-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oj+M3mFo1Or7n9co4quLdniBYzvLO73PpKg9EPboZ4eWEgXD8Pj7zdPOkTW1MMzl cR7XZ1Okm5mTHNSb1dwr4w== 0000737468-96-000006.txt : 19960402 0000737468-96-000006.hdr.sgml : 19960402 ACCESSION NUMBER: 0000737468-96-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON TRUST BANCORP INC CENTRAL INDEX KEY: 0000737468 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 050404671 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13091 FILM NUMBER: 96543217 BUSINESS ADDRESS: STREET 1: 23 BROAD ST CITY: WESTERLY STATE: RI ZIP: 02891 BUSINESS PHONE: 4013481200 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, 1995 ------------------------------------------------------ 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 $80,652,096 at March 18, 1996 which includes $7,687,792 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 18, 1996 was 2,880,432. Page 1 of 92 Exhibit Index page 23 DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's 1995 Annual Report to Shareholders. (Parts I, II and IV) 2. Portions of the Registrant's Proxy Statement dated March 18, 1996 for the 1996 Annual Meeting of Shareholders. (Part III). =============================================================================== FORM 10-K WASHINGTON TRUST BANCORP, INC. For the Year Ended December 31, 1995 TABLE OF CONTENTS ----------------- Description Page Number --------------- ----------- Part I - ------ Item 1 - Business 3 Item 2 - Properties 16 Item 3 - Legal Proceedings 17 Item 4 - Submission of Matters to a Vote of Security Holders 17 Executive Officers of the Registrant 18 Part II - ------- Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters 20 Item 6 - Selected Financial Data 21 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 8 - Financial Statements and Supplementary Data 21 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 Part III - -------- Item 10 - Directors and Executive Officers of the Registrant 22 Item 11 - Executive Compensation 22 Item 12 - Security Ownership of Certain Beneficial Owners and Management 22 Item 13 - Certain Relationships and Related Transactions 22 Part IV - ------- Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 23 Signatures 24 - ---------- -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"), subject to regulatory limits. The Corporation was formed in 1984 under a plan of reorganization in which outstanding common shares of The Washington Trust Company were exchanged for common shares of Washington Trust Bancorp, Inc. At December 31, 1995 the Corporation had total consolidated assets of $548 million, deposits of $468 million and equity capital of $53 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 - - Consumer installment loans - Retirement accounts - - Home equity lines of credit - Cash management services - - VISA and Mastercard accounts - Safe deposit boxes - - Merchant credit card services - Trust and investment services Automated teller machines (ATM's) are located at each of the Bank's six banking offices. The Bank is a member of the NYCE, Plus and Cashstream ATM networks. Data processing for most of the Bank's deposit and loan accounts and other applications is conducted internally using owned equipment. Application software is primarily obtained through purchase or licensing agreements. The Bank's Trust and Investment Department provides fiduciary services as trustee under wills and trust agreements; as executor or administrator of estates; as a provider of agency and custodial investment services to individuals and institutions; and as a trustee for employee benefit plans. The market value of total trust assets amounted to $467 million as of December 31, 1995. -3- 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. 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:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Interest and fees on: Residential real estate loans 29% 31% 33% 37% 37% Commercial and other loans 33 32 30 31 33 Installment and consumer loans 10 9 8 9 10 ---- ---- ---- ---- ---- Total loan income 72 72 71 77 80 Interest and dividends on securities 13 13 13 9 7 Trust income 7 7 7 6 5 Other noninterest income 8 8 9 8 8 ---- ---- ---- ---- ---- Gross operating income 100% 100% 100% 100% 100% ==== ==== ==== ==== ====
The percentage of gross income derived from interest and fees on loans was 72% in 1995, down from a five-year high of 80% in 1991, primarily as a result of the lower interest rate environment that existed in 1993, 1994 and 1995. Market Area and Competition - --------------------------- The Bank's market area includes Washington County and a portion of Kent County in southern Rhode Island as well as a portion of New London County in southeastern Connecticut. The Bank'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. Plans to construct a new branch facility in North Kingstown, Rhode Island are currently in process. 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, 1995 the Corporation employed approximately 233 full-time and 55 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 authorities are often intended primarily for the protection of customers or are aimed at carrying out broad public policy goals that may not be directly related to the financial services provided by the Corporation and the Bank, nor intended for the protection of the Corporation's shareholders. 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 and the State of Rhode Island. 