-----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, GYG6SsMqIyqdREfb4fRDQRp4KaU4LuWh2K3qyOzQlNXslG+To6caEzZHRFU8amV2 Duuc8a6kQDQqFERrmUWYlQ== 0000737468-03-000043.txt : 20030813 0000737468-03-000043.hdr.sgml : 20030813 20030813151147 ACCESSION NUMBER: 0000737468-03-000043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13091 FILM NUMBER: 03840848 BUSINESS ADDRESS: STREET 1: 23 BROAD ST CITY: WESTERLY STATE: RI ZIP: 02891 BUSINESS PHONE: 4013481200 10-Q 1 q22003.txt 10-Q Q2-2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended JUNE 30, 2003 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) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X]Yes [ ]No The number of shares of common stock of the registrant outstanding as of July 31, 2003 was 13,125,503. Page 1 FORM 10-Q WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY For The Quarter Ended June 30, 2003 TABLE OF CONTENTS PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets June 30, 2003 and December 31, 2002 Consolidated Statements of Income Three and Six Months Ended June 30, 2003 and 2002 Consolidated Statements of Changes in Shareholders' Equity Six Months Ended June 30, 2003 and 2002 Consolidated Statements of Cash Flows Six Months Ended June 30, 2003 and 2002 Condensed Notes to Consolidated Financial Statements Independent Auditors' Review Report Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PART II. Other Information Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits 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, performance or achievements could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general national or regional economic conditions, changes in interest rates, reductions in the market value of trust and investment management assets under management, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in the size and nature of the Corporation's competition, changes in loan default and charge-off rates and changes in the assumptions used in making such forward-looking statements. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands) CONSOLIDATED BALANCE SHEETS June 30, December 31, 2003 2002 - -------------------------------------------------------------------------------- Assets: Cash and due from banks $45,961 $39,298 Federal funds sold and other short-term investments 11,475 11,750 Mortgage loans held for sale 11,212 4,566 Securities: Available for sale, at fair value 621,172 553,556 Held to maturity, at cost; fair value $232,374 in 2003 and $250,446 in 2002 225,729 242,277 - -------------------------------------------------------------------------------- Total securities 846,901 795,833 Federal Home Loan Bank stock, at cost 28,668 24,582 Loans 822,794 795,126 Less allowance for loan losses 15,742 15,487 - -------------------------------------------------------------------------------- Net loans 807,052 779,639 Premises and equipment, net 25,521 24,415 Accrued interest receivable 8,059 7,773 Goodwill and other intangibles 24,903 25,260 Other assets 29,660 32,545 - -------------------------------------------------------------------------------- Total assets $1,839,412 $1,745,661 - -------------------------------------------------------------------------------- Liabilities: Deposits: Demand $183,785 $157,539 Savings 482,876 471,354 Time 469,543 481,600 - -------------------------------------------------------------------------------- Total deposits 1,136,204 1,110,493 Dividends payable 1,968 1,825 Federal Home Loan Bank advances 543,878 480,080 Other borrowings 7,513 9,183 Accrued expenses and other liabilities 14,658 15,359 - -------------------------------------------------------------------------------- Total liabilities 1,704,221 1,616,940 - -------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 30 million shares; issued 13,121,321 shares in 2003 and 13,086,795 in 2002 820 818 Paid-in capital 28,865 28,767 Retained earnings 96,111 90,717 Unamortized employee restricted stock (16) (24) Accumulated other comprehensive income 9,533 9,294 Treasury stock, at cost; 6,243 shares in 2003 and 44,361 in 2002 (122) (851) - -------------------------------------------------------------------------------- Total shareholders' equity 135,191 128,721 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,839,412 $1,745,661 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (Dollars in thousands, CONSOLIDATED STATEMENTS OF INCOME except per share amounts) (Unaudited) Three Months Six Months Periods ended June 30, 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $12,853 $12,823 $25,499 $23,804 Interest on securities 8,333 9,307 16,888 17,495 Dividends on corporate stock and Federal Home Loan Bank stock 531 497 1,018 980 Interest on federal funds sold and other short-term investments 39 46 76 108 - ------------------------------------------------------------------------------------------------------------------------ Total interest income 21,756 22,673 43,481 42,387 - ------------------------------------------------------------------------------------------------------------------------ Interest expense: Savings deposits 880 1,182 1,830 2,153 Time deposits 3,799 4,340 7,733 8,463 Federal Home Loan Bank advances 4,777 5,510 9,670 10,729 Other 18 20 37 37 - ------------------------------------------------------------------------------------------------------------------------ Total interest expense 9,474 11,052 19,270 21,382 - ------------------------------------------------------------------------------------------------------------------------ Net interest income 12,282 11,621 24,211 21,005 Provision for loan losses 160 100 260 200 - ------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 12,122 11,521 23,951 20,805 - ------------------------------------------------------------------------------------------------------------------------ Noninterest income: Trust and investment management 2,744 2,667 5,277 5,232 Service charges on deposit accounts 1,348 975 2,448 1,802 Net gains on loan sales 1,441 398 2,679 914 Merchant processing fees 862 776 1,319 1,222 Income from bank-owned life insurance 263 285 547 573 Net realized gains on securities 400 381 630 672 Other income 297 303 488 598 - ------------------------------------------------------------------------------------------------------------------------ Total noninterest income 7,355 5,785 13,388 11,013 - ------------------------------------------------------------------------------------------------------------------------ Noninterest expense: Salaries and employee benefits 6,619 6,008 13,153 11,583 Net occupancy 736 670 1,498 1,295 Equipment 837 798 1,674 1,583 Merchant processing costs 683 614 1,045 971 Legal, audit and professional fees 281 221 586 394 Advertising and promotion 542 436 812 676 Outsourced services 325 267 696 528 Debt prepayment penalties 941 - 941 - Amortization of intangibles 179 189 359 221 Acquisition related expenses - 605 - 605 Other 1,705 1,666 3,062 2,782 - ------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 12,848 11,474 23,826 20,638 - ------------------------------------------------------------------------------------------------------------------------ Income before income taxes 6,629 5,832 13,513 11,180 Income tax expense 2,055 1,808 4,189 3,412 - ------------------------------------------------------------------------------------------------------------------------ Net income $4,574 $4,024 $9,324 $7,768 - ------------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding - basic 13,089.4 12,858.7 13,074.4 12,434.1 Weighted average shares outstanding - diluted 13,304.9 13,065.1 13,265.2 12,622.4 Per share information: Basic earnings per share $.35 $.31 $.71 $.62 Diluted earnings per share $.34 $.31 $.70 $.62 Cash dividends declared per share $.15 $.14 $.30 $.28
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 (Unaudited) Unamortized Accumulated Employee Other Common Paid-in Retained Restricted Comprehensive Treasury Six months ended June 30, Stock Capital Earnings Stock Income Stock Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2002 $754 $10,696 $81,114 $- $6,416 $(1,043) $97,937 Net income 7,768 7,768 Other comprehensive income, net of tax: Net unrealized gains on securities 2,426 2,426 Reclassification adjustments (659) (659) ------------ Comprehensive income 9,535 Cash dividends declared (3,504) (3,504) Shares issued (153) 420 267 Shares issued for acquisition 64 18,255 18,319 Shares repurchased (536) (536) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2002 $818 $28,798 $85,378 $- $8,183 $(1,159) $122,018 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2003 $818 $28,767 $90,717 $(24) $9,294 $(851) $128,721 Net income 9,324 9,324 Other comprehensive income, net of tax: Net unrealized gains on securities 649 649 Reclassification adjustments (410) (410) ------------ Comprehensive income 9,563 Cash dividends declared (3,930) (3,930) Amortization of employee restricted 8 8 stock Shares issued 2 98 851 951 Shares repurchased (122) (122) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2003 $820 $28,865 $96,111 $(16) $9,533 $(122) $135,191 - ----------------------------------------------------------------------------------------------------------------------------------
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 (Unaudited) Six months ended June 30, 2003 2002 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $9,324 $7,768 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 260 200 Depreciation of premises and equipment 1,560 1,459 Amortization of premium in excess of accretion of discount on debt securities 2,352 508 Increase in bank-owned life insurance cash surrender value (547) (573) Net amortization of intangibles 359 221 Net realized gains on securities (630) (672) Net gains on loan sales (2,679) (914) Proceeds from sales of loans 107,256 39,297 Loans originated for sale (111,759) (32,740) Increase in accrued interest receivable (286) (437) Decrease (increase) in other assets 904 (270) Decrease in accrued expenses and other liabilities (701) (2,362) Other, net 237 121 - -------------------------------------------------------------------------------- Net cash provided by operating activities 5,650 11,606 - -------------------------------------------------------------------------------- Cash flows from investing activities: Securities available for sale: Purchases (273,701) (145,737) Proceeds from sales 42,858 28,603 Maturities and principal repayments 165,431 76,505 Securities held to maturity: Purchases (62,347) (84,828) Maturities and principal repayments 77,974 29,189 Purchase of Federal Home Loan Bank stock (4,086) - Principal collected on loans under loan originations (20,012) (22,175) Purchases of loans (7,661) - Proceeds from sales of other real estate owned 134 13 Purchases of premises and equipment (2,667) (1,293) Cash acquired, net of payment made for acquisition - 34,506 - -------------------------------------------------------------------------------- Net cash used in investing activities (84,077) (85,217) - -------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 25,860 103,054 Net (decrease) increase in other borrowings (1,670) 1,719 Proceeds from Federal Home Loan Bank advances 675,441 366,000 Repayment of Federal Home Loan Bank advances (611,548) (387,007) Purchase of treasury stock (122) (536) Net effect of common stock transactions 633 181 Issuance of restricted stock, net of amortization 8 - Cash dividends paid (3,787) (3,249) - -------------------------------------------------------------------------------- Net cash provided by financing activities 84,815 80,162 - -------------------------------------------------------------------------------- Net decrease in cash and cash equivalents 6,388 6,551 Cash and cash equivalents at beginning of year 51,048 50,899 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $57,436 $57,450 - -------------------------------------------------------------------------------- (Continued) 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 (Continued) (Unaudited) Six months ended June 30, 2003 2002 - -------------------------------------------------------------------------------- Noncash Investing and Financing Activities: Net transfers from loans to other real estate owned (OREO) $253 $ - Loans charged off 122 209 Loans made to facilitate the sale of other real estate owned 322 - Increase in unrealized gain on securities available for sale, net of tax (239) 1,767 Increase in paid-in capital resulting from tax benefits on stock option exercises 318 86 In conjunction with the April 16, 2002 acquisition of First Financial Corp., assets were acquired and liabilities were assumed as follows: Fair value of assets acquired $- $204,807 Less liabilities assumed - 166,753 Supplemental Disclosures: Interest payments $19,587 $21,218 Income tax payments, net 4,234 4,600 The accompanying notes are an integral part of these consolidated financial statements. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation The accounting and reporting policies of Washington Trust Bancorp, Inc. (the "Bancorp") and its wholly owned subsidiary, The Washington Trust Company (the "Bank" or "Subsidiary") (together, the "Corporation") are in accordance with accounting principles generally accepted in the United States of America and conform to general practices of the banking industry. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) and disclosures necessary to present fairly the Corporation's financial position as of June 30, 2003 and December 31, 2002 and the results of operations and cash flows for the interim periods presented. The consolidated financial statements include the accounts of the Bancorp and the Bank. All significant intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. The Corporation has not changed its accounting and reporting policies from those disclosed in the Bancorp's Annual Report on Form 10-K for the year ended December 31, 2002. Certain reclassifications have been made to prior period financial statements to conform to the 2003 presentation. Such reclassifications have no effect on previously reported net income or shareholders' equity. (2) Stock Based Compensation The Corporation measures compensation cost for stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. In addition, the Corporation discloses pro forma net income and earnings per share computed using the fair value based method of accounting for these plans as required by SFAS No. 123 and SFAS No. 148. In determining the pro forma disclosures required by SFAS No. 123 and SFAS No. 148, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents pro forma net income and earnings per share assuming options granted were accounted for using the fair value method prescribed by SFAS No. 123 and SFAS No. 148. (Dollars in thousands, except per share amounts) Six months ended June 30, 2003 2002 -------------------------------------------------------------------------- Net income As reported $9,324 $7,768 Less: Total stock-based compensation determined under fair value method for all awards, net of tax (449) (671) -------------------------------------------------------------------------- Pro forma $8,875 $7,097 Basic earnings per share As reported $.71 $.62 Pro forma $.68 $.57 Diluted earnings per share As reported $.70 $.62 Pro forma $.67 $.56 There were 231,755 and 206,610 options granted for the six-month periods ended June 30, 2003 and 2002, respectively. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (3) Securities Securities available for sale are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- June 30, 2003 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $ 89,837 $ 2,576 $ (7) $ 92,406 Mortgage-backed securities 414,002 7,075 (669) 420,408 Corporate bonds 79,442 2,345 (1,529) 80,258 Corporate stocks 23,140 5,824 (864) 28,100 - --------------------------------------------------------------------------------------------------------------------- Total 606,421 17,820 (3,069) 621,172 - --------------------------------------------------------------------------------------------------------------------- December 31, 2002 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 74,852 3,121 - 77,973 Mortgage-backed securities 378,162 8,830 (245) 386,747 Corporate bonds 67,018 1,386 (1,969) 66,435 Corporate stocks 19,077 4,459 (1,135) 22,401 - --------------------------------------------------------------------------------------------------------------------- Total $539,109 $17,796 $(3,349) $553,556 - --------------------------------------------------------------------------------------------------------------------- For the six months ended June 30, 2003, proceeds from sales of securities available for sale amounted to $42.9 million while net realized gains on these sales amounted to $630 thousand.
