of duration is stated in its Articles of Incorporation. (b) To sue and be sued, complain and defend, in its corporate name. (c) To have a corporate seal which may be altered at pleasure, and to sue the same by causing it, or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. (d) To purchase, take, receive, lease, or otherwise acquire, own, hold, improve, use and otherwise deal in and with, real or personal property, or any interest therein, wherever situated. (e) To sell, convey, mortgage, pledge, lease, exchange, transfer and otherwise dispose of all or any part of its property and assets. (f) To lend money and to use its credit to assist its employees. (g) To purchase, take, receive, subscribe for, or otherwise acquire, own, hold, vote, use, employ, sell, mortgage, lend, pledge or otherwise dispose of, and otherwise use and deal in and with, shares or other interests in, or obligations of, other domestic or foreign corporations, associations, partnerships or individuals, or direct or indirect obligations of the United States or of any other government, state, territory, governmental district or municipality or of any instrumentality thereof. (h) To make contracts and guarantees and incur liabilities, borrow money at such rates of interest as the Corporation may determine, issue its notes, bonds, and other obligations, and secure any of its obligations by mortgage or pledge of all or any of its property, franchises, and income. (i) To lend money for its corporate purposes, invest and reinvest its funds, and take and hold real and personal property as security for the payment of funds so loaned or invested. (j) To conduct its business, carry on its operations, and have offices and exercise the powers granted by the Rhode Island Business Corporation Act, as amended, from time to time, within or without this state. (k) To elect or appoint officers and agents of the Corporation, and define their duties and fix their compensation. (l) To make and alter by-laws, not inconsistent with these Articles of Incorporation or with the laws of this state, for the administration and regulation of the affairs of the Corporation. (m) To make donations for the public welfare or for charitable, scientific or educational purposes. (n) To transact any lawful business which the Board of Directors shall find will be in aid of governmental authority. (o) To pay pensions and establish pension plans, pension trusts, profit-sharing plans, stock bonus plans, stock option plans and other incentive plans for any or all of its directors, officers and employees. (p) To provide insurance for its benefit on the life of any of its directors , officers, or employees, or on the life of any stockholder for the purpose of acquiring at his death shares of its stock owned by such stockholder. (q) To be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust or other enterprise. (r) To have and exercise all other powers necessary or convenient to effect its purposes. FOURTH. Capital Stock. The aggregate number of shares which the Corporation shall have authority to issue is 10,000,000, par value $.0625 per share, all of which shares are to be a class designated as "Common Stock". Subject to the provisions of these Articles of Incorporation and except as otherwise provided by law, the shares of stock of the Corporation may be issued for such consideration and for such corporate purposes as the Board of Directors may from time to time determine. FIFTH. No Preemptive Rights. No holder of stock of any class of the Corporation, whether now or hereafter authorized, shall have any preemptive, preferential or other rights to subscribe for or purchase or acquire any shares of any class or any other securities of the Corporation, whether now or hereafter authorized, and whether or not convertible into, or evidencing or carrying the right to purchase, shares of any class or any other securities now or hereafter authorized, and whether the same shall be issued for cash, services or property, or by way of dividend or otherwise. SIXTH. Approval of Certain Business Combinations. Whether or not a vote of the stockholders is otherwise required in connection with the transaction, neither the Corporation nor any of its Subsidiaries shall become a party to any Business Combination without prior compliance with the provisions of Section(a) or (b) or (c) hereinbelow, in addition to such additional vote of the Preferred Stock as may be required by the provisions of any series thereof or by applicable law. (a) Prior Approval by the Board of Directors. Such Business Combination was approved by the Board of Directors of the Corporation~by the affirmative vote of at least 80% of the Board of Directors of the Corporation either (i) at a time prior to the acquisition of 10% or more of the outstanding Voting Shares of the Corporation by a Related Person, or (ii) after such acquisition, but only so long as such Related Person sought and obtained the approval, by the affirmative vote of at least 80% of the Board of Directors of the Corporation, of the acquisition of 10% or more of the outstanding Voting Shares prior to such acquisition being consummated. (b) Approval by Continuing Directors and Additional Requirements. Such Business Combination (i) shall be approved at a meeting of the Board of Directors by the affirmative vote of 80% of the Continuing Directors and a majority of the Board of Directors, and (ii) all of the conditions hereinafter set forth in subsection (1) through (5) below shall be satisfied: (1) The ratio of (i) the aggregate amount of the cash and the fair market value of other consideration to be received per share of Common Stock in such Business Combination by holders of Common Stock other than the Related Person involved in such Business Combination, to (ii) the market price per share of the Common Stock immediately prior to the announcement of the proposed Business Combination, is at least as great as the ratio of (x) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) which such Related Person has theretofore paid in acquiring any Common Stock prior to such Business Combination, to (y) the market price per share of Common Stock immediately prior to the initial acquisition by such Related Person of any shares of Common Stock; and (2) The aggregate amount of the cash and the fair market value of other consideration to be received per share of Common Stock in such Business Combination by holders of Common Stock, other than the Related Person involved in such Business Combination, (i) is not less than the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) paid by such Related Person in acquiring any of its holdings of Common Stock, (ii) is not less than the earnings per share of Common Stock for the four full consecutive fiscal quarters of the Corporation immediately preceding the Date of Determination of such Business Combination multiplied by the then price-earnings multiple (if any) of such Related Person as customarily computed and reported in the financial community; provided, that for the purposes of this clause (ii), if more than one Person constitutes the Related Person involved in the Business Combination, the price-earnings multiple (if any) of the Person having the highest price-earnings multiple shall be used for the computation in this clause (ii), and (iii) is not less than the book value of a share of the Common Stock, as reflected in the balance sheet of the Corporation as of the last day of the last fiscal quarter of the Corporation preceding the Date of Determination; and (3) The consideration (if any) to be received in such Business Combination by holders of Common Stock other than the Related Person involved shall, to the extent that a stockholder agrees otherwise as to all or part of the shares which he or she owns, be in the same form and of the same kind as the consideration paid by the Related Person in acquiring Common Stock already owned by it; and (4) After such Related Person became a Related Person and prior to the consummation of such Business Combination: (i) such Related Person shall have taken steps to insure that the Board of Directors of the Corporation included at all times representation by Continuing Directors proportionate to the ratio that the number of Voting Shares of the Corporation from time to time owned by stockholders who are not Related Persons bears to all Voting Shares of the Corporation outstanding at the time in question (with a Continuing Director to occupy any resulting fractional position among the directors); (ii) such Related Person shall not have acquired from the Corporation, directly or indirectly, any shares of the Corporation (except (x) upon conversion of convertible securities acquired by it prior to becoming a Related Person or (y) as a result of a pro rata stock dividend, stock split or division of shares or (z) in a transaction consummated after this Article SIXTH was added to these Articles of Incorporation and which satisfied all applicable requirements of this Article SIXTH; (iii) such Related Person shall not have acquired any additional Voting Shares of the Corporation or securities convertible into or exchangeable for Voting Shares except as a part of the transaction which resulted in such Related Person's becoming a Related Person; and (iv) such Related Person shall not have (x) received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation or any Subsidiary, or (y) made any major change in the Corporation's business or equity capital structure or entered into any contract, arrangement or understanding with the Corporation except any such change, contract, arrangement or understanding as may have been approved by the favorable vote of not less than 80% of the Continuing Directors and a majority of the Board of Directors of the Corporation; and (5) A proxy statement complying with the requirements of the Securities Exchange Act of 1934 shall have been mailed to all holders of Voting Shares for the purpose of soliciting stockholder approval of such Business Combination. Such proxy statement shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by two-thirds of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination from the point of view of the holders of Voting Shares other than any Related Person (such investment banking firm to be selected by two-thirds of the Continuing Directors, to be furnished with all information it reasonably requests, and to be paid by the Corporation a reasonable fee for its services upon receipt by the Corporation of such opinion). For purposes of Sections (b)(1) and (2) hereof, in the event of a Business Combination upon consummation of which the Corporation would be the surviving corporation or company or would continue to exist (unless it is provided, contemplated or intended that as part of such Business Combination or within one year after consummation thereof a plan of liquidation or dissolution of the Corporation will be effected), the term "other consideration to be received" shall include (without limitation) Common Stock retained by stockholders of the Corporation other than Related Persons who are parties to such Business Combination. (c) Approval by Stockholders. If there is not full compliance with the provisions of Section (a) or (b) of this Article, such Business Combination shall be approved by the affirmative vote of 80% of the outstanding Voting Shares, voting as a single class; provided that a proxy statement complying with the requirements of the Securities Exchange Act of 1934 shall have been mailed to all holders of Voting Shares for the purpose of soliciting stockholder approval of such Business Combination. Such proxy statement shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by two-thirds of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination from the point of view of the holders of Voting Shares other than any Related Person (such investment banking firm to be selected by two-thirds of the Continuing Directors, to be furnished with all information it reasonably requests, and to be paid a reasonable fee by the Corporation for its services upon receipt by the Corporation of such opinion). (d) Evaluation of Business Combinations, etc. In connection with the exercise of its judgment in determining what is in the best interest of the Corporation and its stockholders when evaluating a Business Combination or a proposal by another Person or Persons to make a Business Combination or a tender or exchange offer or a proposal by another Person or Persons to make a tender or exchange offer, the Board of Directors of the Corporation shall, in addition to considering the adequacy of the amount to be paid in connection with any such transaction, consider all of the following factors and any other factors which it deems relevant: (i) the social and economic effects of the transaction on the Corporation and its Subsidiaries, employees, depositors, loan and other customers, creditors and other elements of the communities in which the Corporation and its Subsidiaries operate or are located; (ii) the business and financial condition and earnings prospects of the acquiring Person or Persons, including, but not limited to, debt service and other existing or likely financial obligations of the acquiring Person or Persons, and the possible effect of such conditions upon the Corporation and its Subsidiaries and the other elements of the communities in which the Corporation and its Subsidiaries operate or are located; and (iii) the competence, experience, and integrity of the acquiring Person or Persons and its or their management. (e) Amendments to this Article SIXTH. Notwithstanding any other provisions of these Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the By-laws of the Corporation), and in addition to such additional vote of any Preferred Stock that may hereafter be authorized as may be required by the provisions of any series thereof or by applicable law, this Article SIXTH shall not be amended, altered, changed or repealed without: (1) The affirmative vote of 80% of the Board of Directors and a majority of the Continuing Directors; and (2) The affirmative vote as to all stock held by the holders of 80% or more of the outstanding Voting Shares, voting