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 -5- regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers, ranging from "well-capitalized" to "critically undercapitalized." A depository institution is well-capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well- capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. In addition, "pass through" deposit insurance coverage may not be available for certain employee benefit accounts. At December 31, 1995, 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 contained other significant provisions that require the federal banking regulators to establish standards for safety and soundness for depository institutions and their holding companies in three areas: (i) operational and managerial; (ii) asset quality, earnings and stock valuation; and (iii) management compensation. The legislation also required that risk-based capital requirements contain provisions for interest rate risk, credit risk and risks of nontraditional activities. FDICIA also imposed expanded accounting and audit reporting requirements for depository institutions. In addition, FDICIA imposed numerous restrictions on state-chartered banks, including those which generally limit investments and activities to those permitted to national banks, and contains several consumer banking law provisions. 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 September 30, 1995, adequately capitalized bank holding companies are 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 in" or "opt out" of certain provisions of the law by passage of state law. In 1995, Rhode Island passed legislation to "opt in" to interstate merger and branching provisions that effectively eliminated state law barriers. Dividend Restrictions - The Corporation's revenues consist of cash dividends paid to it by the Bank. Such payments are restricted pursuant to various state and federal regulatory limitations. Reference is made to Note 16 to the Corporation's Consolidated Financial Statements included in its 1995 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 allowance for loan losses (limited to 1.25% of total risk- weighted assets). As of December 31, 1995, net risk-weighted assets amounted to $344.9 million, the Tier 1 capital ratio was 14.08% and the total risk-based capital ratio was approximately 15.34%. 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 8.99% as of December 31, 1995. 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 21 of the Corporation's 1995 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 21 of the Corporation's 1995 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 22 of the Corporation's 1995 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. SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE ------------------------------------------------------------- A. The carrying amounts of securities held to maturity as of the dates indicated are presented in the following table:
December 31, 1995 1994 1993 ------------------------------------------------------------------------- U.S. Treasury obligations and obligations of U.S. government- sponsored agencies $ -- $20,413,017 $19,419,860 Mortgage-backed securities 13,947,011 21,696,508 25,401,432 States and political subdivisions 14,925,980 10,387,091 7,676,540 ---------- ---------- ---------- $28,872,991 $52,496,616 $52,497,832 ========== ========== ===========
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, 1995 and 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. During the fourth quarter of 1995, the Corporation transferred a pool of debt securities with a book value of $37.1 million, consisting primarily of U.S. Treasury and government agency obligations and mortgage-backed securities, from the held-to-maturity category to the available-for-sale category. The transfer was made in response to a special report issued by the Financial Accounting Standards Board which allowed enterprises a one- time opportunity to reassess the appropriateness of their securities classifications under SFAS No. 115. -8-
December 31, 1995 1994 1993 ------------------------------------------------------------------------- U.S. Treasury obligations and obligations of U.S. government- sponsored agencies $37,877,528 $24,533,220 $25,120,650 Mortgage-backed securities 30,026,897 -- -- Corporate debt securities -- -- 1,000,000 Corporate stocks 17,647,910 9,076,095 8,143,093 ---------- ---------- ---------- $85,552,335 $33,609,315 $34,263,743 ========== ========== ===========
B. Maturities of debt securities as of December 31, 1995 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.
Mortgage- States and backed Political Total Debt Securities Held to Maturity Securities Subdivisions Securities --------------------------- ---------- ------------ ---------- Due in 1 year or less: Amount $ 1,244,432 $ 3,488,507 $ 4,732,939 Yield 7.45% 4.20% 5.06% After 1 but within 5 years: Amount 3,588,817 8,718,416 12,307,233 Yield 7.39 4.24 5.16 After 5 but within 10 years: Amount 3,414,764 2,419,743 5,834,507 Yield 7.40 4.38 6.15 After 10 years: Amount 5,698,998 299,314 5,998,312 Yield 7.67 5.03 7.54 ---------- ---------- ---------- Totals: Amount $13,947,011 $14,925,980 $28,872,991 Yield 7.51% 4.27% 5.84% ========== ========== ==========
-9-
Weighted Amortized Fair average Securities Available for Sale Cost Value yield ----------------------------- ---------- --------- -------- U.S. Treasury obligations and obligations of U.S. government- sponsored agencies due: In 1 year or less $ 9,513,569 $ 9,595,620 6.78% After 1 but within 5 years 27,342,389 27,519,409 5.97 After 10 years 490,738 762,499 13.02 ---------- ---------- ------ Total 37,346,696 37,877,528 6.27 ---------- ---------- ------ Mortgage-backed securities due: In 1 year or less 3,512,499 3,508,734 7.50 After 1 but within 5 years 9,619,183 9,612,547 7.50 After 5 but within 10 years 9,199,652 9,106,160 6.91 After 10 years 7,693,274 7,799,456 7.35 ---------- ---------- ------ Total 30,024,608 30,026,897 7.28 ---------- ---------- ------ Total debt securities due: In 1 year or less 13,026,068 13,104,354 6.98 After 1 but within 5 years 36,961,572 37,131,956 6.37 After 5 but within 10 years 9,199,652 9,106,160 6.91 After 10 years 8,184,012 8,561,955 7.69 ---------- ---------- ------ Total debt securities $67,371,304 $67,904,425 6.72% ========== ========== ======
C. Not applicable. -10- III. LOAN PORTFOLIO -------------- A. The following table sets forth the composition of the Corporation's loan portfolio for each of the past five years. Amounts for years prior to 1995 have been restated to reflect the adoption of SFAS #114.