Securities held to maturity are summarized as follows:
(Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- June 30, 2003 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $ 8,000 $105 $ - $ 8,105 Mortgage-backed securities 201,594 5,653 (11) 207,236 States and political subdivisions 16,135 898 - 17,033 - --------------------------------------------------------------------------------------------------------------------- Total 225,729 6,656 (11) 232,374 - --------------------------------------------------------------------------------------------------------------------- December 31, 2002 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies 3,000 13 - 3,013 Mortgage-backed securities 220,711 7,199 - 227,910 States and political subdivisions 18,566 957 - 19,523 - --------------------------------------------------------------------------------------------------------------------- Total $242,277 $8,169 $ - $250,446 - --------------------------------------------------------------------------------------------------------------------- There were no sales of securities held to maturity during the six months ended June 30, 2003.
Securities available for sale and held to maturity with a fair value of $549.6 million and $559.7 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings, and public deposits at June 30, 2003 and December 31, 2002, respectively. In addition, securities available for sale and held to maturity with a fair value of $24.9 million and $27.6 million were collateralized for the discount window at the Federal Reserve Bank at June 30, 2003 and December 31, 2002, respectively. There were no borrowings with the Federal Reserve Bank at either date. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At June 30, 2003, securities available for sale with a fair value of $2.7 million were designated in a rabbi trust for a nonqualified retirement plan. At December 31, 2002, assets with a carrying value of $2.8 million were designated for this purpose and were classified in Other Assets in the Corporation's Consolidated Balance Sheet. (4) Loan Portfolio The following is a summary of loans: (Dollars in thousands) June 30, December 31, 2003 2002 - -------------------------------------------------------------------------------- Commercial: Mortgages (1) $206,256 $197,814 Construction and development (2) 15,334 10,337 Other (3) 173,203 174,018 - -------------------------------------------------------------------------------- Total commercial 394,793 382,169 Residential real estate: Mortgages (4) 271,880 269,548 Homeowner construction 12,741 11,338 - -------------------------------------------------------------------------------- Total residential real estate 284,621 280,886 Consumer Home equity lines 96,404 81,503 Other 46,976 50,568 - -------------------------------------------------------------------------------- Total consumer 143,380 132,071 - -------------------------------------------------------------------------------- Total loans (5) $822,794 $795,126 - -------------------------------------------------------------------------------- (1) Amortizing mortgages, primarily secured by income producing property. (2) Loans for construction of residential and commercial properties and for land development. (3) Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate. (4) A substantial portion of these loans is used as qualified collateral for FHLB borrowings (See Note 8 for additional discussion of FHLB borrowings). (5) Net of $742 thousand and $478 thousand of unearned income and unamortized loan origination and other fees net of costs at June 30, 2003 and December 31, 2002, respectively. Includes $1.2 million and $1.1 million of net purchased premium at June 30, 2003 and December 31, 2002, respectively. (5) Allowance For Loan Losses The following is an analysis of the allowance for loan losses: (Dollars in thousands) Three Months Six Months --------------------------------------------- Periods ended June 30, 2003 2002 2003 2002 - -------------------------------------------------------------------------------- Balance at beginning of period $15,495 $13,665 $15,487 $13,593 Allowance on acquired loans - 1,829 - 1,829 Provision charged to expense 160 100 260 200 Recoveries of loans previously charged off 108 24 117 53 Loans charged off (21) (152) (122) (209) - -------------------------------------------------------------------------------- Balance at end of period $15,742 $15,466 $15,742 $15,466 - -------------------------------------------------------------------------------- (6) Goodwill and other intangibles The second quarter 2002 acquisition of First Financial Corp. resulted in the recording of goodwill of $22.6 million. In accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill acquired in business combinations after June 30, 2001 will not be amortized. Goodwill and intangible assets are reviewed for impairment, based on their fair values, at least annually. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At June 30, 2003 and December 31, 2002, the Corporation had other intangible assets with carrying values of $2.3 million and $2.7 million, respectively. In conjunction with the 2002 First Financial Corp. acquisition, the Corporation recorded core deposit intangibles of $1.8 million with an average useful life of ten years. Amortization expense associated with these other intangible assets, amounted to $179 thousand and $189 thousand for the second quarter of 2003 and 2002, respectively. Comparable amounts for the six months ended June 30, 2003 and 2002 were $359 thousand and $221 thousand, respectively. The changes in the carrying value of goodwill and other intangible assets for the six months ended June 30, 2003 are as follows:
(Dollars in thousands) Core Deposit Other Total Goodwill Intangibles Intangibles Intangibles - ---------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 $22,588 $2,009 $663 $25,260 Recorded during the period 2 - - 2 Amortization expense - (217) (142) (359) Impairment recognized - - - - - ---------------------------------------------------------------------------------------------------------------------- Balance June 30, 2003 $22,590 $1,792 $521 $24,903 - ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Core Deposit Other Total Estimated amortization expense Intangibles Intangibles Intangibles - -------------------------------------------------------------------------------- July 1 through December 31, 2003 $218 $142 $360 2004 359 284 643 2005 303 95 398 2006 262 - 262 2007 140 - 140 The components of intangible assets as of June 30, 2003 are as follows: (Dollars in thousands) Gross Carrying Accumulated Net Carrying Intangible assets Amount Amortization Amount - -------------------------------------------------------------------------------- Core deposit intangibles $3,096 $1,304 $1,792 Other intangibles 852 331 521 - -------------------------------------------------------------------------------- Total $3,948 $1,635 $2,313 - -------------------------------------------------------------------------------- (7) Derivative Financial Instruments The Corporation recognizes commitments to originate and commitments to sell fixed rate mortgage loans as derivative financial instruments. Accordingly, the Corporation recognizes the fair value of these commitments as an asset on the balance sheet. At June 30, 2003 and December 31, 2002, the carrying value of these commitments amounted to $(26) thousand and $(45) thousand, respectively. Changes in fair value are recorded in current earnings and amounted to $48 thousand and $2 thousand of appreciation in value for the three months ended June 30, 2003 and 2002, respectively. Included in earnings for the six months ended June 30, 2003 and 2002, was $108 thousand of appreciation and $(95) thousand of depreciation in value, respectively. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (8) Borrowings Federal Home Loan Bank ("FHLB") advances outstanding are summarized below: (Dollars in thousands) June 30, December 31, 2003 2002 - -------------------------------------------------------------------------------- FHLB advances $543,878 $480,080 - -------------------------------------------------------------------------------- In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at June 30, 2003 and December 31, 2002. Under agreement with the FHLB, the Corporation 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 ("FHLB borrowings"). The FHLB maintains a security interest in various assets of the Corporation including, but not limited to, residential mortgages loans, U.S. government or agency securities, U.S. government-sponsored agency securities and amounts maintained on deposit at the FHLB. The Corporation maintained qualified collateral in excess of the amount required to secure FHLB borrowings at June 30, 2003 and December 31, 2002. Included in the collateral were securities available for sale and held to maturity with a fair value of $533.2 million and $540.0 million that were specifically pledged to secure FHLB borrowings at June 30, 2003 and December 31, 2002, respectively. Unless there is an event of default under the agreement, the Corporation may use, encumber or dispose of any portion of the collateral in excess of the amount required to secure FHLB borrowings, except for that collateral which has been specifically pledged. The following is a summary of other borrowings: (Dollars in thousands) June 30, December 31, 2003 2002 - -------------------------------------------------------------------------------- Treasury, Tax and Loan demand note balance $6,711 $8,283 Other 802 900 - -------------------------------------------------------------------------------- Other borrowings $7,513 $9,183 - -------------------------------------------------------------------------------- (9) Litigation Read & Lundy Matter - In June 1999 a lawsuit was filed against First Bank and Trust Company ("First Bank") in Providence County, Rhode Island Superior Court (the "Action") by Read & Lundy, Inc. and its principal, Cliff McFarland (collectively, "the Plaintiffs"). The original complaint alleged claims for breach of contract, tortious interference with contractual relations, and civil conspiracy arising out of First Bank's 1996 loan to a third party company. The Plaintiffs allege that the loan to the third party enabled that company to compete unlawfully with Read & Lundy and thereby diminished Read & Lundy's profitability. The complaint was amended in December 2001 to add a claim for violation of the Rhode Island Trade Secrets Act. The Bank was substituted as defendant in June 2002 following the acquisition of First Financial Corp., the parent company of First Bank. The Plaintiffs had previously filed a suit in the same court in 1996 against the third party company and its founder. The Bank is not a party to this suit. In September 2001, judgment was entered against the third party company and its founder in favor of the Plaintiffs for approximately $1.6 million in compensatory and punitive damages, including pre-judgment interest. The Plaintiffs contend in the Action that the Bank, as an alleged co-conspirator of the third party company, is liable for this entire amount, none of which has been collected from the third party company. The Plaintiffs are also seeking additional compensatory damages and other costs allegedly arising after the third party trial. Including interest, it is estimated that the amount of the claim against the Bank is approximately $2.0 million. WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Management believes, based on its review with counsel of the development of this matter to date, that the Bank has meritorious defenses in the Action. The Bank vigorously defended the Action and in December 2002 obtained a judgment in its favor and a dismissal of the Action on all counts by way of summary judgment motion. Plaintiffs appealed the judgment to the Rhode Island Supreme Court in December 2002. The appeal is pending. Because of the uncertainties surrounding the outcome of the appeal no assurance can be given that the litigation will be resolved in favor of the Bank. Management and legal counsel are unable to estimate the amount of loss, if any, that may be incurred with respect to this litigation. Consequently, no loss provision has been recorded. A second claim ancillary to this litigation was brought by the Plaintiffs in March 2002 in connection with their suit against the third party company. The Bank has also been substituted for First Bank in these proceedings. In this matter, the Plaintiffs brought a motion seeking enforcement of a prejudgment writ of attachment obtained in 1997 by the Plaintiffs against funds held by First Bank as collateral for the loan to the third party company. First Bank had applied these funds as an offset to that loan in 1999. In August 2002, judgment against the Bank was rendered on this motion requiring the Bank to make the funds available for attachment by the Plaintiffs. This judgment is under appeal to the Rhode Island Supreme Court. During the quarter ended September 30, 2002, the Bank recorded a liability for the judgment award of $273 thousand in connection with this matter. Kiepler Matter - On February 20, 2001, a suit was filed against the Bank in its capacity as trustee of the Walfred M. Nyman Trust (the "Nyman Trust") as well as Robert C. Nyman, Kenneth J. Nyman and Keith Johnson (the "Co-Defendants") in the United States District Court for the District of Rhode Island (the "District Court") by Beverly Kiepler ("Kiepler"), a beneficiary of the Nyman Trust. The claim is for damages, which the Nyman Trust allegedly incurred as a result of the Bank's alleged failure to file suit against the Co-Defendants for their wrongful dilution of the stock value of Nyman Manufacturing Company ("Nyman Mfg."), an asset of the Nyman Trust. In July 2002, the Bank, in its capacity as trustee of the Nyman Trust, filed a cross-claim in the District Court against the Co-Defendants for the above-described damages to the Nyman Trust. On April 16, 2003 the District Court awarded the Nyman Trust a judgment against the Co-Defendants. Washington Trust expects to finalize an agreement among all parties to the suit and the related cross-claim in settlement of these matters. The terms of the settlement agreement have been approved by the Superior Court of Washington County, Rhode Island, which has statutory jurisdiction over the administration of trusts. Management expects the suit and cross-claim to be dismissed shortly. The settlement will not result in any loss to the Bank. 