separately as a class. (f) Amendments Recommended by Directors. The provisions of paragraph (e) of this Article SIXTH shall not apply to, and the vote referred to therein shall not be required for, any amendment, addition, alteration or repeal of any provision of this Article SIXTH that is recommended to the stockholders by the favorable vote of (1) a majority of the Board of Directors, and (2) not less than 80% of the Continuing Directors, and any such amendment, addition, alteration or repeal so recommended shall require only the vote, if any, required under the applicable provisions of the Rhode Island Business Corporation Law. SEVENTH. Registered Office. The address of the initial registered office of the Corporation is 126 Franklin Street, Westerly, Rhode Island and the name of its initial registered agent at such address is Louis J. Luzzi. EIGHTH. Board of Directors; Amendment of By-Laws. (a) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The number of directors of the Corporation (exclusive of directors to be elected by the holders of any one or more series of any Preferred Stock that may hereafter be authorized voting separately as a class or classes) that shall constitute the Board of Directors shall be 20, unless otherwise determined from time to time by resolution adopted by the affirmative vote of: (1) At least 80% of the Board of Directors; and (2) A majority of the Continuing Directors. (b) The names and addresses and classes of the persons who are to serve as directors of the Corporation until the expiration of the term of their respective classes or until their successors are duly elected and shall qualify are: Name Address Class William Atherton Sherwood Court, Westerly, RI 02891 1986 Charles C. Buffum 73 Avondale Rd., Westerly, RI 02891 1987 Steven J. Crandall 24 Saratoga Ave., Westerly, RI 02891 1985 David Curtis 365 Pine Hill Rd., Wakefield, RI 02879 1986 Jacques deLaporte P.O. Box 448, Skunk Hill Rd., Hope Valley, RI 02832 1986 Richard A. Grills Oak St., Ashaway, RI 02804 1985 Joseph J. Kirby 38 Elm St., Westerly, RI 02891 1987 James W. McCormick, Jr. "Sunny Hill", Watch Hill, RI 02891 1985 Thomas F. Moore, Jr. RFD 2, Box 9, North Main St., Stonington, CT 06378 1987 Brendan P. O'Donnell P.O. Box 278, Money Point Rd., Mason's Island, Mystic, CT 06355 1986 Victor J. Orsinger,II 51 Elm St., Westerly, RI 02891 1985 Arthur Perry 71 Spencer Brook Rd., Concord, MA 01742 1985 Robert B. Perry Taylor Lane, Weekapaug, RI 02891 1987 Joseph H. Potter Midway Ave., Westerly, RI 02891 1986 Joseph E. Pucci 34 Elm St., Westerly, RI 02891 1987 Anthony J. Rose, Jr. 80 Pine Hill Rd., Wakefield, RI 02879 1986 James P. Sullivan 125 Watch Hill Rd., Westerly, RI 02891 1985 James D. Thornton 185 East Ave., Westerly, RI 02891 1987 Neil H. Thorp 14 Cedarcrest Dr., Westerly, RI 02891 1985 Albert E. Wilson Box 215, Nathaniel Lewis Rd., Ashaway, RI 02804 1986 (c) Subject to applicable law, the directors shall be divided into three (3) classes, each class to be as nearly equal in number as possible. The term of office of directors of the first class shall expire at the annual meeting of stockholders to be held in 1985 and until their respective successors are duly elected and qualified. The term of office of directors of the second class shall expire at the annual meeting of stockholders to be held in 1986 and until their respective successors are duly elected and qualified. The term of office of directors of the third class shall expire at the annual meeting of stockholders to be held in 1987 and until their respective successors are duly elected and qualified. Subject to the foregoing, at each annual meeting of stockholders, commencing at the annual meeting to be held in 1985, the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting and until their successors shall be duly elected and qualified. Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the number of directors, may be filled only by the Board of Directors, acting by vote of 80% of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their respective successors shall be duly elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of any Preferred Stock that may hereafter be authorized shall have the right, voting separately as a class, to elect one or more directors of the Corporation, (i) the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders and vacancies created with respect to any directorship of the directors so elected may be filled in the manner specified by such Preferred Stock, and (ii) this Article EIGHTH shall be deemed to be construed and/or modified so as to permit the full implementation of the terms and conditions relating to election of directors of any series of Preferred Stock that has been or will be designated by the Board of Directors. (d) Notwithstanding any other provisions of these Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the By-laws of the Corporation), any one or more directors of the Corporation may be removed at any time, but only for cause and only by either (1) the affirmative vote of a majority of the Continuing Directors and a majority of the Board of Directors or (2) the affirmative vote, at a meeting of the stockholders called for that purpose, as to all stock held by the holders of 80% or more of the outstanding Voting Shares, voting separately as a class. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock that may hereafter be authorized shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the provisions of this Section (d) shall not apply with respect to the director or directors elected by such holders of Preferred Stock. (e) In addition to the right of the Board of Directors of the Corporation to make nominations for the election of directors, nominations for the election of directors may be made by any stockholder entitled to vote for the election of directors if that stockholder complies with all of the provisions of this Section (e). (1) Advance written notice of such proposed nomination shall be received by the Secretary of the Corporation not less than 14 days nor more than 60 days prior to any meeting of the stockholders called for the election of directors; provided, however, that if fewer than 21 days' notice of the meeting is given to stockholders, such written notice of such proposed nomination shall be received by the Secretary of the Corporation not later than the close of the tenth day following the day on which notice of the meeting was mailed to stockholders. (2) Each notice under Section (e)(1) shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are Beneficially Owned by each such nominee, (iv) any other information reasonably requested by the Corporation. (3) The nomination made by a stockholder may only be made in a meeting of the stockholders of the Corporation called for the election of directors at which such stockholder is present in person or by proxy, and can only be made by a stockholder who has theretofore complied with the notice provisions of Sections (e)(1) and (2) above. (4) The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (f) The By-laws of the Corporation may be altered, amended or repealed or new By-laws may be adopted by the Board of Directors at any regular or special meeting solely upon the affirmative vote of both 80% of the Board of Directors and a majority of the Continuing Directors. If such vote is to be taken at any special meeting of the Board of Directors, notice of such proposed action and the substance thereof shall be contained in the notice of such special meeting. (g) Notwithstanding any other provisions of these Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the By-laws of the Corporation), and in addition to such additional vote of any Preferred Stock that may hereafter be authorized as may be required by the provisions of any series thereof or by applicable law, this Article EIGHTH shall not be amended, altered, changed or repealed without: (1) The affirmative vote of 80% of the Board of Directors and of a majority of Continuing Directors; and (2) The affirmative vote as to all stock held by the holders of 80% or more of the outstanding Voting Shares, voting separately as a class. NINTH. Certain Definitions. For purposes of Articles SIXTH and EIGHTH, the following definitions shall apply: (a) Affiliate. An "Affiliate" of, or a Person " affiliated with", a specified Person, means a Person that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. (b) Associate. The term "Associate" used to indicate a relationship with any Person means: (1) Any corporation or organization (other than the Corporation or a Subsidiary of the Corporation) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities; (2) Any trust or other estate in which such Person has a ten percent or greater beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; (3) Any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person; or (4) Any investment company registered under the Investment Company Act of 1940 for which such Person or any Affiliate or Associate of such Person serves as investment advisor. (c) Beneficial Owner. A Person shall be considered the "Beneficial Owner" of any shares of stock (whether or not owned of record): (1) With respect to which such Person or any Affiliate or Associate of such Person directly or indirectly has or shares (i) voting power, including the power to vote or to direct the voting of such shares of stock, and/or (ii) investment power, including the power to dispose of or to direct the disposition of such shares of stock; (2) Which such Person or any Affiliate or Associate of such Person has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, and/or (ii) the right to vote pursuant to any agreement, arrangement or understanding (whether such right is exercisable immediately or only after the passage of time); or (3) Which are Beneficially Owned within the meaning of (1) or (2) of this Section (c) by any other Person with which such first mentioned Person or any of its Affiliates or Associates has any agreement, arrangement or understanding, written or oral, with respect to acquiring, holding, voting or disposing of any shares of stock of the Corporation or any Subsidiary of the Corporation or acquiring, holding or disposing of all or substantially all, or any Substantial Part, of the assets or businesses of the Corporation or a Subsidiary of the Corporation. For the purpose only of determining whether a Person is the Beneficial Owner of a percentage specified in Article SIXTH or Article EIGHTH of the outstanding Voting Shares, such shares shall be deemed to include any Voting Shares which may be issuable pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants, options or otherwise and which are deemed to be beneficially owned by only such Person pursuant to the foregoing provisions of this Section (c). (d) Business Combination. A "Business Combination" means: (1) The sale, exchange, lease, transfer or other disposition to or with a Related Person or any Affiliate or Associate of such Related Person by the Corporation or any of its Subsidiaries (in a single transaction or a series of related transactions) of all or substantially all, or any Substantial Part, of its or their assets or businesses (including, without limitation, any securities issued by a Subsidiary); (2) The purchase, exchange, lease or other acquisition by the Corporation or any of its Subsidiaries (in a single transaction or a series of related transactions) of all or substantially all, or any Substantial Part , of the assets or business of a Related Person or any Affiliate or Associate of such Related Person; (3) Any merger or consolidation of the Corporation or any Subsidiary thereof into or with a Related Person or any Affiliate or Associate of such Related Person, irrespective of which Person is the surviving entity in such merger or consolidation; (4) Any reclassification of securities, recapitalization or other transaction (other than a redemption in accordance with the terms of the security redeemed) which has the effect, directly or indirectly, of increasing the proportionate amount of Voting Shares of the Corporation or any Subsidiary thereof which are Beneficially Owned by a Related Person, or any partial or complete liquidation, spin-off, split-off or split-up of the Corporation or any Subsidiary thereof; provided, however, that this Section (d)(4) shall not relate to any transaction of the types specified herein that has been approved by (i) a majority of the Board of Directors, and (ii) 80% of the Continuing Directors; or (5) The acquisition upon the issuance thereof of Beneficial Ownership by a Related Person of Voting Shares or securities convertible into Voting Shares or any voting securities or securities convertible into voting securities of any Subsidiary of the Corporation, or the acquisition upon the issuance thereof of Beneficial Ownership by a Related Person of any rights, warrants or options to acquire any of the foregoing or any combination of the foregoing Voting Shares or voting securities of a Subsidiary of the Corporation. As used in this definition, a "series of related transactions" shall be deemed to include not only a series of transactions with the same Related Person but also a series of separate transactions with a Related Person or any Affiliate or Associate of such Related Person. Anything in this definition to the contrary notwithstanding, this definition shall not be deemed to include any transaction of the type set forth in Sections (d)(1) through (d)(3) above between or among any two or more Subsidiaries of the Corporation or the Corporation and one or more Subsidiaries of the Corporation if such transaction has been approved by the affirmative vote of at least 80% of the Board of Directors and a majority of the Continuing Directors on or prior to the Date of Determination. (e) Continuing Director. A "Continuing Director" shall mean: (1) An individual who was designated as a member of the Board of Directors of the Corporation in these Articles of Incorporation as filed with the Secretary of State of the State of Rhode Island; or (2) An individual designated (before such individual's initial election as a director) as a Continuing Director by a majority of the