December 31, 1995 1994 1993 1992 1991 -------------------------------------------------------------------------------------------------------- Residential real estate: Mortgages $167,510,929 $170,366,731 $153,506,179 $142,322,653 $168,505,925 Homeowner construction 3,071,177 6,933,793 6,120,171 5,124,603 4,482,367 ----------- ----------- ----------- ----------- ----------- Total residential real estate 170,582,106 177,300,524 159,626,350 147,447,256 172,988,292 ----------- ----------- ----------- ----------- ----------- Commercial: Mortgages 58,837,483 56,014,628 49,194,243 41,952,619 40,962,685 Construction and development 5,968,404 12,089,966 10,719,271 11,923,274 18,644,654 Other 96,830,889 103,334,837 103,721,694 100,013,004 97,988,349 ----------- ----------- ----------- ----------- ----------- Total commercial 161,636,776 171,439,431 163,635,208 153,888,897 157,595,688 ----------- ----------- ----------- ----------- ----------- Installment 54,240,010 45,186,245 34,100,374 32,645,643 36,720,803 ----------- ----------- ----------- ----------- ----------- $386,458,892 $393,926,200 $357,361,932 $333,981,796 $367,304,783 =========== =========== =========== =========== ===========
B. An analysis of the maturity and interest rate sensitivity of Real Estate Construction and Other Commercial loans as of December 31, 1995 follows: Maturity analysis:
One Year One to five After five or Less Years Years Total ---------- ---------- ---------- ----------- Construction and development (*) $ 4,185,017 1,713,275 3,141,289 $ 9,039,581 Commercial - other 36,439,799 41,351,186 19,039,904 96,830,889 ---------- ---------- ---------- ----------- $40,624,816 43,064,461 22,181,193 $105,870,470 ========== ========== ========== =========== (*) 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 $ 8,259,200 $56,986,453 $65,245,654 ========== ========== ==========
-11- C. Risk Elements Reference is made to the caption "Asset Quality" included in Management's Analysis of Financial Statements on pages 26-28 of the Corporation's 1995 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 nonperforming assets at December 31, 1995 and the Corporation's ongoing efforts to reduce the level of nonperforming assets. 1. Nonaccrual, Past Due and Restructured Loans. (a). Nonaccrual loans as of the dates indicated were as follows:
December 31, 1995 1994 1993 1992 1991 -------------------------------------------------------------------------- $8,573,656 $10,911,999 $16,221,963 $21,306,840 $24,149,690 ========= ========== ========== ========== ==========
For the years 1992 through 1995, loans, with the exception of credit card loans and certain well-secured residential mortgage 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. Loans were also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest was doubtful. 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, 1995, 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 $598,000. Interest recognized on these loans amounted to approximately $458,000. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 1995. -12- (b). Loans contractually past due 90 days or more and still accruing for the dates indicated were as follows:
December 31, 1995 1994 1993 1992 1991 -------------------------------------------------------------------- $256,276 $24,124 $22,455 $42,648 $6,064,648 ======= ====== ====== ====== =========
(c). Restructured accruing loans for the dates indicated were as follows:
December 31, 1995 1994 1993 1992 1991 ----------------------------------------------------------------------- $ --- $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 1995 amounted to approximately $1,632,000, all of which are 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, 1995, but were identified by management of the Bank as potential problem loans. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve as a result of collection efforts, while the credit quality of other loans may deteriorate, resulting in some amount of losses. These loans are not included in the analysis of nonaccrual, past due and restructured loans in III.C.1 above. At December 31, 1995, potential problem loans amounted to approximately $7.1 million. 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 -13- IV. SUMMARY OF LOAN LOSS EXPERIENCE ------------------------------- A. The allowance for loan losses is available for future credit losses inherent in the loan portfolio. The level of the allowance is based on management's ongoing review of the growth and composition of the loan portfolio, net charge-off experience, current and expected economic conditions, and other pertinent factors. Loans (or portions thereof) deemed to be uncollectible are charged against the allowance and recoveries of amounts previously charged off are added to the allowance. Loss provisions charged to earnings are added to the allowance to bring it to the desired level. Loss experience on loans is presented in the following table for the years indicated. Amounts for years prior to 1995 have been restated to reflect the adoption of SFAS #114. Analysis of the Allowance for Loan Losses -----------------------------------------
