10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1994 ---------------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ____________________ to __________________ Commission file Number 0-13091 ------------------------------------------------------ WASHINGTON TRUST BANCORP, INC. ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) RHODE ISLAND 05-0404671 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 23 BROAD STREET, WESTERLY, RHODE ISLAND 02891 ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (401) 348-1200 ------------------ Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange on Title of each class which registered NONE NONE ---------------------- ---------------------- Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, $.0625 PAR VALUE ------------------------------------------------------------------------------ (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant was $61,445,077 at March 14, 1995 which includes $5,701,523 held by The Washington Trust Company under trust agreements and other instruments. The number of shares of common stock of the registrant outstanding as of March 14, 1995 was 2,825,061. Page 1 of 141 Exhibit Index page 22 DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's 1994 Annual Report to Shareholders. (Parts I, II and IV) 2. Portions of the Registrant's Proxy Statement dated March 20, 1995 for the 1995 Annual Meeting of Shareholders. (Part III). =============================================================================== FORM 10-K WASHINGTON TRUST BANCORP, INC. For the Year Ended December 31, 1994 TABLE OF CONTENTS ----------------- Description Page Number --------------- ----------- Part I ------ Item 1 - Business 3 Item 2 - Properties 16 Item 3 - Legal Proceedings 16 Item 4 - Submission of Matters to a Vote of Security Holders 16 Executive Officers of the Registrant 17 Part II ------- Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters 18 Item 6 - Selected Financial Data 19 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 8 - Financial Statements and Supplementary Data 19 Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 19 Part III -------- Item 10 - Directors and Executive Officers of the Registrant 20 Item 11 - Executive Compensation 20 Item 12 - Security Ownership of Certain Beneficial Owners and Management 20 Item 13 - Certain Relationships and Related Transactions 20 Part IV ------- Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 21 Signatures 22 ---------- -2- PART I ------ ITEM 1. BUSINESS ---------------- Washington Trust Bancorp, Inc. ------------------------------ Washington Trust Bancorp, Inc. (the "Corporation") is a publicly-owned, registered bank holding company, organized in 1984 under the laws of the state of Rhode Island, whose subsidiaries are permitted to engage in banking and other financial services and businesses. The Corporation conducts its business through its wholly-owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Corporation was formed in 1984 under a plan of reorganization in which outstanding common shares of The Washington Trust Company were exchanged for common shares of Washington Trust Bancorp, Inc. At December 31, 1994 the Corporation had total consolidated assets of $516 million, deposits of $441 million and equity capital of $46 million. The Washington Trust Company ---------------------------- The Washington Trust Company was originally chartered in 1800 as the Washington Bank and is the oldest banking institution headquartered in its market area. Its current corporate charter dates to 1902. See "Market Area and Competition" below for further information. A broad range of financial services are provided by the Bank, including: - Residential mortgages - Commercial and consumer demand deposits - Commercial loans - Savings, NOW and money market deposits - Construction loans - Certificates of deposit - Installment loans - Retirement accounts - Home equity lines of credit - Electronic funds transfer - VISA and Mastercard accounts - Safe deposit boxes - Merchant credit card services - Trust and investment services The Bank's primary source of income is net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing deposits and other borrowed funds. Sources of noninterest income include fees for management of customer investment portfolios, trusts and estates, service charges on deposit accounts, merchant processing fees and other banking-related fees. Noninterest expenses include the provision for loan losses, salaries and employee benefits, occupancy, equipment, office supplies deposit taxes and assessments, foreclosed property costs and other administrative expenses. Automated teller machines (ATM's) are located at each of the Bank's six banking offices. The Bank is a member of the NYCE, Yankee 24, Plus, and Cashstream ATM networks. -3- Data processing for most of the Bank's deposit and loan accounts and other applications is conducted internally using owned equipment. Application software is primarily obtained through purchase or licensing agreements. The Bank's Trust and Investment Department provides fiduciary services as trustee under wills and trust agreements; as executor or administrator of estates; as a provider of agency and custodial investment services to individuals and institutions; and as a trustee for employee benefit plans. The market value of total trust assets amounted to $389 million as of December 31, 1994. The following is a summary of the relative amounts of income producing functions as a percentage of gross operating income during the past five years:
1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Interest and fees on: Residential real estate loans 31% 33% 37% 37% 35% Commercial and other loans 32 30 31 33 40 Installment and consumer loans 9 8 9 10 10 ---- ---- ---- ---- ---- Total loan income 72 71 77 80 85 Interest and dividends on securities 13 13 9 7 6 Trust income 7 7 6 5 5 Other noninterest income 8 9 8 8 4 ---- ---- ---- ---- ---- Gross operating income 100% 100% 100% 100% 100% ==== ==== ==== ==== ====
The percentage of gross income derived from interest and fees on loans was 72% and 71% in 1994 and 1993, respectively, down from a five-year high of 85% in 1990, primarily as a result of the low interest rate environment that existed in 1993 and 1994. Market Area and Competition --------------------------- The Bank's market area includes most of southern Rhode Island (Washington County) and a portion of New London County in southeastern Connecticut. The Bank's six banking offices are located in the following Rhode Island communities: - Westerly (2) - Charlestown - New Shoreham (Block Island) - Richmond - Narragansett The Bank's offices in Charlestown and on Block Island are the only bank facilities in those communities. The Block Island office was acquired from another Rhode Island bank in 1984. The Charlestown office was opened in 1988 and the Narragansett office was opened in 1989. The Bank faces strong competition from branches of major Rhode Island and regional commercial banks, local branches of certain Connecticut banks, as well as various credit unions, savings institutions and, to some extent, finance -4- companies. The principal methods of competition are through interest rates, financing terms and other customer conveniences. The Washington Trust Company had 36% of total deposits reported by financial institutions for banking offices within its market area as of June 30, 1994. The two closest competitors held 16% each, and the third closest competitor held 6% of total deposits in the market area. The Corporation believes that being the largest commercial banking institution headquartered within the market area provides a competitive advantage over other financial institutions. The Bank has a marketing department which is responsible for the review of existing products and services and the development of new products and services. Employees --------- As of December 31, 1994 the Corporation employed approximately 241 full-time and 53 part-time employees. Management believes that its employee relations are good. Supervision and Regulation -------------------------- General - The business in which the Corporation and the Bank are engaged is subject to extensive supervision, regulation, and examination by various bank regulatory authorities and other agencies of federal and state government. The supervisory and regulatory activities of these parties are often intended primarily for the protection of customers or are aimed at carrying out broad public policy goals that may not be directly related to the financial services provided by the Corporation and the Bank, nor intended for the protection of the Corporation's shareholders. Proposals to change regulations and laws which affect the banking industry are frequently raised at the federal and state level. The potential impact on the Corporation of any future revisions to the supervisory or regulatory structure cannot be determined. The Corporation and the Bank are required by various authorities to file extensive periodic reports of financial and other information and such other reports as the regulatory and supervisory authorities may require. The Corporation is also subject to the reporting and other requirements of the Securities Exchange Act of 1934. The Corporation is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a bank holding company, the activities of the Corporation are regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The BHC Act requires that the Corporation obtain prior approval of the Federal Reserve Board to acquire control over a bank or certain nonbank entities and restricts the activities of the Corporation to those closely related to banking. Federal law also regulates transactions between the Corporation and the Bank, including loans or extensions of credit. The Bank is subject to the supervision of, and examination by, the FDIC. As a state chartered institution, The Washington Trust Company is also subject to various Rhode Island business and banking regulations. Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) - FDICIA was enacted in December 1991 and has resulted in extensive changes to the federal banking laws. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository -5- institutions that do not meet minimum capital requirements. FDICIA established five capital tiers, ranging from "well-capitalized" to "critically undercapitalized." A depository institution is well-capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well- capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. In addition, "pass through" deposit insurance coverage may not be available for certain employee benefit accounts. At December 31, 1994, the Bank's capital ratios placed it in the well-capitalized category. Another primary purpose of FDICIA was to recapitalize the Bank Insurance Fund (BIF). The FDIC adopted a risk-related premium system for the assessment period beginning January 1, 1993. Under this new system, each institution's assessment rate is based on its capital ratios in combination with a supervisory evaluation of the risk the institution poses to the BIF. Banks deemed to be well-capitalized and who pose the lowest risk to the BIF will pay the lowest assessment rates, while undercapitalized banks, who present the highest risk, will pay the highest rates. FDICIA contains other significant provisions that require the federal banking regulators to establish standards for safety and soundness for depository institutions and their holding companies in three areas: (i) operational and managerial; (ii) asset quality, earnings and stock valuation; and (iii) management compensation. The legislation also requires that risk-based capital requirements contain provisions for interest rate risk, credit risk and risks of nontraditional activities. FDICIA also imposes expanded accounting and audit reporting requirements for depository institutions. In addition, FDICIA imposes numerous restrictions on state-chartered banks, including those which generally limit investments and activities to those permitted to national banks, and contains several consumer banking law provisions. The provisions of FDICIA are being phased in over several years. While final rules have been issued on most provisions, others have yet to be issued. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 - On September 30, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was signed into law. Effective one year after enactment, adequately capitalized bank holding companies will be permitted to acquire banks in any state subject to certain concentration limits and other conditions. Also, on a phased-in basis over three years from the date of its enactment, other limitations on interstate bank mergers, consolidations and branching will be eased, subject to a state's ability to "opt out" of certain provisions of the law by passage of state law. No legislation has been introduced in Rhode Island for the 1995 legislative session that would constitute an "opt out" election by the State. Dividend Restrictions -The Corporation's revenues consist of cash dividends paid to it by the Bank. Such payments are restricted pursuant to various state and federal regulatory limitations. Reference is made to Note 16 to the Corporation's Consolidated Financial Statements included in its 1994 Annual Report to Shareholders incorporated herein by reference for additional discussion of the Corporation's ability to pay dividends. -6- Capital Guidelines - Regulatory guidelines have been established that require bank holding companies and banks to maintain minimum ratios of capital to risk- adjusted assets. Banks are required to have minimum core capital (Tier 1) of 4% and total risk-adjusted capital (Tier 1 and Tier 2) of 8%. For the Corporation, Tier 1 capital is essentially equal to shareholders' equity excluding the net unrealized gain on securities available for sale. Tier 2 capital consists of a portion of the reserve for possible loan losses (limited to 1.25% of total risk- weighted assets). As of December 31, 1994, net risk-weighted assets amounted to $342.5 million, the Tier 1 capital ratio was 12.55% and the total risk-based capital ratio was approximately 13.82%. The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the risk-based capital guidelines) divided by average assets (net of intangible assets and excluding the effects of accounting for securities available for sale under SFAS No. 115). The minimum leverage ratio is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk (including no undue interest rate risk), excellent asset quality, high liquidity and strong earnings. Other banking organizations are expected to have ratios of at least 4 - 5%, depending on their particular condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstances or risk profile of a given banking organization. The Corporation's Tier 1 leverage ratio was 8.45% as of December 31, 1994. The Federal Reserve has not advised the Corporation of any specific minimum Tier 1 leverage capital ratio applicable to it. GUIDE 3 STATISTICAL DISCLOSURES ------------------------------- The following tables contain additional consolidated statistical data about the Corporation and its subsidiary. I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential ------------------------------------------------------------- A. Average balance sheets are presented on page 28 of the Corporation's 1994 Annual Report to Shareholders under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)", and are incorporated herein by reference. Nonaccrual loans are included in average loan balances. Average balances are based upon daily averages. B. An analysis of net interest earnings, including interest earned and paid, average yields and costs, and net yield on interest-earning assets is presented on page 28 of the Corporation's 1994 Annual Report to Shareholders under the caption "Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis)", and is incorporated herein by reference. Interest income is reported on the fully taxable-equivalent basis. Tax exempt income is converted to a fully taxable equivalent basis by assuming a 34% marginal federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Interest on nonaccrual loans is included in the analysis of net interest earnings to the extent that such interest income has been recognized in the Consolidated Statements of Income. See Guide 3 Item III.C.1. -7- C. An analysis of rate/volume changes in interest income and interest expense is presented on page 29 of the Corporation's 1994 Annual Report to Shareholders under the caption "Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis)", and is incorporated herein by reference. The net change attributable to both volume and rate has been allocated proportionately. II. INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE ------------------------------------------------------- A. The carrying amounts of investment securities as of the dates indicated are presented in the following table:
December 31, 1994 1993 1992 ------------------------------------------------------------------------- U.S. Treasury obligations and obligations of U.S. government agencies $20,413,017 $19,419,860 $ 8,998,075 Mortgage-backed securities 21,696,508 25,401,432 24,202,972 States and political subdivisions 10,387,091 7,676,540 5,905,595 ---------- ---------- ---------- $52,496,616 $52,497,832 $39,106,642 ========== ========== ===========
The December 31, 1992 balance of mortgage-backed securities includes $19,209,775 of securitized mortgages originated by the Bank which were previously classified as loans in the Corporation's 1992 consolidated financial statements. The carrying amounts of securities available for sale as of the dates indicated are summarized in the table below. Effective January 1, 1994, the Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). The Statement requires that securities available for sale be reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Therefore, the carrying value of securities available for sale at December 31, 1994 presented below is equal to market value. Prior to the adoption of SFAS No. 115, securities available for sale were carried at the lower of aggregate cost, adjusted for amortization of premium or accretion of discount in the case of debt securities, or market value.
December 31, 1994 1993 1992 ------------------------------------------------------------------------- U.S. Treasury obligations $24,533,220 $25,120,650 $23,165,503 Corporate debt securities -- 1,000,000 1,000,000 Corporate stocks 9,076,095 8,143,093 9,577,786 Federal Home Loan Bank stock 2,906,800 1,972,800 1,942,000 ---------- ---------- ---------- $36,516,115 $36,236,543 $35,685,289 ========== ========== ===========
-8- B. Maturities of debt securities as of December 31, 1994 are presented in the following tables. Mortgage-backed securities are included based on their weighted average maturities, adjusted for anticipated future prepayments. Yields on tax exempt obligations were not computed on a tax equivalent basis.
U.S. Treasury obligations & obligations of Mortgage- States and U.S. Government backed Political Total Debt Investment Securities Agencies Securities Subdivisions Securities --------------------------- --------------- ----------- ------------ ----------- Due in 1 year or less: Amount $ 2,998,917 $ 1,491,000 $ 3,539,599 $ 8,029,516 Yield 4.04% 7.00% 4.68% 4.87% After 1 but within 5 years: Amount 16,414,100 6,393,819 5,889,928 28,697,847 Yield 5.15% 6.97% 4.34% 5.39% After 5 but within 10 years: Amount 1,000,000 5,575,938 658,309 7,234,247 Yield 8.00% 7.23% 4.88% 7.13% After 10 years: Amount -- 8,235,751 299,255 8,535,006 Yield -- 7.49% 3.43% 7.35% ---------- ---------- ---------- ---------- Totals: Amount $20,413,017 $21,696,508 $10,387,091 $52,496,616 Yield 5.13% 7.24% 4.46% 5.87% ========== ========== ========== ==========
U.S. Treasury U.S. Treasury Weighted obligations at obligations at average Securities Available for Sale amortized cost market value yield ----------------------------- -------------- -------------- -------- Due in 1 year or less: Amount $ 6,001,105 $ 5,980,350 5.54% After 1 but within 5 years: Amount 18,568,315 17,881,150 6.11% After 5 but within 10 years: Amount -- -- -- After 10 years: Amount 490,060 671,720 13.14% ---------- ---------- ----- Totals: Amount $25,059,480 $24,533,220 6.11% ========== ========== =====
C. Not applicable. -9- III. LOAN PORTFOLIO -------------- A. Types of Loans
December 31, 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------- Residential real estate: Mortgages $169,715,217 $152,758,727 $140,438,839 $168,173,712 $156,007,304 Homeowner construction 6,933,793 6,120,171 5,124,603 4,482,367 9,070,011 ----------- ----------- ----------- ----------- ----------- Total residential real estate 176,649,010 158,878,898 145,563,442 172,656,079 165,077,315 ----------- ----------- ----------- ----------- ----------- Commercial: Mortgages 54,735,825 48,011,836 38,921,833 36,734,260 36,070,358 Construction and development 11,909,730 10,051,008 10,947,411 18,644,654 28,124,400 Other 101,796,053 101,636,280 97,344,028 96,392,707 105,605,074 ----------- ----------- ----------- ----------- ----------- Total commercial 168,441,608 159,699,124 147,213,272 151,771,621 169,799,832 ----------- ----------- ----------- ----------- ----------- Installment 45,042,854 33,932,673 32,461,572 36,583,783 38,893,929 ----------- ----------- ----------- ----------- ----------- $390,133,472 $352,510,695 $325,238,286 $361,011,483 $373,771,076 =========== =========== =========== =========== ===========
B. An analysis of the maturity and interest rate sensitivity of real estate construction and commercial and other loans as of December 31, 1994 follows: Maturity analysis:
One Year One to five After five or Less Years Years Total ---------- ---------- ---------- ----------- Construction and development (*) $ 4,580,438 4,463,857 9,799,228 $ 18,843,523 Commercial - other 36,609,542 43,458,125 21,728,386 101,796,053 ---------- ---------- ---------- ----------- $41,189,980 47,921,982 31,527,614 $120,639,576 ========== ========== ========== =========== (*) Includes homeowner construction and commercial construction and development. Maturities of homeowner construction loans are included based on their contractual conventional mortgage repayment terms following the completion of construction.
Sensitivity to changes in interest rates for all such loans due after one year is as follows:
Floating or Predetermined Adjustable Rates Rates Totals ------------- ---------- ---------- Principal due after one year $12,200,919 $67,248,677 $79,449,596 ========== ========== ==========
-10- C. Risk Elements Reference is made to the caption "Asset Quality" included in Management's Analysis of Financial Statements on pages 25-27 of the Corporation's 1994 Annual Report to Shareholders incorporated herein by reference. Included therein is a discussion of the Corporation's credit review and collection practices. Also included therein is information concerning property acquired through foreclosure and in-substance foreclosures held at December 31, 1994 and the Corporation's ongoing efforts to dispose of such properties. 1. Nonaccrual, Past Due and Restructured Loans. (a). Nonaccrual loans as of the dates indicated were as follows:
December 31, 1994 1993 1992 1991 1990 -------------------------------------------------------------------------- $7,119,271 $11,370,726 $12,563,329 $17,856,390 $16,329,966 ========= ========== ========== ========== ==========
For years 1994, 1993 and 1992, loans, with the exception of credit card loans, were placed on nonaccrual status and interest recognition was suspended when such loans were 90 days or more overdue with respect to principal and/or interest. Interest previously accrued, but not collected on such loans was reversed against current period income. Cash receipts on nonaccrual loans were recorded as interest income, or as a reduction of principal if full collection of the loan was doubtful or if impairment of the collateral was identified. Loans were removed from nonaccrual status when they had been current as to principal and interest for a period of time, the borrower had demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans were considered to be fully collectible. In years prior to 1992, commercial loans were placed on nonaccrual status and interest recognition was suspended when they were 90 days or more overdue. Residential mortgages and consumer loans were placed on nonaccrual status when, in management's judgment, the probability of collection was deemed insufficient to warrant further income recognition. For the year ended December 31, 1994, the gross interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $628,000. Interest recognized on these loans amounted to approximately $287,000. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 1994. (b). Loans contractually past due 90 days or more and still accruing for the dates indicated were as follows:
December 31, 1994 1993 1992 1991 1990 -------------------------------------------------------------------- $24,124 $22,455 $42,648 $6,064,648 $4,039,105 ====== ====== ====== ========= =========
-11- (c). Restructured accruing loans for the dates indicated were as follows:
December 31, 1994 1993 1992 1991 1990 ----------------------------------------------------------------------- $364,824 $ --- $1,476,000 $1,522,282 $ -- ======= ========= ========= ========= =========
Restructured accruing loans include those for which concessions, such as reduction of interest rates other than normal market rate adjustments or deferral of principal or interest payments, have been granted due to a borrower's financial condition. Interest on restructured loans is accrued at the reduced rate. Loans restructured during 1994 amounted to $525,809, of which $160,985 is included in nonaccrual loans reported in Section III.C.1.(a) above. 2. Potential Problem Loans. Potential problem loans consist of certain accruing commercial loans that were less than 90 days past due at December 31, 1994, including certain loans classified as either substandard, doubtful or loss by the Bank's primary regulator during their most recent examination conducted during the fourth quarter of 1994 and loans identified by management of the Bank as potential problem loans. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve as a result of collection efforts, while the credit quality of other loans may deteriorate, resulting in some amount of losses. These loans are not included in the analysis of nonaccrual, past due and restructured loans in III.C.1 above. At December 31, 1994, potential problem loans which were contractually current amounted to $4.9 million. In addition, potential problem loans that were 30-89 days past due amounted to approximately $2.3 million at December 31, 1994. The Corporation's loan policy provides guidelines for the review of such loans in order to facilitate collection. Depending on future events, the potential problem loans referred to above, and others not currently identified, could be classified as nonperforming in the future. 3. Foreign Outstandings. None 4. Loan Concentrations. The Corporation has no concentration of loans which exceed 10% of its total loans except as disclosed by types of loan in Section III.A. D. Other Interest-Bearing Assets: None -12- IV. SUMMARY OF LOAN LOSS EXPERIENCE ------------------------------- A. The reserve for possible loan losses is available for future credit losses inherent in the loan portfolio. The level of the reserve is based on management's ongoing review of the growth and composition of the loan portfolio, net charge-off experience, current and expected economic conditions, and other pertinent factors. Loans (or portions thereof) deemed to be uncollectible are charged against the reserve and recoveries of amounts previously charged off are added to the reserve. Loss provisions charged to earnings are added to the reserve to bring it to the desired level. Loss experience on loans is presented in the following table for the years indicated. Analysis of the Reserve for Possible Loan Losses ------------------------------------------------
December 31, 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------- Balance at beginning of year $8,657,263 $7,342,276 $6,474,272 $8,487,196 $3,229,112 Charge-offs (domestic): Residential: Mortgages 158,526 203,472 260,848 331,130 41,699 Homeowner construction -- -- -- -- -- Commercial: Mortgages 329,233 596,250 24,154 2,097,532 100,000 Construction and development -- -- 114,315 1,312,452 980,143 Other 375,609 333,924 2,522,916 2,928,730 1,867,843 Installment 250,840 378,575 494,756 771,705 269,260 --------- --------- --------- --------- --------- Total charge-offs 1,114,208 1,512,221 3,416,989 7,441,549 3,258,945 --------- --------- --------- --------- --------- Recoveries (domestic): Residential: Mortgages 1,110 2,278 -- 272 -- Homeowner construction -- -- -- -- -- Commercial: Mortgages 21,830 84,351 200 -- -- Construction and development 6,504 20,756 29,424 100,997 -- Other 188,722 174,976 192,845 23,981 11,018 Installment 74,686 44,847 62,524 103,375 6,011 --------- --------- --------- --------- --------- Total recoveries 292,852 327,208 284,993 228,625 17,029 --------- --------- --------- --------- --------- Net charge-offs 821,356 1,185,013 3,131,996 7,212,924 3,241,916 Additions charged to earnings 1,000,000 2,500,000 4,000,000 5,200,000 8,500,000 --------- --------- --------- --------- --------- Balance at end of period $8,835,907 $8,657,263 $7,342,276 $6,474,272 $8,487,196 ========= ========= ========= ========= ========= Net charge-offs to average loans .22% .35% .89% 1.95% .89% ========= ========= ========= ========= =========
-13- B. The following table presents the allocation of the allowance for loan losses.
December 31, 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------- Residential: Mortgages $1,088,974 1,064,022 1,053,778 1,225,000 1,020,000 % of these loans to all loans 43.5% 43.3% 43.2% 46.6% 41.7% Homeowner construction 44,047 33,661 35,222 -- -- % of these loans to all loans 1.8% 1.7% 1.6% 1.2% 2.4% Commercial: Mortgages 1,114,797 1,090,454 1,017,490 1,305,509 1,493,453 % of these loans to all loans 14.0% 13.6% 12.0% 10.2% 9.7% Construction and development 270,684 110,645 179,395 494,694 1,373,735 % of these loans to all loans 3.0% 2.9% 3.4% 5.2% 7.5% Other 2,686,977 2,726,961 2,753,695 2,453,753 1,887,083 % of these loans to all loans 26.1% 28.9% 29.8% 26.7% 28.3% Installment 854,688 559,889 692,913 726,000 669,615 % of these loans to all loans 11.6% 9.6% 10.0% 10.1% 10.4% Unallocated (1) 2,775,740 3,071,631 1,609,783 269,316 2,043,310 --------- --------- --------- --------- --------- $8,835,907 8,657,263 7,342,276 6,474,272 8,487,196 100.0% 100.0% 100.0% 100.0% 100.0% ========= ========= ========= ========= ========= (1) Beginning with 1991, the Corporation's practice for allocating loss exposure was refined, resulting in a broader allocation of the overall reserve. Accordingly, portions of the unallocated reserve have been redistributed to specific loan categories.