then Continuing Directors. (f) Date of Determination. The term "Date of Determination" means: (1) The date on which a binding agreement (except for the fulfillment of conditions precedent, including, without limitation, votes of stockholders to approve such transaction) is entered into by the Corporation, as authorized by its Board of Directors, and another Person providing for any Business Combination; or (2) If such an agreement as referred to in Section (f)(1) above is amended so as to make it less favorable to the Corporation and its stockholders, the date on which such amendment is approved by the Board of Directors of the Corporation; or (3) In cases where neither Section (f)(1) or (2) above shall be applicable, the record date for the determination of stockholders of the Corporation entitled to notice of and to vote upon the transaction in question. A majority of the Continuing Directors shall have the power and duty to determine the Date of Determination as to any transaction under Article SIXTH or Article EIGHTH. Any such determination shall be conclusive and binding for all purposes in either of such Articles. (g) Person. The term "Person" shall mean any individual, partnership, corporation, group or other entity (other than the Corporation, any Subsidiary of the Corporation for itself or as a fiduciary for customers in the ordinary course, or a trustee holding stock for the benefit of employees of the Corporation or its Subsidiaries, or any one of them, pursuant to one or more employee benefit plans or arrangements). When two or more Persons act as a partnership, limited partnership, syndicate, association or other group for the purpose of acquiring, holding or disposing of shares of stock, such partnership, syndicate, association or group shall be deemed a "Person". (h) Related Person. "Related Person" means any Person which is the Beneficial Owner, as of the Date of Determination or immediately prior to the consummation of a Business Combination, or both, of 10% or more of the Voting Shares, or any Person who is an Affiliate of the Corporation and at any time within five years preceding the Date of Determination was the Beneficial Owner of 10% or more of the then outstanding Voting Shares, but does not include any one or group of more than one Continuing Director. (i) Substantial Part. The term "Substantial Part" as used with reference to the assets of the Corporation, of any Subsidiary or of any Related Person means assets having a value of more than five percent of the total consolidated assets of the Corporation and its Subsidiaries as of the end of the Corporation's most recent fiscal year ending prior to the time the determination is being made. (j) Subsidiary. "Subsidiary" shall mean any corporation or entity of which the Person in question owns not less than 50% of any class of equity securities, directly or indirectly. (k) Voting Shares. "Voting Shares" shall mean shares of the Corporation's capital stock entitled to vote generally in the election of directors. (l) Certain Determinations with Respect to Articles SIXTH and EIGHTH. (1) A majority of the Continuing Directors shall have the conclusive power and authority to determine, for the purposes of Articles SIXTH and EIGHTH, on the basis of information known to them: (i) the number of Voting Shares of which any Person is the Beneficial Owner, (ii) whether a Person is an Affiliate or Associate of another, (iii) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in the definition of "Beneficial Owner" as hereinabove defined, (iv) whether the assets subject to any Business Combination constitute a "Substantial Part" as hereinabove defined, (v) whether two or more transactions constitute a "series of related transactions" as hereinabove defined, (vi) any matters referred to in subsection (l)(2) below, and (vii) such other matters with respect to which a determination is required under Article SIXTH or EIGHTH. Any such determination shall be final and binding for all purposes hereunder. (2) A Related Person shall be deemed to have acquired a Voting Share of the Corporation at the time when such Related Person became the Beneficial Owner thereof. With respect to Voting Shares owned by Affiliates, Associates or other Persons whose ownership is attributed to a Related Person under the foregoing definition of Beneficial Owner, if the price paid by such Related Person for such shares is not determinable, the price so paid shall be deemed to be the higher of (i) the price paid upon acquisition thereof by the Affiliate, Associate or other Person or (ii) the market price of the shares in question (as determined by a majority of the Continuing Directors) at the time when the Related Person became the Beneficial Owner thereof. Notwithstanding any other provisions of these Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or By-laws of the Corporation), and in addition to such additional vote of any Preferred Stock that may hereafter be authorized as may be required by the provisions of any series thereof or by applicable law, this Article NINTH shall not be amended, altered, changed or repealed without: (1) The affirmative vote of 80% of the Board of Directors and of a majority of Continuing Directors; and (2) The affirmative vote as to all stock held by the holders of 80% or more of the outstanding Voting Shares, voting separately as a class. TENTH. Amendments. (a) The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in these Articles of Incorporation, and other provisions authorized by the laws of the State of Rhode Island at the time in force may be added or inserted in these Articles of Incorporation, in the manner (i) now or hereafter prescribed by law, and (ii) as has otherwise been provided in Articles SIXTH, EIGHTH and NINTH of these Articles of Incorporation; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to these Articles of Incorporation in their present form or as hereafter amended are granted subject to the right reserved in this Article TENTH. (b) Notwithstanding any other provisions of these Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the By-laws of the Corporation), and in addition to such additional vote of any Preferred Stock that may hereafter be authorized as may be required by the provisions of any series thereof or by applicable law, this Article TENTH shall not be amended, altered, changed or repealed without the affirmative vote as to all stock held by the holders of 80% or more of the outstanding shares of the Corporation's capital stock entitled to vote generally in the election of directors, voting separately as a class. ELEVENTH. Limiting Director Liability. (c) No director of the Corporation shall be liable to the Corporation or to its stockholders for monetary damages for breach of the director's duty as a director; provided, however, that this Article ELEVENTH shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; ( ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) the liability imposed pursuant to the provisions of R.I.G.L. Section 7-1.1-43 (as in effect or as hereafter amended); or (iv) for any transaction from which the director derived an improper personal benefit unless said transaction is permitted by R.I.G.L. Section 7- 1.1-37.1 (as in effect or as hereafter amended). If the Rhode Island General Laws are amended after the adoption of this Article ELEVENTH to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of each director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Rhode Island General Laws, as so amended. Neither the amendment nor repeal of this Article ELEVENTH nor the adoption of any provision of these Articles of Incorporation inconsistent with this Article ELEVENTH shall eliminate or reduce the effect of this Article ELEVENTH in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article ELEVENTH, would occur or arise, prior to such amendment, repeal or adoption of an inconsistent provision. (a) Notwithstanding any other provisions of these Articles of Incorporation, including Section TENTH (a), or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the By-laws of the Corporation), and in addition to such additional vote of any Preferred Stock that may hereafter be authorized as may be required by the provisions of any series thereof or by applicable law, this Article ELEVENTH shall not be amended, altered, changed or repealed without: (1) The affirmative vote of 80% of the Board of Directors and of a majority of Continuing Directors (as defined in Article NINTH of these Articles of Incorporation), and (2) The affirmative vote as to all stock held by the holders of 80% or more of the outstanding Voting Shares (as defined in Article NINTH of these Articles of Incorporation), voting separately as a class. TWELFTH. The Restated Articles of Incorporation correctly set forth without change the corresponding provisions of the Articles of Incorporation as heretofore restated and amended, and supersede the original Articles of Incorporation and all amendments thereto. Washington Trust Bancorp, Inc. Dated: August 8, 1994 By Joseph J. Kirby -------------------- Its President and Harvey C. Perry, II ------------------------ Its Secretary STATE OF RHODE ISLAND COUNTY OF WASHINGTON At Westerly in said county on this 9th day of August, 1994, personally appeared before me Joseph J. Kirby, who being by me first duly sworn, declared that he is the President of Washington Trust Bancorp, Inc., that he signed the foregoing document as President of the Corporation, and that the statements therein contained are true. Yvonne Mole ------------- Notary Public {Notarial Seal} EX-10 3 0003.txt SUPPLEMENTAL PENSION BENEFIT & PROFIT SHARING PLAN EXHIBIT l0.a THE WASHINGTON TRUST COMPANY SUPPLEMENTAL PENSION BENEFIT AND PROFIT SHARING PLAN Effective November 1,1994 TABLE OF CONTENTS ARTICLE I - NAME, PURPOSE, AND EFFECTIVE DATE 1.01 Name and Purpose 1.02 Effective Date ARTICLE II - DEFINITIONS 2.01 Board 2.02 Code 2.03 Compensation 2.04 Effective Date 2.05 Employee 2.06 Employer 2.07 Participant 2.08 Plan Administrator 2.09 Plan 2.10 Pension Plan 2.11 Profit Sharing Plan 2.12 Profit Sharing Plan Restrictions 2.13 Supplemental Pension Plan Benefit 2.15 Supplemental Profit Sharing Plan Benefit ARTICLE III - ELIGIBILITY 3.01 Participation ARTICLE IV - SUPPLEMENTAL PENSION PLAN BENEFITS 4.01 Amount of Supplemental Retirement Plan Benefits 4.02 Distributions of Supplemental Retirement Plan Benefit 4.03 Commencement of Payment of Supplemental Pension Plan Benefit 4.04 Death Benefit ARTICLE V - SUPPLEMENTAL PROFIT SHARING PLAN BENEFITS 5.01 Supplemental Profit Sharing Plan Contributions 5.02 Distributions of Supplemental Profit Sharing Plan Benefits 5.03 Commencement of Payment of Supplemental Profit Sharing Plan Benefits 5.04 Death Benefit ARTICLE VI - VESTING 6.01 Vesting ARTICLE VII - FUNDING 7.01 Funding ARTICLE VIII - ADMINISTRATION 8.01 Duties of the Plan Administrator 8.02 Finality of Decisions ARTICLE IX - MISCELLANEOUS 9.01 Non-Guarantee of Employment 9.02 Rights under Plan 9.03 Amendments/Termination 9.04 Nonassignability 9.05 Entire Agreement; Successors 9.06 Successor Employer 9.07 Governing Law ARTICLE I NAME, PURPOSE AND EFFECTIVE DATE 1.01 NAME AND PURPOSE The supplemental retirement plan set forth herein shall be known as The Washington Trust Company Supplemental Pension Benefit and Profit Sharing Plan (the "Plan"). The Plan is established, and shall be maintained, solely for the purpose of providing supplemental pension and profit sharing benefits which are not provided under The Washington Trust Company Pension Trust and The Washington Trust Company Profit Sharing Plan for certain Participants. The Plan is unfunded and maintained prirnarily for the purpose of providing deferred compensation for certain Participants who are highly compensated employees. 1.02 EFFECTIVE DATE This Plan shall be effective November 1, 1994. This Plan shall apply to Participants who retire or terminate their employment with the Employer after the Effective Date. ARTICLE II DEFINITIONS When used herein, the following terms defmed hereinafter shall have the following meanings unless a different meaning is clearly required by the context of the Plan: 2.01 "Board" means the Board of Directors of the Employer. 2.02 "Code" means the Internal Revenue Code of 1986, as amended from time to time. Reference to a specific provision of the Code shall include such provision, any valid regulation or ruling promulgated thereunder, and any provision of future law that amends, supplements, or supersedes such provision. 2.03 "Compensation" means, with respect to an eligible Employee, "Compensation" as defmed in Section 1.12 of the Pension Plan with respect to the determination of a supplemental pension benefit and "Compensation" as defmed in Section 2.11 of the Profit Sharing Plan with respect to the determination of a supplemental profit sharing benefit. 2.04 "Effective Date" means November 1, 1994. 2.05 "Employee" means any person employed by the Employer. 2.06 "Employer" means The Washington Trust Company and any subsidiary and/or affiliated corporation which has adopted this Plan. 2.07 "Participant" means an Employee who has become a Participant in this Plan in the manner set forth in Article III. 2.08 "Plan Administrator" means The Washington Trust Company, or its duly authorized representative. 2.09 "Plan" means The Washington Trust Company Supplemental Pension Benefit and Profit Sharing Plan as set forth herein. 