December 31, 1995 1994 1993 1992 1991 -------------------------------------------------------------------------------------------- Balance at beginning of year $9,327,942 $9,089,775 $7,872,351 $6,474,272 $8,487,196 Charge-offs (domestic): Residential: Mortgages 301,182 158,526 203,472 260,848 331,130 Homeowner construction -- -- -- -- -- Commercial: Mortgages 795,858 405,624 927,720 24,154 2,097,532 Construction and development 526,224 9,250 -- 114,315 1,312,452 Other 1,451,066 512,020 374,424 2,522,916 2,928,730 Installment 341,737 250,840 378,575 494,756 771,705 --------- --------- --------- --------- --------- Total charge-offs 3,416,067 1,336,260 1,884,191 3,416,989 7,441,549 --------- --------- --------- --------- --------- Recoveries (domestic): Residential: Mortgages 114,083 21,329 2,278 -- 272 Homeowner construction -- -- -- -- -- Commercial: Mortgages 13,384 21,830 84,351 200 -- Construction and development -- 10,948 20,756 29,424 100,997 Other 217,078 188,722 174,976 192,844 23,981 Installment 128,096 74,686 44,847 62,524 103,375 --------- --------- --------- --------- --------- Total recoveries 472,641 317,515 327,208 284,992 228,625 --------- --------- --------- --------- --------- Net charge-offs 2,943,426 1,018,745 1,556,983 3,131,997 7,212,924 Additions charged to earnings 1,400,000 1,256,912 2,774,407 4,530,076 5,200,000 --------- --------- --------- --------- --------- Balance at end of period $7,784,516 $9,327,942 $9,089,775 $7,872,351 $6,474,272 ========= ========= ========= ========= ========= Net charge-offs to average loans .75% .27% .45% .87% 1.93% ======== ========= ========= ========= =========
-14- B. The following table presents the allocation of the allowance for loan losses. Amounts for years prior to 1995 have been restated to reflect the adoption of SFAS #114.
December 31, 1995 1994 1993 1992 1991 -------------------------------------------------------------------------------------------- Residential: Mortgages $1,066,281 1,134,916 1,136,341 1,132,855 1,225,000 % of these loans to all loans 43.4% 43.2% 43.0% 42.6% 45.9% Homeowner construction 19,412 44,047 33,661 35,222 -- % of these loans to all loans .8% 1.8% 1.7% 1.5% 1.2% Commercial: Mortgages 1,640,176 1,364,993 1,246,070 1,253,447 1,305,509 % of these loans to all loans 15.2% 14.2% 13.8% 12.6% 11.1% Construction and development 133,754 275,681 150,110 247,535 494,694 % of these loans to all loans 1.5% 3.1% 3.0% 3.6% 5.1% Other 2,245,789 2,870,242 2,890,785 2,899,120 2,453,753 % of these loans to all loans 25.1% 26.2% 29.0% 29.9% 26.7% Installment 911,069 862,323 561,177 694,390 726,000 % of these loans to all loans 14.0% 11.5% 9.5% 9.8% 10.0% Unallocated 1,768,035 2,775,740 3,071,631 1,609,782 269,316 --------- --------- --------- --------- --------- $7,784,516 9,327,942 9,089,775 7,872,351 6,474,272 100.0% 100.0% 100.0% 100.0% 100.0% ========= ========= ========= ========= =========
V. DEPOSITS -------- A. Average deposit balances outstanding and the average rates paid thereon are presented in the following table:
1995 1994 1993 --------------------- -------------------- -------------------- Average Average Average Average Average Average Amount Rate Paid Amount Rate Paid Amount Rate Paid ----------- --------- ---------- --------- ---------- --------- Demand deposits $ 55,189,000 -- 49,369,000 -- 40,097,000 -- Savings deposits: Regular 92,739,000 2.69% 98,851,000 2.70% 79,567,000 2.83% NOW accounts 55,831,000 1.39% 57,834,000 1.36% 58,930,000 1.84% Money market accounts 30,096,000 2.23% 40,101,000 2.17% 59,473,000 2.74% ----------- ----------- ----------- Total savings 178,666,000 2.21% 196,786,000 2.20% 197,970,000 2.51% Time deposits 224,169,000 5.25% 183,950,000 4.30% 176,148,000 4.60% ----------- ----------- ----------- Total deposits $458,024,000 430,105,000 414,215,000 =========== =========== ===========
-15- B. Not Applicable C. Not Applicable D. The maturity schedule of time deposits in amounts of $100,000 or more at December 31, 1995 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: $15,257,004 2,873,657 7,174,196 3,644,067 28,948,924 ========== ========= ========= ========= ==========
E. Not applicable VI. RETURN ON EQUITY AND ASSETS ---------------------------
1995 1994 1993 ---- ---- ---- Return on average assets 1.44% 1.25% 1.01% Return on average shareholders' equity 15.47% 14.11% 12.92% Dividend payout ratio 33.97% 33.02% 34.30% Average equity to average total assets 9.31% 8.84% 7.81%
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. ITEM 2. PROPERTIES - ------------------ As of December 31, 1995 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 -16- 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. In 1996, the Corporation plans to expand its existing Trust and Investment department facility and construct a new branch office in North Kingstown, Rhode Island. The total cost of these projects is expected to be approximately $4 million. These facilities expansion plans, along with existing structures, are adequate to meet the Corporation's facilities needs in the forseeable future. 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, 1995. -17- EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------ The following is a list of all executive officers of the Corporation and the Bank with their titles, ages, and length of service with the Corporation. Years of Officers of the Corporation Age service (1) - --------------------------- --- ---------- Joseph J. Kirby Chief Executive Officer 64 33 John C. Warren President and Chief Operating 50 0 Officer Joseph H. Potter Executive Vice President 62 37 David V. Devault, CPA Vice President and Chief Financial Officer 41 9 Louis J. Luzzi Vice President and Treasurer 54 35 Harvey C. Perry, II Vice President and Secretary 45 21 (1) Includes years of service with the Bank. 