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. With respect to the unaudited consolidated financial statements of Washington Trust Bancorp, Inc. and subsidiaries at June 30, 2003 and for the six month periods ended June 30, 2003 and 2002, KPMG LLP has made a review (based on the procedures adopted by the American Institute of Certified Public Accountants) and not an audit, set forth in their separate report dated August 13, 2003 appearing on page 14. That report does not express an opinion on the interim unaudited consolidated financial information. KPMG LLP has not carried out any significant or additional audit tests beyond those which would have been necessary if their report had not been included. Accordingly, such report is not a "report" or "part of the Registration Statement" within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply. INDEPENDENT AUDITORS' REVIEW REPORT The Board of Directors and Shareholders Washington Trust Bancorp, Inc.: We have reviewed the consolidated balance sheet of Washington Trust Bancorp, Inc. and subsidiary (the "Corporation") as of June 30, 2003, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the three-month and six-month periods ended June 30, 2003 and 2002. These consolidated financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 2002, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 14, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects. KPMG LLP Providence, Rhode Island August 13, 2003 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements 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. 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 management, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in the size and nature of the Corporation's competition, changes in loan default and charge-off rates and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1 of the Bancorp's Annual Report on Form 10-K for the year ended December 31, 2002 may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Recent Events In April 2003, the Corporation opened its sixteenth branch office located in Warwick, Rhode Island. The opening of this branch expanded the Bank's market area into Kent County. Results of Operations The Corporation reported net income of $4.6 million for the three months ended June 30, 2003, up 13.7% from the $4.0 million reported for the second quarter of 2002. On a diluted earnings per share basis, the Corporation earned $.34 per diluted share for the three months ended June 30, 2003, compared to $.31 per diluted share for the second quarter of 2002. Net income for the six months ended June 30, 2003 amounted to $9.3 million, or $.70 per diluted share, as compared to $7.8 million, or $.62 per diluted share, for the same period in 2002. In June 2003, the Corporation incurred an after tax charge of $649 thousand, or $.05 per diluted share, related to the prepayment of certain higher interest rate FHLB advances. In the second quarter of 2002, the Corporation recorded merger related charges of $417 thousand after tax, or $.03 per diluted share, in connection with the acquisition of First Financial Corp. The return on average assets and average equity for the three months ended June 30, 2003 were 1.01% and 13.57%, compared to 1.03% and 13.68%, respectively, for the three months ended June 30, 2002. The return on average assets for the six months ended June 30, 2003 was similar to that of the same period a year ago, 1.04% as compared to 1.07%, while the return on average equity declined to 14.06% for the six months ended June 30, 2003, as compared to 14.27% for the same period last year. Net interest income (the difference between interest earned on loans and investments and interest paid on deposits and other borrowings) for the second quarter of 2003 increased by 5.7% to $12.3 million from the second quarter of 2002. Net interest income for the six months ended June 30, 2003 amounted to $24.2 million, up by 15.3% from the $21.0 million reported for the corresponding period in 2002, largely due to the April 2002 acquisition of First Financial Corp. The increase in net interest income was due to earning asset growth, however net interest income was adversely affected by a decline in the net interest margin. For the six months ended June 30, 2003, average-earning assets increased $318.8 million, or 23.4%, compared to the same period last year. The net interest margin for the first six months of 2003 amounted to 2.97%, down 22 basis points from the 3.19% reported for the same period a year ago. The net interest margin has been affected by the significant decline in market interest rates and reflects a decline in yields on loans and securities offset somewhat by lower funding costs of interest-bearing deposits and FHLB advances. (See additional discussion under the caption "Net Interest Income.") The Corporation's provision for loan losses amounted to $160 thousand and $100 thousand in the second quarter of 2003 and 2002, respectively. The year to date 2003 provision was $260 thousand, compared to last year's amount of $200 thousand. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance for loan losses increased from $15.5 million at December 31, 2002 to $15.7 million at June 30, 2003 due to the year to date 2003 provision and recoveries, net of charge-offs. The Corporation's ratio of the allowance for loan losses to total loans decreased from 1.95% at December 31, 2002 to 1.91% at June 30, 2003. Other noninterest income (noninterest income excluding net realized gains on securities) amounted to $7.0 million for the quarter ended June 30, 2003, up by 28.7% from the $5.4 million reported for the second quarter of 2002. For the six months ended June 30, 2003, noninterest income amounted to $12.8 million, an increase of 23.4% from the comparable 2002 amount of $10.3 million. The growth in noninterest income was mainly attributable to increases in gains on loan sales and service charges on deposits. For the first six months of 2003, gains on loan sales totaled $2.7 million, up $1.8 million from the same period in 2002. As a result of the decline in interest rates, the Corporation has experienced heavy residential mortgage activity, predominately refinancing, which increased the amount of loans sold into the secondary market. The Corporation expects this activity to remain strong during the third quarter of 2003, however this level of activity may not be sustainable in future periods. In addition to selling residential mortgage loans, the Corporation sells the guaranteed portion of SBA loan originations. Included in gains on loan sales for the first six months of 2003 and 2002 are approximately $181 thousand and $80 thousand, respectively, in gains on sales of SBA loans. For the six months ended June 30, 2003, service charges on deposit accounts amounted to $2.4 million, up $646 thousand, or 35.8%, from the corresponding period a year ago. Growth in deposits and changes in the fee structure of various deposit products were contributing factors in the increase. Revenue from trust and investment management services continues to be the largest component of noninterest income. Trust and investment management income, which is closely tied to the performance of the financial markets, totaled $5.3 million for the six months ended June 30, 2003, essentially unchanged from the amount reported for the corresponding period in 2002. Revenue growth has slowed reflecting the financial market declines. The market value of trust and investment management assets under administration amounted to $1.576 billion and $1.524 billion at June 30, 2003 and December 31, 2002, respectively. The Corporation recognized net realized securities gains amounting to $400 thousand and $381 thousand in the second quarter of 2003 and 2002, respectively, related to annual contributions of appreciated equity securities to the Corporation's charitable foundation. The costs associated with the contributions amounted to $433 thousand and $403 thousand and were included in other noninterest expenses in the second quarter of 2003 and 2002, respectively. For the six months ended June 30, 2003 and 2002, net realized gains on securities totaled $630 thousand and $672 thousand, respectively. For the second quarter of 2003, total noninterest expense amounted to $12.8 million, up $1.4 million from the amount reported for the second quarter of 2002. For the six months ended June 30, 2003, noninterest expenses amounted to $23.8 million, up $3.2 million from the comparable 2002 amount. Included in noninterest expenses in the second quarter of 2003 were $941 thousand in prepayment penalty charges associated with the prepayment of certain FHLB advances totaling $23 million. The prepayment of certain higher interest rate borrowings was consummated in June 2003 to reduce future funding costs. The Corporation expects that this debt restructuring will result in future interest expense savings of approximately $510 thousand on an annualized basis over the remaining term of the prepaid debt. Included in the second quarter of 2002 were $605 thousand of acquisition costs incurred in connection with acquisition of First Financial Corp. Exclusive of the debt prepayment penalties in 2003 and the acquisition costs in 2002, the increase in noninterest expenses was primarily due to normal growth and higher operating costs resulting from the acquisition of First Financial Corp. Salaries and benefits, the largest component of total noninterest expense, amounted to $13.2 million for the six months ended June 30, 2003, compared to the $11.6 million reported for the first six months of 2002. Income tax expense amounted to $4.2 million and $3.4 million for the six months ended June 30, 2003 and 2002, respectively. The Corporation's effective tax rate for the first six months of 2003 was 31.0%, compared to 30.5% for the corresponding 2002 period. Net Interest Income (The accompanying schedule entitled "Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis (FTE)" should be read in conjunction with this discussion.) FTE net interest income for the six months ended June 30, 2003 amounted to $24.7 million, up $3.2 million, or 14.8%, from the same 2002 period. This increase in net interest income was largely due to the April 2002 acquisition of First Financial Corp. For the six months ended June 30, 2003, average interest-earning assets amounted to $1.679 billion, up $318.8 million, or 23.4%, compared to the same period last year, of which approximately $178.5 million related to the acquisition of First Financial Corp. The net interest margins (FTE net interest income as a percentage of average interest-earning assets) for the six months ended June 30, 2003 and 2002 were 2.97% and 3.19%, respectively. The net interest margin has been affected by the significant decline in market interest rates and reflects a decline in yields on loans and securities offset somewhat by lower funding costs of interest-bearing deposits and FHLB advances. The interest rate spread decreased 10 basis points to 2.67% for the six months ended June 30, 2003. The yield on total interest-earnings assets declined 108 basis points to 5.28%, while the cost of interest-bearing liabilities decreased 98 basis points to 2.61%. The yield on average total loans amounted to 6.27% for the six months ended June 30, 2003, down 107 basis points from 7.34% for the comparable 2002 period. This decline is primarily due to lower marginal yields on floating and adjustable rate loans for the six months of 2003 as compared to the prior year period and a decline in yields on new loan originations. Average loans for the six months ended June 30, 2003 amounted to $822.7 million, an increase of $166.3 million compared to the same period last year, of which approximately $115.3 million related to the April 2002 First Financial Corp. acquisition. Average commercial loans rose 29.0% to $392.8 million while the yield on commercial loans declined 93 basis points to 6.96%. Included in interest income on commercial loans for the six months ended June 30, 2002, was $229 thousand of depreciation in value of the interest rate floor contract that was terminated in May 2002. Average residential real estate loans amounted to $294.4 million, up 23.9% from the prior year level. The yield on residential real estate loans decreased 124 basis points from the prior year period, amounting to 5.95%. Average consumer loans rose 18.5% over the prior year and amounted to $135.5 million. The yield on consumer loans decreased 122 basis points from the prior year to 4.95%, mainly due to a decline in yield on home equity loans. Total average investments rose $152.5 million, or 21.7%, over the comparable prior year period mainly due to purchases of taxable debt securities. The FTE rate of return on investments was 4.33% for the six months ended June 30, 2003, compared to 5.44% for the same 2002 period. The decrease in yields on investments reflects a combination of lower yields on variable rate securities tied to short-term interest rates and lower marginal rates on reinvestment of cash flows in 2003 relative to the prior year. Average interest-bearing liabilities increased $287.3 million, or 23.9%, to $1.490 billion at June 30, 2003, of which approximately $162.9 million related to the April 2002 First Financial acquisition. The increase in average interest-bearing liabilities was mainly due to growth in deposits. Due to lower rates paid on both borrowed funds and deposits, the Corporation's total cost of funds on interest-bearing liabilities amounted to 2.61% for the six months ended June 30, 2003, down from 3.59% for the comparable 2002 period. Average savings deposits for the six months ended June 30, 2003 increased $123.5 million, or 36.1%, to $466.1 million from the comparable 2002 amount. The rate paid on savings deposits for the first six months of 2003 was 0.79%, compared to 1.27% for the same 2002 period. Average time deposits increased $55.1 million to $480.5 million with a decrease of 76 basis points in the rate paid. For the six months ended June 30, 2003, average demand deposits, an interest-free funding source, were up by $27.9 million, or 21.0%, from the same prior year period. Average FHLB advances for the six months ended June 30, 2003 amounted to $541.0 million, up from the comparable 2002 amount of $431.2 million. The average rate paid on FHLB advances for the six months ended June 30, 2003 was 3.60%, a decrease of 142 basis points from the prior year rate. Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis (FTE) The following table sets forth average balance and interest rate information. Income is presented on a fully taxable equivalent basis (FTE). For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Loans held for sale, 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. Customer overdrafts are excluded from amounts presented for loans. Average balances for securities are presented at cost, with any unrealized gains and losses of securities available for sale included in noninterest-earning assets.