2.10 "Pension Plan" means The Washington Trust Company Pension Trust, as in effect on November 1, 1994 or as amended thereafter from time to time. 2.11 "Profit Sharing Plan" means The Washington Trust Company Profit Sharing Plan as in effect on November 1, 1994 or as amended thereafter from time to time. 2.12 "Profit Sharing Plan Restrictions" means the linuts imposed under Section 401(a)(17) of the Code on the amount of employer matching contribution made in accordance with Section 4.06 of the Profit Sharing Plan. 2.13 "Supplemental Pension Plan Benefit" means the benefit payable under Article IV of the Plan. 2.14 "Supplemental Profit Sharing Benefit" means the benefit payable under Article V of the Plan. ARTICLE III ELIGIBILITY 3.01 PARTICIPATION Any Employee shall become a Participant in the Plan provided: (a) he has satisfied the eligibility requirements for participation under the Pension Plan or the Profit Sharing Plan; (b) he is a higlily compensated employee within the meaning of Section 414(q)(1)(B) of the Code; and (c) (1) his pension benefit under the Pension Plan is in excess of the limits of Section 415(b) or 415(e) of the Code or is otherwise reduced due to the limitations of Section 401(a)(17) of the Code, or (2) the Employer matching contribution on his behalf is restricted by Section 401(a)(17) of the Code. ARTICLE IV SUPPLEMENTAL PENSION PLAN BENEFITS 4.01 AMOUNT OF SUPPLEMENTAL PENSION PLAN BENEFITS A Participant shall be entitled to a benefit under the provisions of this Article if his benefit determined under the provisions of the Pension Plan is less than such benefit would have been if (a) the definition of compensation under the Pension Plan included compensation in excess of the limit of Section 401(a)(17) of the Code and/or (b) the limits under Section 415 of the Code did not apply. If a Participant's benefit from the Pension Plan is reduced as a result of either or both of the conditions described in the preceding paragraph, the benefit to which the Participant shall be entitled under the Plan shall be determined as follows: (i) The benefit actually payable to the Participant at his actual retirement date under the terms of the Pension Plan shall be calculated. (ii) The benefit which would have been payable under the terms of the Pension Plan if the definition of compensation under the Pension Plan included compensation in excess of Section 401(a)(17) of the Code and if the ijinits under Section 415 of the Code did not apply shall be calculated. (iii) The result of step (i) shall be subtracted from the result of step (ii), and the difference, if any, shall be the benefit payable to the Participant. 4.02 DISTRIBUTIONS OF SUPPLEMENTAL PENSION PLAN BENEFIT All payments of benefits to Participants and/or their designated beneficiaries under this Article IV shall be made in the same form the Participant elects under the Pension Plan. 4.03 COMMENCEMENT OF PAYMENT OF SUPPLEMENTAL PENSION PLAN BENEFIT Benefits shall commence under this Article to a Participant as of the same date that benefits commence to the Participant under the Pension Plan; provided, however, that, in the case of a Participant required to commence benefit payments under the Pension Plan pursuant to Section 401(a)(9) of the Code, benefits shall not commence under this Article until the Participant actually retires. Any reductions for the commencement of benefits prior to the Participant's normal retirement age under the Pension Plan shall also apply to the payment of benefits under this Article. 4.04 DEATH BENEFIT Upon the death of a Participant any accrued Supplemental Pension Plan Benefit shall be applied to provide such Participant's surviving spouse or beneficiary with a supplemental pre-retirement death benefit under the same terms and in the same manner as provided by the applicable death benefit provisions of the Pension Plan. ARTICLE V SUPPLEMENTAL PROFIT SHARING PLAN BENEFITS 5.01 SUPPLEMENTAL PROFIT SHARING PLAN CONTRIBUTIONS (a) If Employer matching contributions under the Profit Sharing Plan are limited by the Profit Sharing Plan Restrictions, the Employer shall credit to a Supplemental Employer Contribution Account established for such Participant an amount equal to the Employer matching contribu(ion which would have been made pursuant to the Profit Sharing Plan in the absence of the Profit Sharing Plan Restrictions. If a Participant makes tax deferred contributions under the Profit Sharing Plan that are limited to the dollar limit of Section 402(g) of the Code, the 50% and 100% matching contribution under this Plan will be determined in the same manner as for Section 4.06 of the Profit Sharing Plan, but assuming that the Participant's Compensation for this purpose is the lesser of (i) "Compensation" as defined for purposes of Section 2.11 of the Profit Sharing Plan, but without regard to the limit of Section 401(a)(17) of the Code, and (ii) The dollar limit of Section 402(g) of the Code for the year multiplied by 25. The Participant's Supplemental Employer Contribution Account shall be adjusted at the end of each calendar quarter to reflect a rate of return determined as if such accounts were invested at the rate of interest in effect on the first day of the calendar year for one year certificates of deposit of The Washington Trust Company or such other rate as may be adopted from time to time by the Board in its sole discretion. 5.02 DISTRIBUTIONS OF SUPPLEMENTAL PROFIT SHARING PLAN BENEFITS All payments of benefits to Participants and/or their designated beneficiaries under this Article V shall be made in a lump sum. 5.03 COMMENCEMENT OF PAYMENT OF SUPPLEMENTAL PROFIT SHARING PLAN BENEFITS Benefits shall commence under this Article to a Participant as of the same date that benefits commence to a Participant under the Profit Sharing Plan; provided, however, that, in the case of a Participant required to commence benefit payments under the Profit Sharing Plan pursuant to Section 401(a)(9) of the Code, benefits shall not commence under this Article until the Participant actually retires. 5.04 DEATH BENEFIT Upon a Participant's death, any amounts set aside in his Supplemental Employer Contribution Account shall be distributed to his beneficiary or beneficiaries designated under the Profit Sharing Plan. ARTICLE VI VESTING 6.01 VESTING A Participant shall be vested in his Supplemental Pension Plan Benefit, if any, in accordance with the vesting provisions of the Pension Plan. A Participant shall be fully vested at all times in his Supplemental Profit Sharing Plan Benefit. ARTICLE VII FUNDING 7.01 FUNDING The Employer shall be under no obligation to establish a fund or reserve in order to pay the benefits under the Plan. The Employer shall be required to make payments only as benefits become due and payable. No person shall have any right, other than the right of an unsecured general creditor, against the Employer with respect to the benefits payable hereunder, or which may be payable hereunder, to any Participant, surviving spouse or beneficiary hereunder. Notwithstanding the foregoing, in order to pay benefits under this Plan the Employer may establish a grantor trust (hereinafter the "Trust"), within the meaning of Section 671 of the Code as may be amended from time to time. The assets in such Trust shall at all times be subject to the claims of the general creditors of the Employer, and neither the Plan nor any Participant, surviving spouse or beneficiary shall have any preferred claim or right, or any beneficial ownership interest in any such assets of the Trust prior to the time such assets are paid to a Participant as a Supplemental Pension Benefit or as a Supplemental Profit Sharing Plan Benefit, and all rights credited under this Plan and said Trust shall be mere unsecured contracmal rights of a Participant against the Employer. ARTICLE VIII ADMINISTRATION 8.01 DUTIES OF THE PLAN ADMINISTRATOR The Plan shall be administered by the Plan Administrator in accordance with its terms and purposes. The Plan Administrator shall determine the amount and manner of payment of the benefits due to or on behalf of each Participant from the Plan and shall cause them to be paid by the Employer accordingly. 8.02 FINALITY OF DECISIONS The Plan Administrator is expressly granted, without intending any limitation, the discretion to construe the terms of the Plan and to determine eligibility for benefits hereunder. The decisions made by and the actions taken by the Plan Administrator in the administration of the Plan shall be final and conclusive on all persons, and neither the Plan Administrator nor the Employer shall be subject to individual liability with respect to the Plan. ARTICLE IX MISCELLANEOUS 9.01 NON-GUARANTEE OF EMPLOYMENT Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any Participant, or as a right of any such Participant to be continued in the employment of the Employer, or as a limitation on the right of the Employer to deal with any Participant, as to their hiring, discharge, layoff, compensation, and all other conditions of employment in all respects as though this Plan did not exist. 9.02 RIGHTS UNDER PLAN Nothing in this Plan shall be construed to limit, broaden, restrict, or grant any right to a Participant, surviving spouse or any beneficiary thereof under the Pension Plan or Profit Sharing Plan ("Qualified Plans"), nor to grant any additional rights to any such person under the Qualified Plans, nor in any way to limlt, modify, repeal or otherwise affect the Employer's right to amend or modify the Qualified Plans. 9.03 AMENDMENTS/TERMINATION The Employer reserves the right to make from time to time amendments to or terminate this Plan by vote duly adopted by the Board of Directors, provided that no such amendment or termination shall reduce any benefits earned under the terms of this Plan prior to the date of termination or amendment. 9.04 NONASSIGNABILITY The benefits payable under this Plan shall not be subject to alienation, assignment ,garnishment, execution or levy of any kind and any attempt to cause any benefits to be so subjected shall not be recognized, except to the extent required by applicable law. 9.05 ENTIRE AGREEMENT; SUCCESSORS This Plan, including any subsequently adopted amendments, shall constitute the entire agreement or contract between the Employer and any Participant regarding the Plan. There are no covenants, promises, agreements, conditions or understandings, either oral or written, between the Employer and any Participant relating to the subject matter hereof, other than those set forth in this Plan. This Plan and any amendment shall be binding on the parties hereto and their respective heirs, adminlstrators, trustees, successors and assigns, and on all designated beneficiaries of the Participant. 9.06 SUCCESSOR EMPLOYER In the event of the dissolution, merger, consolidation or reorganization of the Employer, provision may be made by which a successor to all or a major portion of the Employer's property or business shall continue this Plan, and the successor shall have all of the powers, duties and responsibilities of the Employer under this Plan. 9.07 GOVERNING LAW This Plan shall be construed and enforced in accordance with, and governed by, the laws of the State of Rhode Island. IN WITNESS WHEREOF, The Washington Trust Company has~~used this instrument to be executed in its name and on its behalf this 15th day of December, 1994. The Washington Trust Company By: Joseph J. Kirby, President Attest: Vernon F. Bliven, SVP (Seal) EX-10 4 0004.txt AMENDED AND RESTATED 1988 STOCK OPTION PLAN Exhibit 10.d WASHINGTON TRUST BANCORP, INC. AMENDED AND RESTATED 1988 STOCK OPTION PLAN This Amended and Restated Stock Option Plan (the "Plan") constitutes an amendment and restatement of the 1988 Stock Option Plan which was adopted by the Board of Directors of Washington Trust Bancorp, Inc. (the "Corporation") in 1988 and by the shareholders of the Corporation on April 4, 1988, and further amended by the Board of Directors on April 3, 1989. The purpose of this Plan is to encourage and enable certain officers, employees and directors of the Corporation and any subsidiaries to acquire an interest in the Corporation through the granting of stock options, as herein provided, to acquire its common stock, $.0625 par value per share (the "Common Stock") . Two separate forms of options may be granted pursuant to this Plan: Incentive Stock Options under the provisions of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code") ; and Non-Qualified Options. Both forms of options are herein referred to collectively hereunder as "options". 1. Shares of Stock Subject to the Plan The stock that may be issued and sold pursuant to options granted under the Plan shall not exceed, in the aggregate, 400,000 shares of Common Stock, which may be (i) authorized but unissued shares, (ii) treasury shares, or (iii) shares previously reserved for issue upon exercise of options under the Plan, which options have expired or terminated; provided, however, that the number of shares subject to the Plan shall be subject to adjustment as provided in Section 7. 2. Administration The Plan shall be administered, construed and interpreted by a committee appointed by the Board of Directors of the Corporation (hereinafter called the "Committee") . The Committee shall consist of three or more members of the Board of Directors who are not officers of the Corporation. No member of the Committee shall be entitled to participate in the Plan, except as provided in Section 14 hereof. Subject to the provisions of the Plan, the Committee shall determine the persons to be granted options (the "Optionees"), the number of shares subject to each option, whether the options shall be Incentive Stock Options or Non-Qualified Options, the price to be paid for the shares upon the exercise of each option, and the terms and conditions of the options. In addition, the Committee shall adopt forms of option agreements and make determinations under, or interpretations of, any provision of the Plan and any option. The Committee shall maintain separate records with respect to Incentive Stock Options and Non-Qualified Options granted under the Plan to facilitate the determination of the appropriate tax treatment for such options. Any of the foregoing action taken by the Committee in its sole discretion shall be final and conclusive. Any Committee action with respect to options granted to non-employee directors pursuant to Section 14 hereof shall be limited to ministerial, non-discretionary matters, consistent with the terms of the Plan. 3. Eligibility Officers (whether or not they are directors) and employees of the Corporation shall be eligible to receive options. A director of the Corporation who is not a full time employee of the Corporation shall not be eligible to receive options, except as provided in Section 14 hereof. 