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 and was named Chief Executive Officer in February, 1996. John C. Warren joined the Bank and the Corporation in 1996 as President and Chief Operating Officer. He served as President and Chief Executive Officer of Sterling Bancshares Corporation from 1990 to 1994 and as Chairman from 1993 to 1994. 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 LLP. 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. -18- Years Officers of the Bank Age of service - -------------------- --- ---------- Vernon F. Bliven Senior Vice President - 46 23 Human Resources Robert G. Cocks, Jr. Senior Vice President - Lending 51 3 Louis W. Gingerella, Jr. Senior Vice President - 43 5 Credit Administration B. Michael Rauh, Jr. Senior Vice President - 36 4 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. -19- 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, 1995 and 1994 are presented in the following table. The stock prices are based on the high and low sales prices during the respective quarter. Stock price and dividend amounts for the first and second quarters of 1994 have been restated to reflect a 3-for-2 stock split paid in the form of a stock dividend on August 31, 1994.
1995 Quarters 1 2 3 4 - -------------------------------------------------------------------- Stock prices: high 22.50 27.50 28.00 30.00 low 19.00 20.50 26.00 26.00 Cash dividend declared .22 .22 .24 .24 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
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 21, 1996, the Corporation's Board of Directors declared a cash dividend of $.26 per share, an increase of 8.3% over the previous dividend amount. The dividend is payable April 15, 1996 to shareholders of record as of April 1, 1996. 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 1995 Annual Report to Shareholders which is incorporated herein by reference. At December 31, 1995 there were 1,257 holders of record of the Corporation's common stock. -20- ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- Selected consolidated financial data for the five years ended December 31, 1995 appears under the caption "Five Year Summary of Selected Consolidated Financial Data" on page 18 of the Corporation's 1995 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 19-32 of the Corporation's 1995 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 1995 Annual Report to Shareholders, filed as Exhibit 13, on the pages indicated in the following table, and are incorporated herein by reference. Page of 1995 Annual Report ------------- Consolidated Balance Sheets 33 Consolidated Statements of Income 34 Consolidated Statements of Changes in Shareholders' Equity 35 Consolidated Statements of Cash Flows 36 Notes to Consolidated Financial Statements 37 Parent Company Financial Statements 53 Independent Auditors' Report 55 Summary of Unaudited Quarterly Financial Information 56 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ---------------------------------------------------------- None. -21- PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- Required information regarding directors is presented under the caption "Nominee and Director Information" in the Corporation's Proxy Statement dated March 18, 1996 prepared for the 1996 Annual Meeting of Shareholders and incorporated herein by reference. Required information regarding executive officer 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 18, 1996 prepared for the 1996 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 18, 1996 prepared for the 1996 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 18, 1996 prepared for the 1996 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 18, 1996 prepared for the 1996 Annual Meeting of Shareholders. -22- 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, 1995. (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 1995 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors * 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. **** Incorporated herein by reference to Exhibits 3(i), 10.1, 10.2, 10.3 and 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, previously filed with the Commission. (d) Financial Statement Schedules. None. -23- 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 21, 1996 Joseph J. Kirby Date ________________ By ______________________________________ Joseph J. Kirby, Chairman, Chief Executive Officer and Director March 21, 1996 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 21, 1996 Gary P. Bennett Date ________________ ______________________________________ Gary P. Bennett, Director March 21, 1996 Steven J. Crandall Date ________________ ______________________________________ Steven J. Crandall, Director March 21, 1996 Richard A. Grills Date ________________ ______________________________________ Richard A. Grills, Director March 21, 1996 Larry J. Hirsch Date ________________ ______________________________________ Larry J. Hirsch, Director March 21, 1996 Katherine W. Hoxsie Date ________________ ______________________________________ Katherine W. Hoxsie, Director March 21, 1996 Mary E. Kennard Date ________________ ______________________________________ Mary E. Kennard, Director March 21, 1996 James W. McCormick, Jr. Date ________________ ______________________________________ James W. McCormick, Jr., Director March 21, 1996 Brendan P. O'Donnell Date ________________ ______________________________________ Brendan P. O'Donnell, Director March 21, 1996 Victor J. Orsinger Date ________________ ______________________________________ Victor J. Orsinger, II, Director March 21, 1996 Joseph H. Potter Date ________________ ______________________________________ Joseph H. Potter, Executive Vice President and Director March 21, 1996 Anthony J. Rose, Jr. Date ________________ ______________________________________ Anthony J. Rose, Jr., Director March 21, 1996 James P. Sullivan Date ________________ ______________________________________ James P. Sullivan, Director March 21, 1996 Neil H. Thorp Date ________________ ______________________________________ Neil H. Thorp, Director March 21, 1996 John C. Warren Date ________________ ______________________________________ John C. Warren, President, Chief Operating Officer and Director -25- EX-11 2 Exhibit 11 Washington Trust Bancorp, Inc. Computation of Primary and Fully Diluted Earnings Per Share For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993 ---- ---- ---- Primary: Weighted average shares 2,832,969 2,816,494 2,794,778 Common stock equivalents 77,232 55,866 17,068 --------- --------- --------- Primary weighted average shares 2,910,201 2,872,360 2,811,846 ========= ========= ========= Fully diluted: Weighted average shares 2,832,969 2,816,494 2,794,778 Common stock equivalents 105,681 56,281 30,981 --------- --------- --------- Fully diluted weighted average shares 2,938,650 2,872,775 2,825,759 ========= ========= ========= Income before cumulative effect of accounting change $7,687,967 $6,264,640 $4,476,531 Cumulative effect of change in accounting for income taxes -- -- 305,000 --------- --------- --------- Net income $7,687,967 $6,264,640 $4,781,531 ========= ========= ========= Primary earnings per share: Income before cumulative effect of accounting change $ 2.64 $ 2.18 $ 1.59 Cumulative effect of change in accounting for income taxes -- -- .11 ------ ------ ------ Net income $ 2.64 $ 2.18 $ 1.70 ====== ====== ====== Fully diluted earnings per share: Income before cumulative effect of accounting change $ 2.62 $ 2.18 $ 1.58 Cumulative effect of change in accounting for income taxes -- -- .11 ------ ------ ------ Net income $ 2.62 $ 2.18 $ 1.69 ====== ====== ======
EX-13 3 EXHIBIT 13 Washington Trust Bancorp, Inc. 1995 Annual Report to Shareholders (Portions Incorporated by Reference) Five Year Summary of Selected Consolidated Financial Data Washington Trust Bancorp, Inc. and Subsidiary
1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------- Financial Condition: (1) Cash and cash equivalents $28,650,646 $18,404,910 $21,650,128 $21,817,649 $16,683,667 Securities available for sale 85,552,335 33,609,315 34,263,743 33,743,289 - Securities held to maturity 28,872,991 52,496,616 52,497,832 39,106,642 35,615,089 Net loans 378,674,376 384,598,258 348,272,157 326,109,445 360,830,511 Other real estate owned, net 1,705,147 2,007,212 3,412,421 5,242,054 5,355,506 Other 24,203,809 24,563,652 27,232,543 31,679,861 22,571,521 - ---------------------------------------------------------------------------------------------------------------------- Total assets $547,659,304 $515,679,963 $487,328,824 $457,698,940 $441,056,294 ====================================================================================================================== Deposits $467,854,012 $440,731,142 $423,374,620 $404,660,005 $399,717,920 Federal Home Loan Bank advances 20,951,266 23,522,343 20,500,000 14,000,000 5,000,000 Other liabilities 5,917,528 5,643,494 4,991,279 4,089,140 3,298,951 Shareholders' equity 52,936,498 45,782,984 38,462,925 34,949,795 33,039,423 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $547,659,304 $515,679,963 $487,328,824 $457,698,940 $441,056,294 ====================================================================================================================== Operating Results: Interest income $42,286,180 $36,661,688 $34,927,863 $35,868,747 $41,028,507 Interest expense 17,015,264 13,588,582 14,178,779 16,800,218 23,556,762 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 25,270,916 23,073,106 20,749,084 19,068,529 17,471,745 Provision for loan losses 1,400,000 1,256,912 2,774,407 4,530,076 5,200,000 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 23,870,916 21,816,194 17,974,677 14,538,453 12,271,745 Noninterest income 6,707,020 6,237,576 6,083,500 5,577,685 4,685,934 Gains on sales of securities 495,817 684,590 345,674 196,606 1,495,453 - ---------------------------------------------------------------------------------------------------------------------- Net interest and noninterest income 31,073,753 28,738,360 24,403,851 20,312,744 18,453,132 Noninterest expense 19,354,786 19,447,720 17,672,320 15,558,388 14,881,100 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting 11,718,967 9,290,640 6,731,531 4,754,356 3,572,032 Applicable income taxes 4,031,000 3,026,000 2,255,000 1,604,000 1,095,000 - ---------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 7,687,967 6,264,640 4,476,531 3,150,356 2,477,032 Cumulative effect of change in accounting