-14- V. DEPOSITS -------- A. Average deposit balances outstanding and the average rates paid thereon are presented in the following table:
1994 1993 1992 --------------------- -------------------- -------------------- Average Average Average Average Average Average Amount Rate Paid Amount Rate Paid Amount Rate Paid ----------- --------- ---------- --------- ---------- --------- Demand deposits $ 49,369,000 -- 40,097,000 -- 32,872,000 -- Savings deposits: Regular 98,851,000 2.70% 79,567,000 2.83% 63,163,000 3.33% NOW accounts 57,834,000 1.36% 58,930,000 1.84% 55,178,000 2.73% Money market accounts 40,101,000 2.17% 59,473,000 2.74% 63,969,000 3.45% ----------- ----------- ----------- Total savings 196,786,000 2.20% 197,970,000 2.51% 182,310,000 3.19% Time deposits 183,950,000 4.30% 176,148,000 4.60% 183,443,000 5.60% ----------- ----------- ----------- Total deposits $430,105,000 414,215,000 398,625,000 =========== =========== ===========
B. Not Applicable C. Not Applicable D. The maturity schedule of time deposits in amounts of $100,000 or more at December 31, 1994 was as follows:
Over 3 Over 6 3 months through through Over 12 or less 6 months 12 months months Total ---------- --------- --------- --------- ---------- Time remaining until maturity: $11,381,827 2,224,163 4,643,474 6,313,153 24,562,617 ========== ========= ========= ========= ==========
E. Not applicable VI. RETURN ON EQUITY AND ASSETS ---------------------------
1994 1993 1992 ---- ---- ---- Return on average assets 1.25% 1.01% 0.70% Return on average shareholders' equity 14.11% 12.92% 9.15% Dividend payout ratio 33.02% 34.30% 46.85% Average equity to average total assets 8.84% 7.81% 7.68%
VII. SHORT-TERM BORROWINGS --------------------- The average balance of short-term borrowings during the reported periods was less than 30% of shareholders' equity at the end of each reported period. -15- ITEM 2. PROPERTIES ------------------ As of December 31, 1994 the Corporation was operating six facilities including its main office located in Westerly, Rhode Island and five branch banking facilities located in Westerly, Charlestown, Narragansett, Richmond and Block Island, Rhode Island. All sites are owned, except for the Block Island branch facility, which is leased. The main office premises, containing the corporate offices and a banking facility, consists of a five story building and an adjacent two story building. The buildings, which are connected, contain approximately 50,000 square feet of space, 42,000 square feet of which is occupied by the Corporation. The remaining space is leased to merchant and professional tenants under short-term lease arrangements and could be used for expansion of the Corporation's offices. The main office location also contains a three level retail parking garage with 80,000 square feet of space. The Corporation has made a substantial investment in its branch office facilities. The Charlestown banking office opened in 1988 in a newly constructed facility. The Narragansett banking office began operations in June 1989 in a building which had been acquired in 1988 and was completely renovated. A major renovation and expansion of the Richmond banking office was completed in January of 1990. The Richmond site also contains a separate building operated as a restaurant by a restaurant chain under a long-term lease. ITEM 3. LEGAL PROCEEDINGS ------------------------- Neither the Corporation nor its subsidiary is a party to any material pending legal proceedings, other than routine litigation incidental to their business activities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1994. -16- EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------ Following is a list of all executive officers of the Corporation and the Bank with their titles, ages, and length of service with the Corporation as of December 31, 1994. (Service prior to 1984 for all executive officers of the Corporation was with the Bank.) Years Officers of the Corporation Age of service --------------------------- --- ---------- Joseph J. Kirby President 63 32 Joseph H. Potter Executive Vice President 61 36 David V. Devault, CPA Vice President and Chief Financial Officer 40 8 Louis J. Luzzi Vice President and Treasurer 53 34 Harvey C. Perry, II Vice President and Secretary 44 20 Joseph H. Potter and Louis J. Luzzi are first cousins. Joseph J. Kirby joined the Bank in 1963 as an Investment Officer. He was elected Vice President and Investment Officer in 1965 and Executive Vice President in 1972. He was elected president in 1982. Joseph H. Potter joined the Bank in 1958 and was elected Secretary in 1967. He was elected Vice President and Secretary in 1973 and Executive Vice President in 1982. David V. Devault joined the Bank in 1986 as Controller. He was elected Vice President and Chief Financial Officer of the Corporation and the Bank in 1987. He was elected Senior Vice President and Chief Financial Officer of the Bank in 1990. Prior to joining the Bank he was a Senior Manager with the firm of KPMG Peat Marwick. Louis J. Luzzi joined the Bank in 1960 and was elected Assistant Vice President in 1969. He was elected Vice President in 1979 and Vice President and Treasurer in 1983. Harvey C. Perry, II joined the Bank in 1974 and was elected Assistant Trust Officer in 1977, Trust Officer in 1981 and Secretary and Trust Officer in 1982. He was elected Vice President and Secretary of the Corporation and the Bank in 1984, and Senior Vice President and Secretary of the Bank in 1990. Years Officers of the Bank Age of service -------------------- --- ---------- Vernon F. Bliven Senior Vice President - 45 22 Human Resources Robert G. Cocks, Jr. Senior Vice President - Lending 50 2 -17- Louis W. Gingerella, Jr. Senior Vice President - 42 4 Credit Administration B. Michael Rauh, Jr. Senior Vice President - 35 3 Retail Banking Vernon F. Bliven joined the Bank in 1972 and was elected Assistant Vice President in 1980, Vice President in 1986 and Senior Vice President - Human Resources in 1993. Robert G. Cocks, Jr. joined the Bank in 1992 as Senior Vice President - Lending. Prior to joining the Bank he served as Executive Vice President at Bay Bank South from 1987 to 1991. From 1991 to 1992 he worked as an independent consultant. Louis W. Gingerella, Jr. joined the Bank in 1990 as Vice President - Credit Administration. He was elected Senior Vice President - Credit Administration in 1992. Prior to joining the Bank he held the position of Senior Vice President with Bank of New England since 1988. B. Michael Rauh, Jr. joined the Bank in 1991 as Vice President - Marketing and was promoted in 1993 to Senior Vice President - Retail Banking. Prior to joining the Bank he was Executive Vice President with the advertising agency of Chaffee & Partners since 1989. -18- PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS ------------------------------------------------------------- The Corporation's common stock has traded on the NASDAQ Small-Cap Market since June 19, 1992. Previously, the Corporation's common stock had been listed on the NASDAQ Over-The-Counter Market system since June 1987. The quarterly common stock price ranges and dividends paid per share for the years ended December 31, 1994 and 1993 are presented in the following table. The stock prices are based on the high and low sales prices during the respective quarter. Stock price and dividend amounts have been restated to reflect a 3-for-2 stock split paid in the form of a stock dividend on August 31, 1994.
1994 Quarters 1 2 3 4 -------------------------------------------------------------------- Stock prices: high 19.17 22.50 24.00 24.00 low 16.67 17.67 21.33 19.75 Cash dividend declared .16 .17 .20 .20 1993 Quarters 1 2 3 4 -------------------------------------------------------------------- Stock prices: high 13.00 15.33 16.83 18.00 low 10.67 11.67 13.67 15.33 Cash dividend declared .15 .15 .15 .14
The Corporation will continue to review future common stock dividends based on profitability, financial resources and economic conditions. The Corporation has recorded consecutive quarterly dividends for over one hundred years. On March 16, 1995, the Corporation's Board of Directors declared a cash dividend of $.22 per share, an increase of 10% over the previous dividend amount. The dividend is payable April 17, 1995 to shareholders of record as of April 3, 1995. The Corporation's primary source of funds for dividends paid to shareholders is the receipt of dividends from the Bank. A discussion of the restrictions on the advance of funds or payment of dividends to the Corporation is included in Note 16 to the Consolidated Financial Statements included in the 1994 Annual Report to Shareholders which is incorporated herein by reference. At December 31, 1994 there were 1,216 holders of record of the Corporation's common stock. -19- ITEM 6. SELECTED FINANCIAL DATA ------------------------------- Selected consolidated financial data for the five years ended December 31, 1994 appears under the caption "Five Year Summary of Selected Consolidated Financial Data" on page 22 of the Corporation's 1994 Annual Report to Shareholders which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------- The information required by this Item appears under the caption "Management's Analysis of Financial Statements" on pages 23-34 of the Corporation's 1994 Annual Report to Shareholders which is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA --------------------------------------------------- The financial statements and supplementary data are contained in the Corporation's 1994 Annual Report to Shareholders, filed as Exhibit 13, on the pages indicated in the following table, and are incorporated herein by reference. Page of 1994 Annual Report ------------- Consolidated Balance Sheets 35 Consolidated Statements of Income 36 Consolidated Statements of Changes in Shareholders' Equity 38 Consolidated Statements of Cash Flows 37 Notes to Consolidated Financial Statements 39 Parent Company Financial Statements 55 Independent Auditor's Report 57 Summary of Unaudited Quarterly Financial Information 58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ---------------------------------------------------------- None. -20- PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ----------------------------------------------------------- Required information regarding directors is presented under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 20, 1995 prepared for the 1995 Annual Meeting of Shareholders and incorporated herein by reference. Required information regarding executive officers of the Corporation is included in Part I under the caption "Executive Officers of the Registrant". Information required with respect to compliance with Section 16(a) of the Exchange Act appears under the caption "Compliance with Section 16(a) of the Exchange Act" in the Corporation's Proxy Statement dated March 20, 1995 prepared for the 1995 Annual Meeting of Shareholders which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION ------------------------------- The information required by this Item appears under the caption "Compensation of Directors and Executive Officers - Executive Compensation" in the Corporation's Proxy Statement dated March 20, 1995 prepared for the 1995 Annual Meeting of Shareholders which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ------------------------------------------------- The information required by this Item appears under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 20, 1995 prepared for the 1995 Annual Meeting of Shareholders which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ------------------------------------------------------- The information required by this Item is incorporated herein by reference to the caption "Indebtedness and Other Transactions" of the Corporation's Proxy Statement dated March 20, 1995 prepared for the 1995 Annual Meeting of Shareholders. -21- PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ------------------------------------------------------------------------ (a) 1. The financial statements of Washington Trust Bancorp, Inc. required in response to this Item are listed in response to Item 8 of this Report and are incorporated herein by reference. 2. Financial Statement Schedules. All schedules normally required by Article 9 of Regulation S-K and all other schedules to the consolidated financial statements of the Corporation have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto. (b) No reports on Form 8-K have been filed during the fourth quarter of the year ended December 31, 1994. (c) Exhibit Index. Exhibit Number -------------- 3.(i) Restated articles of incorporation 3.(ii) By-laws of the Corporation ** * 10.1 Supplemental Pension Benefit and Profit Sharing Plan * 10.2 Outside Director's Retainer Continuation Plan * 10.3 Plan for Deferral of Director's Fees * 10.4 Amended and Restated 1988 Stock Option Plan * 10.5 Short Term Incentive Plan *** 11 Computation of Earnings per share 13 1994 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule * Management contract or compensatory plan or arrangement. ** Incorporated herein by reference to Exhibit 3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, previously filed with the Commission. *** Incorporated herein by reference to Exhibit 10 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, previously filed with the Commission. (d) Financial Statement Schedules. None. -22- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WASHINGTON TRUST BANCORP, INC. ------------------------------ (Registrant) March 16, 1995 Joseph J. Kirby Date ________________ By ______________________________________ Joseph J. Kirby, President, Principal Executive Officer and Director March 16, 1995 David V. Devault Date ________________ By ______________________________________ David V. Devault, Vice President, Chief Financial Officer and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 16, 1995 Joseph H. Potter Date ________________ ______________________________________ Joseph H. Potter, Executive Vice President and Director March 16, 1995 Gary P. Bennett Date ________________ ______________________________________ Gary P. Bennett, Director Date ________________ ______________________________________ Steven J. Crandall, Director March 16, 1995 Richard A. Grills Date ________________ ______________________________________ Richard A. Grills, Director March 16, 1995 Larry J. Hirsch Date ________________ ______________________________________ Larry J. Hirsch, Director -23- March 16, 1995 Katherine W. Hoxsie Date ________________ ______________________________________ Katherine W. Hoxsie, Director March 16, 1995 Mary E. Kennard Date ________________ ______________________________________ Mary E. Kennard, Director March 16, 1995 James W. McCormick, Jr. Date ________________ ______________________________________ James W. McCormick, Jr., Director March 16, 1995 Thomas F. Moore Date ________________ ______________________________________ Thomas F. Moore, Director March 16, 1995 Brendan P. O'Donnell Date ________________ ______________________________________ Brendan P. O'Donnell, Director March 16, 1995 Victor J. Orsinger, II Date ________________ ______________________________________ Victor J. Orsinger, II, Director March 16, 1995 Anthony J. Rose, Jr. Date ________________ ______________________________________ Anthony J. Rose, Jr., Director March 16, 1995 James P. Sullivan Date ________________ ______________________________________ James P. Sullivan, Director March 16, 1995 Neil H. Thorp Date ________________ ______________________________________ Neil H. Thorp, Director -24- EX-3.(I) 2 EXHIBIT 3.(i) STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS Business Corporation Restated Articles of Incorporation of WASHINGTON TRUST BANCORP, INC. Pursuant to the provisions of Section 7-1.1-59 of the General Laws, 1956, as amended, the undersigned corporation adopts the following Restated Articles of Incorporation: FIRST. Name. The name of the Corporation is Washington Trust Bancorp, Inc. SECOND. Duration. The period of its duration is perpetual. THIRD. Purposes and Powers. The purposes for which the Corporation is organize are to act as a holding company whose subsidiaries will engage, as permitted by law, in banking and other financial services and businesses; and to transact and engage in, directly, through subsidiaries or otherwise, any other lawful business. The Corporation shall have power (a) To have perpetual succession by its corporate name unless a limited period of duration is stated in its Articles of Incorporation. (b) To sue and be sued, complain and defend, in its corporate name. (c) To have a corporate seal which may be altered at pleasure, and to sue the same by causing it, or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. (d) To purchase, take, receive, lease, or otherwise acquire, own, hold, improve, use and otherwise deal in and with, real or personal property, or any interest therein, wherever situated. (e) To sell, convey, mortgage, pledge, lease, exchange, transfer and otherwise dispose of all or any part of its property and assets. (f) To lend money and to use its credit to assist its employees. (g) To purchase, take, receive, subscribe for, or otherwise acquire, own, hold, vote, use, employ, sell, mortgage, lend, pledge or otherwise dispose of, and otherwise use and deal in and with, shares or other interests in, or obligations of, other domestic or foreign corporations, associations, partnerships or individuals, or direct or indirect obligations of the United States or of any other government, state, territory, governmental district or municipality or of any instrumentality thereof. (h) To make contracts and guarantees and incur liabilities, borrow money at such rates of interest as the Corporation may determine, issue its notes, bonds, and other obligations, and secure any of its obligations by mortgage or pledge of all or any of its property, franchises, and income. (i) To lend money for its corporate purposes, invest and reinvest its funds, and take and hold real and personal property as security for the payment of funds so loaned or invested. (j) To conduct its business, carry on its operations, and have offices and exercise the powers granted by the Rhode Island Business Corporation Act, as amended, from time to time, within or without this state. (k) To elect or appoint officers and agents of the Corporation, and define their duties and fix their compensation. (l) To make and alter by-laws, not inconsistent with these Articles of Incorporation or with the laws of this state, for the administration and regulation of the affairs of the Corporation. (m) To make donations for the public welfare or for charitable, scientific or educational purposes. (n) To transact any lawful business which the Board of Directors shall find will be in aid of governmental authority. (o) To pay pensions and establish pension plans, pension trusts, profit-sharing plans, stock bonus plans, stock option plans and other incentive plans for any or all of its directors, officers and employees. (p) To provide insurance for its benefit on the life of any of its directors , officers, or employees, or on the life of any stockholder for the purpose of acquiring at his death shares of its stock owned by such stockholder. (q) To be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust or other enterprise. (r) To have and exercise all other powers necessary or convenient to effect its purposes. FOURTH. Capital Stock. The aggregate number of shares which the Corporation shall have authority to issue is 10,000,000, par value $.0625 per share, all of which shares are to be a class designated as "Common Stock". Subject to the provisions of these Articles of Incorporation and except as otherwise provided by law, the shares of stock of the Corporation may be issued for such consideration and for such corporate purposes as the Board of Directors may from time to time determine. FIFTH. No Preemptive Rights. No holder of stock of any class of the Corporation, whether now or hereafter authorized, shall have any preemptive, preferential or other rights to subscribe for or purchase or acquire any shares of any class or any other securities of the Corporation, whether now or hereafter authorized, and whether or not convertible into, or evidencing or carrying the right to purchase, shares of any class or any other securities now or hereafter authorized, and whether the same shall be issued for cash, services or property, or by way of dividend or otherwise. SIXTH. Approval of Certain Business Combinations. Whether or not a vote of the stockholders is otherwise required in connection with the transaction, neither the Corporation nor any of its Subsidiaries shall become a party to any Business Combination without prior compliance with the provisions of Section(a) or (b) or (c) hereinbelow, in addition to such additional vote of the Preferred Stock as may be required by the provisions of any series thereof or by applicable law. (a) Prior Approval by the Board of Directors. Such Business Combination was approved by the Board of Directors of the Corporation by the affirmative vote of at least 80% of the Board of Directors of the Corporation either (i) at a time prior to the acquisition of 10% or more of the outstanding Voting Shares of the Corporation by a Related Person, or (ii) after such acquisition, but only so long as such Related Person sought and obtained the approval, by the affirmative vote of at least 80% of the Board of Directors of the Corporation, of the acquisition of 10% or more of the outstanding Voting Shares prior to such acquisition being consummated. (b) Approval by Continuing Directors and Additional Requirements. Such Business Combination (i) shall be approved at a meeting of the Board of Directors by the affirmative vote of 80% of the Continuing Directors and a majority of the Board of Directors, and (ii) all of the conditions hereinafter set forth in subsection (1) through (5) below shall be satisfied: (1) The ratio of (i) the aggregate amount of the cash and the fair market value of other consideration to be received per share of Common Stock in such Business Combination by holders of Common Stock other than the Related Person involved in such Business Combination, to (ii) the market price per share of the Common Stock immediately prior to the announcement of the proposed Business Combination, is at least as great as the ratio of (x) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) which such Related Person has theretofore paid in acquiring any Common Stock prior to such Business Combination, to (y) the market price per share of Common Stock immediately prior to the initial acquisition by such Related Person of any shares of Common Stock; and (2) The aggregate amount of the cash and the fair market value of other consideration to be received per share of Common Stock in such Business Combination by holders of Common Stock, other than the Related Person involved in such Business Combination, (i) is not less than the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) paid by such Related Person in acquiring any of its holdings of Common Stock, (ii) is not less than the earnings per share of Common Stock for the four full consecutive fiscal quarters of the Corporation immediately preceding the Date of Determination of such Business Combination multiplied by the then price-earnings multiple (if any) of such Related Person as customarily computed and reported in the financial community; provided, that for the purposes of this clause (ii), if more than one Person constitutes the Related Person involved in the Business Combination, the price-earnings multiple (if any) of the Person having the highest price-earnings multiple shall be used for the computation in this clause (ii), and (iii) is not less than the book value of a share of the Common Stock, as reflected in the balance sheet of the Corporation as of the last day of the last fiscal quarter of the Corporation preceding the Date of Determination; and (3) The consideration (if any) to be received in such Business Combination by holders of Common Stock other than the Related Person involved shall, to the extent that a stockholder agrees otherwise as to all or part of the shares which he or she owns, be in the same form and of the same kind as the consideration paid by the Related Person in acquiring Common Stock already owned by it; and (4) After such Related Person became a Related Person and prior to the consummation of such Business Combination: (i) such Related Person shall have taken steps to insure that the Board of Directors of the Corporation included at all times representation by Continuing Directors proportionate to the ratio that the number of Voting Shares of the Corporation from time to time owned by stockholders who are not Related Persons bears to all Voting Shares of the Corporation outstanding at the time in question (with a Continuing Director to occupy any resulting fractional position among the directors); (ii) such Related Person shall not have acquired from the Corporation, directly or indirectly, any shares of the Corporation (except (x) upon conversion of convertible securities acquired by it prior to becoming a Related Person or (y) as a result of a pro rata stock dividend, stock split or division of shares or (z) in a transaction consummated after this Article SIXTH was added to these Articles of Incorporation and which satisfied all applicable requirements of this Article SIXTH; (iii) such Related Person shall not have acquired any additional Voting Shares of the Corporation or securities convertible into or exchangeable for Voting Shares except as a part of the transaction which resulted in such Related Person's becoming a Related Person; and (iv) such Related Person shall not have (x) received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation or any Subsidiary, or (y) made any major change in the Corporation's business or equity capital structure or entered into any contract, arrangement or understanding with the Corporation except any such change, contract, arrangement or understanding as may have been approved by the favorable vote of not less than 80% of the Continuing Directors and a majority of the Board of Directors of the Corporation; and (5) A proxy statement complying with the requirements of the Securities Exchange Act of 1934 shall have been mailed to all holders of Voting Shares for the purpose of soliciting stockholder approval of such Business Combination. Such proxy statement shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by two-thirds of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination from the point of view of the holders of Voting Shares other than any Related Person (such investment banking firm to be selected by two-thirds of the Continuing Directors, to be furnished with all information it reasonably requests, and to be paid by the Corporation a reasonable fee for its services upon receipt by the Corporation of such opinion). For purposes of Sections (b)(1) and (2) hereof, in the event of a Business Combination upon consummation of which the Corporation would be the surviving corporation or company or would continue to exist (unless it is provided, contemplated or intended that as part of such Business Combination or within one year after consummation thereof a plan of liquidation or dissolution of the Corporation will be effected), the term "other consideration to be received" shall include (without limitation) Common Stock retained by stockholders of the Corporation other than Related Persons who are parties to such Business Combination. (c) Approval by Stockholders. If there is not full compliance with the provisions of Section (a) or (b) of this Article, such Business Combination shall be approved by the affirmative vote of 80% of the outstanding Voting Shares, voting as a single class; provided that a proxy statement complying with the requirements of the Securities Exchange Act of 1934 shall have been mailed to all holders of Voting Shares for the purpose of soliciting stockholder approval of such Business Combination. Such proxy statement shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by two-thirds of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination from the point of view of the holders of Voting Shares other than any Related Person (such investment banking firm to be selected by two-thirds of the Continuing Directors, to be furnished with all information it reasonably requests, and to be paid a reasonable fee by the Corporation for its services upon receipt by the Corporation of such opinion). (d) Evaluation of Business Combinations, etc. In connection with the exercise of its judgment in determining what is in the best interest of the Corporation and its stockholders when evaluating a Business Combination or a proposal by another Person or Persons to make a Business Combination or a tender or exchange offer or a proposal by another Person or Persons to make a tender or exchange offer, the Board of Directors of the Corporation shall, in addition to considering the adequacy of the amount to be paid in connection with any such transaction, consider all of the following factors and any other factors which it deems relevant: (i) the social and economic effects of the transaction on the Corporation and its Subsidiaries, employees, depositors, loan and other customers, creditors and other elements of the communities in which the Corporation and its Subsidiaries operate or are located; (ii) the business and financial condition and earnings prospects of the acquiring Person or Persons, including, but not limited to, debt service and other existing or likely financial obligations of the acquiring Person or Persons, and the possible effect of such conditions upon the Corporation and its Subsidiaries and the other elements of the communities in which the Corporation and its Subsidiaries operate or are located; and (iii) the competence, experience, and integrity of the acquiring Person or Persons and its or their management. (e) Amendments to this Article SIXTH. Notwithstanding any other provisions of these Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the By-laws of the Corporation), and in addition to such additional vote of any Preferred Stock that may hereafter be authorized as may be required by the provisions of any series thereof or by applicable law, this Article SIXTH shall not be amended, altered, changed or repealed without: (1) The affirmative vote of 80% of the Board of Directors and a majority of the Continuing Directors; and (2) The affirmative vote as to all stock held by the holders of 80% or more of the outstanding Voting Shares, voting separately as a class. (f) Amendments Recommended by Directors. The provisions of paragraph (e) of this Article SIXTH shall not apply to, and the vote referred to therein shall not be required for, any amendment, addition, alteration or repeal of any provision of this Article SIXTH that is recommended to the stockholders by the favorable vote of (1) a majority of the Board of Directors, and (2) not less than 80% of the Continuing Directors, and any such amendment, addition, alteration or repeal so recommended shall require only the vote, if any, required under the applicable provisions of the Rhode Island Business Corporation Law. SEVENTH. Registered Office. The address of the initial registered office of the Corporation is 126 Franklin Street, Westerly, Rhode Island and the name of its initial registered agent at such address is Louis J. Luzzi. EIGHTH. Board of Directors; Amendment of By-Laws. (a) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The number of directors of the Corporation (exclusive of directors to be elected by the holders of any one or more series of any Preferred Stock that may hereafter be authorized voting separately as a class or classes) that shall constitute the Board of Directors shall be 20, unless otherwise determined from time to time by resolution adopted by the affirmative vote of: (1) At least 80% of the Board of Directors; and (2) A majority of the Continuing Directors. (b) The names and addresses and classes of the persons who are to serve as directors of the Corporation until the expiration of the term of their respective classes or until their successors are duly elected and shall qualify are: Name Address Class William Atherton Sherwood Court, Westerly, RI 02891 1986 Charles C. Buffum 73 Avondale Rd., Westerly, RI 02891 1987 Steven J. Crandall 24 Saratoga Ave., Westerly, RI 02891 1985 David Curtis 365 Pine Hill Rd., Wakefield, RI 02879 1986 Jacques deLaporte P.O. Box 448, Skunk Hill Rd., Hope Valley, RI 02832 1986 Richard A. Grills Oak St., Ashaway, RI 02804 1985 Joseph J. Kirby 38 Elm St., Westerly, RI 02891 1987 James W. McCormick, Jr. "Sunny Hill", Watch Hill, RI 02891 1985 Thomas F. Moore, Jr. RFD 2, Box 9, North Main St., Stonington, CT 06378 1987 Brendan P. O'Donnell P.O. Box 278, Money Point Rd., Mason's Island, Mystic, CT 06355 1986 Victor J. Orsinger,II 51 Elm St., Westerly, RI 02891 1985 Arthur Perry 71 Spencer Brook Rd., Concord, MA 01742 1985 Robert B. Perry Taylor Lane, Weekapaug, RI 02891 1987 Joseph H. Potter Midway Ave., Westerly, RI 02891 1986 Joseph E. Pucci 34 Elm St., Westerly, RI 02891 1987 Anthony J. Rose, Jr. 80 Pine Hill Rd., Wakefield, RI 02879 1986 James P. Sullivan 125 Watch Hill Rd., Westerly, RI 02891 1985 James D. Thornton 185 East Ave., Westerly, RI 02891 1987 Neil H. Thorp 14 Cedarcrest Dr., Westerly, RI 02891 1985 Albert E. Wilson Box 215, Nathaniel Lewis Rd., Ashaway, RI 02804 1986 (c) Subject to applicable law, the directors shall be divided into three (3) classes, each class to be as nearly equal in number as possible. The term of office of directors of the first class shall expire at the annual meeting of stockholders to be held in 1985 and until their respective successors are duly elected and qualified. The term of office of directors of the second class shall expire at the annual meeting of stockholders to be held in 1986 and until their respective successors are duly elected and qualified. The term of office of directors of the third class shall expire at the annual meeting of stockholders to be held in 1987 and until their respective successors are duly elected and qualified. Subject to the foregoing, at each annual meeting of stockholders, commencing at the annual meeting to be held in 1985, the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting and until their successors shall be duly elected and qualified. Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the number of directors, may be filled only by the Board of Directors, acting by vote of 80% of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their respective successors shall be duly elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of any Preferred Stock that may hereafter be authorized shall have the right, voting separately as a class, to elect one or more directors of the Corporation, (i) the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders and vacancies created with respect to any directorship of the directors so elected may be filled in the manner specified by such Preferred Stock, and (ii) this Article EIGHTH shall be deemed to be construed and/or modified so as to permit the full implementation of the terms and conditions relating to election of directors of any series of Preferred Stock that has been or will be designated by the Board of Directors. (d) Notwithstanding any other provisions of these Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the By-laws of the Corporation), any one or more directors of the Corporation may be removed at any time, but only for cause and only by either (1) the affirmative vote of a majority of the Continuing Directors and a majority of the Board of Directors or (2) the affirmative vote, at a meeting of the stockholders called for that purpose, as to all stock held by the holders of 80% or more of the outstanding Voting Shares, voting separately as a class. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock that may hereafter be authorized shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the provisions of this Section (d) shall not apply with respect to the director or directors elected by such holders of Preferred Stock. (e) In addition to the right of the Board of Directors of the Corporation to make nominations for the election of directors, nominations for the election of directors may be made by any stockholder entitled to vote for the election of directors if that stockholder complies with all of the provisions of this Section (e). (1) Advance written notice of such proposed nomination shall be received by the Secretary of the Corporation not less than 14 days nor more than 60 days prior to any meeting of the stockholders called for the election of directors; provided, however, that if fewer than 21 days' notice of the meeting is given to stockholders, such written notice of such proposed nomination shall be received by the Secretary of the Corporation not later than the close of the tenth day following the day on which notice of the meeting was mailed to stockholders. (2) Each notice under Section (e)(1) shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are Beneficially Owned by each such nominee, (iv) any other information reasonably requested by the Corporation. (3) The nomination made by a stockholder may only be made in a meeting of the stockholders of the Corporation called for the election of directors at which such stockholder is present in person or by proxy, and can only be made by a stockholder who has theretofore complied with the notice provisions of Sections (e)(1) and (2) above. (4) The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (f) The By-laws of the Corporation may be altered, amended or repealed or new By-laws may be adopted by the Board of Directors at any regular or special meeting solely upon the affirmative vote of both 80% of the Board of Directors and a majority of the Continuing Directors. If such vote is to be taken at any special meeting of the Board of Directors, notice of such proposed action and the substance thereof shall be contained in the notice of such special meeting. (g) Notwithstanding any other provisions of these Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the By-laws of the Corporation), and in addition to such additional vote of any Preferred Stock that may hereafter be authorized as may be required by the provisions of any series thereof or by applicable law, this Article EIGHTH shall not be amended, altered, changed or repealed without: (1) The affirmative vote of 80% of the Board of Directors and of a majority of Continuing Directors; and (2) The affirmative vote as to all stock held by the holders of 80% or more of the outstanding Voting Shares, voting separately as a class. NINTH. Certain Definitions. For purposes of Articles SIXTH and EIGHTH, the following definitions shall apply: (a) Affiliate. An "Affiliate" of, or a Person " affiliated with", a specified Person, means a Person that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. (b) Associate. The term "Associate" used to indicate a relationship with any Person means: (1) Any corporation or organization (other than the Corporation or a Subsidiary of the Corporation) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities; (2) Any trust or other estate in which such Person has a ten percent or greater beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; (3) Any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person; or (4) Any investment company registered under the Investment Company Act of 1940 for which such Person or any Affiliate or Associate of such Person serves as investment advisor. (c) Beneficial Owner. A Person shall be considered the "Beneficial Owner" of any shares of stock (whether or not owned of record): (1) With respect to which such Person or any Affiliate or Associate of such Person directly or indirectly has or shares (i) voting power, including the power to vote or to direct the voting of such shares of stock, and/or (ii) investment power, including the power to dispose of or to direct the disposition of such shares of stock; (2) Which such Person or any Affiliate or Associate of such Person has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, and/or (ii) the right to vote pursuant to any agreement, arrangement or understanding (whether such right is exercisable immediately or only after the passage of time); or (3) Which are Beneficially Owned within the meaning of (1) or (2) of this Section (c) by any other Person with which such first mentioned Person or any of its Affiliates or Associates has any agreement, arrangement or understanding, written or oral, with respect to acquiring, holding, voting or disposing of any shares of stock of the Corporation or any Subsidiary of the Corporation or acquiring, holding or disposing of all or substantially all, or any Substantial Part, of the assets or businesses of the Corporation or a Subsidiary of the Corporation. For the purpose only of determining whether a Person is the Beneficial Owner of a percentage specified in Article SIXTH or Article EIGHTH of the outstanding Voting Shares, such shares shall be deemed to include any Voting Shares which may be issuable pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants, options or otherwise and which are deemed to be beneficially owned by only such Person pursuant to the foregoing provisions of this Section (c). (d) Business Combination. A "Business Combination" means: (1) The sale, exchange, lease, transfer or other disposition to or with a Related Person or any Affiliate or Associate of such Related Person by the Corporation or any of its Subsidiaries (in a single transaction or a series of related transactions) of all or substantially all, or any Substantial Part, of its or their assets or businesses (including, without limitation, any securities issued by a Subsidiary); (2) The purchase, exchange, lease or other acquisition by the Corporation or any of its Subsidiaries (in a single transaction or a series of related transactions) of all or substantially all, or any Substantial Part , of the assets or business of a Related Person or any Affiliate or Associate of such Related Person; (3) Any merger or consolidation of the Corporation or any Subsidiary thereof into or with a Related Person or any Affiliate or Associate of such Related Person, irrespective of which Person is the surviving entity in such merger or consolidation; (4) Any reclassification of securities, recapitalization or other transaction (other than a redemption in accordance with the terms of the security redeemed) which has the effect, directly or indirectly, of increasing the proportionate amount of Voting Shares of the Corporation or any Subsidiary thereof which are Beneficially Owned by a Related Person, or any partial or complete liquidation, spin-off, split-off or split-up of the Corporation or any Subsidiary thereof; provided, however, that this Section (d)(4) shall not relate to any transaction of the types specified herein that has been approved by (i) a majority of the Board of Directors, and (ii) 80% of the Continuing Directors; or (5) The acquisition upon the issuance thereof of Beneficial Ownership by a Related Person of Voting Shares or securities convertible into Voting Shares or any voting securities or securities convertible into voting securities of any Subsidiary of the Corporation, or the acquisition upon the issuance thereof of Beneficial Ownership by a Related Person of any rights, warrants or options to acquire any of the foregoing or any combination of the foregoing Voting Shares or voting securities of a Subsidiary of the Corporation. As used in this definition, a "series of related transactions" shall be deemed to include not only a series of transactions with the same Related Person but also a series of separate transactions with a Related Person or any Affiliate or Associate of such Related Person. Anything in this definition to the contrary notwithstanding, this definition shall not be deemed to include any transaction of the type set forth in Sections (d)(1) through (d)(3) above between or among any two or more Subsidiaries of the Corporation or the Corporation and one or more Subsidiaries of the Corporation if such transaction has been approved by the affirmative vote of at least 80% of the Board of Directors and a majority of the Continuing Directors on or prior to the Date of Determination. (e) Continuing Director. A "Continuing Director" shall mean: (1) An individual who was designated as a member of the Board of Directors of the Corporation in these Articles of Incorporation as filed with the Secretary of State of the State of Rhode Island; or (2) An individual designated (before such individual's initial election as a director) as a Continuing Director by a majority of the then Continuing Directors. (f) Date of Determination. The term "Date of Determination" means: (1) The date on which a binding agreement (except for the fulfillment of conditions precedent, including, without limitation, votes of stockholders to approve such transaction) is entered into by the Corporation, as authorized by its Board of Directors, and another Person providing for any Business Combination; or (2) If such an agreement as referred to in Section (f)(1) above is amended so as to make it less favorable to the Corporation and its stockholders, the date on which such amendment is approved by the Board of Directors of the Corporation; or (3) In cases where neither Section (f)(1) or (2) above shall be applicable, the record date for the determination of stockholders of the Corporation entitled to notice of and to vote upon the transaction in question. A majority of the Continuing Directors shall have the power and duty to determine the Date of Determination as to any transaction under Article SIXTH or Article EIGHTH. Any such determination shall be conclusive and binding for all purposes in either of such Articles. (g) Person. The term "Person" shall mean any individual, partnership, corporation, group or other entity (other than the Corporation, any Subsidiary of the Corporation for itself or as a fiduciary for customers in the ordinary course, or a trustee holding stock for the benefit of employees of the Corporation or its Subsidiaries, or any one of them, pursuant to one or more employee benefit plans or arrangements). When two or more Persons act as a partnership, limited partnership, syndicate, association or other group for the purpose of acquiring, holding or disposing of shares of stock, such partnership, syndicate, association or group shall be deemed a "Person". (h) Related Person. "Related Person" means any Person which is the Beneficial Owner, as of the Date of Determination or immediately prior to the consummation of a Business Combination, or both, of 10% or more of the Voting Shares, or any Person who is an Affiliate of the Corporation and at any time within five years preceding the Date of Determination was the Beneficial Owner of 10% or more of the then outstanding Voting Shares, but does not include any one or group of more than one Continuing Director. (i) Substantial Part. The term "Substantial Part" as used with reference to the assets of the Corporation, of any Subsidiary or of any Related Person means assets having a value of more than five percent of the total consolidated assets of the Corporation and its Subsidiaries as of the end of the Corporation's most recent fiscal year ending prior to the time the determination is being made. (j) Subsidiary. "Subsidiary" shall mean any corporation or entity of which the Person in question owns not less than 50% of any class of equity securities, directly or indirectly. (k) Voting Shares. "Voting Shares" shall mean shares of the Corporation's capital stock entitled to vote generally in the election of directors. (l) Certain Determinations with Respect to Articles SIXTH and EIGHTH. (1) A majority of the Continuing Directors shall have the conclusive power and authority to determine, for the purposes of Articles SIXTH and EIGHTH, on the basis of information known to them: (i) the number of Voting Shares of which any Person is the Beneficial Owner, (ii) whether a Person is an Affiliate or Associate of another, (iii) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in the definition of "Beneficial Owner" as hereinabove defined, (iv) whether the assets subject to any Business Combination constitute a "Substantial Part" as hereinabove defined, (v) whether two or more transactions constitute a "series of related transactions" as hereinabove defined, (vi) any matters referred to in subsection (l)(2) below, and (vii) such other matters with respect to which a determination is required under Article SIXTH or EIGHTH. Any such determination shall be final and binding for all purposes hereunder. (2) A Related Person shall be deemed to have acquired a Voting Share of the Corporation at the time when such Related Person became the Beneficial Owner thereof. With respect to Voting Shares owned by Affiliates, Associates or other Persons whose ownership is attributed to a Related Person under the foregoing definition of Beneficial Owner, if the price paid by such Related Person for such shares is not determinable, the price so paid shall be deemed to be the higher of (i) the price paid upon acquisition thereof by the Affiliate, Associate or other Person or (ii) the market price of the shares in question (as determined by a majority of the Continuing Directors) at the time when the Related Person became the Beneficial Owner thereof. Notwithstanding any other provisions of these Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or By-laws of the Corporation), and in addition to such additional vote of any Preferred Stock that may hereafter be authorized as may be required by the provisions of any series thereof or by applicable law, this Article NINTH shall not be amended, altered, changed or repealed without: (1) The affirmative vote of 80% of the Board of Directors and of a majority of Continuing Directors; and (2) The affirmative vote as to all stock held by the holders of 80% or more of the outstanding Voting Shares, voting separately as a class. TENTH. Amendments. (a) The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in these Articles of Incorporation, and other provisions authorized by the laws of the State of Rhode Island at the time in force may be added or inserted in these Articles of Incorporation, in the manner (i) now or hereafter prescribed by law, and (ii) as has otherwise been provided in Articles SIXTH, EIGHTH and NINTH of these Articles of Incorporation; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to these Articles of Incorporation in their present form or as hereafter amended are granted subject to the right reserved in this Article TENTH. (b) Notwithstanding any other provisions of these Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the By-laws of the Corporation), and in addition to such additional vote of any Preferred Stock that may hereafter be authorized as may be required by the provisions of any series thereof or by applicable law, this Article TENTH shall not be amended, altered, changed or repealed without the affirmative vote as to all stock held by the holders of 80% or more of the outstanding shares of the Corporation's capital stock entitled to vote generally in the election of directors, voting separately as a class. ELEVENTH. Limiting Director Liability. (a) No director of the Corporation shall be liable to the Corporation or to its stockholders for monetary damages for breach of the director's duty as a director; provided, however, that this Article ELEVENTH shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; ( ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) the liability imposed pursuant to the provisions of R.I.G.L. Section 7-1.1-43 (as in effect or as hereafter amended); or (iv) for any transaction from which the director derived an improper personal benefit unless said transaction is permitted by R.I.G.L. Section 7- 1.1-37.1 (as in effect or as hereafter amended). If the Rhode Island General Laws are amended after the adoption of this Article ELEVENTH to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of each director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Rhode Island General Laws, as so amended. Neither the amendment nor repeal of this Article ELEVENTH nor the adoption of any provision of these Articles of Incorporation inconsistent with this Article ELEVENTH shall eliminate or reduce the effect of this Article ELEVENTH in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article ELEVENTH, would occur or arise, prior to such amendment, repeal or adoption of an inconsistent provision. (b) Notwithstanding any other provisions of these Articles of Incorporation, including Section TENTH (a), or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the By-laws of the Corporation), and in addition to such additional vote of any Preferred Stock that may hereafter be authorized as may be required by the provisions of any series thereof or by applicable law, this Article ELEVENTH shall not be amended, altered, changed or repealed without: (1) The affirmative vote of 80% of the Board of Directors and of a majority of Continuing Directors (as defined in Article NINTH of these Articles of Incorporation), and (2) The affirmative vote as to all stock held by the holders of 80% or more of the outstanding Voting Shares (as defined in Article NINTH of these Articles of Incorporation), voting separately as a class. TWELFTH. The Restated Articles of Incorporation correctly set forth without change the corresponding provisions of the Articles of Incorporation as heretofore restated and amended, and supersede the original Articles of Incorporation and all amendments thereto. Washington Trust Bancorp, Inc. Dated: August 9, 1994 By Joseph J. Kirby -------------- ------------------------ Its President and Harvey C. Perry, II ---------------------- Its Secretary STATE OF RHODE ISLAND COUNTY OF WASHINGTON On the 9th day of August, 1994, personally appeared before me Joseph J. Kirby, who being by me duly sworn, declared that he is the President of Washington Trust Bancorp, Inc., that he signed the foregoing document as President of the Corporation, and that the statements therein contained are true. Yvonne Mole Notary Public {Notarial Seal} EX-10.1 3 EXHIBIT 10.1 THE WASHINGTON TRUST COMPANY SUPPLEMENTAL PENSION BENEFIT AND PROFIT SHARING PLAN Effective November 1, 1994 TABLE OF CONTENTS ARTICLE I - NAME, PURPOSE, AND EFFECTIVE DATE 1.01 Name and Purpose 1.02 Effective Date ARTICLE II - DEFINITIONS 2.01 Board 2.02 Code 2.03 Compensation 2.04 Effective Date 2.05 Employee 2.06 Employer 2.07 Participant 2.08 Plan Administrator 2.09 Plan 2.10 Pension Plan 2.11 Profit Sharing Plan 2.12 Profit Sharing Plan Restrictions 2.13 Supplemental Pension Plan Benefit 2.15 Supplemental Profit Sharing Plan Benefit ARTICLE III - ELIGIBILITY 3.01 Participation ARTICLE IV - SUPPLEMENTAL PENSION PLAN BENEFITS 4.01 Amount of Supplemental Retirement Plan Benefits 4.02 Distributions of Supplemental Retirement Plan Benefit 4.03 Commencement of Payment of Supplemental Pension Plan Benefit 4.04 Death Benefit ARTICLE V - SUPPLEMENTAL PROFIT SHARING PLAN BENEFITS 5.01 Supplemental Profit Sharing Plan Contributions 5.02 Distributions of Supplemental Profit Sharing Plan Benefits 5.03 Commencement of Payment of Supplemental Profit Sharing Plan Benefits 5.04 Death Benefit ARTICLE VI - VESTING 6.01 Vesting ARTICLE VII - FUNDING 7.01 Funding ARTICLE VIII - ADMINISTRATION 8.01 Duties of the Plan Administrator 8.02 Finality of Decisions ARTICLE IX - MISCELLANEOUS 9.01 Non-Guarantee of Employment 9.02 Rights under Plan 9.03 Amendments/Termination 9.04 Nonassignability 9.05 Entire Agreement; Successors 9.06 Successor Employer 9.07 Governing Law ARTICLE I NAME, PURPOSE AND EFFECTIVE DATE 1.01 NAME AND PURPOSE The supplemental retirement plan set forth herein shall be known as The Washington Trust Company Supplemental Pension Benefit and Profit Sharing Plan (the "Plan"). The Plan is established, and shall be maintained, solely for the purpose of providing supplemental pension and profit sharing benefits which are not provided under The Washington Trust Company Pension Trust and The Washington Trust Company Profit Sharing Plan for certain Participants. The Plan is unfunded and maintained primarily for the purpose of providing deferred compensation for certain Participants who are highly compensated employees. 1.02 EFFECTIVE DATE This Plan shall be effective November 1, 1994. This Plan shall apply to Participants who retire or terminate their employment with the Employer after the Effective Date. ARTICLE II DEFINITIONS When used herein, the following terms defined hereinafter shall have the following meanings unless a different meaning is clearly required by the context of the Plan: 2.01 "Board" means the Board of Directors of the Employer. 2.02 "Code" means the Internal Revenue Code of 1986, as amended from time to time. Reference to a specific provision of the Code shall include such provision, any valid regulation or ruling promulgated thereunder, and any provision of future law that amends, supplements, or supersedes such provision. 2.03 "Compensation" means, with respect to an eligible Employee, "Compensation" as defined in Section 1.12 of the Pension Plan with respect to the determination of a supplemental pension benefit and "Compensation" as defined in Section 2.11 of the Profit Sharing Plan with respect to the determination of a supplemental profit sharing benefit. 2.04 "Effective Date" means November 1, 1994. 2.05 "Employee" means any person employed by the Employer. 2.06 "Employer" means The Washington Trust Company and any subsidiary and/or affiliated corporation which has adopted this Plan. 2.07 "Participant" means an Employee who has become a Participant in this Plan in the manner set forth in Article III. 2.08 "Plan Administrator" means The Washington Trust Company, or its duly authorized representative. 2.09 "Plan" means The Washington Trust Company Supplemental Pension Benefit and Profit Sharing Plan as set forth herein. 2.10 "Pension Plan" means The Washington Trust Company Pension Trust, as in effect on November 1, 1994 or as amended thereafter from time to time. 2.11 "Profit Sharing Plan" means The Washington Trust Company Profit Sharing Plan as in effect on November 1, 1994 or as amended thereafter from time to time. 2.12 "Profit Sharing Plan Restrictions" means the limits imposed under Section 401(a)(17) of the Code on the amount of employer matching contribution made in accordance with Section 4.06 of the Profit Sharing Plan. 2.13 "Supplemental Pension Plan Benefit" means the benefit payable under Article IV of the Plan. 2.14 "Supplemental Profit Sharing Benefit" means the benefit payable under Article V of the Plan. ARTICLE III ELIGIBILITY 3.01 PARTICIPATION Any Employee shall become a Participant in the Plan provided: (a) he has satisfied the eligibility requirements for participation under the Pension Plan or the Profit Sharing Plan; (b) he is a highly compensated employee within the meaning of Section 414(q)(1)(B) of the Code; and (c) (1) his pension benefit under the Pension Plan is in excess of the limits of Section 415(b) or 415(e) of the Code or is otherwise reduced due to the limitations of Section 401(a)(17) of the Code, or (2) the Employer matching contribution on his behalf is restricted by Section 401(a)(17) of the Code. ARTICLE IV SUPPLEMENTAL PENSION PLAN BENEFITS 4.01 AMOUNT OF SUPPLEMENTAL PENSION PLAN BENEFITS A Participant shall be entitled to a benefit under the provisions of this Article if his benefit determined under the provisions of the Pension Plan is less than such benefit would have been if (a) the definition of compensation under the Pension Plan included compensation in excess of the limit of Section 401(a)(17) of the Code and/or (b) the limits under Section 415 of the Code did not apply. If a Participant's benefit from the Pension Plan is reduced as a result of either or both of the conditions described in the preceding paragraph, the benefit to which the Participant shall be entitled under the Plan shall be determined as follows: (i) The benefit actually payable to the Participant at his actual retirement date under the terms of the Pension Plan shall be calculated. (ii) The benefit which would have been payable under the terms of the Pension Plan if the definition of compensation under the Pension Plan included compensation in excess of Section 401(a)(17) of the Code and if the limits under Section 415 of the Code did not apply shall be calculated. (iii) The result of step (i) shall be subtracted from the result of step (ii), and the difference, if any, shall be the benefit payable to the Participant. 4.02 DISTRIBUTIONS OF SUPPLEMENTAL PENSION PLAN BENEFIT All payments of benefits to Participants and/or their designated beneficiaries under this Article IV shall be made in the same form the Participant elects under the Pension Plan. 4.03 COMMENCEMENT OF PAYMENT OF SUPPLEMENTAL PENSION PLAN BENEFIT Benefits shall commence under this Article to a Participant as of the same date that benefits commence to the Participant under the Pension Plan; provided, however, that, in the case of a Participant required to commence benefit payments under the Pension Plan pursuant to Section 401(a)(9) of the Code, benefits shall not commence under this Article until the Participant actually retires. Any reductions for the commencement of benefits prior to the Participant's normal retirement age under the Pension Plan shall also apply to the payment of benefits under this Article. 4.04 DEATH BENEFIT Upon the death of a Participant any accrued Supplemental Pension Plan Benefit shall be applied to provide such Participant's surviving spouse or beneficiary with a supplemental pre-retirement death benefit under the same terms and in the same manner as provided by the applicable death benefit provisions of the Pension Plan. ARTICLE V SUPPLEMENTAL PROFIT SHARING PLAN BENEFITS 5.01 SUPPLEMENTAL PROFIT SHARING PLAN CONTRIBUTIONS (a) If Employer matching contributions under the Profit Sharing Plan are limited by the Profit Sharing Plan Restrictions, the Employer shall credit to a Supplemental Employer Contribution Account established for such Participant an amount equal to the Employer matching contribution which would have been made pursuant to the Profit Sharing Plan in the absence of the Profit Sharing Plan Restrictions. If a Participant makes tax deferred contributions under the Profit Sharing Plan that are limited to the dollar limit of Section 402(g) of the Code, the 50% and 100% matching contribution under this Plan will be determined in the same manner as for Section 4.06 of the Profit Sharing Plan, but assuming that the Participant's Compen- sation for this purpose is the lesser of (i) "Compensation" as defined for purposes of Section 2.11 of the Profit Sharing Plan, but without regard to the limit of Section 401(a)(17) of the Code, and (ii) The dollar limit of Section 402(g) of the Code for the year multiplied by 25. The Participant's Supplemental Employer Contribution Account shall be adjusted at the end of each calendar quarter to reflect a rate of return determined as if such accounts were invested at the rate of interest in effect on the first day of the calendar year for one year certificates of deposit of The Washington Trust Company or such other rate as may be adopted from time to time by the Board in its sole discretion. 5.02 DISTRIBUTIONS OF SUPPLEMENTAL PROFIT SHARING PLAN BENEFITS All payments of benefits to Participants and/or their designated beneficiaries under this Article V shall be made in a lump sum. 5.03 COMMENCEMENT OF PAYMENT OF SUPPLEMENTAL PROFIT SHARING PLAN BENEFITS Benefits shall commence under this Article to a Participant as of the same date that benefits commence to a Participant under the Profit Sharing Plan; provided, however, that, in the case of a Participant required to commence benefit payments under the Profit Sharing Plan pursuant to Section 401(a)(9) of the Code, benefits shall not commence under this Article until the Participant actually retires. 5.04 DEATH BENEFIT Upon a Participant's death, any amounts set aside in his Supplemental Employer Contribution Account shall be distributed to his beneficiary or beneficiaries designated under the Profit Sharing Plan. ARTICLE VI VESTING 6.01 VESTING A Participant shall be vested in his Supplemental Pension Plan Benefit, if any, in accordance with the vesting provisions of the Pension Plan. A Participant shall be fully vested at all times in his Supplemental Profit Sharing Plan Benefit. ARTICLE VII FUNDING 7.01 FUNDING The Employer shall be under no obligation to establish a fund or reserve in order to pay the benefits under the Plan. The Employer shall be required to make payments only as benefits become due and payable. No person shall have any right, other than the right of an unsecured general creditor, against the Employer with respect to the benefits payable hereunder, or which may be payable hereunder, to any Participant, surviving spouse or beneficiary hereunder. Notwithstanding the foregoing, in order to pay benefits under this Plan the Employer may establish a grantor trust (hereinafter the "Trust"), within the meaning of Section 671 of the Code as may be amended from time to time. The assets in such Trust shall at all times be subject to the claims of the general creditors of the Employer, and neither the Plan nor any Participant, surviving spouse or beneficiary shall have any preferred claim or right, or any beneficial ownership interest in any such assets of the Trust prior to the time such assets are paid to a Participant as a Supplemental Pension Benefit or as a Supplemental Profit Sharing Plan Benefit, and all rights credited under this Plan and said Trust shall be mere unsecured contractual rights of a Participant against the Employer. ARTICLE VIII ADMINISTRATION 8.01 DUTIES OF THE PLAN ADMINISTRATOR The Plan shall be administered by the Plan Administrator in accordance with its terms and purposes. The Plan Administrator shall determine the amount and manner of payment of the benefits due to or on behalf of each Participant from the Plan and shall cause them to be paid by the Employer accordingly. 8.02 FINALITY OF DECISIONS The Plan Administrator is expressly granted, without intending any limitation, the discretion to construe the terms of the Plan and to determine eligibility for benefits hereunder. The decisions made by and the actions taken by the Plan Administrator in the administration of the Plan shall be final and conclusive on all persons, and neither the Plan Administrator nor the Employer shall be subject to individual liability with respect to the Plan. ARTICLE IX MISCELLANEOUS 9.01 NON-GUARANTEE OF EMPLOYMENT Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any Participant, or as a right of any such Participant to be continued in the employment of the Employer, or as a limitation on the right of the Employer to deal with any Participant, as to their hiring, discharge, layoff, compensation, and all other conditions of employment in all respects as though this Plan did not exist. 9.02 RIGHTS UNDER PLAN Nothing in this Plan shall be construed to limit, broaden, restrict, or grant any right to a Participant, surviving spouse or any beneficiary thereof under the Pension Plan or Profit Sharing Plan ("Qualified Plans"), nor to grant any additional rights to any such person under the Qualified Plans, nor in any way to limit, modify, repeal or otherwise affect the Employer's right to amend or modify the Qualified Plans. 9.03 AMENDMENTS/TERMINATION The Employer reserves the right to make from time to time amendments to or terminate this Plan by vote duly adopted by the Board of Directors, provided that no such amendment or termination shall reduce any benefits earned under the terms of this Plan prior to the date of termination or amendment. 9.04 NONASSIGNABILITY The benefits payable under this Plan shall not be subject to alienation, assignment, garnishment, execution or levy of any kind and any attempt to cause any benefits to be so subjected shall not be recognized, except to the extent required by applicable law. 9.05 ENTIRE AGREEMENT; SUCCESSORS This Plan, including any subsequently adopted amendments, shall constitute the entire agreement or contract between the Employer and any Participant regarding the Plan. There are no covenants, promises, agreements, conditions or understandings, either oral or written, between the Employer and any Participant relating to the subject matter hereof, other than those set forth in this Plan. This Plan and any amendment shall be binding on the parties hereto and their respective heirs, administrators, trustees, successors and assigns, and on all designated beneficiaries of the Participant. 9.06 SUCCESSOR EMPLOYER In the event of the dissolution, merger, consolidation or reorganization of the Employer, provision may be made by which a successor to all or a major portion of the Employer's property or business shall continue this Plan, and the successor shall have all of the powers, duties and responsibilities of the Employer under this Plan. 9.07 GOVERNING LAW This Plan shall be construed and enforced in accordance with, and governed by, the laws of the State of Rhode Island. IN WITNESS WHEREOF, The Washington Trust Company has caused this instrument to be executed in its name and on its behalf this 15th day of December, 1994. The Washington Trust Company By: Joseph J. Kirby, President -------------------------- Attest: Vernon F. Bliven, SVP --------------------- (Seal) EX-10.2 4 EXHIBIT 10.2 OUTSIDE DIRECTORS RETAINER CONTINUATION PLAN AS AMENDED, DECEMBER 17, 1992 As an element of the compensation of outside directors who are not employees of Washington Trust Bancorp, Inc. ("WTB") or any WTB subsidiary, such outside directors shall receive the following benefit after leaving service as a director: 1. The benefit shall be the regular quarterly retainer in effect at the time of the director's departure from the WTB or subsidiary Board of Directors (the "Board"), payable for a number of years equal to the number of years (or fractions thereof) for which the director served as a regular director of WTB or subsidiary thereof. The benefit will be paid quarterly to coincide with the quarterly retainer fee payments to active directors. 