4. Price and Limitation on Grant of Options (a) The purchase price of the Common Stock which may be purchased under each option shall be at least equal to the fair market value per share of the outstanding Common Stock of the Corporation at the time the option is granted, as determined by the Committee. The aggregate fair market value (determined as of the time the option is granted) of the Common Stock for which any person participating in the Plan may be granted options under the Plan (or any subsequent option plan) as Incentive Stock Options under Section 422A of the Code shall not exceed the minimum amount (either at grant or vesting) that would be permissible under said Section 422A and the Treasury regulations thereunder without disqualifying such option as an Incentive Stock Option. (b) The purchase price of shares which may be purchased under each Incentive Stock Option issued to a person who, immediately prior to the grant of such option, owns (directly or indirectly) stock possessing more than ten percent of the total combined voting power of all classes of stock of the Corporation shall be at least equal to 110 percent of the fair market value of the Common Stock subject to the option, as determined in Section 4(a) above. (c) The option price shall be payable either (i) in United States dollars in cash or by check, bank draft or money order payable to the order of the Corporation, (ii) through the delivery of shares of Common Stock of the Corporation (the "Stock") already owned by the Optionee with a fair market value equal to the option price, or (iii) by a combination of (i) and (ii) above. The fair market value of Stock so delivered shall be the mean of the high and low prices of publicly traded shares of Common Stock of the Corporation on the date of exercise or as otherwise may be determined by the Committee. Unless otherwise determined by the Committee, an Optionee may engage in a successive exchange (or series of exchanges) in which Common Stock they are entitled to receive upon the exercise of an option may be simultaneously utilized as payment for the exercise of an additional option or options. 5. No Rights as Shareholder Until receipt of the purchase price upon exercise of an option and fulfillment of other requirements of the Plan, no Optionee or person entitled to exercise the option shall be, or shall be deemed to be, a holder of any shares of the Corporation subject to the option for any purpose. 6. Non-Transferability of Option Each option granted under the Plan shall provide that it is personal to the Optionee, is not transferable by the Optionee in any manner otherwise than by will or the laws of descent and distribution or a qualified domestic relations order ("Qualified Domestic Relations Order"), as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder ("ERISA"), and is exercisable, during the Optionee's lifetime, only by such Optionee. 7. Dilution or Other Adjustments The terms of the options and the number of shares subject to this Plan shall be equitably adjusted in such manner as to prevent dilution or enlargement of option rights in the following instances: (a) the declaration of a dividend payable to the holders of Common Stock in stock of the same class; (b) a split-up of the Common Stock or a reverse split thereof; or (c) a recapitalization of the Corporation under which shares of one or more different classes are distributed in exchange for or upon the Common Stock without payment of any valuable consideration by the holders thereof. The terms of any such adjustment shall be conclusively determined by the Board. 8. Shareholder Approval The Plan is subject to the approval of the shareholders of the Corporation. If such approval is not given within twelve (12) months after the date of the Plan's adoption by the Board, the portion of the Plan relating to the extension of the option exercise periods, as provided in Sections 12 and 14 hereof, and the grant of options to non-employee directors upon re-election, as provided in Section 14 hereof, shall terminate and be of no force and effect. 9. Period of Grants; Expiration; Termination Options may be granted under the Plan at any time, or from time to time, until December 31, 1997. Each option granted under the Plan shall expire not more than ten years from the date the option is granted. The Plan may be terminated at any time by the Board of Directors of the Corporation, except with respect to any options then outstanding under the Plan. 10. Effect of Certain Transactions If the Corporation is merged into or consolidated with another corporation under circumstances where the Corporation is not the surviving corporation, or if the Corporation is liquidated or sells or otherwise disposes of all or substantially all of its assets to another corporation while unexercised options remain outstanding under the Plan after the effective date of such merger, consolidation or sale, as the case may be, each holder of an outstanding option shall be entitled, upon exercise of such option, to receive in lieu of shares of Common Stock, shares of such stock or other securities as the holders of shares of Common Stock received pursuant to the terms of the merger, consolidation or sale. Notwithstanding the provisions of any option for Common Stock which provides for its exercise in installments, such option shall become immediately exercisable in the event of a change in control or offer to effect a change in control. For purposes of this Section 10, a "change in control" shall have the same meaning as is set forth in Section 14 hereof. The term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision as to whether a change in control or offer to effect a change in control has occurred shall be made by a majority of the Continuing Directors (as defined in the Restated Articles of Incorporation as in effect on March 1, 1988) and shall be conclusive and binding. Notwithstanding Sections 9 and 15 of the Plan, this provision shall not be amended or revoked in any manner without the affirmative vote of 80% of the Board of Directors and a majority of the Continuing Directors (as defined above) 11. Liability and Indemnification No member of the Committee shall be liable for any action or determination made in good faith, and such members shall be entitled to indemnification and reimbursement to the fullest extent provided in the Corporation's By-laws. 12. Termination of Employment In the event that an Optionee's employment by the Corporation shall terminate, any option held by such Optionee, whether granted prior to or following the amendment and restatement of this Section 12, shall terminate immediately, subject to the following: If any termination of employment is due to retirement with the consent of the Corporation, the Optionee shall have the right, subject to the provisions of Section 5 hereof, to exercise any such option at any time within three months, in the case of Incentive Stock Options ("ISO Retirement Exercise Period"), and within three years (or up to five years, upon the approval of the Committee, in any individual case) , in the case of Non-Qualified Options ("NQ Retirement Exercise Period"), after such retirement, to the extent that he was entitled to exercise the same immediately prior to his retirement; and If the Optionee shall die while in the employment of the Corporation or during the ISO Retirement Exercise Period, in the case of Incentive Stock Options, or during the NQ Retirement Exercise Period, in the case of Non-Qualified Options, his estate, personal representative, or beneficiary shall have the right, subject to the provisions of Section 8 hereof, to exercise his option, at any time within three years from the date of his death, to the extent that the Optionee was entitled to exercise the same immediately prior to his death. Whether any termination of employment is to be considered a retirement with the consent of the Corporation and whether an authorized leave of absence or absence on military or government service or for other reasons shall constitute a termination of employment for the purposes of the Plan, shall be determined by the Committee, which determination shall be final and conclusive. On a case by case basis, the Committee may, in its sole discretion, accelerate the schedule of the time or times when an option granted under this Plan, other than an option granted pursuant to Section 14 hereof, may be exercised. 13. Purchase of Options At the discretion of the Committee, an employee who has been granted options may also be granted the right to require the Corporation to purchase all or a portion of such options for cancellation (a "stock appreciation right"). To the extent he exercises this right, the Corporation shall pay him in cash and/or Common Stock the excess of the fair market value of each share of Common Stock covered by the options (or portion thereof purchased) on the date the election is made over the option price. The election shall be made by delivering written notice thereof to the Committee. Shares subject to the options so purchased shall not again be available for purposes of the Plan. 14. Options Granted to Non-Employee Directors The provisions of this Section 14 govern the granting and terms of options for non-employee directors. These provisions supersede all other provisions of the Plan to the extent, and only to the extent, such other provisions are inconsistent with this Section 14. Each person who is initially elected or re-elected a director of the Corporation after December 17, 1992 shall automatically be granted a Non-Qualified Option covering 1,000 shares as of the date of his election or re-election, as the case may be, the option price for which shall be the fair market value of the Common Stock on such date and the expiration of which shall be the tenth anniversary thereof. Each option granted by this Section 14 may be exercised as follows: (a) 25% of the shares subject to such option may be purchased on and after the date of grant; and (b) an additional 25% of such shares may be purchased commencing on the first, second and third anniversaries of the date of grant. In the event of a Change in Control of the Corporation (as hereinafter defined), each option granted under this Section 14 will thereupon be exercisable in full by the Optionee. For the purposes of this Section 14, a "Change in Control of the Corporation" shall occur if: (i) any person, firm, corporation, organization or association of persons or organizations acting in concert, excluding any qualified employee benefit plan of the Corporation applicable to employees generally of the Corporation and its controlled subsidiaries, shall acquire securities having in the aggregate more than 20% of the outstanding voting power of the Corporation, whether in whole or in part by means of an offer made publicly to the holders of all or substantially all of the outstanding shares of any one or more classes of the voting securities of the Corporation to acquire such shares for cash, other property or a combination thereof or whether such acquisition was made by any other means, unless such transaction is consented to by vote of at least a majority of the Continuing Directors (as defined in Article NINTH of the Corporation's Restated Articles of Incorporation); or (ii) the Corporation transfers all or a substantial part of its properties and assets to another person, firm, corporation, organization or association of persons or organizations, excluding a subsidiary controlled by the Corporation itself, unless such transaction is consented to by vote of at least 80% of the Continuing Directors; or (iii) the Corporation shall consolidate or merge with or into any person, firm, corporation, organization or association of persons or organizations unless the Corporation or its controlled subsidiary shall be the continuing corporation or the successor corporation and shall not be controlled by any other person, firm or corporation, unless such transaction is consented to by vote of at least 80% of the Continuing Directors; or (iv) during any period of 24 consecutive months, commencing before or after the date of adoption of this Plan, individuals who at the beginning of such 24-month period were directors of the Corporation shall cease to constitute at least a majority of directors of the Corporation's Board of Directors unless the remaining directors who were directors at the beginning of such period and any directors who were not directors at the beginning of such period but whose election was approved in advance by directors representing at least a majority of the directors then in office who were directors at the beginning of such period, constitute a majority of the Corporation's Board of Directors. If the holder of an option granted pursuant to this Section 14, either prior to or following the amendment and restatement of this Section 14, shall cease to be a director of the Corporation, he may, unless removed for cause by the shareholders of the Corporation, in which event his option shall terminate, thereafter exercise his option to the extent he was entitled to exercise it on the date his service as a director terminated, but only within three years after the date of such termination. In no event, however, may an option granted pursuant to this Section 14 be exercised at a time when the option would not be exercisable had the holder thereof remained a director of the Corporation. In the event of the death of a holder of an option granted pursuant to this Section 14, either prior to or following the amendment and restatement of this Section 14, if such holder was entitled to exercise an option at the time of his death, then at any time or times within three years after his death such option may be exercised, as to all or any of the shares which he was entitled to purchase immediately prior to his death, by his executor or administrator or the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution or pursuant to a Qualified Domestic Relations Order and, except as so exercised, such option will expire at the end of such period. In no event, however, may an option be exercised after the expiration of the option period. The formula set forth in this Section 14 shall not be amended more frequently than once every six months, if at all, other than to comport with changes in the Code or ERISA. 