for income taxes - - 305,000 - - - ---------------------------------------------------------------------------------------------------------------------- Net income $7,687,967 $6,264,640 $4,781,531 $3,150,356 $2,477,032 ====================================================================================================================== Per share information: (2) Earnings per share (3) $2.62 $2.18 $1.69 $1.14 $ .90 Cash dividends declared $ .92 $ .73 $ .59 $ .53 $ .53 Book value (1) $18.56 $16.22 $13.71 $12.58 $11.99 Market value (closing bid price) (1) $29.00 $20.00 $16.50 $11.67 $7.83 Ratios: Return on average assets 1.44% 1.25% 1.01% .70% .56% Return on average shareholders' equity 15.47% 14.11% 12.92% 9.15% 7.58% Dividend payout ratio 33.97% 33.02% 34.30% 46.85% 58.97% Total equity to total assets 9.67% 8.88% 7.89% 7.64% 7.49% Net charge-offs to average loans .75% .27% .45% .87% 1.93% (1) At December 31 (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
Management's Analysis of Financial Statements Washington Trust Bancorp, Inc. and Subsidiary Financial Overview Washington Trust Bancorp, Inc. and subsidiary ("Washington Trust" or "the Corporation") recorded net income of $7.7 million for 1995, an increase of $1.4 million, or 23%, over the $6.3 million of net income recorded in 1994. Fully diluted earnings per share amounted to $2.62 for 1995, up from $2.18 per share earned on net income in 1994. The record earnings in 1995 reflected increases in both net interest income and noninterest income. Washington Trust's rates of return on average assets and average equity ("ROA" and "ROE") for 1995 were 1.44% and 15.47%, respectively. ROA and ROE for the year ended December 31, 1994 amounted to 1.25% and 14.11%, respectively. Total assets rose by 6.2% during 1995 to $547.7 million at year end, up from $515.7 million at the end of the prior year. Average assets amounted to $533.9 million in 1995, up by 6.3% from the 1994 amount of $502.3 million. The growth in total assets was primarily attributable to increases in total securities and federal funds sold, which were partially offset by a reduction in net loans. The funds used to expand the securities portfolio and which provided increased liquidity levels were derived primarily from an increase in total deposits. Total deposits amounted to $467.9 million at the end of 1995, up by $27.1 million from the end of 1994. Net interest income rose in 1995 as the increase in rates earned on loans and investments outpaced the increase in rates paid on deposits. The Corporation's net interest margin was 5.24% in 1995, up from 5.03% in 1994. This increase in net interest margin, together with the growth of average interest-earning assets, resulted in an increase in net interest income of $2.2 million, or 9.5% in 1995. The provision for loan losses amounted to $1.4 million and $1.3 million for 1995 and 1994, respectively. The 1995 provision restored the allowance for loan losses to an amount deemed adequate by management after net charge-offs of $2.9 million were recorded during 1995. Net charge-offs during 1994 were approximately $1.0 million. Noninterest income, excluding securities gains and losses on loan sales, amounted to $6.8 million for 1995, up by 9.4% over the 1994 amount. This increase is primarily attributable to a higher amount of service charges on deposit accounts generated by fee increases and expanded transaction volume. Total noninterest expense amounted to $19.4 million in 1995, down slightly from the 1994 amount. Declines in deposit taxes and assessments and office supplies were partially offset by increases in salaries and employee benefits and foreclosed property costs. In the paper version of the Annual Report to Shareholders there appears here two graphs showing return on average assets and return on average equity for the five most recent years. Following are tabular presentations of the graphic material: Return on Average Assets: Percent 0.56% 0.70% 1.01% 1.25% 1.44% Year 1991 1992 1993 1994 1995 Return on Average Equity: Percent 7.58% 9.15% 12.92% 14.11% 15.47% Year 1991 1992 1993 1994 1995 Net Interest Income Net interest income is the primary source of Washington Trust's operating income. Net interest income is the amount by which interest and fees from interest-earning assets exceeds the interest cost of deposits and other borrowed funds. 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. In the paper version of the Annual Report to Shareholders there appears here a graph showing net interest margin for the five most recent years. Following is a tabular presentation of the graphic material: Net Interest Margin: Percent 4.37% 4.70% 4.82% 5.03% 5.24% Year 1991 1992 1993 1994 1995 In 1995, FTE net interest income rose by $2.6 million, or 10.8%, over 1994 levels. The interest rate spread widened by 6 basis points to 4.64% in 1995, while the net interest margin (FTE net interest income as a percentage of average interest-earning assets) increased from 5.03% in 1994 to 5.24% in 1995. Both yields on interest-earning assets and rates paid on interest-bearing liabilities rose during 1995. Increases in non-interest bearing sources of funds (primarily demand deposits and shareholders' equity) were primarily responsible for the increase in the net interest margin. FTE interest income totalled $43.1 million in 1995, up $6.0 million over