2. The benefit shall be payable only to outside directors who (a) leave service as a director after the date of adoption of this resolution, and (b) have not been removed for cause. 3. No benefit will be paid to a retired director who without the consent of WTB is engaged in or affiliated with any business entity or activity which directly or indirectly competes with WTB or any of its subsidiaries. 4. For purposes of calculating the duration of a director's service as an outside regular director of WTB under this resolution, there shall be added to such service service as an outside regular director of any bank subsidiary of WTB, including service before it became a subsidiary of WTB, and any bank which merged with such bank subsidiary before it became a subsidiary of WTB. Simultaneous service with WTB and a bank subsidiary shall not be cumulated. 5. In the case of a director who retires or resigns from the Board, the benefit shall be payable commencing upon the date of the director's departure from the Board. If a director retires or resigns from the Bank before attaining age 65, the benefit shall be reduced by 5% for each year or fraction thereof that the director is less than age 65, but the benefit shall not be reduced by more than 50%. 6. In the case of a director who dies in service or before commencement of payment of the benefit, 50% of the benefit that would have been payable to the director (with no reduction for the director's age at death) shall be paid in quarterly payments commencing immediately to the director's surviving spouse, if any, for the lesser of the spouse's life or the length of the deceased director's Board service. 7. In the event of a director's death after retirement but before completion of all payments due, the remaining payments (with the amount reduced by 50%) will be paid to the director's surviving spouse, if any, for the lesser of the spouse's life or the remainder of the length of the deceased director's Board service. 8. Accrued and unpaid benefits under this resolution will be an unfunded and unsecured obligation of The Washington Trust Company. The Board may amend, suspend or terminate this plan or any benefits under it at any time, but no amendment, suspension or termination shall, without the consent of a director, impair the rights of the director in any benefits therefore accrued under the plan. EX-10.3 5 EXHIBIT 10.3 WASHINGTON TRUST BANCORP, INC. AND THE WASHINGTON TRUST COMPANY PLAN FOR DEFERRAL OF DIRECTORS' FEES PLAN for the Deferral of Directors' Fees, adopted by Washington Trust Bancorp, Inc. and The Washington Trust Company (collectively, "the Corporation") effective March 1, 1988, for the purpose of permitting members of the Board of Directors of the Corporation ("Directors") to defer receipt of all or any part of their retainer and fees for services as a Director and as a member of any and all committees of the Boards of Directors of the Corporation ("Directors' fees"). 1. Any Director of the Corporation who is now serving as such or is hereafter elected to membership on the Board of Directors, may elect to defer receipt of all or any part of future Director's fees, and to receive such deferred fees, together with interest thereon, at the time and in the manner hereinafter provided, subject to all of the provisions of this Plan. 2. An election to defer all or any part of Directors' fees shall be made by written election on a form to be provided by the Corporation, filed with the Secretary of the Corporation on or before December 31 of any year, and shall be effective with respect to Directors' fees earned for services performed during the following calendar year, provided that if a newly elected Director files an election within 60 days after becoming a Director, such election may be made effective with respect to fees earned by him for services performed in the same calendar year but only for calendar quarters subsequent to the date of filing, and provided further that for the first calendar year of the Plan, such election shall be effective for fees earned in the calendar quarter following the quarter such election is made. 3. At the time he makes his election, the Director shall indicate the amount of the deferral that shall apply to all of his Directors' fees otherwise payable, and shall specify the method of payment selected in accordance with paragraph 7. Such election and all of the terms thereof shall be irrevocable with respect to Directors' fees earned while it is in effect. 4. An election to defer all or any part of Directors' fees shall continue in effect indefinitely from year to year as long as the Director continues as a Director, provided that the Director may terminate the election at any time by written notice filed with the Secretary of the Corporation, effective with respect to fees earned for services performed subsequent to such filing. A Director may also change his selection of the payment date or method of payment by filing a revised selection with the Secretary of the Corporation on or before December 31 of any year, and such revised selection shall apply with respect to Directors' fees earned for services performed during the following calendar year, and thereafter. No such method of payment shall apply to fees deferred under the prior election. 5. A Director's deferred fees shall be credited to a separate memorandum fee account ("Fee Account") maintained by the Corporation on his behalf, and interest shall be credited on the balance of such account (including interest theretofore credited) on the last day of each calendar month at a rate of the last day of each calendar month at a rate of interest equal to the rate of interest in effect on the first day of the calendar year for one year certificates of deposits of The Washington Trust Company. 6. The balance in a Director's Fee Account shall become payable to him on the later of (a) the first business day of January next following the date he ceases to be a Director, or (b) the first business day of January in the year following his 65th birthday. 7. When the balance in a Directors' Fee Account becomes payable, such balance shall be paid either (a) in one lump sum, (b) in a series of five approximately equal annual installments, or (c) in a series of ten approximately equal annual installments, as the Director shall specify at the time he makes his election to defer. If a Director's Fee Account is paid in installments, interest shall be credited on the unpaid balance of the account as provided in paragraph 5 hereof. 8. In the event a Director dies before his Fee Account has become payable, or before he has received the entire balance thereof, the amount of such Account or the remaining balance thereof, shall become payable on the first business day of January next succeeding his death, and shall be paid to his designated beneficiary, either (a) in one lump sum, or (b) in a series of approximately equal annual installments over a period of either five or ten years, with interest credited on the unpaid balance as provided in paragraph 5 hereof, as the Director shall elect. If a designated beneficiary shall survive the Director and die before receiving the entire balance of his Fee Account, the remaining balance shall be paid to the estate of the beneficiary in one lump sum on the next succeeding first business day of January. A Director may designate a beneficiary, or change or revoke a designation of beneficiary, at any time and from time to time, by a written designation filed with the Secretary of the Corporation. In the event there is no designation of beneficiary in effect at the time of the Director's death, or if the last designated beneficiary shall have predeceased the Director, the Fee Account shall be paid in one sum to the executor or administrator of the estate of the Director. 9. The Corporation shall not fund its liability for deferred Directors' fees or interest in any way. A Director's Fee Account shall be solely for the internal bookkeeping purposes of the Corporation, and neither the Director, his beneficiary nor estate shall have any interest therein. 10. In the event of the physical disability or severe financial hardship of a Director, the Chief Executive Officer of the Corporation may in his sole discretion make any payments from the deferred compensation account of such Director to him or for his account as deemed by such Chief Executive Officer to be in his best interests; the fact of disability and financial hardship to be determined in the sole discretion of such Chief Executive Officer. 11. This Plan is to be binding upon the Corporation and upon its successors and assigns. In the event of the merger of the Corporation with any other corporation, the Board of Directors of such merged or resulting corporation shall be deemed to have the powers herein stated. 12. The purpose of the Plan is to accomplish the deferral of the incidence of federal income tax on a Director's deferred fees and the interest thereon until such time as the Director, his beneficiary or estate, actually receives payment of the same, as provided in Internal Revenue Service Revenue Ruling 71-419, and the Plan shall be construed in accordance with such purpose. 13. This Plan may be amended at any time and from time to time, or terminated in whole or in part, as to the Corporation by action of its Board of Directors; but no amendment or termination shall apply with respect to a Director's fees theretofore deferred except with the consent of the Director, unless in the opinion of legal counsel to the Corporation such amendment or termination is necessary to reflect changes in the principles of Revenue Ruling 71-419, or otherwise necessary or desirable to accomplish the purposes of this Plan. 14. This Plan shall be effective with respect to Directors' fees earned for services performed on or after April 1, 1988. IN WITNESS WHEREOF, the CORPORATION has caused this Plan to be executed and its corporate officer thereunto duly authorized and its corporate seal to be affixed hereto this 11th day of February 1988. WASHINGTON TRUST BANCORP,INC. Thelma C. Smith By Joseph J. Kirby ---------------- ---------------- President THE WASHINGTON TRUST COMPANY Thelma C. Smith By Joseph J. Kirby ---------------- ---------------- President EX-10.4 6 EXHIBIT 10.4 WASHINGTON TRUST BANCORP, INC. AMENDED AND RESTATED 1988 STOCK OPTION PLAN This Amended and Restated Stock Option Plan (the "Plan") constitutes an amendment and restatement of the 1988 Stock Option Plan which was adopted by the Board of Directors of Washington Trust Bancorp, Inc. (the "Corporation") in 1988 and by the shareholders of the Corporation on April 4, 1988, and further amended by the Board of Directors on April 3, 1989. The purpose of this Plan is to encourage and enable certain officers, employees and directors of the Corporation and any subsidiaries to acquire an interest in the Corporation through the granting of stock options, as herein provided, to acquire its common stock, $.0625 par value per share (the "Common Stock"). Two separate forms of options may be granted pursuant to this Plan: Incentive Stock Options under the provisions of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"); and Non- Qualified Options. Both forms of options are herein referred to collectively hereunder as "options". 1. Shares of Stock Subject to the Plan The stock that may be issued and sold pursuant to options granted under the Plan shall not exceed, in the aggregate, 600,000 shares of Common Stock, which may be (i) authorized but unissued shares, (ii) treasury shares, or (iii) shares previously reserved for issue upon exercise of options under the Plan, which options have expired or terminated; provided, however, that the number of shares subject to the Plan shall be subject to adjustment as provided in Section 7. 2. Administration The Plan shall be administered, construed and interpreted by a committee appointed by the Board of Directors of the Corporation (hereinafter called the "Committee"). The Committee shall consist of three or more members of the Board of Directors who are not officers of the Corporation. No member of the Committee shall be entitled to participate in the Plan, except as provided in Section 14 hereof. Subject to the provisions of the Plan, the Committee shall determine the persons to be granted options (the "Optionees"), the number of shares subject to each option, whether the options shall be Incentive Stock Options or Non-Qualified Options, the price to be paid for the shares upon the exercise of each option, and the terms and conditions of the options. In addition, the Committee shall adopt forms of option agreements and make determinations under, or interpretations of, any provision of the Plan and any option. The Committee shall maintain separate records with respect to Incentive Stock Options and Non-Qualified Options granted under the Plan to facilitate the determination of the appropriate tax treatment for such options. Any of the foregoing action taken by the Committee in its sole discretion shall be final and conclusive. Any Committee action with respect to options granted to non-employee directors pursuant to Section 14 hereof shall be limited to ministerial, non-discretionary matters, consistent with the terms of the Plan. 3. Eligibility Officers (whether or not they are directors) and employees of the Corporation shall be eligible to receive options. A director of the Corporation who is not a full time employee of the Corporation shall not be eligible to receive options, except as provided in Section 14 hereof. 4. Price and Limitation on Grant of Options (a) The purchase price of the Common Stock which may be purchased under each option shall be at least equal to the fair market value per share of the outstanding Common Stock of the Corporation at the time the option is granted, as determined by the Committee. The aggregate fair market value (determined as of the time the option is granted) of the Common Stock for which any person participating in the Plan may be granted options under the Plan (or any subsequent option plan) as Incentive Stock Options under Section 422A of the Code shall not exceed the minimum amount (either at grant or vesting) that would be permissible under said Section 422A and the Treasury regulations thereunder without disqualifying such option as an Incentive Stock Option. (b) The purchase price of shares which may be purchased under each Incentive Stock Option issued to a person who, immediately prior to the grant of such option, owns (directly or indirectly) stock possessing more than ten percent of the total combined voting power of all classes of stock of the Corporation shall be at least equal to 110 percent of the fair market value of the Common Stock subject to the option, as determined in Section 4(a) above. (c) The option price shall be payable either (i) in United States dollars in cash or by check, bank draft or money order payable to the order of the Corporation, (ii) through the delivery of shares of Common Stock of the Corporation (the "Stock") already owned by the Optionee with a fair market value equal to the option price, or (iii) by a combination of (i) and (ii) above. The fair market value of Stock so delivered shall be the mean of the high and low prices of publicly traded shares of Common Stock of the Corporation on the date of exercise or as otherwise may be determined by the Committee. Unless otherwise determined by the Committee, an Optionee may engage in a successive exchange (or series of exchanges) in which Common Stock they are entitled to receive upon the exercise of an option may be simultaneously utilized as payment for the exercise of an additional option or options. 5. No Rights as Shareholder Until receipt of the purchase price upon exercise of an option and fulfillment of other requirements of the Plan, no Optionee or person entitled to exercise the option shall be, or shall be deemed to be, a holder of any shares of the Corporation subject to the option for any purpose. 6. Non-Transferability of Option Each option granted under the Plan shall provide that it is personal to the Optionee, is not transferable by the Optionee in any manner otherwise than by will or the laws of descent and distribution or a qualified domestic relations order ("Qualified Domestic Relations Order"), as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder ("ERISA"), and is exercisable, during the Optionee's lifetime, only by such Optionee. 7. Dilution or Other Adjustments The terms of the options and the number of shares subject to this Plan shall be equitably adjusted in such manner as to prevent dilution or enlargement of option rights in the following instances: (a) the declaration of a dividend payable to the holders of Common Stock in stock of the same class; (b) a split-up of the Common Stock or a reverse split thereof; or (c) a recapitalization of the Corporation under which shares of one or more different classes are distributed in exchange for or upon the Common Stock without payment of any valuable consideration by the holders thereof. The terms of any such adjustment shall be conclusively determined by the Board. 8. Shareholder Approval The Plan is subject to the approval of the shareholders of the Corporation. If such approval is not given within twelve (12) months after the date of the Plan's adoption by the Board, the portion of the Plan relating to the extension of the option exercise periods, as provided in Sections 12 and 14 hereof, and the grant of options to non-employee directors upon re-election, as provided in Section 14 hereof, shall terminate and be of no force and effect. 9. Period of Grants; Expiration; Termination Options may be granted under the Plan at any time, or from time to time, until December 31, 1997. Each option granted under the Plan shall expire not more than ten years from the date the option is granted. The Plan may be terminated at any time by the Board of Directors of the Corporation, except with respect to any options then outstanding under the Plan. 10. Effect of Certain Transactions If the Corporation is merged into or consolidated with another corporation under circumstances where the Corporation is not the surviving corporation, or if the Corporation is liquidated or sells or otherwise disposes of all or substantially all of its assets to another corporation while unexercised options remain outstanding under the Plan after the effective date of such merger, consolidation or sale, as the case may be, each holder of an outstanding option shall be entitled, upon exercise of such option, to receive in lieu of shares of Common Stock, shares of such stock or other securities as the holders of shares of Common Stock received pursuant to the terms of the merger, consolidation or sale. Notwithstanding the provisions of any option for Common Stock which provides for its exercise in installments, such option shall become immediately exercisable in the event of a change in control or offer to effect a change in control. For purposes of this Section 10, a "change in control" shall have the same meaning as is set forth in Section 14 hereof. The term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision as to whether a change in control or offer to effect a change in control has occurred shall be made by a majority of the Continuing Directors (as defined in the Restated Articles of Incorporation as in effect on March 1, 1988) and shall be conclusive and binding. Notwithstanding Sections 9 and 15 of the Plan, this provision shall not be amended or revoked in any manner without the affirmative vote of 80% of the Board of Directors and a majority of the Continuing Directors (as defined above). 11. Liability and Indemnification No member of the Committee shall be liable for any action or determination made in good faith, and such members shall be entitled to indemnification and reimbursement to the fullest extent provided in the Corporation's By-laws. 12. Termination of Employment In the event that an Optionee's employment by the Corporation shall terminate, any option held by such Optionee, whether granted prior to or following the amendment and restatement of this Section 12, shall terminate immediately, subject to the following: If any termination of employment is due to retirement with the consent of the Corporation, the Optionee shall have the right, subject to the provisions of Section 5 hereof, to exercise any such option at any time within three months, in the case of Incentive Stock Options ("ISO Retirement Exercise Period"), and within three years (or up to five years, upon the approval of the Committee, in any individual case), in the case of Non-Qualified Options ("NQ Retirement Exercise Period"), after such retirement, to the extent that he was entitled to exercise the same immediately prior to his retirement; and If the Optionee shall die while in the employment of the Corporation or during the ISO Retirement Exercise Period, in the case of Incentive Stock Options, or during the NQ Retirement Exercise Period, in the case of Non-Qualified Options, his estate, personal representative, or beneficiary shall have the right, subject to the provisions of Section 8 hereof, to exercise his option, at any time within three years from the date of his death, to the extent that the Optionee was entitled to exercise the same immediately prior to his death. Whether any termination of employment is to be considered a retirement with the consent of the Corporation and whether an authorized leave of absence or absence on military or government service or for other reasons shall constitute a termination of employment for the purposes of the Plan, shall be determined by the Committee, which determination shall be final and conclusive. On a case by case basis, the Committee may, in its sole discretion, accelerate the schedule of the time or times when an option granted under this Plan, other than an option granted pursuant to Section 14 hereof, may be exercised. 13. Purchase of Options At the discretion of the Committee, an employee who has been granted options may also be granted the right to require the Corporation to purchase all or a portion of such options for cancellation (a "stock appreciation right"). To the extent he exercises this right, the Corporation shall pay him in cash and/or Common Stock the excess of the fair market value of each share of Common Stock covered by the options (or portion thereof purchased) on the date the election is made over the option price. The election shall be made by delivering written notice thereof to the Committee. Shares subject to the options so purchased shall not again be available for purposes of the Plan. 14. Options Granted to Non-Employee Directors The provisions of this Section 14 govern the granting and terms of options for non-employee directors. These provisions supersede all other provisions of the Plan to the extent, and only to the extent, such other provisions are inconsistent with this Section 14. Each person who is initially elected or re-elected a director of the Corporation after December 17, 1992 shall automatically be granted a Non-Qualified Option covering 1,000 shares as of the date of his election or re-election, as the case may be, the option price for which shall be the fair market value of the Common Stock on such date and the expiration of which shall be the tenth anniversary thereof. Each option granted by this Section 14 may be exercised as follows: (a) 25% of the shares subject to such option may be purchased on and after the date of grant; and (b) an additional 25% of such shares may be purchased commencing on the first, second and third anniversaries of the date of grant. In the event of a Change in Control of the Corporation (as hereinafter defined), each option granted under this Section 14 will thereupon be exercisable in full by the Optionee. For the purposes of this Section 14, a "Change in Control of the Corporation" shall occur if: (i) any person, firm, corporation, organization or association of persons or organizations acting in concert, excluding any qualified employee benefit plan of the Corporation applicable to employees generally of the Corporation and its controlled subsidiaries, shall acquire securities having in the aggregate more than 20% of the outstanding voting power of the Corporation, whether in whole or in part by means of an offer made publicly to the holders of all or substantially all of the outstanding shares of any one or more classes of the voting securities of the Corporation to acquire such shares for cash, other property or a combination thereof or whether such acquisition was made by any other means, unless such transaction is consented to by vote of at least a majority of the Continuing Directors (as defined in Article NINTH of the Corporation's Restated Articles of Incorporation); or (ii) the Corporation transfers all or a substantial part of its properties and assets to another person, firm, corporation, organization or association of persons or organizations, excluding a subsidiary controlled by the Corporation itself, unless such transaction is consented to by vote of at least 80% of the Continuing Directors; or (iii) the Corporation shall consolidate or merge with or into any person, firm, corporation, organization or association of persons or organizations unless the Corporation or its controlled subsidiary shall be the continuing corporation or the successor corporation and shall not be controlled by any other person, firm or corporation, unless such transaction is consented to by vote of at least 80% of the Continuing Directors; or (iv) during any period of 24 consecutive months, commencing before or after the date of adoption of this Plan, individuals who at the beginning of such 24-month period were directors of the Corporation shall cease to constitute at least a majority of directors of the Corporation's Board of Directors unless the remaining directors who were directors at the beginning of such period and any directors who were not directors at the beginning of such period but whose election was approved in advance by directors representing at least a majority of the directors then in office who were directors at the beginning of such period, constitute a majority of the Corporation's Board of Directors. If the holder of an option granted pursuant to this Section 14, either prior to or following the amendment and restatement of this Section 14, shall cease to be a director of the Corporation, he may, unless removed for cause by the shareholders of the Corporation, in which event his option shall terminate, thereafter exercise his option to the extent he was entitled to exercise it on the date his service as a director terminated, but only within three years after the date of such termination. In no event, however, may an option granted pursuant to this Section 14 be exercised at a time when the option would not be exercisable had the holder thereof remained a director of the Corporation. In the event of the death of a holder of an option granted pursuant to this Section 14, either prior to or following the amendment and restatement of this Section 14, if such holder was entitled to exercise an option at the time of his death, then at any time or times within three years after his death such option may be exercised, as to all or any of the shares which he was entitled to purchase immediately prior to his death, by his executor or administrator or the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution or pursuant to a Qualified Domestic Relations Order and, except as so exercised, such option will expire at the end of such period. In no event, however, may an option be exercised after the expiration of the option period. The formula set forth in this Section 14 shall not be amended more frequently than once every six months, if at all, other than to comport with changes in the Code or ERISA. 15. Amendment of the Plan The Board may amend and make such changes in and additions to the Plan as it may deem proper and in the best interest of the Corporation; provided, however, that no such action shall adversely affect or impair any options theretofore granted under the Plan without the consent of the Optionee; and provided, further, that no amendment (i) increasing the maximum number of shares which may be issued under the Plan, except as provided in Section 7, (ii) extending the term of the Plan or any option, (iii) changing the minimum exercise price of options to be granted under the Plan, (iv) changing the requirement as to eligibility for participation in the Plan, or (v) that is "material" pursuant to the applicable rules of the Securities and Exchange Commission, shall be adopted without the approval of the shareholders of the Corporation. 16. Section 16 Compliance With respect to persons subject to Section 16 of the Securities Exchange Act of 1934, as amended ("1934 Act"), transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee in its sole discretion. EX-11 7 Exhibit 11 Washington Trust Bancorp, Inc. Computation of Primary and Fully Diluted Earnings Per Share For the Years Ended December 31, 1994, 1993 and 1992
1994 1993 1992 ---- ---- ---- Primary: Weighted average shares 2,816,494 2,794,778 2,766,755 Common stock equivalents 55,866 17,068 2,248 --------- --------- --------- Primary weighted average shares 2,872,360 2,811,846 2,769,003 ========= ========= ========= Fully diluted: Weighted average shares 2,816,494 2,794,778 2,766,755 Common stock equivalents 56,281 30,981 4,206 --------- --------- --------- Fully diluted weighted average shares 2,872,775 2,825,759 2,770,961 ========= ========= ========= Income before cumulative effect of accounting change $6,264,640 $4,476,531 $3,150,356 Cumulative effect of change in accounting for income taxes -- 305,000 -- --------- --------- --------- Net income $6,264,640 $4,781,531 $3,150,356 ========= ========= ========= Primary earnings per share: Income before cumulative effect of accounting change $ 2.18 $ 1.59 $ 1.14 Cumulative effect of change in accounting for income taxes -- .11 -- ------ ------ ------ Net income $ 2.18 $ 1.70 $ 1.14 ====== ====== ====== Fully diluted earnings per share: Income before cumulative effect of accounting change $ 2.18 $ 1.58 $ 1.14 Cumulative effect of change in accounting for income taxes -- .11 -- ------ ------ ------ Net income $ 2.18 $ 1.69 $ 1.14 ====== ====== ======
EX-13 8 Five Year Summary of Selected Consolidated Financial Data Washington Trust Bancorp, Inc. and Subsidiary
1994 1993 1992 1991 1990 ---------------------------------------------------------------------------------------------------------------------- Financial Condition: Cash and cash equivalents $18,404,910 $21,650,128 $21,817,649 $16,683,667 $11,895,946 Securities available for sale 36,516,115 36,236,543 35,685,289 - - Investment securities 52,496,616 52,497,832 39,106,642 36,098,289 30,226,065 Net loans 381,297,565 343,853,432 317,896,010 354,537,211 365,283,880 Other real estate owned, net 5,307,905 7,831,146 13,455,489 11,648,806 3,674,103 Other 21,656,852 25,259,743 29,737,861 22,088,321 23,135,500 ---------------------------------------------------------------------------------------------------------------------- Total assets $515,679,963 $487,328,824 $457,698,940 $441,056,294 $434,215,494 ====================================================================================================================== Deposits $440,731,142 $423,374,620 $404,660,005 $399,717,920 $398,690,078 Other borrowings 23,522,343 20,500,000 14,000,000 5,000,000 - Other liabilities 5,643,494 4,991,279 4,089,140 3,298,951 3,742,326 Shareholders' equity 45,782,984 38,462,925 34,949,795 33,039,423 31,783,090 ---------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $515,679,963 $487,328,824 $457,698,940 $441,056,294 $434,215,494 ====================================================================================================================== Income Statement Summary: Interest income $36,661,688 $34,927,863 $35,868,747 $41,028,507 $43,940,267 Interest expense 13,588,582 14,178,779 16,800,218 23,556,762 26,313,795 ---------------------------------------------------------------------------------------------------------------------- Net interest income 23,073,106 20,749,084 19,068,529 17,471,745 17,626,472 Provision for loan losses 1,000,000 2,500,000 4,000,000 5,200,000 8,500,000 ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 22,073,106 18,249,084 15,068,529 12,271,745 9,126,472 Noninterest income 6,237,576 6,083,500 5,577,685 4,685,934 4,214,916 Gains on sales of securities 684,590 345,674 196,606 1,495,453 406,085 ---------------------------------------------------------------------------------------------------------------------- 28,995,272 24,678,258 20,842,820 18,453,132 13,747,473 Noninterest expense 19,704,632 17,946,727 16,088,464 14,881,100 13,600,952 ---------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 9,290,640 6,731,531 4,754,356 3,572,032 146,521 Applicable income taxes 3,026,000 2,255,000 1,604,000 1,095,000 (310,000) ---------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 6,264,640 4,476,531 3,150,356 2,477,032 456,521 Cumulative effect of change in accounting for income taxes (1) - 305,000 - - - ---------------------------------------------------------------------------------------------------------------------- Net income $6,264,640 $4,781,531 $3,150,356 $2,477,032 $456,521 ====================================================================================================================== Per share information: (2) Earnings per share (3) $2.18 $1.69 $1.14 $ .90 $ .17 Cash dividends declared $ .73 $ .59 $ .53 $ .53 $ .88 Book value $16.22 $13.71 $12.58 $11.99 $11.65 Market value (4) $20.00 $16.50 $11.67 $7.83 $7.33 Ratios: Return on average assets 1.25% 1.01% .70% .56% .11% Return on average shareholders' equity 14.11% 12.92% 9.15% 7.58% 1.32% Dividend payout ratio 33.02% 34.30% 46.85% 58.97% 525.95% Total equity to total assets 8.88% 7.89% 7.64% 7.49% 7.32% Net charge-offs to average loans .22% .35% .89% 1.95% .89% (1) See Note 13 to the Consolidated Financial Statements for explanation of accounting change (2) Adjusted to reflect the 3-for-2 stock split paid in the form of a stock dividend on August 31, 1994 (3) Fully diluted, including $.11 per share accounting change in 1993 (4) Closing bid price