15. Amendment of the Plan The Board may amend and make such changes in and additions to the Plan as it may deem proper and in the best interest of the Corporation; provided, however, that no such action shall adversely affect or impair any options theretofore granted under the Plan without the consent of the Optionee; and provided, further, that no amendment (i) increasing the maximum number of shares which may be issued under the Plan, except as provided in Section 7, (ii) extending the term of the Plan or any option, (iii) changing the minimum exercise price of options to be granted under the Plan, (iv) changing the requirement as to eligibility for participation in the Plan, or (v) that is "material" pursuant to the applicable rules of the Securities and Exchange Commission, shall be adopted without the approval of the shareholders of the Corporation. 16. Section 16 Compliance With respect to persons subject to Section 16 of the Securities Exchange Act of 1934, as amended ("1934 Act"), transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee in its sole discretion. EX-10 5 0005.txt Exhibit 10.j AMENDMENT TO THE WASHINGTON TRUST COMPANY SUPPLEMENTAL PENSION BENEFIT AND PROFIT SHARING PLAN A. WHEREAS, The Washington Trust Company (the "Company") maintains The Washington Trust Company Supplemental Pension and Profit Sharing Plan (the "Plan") for the benefit of its eligible employees; and WHEREAS, the Company desires to amend the Plan; and WHEREAS, the Company has reserved the right to amend the Plan by action of its Board of Directors; and WHEREAS, the Board of Directors of the Company has authorized the following amendment to the Plan; NOW, THEREFORE, the Company hereby amends the Plan as follows: 1. Section 2.03 is hereby amended by deleting said section in its entirety and substituting the following in lieu thereof: "2.03 'Compensation' means, with respect to an eligible Employee, (a) with respect to the determination of a supplemental pension plan benefit under Section 4.01, deferrals under The Washington Trust Company Nonqualified Deferred Compensation Plan plus 'Compensation' as defined in Section 1.12 of the Pension Plan, and (b) with respect to the determination of a supplemental profit sharing plan benefit under Section 5.01, 'Compensation' as defined in Section 2.11 of the Profit Sharing Plan." 2. Section 2.11 is hereby amended by deleting said section in its entirety and substituting the following in lieu thereof: "2.11 'Profit Sharing Plan' means, effective January 1, 1998, The Washington Trust Company 401(k) Plan, effect as of January 1, 1998 or as amended and/or restated thereafter from time to time. Prior to such date, 'Profit Sharing Plan' means The Washington Trust Company Profit Sharing Plan as in effect on November 1, 1994 or as amended and/or restated thereafter from time to time." 3. Effective November 1, 1999, Section 3.01 is hereby amended by deleting the period at the end of subsection (c)(2) thereof and adding the following in lieu thereof: ", or (3) he retires after attaining age 60, his age plus years of Benefit Service under the Pension Plan equal or exceed 85, and his monthly benefit payable under the Pension Plan is reduced in accordance with Section 3.2(a) of the Pension Plan." 4. Section 3.01 is hereby further amended by adding the following at the end thereof: "Effective August 24, 1999, the former President and Chief Executive Officer of PierBank, Inc. shall also become a Participant in the Plan." 5. Section 4.01 is hereby amended by deleting said section in its entirety and substituting the following in lieu thereof: "4.01 AMOUNT OF SUPPLEMENTAL PENSION PLAN BENEFITS A Participant shall be entitled to a benefit under the provisions of this Article if his benefit determined under the provisions of the Pension Plan is less than such benefit would have been if (a) the definition of compensation under the Pension Plan included deferrals to The Washington Trust Company Nonqualified Deferred Compensation Plan plus compensation in excess of the limit of Section 401(a)(17) of the Code, (b) the limits under Section 415 of the Code did not apply, and/or (c) the provisions of Section 3.2(a) of the Pension Plan reducing the monthly amount of benefit did not apply. A Participant's benefit under the Plan shall be determined as follows: (i) The benefit actually payable to the Participant at his actual retirement date under the terms of the Pension Plan shall be calculated. (ii) The benefit, which would have been payable under the terms of the Pension Plan, if (1) the definition of compensation under the Pension Plan included, effective January 1, 1999, deferrals to The Washington Trust Company Nonqualified Deferred Compensation Plan, plus compensation in excess of Section 401(a)(17) of the Code, (2) the limits under Section 415 of the Code did not apply, and (3) effective November 1, 1999, the reduction in monthly benefit amount under Section 3.2(a) of the Pension Plan did not apply, shall be calculated. (iii) The result of step (i) shall be subtracted from the result of step (ii), and the difference, if any, shall be the benefit payable to the Participant." 6. A new Section 4.01A is added effective August 24, 1999 immediately after Section 4.01 as follows: "4.01A SPECIAL SUPPLEMENTAL PENSION PLAN BENEFIT. Solely with respect to the former President and Chief Executive Officer of PierBank, Inc. who became a Participant effective August 24, 1999, a Special Supplemental Pension Plan Benefit shall be payable to him (in addition to any other amount which may be payable to him under Section 4.01) equal to the benefit that would have been payable to him under the Pension Plan if he had (a) been employed by the Employer for the period beginning November 22, 1993 and ending August 23, 1999, (b) participated in the Pension Plan during such period, and (c) received Compensation (as defined in the Pension Plan) during such period in the same amount as the compensation he received from PierBank, Inc. during such period." 7. Section 5.01 is hereby amended by deleting said section in its entirety and substituting the following in lieu thereof: "5.01 SUPPLEMENTAL PROFIT SHARING PLAN CONTRIBUTIONS (a) If Employer matching contributions under the Profit Sharing Plan are limited by the Profit Sharing Plan Restrictions, the Employer shall credit to a Supplemental Employer Contribution Account established for such Participant an amount equal to the Employer matching contribution which would have been made pursuant to the Profit Sharing Plan in the absence of the Profit Sharing Plan Restrictions. If a Participant makes tax-deferred contributions under the Profit Sharing Plan that are limited to the dollar limit of Section 402(g) of the Code, the 50% and 100% matching contribution under this Plan will be determined in the same manner as for Section 4.06 of the Profit Sharing Plan, but assuming that the Participant's Compensation for this purpose is the lesser of (i) 'Compensation' as defined for purposes of Section 2.11 of the Profit Sharing Plan, but without regard to the limit of Section 401(a)(17) of the Code, plus, effective January 1, 1999, deferrals to any nonqualified deferred compensation plan sponsored by the Employer, and (ii) The dollar limit of Section 402(g) of the Code for the year multiplied by 25. The Participant's Supplemental Employer Contribution Account shall be adjusted at the end of each calendar quarter to reflect a rate of return determined as if such accounts were invested at the rate of interest in effect on the first day of the calendar year for one year certificates of deposit of The Washington Trust Company or such other rate as may be adopted from time to time by the Board in its sole discretion." B. Except at otherwise provided above, the effective date of this Amendment is January 1, 1999. C. Except as amended above, the Plan remains in full force and effect and is in all other respects ratified and confirmed. IN WITNESS WHEREOF, the Company has caused this Amendment to be executed this 2nd day of December, 1999. THE WASHINGTON TRUST COMPANY By: John C. Warren Title: Chairman and Chief Executive Officer EX-10 6 0006.txt Exhibit 10.k JULY 2000 AMENDMENT TO THE WASHINGTON TRUST COMPANY SUPPLEMENTAL PENSION BENEFIT AND PROFIT SHARING PLAN A. WHEREAS, The Washington Trust Company (the "Company") maintains The Washington Trust Company Supplemental Pension and Profit Sharing Plan (the "Plan") for the benefit of its eligible employees; and WHEREAS, the Company desires to amend the Plan; and WHEREAS, the Company has reserved the right to amend the Plan by action of its Board of Directors; and WHEREAS, the Board of Directors of the Company has authorized the following amendment to the Plan; NOW, THEREFORE, the Company hereby amends the Plan as follows: 1. Article V is hereby amended by adding a new Section 5.05 at the end thereof as follows: "5.05 TRANSFER OF LIABILITY Notwithstanding anything herein to the contrary, effective July 1, 2000 (the "Transfer Date") any amount credited under Section 5.01 to a Supplemental Contribution Account established for a Participant shall be transferred to The Washington Trust Company Nonqualified Deferred Compensation Plan. On and after the Transfer Date, the provisions of this Article V shall cease to apply." B. Except at otherwise provided above, the effective date of this Amendment is July 1, 2000. C. Except as amended above, the Plan remains in full force and effect and is in all other respects ratified and confirmed. IN WITNESS WHEREOF, the Company has caused this Amendment to be executed this 8th day of September, 2000. THE WASHINGTON TRUST COMPANY By: John C. Warren Title: Chairman and Chief Executive Officer EX-10 7 0007.txt Exhibit 10.l JULY 2000 AMENDMENT TO THE WASHINGTON TRUST COMPANY NONQUALIFIED DEFERRED COMPENSATION PLAN A. WHEREAS, The Washington Trust Company (the "Company") maintains The Washington Trust Company Nonqualified Deferred Compensation Plan (the "Plan") for the benefit of its eligible employees and directors; and WHEREAS, the Company desires to amend the Plan; and WHEREAS, the Company has reserved the right to amend the Plan by action of its Board of Directors; and WHEREAS, the Board of Directors of the Company has authorized the following amendment to the Plan; NOW, THEREFORE, the Company hereby amends the Plan by adding a new Article XII to the end of Article XI thereof as follows: "ARTICLE XII SUPPLEMENTAL PROFIT SHARING PLAN BENEFITS 12.01 PURPOSE The purpose of this Article XII is to provide supplemental profit sharing benefits for Profit Sharing Participants, which benefits are not provided under The Washington Trust Company 401(k) Plan as a result of certain restrictions imposed by the tax laws. Except as otherwise provided in this Article XII, the provisions of Articles I through XI, inclusive, shall not apply to the profit sharing benefits provided herein. 12.02 DEFINITIONS For purposes of this Article XII, the following definitions shall apply: (a) 'Profit Sharing Participant' means any person employed by the Company provided: (i) he has satisfied the eligibility requirements for participation under the Profit Sharing Plan; (ii) he is a highly compensated employee within the meaning of Section 414(q)(1)(B) of the Code; and (iii) the matching contribution made by the Company on his behalf under the Profit Sharing Plan is restricted by Section 401(a)(17) of the Code. (b) 'Profit Sharing Plan' means The Washington Trust Company 401(k) Plan, as amended or restated and in effect from time to time. (c) 'Profit Sharing Plan Restrictions' means the limits imposed under Section 401(a)(17) of the Code on the amount of matching contributions made by the Company in accordance with Section 4.06 of the Profit Sharing Plan. (d) 'Supplemental Profit Sharing Contribution Account' means the bookkeeping account established on behalf of a Profit Sharing Participant in accordance with Section 12.05. All other capitalized terms shall have the meanings defined in Article I. 12.03 SUPPLEMENTAL PROFIT SHARING CONTRIBUTIONS (a) If matching contributions made by the Company under the Profit Sharing Plan on behalf of a Profit Sharing Participant are limited by the Profit Sharing Plan Restrictions, the Company shall credit to a Supplemental Profit Sharing Contribution Account established for such Profit Sharing Participant an amount equal to the matching contribution which would have been made by the Company pursuant to the Profit Sharing Plan in the absence of the Profit Sharing Plan Restrictions. If a Participant makes tax-deferred contributions under the Profit Sharing Plan that are limited to the dollar limit of Section 402(g) of the Code, the 50% and 100% matching contribution under this Plan will be determined in the same manner as for Section 4.06 of the Profit Sharing Plan, but assuming that the Participant's Compensation for this purpose is the lesser of (i) 'Compensation' as defined for purposes of Section 2.11 of the Profit Sharing Plan, but without regard to the limit of Section 401(a)(17) of the Code, plus, effective January 1, 1999, deferrals to any nonqualified deferred compensation plan sponsored by the Employer, and (ii) The dollar limit of Section 402(g) of the Code for the year multiplied by 25. 12.04 SUPPLEMENTAL PROFIT SHARING CONTRIBUTION ACCOUNT The Administrator shall establish and maintain a bookkeeping Supplemental Profit Sharing Contribution Account in the name of each Profit Sharing Participant, which account may be a subaccount of an Account established for such individual under Section 6.2(a). A Profit Sharing Participant's Supplemental Profit Sharing Contribution Account shall be invested in accordance with the provisions of Section 6.2. Such Supplemental Profit Sharing Contribution Account shall be credited with (a) liability transferred July 1, 2000 on behalf of the Profit Sharing Participant from his Supplemental Employer Contribution Account under The Washington Trust Company Supplemental Pension Benefit and Profit Sharing Plan, (b) liability accrued on and after July 1, 2000 under the provisions of this Article XII, and (c) any amounts attributable to Benchmark Returns. Such Supplemental Profit Sharing Contribution Account shall be debited with any distribution made under Sections 12.05 and 12.06 and any other appropriate adjustments. Such adjustments shall be made as frequently as administratively feasible. 