Six months ended June 30, 2003 2002 - -------------------------------------------- ------------------------------------ ---------------------------------- Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate - ---------------------------------------- ------------- ----------- ----------- -------------- ----------- ---------- Assets: Residential real estate loans $294,391 $8,686 5.95% $237,551 $8,467 7.19% Commercial and other loans 392,774 13,564 6.96% 304,534 11,922 7.89% Consumer loans 135,503 3,328 4.95% 114,323 3,496 6.17% - -------------------------------------------------------------------------------------------------------------------- Total loans 822,668 25,578 6.27% 656,408 23,885 7.34% Federal funds sold and other short-term investments 15,198 76 1.00% 13,233 108 1.64% Taxable debt securities 774,624 16,535 4.30% 628,022 17,077 5.48% Nontaxable debt securities 16,796 542 6.51% 19,908 644 6.53% Corporate stocks and FHLB stock 49,920 1,235 4.99% 42,871 1,180 5.55% - -------------------------------------------------------------------------------------------------------------------- Total investments 856,538 18,388 4.33% 704,034 19,009 5.44% - -------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,679,206 43,966 5.28% 1,360,442 42,894 6.36% - -------------------------------------------------------------------------------------------------------------------- Non interest-earning assets 119,808 95,475 - -------------------------------------------------------------------------------------------------------------------- Total assets $1,799,014 $1,455,917 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Savings deposits $466,102 $1,830 0.79% $342,591 $2,153 1.27% Time deposits 480,509 7,733 3.25% 425,452 8,463 4.01% FHLB advances 540,975 9,670 3.60% 431,161 10,729 5.02% Other 2,336 37 3.25% 3,393 37 2.22% - -------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,489,922 19,270 2.61% 1,202,597 21,382 3.59% Demand deposits 161,078 133,150 Non interest-bearing liabilities 15,342 11,303 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 1,666,342 1,347,050 Total shareholders' equity 132,672 108,867 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,799,014 $1,455,917 - -------------------------------------------------------------------------------------------------------------------- Net interest income $24,696 $21,512 - -------------------------------------------------------------------------------------------------------------------- Net interest spread 2.67% 2.77% - -------------------------------------------------------------------------------------------------------------------- Net interest margin 2.97% 3.19% - --------------------------------------------------------------------------------------------------------------------
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Six months ended June 30, 2003 2002 - -------------------------------------------------------------------------------- Commercial and other loans $79 $81 Nontaxable debt securities 189 225 Corporate stocks 217 201 Financial Condition and Liquidity Total assets rose from $1.746 billion at December 31, 2002 to $1.839 billion at June 30, 2003. Average assets totaled $1.799 billion for the six months ended June 30, 2003, up 23.6% over the comparable 2002 period. (See additional discussion under the caption "Net Interest Income"). Securities Available for Sale - The carrying value of securities available for sale at June 30, 2003 amounted to $621.2 million, an increase of 12.2% from the December 31, 2002 balance of $553.6 million. This increase was mainly due to purchases of mortgage-backed securities, corporate bonds and U.S. government agency securities. The net unrealized gains on securities available for sale amounted to $14.8 million at June 30, 2003 and $14.4 million at December 31, 2002. Securities Held to Maturity - Primarily as a result of principal paydowns on mortgage-backed securities, the carrying value of securities held to maturity decreased 6.8% from $242.3 million at December 31, 2002 to $225.7 million at June 30, 2003. The net unrealized gain on securities held to maturity amounted to $6.6 million at June 30, 2003, compared to $8.2 million at December 31, 2002. Loans - In the first six months of 2003, total loans increased $27.7 million to $822.8 million at June 30, 2003. Commercial loans amounted to $394.8 million at June 30, 2003, up $12.6 million, or 3.3%, from $382.2 million at December 31, 2002. Total consumer loans amounted to $143.4 million at June 30, 2003, an increase of $11.3 million, or 8.6%, from December 31, 2002 primarily due to growth in home equity lines. As of June 30, 2003, total residential real estate loans amounted to $284.6 million, up $3.7 million from the balance of $280.9 million at December 31, 2002. Residential real estate loans were impacted by the refinancing of fixed rate residential loans being sold into the secondary market. In 2003, the Corporation purchased a total of $7.7 million of residential mortgages from other financial institutions. Deposits - Total deposits amounted to $1.136 billion at June 30, 2003, up $25.7 million from the December 31, 2002 balance of $1.110 billion, due in part to the new Warwick branch that opened in April 2003. Demand deposits rose $26.3 million, or 16.7%, in the first six months of 2003 and totaled $183.8 million at June 30, 2003. Savings deposits increased $11.5 million from December 31, 2002 and amounted to $482.9 million at June 30, 2003. Time deposits amounted to $469.5 million at June 30, 2003, down from the December 31, 2002 balance of $481.6 million. Borrowings - The Corporation utilizes advances from the FHLB as well as other borrowings as part of its overall funding strategy. FHLB advances were used to meet short-term liquidity needs and to purchase securities. In the six months ended June 30, 2003, FHLB advances increased $63.8 million to $543.9 million at June 30, 2003. Other borrowings outstanding at June 30, 2003 amounted to $7.5 million, down $1.7 million from the December 31, 2002 balance of $9.2 million. The decrease in other borrowings was primarily due to a lower Treasury, Tax and Loan demand note balance. For the six months ended June 30, 2003, net cash provided by operations amounted to $5.65 million, the majority of which was generated by net income. Proceeds from sales of loans in the first six months of 2003 amounted to $107.3 million, while loans originated for sale amounted to $111.8 million. Net cash used in investing activities amounted to $84.1 million and was primarily used to purchase securities. Net cash provided by financing activities was $84.8 million, the majority of which was derived from FHLB advances. (See Consolidated Statements of Cash Flows for additional information.) Nonperforming Assets Nonperforming assets are summarized in the following table: (Dollars in thousands) June 30, December 31, 2003 2002 - -------------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $1,573 $2,198 Nonaccrual loans less than 90 days past due 1,557 1,979 - -------------------------------------------------------------------------------- Total nonaccrual loans 3,130 4,177 Other real estate owned 10 86 - -------------------------------------------------------------------------------- Total nonperforming assets $3,140 $4,263 - -------------------------------------------------------------------------------- Nonaccrual loans as a percentage of total loans .38% .53% Nonperforming assets as a percentage of total assets .17% .24% Allowance for loan losses to nonaccrual loans 502.94% 370.78% Allowance for loan losses to total loans 1.91% 1.95% There were no accruing loans 90 days or more past due at June 30, 2003 and December 31, 2002. Impaired loans consist of all nonaccrual commercial loans. At June 30, 2003, the recorded investment in impaired loans was $2.2 million, which had a related allowance amounting to $194 thousand. During the six months ended June 30, 2003, the average recorded investment in impaired loans was $2.5 million. Also during this period, interest income recognized on impaired loans amounted to approximately $90 thousand. Interest income on impaired loans is recognized on a cash basis only. The following is an analysis of nonaccrual loans by loan category: (Dollars in thousands) June 30, December 31, 2003 2002 - -------------------------------------------------------------------------------- Residential real estate $538 $1,202 Commercial: Mortgages 1,175 1,356 Other 1,074 1,354 Consumer 343 265 - -------------------------------------------------------------------------------- Total nonaccrual loans $3,130 $4,177 - -------------------------------------------------------------------------------- Capital Resources Total equity capital increased $6.5 million during the first six months of 2003 and amounted to $135.2 million. This increase was principally attributable to a $5.4 million increase in earnings retention. (See the Consolidated Statement of Changes in Shareholders' Equity for additional information.) The ratio of total equity to total assets amounted to 7.35% at June 30, 2003, compared to 7.37% at December 31, 2002. Book value per share as of June 30, 2003 and December 31, 2002 amounted to $10.31 and $9.87, respectively. At June 30, 2003, the Corporation's Tier 1 risk-based capital ratio was 10.28% and the total risk-adjusted capital ratio was 11.76%. The Corporation's Tier 1 leverage ratio amounted to 5.66% at June 30, 2003. These ratios were above the ratios required to be categorized as well-capitalized. Dividends payable at June 30, 2003 amounted to $2.0 million, representing $.15 per share payable on July 15, 2003, consistent with the dividend declared in the first quarter of 2003. The source of funds for dividends paid by the Bancorp is dividends received from the Bank. The Bank is a regulated enterprise, and as such its ability to pay dividends to the parent is subject to regulatory review and restriction. Litigation See the description of Litigation in Footnote 9 to the Consolidated Financial Statements in this quarterly report on Form 10-Q. Critical Accounting Policies Our accounting and reporting policies comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are important to understanding reported results. Management has discussed the development and the selection of critical accounting policies with the Audit Committee of our board of directors. As discussed in our 2002 Annual Report on Form 10-K, we have identified the allowance for loan losses and review of goodwill for impairment as critical accounting policies. Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions. Recent Accounting Developments In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities and is effective for financial statements issued for all fiscal years beginning after June 15, 2002. The adoption of this pronouncement is not expected to have a material impact on the Corporation's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issues No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a liability for cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this pronouncement is not expected to have a material impact on the Corporation's financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." This Statement amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock-based compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Additionally, this Statement amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The amendments to SFAS No. 123 are effective for financial statements for fiscal years ending after December 15, 2002. The amendment to Opinion No. 28 shall be effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002 for transition guidance and annual disclosure provisions. The Corporation has provided the disclosure required under SFAS No. 148 in Note 2 to the Consolidated Financial Statements. On April 22, 2003, the FASB decided to require all companies to expense the value of employee stock options. It has also tentatively decided in principle to measure employee equity-based awards at their date of grant and will later decide the method for determining the cost of employee stock options, as well as the extent to which a final Statement on this matter will permit adjustments for actual forfeitures and actual performance outcomes, which will affect the amount of compensation cost recognized over the employee service period. The FASB plans to issue an exposure draft later this year, which could become effective in 2004. Until a new Statement is issued, the provisions of SFAS No. 123 and SFAS No. 148 remain in effect. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments and hedging activities under SFAS No. 133. The changes in this Statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Most of the provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this pronouncement is not expected to have a material impact on the Corporation's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or as an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this pronouncement is not expected to have a material impact on the Corporation's financial statements. ITEM 3. 