Management's Analysis of Financial Statements Washington Trust Bancorp, Inc. and Subsidiary Results of Operations Washington Trust Bancorp, Inc. and subsidiary ("Washington Trust" or "the Corporation") recorded net income of $6.3 million for 1994, an increase of 40% over the $4.5 million of net income excluding an accounting change for income taxes recorded in 1993. Fully diluted earnings per share amounted to $2.18 per share for 1994, up from $1.58 per share earned on net income excluding the accounting change recorded in 1993. Net income in 1993 included a benefit of $305,000, or $.11 per share, recorded in the first quarter as a result of the cumulative effect of a change in accounting for income taxes. Washington Trust's rates of return on average assets and average equity ("ROA" and "ROE") for 1994 were 1.25% and 14.11%, respectively. ROA and ROE for the year ended December 31, 1993, excluding the effect of the accounting change, amounted to .95% and 12.10%, respectively. Equivalent amounts for 1993 including the effect of the accounting change were 1.01% and 12.92%, respectively. Included in the 1994 ROE calculation is average equity attributable to the implementation of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115), of approximately $3.7 million. Had the Corporation adopted SFAS No. 115 in 1993, ROE in 1993 including the accounting change would have approximated 11.33%. The 1994 increase in earnings was primarily attributable to an increase in net interest income, a reduction in the provision for loan losses, a reduction in the level of nonperforming assets and an increase in noninterest income. Net interest income rose 11.2% in 1994, primarily due to growth in average interest-earning assets and improvement in the net interest margin. The spread between rates paid on deposits and yields on loans and investments rose to 4.66% in 1994, up from 4.55% in the prior year. The resulting increase in net interest income was $2.3 million in 1994. Nonperforming assets as a percentage of total assets was reduced to 2.4% at December 31, 1994, down from 3.9% of total assets at the end of 1993. The provision for loan losses amounted to $1.0 million in 1994, down from $2.5 million in 1993. Noninterest income, excluding securities transactions and loan sales, rose 11.7% in 1994. All categories of noninterest income were up, primarily as a result of increased volume. Gains on sales of securities available for sale amounted to $684,590 in 1994. These gains were taken in the first quarter of 1994 in connection with a nonrecurring charitable contribution expense of approximately $700,000 for the establishment of a charitable trust. Noninterest expense, excluding the nonrecurring charitable contribution expense discussed above, rose 5.9% in 1994. Salaries and employee benefits, the largest component of noninterest expense, rose 14.3% due to increased staffing levels and normal salary adjustments. Foreclosed property costs declined 73.3% due to fewer number of properties owned and a reduction in the amount of write-downs taken on properties. The Corporation's efficiency ratio is defined as the ratio of noninterest expense, excluding nonrecurring expenses, as a percentage of fully taxable equivalent ("FTE") net interest income and noninterest income excluding securities transactions and loan sales. In 1994, the efficiency ratio amounted to 63.7%, down from the comparable 1993 amount of 66.7%. Financial Condition Total assets rose 5.8% to $515.7 million at December 31, 1994, up from $487.3 million at the end of the prior year. Average assets rose to $502.3 million in 1994, compared to $473.7 million in 1993, an increase of 6.0%. The most substantial change in the Corporation's financial condition during 1994 was a $37.6 million, or 10.7%, increase in portfolio loans. Net loans as a percentage of total assets amounted to 73.9% at December 31, 1994 compared to 70.6% one year earlier. The largest source of funding for the loan growth was an increase in total deposits. Other sources of funding included advances from the Federal Home Loan Bank, the liquidation of securities available for sale, and the liquidation of mortgage loans held for sale. Securities Available for Sale The Corporation adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities", effective January 1, 1994. Securities designated at the time of purchase as available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. SFAS No. 115 requires that securities available for sale be reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. The effect of adopting this pronouncement was an $8.2 million increase in the carrying value of these securities and a corresponding increase in shareholders' equity (net of tax) of $4.9 million as of January 1, 1994. During the year ended December 31, 1994, the net appreciation in the unrealized gains on these securities fell to $4.7 million. The decline in market value of U.S. Treasury obligations resulted from a 250 basis point rise in the Federal Funds and discount rates that occurred in 1994. The net unrealized gain at December 31, 1993 of $1.1 million was reduced to a net unrealized loss at December 31, 1994 of $526,000. The market value of the portfolio of corporate stocks declined considerably during the first quarter of 1994, reflecting general equity market conditions affected by interest rates. This factor, along with the realization of approximately $685,000 in gains, contributed to the $1.9 million decline in the market value of these securities in 1994. These gains were taken in connection with a nonrecurring charitable contribution expense for the establishment of a charitable trust in the first quarter of 1994. (See Note 3 to the Consolidated Financial Statements for detail of unrealized gains and losses associated with securities available for sale.) The Corporation's investment in U.S. Treasury obligations amounted to 67.2% of total securities available for sale at December 31, 1994. Because of the credit quality inherent in these instruments and their high liquidity, these securities can also be pledged as collateral for borrowings and other purposes. Corporate stocks were carried at market value during 1994 and at cost during 1993. The cost basis of these securities declined by $3.3 million during 1994 due primarily to the liquidation of auction rate preferred stocks. The balance of auction rate preferred stocks in the portfolio at December 31, 1994 was $500,000, down from the prior year amount of $4.5 million. Investment Securities Securities designated as investment securities are held as part of the Corporation's portfolio of long-term interest-earning assets. These securities are classified as long-term because the Corporation has the intent and ability to hold them until maturity. Investment securities amounted to 10.2% of total assets at December 31, 1994. Included in the investment portfolio at December 31, 1994 are mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association amounting to $21.7 million, or 41.3% of total investment securities. At the end of 1993, mortgage-backed securities totalled $25.4 million, or 48.4% of total investments. At December 31, 1994, approximately 91% of the mortgage-backed securities holdings consisted of mortgage pass-through securities. U.S. Treasury obligations and obligations of U.S. government-sponsored agencies amounted to $20.4 million, or 38.9% of total investment securities at December 31, 1994. Obligations of states and political subdivisions amounted to $10.4 million at December 31, 1994, up from $7.7 million a year earlier. Included in investment securities are structured notes with a carrying value of $15.0 million and a market value of $13.4 million at December 31, 1994. The carrying value and market value of structured notes at December 31, 1993 was $15.0 million and $14.9 million, respectively. Structured notes are defined as debt issues whose coupon, redemption amount and/or stated maturity adjust with changes in interest rates or other external indices. All of the structured notes held by the Corporation are obligations of U.S. government-sponsored agencies. Approximately 80% of the carrying value of the Corporation's structured notes at December 31, 1994 are classified as such because they have interest rates which reset periodically based on various external market indices. The market value of the investment portfolio has been affected by the rise in interest rates that occurred in 1994. At December 31, 1994, net unrealized losses in the portfolio totalled $3.1 million, compared to a net unrealized gain position of $836,000 at December 31, 1993. Loans Total loans amounted to $390.1 million at December 31, 1994, up 10.7% from the prior year amount of $352.5 million. The Corporation experienced strong growth in residential mortgages, commercial mortgages and installment loans in 1994. All of the loan growth took place within the Corporation's regional market area. Residential mortgage loans rose 11.1% in 1994 and accounted for 43.5% of total loans at December 31, 1994. Most of the growth was attributable to adjustable rate mortgages as borrowers opted to take advantage of the initial lower rates associated with this product. The rate of residential mortgage originations declined substantially during the latter part of 1994 due to higher interest rates. The mix between fixed rate mortgages and adjustable rate mortgages was 61% and 39%, respectively, of total residential mortgages at December 31, 1994, compared to 64% and 36%, respectively, one year earlier. Installment loans rose 32.7% during 1994 and amounted to $45.0 million at December 31, 1994. The growth in installment loans was primarily a result of a strong marketing campaign for home equity loans. Commercial mortgages rose 14% during 1994, due primarily to new business relationships with customers in the Corporation's market area. Deposits Total deposits at December 31, 1994 were $440.7 million, up $17.4 million, or 4.1%, from the prior year. In response to rising interest rates in 1994, depositors have reacted by shifting deposits into longer term accounts. Accordingly, time deposits rose 9.0% during 1994 to $194.7 million at December 31, 1994. Savings deposits (regular savings, NOW and money market accounts) declined by $8.2 million. The decrease in savings deposits is largely attributable to a $10.2 million reduction in money market deposits formerly held by fiduciary accounts managed by the trust department of the subsidiary bank. These deposits were eliminated in response to a change in Federal deposit insurance regulations which became effective at the end of 1993 and affected all banks. Demand deposit growth has steadily increased in the last two years. Total demand deposits rose 21.5% during 1994 while average demand deposit balances were up 23.1% over the prior year. Federal Home Loan Bank Advances Washington Trust utilizes advances from the Federal Home Loan Bank of Boston ("FHLB") as part of its overall funding strategy. Advances may be utilized for short-term liquidity and longer-term financing. Total advances amounted to $23.5 million at December 31, 1994, up from $20.5 million one year earlier. Asset Quality Nonperforming Assets Washington Trust's level of nonperforming assets improved by 35.2% during 1994. This decline in nonperforming assets is attributable to sales of foreclosed properties and to continued efforts by the Corporation to reduce the level of nonperforming loans. Nonperforming assets include nonaccrual loans, accruing loans 90 days or more past due with respect to principal and/or interest, and other real estate owned. Nonperforming assets amounted to 2.4% of total assets at December 31, 1994, down from 3.9% of total assets at December 31, 1993. Nonperforming loans as a percent of total loans fell from 3.2% at the end of 1993 to 1.8% at December 31, 1994. The following table presents nonperforming assets and related ratios (dollars in thousands):
December 31, 1994 1993 -------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $ 3,390 $ 4,687 Nonaccrual loans less than 90 days past due 3,729 6,684 Accruing loans 90 days or more past due 24 22 -------------------------------------------------------------------------- Total nonperforming loans 7,143 11,393 -------------------------------------------------------------------------- Other real estate owned: In-substance foreclosures 3,898 5,055 Properties acquired through foreclosure 2,578 4,568 Valuation allowance (1,168) (1,792) -------------------------------------------------------------------------- Other real estate owned, net 5,308 7,831 -------------------------------------------------------------------------- Total nonperforming assets $12,451 $19,224 ========================================================================== Nonperforming loans as a percentage of total loans 1.8% 3.2% Nonperforming assets as a percentage of total assets 2.4% 3.9% Reserve for possible loan losses to nonperforming loans 123.7% 76.0% Reserve for possible loan losses to total loans 2.3% 2.5% ==========================================================================
Risk Elements Washington Trust assesses the quality of its loans by performing ongoing reviews of the loans in its portfolio to determine potential loss exposure and to assess delinquency trends. During this review, management gives consideration to such factors as overall borrower relationship, delinquency trends, credit and collateral quality, prior loss experience, current and expected economic conditions, and other pertinent factors. As a result of this process charge- offs and other potential problem loans are identified and loan loss reserves are established. Loan Portfolio Analysis Nonperforming loans are defined as nonaccrual loans and accruing loans more than 90 days past due with respect to principal and/or interest. An analysis of nonperforming loans by type follows (dollars in thousands):
As a % of Balance loan type December 31, 1994 1993 % change 1994 1993 ------------------------------------------------------------------------------ Residential real estate mortgages $3,029 $4,775 (36.6)% 1.8% 3.1% Commercial and other: Mortgages 421 1,319 (68.1) .8 2.7 Construction and development 509 -- 100.0 4.3 -- Other 2,652 4,677 (43.3) 2.6 4.6 Installment 532 622 (14.5) 1.2 1.8 ------------------------------------------------------------------------------ Total nonperforming loans $7,143 $11,393 (37.3)% 1.8% 3.2% ==============================================================================
The provision for loan losses charged to earnings for 1994 amounted to $1.0 million, down from $2.5 million recorded in 1993. Net loan charge-offs amounted to $821,356, compared to net charge-offs of $1.2 million in 1993. Loans, with the exception of credit card loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more past due with respect to principal and/or interest. Interest previously accrued, but uncollected, is reversed against current period income. Cash receipts on nonaccrual loans are recognized as interest income, or recorded as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified. At December 31, 1994, nonperforming loans amounted to approximately $7.1 million. Approximately $3.7 million, or 52.2% of these nonperforming loans were less than 90 days past due. Nonaccrual loans are returned to accrual status when the obligation has performed in accordance with the contract terms for a reasonable period of time and the ultimate collectibility of the contractual principal and interest is no longer doubtful. During 1994, approximately $3.0 million of loans classified as nonaccrual at December 31, 1993 were returned to accruing status. Residential real estate loans include fixed rate mortgages, adjustable rate mortgages and residential construction loans that are generally well collateralized. The Corporation's loss experience on residential loans historically has been favorable. This was true in 1994 as net charge-offs on residential mortgages amounted to approximately $157,000. Nonaccrual residential real estate loans amounted to $3.0 million at December 31, 1994, down 36.6% from the prior year. Approximately 51.8% of nonaccrual residential real estate loans were less than 90 days past due at December 31, 1994. Nonaccrual residential real estate loans represented 1.8% of total residential real estate loans at December 31, 1994. Adjustable rate mortgages represent approximately 53% of total nonaccrual residential real estate loans, and 39% of total residential loans. The Corporation considers the risk of a rising interest rate environment in the ARM underwriting process. It is possible, however, that ARM delinquencies may increase due to the interest rate increases which began in 1994. Commercial mortgages consist primarily of loans secured by commercial properties which generate revenue for debt service. Nonaccrual commercial mortgages amounted to $421,000 at December 31, 1994, down 68.1% from the prior year. Nonaccrual commercial mortgages accounted for less than 1% of total commercial mortgages. Net charge-offs on commercial mortgages amounted to $307,000 in 1994, compared to net recoveries of $8,000 in 1993. Construction and development loans totalled 3.1% of total loans at December 31, 1994, up slightly from the prior year. These loans are made for the purpose of constructing residential properties for sale and for commercial development. Funds are generally advanced as the project progresses. The distinctive risks associated with this type of loan are that additional funds may need to be advanced due to problems in estimating construction costs, delays in completion of the project, and inaccurate value estimates upon completion. The maturities of these loans are generally short term and principal is due at completion of the project. There were no charge-offs of construction and development loans during 1994 and 1993. Recoveries relating to these loans amounted to $7,000 and $21,000 during 1994 and 1993, respectively. Other commercial loans consist of loans to businesses and individuals, either unsecured or secured, with varied repayment terms. These businesses operate in diversified industry groups including manufacturing, tourism and other service industries. A substantial portion of secured loans in this category are collateralized by real estate. These loans represented 26.1% of total loans at December 31, 1994. Nonaccrual loans in this category declined 43.3% from 1993, but totalled 37.1% of total nonperforming loans at December 31, 1994. Net charge-offs on other commercial loans amounted to $187,000 for 1994, down from $678,000 for 1993. Included in the installment loan category are fixed rate loans to individuals for the purchase of automobiles and boats, fixed rate home equity loans, variable rate home equity lines and credit card loans. These loans generally have relatively short repayment periods, favorable delinquency experience and generate higher yields than other loan categories. Washington Trust experienced strong growth in installment loans during 1994, primarily as a result of growth in home equity loans. Restructured Loans Loans are considered restructured when the lender has granted concessions to a borrower due to the borrower's financial condition. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. Nonaccrual loans which have been restructured are classified as nonaccrual until such time as the borrower has demonstrated his ability to comply with the modified terms. Restructured loans that are performing in accordance with their modified terms are included in accruing loans. At December 31, 1994, restructured loans amounted to $525,809. There were no commitments to lend additional funds to borrowers whose loans had been restructured. Other Real Estate Owned Other real estate owned ("OREO") is composed of properties acquired through foreclosure and other legal means, and in-substance foreclosures ("ISFs"). A loan is considered to be an in-substance foreclosure when the borrower has little or no equity in the property, proceeds for repayment of the loan are dependent upon the sale of the collateral, and the borrower has effectively abandoned control of the property or is unable to rebuild equity in the property. OREO is carried at the lower of cost or fair value minus estimated costs to sell. A valuation allowance is maintained for potential declines in market value, known declines in market value, and estimated selling costs. The balance of OREO amounted to $5.3 million at December 31, 1994, down from the corresponding 1993 amount of $7.8 million. Sales of foreclosed properties and payments on ISFs were greater than the rate of foreclosures in 1994. During 1994, sales of foreclosed properties and payments on in-substance foreclosures amounted to $3.9 million. Washington Trust has provided financing to facilitate the sales of many of these properties. Financing is generally provided at market rates with credit terms similar to those available to other borrowers. Washington Trust has been successful in reducing the balance of OREO properties in 1994. The most significant reductions were made to commercial properties. The balance of commercial OREO properties was reduced from $2.4 million at December 31, 1993 to $752,000 at December 31, 1994. ISFs totalled $3.9 million at December 31, 1994, or approximately 60.2% of total OREO. Foreclosure proceedings are generally initiated on ISF properties, but may be delayed depending upon a borrower's legal circumstances. In January 1995, the Corporation will implement Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114). The effect of the implementation of this pronouncement will be a $3.8 million balance sheet reclassification of ISFs from OREO to loans and a reclassification of $492,000 from the OREO valuation allowance to the reserve for possible loan losses. Average Balances/Net Interest Margin (Fully Taxable Equivalent Basis) The following table presents average balance and interest rate information. Tax exempt income is converted to a fully taxable equivalent basis by assuming a 34% federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income), are included in amounts presented for loans.
Years ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ----------------------------------------------------------------------------------------------------------------------------- ASSETS: Residential real estate loans $169,971 13,473 7.93% $156,462 13,721 8.77% $162,321 15,471 9.53% Commercial and other loans (1) 162,918 13,963 8.57 152,950 12,584 8.23 151,526 12,984 8.57 Installment loans 38,336 3,768 9.83 32,116 3,355 10.45 33,379 3,736 11.19 ----------------------------------------------------------------------------------------------------------------------------- Total loans 371,225 31,204 8.41 341,528 29,660 8.68 347,226 32,191 9.27 Federal funds sold 6,531 256 3.92 11,385 322 2.82 9,223 292 3.17 Taxable debt securities 69,041 4,181 6.06 61,093 3,860 6.32 38,426 2,489 6.48 Nontaxable debt securities (1) 8,812 562 6.38 6,631 439 6.62 5,368 413 7.69 Corporate stocks (1) 7,905 949 12.00 14,347 1,222 8.51 10,745 991 9.22 ----------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 463,514 37,152 8.02% 434,984 35,503 8.16% 410,988 36,376 8.85% ----------------------------------------------------------------------------------------------------------------------------- Cash and due from banks 14,032 14,023 12,508 Reserve for possible loan losses (8,863) (8,426) (7,466) Premises and equipment, net 14,524 14,836 15,136 Accrued interest receivable 2,905 2,666 2,971 Other real estate owned, net 7,282 11,312 10,715 Other 8,887 4,273 3,293 ----------------------------------------------------------------------------------------------------------------------------- Total assets $502,281 $473,668 $448,145 ============================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY: Savings deposits $196,786 4,335 2.20% $197,970 4,964 2.51% $182,310 5,813 3.19% Time deposits 183,950 7,917 4.30 176,148 8,112 4.60 183,443 10,277 5.60 Other 23,707 1,337 5.64 18,892 1,103 5.84 12,082 710 5.87 ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 404,443 13,589 3.36% 393,010 14,179 3.61% 377,835 16,800 4.45% ----------------------------------------------------------------------------------------------------------------------------- Demand deposits 49,369 40,097 32,872 Other liabilities 4,081 3,555 3,018 Shareholders' equity 44,388 37,006 34,420 ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $502,281 $473,668 $448,145 ============================================================================================================================= Net interest income $23,563 $21,324 $19,576 ============================================================================================================================= Interest rate spread 4.66% 4.55% 4.40% Net interest margin 5.08% 4.90% 4.76% (1) Interest amounts presented on a fully taxable equivalent basis (see page 29 for additional information)
Interest income amounts presented in the table on page 28 include the following adjustments for taxable equivalency for the years indicated (in thousands):
Years ended December 31, 1994 1993 1992 --------------------------------------------------------------- Commercial and other loans $ 88 $ 95 $110 Nontaxable debt securities 200 156 135 Corporate stocks 203 324 262
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis) 1994/1993 1993/1992 1992/1991 ----------------------- ------------------------ ------------------------ Net Net Net (In thousands) Volume Rate Change Volume Rate Change Volume Rate Change -------------------------------------------------------------------------------------------------------------------------- Interest on: Interest-earning assets: Residential real estate loans $1,131 (1,379) (248) $ (545) (1,205) (1,750) $ (588) (1,581) (2,169) Commercial and other loans 841 538 1,379 121 (521) (400) (1,137) (1,637) (2,774) Installment loans 620 (207) 413 (138) (243) (381) (524) (325) (849) Federal funds sold (165) 99 (66) 64 (34) 30 68 (218) (150) Taxable debt securities 493 (172) 321 1,441 (70) 1,371 1,075 (339) 736 Nontaxable debt securities 139 (16) 123 89 (63) 26 66 (60) 6 Corporate stocks (666) 393 (273) 311 (80) 231 515 (554) (39) -------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 2,393 (744) 1,649 1,343 (2,216) (873) (525) (4,714) (5,239) -------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings deposits (29) (600) (629) 469 (1,318) (849) 1,338 (3,285) (1,947) Time deposits 350 (545) (195) (395) (1,770) (2,165) (2,590) (2,887) (5,477) Other 273 (39) 234 398 (5) 393 668 (1) 667 -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 594 (1,184) (590) 472 (3,093) (2,621) (584) (6,173) (6,757) -------------------------------------------------------------------------------------------------------------------------- Net interest income $1,799 440 2,239 $ 871 877 1,748 $ 59 1,459 1,518 ==========================================================================================================================
Net Interest Income Net interest income is the amount by which interest and fees on interest-earning assets exceeds the interest cost of deposits and other borrowed funds. Net interest income is the primary source of Washington Trust's operating income. The level of net interest income is affected by the volume of average interest- earning assets and interest-bearing liabilities, market interest rates and other factors. The following discussion presents net interest income on a fully taxable equivalent (FTE) basis by adjusting income and yields on tax-exempt loans and investments to be comparable to taxable loans and investments. FTE net interest income increased by $2.2 million, or 10.5%, from 1993 to 1994. The increase was due to continued growth in interest-earning assets and a widening spread between yields earned on assets and rates paid on deposits. The interest rate spread widened by 11 basis points to 4.66% in 1994, while the net interest margin (FTE net interest income as a percentage of average interest-earning assets) increased from 4.90% in 1993 to 5.08% in 1994. Despite the overall increase in rates in 1994, both asset yields and rates paid on deposits and other interest-bearing liabilities were lower in 1994 than in 1993. Lower rates on interest-earning assets were offset by strong growth in average earning assets as well as a more favorable mix of interest-earning assets. FTE interest income totalled $37.2 million in 1994, up 4.6% from the 1993 amount of $35.5 million. The FTE yield on interest-earning assets was 8.02% in 1994, down from 8.16% in 1993. Average interest-earning assets increased by $28.5 million, or 6.6%, in 1994. Despite the lower yield on the loan portfolio, loan growth changed the mix of interest-earning assets and contributed to the increase in net interest income. Average total loans, generally the Corporation's highest yielding asset category, increased by 8.7% in 1994. The FTE rate of return on total loans was 8.41% in 1994, down from 8.68% in 1993. The decrease primarily resulted from the effect of fixed rate mortgage refinancings. The yield on the residential mortgage portfolio fell to 7.93% in 1994, down 84 basis points from 1993. Continued refinancings at lower interest rates through the first half of 1994 led to a decrease in rates earned on the fixed rate residential mortgage portfolio. The average adjustable rate mortgage ("ARM") portfolio grew by $19.0 million, or 44.1%, in 1994, contributing to the decline in rates earned on the residential mortgage portfolio because such loans have a lower interest yield at origination than fixed rate mortgages. The reduction in rates earned on the residential mortgage portfolio was offset by higher rates earned on commercial loans, which have benefitted from the increase in interest rates, and by substantial growth in the consumer loan portfolio, which generated the highest aggregate loan yield. Average interest-bearing liabilities rose by $11.4 million, or 2.9%, during 1994, but declining rates paid on these liabilities reduced interest expense by 4.2% from the prior year. The average rate paid on interest-bearing liabilities fell from 3.61% in 1993 to 3.36% in 1994. The mix in interest-bearing liabilities changed during the year as well. Average time deposits grew 4.4% in 1994, while average savings deposits were virtually unchanged from the prior year. However, savings deposits declined by $8.2 million from December 31, 1993 to the end of 1994 as rates paid on time deposits increased relative to savings deposits. Included in other interest-bearing liabilities are term advances from the Federal Home Loan Bank averaging $22.3 million in 1994, up from an average of $18.6 million in 1993. The average rate paid on these advances was 5.74% and 5.87% in 1994 and 1993, respectively. These advances were used for general corporate funding purposes. Average demand deposits, an interest-free source of funding, increased by $9.2 million, or 23.1%, from 1993 to 1994. This contributed to the increase in net interest margin in 1994. Interest Rate Sensitivity and Liquidity The Corporation's Asset/Liability Committee ("ALCO") is responsible for establishing policy guidelines on acceptable exposure to interest rate risk. The objective of the ALCO is to manage assets and funding sources to produce results which are consistent with Washington Trust's liquidity, capital adequacy, growth, risk and profitability goals. The ALCO establishes and monitors guidelines for proper origination and matching of assets and funding sources, and determines asset/liability origination and pricing strategies to meet its goals. The ALCO meets regularly to review the economic environment and the volume, mix and maturity of assets and liabilities, and implements appropriate changes in strategy to manage liquidity and exposure to changes in interest rates. Interest rate "gap" analysis is one of the tools used by the ALCO to evaluate the Corporation's interest rate sensitivity at a specific point in time. Gap analysis measures the relative amounts of interest-earning assets and interest- bearing liabilities that reprice within a given period. When an institution's interest-earning assets exceed its interest-bearing liabilities maturing or repricing within the same period (commonly referred to as a "positive gap"), the institution can expect asset yields to increase faster than liability costs in a rising rate environment, thereby increasing its net interest margin. Conversely, in a rising rate environment an institution with a "negative gap" would expect its rates paid on liabilities to rise faster than its yield on assets, thereby reducing its net interest margin. At December 31, 1994, the Corporation's cumulative one-year gap was a negative $33.7 million, or 7% of earning assets. The following table details the amounts of interest-earning assets and interest-bearing liabilities at December 31, 1994 that are expected to mature or reprice in each of the time periods presented. To the extent applicable, amounts of assets and liabilities which mature or reprice within a particular period were determined in accordance with their contractual terms. Fixed rate mortgages, mortgage-backed securities and installment loans have been allocated based on expected amortization and prepayment rates using standard industry assumptions. Savings, NOW and money market deposit accounts, which have no contractual term, and are subject to immediate repricing, are presented in the under three-month category. Gap analysis, however, does not take into account the differing impact and timing of rate fluctuations on assets and liabilities. Certain assets and liabilities that have similar repricing or maturity periods may react differently to changes in interest rates. During 1994, rates paid on Washington Trust's retail deposits did not increase as quickly as rates earned on assets. This led to an increase in the net interest margin during 1994, despite the Corporation's negative gap position at December 31, 1993. This increase reflects some of the limitations of gap analysis. Consequently, the ALCO uses other measurement techniques to supplement gap analysis in its assessment of interest rate risk. The ALCO reviews interest income simulations to evaluate the potential effect of future upward or downward changes in interest rates on net interest income. These simulations incorporate maturity and repricing data for earning assets and liabilities as well as other relevant assumptions which affect outstanding balances under various interest rate scenarios. In 1994, the Corporation supplemented its interest rate risk management strategies with off-balance sheet transactions. Interest rate swap agreements with a notional principal amount of $10 million were used to convert a 23-month fixed rate deposit product to a variable rate. The effect of this swap on net interest income for 1994 was not material. Washington Trust may utilize additional interest rate exchange agreements as a component of its overall asset/liability management strategy.