12.05 COMMENCEMENT OF PAYMENT OF SUPPLEMENTAL PROFIT SHARING BENEFITS Benefits shall commence under this Article XII to a Profit Sharing Participant as of the same date that benefits commence to a Profit Sharing Participant under the Profit Sharing Plan; provided, however, that, in the case of a Profit Sharing Participant required to commence benefit payments under the Profit Sharing Plan pursuant to Section 401(a)(9) of the Code, benefits shall not commence under this Article XII until such Profit Sharing Participant actually retires. 12.06 DISTRIBUTIONS OF SUPPLEMENTAL PROFIT SHARING BENEFITS All payments of benefits to Profit Sharing Participants and/or their designated beneficiaries under this Article XII shall be made in a lump sum. 12.07 DEATH BENEFIT Upon a Profit Sharing Participant's death, any amounts set aside in his Supplemental Profit Sharing Contribution Account shall be distributed to his beneficiary or beneficiaries designated under the Profit Sharing Plan. 12.08 VESTING A Profit Sharing Participant shall be fully vested at all times in his Supplemental Profit Sharing Plan Benefit. 12.09 OTHER APPLICABLE PROVISIONS In addition to the provisions of this Article XII, and to the extent not inconsistent with such provisions, the following provisions of this Plan shall apply to Profit Sharing Participants and their Supplemental Profit Sharing Contribution Accounts: Sections 3.2, 4.4(a)(ii) and (iii), 4.4(b)(ii) and (iii), 6.2, 8.2, 8.4, Article IX, Article X and Article XI." B. Except at otherwise provided above, the effective date of this Amendment is July 1, 2000. C. Except as amended above, the Plan remains in full force and effect and is in all other respects ratified and confirmed. IN WITNESS WHEREOF, the Company has caused this Amendment to be executed this 8th day of September, 2000. THE WASHINGTON TRUST COMPANY By: John C. Warren Title: Chairman and Chief Executive Officer EX-10 8 0008.txt EMPLOYMENT AGREEMENT WITH EXECUTIVE OFFICER Exhibit 10.m EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is made on August 24, 1999 (the "Commencement Date"), by and between The Washington Trust Company of Westerly, a Rhode Island financial institution with its headquarters located in Westerly, Rhode Island (the "Employer"), and Joseph E. LaPlume (the "Executive"). WHEREAS, the Executive has been employed by PierBank, Inc., a Rhode Island financial institution ("PierBank"), as its President and Chief Executive Officer; WHEREAS, PierBank has merged with and into the Employer upon the terms and conditions set forth in the Agreement and Plan of Merger dated as of February 22, 1999, by and among the Employer, Washington Trust Bancorp, Inc. (the "Bancorp") and PierBank (the "Merger Agreement"); WHEREAS, in connection with the transactions contemplated by the Merger Agreement, the Employer and the Executive have agreed to enter into an Employment Agreement as set forth herein; and WHEREAS, the Executive is desirous of committing to serve the Employer on the terms herein provided. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties agree as follows: 1. Employment. The Employer agrees to employ the Executive and the Executive agrees to be employed by the Employer on the terms and conditions set forth in this Agreement. 2. Position and Duties; Location. (a) The Executive shall serve the Employer as its Senior Vice President, Regional Manager. In such capacity or capacities, the Executive shall perform such services and duties in connection with the business, affairs and operations of the Employer as may be assigned or delegated to the Executive from time to time by or under the authority of the Board of Directors and which are appropriate for an executive at the Senior Vice President level. (b) The Employer shall make every reasonable effort to maintain the Executive's office in the Narragansett and South Kingstown area of Rhode Island. 3. Term. Subject to the provisions of Section 6, the term of the Executive's employment pursuant to this Agreement shall be from the Commencement Date until December 31, 2001 (the "Term End Date"), unless otherwise earlier terminated in accordance with Section 6 hereof (the "Term"). In no event shall the term of this Agreement be extended beyond the Term End Date. After the Term End Date, the Executive's continued employment by the Employer shall be at-will and shall not be covered by any employment agreement. 4. Compensation and Benefits. The regular compensation and benefits payable to the Executive under this Agreement shall be as follows: (a) Salary. For all services rendered by the Executive under this Agreement, the Employer shall pay the Executive a salary (the "Salary") at the annual rate of One Hundred Twenty-Five Thousand Dollars ($125,000), subject to increase after the first year of the Term from time to time in the sole discretion of the Board of Directors. The Salary shall be payable in periodic installments in accordance with the Employer's usual practice for its senior executives. (b) Regular Benefits. The Executive shall also be entitled to participate in any employee benefit plans, medical insurance plans, life insurance plans, disability income plans, retirement plans, vacation plans, expense reimbursement plans and other benefit plans which the Employer may from time to time have in effect for all or most of its senior executives. Such participation shall be subject to the terms of the applicable plan documents, generally applicable policies of the Employer, applicable law and the discretion of the Board of Directors, the Compensation Committee or any administrative or other committee provided for in or contemplated by any such plan. Notwithstanding the preceding sentence, the Employer shall recognize the Executive's prior service with PierBank (which commenced on November 22, 1993) for all employment, compensation and personnel purposes, except that with respect to The Washington Trust Company 401(k) Plan and The Washington Trust Company Pension Plan (the "Pension Plan"), such prior service with PierBank shall be recognized only for purposes of eligibility and vesting but not for purposes of benefit accrual. Nothing contained in this Agreement shall be construed to create any obligation on the part of the Employer to establish any such plan or to maintain the effectiveness of any such plan which may be in effect from time to time. (c) Executive Benefits. (i) Short-Term Incentive Plan. The Executive shall be eligible to participate in the Employer's Short-Term Incentive Plan as of the Commencement Date and shall be eligible for an award thereunder for 1999. (ii) SERP. The Executive shall be eligible to participate in The Washington Trust Company Supplemental Pension Benefit and Profit Sharing Plan (the "SERP"). The Employer shall amend the SERP to provide the Executive with a benefit under the SERP equal to the equivalent benefit credit and vesting service that he would have accrued under the Pension Plan for his PierBank service. (d) Vacations. The Executive shall be entitled to accrue vacation days at the rate of twenty (20) days per calendar year, which shall accrue at the rate of one and two-thirds (1 2/3) days per month, with a maximum vacation accrual of twenty (20) days. The Executive shall also be entitled to all paid holidays given by the Employer to its executives. (e) Additional Benefits. The Employer shall provide the following additional benefits to the Executive: (i) Automobile Lease. The Employer shall assume the automobile lease which is in place as of the Commencement Date for the company car in use by the Executive as of the Commencement Date and shall pay for or reimburse the Executive for all reasonable business-related expenses associated with the lease of such automobile and its maintenance and operation, all in accordance with Employer's current policies regarding company cars. The provision of such company car shall terminate on the Term End Date or the termination of the Executive's employment hereunder, if earlier. The Employer shall not provide any tax gross-up or reimbursement payments to the Executive with respect to any taxes payable by the Executive for any personal use of such automobile. (ii) Country Club Membership. The Employer shall pay the Executive's membership fees at the Quidnessett Country Club through the Term End Date or the termination of the Executive's employment hereunder, if earlier. The Employer shall not provide any tax gross-up or reimbursement payments to the Executive with respect to any taxes payable by the Executive for any personal use of the Quidnessett Country Club. (iii) Professional Membership. The Employer shall reimburse the Executive or pay, on the Executive's behalf, the professional membership fees incurred by the Executive with respect to those organizations which have received the prior approval of the Chairman and Chief Executive Officer. (iv) Business Expenses. The Employer shall provide the Executive with prompt reimbursement for all usual and customary business expenses, subject to the provision by the Executive of proper receipts and other documentation as required under the Employer's standard policies. (v) Stock Option. To the extent not prohibited by the pooling-of-interest accounting rules, the Executive will also be given one stock option award in 1999 in an amount commensurate with his position. (f) Taxation of Payments and Benefits. The Employer shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Agreement to the extent that it reasonably and in good faith believes that it is required to make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or withholdings. Nothing in this Agreement shall be construed to require the Employer to make any payments to compensate the Executive for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. 5. Extent of Service. During the Executive's employment under this Agreement, the Executive shall devote the Executive's full business time, best efforts and business judgment, skill and knowledge to the advancement of the Employer's interests and to the discharge of the Executive's duties and responsibilities under this Agreement. The Executive shall not engage in any other business activity, except as may be approved by the Board of Directors; provided that nothing in this Agreement shall be construed as preventing the Executive from: (a) investing the Executive's assets in any company or other entity in a manner not prohibited by Section 7(d) and in such form or manner as shall not require any material activities on the Executive's part in connection with the operations or affairs of the companies or other entities in which such investments are made; or (b) engaging in religious, charitable or other community or non-profit activities that do not impair the Executive's ability to fulfill the Executive's duties and responsibilities under this Agreement. 6. Termination and Termination Benefits. Notwithstanding the provisions of Section 3, the Executive's employment under this Agreement shall terminate under the following circumstances set forth in this Section 6. (a) Termination by the Employer for Cause. The Executive's employment under this Agreement may be terminated for Cause without further liability on the part of the Employer, effective immediately upon a vote of the Board of Directors and written notice to the Executive. Only the following actions or inactions by the Executive shall constitute "Cause" for such termination: (i) misappropriation of the Employer's or the Bancorp's funds; (ii) intentionally and materially damaging the property of the Employer or the Bancorp; (iii) intentionally and materially damaging the business reputation of the Employer or the Bancorp; and (iv) willfully neglecting his duties and responsibilities as Senior Vice President of the Employer. (b) Termination by the Executive. The Executive's employment under this Agreement may be terminated by the Executive by written notice to the Board of Directors and the Chairman and Chief Executive Officer at least sixty (60) days prior to such termination. (c) Termination by the Employer Without Cause. Subject to the payment of Termination Benefits pursuant to Section 6(d), the Executive's employment under this Agreement may be terminated by the Employer without Cause upon written notice to the Executive by a vote of the Board of Directors. Termination of the Executive's employment hereunder due to the Executive's death or by the Employer due to the Executive's Disability shall not be deemed to be a termination without Cause. For purposes hereof, "Disability" shall be defined as the incapacity of the Executive due to physical or mental illness, which incapacity results in the Executive being absent from his duties hereunder on a full-time basis for one hundred eighty (180) calendar days in the aggregate in any twelve (12) month period. (d) Certain Termination Benefits. Unless otherwise specifically provided in this Agreement or otherwise required by law, all compensation and benefits payable to the Executive under this Agreement shall terminate on the date of termination of the Executive's employment under this Agreement. Notwithstanding the foregoing, in the event of termination of the Executive's employment with the Employer by the Employer without Cause, the Employer shall provide to the Executive the following termination benefits ("Termination Benefits"): (i) continuation of the Executive's Salary at the rate then in effect pursuant to Section 4(a); and (ii) continuation of group health plan benefits on the same basis as similarly situated active employees of the Employer. The Termination Benefits set forth in (i) and (ii) above shall continue until the Term End Date. Notwithstanding the foregoing, in the event of the termination of the Executive's employment during the Term following a Change in Control of the Bancorp (as defined in the Change in Control Agreement entered into among the Employer, the Bancorp and the Executive (the "Change in Control Agreement")) and the Executive becomes entitled to receive severance benefits under the Change in Control Agreement, the Executive shall receive the severance benefits set forth in the Change in Control Agreement in lieu of the Termination Benefits payable hereunder which shall in no event be less than the Termination Benefits. 