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 Corporation's objective is to manage assets and funding sources to produce results that are consistent with its liquidity, capital adequacy, growth, risk and profitability goals. The Corporation manages interest rate risk using income simulation to measure interest rate risk inherent in its 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 for future periods. The simulation results are reviewed to determine whether the exposure of net interest income to changes in interest rates remains within established tolerance levels and to develop appropriate strategies to manage this exposure. The Corporation's interest rate risk modeling incorporates a wide range of interest rate scenarios, including both parallel rate shifts and changes in the shape of the yield curve of varying magnitudes in addition to those presented here. The following table presents the Corporation's estimated net interest income exposure as a percentage of net interest income for the first 12-month period, the subsequent 12-month period thereafter (months 13 - 24), and months 1-60, as of June 30, 2003. Interest rates are assumed to shift upward by 200 basis points or downward by 50 basis points. This asymmetric rate shift reflects the fact that interest rates are at extremely low levels and the likelihood of a 200 basis point decline is considered remote. Months 1 - 12 Months 13-24 Months 1 - 60 ------------------------------------------------------------------------------ 200 basis point increase in rates 2.9% 3.6% 2.9% 50 basis point decrease in rates -2.3% -3.1% -4.1% At June 30, 2003, income simulation results assume that changes in core deposit rates are linked to short-term market interest rates. The assumed relationship and correlation between short-term interest rate changes and core deposit rate changes used in income simulation may fluctuate over time based on the Corporation's assessment of market conditions. Since this simulation assumes the Corporation's balance sheet will remain static over the 60-month simulation horizon, the results do not reflect adjustments in strategy that the Corporation could implement in response to rate shifts, and should not be relied upon as a estimate of future net interest income. The Corporation estimates that the negative exposure of net interest income to falling rates results from the difficulty of reducing rates paid on core savings deposits significantly below current levels. If rates were to fall and remain low for a sustained period, core savings deposit rates would likely not fall as fast as other market rates, while asset yields would decline as current asset holdings mature or reprice. The pace of asset cash flows would also be likely to increase in a falling rate environment due to more rapid mortgage-related prepayments and redemption of callable securities. While the Corporation reviews simulation assumptions to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk since the repricing, maturity and prepayment characteristics of financial instruments may change to a different degree than estimated. Specifically, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income. Changes in prepayment speeds can also affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. The sensitivity of core savings deposits to fluctuations in interest rates could also differ from simulation assumptions, and could result in changes in both liability mix and interest expense that differ from those used to estimate interest rate risk exposure. The Corporation also monitors the potential change in market value of its available for sale debt securities using both rate shifts and "value at risk" analysis. The purpose is to determine market value exposure which may not be captured by income simulation, but which might result in changes to the Corporation's capital position. Results are calculated using industry-standard modeling analytics and securities data. The Corporation uses the results to manage the effect of market value changes on the Corporation's capital position. As of June 30, 2003, an immediate 200 basis point rise in rates would result in a 3.1% decline in the value of the Corporation's available for sale debt securities. Conversely, a 100 basis point fall in rates would result in a 0.6% increase in the value of the Corporation's available for sale debt securities. "Value at risk" analysis measures the theoretical maximum market value loss over a given time period based on recent historical price activity of different classes of securities. The anticipated maximum market value reduction for the Corporation's available for sale securities portfolio at June 30, 2003, including both debt and equity securities, was 5.9%, assuming a one-year time horizon and a 5% probability of occurrence for "value at risk" analysis. On occasion, the Corporation has supplemented its interest rate risk management strategies with off-balance sheet transactions. Such transactions are intended to hedge specifically identified risks inherent in the Corporation's balance sheet, and not to produce speculative profits. The Corporation has written policy guidelines that designate limits on the notional value of off-balance sheet transactions and require periodic evaluation of risks associated with these transactions, including counterparty credit risk. ITEM 4. CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") the Corporation carried out an evaluation under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures as of the end of the quarter ended June 30, 2003. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. The Corporation will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate. There has been no change in our internal controls over financial reporting during the period ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II OTHER INFORMATION Item 1. Legal Proceedings On February 20, 2001, a suit was filed against the Bank in its capacity as trustee of the Walfred M. Nyman Trust (the "Nyman Trust") as well as Robert C. Nyman, Kenneth J. Nyman and Keith Johnson (the "Co-Defendants") in the United States District Court for the District of Rhode Island (the "District Court") by Beverly Kiepler ("Kiepler"), a beneficiary of the Nyman Trust. The claim is for damages, which the Nyman Trust allegedly incurred as a result of the Bank's alleged failure to file suit against the Co-Defendants for their wrongful dilution of the stock value of Nyman Manufacturing Company ("Nyman Mfg."), an asset of the Nyman Trust. In July 2002, the Bank, in its capacity as trustee of the Nyman Trust, filed a cross-claim in the District Court against the Co-Defendants for the above-described damages to the Nyman Trust. On April 16, 2003 the District Court awarded the Nyman Trust a judgment against the Co-Defendants. Washington Trust expects to finalize an agreement among all parties to the suit and the related cross-claim in settlement of these matters. The terms of the settlement agreement have been approved by the Superior Court of Washington County, Rhode Island, which has statutory jurisdiction over the administration of trusts. Management expects the suit and cross-claim to be dismissed shortly. The settlement will not result in any loss to the Bank. Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on April 29, 2003. (b) The results of matters voted upon are presented below. i. Election of Directors to Serve Until 2006 Annual Meeting: Steven J. Crandall, Victor J. Orsinger II, Patrick J. Shanahan, James P. Sullivan, CPA and Neil H. Thorp were nominated and duly elected to hold office as Directors of Washington Trust Bancorp, Inc., each to serve a term of three years and until their successors are duly elected and qualified, by the number of votes set forth opposite each person's name as follows:
Abstentions Votes Votes and Broker Term In Favor Withheld Non-votes ---------------------------------- ---------- ---------------- -------------- ----------------- Steven J. Crandall 3 years 10,743,224 187,817 0 Victor J. Orsinger II 3 years 9,741,578 1,189,463 0 Patrick J. Shanahan 3 years 10,798,124 132,917 0 James P. Sullivan, CPA 3 years 10,713,203 217,838 0 Neil H. Thorp 3 years 10,771,517 159,524 0
The following additional persons continued as Directors of Washington Trust Bancorp, Inc. following the Annual Meeting: Gary P. Bennett Larry J. Hirsch, Esq. Mary E. Kennard, Esq. H. Douglas Randall, III John F. Treanor Katherine W. Hoxsie, CPA Edward M. Mazze, Ph.D. Joyce O. Resnikoff John C. Warren ii. A proposal to adopt the 2003 Stock Incentive Plan was passed by a vote of 10,302,288 shares in favor; 463,889 shares against, with 164,864 abstentions and broker non-votes. iii. A proposal for the ratification of KPMG LLP to serve as independent auditors of the Corporation for the current fiscal year ending December 31, 2003 was passed by a vote of 10,739,723 shares in favor; 123,201 shares against, with 68,117 abstentions and broker non-votes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit index Exhibit No. ----------- 10 2003 Stock Incentive Plan 11 Statement re Computation of Per Share Earnings 15 Letter re Unaudited Interim Financial Information 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32** Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** These certifications are not "filed" for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Exchange Act. (b) On April 17, 2003, a Form 8-K, which reported the Corporation's earnings for the quarter ended March 31, 2003, was furnished to the Securities and Exchange Commission. SIGNATURES Pursuant to the requirements 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) August 13, 2003 By: John C. Warren -------------------------------------------- John C. Warren Chairman and Chief Executive Officer (principal executive officer) August 13, 2003 By: David V. Devault -------------------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and accounting officer) EX-10 3 q22003ex10.txt 2003 STOCK INCENTIVE PLAN EXHIBIT 10 WASHINGTON TRUST BANCORP INC. EXHIBIT A 2003 STOCK INCENTIVE PLAN GENERAL PURPOSE OF THE PLAN; DEFINITIONS - ---------------------------------------- The name of the plan is the Washington Trust Bancorp, Inc. 2003 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and enable the officers, employees, Non-Employee Directors and other key persons (including consultants) of Washington Trust Bancorp, Inc. (the "Company") and its Subsidiaries upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company's welfare will assure a closer identification of their interests with those of the Company, thereby stimulating their efforts on the Company's behalf and strengthening their desire to remain with the Company. The following terms shall be defined as set forth below: "Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Administrator" is defined in Section 2(a). "Award" or "Awards," except where referring to a particular category of grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Deferred Stock Awards, Restricted Stock Awards, Unrestricted Stock Awards and Dividend Equivalent Rights. "Board" means the Board of Directors of the Company. "Change of Control" is defined in Section 15. "Code" means the Internal Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations. "Committee" means the Compensation and Benefits Committee of the Board or such other committee of not less than three members of the Board appointed by the Board to administer the Plan, provided that members of such Committee must be "Non-Employee Directors" within the meaning of Rule 16b-3(b) promulgated under the Exchange Act. "Deferred Stock Award" means Awards granted pursuant to Section 8. "Dividend Equivalent Right" means Awards granted pursuant to Section 10. "Effective Date" means the date on which the Plan is approved by stockholders as set forth in Section 17. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Fair Market Value" of the Stock on any given date means the fair market value of the Stock determined in good faith by the Administrator; provided, however, that if the Stock is admitted to quotation on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), NASDAQ National System or a national securities exchange, the determination shall be made by reference to market quotations. If there are no market quotations for such date, the determination shall be made by reference to the last date preceding such date for which there are market quotations. "Incentive Stock Option" means any Stock Option designated and qualified as an "incentive stock option" as defined in Section 422 of the Code. "Non-Employee Director" means a member of the Board who is not also an employee of the Company or any Subsidiary. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. "Option" or "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5. "Restricted Stock Award" means Awards granted pursuant to Section 7. "Stock" means the Common Stock, par value $.0625 per share, of the Company, subject to adjustments pursuant to Section 3. "Stock Appreciation Right" means any Award granted pursuant to Section 6. "Subsidiary" means any corporation or other entity (other than the Company) in which the Company has a controlling interest, either directly or indirectly. "Unrestricted Stock Award" means Awards granted pursuant to Section 9. SECTION 2. ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT GRANTEES -------------------------------------------------------------------- AND DETERMINE AWARDS -------------------- a) Committee. ---------- The Plan shall be administered by either the Board or the Committee (in either case, the "Administrator"). b) Powers of Administrator. -------------------------- The Administrator shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority: (i) to select the individuals to whom Awards may from time to time be granted; (ii) to determine the time or times of grant, and the extent, if any, of Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Deferred Stock Awards, Unrestricted Stock Awards and Dividend Equivalent Rights, or any combination of the foregoing, granted to any one or more grantees; (iii) to determine the number of shares of Stock to be covered by any Award; (iv) to determine and modify from time to time the terms and conditions, including restrictions, not inconsistent with the terms of the Plan, of any Award, which terms and conditions may differ among individual Awards and grantees, and to approve the form of written instruments evidencing the Awards; (v) to accelerate at any time the exercisability or vesting of all or any portion of any Award; (vi) subject to the provisions of Section 5(a)(ii), to extend at any time the period in which Stock Options may be exercised; (vii) to determine at any time whether, to what extent, and under what circumstances distribution or the receipt of Stock and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the grantee and whether and to what extent the Company shall pay or credit amounts constituting interest (at rates determined by the Administrator) or dividends or deemed dividends on such deferrals; and (viii)at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including related written instruments); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan. All decisions and interpretations of the Administrator shall be binding on all persons, including the Company and Plan grantees. c) Delegation of Authority to Grant Awards. --------------------------------------------- The Administrator, in its discretion, may delegate to the Chief Executive Officer of the Company all or part of the Administrator's authority and duties with respect to the granting of Awards at Fair Market Value, to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act or "covered employees" within the meaning of Section 162(m) of the Code. Any such delegation by the Administrator shall include a limitation as to the amount of Awards that may be granted during the period of the delegation and shall contain guidelines as to the determination of the exercise price of any Stock Option or Stock Appreciation Right, the conversion ratio or price of other Awards and the vesting criteria. The Administrator may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Administrator's delegate or delegates that were consistent with the terms of the Plan. d) Indemnification. ---------------- Neither the Board nor the Committee, nor any member of either or any delegatee thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan, and the members of the Board and the Committee (and any delegatee thereof) shall be entitled in all cases to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, reasonable attorneys' fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors' and officers' liability insurance coverage which may be in effect from time to time. SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION ---------------------------------------------------- (a) Stock Issuable. ---------------- The maximum number of shares of Stock reserved and available for issuance under the Plan shall be 600,000 shares, subject to adjustment as provided in Section 3(b); provided that not more than 200,000 shares shall be issued in the form of Awards other than Stock Options or Stock Appreciation Rights except to the extent such Awards are granted in lieu of cash compensation or fees. For purposes of this limitation, the shares of Stock underlying any Awards which are forfeited, canceled, reacquired by the Company, satisfied without the issuance of Stock or otherwise terminated (other than by exercise) shall be added back to the shares of Stock available for issuance under the Plan. Subject to such overall limitation, shares of Stock may be issued up to such maximum number pursuant to any type or types of Award; provided, however, that Stock Options or Stock Appreciation Rights with respect to no more than 100,000 shares of Stock may be granted to any one individual grantee during any one calendar year period. The shares available for issuance under the Plan may be authorized but unissued shares of Stock or shares of Stock reacquired by the Company and held in its treasury. (b) Changes in Stock. ----------------- Subject to Section 3(c) hereof, if, as a result of any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar change in the Company's capital stock, the outstanding shares of Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company, or additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Stock or other securities, or, if, as a result of any merger or consolidation, sale of all or substantially all of the assets of the Company, the outstanding shares of Stock are converted into or exchanged for a different number or kind of securities of the Company or any successor entity (or a parent or subsidiary thereof), the Administrator shall make an appropriate or proportionate adjustment in (i) the maximum number of shares reserved for issuance under the Plan, including the maximum number of shares that may be issued in the form of Restricted Stock Awards, (ii) the number of Stock Options or Stock Appreciation Rights that can be granted to any one individual grantee, (iii) the number and kind of shares or other securities subject to any then outstanding Awards under the Plan, (iv) the repurchase price per share subject to each outstanding Restricted Stock Award, (v) the number of Stock Options automatically granted to Non-Employee Directors, and (vi) the price for each share subject to any then outstanding Stock Options and Stock Appreciation Rights under the Plan, without changing the aggregate exercise price (i.e., the exercise price multiplied by the number of Stock Options and Stock Appreciation Rights) as to which such Stock Options and Stock Appreciation Rights remain exercisable. The adjustment by the Administrator shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan resulting from any such adjustment, but the Administrator in its discretion may make a cash payment in lieu of fractional shares. The Administrator may also adjust the number of shares subject to outstanding Awards and the exercise price and the terms of outstanding Awards to take into consideration material changes in accounting practices or principles, extraordinary dividends, acquisitions or dispositions of stock or property or any other event if it is determined by the Administrator that such adjustment is appropriate to avoid distortion in the operation of the Plan, provided that no such adjustment shall be made in the case of an Incentive Stock Option, without the consent of the grantee, if it would constitute a modification, extension or renewal of the Option within the meaning of Section 424(h) of the Code. (c) Mergers and Other Transactions. -------------------------------- In the case of and subject to the consummation of (i) the dissolution or liquidation of the Company, (ii) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity, (iii) a merger, reorganization or consolidation in which the outstanding shares of Stock are converted into or exchanged for a different kind of securities of the successor entity and the holders of the Company's outstanding voting power immediately prior to such transaction do not own a majority of the outstanding voting power of the successor entity immediately upon completion of such transaction, or (iv) the sale of all of the Stock of the Company to an unrelated person or entity (in each case, a "Sale Event"), all Options and Stock Appreciation Rights that are not exercisable immediately prior to the effective time of the Sale Event shall become fully exercisable as of the effective time of the Sale Event and all other Awards with conditions and restrictions relating solely to the passage of time and continued employment shall become fully vested and nonforfeitable as of the effective time of the Sale Event, except as the Administrator may otherwise specify with respect to particular Awards. Upon the effective time of the Sale Event, the Plan and all outstanding Awards granted hereunder shall terminate, unless provision is made in connection with the Sale Event in the sole discretion of the parties thereto for the assumption or continuation of Awards theretofore granted by the successor entity, or the substitution of such Awards with new Awards of the successor entity or parent thereof, with appropriate adjustment as to the number and kind of shares and, if appropriate, the per share exercise prices, as such parties shall agree (after taking into account any acceleration hereunder). In the event of such termination, each grantee shall be permitted, within a specified period of time prior to the consummation of the Sale Event as determined by the Administrator, to exercise all outstanding Options and Stock Appreciation Rights held by such grantee, including those that will become exercisable upon the consummation of the Sale Event; provided, however, that the exercise of Options and Stock Appreciation Rights not exercisable prior to the Sale Event shall be subject to the consummation of the Sale Event. Notwithstanding anything to the contrary in this Section 3(c), in the event of a Sale Event pursuant to which holders of the Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the Sale Event, the Company shall have the right, but not the obligation, to make or provide for a cash payment to the grantees holding Options and Stock Appreciation Rights, in exchange for the cancellation thereof, in an amount equal to the difference between (A) the value as determined by the Administrator of the consideration payable per share of Stock pursuant to the Sale Event (the "Sale Price") times the number of shares of Stock subject to outstanding Options and Stock Appreciation Rights (to the extent then exercisable at prices not in excess of the Sale Price) and (B) the aggregate exercise price of all such outstanding Options and Stock Appreciation Rights. (d) Substitute Awards. ------------------- The Administrator may grant Awards under the Plan in substitution for stock and stock based awards held by employees, directors or other key persons of another corporation in connection with the merger or consolidation of the employing corporation with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary of property or stock of the employing corporation. The Administrator may direct that the substitute awards be granted on such terms and conditions as the Administrator considers appropriate in the circumstances. Any substitute Awards granted under the Plan shall not count against the share limitation set forth in Section 3(a). SECTION 4. ELIGIBILITY ----------- Grantees under the Plan will be such full or part-time officers and other employees, Non-Employee Directors and key persons (including consultants and prospective employees) of the Company and its Subsidiaries as are selected from time to time by the Administrator in its sole discretion. SECTION 5. STOCK OPTIONS ------------- Any Stock Option granted under the Plan shall be in such form as the Administrator may from time to time approve. Stock Options granted under the Plan may be either Incentive Stock Options or Non-Qualified Stock Options. Incentive Stock Options may be granted only to employees of the Company or any Subsidiary that is a "subsidiary corporation" within the meaning of Section 424(f) of the Code. To the extent that any Option does not qualify as an Incentive Stock Option, it shall be deemed a Non-Qualified Stock Option. No Incentive Stock Option shall be granted under the Plan after February 20, 2013. a) Stock Options Granted to Employees and Key Persons. --------------------------------------------------- The Administrator in its discretion may grant Stock Options to eligible employees and key persons of the Company or any Subsidiary. Stock Options granted pursuant to this Section 5(a) shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable. If the Administrator so determines, Stock Options may be granted in lieu of cash compensation at the optionee's election, subject to such terms and conditions as the Administrator may establish. (i) Exercise Price. --------------- The exercise price per share for the Stock covered by a Stock Option granted pursuant to this Section 5(a) shall be determined by the Administrator at the time of grant but shall not be less than 100 percent of the Fair Market Value on the date of grant in the case of Incentive Stock Options or Non-Qualified Stock Options (other than options granted in lieu of cash compensation). If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10 percent of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation and an Incentive Stock Option is granted to such employee, the option price of such Incentive Stock Option shall be not less than 110 percent of the Fair Market Value on the grant date. (ii) Option Term. ------------- The term of each Stock Option shall be fixed by the Administrator, but no Stock Option shall be exercisable more than 10 years after the date the Stock Option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10 percent of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation and an Incentive Stock Option is granted to such employee, the term of such Stock Option shall be no more than five years from the date of grant. (iii)Exercisability; --------------- Rights of a Stockholder. Stock Options shall become exercisable at such time or times, whether or not in installments, as shall be determined by the Administrator at or after the grant date. The Administrator may at any time accelerate the exercisability of all or any portion of any Stock Option. An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options. (iv) Method of Exercise. -------------------- Stock Options may be exercised in whole or in part, by giving written notice of exercise to the Company, specifying the number of shares to be purchased. Payment of the purchase price may be made by one or more of the following methods to the extent provided in the Option Award agreement: (A) In cash, by certified or bank check or other instrument acceptable to the Administrator; (B) Through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the optionee on the open market or that have been beneficially owned by the optionee for at least six months and are not then subject to restrictions under any Company plan. Such surrendered shares shall be valued at Fair Market Value on the exercise date; or (C) By the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company for the purchase price; provided that in the event the optionee chooses to pay the purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure. Payment instruments will be received subject to collection. The delivery of certificates representing the shares of Stock to be purchased pursuant to the exercise of a Stock