3 months 3 to 6 6 months 1 to 5 over (In thousands) or less months to 1 year years 5 years ------------------------------------------------------------------------------------- Interest-earning assets: Loans $ 116,444 $ 41,115 $ 89,129 $ 61,329 $ 82,321 Debt securities 16,738 3,216 8,577 33,727 23,846 Other assets 4,294 -- -- -- 2,907 ------------------------------------------------------------------------------------- Total interest-earning assets 137,476 44,331 97,706 95,056 109,074 ------------------------------------------------------------------------------------- Interest-bearing liabilities: Deposits (232,955) (25,413) (36,828) (92,291) -- Interest rate swap agreements (10,000) -- -- 10,000 -- Federal Home Loan Bank advances (4,000) (1,000) (3,000) (14,000) (1,522) ------------------------------------------------------------------------------------- Total interest-bearing liabilities (246,955) (26,413) (39,828) (96,291) (1,522) ------------------------------------------------------------------------------------- Interest sensitivity gap per period $(109,479) $ 17,918 $ 57,878 $ (1,235) $107,552 ===================================================================================== Cumulative interest sensitivity gap $(109,479) $(91,561) $(33,683) $(34,918) $ 72,634 =====================================================================================
Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. Washington Trust monitors its liquidity to ensure that anticipated funding needs will be met. Washington Trust's primary source of liquidity is customer deposits. Customer deposits (time, savings, and demand deposits) funded approximately 85.6% of total average assets in 1994. Other sources of funding include loan repayments and discretionary use of purchased liabilities. These purchased liabilities include federal funds purchased, securities sold under agreements to repurchase and Federal Home Loan Bank term advances. In addition, investment securities designated as available for sale may be sold in response to liquidity needs. The ALCO establishes and monitors internal liquidity measurements to manage liquidity exposure. Net loans as a percentage of total assets rose to 73.9% at December 31, 1994, compared to 70.6% at December 31, 1993. Investment securities and securities available for sale as a percentage of total assets fell to 17.3% at December 31, 1994, down from 18.2% at December 31, 1993. For the year ended December 31, 1994, net cash provided by financing activities was $18.8 million. Approximately $17.4 million was generated by increases in deposits, and $3.0 million from net advances from the FHLB. Net cash used in investing activities was $31.8 million in 1994, the majority of which was used to fund loan demand. (See the Consolidated Statements of Cash Flows for further information about sources and uses of cash.) Capital Resources Shareholders' equity in the Corporation consists primarily of retained earnings, as well as common stock and related paid-in capital. The ratio of total equity to total assets amounted to 8.9% at December 31, 1994, compared to 7.9% at December 31, 1993. Book value rose to $16.22 per share at December 31, 1994, up from the year-earlier amount of $13.71 per share. Total shareholders' equity increased by $7.3 million, or 19.0%, during 1994. Approximately $2.8 million of this increase is attributable to the unrealized gain on securities available for sale resulting from the adoption of SFAS No. 115. In addition, approximately $4.2 million in capital growth resulted from earnings retention. The Corporation increased cash dividends declared per share by 24% in 1994 in recognition of continued improvements in earnings and a strong capital position. Cash dividends per share amounted to $.73 in 1994 versus $.59 in 1993. In July 1994, the Corporation declared a 3-for-2 stock split on shares of common stock, effected in the form of a stock dividend which was paid in August 1994. All per share data included in the consolidated financial statements, the related notes, and this discussion have been restated to reflect the stock split. Regulatory guidelines require bank holding companies and state chartered banks to maintain minimum ratios of capital to risk-adjusted assets. These guidelines were established to more accurately assess the credit risk inherent in the assets and off-balance sheet activities of financial institutions. Each balance sheet asset and each off-balance sheet asset is assigned a "risk-weight" in determining the ratio of capital to risk-adjusted assets. Banks are required to have minimum core capital (Tier 1) of 4% and total risk- adjusted capital (Tier 1 and Tier 2) of 8%. For Washington Trust, Tier 1 capital is essentially equal to shareholders' equity excluding the unrealized gain on securities available for sale. Tier 2 capital consists of a portion of the reserve for possible loan losses (limited to 1.25% of total risk-weighted assets). As a supplement to the risk-based capital measure, regulatory guidelines restrict the extent to which banking organizations can leverage their capital base. The Tier 1 leverage ratio is defined as Tier 1 capital (as defined under the risk-based capital guidelines) divided by average assets (net of intangible assets). The minimum leverage ratio is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk (including no undue interest rate risk), excellent asset quality, high liquidity, and good earnings. Other banking organizations are expected to have ratios of at least 4-5%, depending on their particular financial condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstances or risk profile of a given banking organization. The Corporation's Tier 1 leverage ratio as of December 31, 1994 was 8.45%. The Federal Reserve has not advised the Corporation of any specific minimum Tier 1 leverage capital ratio applicable to it. See Note 16 to the Corporation's Consolidated Financial Statements for additional discussion of the Corporation's ability to pay dividends. The following table presents information concerning the Corporation's compliance with regulatory requirements at December 31, 1994 and 1993:
(Dollars in thousands) 1994 1993 ------------------------------------------------------------------------------------------- Risk-based capital: (1) Tier 1 capital (shareholders' equity) $42,981 $38,463 Tier 2 capital (eligible portion of reserve for possible loan losses) 4,337 4,112 ------------------------------------------------------------------------------------------- Total risk-based capital $47,318 $42,575 =========================================================================================== Assets: (1) Net risk-weighted assets $342,472 $324,408 Average quarterly assets $508,540 $490,899 =========================================================================================== Risk-based capital ratios: Tier 1 (minimum 4.0%) 12.55% 11.86% Total (Tier 1 plus Tier 2, minimum 8.0%) 13.82% 13.12% Tier 1 leverage ratio (minimum 3.0%) 8.45% 7.84% =========================================================================================== (1) 1994 amounts exclude the effects of accounting for securities available for sale under SFAS No. 115.
Noninterest Income Noninterest income is an important source of revenue for the Corporation. For the year ended December 31, 1994, noninterest income, excluding securities sales and loan sales, accounted for 14.6% of gross income. The Corporation generates recurring noninterest income by charging for banking related services such as management of customer investment portfolios, trusts and estates, assessing fees for servicing deposit accounts, servicing residential mortgages sold in the secondary market, and processing merchant bankcard activity. Income from trust-related services continues to be the largest component of noninterest income. Trust income represented 47% of noninterest income and amounted to $3.3 million in 1994, up 11.2% from the $3.0 million reported in 1993. This increase is primarily due to an increase in the number of accounts under management. Service charges on deposit accounts rose 11.4% to $1.6 million in 1994. The increase reflects growth in the Corporation's total deposit base, as well as changes in the fee structures of various deposit products during the year. Net gains on securities available for sale totalled $684,590 in 1994, up from $345,674 reported in 1993. These gains were taken in the first quarter of 1994 in connection with a nonrecurring contribution expense of approximately $700,000 for the establishment of a charitable trust. (See Note 3 to the Consolidated Financial Statements for additional information regarding this transaction.) Losses on loan sales totalled $15,998 for the year ended December 31, 1994, down from gains of $484,960 reported during 1993. The decrease is attributable to substantial reductions in originations and sales of fixed rate mortgages in 1994, as well as from interest rate increases during 1994. Fixed rate mortgages originated for sale amounted to $10.4 million in 1994, down 56.7% from the prior year. (See the Consolidated Statements of Cash Flows for additional information.) The Corporation retains servicing rights on all residential mortgage loans sold. The balance of serviced loans at December 31, 1994 amounted to $91.8 million, compared to $91.3 million at December 31, 1993.
% Change --------------------------- (Dollars in thousands) 1994 1993 1992 1994 vs 1993 1993 vs 1992 ------------------------------------------------------------------------------------------- Trust income $3,284 $2,952 $2,678 11.2% 10.2% Service charges on deposit accounts 1,611 1,446 1,229 11.4 17.7 Merchant processing fees 622 522 437 19.2 19.5 Gains on sales of securities 685 346 197 98.0 75.6 Gains (losses) on loan sales (16) 485 484 (103.3) .2 Fees, service charges and other 394 391 409 .8 (4.4) Mortgage servicing fees 342 287 340 19.2 (15.6) ------------------------------------------------------------------------------------------- Total noninterest income $6,922 $6,429 $5,774 7.7% 11.3% ===========================================================================================
Noninterest Expense Total noninterest expense rose 9.8% to $19.7 million in 1994. Salaries and employee benefits accounted for the majority of the increase, rising by 14.3% due to increased staffing levels, normal salary adjustments and higher profit sharing and incentive plan costs. Foreclosed property costs totalled $240,975 in 1994, down from $901,320 in 1993. The decrease of 73.3% is primarily due to a decline in the number of properties owned and a reduction in the amount of write-downs recorded to adjust the carrying values of the properties owned to their fair value. The provision for valuation of other real estate owned amounted to $407,530 in 1994, down from the prior year amount of $1,042,428. Charitable contributions amounted to $699,896 in 1994, up from $6,894 in 1993. This nonrecurring expense is associated with the donation of equity securities for the establishment of a charitable trust in the first quarter of 1994. This transaction had little effect on net income in 1994 as the expense was substantially offset by a related gain on the disposition of the donated securities. (See Note 3 to the Consolidated Financial Statements for additional information relating to this transaction.)
% Change -------------------------- (Dollars in thousands) 1994 1993 1992 1994 vs 1993 1993 vs 1992 ------------------------------------------------------------------------------------------ Salaries $ 8,343 $ 7,597 $ 6,630 9.8% 14.6% Employee benefits 1,587 1,089 1,007 45.7 8.1 Depreciation - occupancy 539 540 524 (0.2) 3.1 Other occupancy costs 667 648 490 2.9 32.2 Depreciation - equipment 774 906 786 (14.6) 15.3 Other equipment costs 414 424 432 (2.4) (1.9) Deposit taxes and assessments 1,279 1,217 1,150 5.1 5.8 Foreclosed property costs 241 901 1,054 (73.3) (14.5) Office supplies 606 517 482 17.2 7.3 Advertising and promotion 505 476 443 6.1 7.4 Credit and collection 513 582 453 (11.9) 28.5 Postage 363 331 328 9.7 .9 Charitable contributions 700 7 10 1,000.0 (30.0) Other 3,174 2,711 2,299 17.1 17.9 ------------------------------------------------------------------------------------------ Total noninterest expense $19,705 $17,946 $16,088 9.8% 11.5% ==========================================================================================
Income Taxes Income tax expense amounted to $3.0 million and $2.3 million in 1994 and 1993, respectively. The Corporation's effective tax rate was 32.6% in 1994, down from the 1993 rate of 33.5%. These rates differed from the federal rate of 34.0% due to the benefits of tax-exempt income and the dividends received deduction as well as the expense resulting from state income taxes. The Corporation adopted SFAS No. 109, "Accounting for Income Taxes", as of January 1, 1993. SFAS No. 109 required a change from the deferred method of determining income tax expense to the asset and liability method. Deferred tax assets and liabilities are established for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The cumulative effect of the January 1, 1993 adoption of SFAS No. 109 was a $305,000 increase in earnings. The Corporation had a net deferred tax asset amounting to $1.8 million at December 31, 1994, down from $3.3 million at December 31, 1993. The reduction in the amount of the deferred tax asset is attributable to the implementation of SFAS No. 115, which requires that securities available for sale be recorded at their market value. The deferred tax asset was increased in 1994 by approximately $1.2 million as a result of a required change in the method of calculating the allowable tax deduction for loan losses. A significant portion of the Corporation's deferred tax asset is expected to be realized for tax purposes within a five year period. Recent Accounting Developments Loan Impairment The Financial Accounting Standards Board ("FASB") has issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which is effective for fiscal years beginning after December 15, 1994. This pronouncement establishes accounting standards for measuring impairment on loans for which it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS No. 114 requires impairment to be measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. This pronouncement also narrows the definition of in-substance foreclosures. Accordingly, many of the loans currently classified as in- substance foreclosures will be treated as impaired loans rather than OREO under these new guidelines. The January 1, 1995 adoption of SFAS No. 114 will result in an increase in net loans of $3,301,000, and a corresponding decrease in OREO. The adoption of this pronouncement will not have a significant effect on the Corporation's results of operations. Comparison of 1993 with 1992 Washington Trust recorded net income, before the accounting change for income taxes of $4,476,531, or $1.59 per share in 1993, compared to $3,150,356, or $1.14 per share earned in 1992. Increased net interest income, improved levels of nonperforming assets, and a resultant decrease in the Corporation's provision for loan losses all had a positive impact on 1993 earnings. Net income in 1993 included a benefit of $305,000 or $.11 per share recorded as a result of a change in accounting for income taxes. Net interest income rose 8.8% in 1993, primarily due to a favorable interest rate environment. Rates paid on deposits continued to decline more rapidly than those earned on loans and investments, resulting in a $1.7 million increase in net interest income in 1993. The net interest margin amounted to 4.90% in 1993, up from 4.76% in 1992. The interest rate spread rose 15 basis points to 4.55% for the year ended December 31, 1993. Total loans increased by $27.3 million in 1993 and amounted to $352.5 million at December 31, 1993. Commercial loan demand was soft during 1993, but demand for fixed rate residential mortgage refinancings was strong due to low interest rates. The majority of the fixed rate mortgages originated in 1993 were sold in the secondary market. Adjustable rate residential mortgages increased $22.0 million, or 65.8%, as borrowers opted for the attractive rates that this product offered. Nonperforming assets totalled 3.9% of total assets at December 31, 1993, down from the 1992 amount of 5.7%. The Corporation's loan loss provision amounted to $2.5 million in 1993, down from $4.0 million in 1992. Net loan charge-offs amounted to $1.2 million in 1993, down from $3.1 million in 1992. Shareholders' equity rose 10.1% in 1993 to $38.5 million. The ratio of capital to assets was 7.9% and 7.6% at December 31, 1993 and 1992, respectively. Dividends paid per share amounted to $.59 in 1993, up 10% from the prior year. Consolidated Balance Sheets Washington Trust Bancorp, Inc. and Subsidiary
December 31, 1994 1993 -------------------------------------------------------------------------------------------------- Assets: Cash and due from banks (note 2) $ 15,172,421 $ 14,978,427 Federal funds sold 3,232,489 6,671,701 Securities available for sale, at market value in 1994 (cost $31,846,965) and at lower of cost or market in 1993 (market value $44,420,747); (note 3) 36,516,115 36,236,543 Mortgage loans held for sale 203,750 3,709,499 Investment securities, at cost; market value $49,395,262 in 1994 and $53,333,595 in 1993 (note 4) 52,496,616 52,497,832 Loans (notes 5 and 14) 390,133,472 352,510,695 Less reserve for possible loan losses (note 6) 8,835,907 8,657,263 -------------------------------------------------------------------------------------------------- Net loans 381,297,565 343,853,432 Premises and equipment, net (note 7) 14,779,903 14,354,731 Accrued interest receivable 3,232,211 2,870,911 Net deferred tax asset (note 13) 1,797,340 3,305,000 Other real estate owned, net (note 9) 5,307,905 7,831,146 Other assets 1,643,648 1,019,602 -------------------------------------------------------------------------------------------------- Total assets $515,679,963 $487,328,824 ================================================================================================== Liabilities: Deposits: Demand $ 53,373,386 $ 43,924,560 Savings 192,653,937 200,846,347 Time (note 10) 194,703,819 178,603,713 -------------------------------------------------------------------------------------------------- Total deposits 440,731,142 423,374,620 Dividends payable 564,686 411,473 Federal Home Loan Bank advances (note 11) 23,522,343 20,500,000 Accrued expenses and other liabilities 5,078,808 4,579,806 -------------------------------------------------------------------------------------------------- Total liabilities 469,896,979 448,865,899 -------------------------------------------------------------------------------------------------- Commitments and contingencies (notes 8 and 15) Shareholders' Equity: (note 16) Common stock of $.0625 par value; authorized 10,000,000 shares in 1994 and 3,000,000 shares in 1993; issued 2,880,000 shares 180,000 120,000 Paid-in capital 2,869,135 2,822,908 Retained earnings 40,613,979 36,418,073 Unrealized gain on securities available for sale, net of tax 2,801,490 -- Treasury stock, at cost; 56,570 shares in 1994 and 74,505 shares in 1993 (681,620) (898,056) -------------------------------------------------------------------------------------------------- Total shareholders' equity 45,782,984 38,462,925 -------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $515,679,963 $487,328,824 ================================================================================================== See accompanying notes to consolidated financial statements.