7. Confidential Information, Noncompetition and Cooperation. (a) Confidential Information. As used in this Agreement, "Confidential Information" means information belonging to the Employer or the Bancorp which is of value to the Employer or the Bancorp in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Employer or the Bancorp. Confidential Information includes, without limitation, financial information, reports, and forecasts; inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Employer or the Bancorp. Confidential Information includes information about the Employer or the Bancorp developed by the Executive in the course of the Executive's employment by the Employer, as well as other information about the Employer or the Bancorp to which the Executive may have access in connection with the Executive's employment. Confidential Information also includes the confidential information of others with which the Employer or the Bancorp has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain, unless due to breach of the Executive's duties under Section 7(b). (b) Confidentiality. The Executive understands and agrees that the Executive's employment creates a relationship of confidence and trust between the Executive and the Employer with respect to all Confidential Information. At all times, both during the Executive's employment with the Employer and after its termination, the Executive shall keep in confidence and trust all such Confidential Information, and shall not use or disclose any such Confidential Information without the written consent of the Employer, except as may be necessary in the ordinary course of performing the Executive's duties to the Employer. (c) Documents, Records, etc. All documents, records, data, apparatus, equipment and other physical property, whether or not pertaining to Confidential Information, which are furnished to the Executive by the Employer or are produced by the Executive in connection with the Executive's employment shall be and remain the sole property of the Employer. The Executive shall return to the Employer all such materials and property as and when requested by the Employer. In any event, the Executive shall return all such materials and property immediately upon termination of the Executive's employment for any reason. The Executive shall not retain with the Executive any such material or property or any copies thereof after such termination. (d) Noncompetition and Nonsolicitation. During the Term and while the Executive is receiving any Termination Benefits or Severance Benefits, the Executive (i) shall not, directly or indirectly, whether as owner, partner, shareholder, consultant, agent, employee, co-venturer or otherwise, engage, participate, assist or invest in any Competing Business (as hereinafter defined); (ii) shall refrain from directly or indirectly employing, attempting to employ, recruiting or otherwise soliciting, inducing or influencing any person to leave employment with the Employer (other than terminations of employment of subordinate employees undertaken in the course of the Executive's employment with the Employer); and (iii) shall refrain from soliciting or encouraging any customer or supplier to terminate or otherwise modify adversely its business relationship with the Employer; notwithstanding any provision contained herein, the Executive may invest in any publicly held company, whether or not such company is a Competing Business, as long as the Executive does not engage in an active management role in such company. The Executive understands that the restrictions set forth in this Section 7(d) are intended to protect the Employer's and the Bancorp's interest in its Confidential Information and established employee, customer and supplier relationships and goodwill, and agrees that such restrictions are reasonable and appropriate for this purpose. For purposes of this Agreement, the term "Competing Business" shall mean a business conducted anywhere in the geographic area for which the Executive was primarily responsible during the Term which is competitive with any business which the Employer, the Bancorp, or any of its affiliates conducts at any time during the employment of the Executive. (e) Third-Party Agreements and Rights. The Executive hereby confirms that the Executive is not bound by the terms of any agreement with any previous employer or other party which restricts in any way the Executive's use or disclosure of information or the Executive's engagement in any business. The Executive represents to the Employer that the Executive's execution of this Agreement, the Executive's employment with the Employer and the performance of the Executive's proposed duties for the Employer shall not violate any obligations the Executive may have to any such previous employer or other party. In the Executive's work for the Employer, the Executive shall not disclose or make use of any information in violation of any agreements with or rights of any such previous employer or other party, and the Executive shall not bring to the premises of the Employer any copies or other tangible embodiments of non-public information belonging to or obtained from any such previous employment or other party. (f) Litigation and Regulatory Cooperation. During and after the Executive's employment, the Executive shall reasonably cooperate with the Employer and the Bancorp in the defense or prosecution of any claims or actions now in existence or which may be brought in the future against or on behalf of the Employer and/or the Bancorp which relate to events or occurrences that transpired while the Executive was employed by the Employer. The Executive's reasonable cooperation in connection with such claims or actions shall include, but not be limited to, being available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of the Employer and/or the Bancorp at mutually convenient times. During and after the Executive's employment, the Executive also shall reasonably cooperate with the Employer and the Bancorp in connection with any investigation or review of any federal, state or local regulatory authority as any such investigation or review relates to events or occurrences that transpired while the Executive was employed by the Employer. During the Term, the Employer shall reimburse the Executive for any reasonable out-of-pocket expenses incurred in connection with the Executive's performance of his obligations pursuant to this Section 7(f). If such cooperation is required after the Term, the Employer shall provide the Executive with compensation for his services under this Section 7(f) on an hourly basis, calculated at the Executive's final salary rate, and shall also reimburse the Executive for any reasonable out-of-pocket expenses incurred in connection with the Executive's performance of his obligations pursuant to this Section 7(f). (g) Injunction. The Executive agrees that it would be difficult to measure any damages caused to the Employer and/or the Bancorp which might result from any breach by the Executive of the promises set forth in this Section 7, and that in any event money damages would be an inadequate remedy for any such breach. Accordingly, subject to Section 8 of this Agreement, the Executive agrees that if the Executive breaches, or proposes to breach, any portion of this Agreement, the Employer shall be entitled, in addition to all other remedies that it may have, to an injunction or other appropriate equitable relief to restrain any such breach without showing or proving any actual damage to the Employer and/or the Bancorp. 8. Non-Disparagement. During and after the Term, the Executive shall not take any action or make any statement, written, oral or by means of nonverbal communication, to any current or former employee of the Employer or the Bancorp or to any other person which (a) disparages or criticizes the Employer or the Bancorp or any officer, director, employee or agent thereof, its management or its practices, or (b) disrupts or impairs the normal operations of the Employer or the Bancorp, including actions that would (i) harm the reputation of the Employer or the Bancorp with its clients, suppliers or the public; (ii) interfere with existing contractual or employment relationships of the Employer or the Bancorp with clients, suppliers or employees; or (iii) result in the filing of any claims, lawsuits or charges against the Employer or the Bancorp. 9. Indemnification. The Employer shall indemnify and hold harmless the Executive on the same basis as the indemnification made available to other Senior Vice Presidents of the Employer pursuant to the terms of the by-laws of the Employer. 10. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof or otherwise arising out of the Executive's employment or the termination of that employment (including, without limitation, any claims of unlawful employment discrimination whether based on age or otherwise) shall, to the fullest extent permitted by law, be settled by arbitration in any forum and form agreed upon by the parties or, in the absence of such an agreement, under the auspices of the American Arbitration Association ("AAA") in Providence, Rhode Island in accordance with the Employment Dispute Resolution Rules of the AAA, including, but not limited to, the rules and procedures applicable to the selection of arbitrators. In the event that any person or entity other than the Executive or the Employer may be a party with regard to any such controversy or claim, such controversy or claim shall be submitted to arbitration subject to such other person or entity's agreement. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. This Section 10 shall be specifically enforceable. Notwithstanding the foregoing, this Section 10 shall not preclude either party from pursuing a court action for the sole purpose of obtaining a temporary restraining order or a preliminary injunction in circumstances in which such relief is appropriate; provided that any other relief shall be pursued through an arbitration proceeding pursuant to this Section 10. 11. Consent to Jurisdiction. To the extent that any court action is permitted consistent with or to enforce Section 10 of this Agreement, the parties hereby consent to the jurisdiction of the Superior Court of the State of Rhode Island and the United States District Court for the District of Rhode Island. Accordingly, with respect to any such court action, the Executive (a) submits to the personal jurisdiction of such courts; (b) consents to service of process; and (c) waives any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction or service of process. 12. Integration. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements between the parties with respect to any related subject matter. 13. Assignment; Successors and Assigns, etc. Neither the Employer nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party; provided that the Employer may assign its rights under this Agreement without the consent of the Executive in the event that the Employer or the Bancorp shall effect a reorganization, consolidate with or merge into any other corporation, partnership, organization or other entity, or transfer all or substantially all of its properties or assets to any other corporation, partnership, organization or other entity. This Agreement shall inure to the benefit of and be binding upon the Employer and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. 14. Enforceability. If any portion or provision of this Agreement (including, without limitation, any portion or provision of any section of this Agreement) shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 15. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 16. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by a nationally recognized overnight courier service or by registered or certified mail, postage prepaid, return receipt requested, to the Executive at the last address the Executive has filed in writing with the Employer or, in the case of the Employer, at its main offices, attention of the Chairman and Chief Executive Officer, and shall be effective on the date of delivery in person or by courier or three (3) days after the date mailed. 17. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Employer. 18. Governing Law. This is a Rhode Island contract and shall be construed under and be governed in all respects by the laws of the State of Rhode Island, without giving effect to the conflict of laws principles of such State. With respect to any disputes concerning federal law, such disputes shall be determined in accordance with the law as it would be interpreted and applied by the United States Court of Appeals for the First Circuit. 19. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute one and the same document. IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Employer, by its duly authorized officer, and by the Executive, as of the date first written above. The Washington Trust Company of Westerly By: John C. Warren --------------------------------------------- Name: John C. Warren Title: Chairman and Chief Executive Officer Joseph E. LaPlume --------------------------------------------- Joseph E. LaPlume EX-23 9 0009.txt INDEPENDENT ACCOUNTANTS' CONSENT EXHIBIT 23 INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors Washington Trust Bancorp, Inc.: We consent to incorporation by reference in the registration statements (Nos. 333-72277, 333-48315, 333-13167 and 33-23048) on Forms S-8 and in the registration statements (Nos. 333-13821, 33-28065 and 333-42502) on Forms S-3 of Washington Trust Bancorp, Inc. and subsidiary of our report dated January 15, 2001, relating to the consolidated balance sheets of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, 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, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of Washington Trust Bancorp, Inc. KPMG LLP Providence, Rhode Island March 16, 2001 -----END PRIVACY-ENHANCED MESSAGE-----