Option will be contingent upon receipt from the optionee (or a purchaser acting in his stead in accordance with the provisions of the Stock Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Option Award agreement or applicable provisions of laws. In the event an optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the number of shares of Stock transferred to the optionee upon the exercise of the Stock Option shall be net of the number of shares attested to. (v) Annual Limit on Incentive Stock Options. ---------------------------------------- To the extent required for "incentive stock option" treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the shares of Stock with respect to which Incentive Stock Options granted under this Plan and any other plan of the Company or its parent and subsidiary corporations become exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. To the extent that any Stock Option exceeds this limit, it shall constitute a Non-Qualified Stock Option. b) Stock Options Granted to Non-Employee Directors. ------------------------------------------------ (i) Automatic Grant of Options. --------------------------- (A) Each Non-Employee Director who is serving as Director of the Company as of the date of each Annual Meeting of the Company after which such Director will continue to serve as a Director of the Company, beginning with the 2003 Annual Meeting and in lieu of options which would be granted pursuant to Section 11 of the Company's 1997 Equity Incentive Plan, shall automatically be granted on such day a Non-Qualified Stock Option to acquire 2,000 shares of Stock. (B) The exercise price per share for the Stock covered by a Stock Option granted under this Section 5(b) shall be equal to the Fair Market Value of the Stock on the date the Stock Option is granted. (ii) Exercise; Termination. ---------------------- (A) Unless otherwise determined by the Administrator, an Option granted under Section 5(b) shall be exercisable upon the earlier of (1) the third anniversary of the grant date, or (2) the Non-Employee Director's retirement from the Board. An Option issued under this Section 5(b) shall not be exercisable after the expiration of ten years from the date of grant. (B) Options granted under this Section 5(b) may be exercised only by written notice to the Company specifying the number of shares to be purchased. Payment of the full purchase price of the shares to be purchased may be made by one or more of the methods specified in Section 5(a)(iv). An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options. c) Non-transferability of Options. -------------------------------- No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee, or by the optionee's legal representative or guardian in the event of the optionee's incapacity. Notwithstanding the foregoing, the Administrator, in its sole discretion, may provide in the Award agreement regarding a given Option that the optionee may transfer his Non-Qualified Stock Options to members of his immediate family, to trusts for the benefit of such family members, to partnerships in which such family members are the only partners, or to a former spouse in connection with a divorce settlement, provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Option. SECTION 6. STOCK APPRECIATION RIGHTS ------------------------- a) Nature of Stock Appreciation Rights. ------------------------------------ A Stock Appreciation Right is an Award entitling the recipient to receive an amount in cash or shares of Stock or a combination thereof having a value equal to the excess of the Fair Market Value of the Stock on the date of exercise over the exercise price of the Stock Appreciation Right, which price shall not be less than 100 percent of the Fair Market Value of the Stock on the date of grant (or more than the option exercise price per share, if the Stock Appreciation Right was granted in tandem with a Stock Option) multiplied by the number of shares of Stock with respect to which the Stock Appreciation Right shall have been exercised, with the Administrator having the right to determine the form of payment. b) Grant and Exercise of Stock Appreciation Rights. ------------------------------------------------ Stock Appreciation Rights may be granted by the Administrator in tandem with, or independently of, any Stock Option granted pursuant to Section 5 of the Plan. In the case of a Stock Appreciation Right granted in tandem with a Non-Qualified Stock Option, such Stock Appreciation Right may be granted either at or after the time of the grant of such Option. In the case of a Stock Appreciation Right granted in tandem with an Incentive Stock Option, such Stock Appreciation Right may be granted only at the time of the grant of the Option. A Stock Appreciation Right or applicable portion thereof granted in tandem with a Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Option. c) Terms and Conditions of Stock Appreciation Rights. -------------------------------------------------- Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined from time to time by the Administrator, subject to the following: (i) Stock Appreciation Rights granted in tandem with Options shall be exercisable at such time or times and to the extent that the related Stock Options shall be exercisable. (ii) Upon exercise of a Stock Appreciation Right, the applicable portion of any related Option shall be surrendered. (iii)All Stock Appreciation Rights shall be exercisable during the grantee's lifetime only by the grantee or the grantee's legal representative. SECTION 7. RESTRICTED STOCK AWARDS ----------------------- a) Nature of Restricted Stock Awards. ------------------------------------ A Restricted Stock Award is an Award entitling the recipient to acquire, at such purchase price as determined by the Administrator, shares of Stock subject to such restrictions and conditions as the Administrator may determine at the time of grant ("Restricted Stock"). Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives. The grant of a Restricted Stock Award is contingent on the grantee executing the Restricted Stock Award agreement. The terms and conditions of each such agreement shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and grantees. b) Rights as a Stockholder. ------------------------- Upon execution of a written instrument setting forth the Restricted Stock Award and payment of any applicable purchase price, a grantee shall have the rights of a stockholder with respect to the voting of the Restricted Stock, subject to such conditions contained in the written instrument evidencing the Restricted Stock Award. Unless the Administrator shall otherwise determine, certificates evidencing the Restricted Stock shall remain in the possession of the Company until such Restricted Stock is vested as provided in Section 7(d) below, and the grantee shall be required, as a condition of the grant, to deliver to the Company a stock power endorsed in blank. c) Restrictions. ------------- Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided herein or in the Restricted Stock Award agreement. If a grantee's employment (or other service relationship) with the Company and its Subsidiaries terminates for any reason, the Company shall have the right to repurchase Restricted Stock that has not vested at the time of termination at its original purchase price, from the grantee or the grantee's legal representative. d) Vesting of Restricted Stock. ----------------------------- The Administrator at the time of grant shall specify the date or dates and/or the attainment of pre-established performance goals, objectives and other conditions on which the non-transferability of the Restricted Stock and the Company's right of repurchase or forfeiture shall lapse. Notwithstanding the foregoing, in the event that any such Restricted Stock shall have a performance based goal, the restriction period with respect to such shares shall not be less than one year and in the event that any such Restricted Stock shall have a time based restriction, the restriction period with respect to such shares shall not be less than three years. Subsequent to such date or dates and/or the attainment of such pre-established performance goals, objectives and other conditions, the shares on which all restrictions have lapsed shall no longer be Restricted Stock and shall be deemed "vested." Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 13 below, in writing after the Award agreement is issued, a grantee's rights in any shares of Restricted Stock that have not vested shall automatically terminate upon the grantee's termination of employment (or other service relationship) with the Company and its Subsidiaries and such shares shall be subject to the Company's right of repurchase as provided in Section 7(c) above. e) Waiver, Deferral and Reinvestment of Dividends. ----------------------------------------------- The Restricted Stock Award agreement may require or permit the immediate payment, waiver, deferral or investment of dividends paid on the Restricted Stock. SECTION 8. DEFERRED STOCK AWARDS --------------------- a) Nature of Deferred Stock Awards. -------------------------------- A Deferred Stock Award is an Award of phantom stock units to a grantee, subject to restrictions and conditions as the Administrator may determine at the time of grant. Conditions may be based on continuing employment (or other service relationship) and/or achievement of pre-established performance goals and objectives. The grant of a Deferred Stock Award is contingent on the grantee executing the Deferred Stock Award agreement. The terms and conditions of each such agreement shall be determined by the Administrator, and such terms and conditions may differ among individual Awards and grantees. At the end of the deferral period, the Deferred Stock Award, to the extent vested, shall be paid to the grantee in the form of shares of Stock. b) Election to Receive Deferred Stock Awards in Lieu of Compensation. ------------------------------------------------------------------ The Administrator may, in its sole discretion, permit a grantee to elect to receive a portion of the cash compensation or Restricted Stock Award otherwise due to such grantee in the form of a Deferred Stock Award. Any such election shall be made in writing and shall be delivered to the Company no later than the date specified by the Administrator and in accordance with rules and procedures established by the Administrator. The Administrator shall have the sole right to determine whether and under what circumstances to permit such elections and to impose such limitations and other terms and conditions thereon as the Administrator deems appropriate. c) Rights as a Stockholder. ------------------------ During the deferral period, a grantee shall have no rights as a stockholder; provided, however, that the grantee may be credited with Dividend Equivalent Rights with respect to the phantom stock units underlying his Deferred Stock Award, subject to such terms and conditions as the Administrator may determine. d) Restrictions. ------------- A Deferred Stock Award may not be sold, assigned, transferred , pledged or otherwise encumbered or disposed of during the deferral period. e) Termination. ------------ Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 13 below, in writing after the Award agreement is issued, a grantee's right in all Deferred Stock Awards that have not vested shall automatically terminate upon the grantee's termination of employment (or cessation of service relationship) with the Company and its Subsidiaries for any reason. SECTION 9. UNRESTRICTED STOCK AWARDS ------------------------- Grant or Sale of Unrestricted Stock. - ---------------------------------------- The Administrator may, in its sole discretion, grant (or sell at par value or such higher purchase price determined by the Administrator) an Unrestricted Stock Award to any grantee pursuant to which such grantee may receive shares of Stock free of any restrictions ("Unrestricted Stock") under the Plan. Unrestricted Stock Awards may be granted in respect of past services or other valid consideration, or in lieu of cash compensation due to such grantee. SECTION 10. DIVIDEND EQUIVALENT RIGHTS -------------------------- a) Dividend Equivalent Rights. ----------------------------- A Dividend Equivalent Right is an Award entitling the grantee to receive credits based on cash dividends that would have been paid on the shares of Stock specified in the Dividend Equivalent Right (or other award to which it relates) if such shares had been issued to and held by the grantee. A Dividend Equivalent Right may be granted hereunder to any grantee as a component of another Award or as a freestanding award. The terms and conditions of Dividend Equivalent Rights shall be specified in the Award agreement. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair Market Value on the date of reinvestment or such other price as may then apply under a dividend reinvestment plan sponsored by the Company, if any. Dividend Equivalent Rights may be settled in cash or shares of Stock or a combination thereof, in a single installment or installments. A Dividend Equivalent Right granted as a component of another Award may provide that such Dividend Equivalent Right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other award. A Dividend Equivalent Right granted as a component of another Award may also contain terms and conditions different from such other award. b) Interest Equivalents. --------------------- Any Award under this Plan that is settled in whole or in part in cash on a deferred basis may provide in the grant for interest equivalents to be credited with respect to such cash payment. Interest equivalents may be compounded and shall be paid upon such terms and conditions as may be specified by the grant. c) Termination. ------------ Except as may otherwise be provided by the Administrator either in the Award agreement or, subject to Section 13 below, in writing after the Award agreement is issued, a grantee's rights in all Dividend Equivalent Rights or interest equivalents shall automatically terminate upon the grantee's termination of employment (or cessation of service relationship) with the Company and its Subsidiaries for any reason. SECTION 11. TAX WITHHOLDING --------------- a) Payment by Grantee. ------------------- Each grantee shall, no later than the date as of which the value of an Award or of any Stock or other amounts received thereunder first becomes includable in the gross income of the grantee for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the grantee. The Company's obligation to deliver stock certificates to any grantee is subject to and conditioned on tax obligations being satisfied by the grantee. b) Payment in Stock. ----------------- Subject to approval by the Administrator, a grantee may elect to have the minimum required tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due, or (ii) transferring to the Company shares of Stock owned by the grantee with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due. SECTION 12. TRANSFER, LEAVE OF ABSENCE, ETC. -------------------------------- For purposes of the Plan, the following events shall not be deemed a termination of employment: a) a transfer to the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to another; or b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee's right to re-employment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Administrator otherwise so provides in writing. SECTION 13. AMENDMENTS AND TERMINATION -------------------------- The Board may, at any time, amend or discontinue the Plan and the Administrator may, at any time, amend or cancel any outstanding Award for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding Award without the holder's consent. If and to the extent determined by the Administrator to be required by the relevant securities exchange or by the Code to ensure that Incentive Stock Options granted under the Plan are qualified under Section 422 of the Code or to ensure that compensation earned under Awards qualifies as performance-based compensation under Section 162(m) of the Code, if and to the extent intended to so qualify, Plan amendments shall be subject to approval by the Company stockholders entitled to vote at a meeting of stockholders. All Material Plan Amendments shall be subject to approval by the Company's stockholders entitled to vote at a meeting of the stockholders. For purposes of this Section 13, a Material Plan Amendment shall mean any Plan amendment which would require stockholder approval pursuant to the rules of the national securities exchange or NASDAQ, on which the Company's stock is listed at the time of such amendment. Material Plan Amendments shall be approved by the stockholders in accordance with the rules of NASDAQ or the appropriate national securities exchange, as the case may be. Nothing in this Section 13 shall limit the Administrator's authority to take any action permitted pursuant to Section 3(c). SECTION 14. STATUS OF PLAN -------------- With respect to the portion of any Award that has not been exercised and any payments in cash, Stock or other consideration not received by a grantee, a grantee shall have no rights greater than those of a general creditor of the Company unless the Administrator shall otherwise expressly determine in connection with any Award or Awards. In its sole discretion, the Administrator may authorize the creation of trusts or other arrangements to meet the Company's obligations to deliver Stock or make payments with respect to Awards hereunder, provided that the existence of such trusts or other arrangements is consistent with the foregoing sentence. SECTION 15. CHANGE OF CONTROL PROVISIONS ---------------------------- Upon the occurrence of a Change of Control as defined in this Section 15: a) Except as otherwise provided in the applicable Award agreement, each outstanding Stock Option and Stock Appreciation Right shall automatically become fully exercisable. b) Except as otherwise provided in the applicable Award Agreement, conditions and restrictions on each outstanding Restricted Stock Award and Deferred Stock Award will be removed. c) "Change of Control" shall mean the occurrence of any one of the following events: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"); provided, however, that any acquisition by the Company or its subsidiaries, or any employee benefit plan (or related trust) of the Company or its subsidiaries of 20% or more of Outstanding Company Common Stock shall not constitute a Change in Control; and provided, further, that any acquisition by a corporation with respect to which, following such acquisition, more than 50% of the then outstanding shares of common stock of such corporation, is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the Outstanding Company Common Stock, shall not constitute a Change in Control; or (ii) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; or (iii)Consummation by the Company of (i) a reorganization, merger or consolidation, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 40% of the then outstanding shares of common stock of the corporation resulting from such a reorganization, merger or consolidation; (ii) a reorganization, merger or consolidation, in each case, (A) with respect to which all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock immediately prior to such reorganization, merger or consolidation, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 40% but less than 50% of the then outstanding shares of common stock of the corporation resulting from such a reorganization, merger or consolidation, (B) at least a majority of the directors then constituting the Incumbent Board do not approve the transaction and do not designate the transaction as not constituting a Change in Control, and (C) following the transaction members of the then Incumbent Board do not continue to comprise at least a majority of the Board; or (iii) the sale or other disposition of all or substantially all of the assets of the Company, excluding a sale or other disposition of assets to a subsidiary of the Company; or (iv) Consummation by The Washington Trust Company, the wholly-owned subsidiary of the Company, of (i) a reorganization, merger or consolidation, in each case, with respect to which, following such reorganization, merger or consolidation, the Company does not beneficially own, directly or indirectly, more than 50% of the then outstanding shares of common stock of the corporation or bank resulting from such a reorganization, merger or consolidation or (ii) the sale or other disposition of all or substantially all of the assets of the Bank, excluding a sale or other disposition of assets to the Company or a subsidiary of the Company. The decision as to whether a Change in Control of the Company has occurred shall be made by a majority of the Continuing Directors of the Company (as defined in the Restated Articles of Incorporation of the Company) and shall be conclusive and binding. SECTION 16. GENERAL PROVISIONS ------------------ a) No Distribution; Compliance with Legal Requirements. ---------------------------------------------------- The Administrator may require each person acquiring Stock pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution therof. No shares of Stock shall be issued pursuant to an Award until all applicable securities law and other legal and stock exchange or similar requirements have been satisfied. The Administrator may require the placing of such stop-orders and restrictive legends on certificates for Stock and Awards as it deems appropriate. b) Delivery of Stock Certificates. -------------------------------- Stock certificates to grantees under this Plan shall be deemed delivered for all purposes when the Company or a stock transfer agent of the Company shall have mailed such certificates in the United States mail, addressed to the grantee, at the grantee's last known address on file with the Company. c) Other Compensation Arrangements; No Employment Rights. ------------------------------------------------------ Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, including trusts, and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of this Plan and the grant of Awards do not confer upon any employee any right to continued employment with the Company or any Subsidiary. d) Trading Policy Restrictions. ---------------------------- Option exercises and other Awards under the Plan shall be subject to such Company's insider trading policy, as in effect from time to time. e) Designation of Beneficiary. --------------------------- Each grantee to whom an Award has been made under the Plan may designate a beneficiary or beneficiaries to exercise any Award or receive any payment under any Award payable on or after the grantee's death. Any such designation shall be on a form provided for that purpose by the Administrator and shall not be effective until received by the Administrator. If no beneficiary has been designated by a deceased grantee, or if the designated beneficiaries have predeceased the grantee, the beneficiary shall be the grantee's estate. SECTION 17. EFFECTIVE DATE OF PLAN ---------------------- This Plan shall become effective upon approval by the holders of a majority of the votes cast at a meeting of stockholders at which a quorum is present. Subject to such approval by the stockholders and to the requirement that no Stock may be issued hereunder prior to such approval, Stock Options and other Awards may be granted hereunder on and after adoption of this Plan by the Board. SECTION 18. GOVERNING LAW ------------- This Plan and all Awards and actions taken thereunder shall be governed by, and construed in accordance with, the laws of the State of Rhode Island, applied without regard to conflict of law principles. EX-11 4 q22003ex11.txt EPS 06.30.2003 EXHIBIT 11 Washington Trust Bancorp, Inc. Computation of Per Share Earnings For the Periods Ended June 30, 2003 and 2002
Three months ended June 30, 2003 2002 - ---------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Basic Diluted Basic Diluted ----------------- ---------------- ----------------- ---------------- Net income $4,574 $4,574 $4,024 $4,024 Share amounts: Average outstanding 13,089.4 13,089.4 12,858.7 12,858.7 Common stock equivalents - 215.5 - 206.4 - ------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Weighted average outstanding 13,089.4 13,304.9 12,858.7 13,065.1 - ------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Earnings per share $.35 $.34 $.31 $.31 - ------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Six months ended June 30, 2003 2002 - ---------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Basic Diluted Basic Diluted ----------------- ---------------- ----------------- ---------------- Net income $9,324 $9,324 $7,768 $7,768 Share amounts: Average outstanding 13,074.4 13,074.4 12,434.1 12,434.1 Common stock equivalents - 190.8 - 188.3 - ------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Weighted average outstanding 13,074.4 13,265.2 12,434.1 12,622.4 - ------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Earnings per share $.71 $.70 $.62 $.62 - ------------------------------------------------ ----------------- ---------------- ----------------- ----------------
EX-15 5 q22003ex15.txt LETTER RE: UNAUDITED INTERIM FINANCIAL INFO EXHIBIT 15 Washington Trust Bancorp, Inc. Letter regarding unaudited interim financial information To the Board of Directors and Shareholders of Washington Trust Bancorp, Inc.: Re: Registration Statements on Form S-8 File No. 333-107141, 333-72277, 333-48315, 333-13167, and 33-23048 Registration Statements on Form S-3 File No. 333-13821, 33-28065, and 333-42502 With respect to the subject Registration Statements, we acknowledge our awareness of the use therein of our report dated August 13, 2003 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933 (the "Act"), such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. KPMG LLP Providence, Rhode Island August 13, 2003 EX-31 6 q22003ex31-1.txt CERTIFICATION: SECTION 302 JCW EXHIBIT 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John C. Warren, Chairman and Chief Executive Officer of Washington Trust Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q, for the quarterly period ended June 30, 2003, of Washington Trust Bancorp, Inc. (the "Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the Registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others with that entity, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors: (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Date: August 13, 2003 By: John C. Warren - ---------------------- ------------------------------------ John C. Warren Chairman and Chief Executive Officer (principal executive officer) EX-31 7 q22003ex31-2.txt CERTIFICATION: SECTION 302 DVD EXHIBIT 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, David V. Devault, Executive Vice President, Treasurer and Chief Financial Officer of Washington Trust Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q, for the quarterly period ended June 30, 2003, of Washington Trust Bancorp, Inc. (the "Registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the Registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others with that entity, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors: (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Date: August 13, 2003 By: David V. Devault - ---------------------- -------------------------------------------- David V. Devault Executive Vice President, Treasurer and Chief Financial Officer (principal financial and accounting officer) EX-32 8 q22003ex32.txt CERTIFICATIONS: SECTION 906 EXHIBIT 32 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned officer of Washington Trust Bancorp, Inc. (the "Corporation"), hereby certifies that the Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 to which this certification is attached (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Date: August 13, 2003 John C. Warren _____________________________________________ John C. Warren Chairman and Chief Executive Officer The undersigned officer of Washington Trust Bancorp, Inc. (the "Corporation"), hereby certifies that the Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 to which this certification is attached (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Date: August 13, 2003 David V. Devault _____________________________________________ David V. Devault Executive Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----