Consolidated Statements of Income Washington Trust Bancorp, Inc. and Subsidiary
Years ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans (note 5) $ 31,116,418 $ 29,565,118 $ 32,080,668 Income from investment securities and securities available for sale: Interest 4,543,584 4,143,297 2,767,561 Dividends 745,925 897,869 728,260 Interest on federal funds sold 255,761 321,579 292,258 ------------------------------------------------------------------------------------------------------- Total interest income 36,661,688 34,927,863 35,868,747 ------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 4,334,637 4,964,023 5,810,111 Time deposits 7,917,428 8,111,506 10,280,550 Other 1,336,517 1,103,250 709,557 ------------------------------------------------------------------------------------------------------- Total interest expense 13,588,582 14,178,779 16,800,218 ------------------------------------------------------------------------------------------------------- Net interest income 23,073,106 20,749,084 19,068,529 Provision for loan losses (note 6) 1,000,000 2,500,000 4,000,000 ------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 22,073,106 18,249,084 15,068,529 ------------------------------------------------------------------------------------------------------- Noninterest income: Trust income 3,284,435 2,952,216 2,678,082 Service charges on deposit accounts 1,610,550 1,446,269 1,228,610 Merchant processing fees 622,013 521,545 436,511 Gains on sales of securities (notes 3 and 4) 684,590 345,674 196,606 Gains (losses) on loan sales (15,998) 484,960 484,187 Other income 736,576 678,510 750,295 ------------------------------------------------------------------------------------------------------- Total noninterest income 6,922,166 6,429,174 5,774,291 ------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits (note 12) 9,929,943 8,686,310 7,636,843 Net occupancy 1,206,031 1,187,937 1,013,706 Equipment 1,188,352 1,330,052 1,218,225 Deposit taxes and assessments 1,279,417 1,216,740 1,149,683 Foreclosed property costs (note 9) 240,975 901,320 1,053,768 Office supplies 605,645 516,788 481,678 Advertising and promotion 505,351 476,305 442,980 Credit and collection 512,715 581,831 453,460 Charitable contributions (note 3) 699,896 6,894 10,300 Other 3,536,307 3,042,550 2,627,821 ------------------------------------------------------------------------------------------------------- Total noninterest expense 19,704,632 17,946,727 16,088,464 ------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 9,290,640 6,731,531 4,754,356 Applicable income taxes (note 13) 3,026,000 2,255,000 1,604,000 ------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 6,264,640 4,476,531 3,150,356 Cumulative effect of change in accounting for income taxes -- 305,000 -- ------------------------------------------------------------------------------------------------------- Net income $ 6,264,640 $ 4,781,531 $ 3,150,356 ======================================================================================================= Weighted average shares outstanding - primary 2,872,360 2,811,846 2,769,003 Weighted average shares outstanding - fully diluted 2,872,775 2,825,759 2,770,961 Earnings per share - primary: Income before cumulative effect of accounting change $2.18 $1.59 $1.14 Cumulative effect of change in accounting for income taxes -- .11 -- ----- ----- ----- Net income $2.18 $1.70 $1.14 ===== ===== ===== Earnings per share - fully diluted: Income before cumulative effect of accounting change $2.18 $1.58 $1.14 Cumulative effect of change in accounting for income taxes -- .11 -- ----- ----- ----- Net income $2.18 $1.69 $1.14 ===== ===== ===== Cash dividends declared per share $ .73 $ .59 $ .53 See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows Washington Trust Bancorp, Inc. and Subsidiary
Years Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 6,264,640 $ 4,781,531 $ 3,150,356 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,000,000 2,500,000 4,000,000 Provision for valuation of other real estate owned 407,530 1,042,428 579,170 Depreciation of premises and equipment 1,313,158 1,446,367 1,310,635 Amortization of net deferred loan fees and costs (819,142) (599,670) (303,548) Cumulative effect of change in accounting principle -- (305,000) -- Deferred income tax benefit (360,000) (881,000) (833,000) Gains on sales of investment securities -- -- (197,214) Losses (gains) on sales of securities available for sale (684,590) (345,674) 608 Gains on sales of other real estate owned (478,519) (674,331) (131,958) Losses (gains) on loan sales 15,998 (484,960) (484,187) Proceeds from sales of loans 13,867,186 29,396,915 -- Loans originated for sale (10,377,435) (23,981,881) -- Decrease (increase) in accrued interest receivable (361,300) (9,414) 901,201 Decrease (increase) in other assets (624,046) 49,001 723,134 Increase in accrued expenses and other liabilities 499,002 861,108 419,747 Other, net 121,778 22,998 70,816 ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 9,784,260 12,818,418 9,205,760 ------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Securities available for sale: Purchases (5,653,443) (7,655,294) (10,936,945) Proceeds from sales of equity securities 9,666,129 7,387,344 7,508,250 Maturities 1,000,000 -- -- Investment securities: Purchases (8,399,712) (26,043,737) (48,617,219) Maturities and principal repayments 8,355,132 12,611,066 25,353,427 Proceeds from sales of equity securities -- -- 7,332,350 Loan originations in excess of principal collected on loans (37,685,414) (26,244,158) (44,356,538) Proceeds from sales and other reductions of other real estate owned 2,656,786 3,726,763 3,161,646 Proceeds from sales of loans -- -- 44,516,903 Purchases of premises and equipment (1,754,963) (755,168) (1,106,195) ------------------------------------------------------------------------------------------------------- Net cash used in investing activities (31,815,485) (36,973,184) (17,144,321) ------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 17,356,522 18,714,615 4,942,085 Proceeds from Federal Home Loan Bank advances 15,051,500 10,000,000 11,500,000 Repayment of Federal Home Loan Bank advances (12,029,157) (3,500,000) (2,500,000) Proceeds from issuance of commmon stock from treasury 322,663 371,803 236,053 Cash dividends paid (1,915,521) (1,599,173) (1,105,595) ------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 18,786,007 23,987,245 13,072,543 ------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (3,245,218) (167,521) 5,133,982 Cash and cash equivalents at beginning of year 21,650,128 21,817,649 16,683,667 ------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $18,404,910 $21,650,128 $21,817,649 ======================================================================================================= Noncash Investing Activities: Net transfers from loans to other real estate owned $ 1,770,354 $ 1,440,156 $ 9,959,742 Loans charged off 1,114,208 1,512,221 3,416,989 Loans made to facilitate the sale of other real estate owned 1,709,931 3,053,750 4,542,550 Change in unrealized gain on securities available for sale, net of tax 2,801,490 -- -- Supplemental Disclosures: Interest payments $ 7,384,172 $ 8,154,492 $ 8,959,552 Income tax payments 2,942,787 2,844,278 1,964,111 See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity Washington Trust Bancorp, Inc. and Subsidiary
Years ended December 31, 1994 1993 1992 -------------------------------------------------------------------------------------------------------- Common Stock Balance at beginning of year $ 120,000 $ 120,000 $ 120,000 3-for-2 stock split in the form of a 50% stock dividend 60,000 -- -- -------------------------------------------------------------------------------------------------------- Balance at end of year 180,000 120,000 120,000 -------------------------------------------------------------------------------------------------------- Paid-in Capital Balance at beginning of year 2,822,908 2,784,205 2,824,307 Issuance of common stock for dividend reinvestment and stock option plans 106,227 38,703 (40,102) 3-for-2 stock split in the form of a 50% stock dividend (60,000) -- -- -------------------------------------------------------------------------------------------------------- Balance at end of year 2,869,135 2,822,908 2,784,205 -------------------------------------------------------------------------------------------------------- Retained Earnings Balance at beginning of year 36,418,073 33,276,746 31,602,427 Net income 6,264,640 4,781,531 3,150,356 Cash dividends declared (2,068,734) (1,640,204) (1,476,037) -------------------------------------------------------------------------------------------------------- Balance at end of year 40,613,979 36,418,073 33,276,746 -------------------------------------------------------------------------------------------------------- Unrealized Gain on Securities Available for Sale Balance at beginning of year -- -- -- Adoption of SFAS No. 115 4,910,522 -- -- Change in unrealized gain on securities available for sale, net of tax (2,109,032) -- -- -------------------------------------------------------------------------------------------------------- Balance at end of year 2,801,490 -- -- -------------------------------------------------------------------------------------------------------- Treasury Stock Balance at beginning of year (898,056) (1,231,156) (1,507,311) Issuance of common stock for dividend reinvestment and stock option plans 216,436 333,100 276,155 -------------------------------------------------------------------------------------------------------- Balance at end of year (681,620) (898,056) (1,231,156) -------------------------------------------------------------------------------------------------------- Total Shareholders' Equity $ 45,782,984 $ 38,462,925 $ 34,949,795 ======================================================================================================== See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (1) Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements of Washington Trust Bancorp, Inc. and subsidiary (the Corporation) include the accounts of Washington Trust Bancorp, Inc. and its wholly-owned subsidiary, The Washington Trust Company, a Rhode Island chartered bank. All significant intercompany transactions have been eliminated. The consolidated financial statements are presented on the accrual basis of accounting except for certain fees earned in a fiduciary capacity which are reported on a cash basis and which do not differ materially from amounts determined on the accrual basis. Certain amounts in the 1993 and 1992 consolidated financial statements have been reclassified to conform to the current reporting format. Securities Available for Sale The Corporation designates securities that it intends to use as part of its asset/liability strategy or that may be sold as a result of changes in market conditions, changes in prepayment risk, rate fluctuations, liquidity or capital requirements as available for sale. The determination to classify such securities as available for sale is made at the time of purchase. Effective January 1, 1994, the Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). The Statement requires that securities available for sale be reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Any decline in fair value below the amortized cost basis of an individual security deemed to be other than temporary is recognized as a realized loss in the accounting period in which the determination is made. The fair value of the security at the time of the write- down becomes the new cost basis of the security. Prior to adoption of SFAS No. 115, securities available for sale were carried at the lower of aggregate cost, adjusted for amortization of premium or accretion of discount in the case of debt securities, or market value. The resulting net unrealized loss, if any, was charged to current period earnings. Any unrealized loss on an individual security deemed to be other than temporary was recognized as a realized loss in the accounting period in which the determination was made. Realized gains or losses from sales of equity securities are determined using the average cost method, while other realized gains and losses are determined using the specific identification method. Investment Securities The determination to classify debt securities in the investment category is made at the time of purchase and is based on management's intent and ability to hold the securities until maturity. Debt securities held in the investment portfolio are stated at cost, adjusted for amortization of premium and accretion of discount (calculated on a method that approximates the interest method). Loan Accounting Policy Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost, net of unamortized deferred loan origination fees and costs, or market. Unrealized losses, if any, are charged to current period earnings. Loans Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs. Interest income is accrued on various methods which approximate a level yield related to principal amounts outstanding. Deferred loan fees and costs are amortized as an adjustment to yield over the life of the related loans. Nonaccrual Loans Loans, with the exception of credit card loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Interest previously accrued, but not collected on such loans is reversed against current period income. Subsequent cash receipts on nonaccrual loans are applied to the outstanding principal balance of the loan, or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible. Restructured Loans Restructured loans include those for which concessions such as reduction of interest rates other than normal market rate adjustments, or deferral of principal or interest payments have been granted due to a borrower's financial condition. Subsequent cash receipts on restructured loans are applied to the outstanding principal balance of the loan, or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Reserve for Possible Loan Losses The reserve for possible loan losses is available for future credit losses inherent in the loan portfolio. The level of the reserve is based on management's ongoing review of the growth and composition of the loan portfolio, net charge-off experience, current and expected economic conditions, and other pertinent factors. Loans (or portions thereof) deemed to be uncollectible are charged against the reserve and recoveries of amounts previously charged off are added to the reserve. Loss provisions charged to earnings are added to the reserve to bring it to the desired level. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. Expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses. Other Real Estate Owned (OREO) Other real estate owned consists of property acquired through foreclosure, and includes loans determined to be "in-substance" foreclosures (ISFs). A loan is considered to be an ISF when the borrower has little or no equity in the underlying collateral property, proceeds for repayment of the loan are dependent upon the sale of the collateral, and the borrower has effectively abandoned control of the property or it is doubtful that the borrower will be able to rebuild equity in the property. OREO is stated at the lower of cost or fair value at the date of acquisition or classification to ISF status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure or classification to ISF status is charged to the reserve for possible loan losses. A valuation allowance is maintained for potential declines in market value, known specific declines in market value, and estimated selling costs. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in foreclosed property costs. Interest Rate Swap Agreements Interest rate swap agreements are agreements to exchange interest payments (e.g. fixed-rate for variable-rate payments) computed on contractual amounts. Interest rate swap agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Corporation does not trade in speculative swaps. Therefore, these instruments are not marked to market. Amounts paid or received related to outstanding contracts that are used to manage interest rate risk are recognized in earnings as an adjustment to the related interest income or expense over the life of the swap agreements. Gains or losses resulting from the termination of interest rate swap agreements on qualifying hedges of existing assets or liabilities are deferred and amortized over the remaining lives of the related assets/liabilities as an adjustment to the yield. Unamortized deferred gains/losses on terminated interest rate swap agreements are included in the underlying assets/liabilities hedged. Deposit Taxes and Assessments Deposit taxes and assessments consist of amounts assessed to members of the Bank Insurance Fund (BIF) by the Federal Deposit Insurance Corporation (FDIC) and deposit taxes imposed by the State of Rhode Island. These amounts are calculated based on levels of bank deposits using rates established by the respective regulatory authorities. Pension Costs Annual charges to earnings for the Corporation's defined benefit plans are recognized based upon actuarial calculations and other methods. Advertising and Promotion Costs Advertising and promotion costs, including advertising production and communication costs, are reported as an expense in the period in which they are incurred. Income Taxes Income tax expense is determined based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Corporation adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) on January 1, 1993. The cumulative effect of adoption of SFAS No. 109 was reported in the 1993 Consolidated Statements of Income. Prior to adoption of SFAS No. 109, the Corporation accounted for income taxes under Accounting Principles Board Opinion No. 11, whereby deferred taxes are provided for income and expense items which are recognized in different time periods for financial reporting and tax return purposes. Earnings Per Share Earnings per share is determined by dividing net income by the average number of common shares and common stock equivalents outstanding, net of shares assumed to be repurchased using the treasury stock method. Common stock equivalents arise from the assumed exercise of outstanding stock options, if dilutive. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold on an overnight basis. In 1993 the Corporation adopted the policy of originating certain mortgage loans specifically for sale in the secondary market. Accordingly, originations and sales of such loans in 1993 and 1994 are classified as operating activities in the Consolidated Statements of Cash Flows. (2) Cash and Due From Banks The Corporation's bank subsidiary is required to maintain certain average reserve balances with the Federal Reserve. Such reserve balances amounted to $6,856,533 and $6,249,989 at December 31, 1994 and 1993, respectively. (3) Securities Available For Sale As discussed in Note 1, the Corporation adopted SFAS No. 115 as of January 1, 1994. The effect of adopting this pronouncement was an increase in the carrying value of securities available for sale of $8,184,204. Prior year amounts have not been restated. Securities available for sale are summarized as follows:
Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------------------------------------------------------------------------------ December 31, 1994 U.S. Treasury obligations $25,059,480 $ 181,660 $ (707,920) $24,533,220 Corporate stocks 3,880,685 5,215,167 (19,757) 9,075,095 Federal Home Loan Bank stock 2,906,800 -- -- 2,906,800 ------------------------------------------------------------------------------------ Total $31,846,965 $5,396,827 $ (727,677) $36,516,115 ==================================================================================== December 31, 1993 U.S. Treasury obligations $25,120,650 $1,097,084 $ (12,053) $26,205,681 Corporate debt securities 1,000,000 -- (2,500) 997,500 ------------------------------------------------------------------------------------ Total debt securities 26,120,650 1,097,084 (14,553) 27,203,181 Corporate stocks 8,143,093 7,161,080 (59,407) 15,244,766 Federal Home Loan Bank stock 1,972,800 -- -- 1,972,800 ------------------------------------------------------------------------------------ Total $36,236,543 $8,258,164 $ (73,960) $44,420,747 ====================================================================================
The contractual maturities and weighted average yields of debt securities are summarized below.
Weighted Amortized Market Average Debt Securities Available for Sale (1) Cost Value Yield ----------------------------------------------------------------------------- December 31, 1994 Due in 1 year or less $ 6,001,105 $ 5,980,350 5.54% After 1 but within 5 years 18,568,315 17,881,150 6.11% After 5 but within 10 years -- -- -- After 10 years 490,060 671,720 13.14% ----------------------------------------------------------------------------- Total $25,059,480 $24,533,220 6.11% ============================================================================= (1) Debt securities designated as available for sale may be sold prior to their contractual maturity.
The following is a summary of amounts relating to sales of corporate stocks:
Years ended December 31, 1994 1993 1992 --------------------------------------------------------------------------- Proceeds from sales $9,666,129 $7,387,344 $7,508,250 =========================================================================== Realized gains $ 713,534 $ 345,844 $ -- =========================================================================== Realized losses $ 28,944 $ 170 $ 608 ===========================================================================
Included in proceeds from sales of corporate stocks in 1994 are proceeds of $699,896 which represent the donation of corporate stocks to a charitable trust established by the Corporation. The gain on this transaction is included in gains on sales of securities available for sale and amounted to $676,058, the excess of the fair market value of the donated securities over their historical cost. The Corporation also recorded a contribution expense of $699,896 in accordance with Statement of Financial Accounting Standards No. 116, "Accounting for Contributions Received and Contributions Made". This statement requires contributions to be measured at the fair value of the asset given. Prior to 1994, contribution expense was recorded in the amount of the historical cost of donated stocks, with no gain or loss recognized. Included in proceeds from sales of corporate stocks available for sale are $7.5 million and $7.0 million in 1994 and 1993, respectively, from dispositions of dutch auction preferred stocks with no gain or loss. Purchases of dutch auction preferred stocks available for sale amounted to $3.5 million and $5.0 million in 1994 and 1993, respectively. These are preferred stock instruments whose dividend rate is reset by auction every 49 days to a market rate, resulting in a market value of par. At each auction, the holder can elect not to participate in the auction and therefore liquidate its investment at par (cost). There were no sales of debt securities available for sale during 1994, 1993 and 1992. Securities available for sale with a book value of $2,999,133 and $2,997,163 were pledged to secure public deposits and for other purposes at December 31, 1994 and 1993, respectively. (4) Investment Securities Investment securities are summarized as follows:
Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------------------------------------------------------------------------------- December 31, 1994 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $20,413,017 $ -- $(1,714,040) $18,698,977 Mortgage-backed securities 21,696,508 -- (1,160,590) 20,535,918 States and political subdivisions 10,387,091 9,385 (236,109) 10,160,367 ------------------------------------------------------------------------------------- Total $52,496,616 $ 9,385 $(3,110,739) $49,395,262 ===================================================================================== December 31, 1993 U.S. Treasury obligations and obligations of U.S. government-sponsored agencies $19,419,860 $ 26,765 $ (131,194) $19,315,431 Mortgage-backed securities 25,401,432 880,196 (33,684) 26,247,944 States and political subdivisions 7,676,540 99,539 (5,859) 7,770,220 ------------------------------------------------------------------------------------- Total $52,497,832 $1,006,500 $ (170,737) $53,333,595 =====================================================================================
Mortgage-backed securities included in the investment securities portfolio are issued by both the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. These securities represent participating interests in pools of long-term residential mortgage loans. Included in mortgage-backed securities are Federal Home Loan Mortgage Corporation participation certificates backed by mortgage loans originated by the bank subsidiary amounting to $15,084,526 and $17,273,190 at December 31, 1994 and 1993, respectively. Investment securities with a carrying value of $999,828 and $999,636 were pledged to secure public deposits and for other purposes at December 31, 1994 and 1993, respectively. The contractual maturities and weighted average yields of debt securities are summarized below.
Weighted Amortized Market Average Debt Securities Held for Investment (1) Cost Value Yield ------------------------------------------------------------------------------ December 31, 1994 Due in 1 year or less $ 8,029,516 $ 7,878,497 4.87% After 1 but within 5 years 28,697,847 26,756,480 5.39% After 5 but within 10 years 7,234,247 6,680,304 7.13% After 10 years 8,535,006 8,079,981 7.35% ------------------------------------------------------------------------------ Total $52,496,616 $49,395,262 5.87% ============================================================================== (1) Mortgage-backed securities are included based on their weighted average maturities, adjusted for anticipated future prepayments.
On September 30, 1992, the Corporation adopted the policy of designating securities as either available for sale or held for investment. There were no sales of securities held for investment subsequent to the adoption of this policy. During the nine month period ended September 30, 1992, proceeds from sales of equity securities from the investment portfolio amounted to $7,332,350. There were no sales of debt securities from the investment portfolio in 1992. Gross realized gains and losses on sales of investment securities in 1992 amounted to $208,464 and $11,250, respectively. Included in proceeds from sales of investment securities in 1992 is $6.5 million from dispositions of dutch auction preferred stocks with no gain or loss. Purchases of dutch auction preferred stocks for the investment portfolio amounted to $13.0 million in 1992. (5) Loans The following is a summary of loans:
December 31, 1994 1993 ---------------------------------------------------------------------------------- Residential real estate: Mortgages $169,715,217 $152,758,727 Homeowner construction 6,933,793 6,120,171 ---------------------------------------------------------------------------------- Total residential real estate 176,649,010 158,878,898 Commercial and other: Mortgages (1) 54,735,825 48,011,836 Construction and development (2) 11,909,730 10,051,008 Other (3) 101,796,053 101,636,280 ---------------------------------------------------------------------------------- Total commercial and other 168,441,608 159,699,124 Installment 45,042,854 33,932,673 ---------------------------------------------------------------------------------- Total loans $390,133,472 $352,510,695 ================================================================================== (1) Amortizing mortgages, primarily secured by income producing property (2) Loans for construction of residential and commercial properties and for land development (3) Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate
Concentrations of Credit Risk The Corporation's lending activities are primarily conducted in southern Rhode Island and southeastern Connecticut. The Corporation grants single family and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. In addition, loans are granted for the construction of residential homes, multi-family properties, commercial real estate properties, and for land development. The ability and willingness of the single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability and willingness of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the market area. Nonaccrual Loans The balance of loans on nonaccrual status as of December 31, 1994 and 1993 was $7,119,271 and $11,370,726, respectively. Interest income that would have been recognized had these loans been performing at originally contracted rates was approximately $628,000 in 1994, $1,021,000 in 1993, and $1,290,000 in 1992. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $287,000 in 1994, $597,000 in 1993 and $709,000 in 1992. Troubled Debt Restructurings During 1994, $528,999 of loans were restructured. Restructured loans which are performing in accordance with their new terms and, therefore, not included in nonaccrual loans, amounted to $365,000 at December 31, 1994. Interest income that would have been recognized had these loans been performing at originally contracted rates was approximately $34,000 in 1994. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to $26,000 in 1994. At December 31, 1994, there were no commitments to lend additional funds to borrowers whose loans had been restructured. There were no accruing restructured loans at December 31, 1993. Mortgage Servicing Activities Mortgage loans sold to others and serviced by the Corporation on a fee basis under various agreements amounted to $91,767,691 and $91,341,476 at December 31, 1994 and 1993, respectively. Loans serviced for others are not included in the Consolidated Balance Sheets. Impaired Loans Effective January 1, 1995, the Corporation will adopt Statements of Financial Accounting Standards Nos. 114 and 118, "Accounting by Creditors for Impairment of a Loan" and "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (SFAS No. 114 and No. 118). These statements establish accounting standards for measuring impairment on loans for which it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS No. 114 requires impairment to be measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. This statement also narrows the definition of in- substance foreclosures. Accordingly, loans currently classified as ISFs will be treated as impaired loans rather than OREO under these new guidelines. The January 1, 1995 adoption of SFAS No. 114 and No. 118 will result in an increase in gross loans of approximately $3,793,000. The adoption of these pronouncements will not have a significant effect on the Corporation's results of operations. (6) Reserve for Possible Loan Losses The following is an analysis of the reserve for possible loan losses:
Years ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------------- Balance at beginning of year $8,657,263 $7,342,276 $6,474,272 Provision charged to expense 1,000,000 2,500,000 4,000,000 Recoveries of loans previously charged off 292,852 327,208 284,993 Loans charged off (1,114,208) (1,512,221) (3,416,989) ------------------------------------------------------------------------------------- Balance at end of year $8,835,907 $8,657,263 $7,342,276 =====================================================================================
Management believes that the reserve for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the reserve may be necessary based on changes in economic conditions, particularly in the northeastern United States. In addition, various regulatory agencies may periodically review the Corporation's reserve for possible loan losses. Such agencies may require the recognition of additions to the reserve based on their judgments about information available to them at the time of their examination. As stated in Note 5, the Corporation is required to adopt SFAS No. 114 and SFAS No. 118. The adoption of these statements on January 1, 1995 will result in an increase in the reserve for possible loan losses of approximately $492,000 and a corresponding decrease in the OREO valuation allowance. This increase in the reserve for possible loan losses is associated with loans previously accounted for as ISFs. (7) Premises and Equipment The following is a summary of premises and equipment:
December 31, 1994 1993 ---------------------------------------------------------------------------- Land and improvements $ 1,530,736 $ 1,530,736 Premises and improvements 15,120,987 15,050,701 Furniture, fixtures, and equipment 8,977,727 7,748,246 ---------------------------------------------------------------------------- 25,629,450 24,329,683 Less accumulated depreciation 10,849,547 9,974,952 ---------------------------------------------------------------------------- Total premises and equipment, net $14,779,903 $14,354,731 ============================================================================
(8) Financial Instruments with Off-Balance Sheet Risk and Derivative Financial Instruments The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation's exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees and interest rate swaps. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:
December 31, 1994 1993 ------------------------------------------------------------------------------ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Commercial and other loans $18,607,837 $19,837,556 Revolving, open-end loans secured by residential properties; home equity lines 11,000,699 8,791,330 Credit card lines 10,975,795 9,845,871 Homeowner construction loans 2,602,710 3,257,811 Construction and development loans 1,274,763 1,329,486 Loans sold with recourse 1,505,466 2,104,375 Standby letters of credit 521,800 848,253 Financial instruments whose notional amounts exceed the amount of credit risk: Interest rate swap agreements 10,000,000 --
Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each borrower's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the borrower. Loans Sold With Recourse The Corporation has retained credit risk on certain residential mortgage loans sold with recourse. In the event of default by the mortgagor, the Corporation could become obligated to repurchase the loan. Such repurchases have been insignificant and have not resulted in any losses to the Corporation. Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Interest Rate Swap Agreements The Corporation uses interest rate swaps as part of its interest rate risk management strategy. Swaps are agreements in which the Corporation and another party agree to exchange interest payments on a notional principal amount. The credit risk associated with swap transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into swap agreements only with creditworthy counterparties. The notional amounts of swap transactions do not represent amounts exchanged by the parties and, thus, are not a measure of the Corporation's potential loss exposure. During 1994, the Corporation entered into interest rate swap agreements with a total notional amount of $10 million which mature in May 1996. Under the agreements, the Corporation pays a quarterly-resetting rate equal to 3-month London Interbank Offered Rate (LIBOR) on the notional balance while receiving an average fixed rate of 6.1% over the life of the agreements. At December 31, 1994, the weighted average rate paid by the Corporation on the swap agreements was 5.94%. The purpose of the swap agreements is to convert the fixed rate paid on certain time deposits to a quarterly-resetting rate. The Corporation has not terminated any interest rate swap agreements and there are no unamortized deferred gains or losses. At December 31, 1994, the fair value, or the cost to terminate the agreements, was $256,000. (9) Other Real Estate Owned An analysis of the composition of OREO, including in-substance foreclosures, follows:
December 31, 1994 1993 --------------------------------------------------------------------------- Property acquired through foreclosure: Commercial real estate $ 751,857 $ 2,354,325 Residential real estate 457,210 382,209 Construction and development 401,302 715,599 Land 967,388 1,115,988 --------------------------------------------------------------------------- Total property acquired through foreclosure 2,577,757 4,568,121 --------------------------------------------------------------------------- In-substance foreclosures: Commercial real estate 1,327,845 1,670,646 Residential real estate 2,042,727 1,443,285 Construction and development -- 989,617 Land 293,200 625,777 Other 234,200 325,672 --------------------------------------------------------------------------- Total in-substance foreclosures 3,897,972 5,054,997 --------------------------------------------------------------------------- Valuation allowance (1,167,824) (1,791,972) --------------------------------------------------------------------------- Other real estate owned, net $ 5,307,905 $ 7,831,146 ===========================================================================
In the fourth quarter of 1992, the Corporation adopted Statement of Position (SOP) 92-3, "Accounting for Foreclosed Assets". This statement requires that other real estate owned be carried at the lower of cost or fair value minus estimated costs to sell. A valuation allowance is maintained for known specific and potential market declines and for estimated selling expenses. The valuation allowance is reduced by selling expenses incurred and increased by charges to earnings. Realized gains and losses on dispositions are recognized in earnings. Prior to the adoption of SOP 92-3, the Corporation provided for estimated selling expenses and known specific market declines as a reduction of the cost basis of OREO, rather than through the valuation allowance. Adoption of SOP 92- 3 resulted in increases of $798,541 to the OREO cost basis and the valuation allowance in 1992. Prior to the adoption of SOP 92-3, realized gains and losses on dispositions of properties were credited or charged to the valuation allowance. An analysis of the activity relating to other real estate owned, including in- substance foreclosures, follows:
Years ended December 31, 1994 1993 ---------------------------------------------------------------------------- Balance at beginning of year $ 9,623,118 $15,633,419 Net transfers from loans 1,770,354 1,440,156 Sales and other reductions (5,013,648) (7,526,597) Other, net 95,905 76,140 ---------------------------------------------------------------------------- 6,475,729 9,623,118 Valuation allowance (1,167,824) (1,791,972) ---------------------------------------------------------------------------- Balance at end of year $ 5,307,905 $ 7,831,146 ============================================================================
The following is an analysis of activity relating to the OREO valuation allowance:
Years ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------- Balance at beginning of year $1,791,972 $2,177,930 $505,268 Provision charged to expense 407,530 1,042,428 579,170 Net gains (losses) on dispositions -- -- 462,852 Specific write-downs -- -- (189,600) Adoption of SOP 92-3 -- -- 798,541 Sales and other reductions (725,464) (1,274,911) (86,398) Selling expenses incurred (55,763) (114,712) (19,287) Other, net (250,451) (38,763) 127,384 ------------------------------------------------------------------------------- Balance at end of year $1,167,824 $1,791,972 $2,177,930 ===============================================================================
Provisions charged to earnings for potential declines in market value, specific write-downs and estimated costs to sell amounted to $407,530, $1,042,428, and $579,170 in 1994, 1993, and 1992, respectively. Net realized gains on dispositions of properties amounted to $478,519, $674,331, and $131,958 in 1994, 1993, and 1992, respectively. These amounts are included in foreclosed property costs on the Consolidated Statements of Income. The January 1, 1995 adoption of SFAS No. 114 (discussed in Note 5) will result in a decrease in net OREO of $3,301,000 and a corresponding increase in net loans. (10) Time Certificates of Deposit The aggregate amount of time certificates of deposit in denominations of $100,000 or more was $24,562,617 and $21,719,195 at December 31, 1994 and 1993, respectively. (11) Federal Home Loan Bank Advances The following table presents scheduled maturities and interest rates of Federal Home Loan Bank advances outstanding at December 31, 1994:
Years ending Weighted December 31, Average Rate Amount -------------------------------------------------- 1995 5.68% 8,042,080 1996 5.55% 3,544,297 1997 6.64% 7,047,482 1998 5.54% 2,550,147 1999 6.04% 1,054,196 2000 and thereafter 6.31% 1,284,141 -------------------------------------------------- $23,522,343 ==================================================
The Corporation's subsidiary bank is a member of the Federal Home Loan Bank of Boston ("FHLBB"). In addition to the outstanding advances, the subsidiary bank also has access to an unused line of credit equal to 2% of assets at December 31, 1994. Under agreement with the FHLBB, the subsidiary bank is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances. Qualified collateral may consist of residential mortgage loans, U.S. government or agency securities, and amounts maintained on deposit at the FHLBB. The subsidiary bank maintains qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at December 31, 1994. (12) Employee Benefits Pension Plan The Corporation's noncontributory defined benefit pension plan covers substantially all full-time employees. Benefits are based on an employee's years of service and highest 3-year compensation. The plan is funded on a current basis, in compliance with the requirements of the Employee Retirement Income Security Act. The following table presents the funded status of the plan and amounts presented in the consolidated financial statements:
October 1, 1994 1993 ----------------------------------------------------------------------------------------- Plan funded status: Vested accumulated benefit obligation $(5,828,000) $(5,892,300) Nonvested accumulated benefit obligation (97,400) (104,400) Effect of future compensation increases (2,042,500) (1,502,700) ----------------------------------------------------------------------------------------- Projected benefit obligation (7,967,900) (7,499,400) Plan assets (primarily listed stocks and fixed income securities), at fair value 8,244,400 8,221,100 ----------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 276,500 721,700 Unrecognized net gain (376,300) (740,200) Unrecognized prior service cost 426,300 456,800 Unrecognized net transition asset being amortized over 21 years (78,500) (84,600) ----------------------------------------------------------------------------------------- Prepaid pension cost $ 248,000 $ 353,700 ========================================================================================= Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: Discount rate 8.00% 6.75% Rate of increase in compensation levels 6.00% 5.00%
Years ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------------------- Net pension cost: Service cost; benefits earned during the period $328,200 $303,200 $ 283,700 Interest cost on projected benefit obligation 519,400 521,100 486,500 Actual return on plan assets (126,300) (350,700) (705,400) Net amortization and deferral (450,000) (238,800) 153,500 ----------------------------------------------------------------------------------------- Net periodic pension cost $271,300 $234,800 $ 218,300 ========================================================================================= Assumptions used in determining net periodic pension expense were as follows: Discount rate 6.75% 7.50% 7.50% Rate of increase in compensation levels 5.00% 6.00% 6.00% Expected long term rate of return on plan assets 7.75% 8.50% 8.50%
Supplemental Pension Plan Effective November 1, 1994, the Corporation established a nonqualified retirement plan to provide supplemental retirement benefits to certain employees, as defined in the plan. Accrued and unpaid benefits under this plan are an unfunded obligation of the subsidiary bank. At December 31, 1994, the projected benefit obligation for this plan amounted to $386,200. The expense of this plan amounted to $19,125 in 1994. The actuarial assumptions used for this supplemental plan are the same as those used for the Corporation's regular pension plan. Savings and Profit Sharing Plan The Corporation has a qualified savings and profit sharing plan. The plan provides a specified match of employee contributions for substantially all full- time employees. In addition, full-time employees, excluding those key employees participating in the Short-Term Incentive Plan, are eligible for an annual benefit pursuant to a formula based on return on equity. Total employer matching contributions under this plan amounted to $173,700, $165,300, and $81,900 in 1994, 1993, and 1992, respectively. The amount of the profit sharing benefit was $241,800 and $110,800 for 1994 and 1993, respectively. There was no profit sharing distribution during 1992. Short-Term Incentive Plan The Corporation's nonqualified Short-Term Incentive Plan rewards key employees for their contributions to the Corporation's success. This plan provides for annual payments up to a maximum percentage of each participant's base salary, which percentages vary among participants. Payment amounts are based on the achievement of target levels of return on equity and/or the achievement of individual objectives. Participants in this plan are not eligible to receive benefits provided under the profit sharing component of the Savings and Profit Sharing Plan. The expense of the Short-Term Incentive Plan amounted to $480,600, $462,500 and $85,700 in 1994, 1993, and 1992, respectively. Postemployment Benefits The Corporation adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits", on January 1, 1994. This statement establishes standards of accounting for the expected cost of providing benefits to former or inactive employees after employment but before retirement. It requires employers to accrue for these benefits during the period in which the employee renders service. The Corporation provides disability-related benefits to certain employees. The implementation of SFAS No. 112 as of January 1, 1994 did not have a material effect on the Corporation's financial condition or results of operations. Directors' Retainer Continuation Plan The Corporation has a nonqualified plan which provides retirement benefits to non-officer directors. The plan pays the regular quarterly retainer in effect at the time of departure for as many quarters as the director served with the Corporation or a subsidiary. The benefit commences upon departure and is reduced for departure occurring before age 65. Accrued and unpaid benefits under this plan are an unfunded obligation of the subsidiary bank. Prior service cost is being amortized over the expected remaining service period of each director. Current cost is being recognized based on the present value of expected future benefits. The expense of this plan is included in other noninterest expense and amounted to $89,500, $77,800 and $78,800 for 1994, 1993, and 1992, respectively. (13) Income Taxes As discussed in Note 1, the Corporation adopted SFAS No. 109 as of January 1, 1993. The cumulative effect of this change in accounting for income taxes was an increase of $305,000 in consolidated net income. Financial statements for 1992 have not been restated to apply the provisions of SFAS No. 109. The components of income tax expense were as follows:
Years ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------------------- Current expense: Federal $2,858,000 $2,614,000 $2,047,000 State 528,000 522,000 390,000 ----------------------------------------------------------------------------------------- Total current expense 3,386,000 3,136,000 2,437,000 ----------------------------------------------------------------------------------------- Deferred expense (benefit): Federal (271,000) (715,000) (834,000) State (89,000) (186,000) 1,000 Change in valuation allowance for deferred tax assets -- 20,000 -- ----------------------------------------------------------------------------------------- Total deferred tax benefit (360,000) (881,000) (833,000) ----------------------------------------------------------------------------------------- Total income tax expense $3,026,000 $2,255,000 $1,604,000 =========================================================================================
Total income tax expense varied from the amount determined by applying the Federal income tax rate to income before income taxes. The reasons for the differences were as follows:
Years ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------------------- Tax expense at Federal statutory rate $3,159,000 $2,289,000 $1,617,000 Increase (decrease) in taxes resulting from: Tax-exempt income (155,000) (134,000) (148,000) Dividends received deduction (134,000) (179,000) (150,000) State tax, net of Federal income tax benefit 289,000 222,000 258,000 Appreciated value of donated assets (230,000) (30,000) (24,000) Change in valuation allowance for deferred tax assets -- 20,000 -- Other 97,000 67,000 51,000 ----------------------------------------------------------------------------------------- Total income tax expense $3,026,000 $2,255,000 $1,604,000 =========================================================================================
For the year ended December 31, 1992, deferred income taxes resulted from timing differences in the recognition of certain revenue and deductions for tax and financial statement purposes. The sources of these differences and the tax expense (benefit) of each were as follows:
Year ended December 31, 1992 ------------------------------------------------------------------------ Provision for loan losses $(172,000) Depreciation (6,000) Write-downs of foreclosed property (157,000) Deferred compensation and employee benefits (66,000) Deferred loan fees and costs (242,000) Cash basis recognition of income and expense (197,000) Other, net 7,000 ------------------------------------------------------------------------ Total deferred tax benefit $(833,000) ========================================================================
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 1994 and 1993 are as follows:
December 31, 1994 1993 ------------------------------------------------------------------------------ Gross deferred tax assets: Reserve for possible loan losses $3,471,000 $2,313,000 Other real estate owned 338,000 417,000 Deferred loan origination fees 920,000 1,394,000 Interest on nonperforming loans 455,000 430,000 Other 531,000 480,000 ------------------------------------------------------------------------------ Gross deferred tax assets 5,715,000 5,034,000 Valuation allowance (168,000) (168,000) ------------------------------------------------------------------------------ Gross deferred tax assets, net of valuation allowance 5,547,000 4,866,000 ------------------------------------------------------------------------------ Gross deferred tax liabilities: Securities available for sale 1,867,660 -- Premises and equipment 1,020,000 955,000 Deferred loan origination costs 525,000 460,000 Other 337,000 146,000 ------------------------------------------------------------------------------ Gross deferred tax liabilities 3,749,660 1,561,000 ------------------------------------------------------------------------------ Net deferred tax asset $1,797,340 $3,305,000 ==============================================================================
In addition to future taxable income, a primary source of recovery of deferred tax assets is taxes paid in prior years available for carryback. A valuation allowance has been established for a portion of the deferred tax asset that relates to state income taxes on temporary differences for which no carryback is allowed. (14) Loans to Related Parties At December 31, 1994, the Corporation has made loans in the ordinary course of business to certain directors and executive officers including their immediate families and their affiliated companies. Such loans were made under normal interest rate and collateralization terms. A substantial portion of the increase in 1994 resulted from the adoption of a broader definition of related parties by the Corporation. Activity related to these loans in 1994 was as follows: Balance at December 31, 1993 $2,335,132 Additions 1,527,586 Reductions (812,317) ---------------------------------------------------------------------------- Balance at December 31, 1994 $3,050,401 ============================================================================
(15) Litigation The Corporation is involved in various 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 these matters will not materially affect the consolidated financial position or results of operations of the Corporation. (16) Shareholders' Equity Stock Split On July 1, 1994, the Corporation's board of directors voted to approve a 3-for-2 stock split on shares of common stock. The stock split, in the form of a stock dividend, was paid on August 31, 1994 to shareholders of record as of August 1, 1994. The par value of the common stock remained unchanged at $.0625 per share. Cash payments were made in lieu of issuing fractional shares. All share and per share amounts in the consolidated financial statements and related notes have been restated to reflect the stock split. Stock Option Plan The 1988 Amended and Restated Stock Option Plan provides for the granting of options to directors, officers, and key employees. Up to 600,000 shares of the Corporation's common stock may be used from authorized but unissued shares, treasury stock, or shares available from expired options. Options are designated either as non-qualified or as incentive options and may be granted with stock appreciation rights (SARs). The exercise price of an option may not be less than the fair market value on the date of grant. The option price is payable in cash, by the delivery of shares of the Corporation's common stock already owned by the grantee, or a combination thereof. Options may be granted at any time until December 31, 1997. As of December 31, 1994, no options have been granted with SARs. All options granted prior to 1993 are exercisable. Options granted in 1994 and 1993 become vested over a three year period. The following table presents changes in options outstanding during 1994 and 1993:
$21.750 $13.916 $11.666 to to to Exercise price per share $16.583 $13.250 $11.000 $9.166 ------------------------------------------------------------------------------- Outstanding at December 31, 1991 217,350 -- -- 7,500 Granted during 1992 -- -- 55,018 -- Cancelled during 1992 (15,150) -- (2,102) -- ------------------------------------------------------------------------------- Outstanding at December 31, 1992 202,200 -- 52,916 7,500 Granted during 1993 -- 48,823 -- -- Exercised during 1993 -- -- (341) -- ------------------------------------------------------------------------------- Outstanding at December 31, 1993 202,200 48,823 52,575 7,500 Granted during 1994 50,794 -- -- -- Exercised during 1994 (3,750) -- (1,243) -- ------------------------------------------------------------------------------- Outstanding at December 31, 1994 249,244 48,823 51,332 7,500 ===============================================================================
Dividend Reinvestment Under the Dividend Reinvestment and Stock Purchase Plan, 180,000 shares of common stock were originally reserved to be issued for dividends reinvested and cash payments to the plan. As of December 31, 1994, a total of 679,375 common stock shares were reserved for issuance under the Stock Option Plan and the Dividend Reinvestment and Stock Purchase Plan. Dividends The source of funds for dividends paid by the Corporation is dividends received from its subsidiary bank. The Corporation and its subsidiary bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans, and advances from the subsidiary bank to the Corporation. Generally the subsidiary bank has the ability to pay dividends to the parent subject to minimum regulatory capital requirements and subject to "Guaranty Fund" requirements of the State of Rhode Island. Under the most restrictive of these requirements, the subsidiary bank could have declared aggregate additional dividends of $19.7 million as of December 31, 1994. (17) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Corporation disclose estimated fair values of its financial instruments. Fair value estimates are made as of a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any pricing adjustments that could result from the sale of the Corporation's entire holding of a particular financial instrument. Because no quoted market exists for a significant portion of the financial instruments, fair value estimates are based on subjective judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. Changes in assumptions could significantly affect the estimates of fair value. Fair value estimates, methods, and assumptions are set forth as follows: Cash and Investments The carrying amount of short-term instruments such as cash and federal funds sold is used as an estimate of fair value. The fair value of securities available for sale and investment securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. No market exists for shares of the Federal Home Loan Bank of Boston. Such stock may be redeemed at par upon termination of FHLBB membership and is therefore valued at par, which equals cost. Mortgage Loans Held for Sale The fair value of mortgage loans held for sale is estimated using the quoted market prices for sales of similar loans on the secondary market. Loans Fair values are estimated for categories of loans with similar financial characteristics. Loans are segregated by type and are then further segmented into fixed rate and adjustable rate interest terms to determine their fair value. The fair value of fixed rate commercial and consumer loans is calculated by discounting scheduled cash flows through the estimated maturity of the loan using interest rates offered at December 31, 1994 and 1993 that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Corporation's historical repayment experience. For residential mortgages, fair value is estimated by using quoted market prices for sales of similar loans on the secondary market, adjusted for servicing costs. The fair value of floating rate commercial and consumer loans approximates carrying value. The fair value of nonaccrual loans is calculated by discounting estimated cash flows, using a rate commensurate with the risk associated with the loan type or by other methods that give consideration to the value of the underlying collateral. Deposit Liabilities The fair value of demand deposits, savings accounts, and certain money market accounts is equal to the amount payable on demand as of December 31, 1994 and 1993. The discounted values of cash flows using the rates currently offered for deposits of similar remaining maturities were used to estimate the fair value of certificates of deposit. Federal Home Loan Bank Advances Rates currently available to the Corporation for advances with similar terms and remaining maturities are used to estimate fair value of existing advances. Off-Balance Sheet Instruments The fair value of interest rate swap agreements is determined based on dealer quotes. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The following table presents the fair values of the Corporation's financial instruments:
December 31, 1994 1993 ---------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 18,404,910 $ 18,404,910 $ 21,650,128 $ 21,650,128 Securities available for sale 36,516,115 36,516,115 36,236,543 44,420,747 Mortgage loans held for sale 203,750 203,750 3,709,499 3,715,708 Investment securities 52,496,616 49,395,262 52,497,832 53,333,595 Loans, net of reserve for possible loan losses 381,297,565 379,008,738 343,853,432 355,979,418 Accrued interest receivable 3,232,211 3,232,211 2,870,911 2,870,911 Financial liabilities: Noninterest bearing demand deposits $ 53,373,386 $ 53,373,386 $ 43,924,560 $ 43,924,560 Non-term savings accounts 192,653,937 192,653,937 200,846,347 200,846,347 Certificates of deposit 194,703,819 193,611,981 178,603,713 180,232,100 Federal Home Loan Bank advances 23,522,343 22,542,346 20,500,000 20,859,510 Accrued interest payable 1,278,552 1,278,552 1,111,184 1,111,184 Off-Balance Sheet Instruments: The notional amount of interest rate swap agreements at December 31, 1994 was $10.0 million. The fair value, or the cost to the Corporation of terminating the swap agreements, was approximately $256,000 at December 31, 1994. There were no interest rate swap agreements outstanding at December 31, 1993. Other off-balance sheet instruments, consisting largely of loan commitments, contain provisions for fees, conditions and term periods which are consistent with customary market practices. Accordingly, the fair value amounts (considered to be the discounted present value of the remaining contractual fees over the unexpired commitment period) would not be material.
(18) Parent Company Financial Statements The following are condensed parent company only financial statements of Washington Trust Bancorp, Inc. reflecting the investment in the bank subsidiary on the equity basis of accounting. The Statements of Changes in Shareholders' Equity for the parent company only are identical to the Consolidated Statements of Changes in Shareholders' Equity and are therefore not presented.
Statements of Income Years ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------------------- Dividends from bank subsidiary $1,776,000 $1,368,000 $1,200,000 Equity in undistributed earnings of subsidiary 4,488,640 3,413,531 1,950,356 ----------------------------------------------------------------------------------------- Net income $6,264,640 $4,781,531 $3,150,356 =========================================================================================
Balance Sheets December 31, 1994 1993 -------------------------------------------------------------------------------------- Assets: Cash on deposit with bank subsidiary $ 245,100 $ 281,447 Investment in bank subsidiary at equity value 45,541,081 38,250,951 Dividend receivable from bank subsidiary 552,000 342,000 Recoverable income taxes 9,489 -- -------------------------------------------------------------------------------------- Total assets $46,347,670 $38,874,398 ====================================================================================== Liabilities: Dividends payable $ 564,686 $ 411,473 -------------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 10,000,000 shares in 1994 and 3,000,000 shares in 1993; issued 2,880,000 shares 180,000 120,000 Paid-in capital 2,869,135 2,822,908 Retained earnings 40,613,979 36,418,073 Unrealized gain on securities available for sale, net of tax 2,801,490 -- Treasury stock, at cost; 56,570 shares in 1994 and 74,505 shares in 1993 (681,620) (898,056) -------------------------------------------------------------------------------------- Total shareholders' equity 45,782,984 38,462,925 -------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $46,347,670 $38,874,398 ======================================================================================
Statements of Cash Flows Years ended December 31, 1994 1993 1992 ---------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $6,264,640 $4,781,531 $3,150,356 Adjustments to reconcile net income to net cash provided by operating activities: Equity effect of undistributed earnings of subsidiary (4,488,640) (3,413,531) (1,950,356) Increase in dividend receivable (210,000) (42,000) (300,000) Increase in recoverable income taxes (9,489) -- -- ----------------------------------------------------------------------------------------- Net cash provided by operating activities 1,556,511 1,326,000 900,000 ----------------------------------------------------------------------------------------- Cash flows from financing activities: Issuance of common stock from treasury 322,663 371,803 236,053 Cash dividends paid (1,915,521) (1,599,173) (1,105,595) ----------------------------------------------------------------------------------------- Net cash used in financing activities (1,592,858) (1,227,370) (869,542) ----------------------------------------------------------------------------------------- Net increase (decrease) in cash (36,347) 98,630 30,458 Cash at beginning of year 281,447 182,817 152,359 ----------------------------------------------------------------------------------------- Cash at end of year $ 245,100 $ 281,447 $ 182,817 =========================================================================================
Independent Auditors' Report The Board of Directors and Shareholders Washington Trust Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Washington Trust Bancorp, Inc. and Subsidiary (the Corporation) as of December 31, 1994 and 1993 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Washington Trust Bancorp, Inc. and Subsidiary at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in notes 1 and 3 to the financial statements, the Corporation adopted a new method of accounting for certain investments in debt and equity securities effective January 1, 1994. As discussed in notes 1 and 13 to the financial statements, the Corporation adopted a new method of accounting for income taxes effective January 1, 1993. KPMG Peat Marwick, LLP Providence, Rhode Island January 19, 1995 Summary of Unaudited Quarterly Financial Information Washington Trust Bancorp, Inc. and Subsidiary
1994 Q1 Q2 Q3 Q4 Year --------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $7,246,159 $7,549,389 $7,948,985 $8,371,885 $31,116,418 Income from investment securities and securities available for sale 1,319,146 1,313,828 1,308,567 1,347,968 5,289,509 Interest on federal funds sold 50,614 42,304 99,412 63,431 255,761 --------------------------------------------------------------------------------------------------------------- Total interest income 8,615,919 8,905,521 9,356,964 9,783,284 36,661,688 --------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 1,070,141 1,050,681 1,104,627 1,109,188 4,334,637 Time deposits 1,917,840 1,887,310 1,974,678 2,137,600 7,917,428 Other 319,282 391,369 325,417 300,449 1,336,517 --------------------------------------------------------------------------------------------------------------- Total interest expense 3,307,263 3,329,360 3,404,722 3,547,237 13,588,582 --------------------------------------------------------------------------------------------------------------- Net interest income 5,308,656 5,576,161 5,952,242 6,236,047 23,073,106 Provision for loan losses 300,000 300,000 200,000 200,000 1,000,000 --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 5,008,656 5,276,161 5,752,242 6,036,047 22,073,106 --------------------------------------------------------------------------------------------------------------- Noninterest income: Trust income 801,520 800,043 880,659 802,213 3,284,435 Service charges on deposit accounts 383,357 412,278 408,265 406,650 1,610,550 Merchant processing fees 57,568 94,673 326,115 143,657 622,013 Gains on sales of securities 681,558 -- -- 3,032 684,590 Gains (losses) on loan sales (43,726) 11,909 13,276 2,543 (15,998) Other income 185,050 177,636 193,424 180,466 736,576 --------------------------------------------------------------------------------------------------------------- Total noninterest income 2,065,327 1,496,539 1,821,739 1,538,561 6,922,166 --------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 2,459,221 2,398,778 2,557,631 2,514,313 9,929,943 Net occupancy 307,985 295,758 313,090 289,198 1,206,031 Equipment 292,036 310,861 300,599 284,856 1,188,352 Deposit taxes and assessments 298,356 299,567 295,726 385,768 1,279,417 Foreclosed property costs, net 142,211 (13,379) 132,808 (20,665) 240,975 Office supplies 181,040 149,320 177,227 98,058 605,645 Other 1,762,507 1,054,934 1,182,666 1,254,162 5,254,269 --------------------------------------------------------------------------------------------------------------- Total noninterest expense 5,443,356 4,495,839 4,959,747 4,805,690 19,704,632 --------------------------------------------------------------------------------------------------------------- Income before income taxes 1,630,627 2,276,861 2,614,234 2,768,918 9,290,640 Applicable income taxes 526,000 733,000 844,000 923,000 3,026,000 --------------------------------------------------------------------------------------------------------------- Net income $1,104,627 $1,543,861 $1,770,234 $1,845,918 $ 6,264,640 =============================================================================================================== Fully diluted earnings per share $ .39 $ .53 $ .61 $ .64 $2.18 Cash dividends declared per share $ .16 $ .17 $ .20 $ .20 $ .73
1993 Q1 Q2 Q3 Q4 Year --------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $7,377,871 $7,279,792 $7,497,066 $7,410,389 $29,565,118 Income from investment securities and securities available for sale 1,174,731 1,181,934 1,304,507 1,379,994 5,041,166 Interest on federal funds sold 59,175 64,335 117,045 81,024 321,579 --------------------------------------------------------------------------------------------------------------- Total interest income 8,611,777 8,526,061 8,918,618 8,871,407 34,927,863 --------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 1,279,003 1,328,257 1,201,234 1,155,529 4,964,023 Time deposits 2,105,547 1,982,487 2,040,109 1,983,363 8,111,506 Other 238,270 289,275 287,044 288,661 1,103,250 --------------------------------------------------------------------------------------------------------------- Total interest expense 3,622,820 3,600,019 3,528,387 3,427,553 14,178,779 --------------------------------------------------------------------------------------------------------------- Net interest income 4,988,957 4,926,042 5,390,231 5,443,854 20,749,084 Provision for loan losses 800,000 600,000 600,000 500,000 2,500,000 --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 4,188,957 4,326,042 4,790,231 4,943,854 18,249,084 --------------------------------------------------------------------------------------------------------------- Noninterest income: Trust income 713,883 758,794 722,648 756,891 2,952,216 Service charges on deposit accounts 328,010 369,831 355,101 393,327 1,446,269 Merchant processing fees 53,128 77,359 274,576 116,482 521,545 Gains (losses) on sales of securities -- 147,599 198,245 (170) 345,674 Gains on loan sales 190,253 72,918 167,612 54,177 484,960 Other income 189,611 156,242 162,134 170,523 678,510 --------------------------------------------------------------------------------------------------------------- Total noninterest income 1,474,885 1,582,743 1,880,316 1,491,230 6,429,174 --------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 1,975,721 2,165,042 2,363,261 2,182,286 8,686,310 Net occupancy 266,686 347,320 287,690 286,241 1,187,937 Equipment 313,139 308,556 302,300 406,057 1,330,052 Deposit taxes and assessments 316,832 317,662 290,782 291,464 1,216,740 Foreclosed property costs, net 384,646 115,273 51,961 349,440 901,320 Office supplies 129,540 133,538 120,956 132,754 516,788 Other 827,618 974,326 1,237,724 1,067,912 4,107,580 --------------------------------------------------------------------------------------------------------------- Total noninterest expense 4,214,182 4,361,717 4,654,674 4,716,154 17,946,727 --------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 1,449,660 1,547,068 2,015,873 1,718,930 6,731,531 Applicable income taxes 485,800 518,200 701,000 550,000 2,255,000 --------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 963,860 1,028,868 1,314,873 1,168,930 4,476,531 Cumulative effect of change in accounting for income taxes 305,000 -- -- -- 305,000 --------------------------------------------------------------------------------------------------------------- Net income $1,268,860 $1,028,868 $1,314,873 $1,168,930 $ 4,781,531 =============================================================================================================== Fully diluted earnings per share: Income before cumulative effect of accounting change $ .34 $ .37 $ .47 $ .41 $1.58 Cumulative effect of change in accounting for income taxes .11 -- -- -- .11 ----- ----- ----- ----- ----- Net income $ .45 $ .37 $ .47 $ .41 $1.69 ===== ===== ===== ===== ===== Cash dividends declared per share $ .15 $ .15 $ .15 $ .14 $ .59
EX-21 9 EXHIBIT 21 ---------- Subsidiaries of the Registrant Name of Subsidiary State of Incorporation ------------------ ---------------------- The Washington Trust Company of Westerly Rhode Island EX-23 10 EXHIBIT 23 ACCOUNTANTS' CONSENT -------------------- The Board of Directors Washington Trust Bancorp, Inc.: We consent to incorporation by reference in the Registration Statement No. 33-23048 on Form S-8/S-3 and in the Registration Statement No. 33-28065 on Form S-3 of Washington Trust Bancorp, Inc. of our report dated January 19, 1995, relating to the consolidated balance sheets of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 1994 and 1993 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994, which report included an explanatory paragraph that described the adoption of new methods of accounting for investments in debt and equity securities and income taxes discussed in Notes 1, 3 and 13 of those statements, such report has been incorporated by reference in the 1994 annual report of Washington Trust Bancorp, Inc. on Form 10-K. KPMG Peat Marwick LLP Providence, Rhode Island March 30, 1995 EX-27 11
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF WASHINGTON TRUST BANCORP, INC. AS OF DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1994 DEC-31-1994 15,172,421 0 3,232,489 0 36,516,115 52,496,616 49,395,262 390,133,472 8,835,907 515,679,963 440,731,142 0 5,643,494 23,522,343 180,000 0 0 45,602,984 515,679,963 31,116,418 5,289,509 255,761 36,661,688 12,252,065 13,588,582 23,073,106 1,000,000 684,590 19,704,632 9,290,640 9,290,640 0 0 6,264,640 2.18 2.18 5.08 7,119,271 24,124 364,824 7,261,084 8,657,263 1,114,208 292,852 8,835,907 6,060,167 0 2,775,740 Amount represents total Federal Home Loan Bank advances, of which $8,042,080 matures during the year ending December 31, 1995. See discussion of potential problem loans required by Guide 3, section III.C.2 under the caption Guide 3 Statistical Disclosures in the Corporation's Form 10-K.