the 1994 amount. The FTE yield on interest-earning assets was 8.65% in 1995, up from 7.94% in 1994. Average interest-earning assets increased by $30.3 million, or 6.5%, in 1995. Despite a decline in the balance of loans held in the Corporation's portfolio during 1995, the average balance of loans held during 1995 rose by 4.4% over prior year levels. Overall loan demand was slow in 1995, particularly in the commercial loan portfolio. Average installment loans, however, rose 27.1% during 1995 as a result of strong marketing efforts. The FTE rate of return on total loans was 9.12% in 1995, up from 8.30% in 1994. The effect of the prime rate increases that occurred in 1994 and the early part of 1995 was reflected in higher yields on commercial loans, most of which reprice based on the prime rate. Rates earned on the residential mortgage portfolio also increased, mainly as the result of upward repricing of adjustable rate mortgages. Growth in the installment loan portfolio, which carries the highest aggregate loan yield, also contributed to increase the earning asset yield. Because of relatively soft loan demand, excess liquidity was directed to various categories of securities. (See Consolidated Statements of Cash Flows for additional information.) Average federal funds sold and securities purchased under agreements to resell rose by $8.2 million over 1994 levels. Additionally, investments in nontaxable debt securities and corporate stocks rose by $5.5 million, or 32.8%, in 1995. Interest expense rose by $3.4 million, or 25.2%, in 1995. Growth in the time deposit category, as well as a change in deposit mix during the year, contributed to the increase in interest expense. Average interest-bearing liabilities increased by $19.4 million during 1995 due primarily to the growth of time deposits. Rates paid on time deposits rose by 95 basis points in 1995, while rates paid on savings deposits were virtually unchanged from 1994. This caused a shift of depositor funds out of savings accounts into higher cost time deposits. Average savings deposits declined by 9.2% from 1994 while average time deposits rose by 21.9%. Average demand deposit balances, an interest-free source of funds, rose by 11.8% in 1995. Included in other interest-bearing liabilities are term advances from the Federal Home Loan Bank averaging $20.6 million in 1995, down from an average of $22.3 million in 1994. The average rate paid on these advances was 6.19% and 5.74% in 1995 and 1994, respectively. These advances were used for general corporate funding purposes. 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, 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------------- ASSETS: Residential real estate loans $175,248 14,589 8.32% $170,619 13,473 7.90% $158,068 13,721 8.68% Commercial and other loans (1) 168,060 16,286 9.69 166,670 13,963 8.38 158,606 12,584 7.93 Installment loans 48,922 4,916 10.05 38,492 3,768 9.79 32,296 3,355 10.39 - ----------------------------------------------------------------------------------------------------------------------------- Total loans 392,230 35,791 9.12 375,781 31,204 8.30 348,970 29,660 8.50 Federal funds sold and securities purchased under agreements to resell 14,770 855 5.79 6,531 256 3.92 11,385 322 2.82 Taxable debt securities 69,168 4,540 6.56 69,041 4,181 6.06 61,093 3,860 6.32 Nontaxable debt securities (1) 11,148 743 6.67 8,812 562 6.38 6,631 439 6.62 Corporate stocks (1) 11,046 1,201 10.87 7,905 949 12.00 14,347 1,222 8.51 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 498,362 43,130 8.65% 468,070 37,152 7.94% 442,426 35,503 8.02% - ----------------------------------------------------------------------------------------------------------------------------- Cash and due from banks 13,866 14,032 14,023 Allowance for loan losses (8,740) (9,249) (8,963) Premises and equipment, net 14,784 14,524 14,836 Other 15,641 14,904 11,346 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $533,913 $502,281 $473,668 ============================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY: Savings deposits $178,666 3,946 2.21% $196,786 4,335 2.20% $197,970 4,964 2.51% Time deposits 224,169 11,770 5.25 183,950 7,917 4.30 176,148 8,112 4.60 Federal Home Loan Bank advances 20,603 1,274 6.19 22,268 1,279 5.74 18,597 1,092 5.87 Other 420 25 5.91 1,439 58 4.04 295 11 3.66 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 423,858 17,015 4.01% 404,443 13,589 3.36% 393,010 14,179 3.61% - ----------------------------------------------------------------------------------------------------------------------------- Demand deposits 55,189 49,369 40,097 Other liabilities 5,172 4,081 3,555 Shareholders' equity 49,694 44,388 37,006 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $533,913 $502,281 $473,668 ============================================================================================================================= Net interest income $26,115 $23,563 $21,324 ============================================================================================================================= Interest rate spread 4.64% 4.58% 4.41% Net interest margin 5.24% 5.03% 4.82% (1) Interest amounts are presented on a fully taxable equivalent basis (see page 22 for additional information). Interest income amounts presented in the table on page 21 include the following adjustments for taxable equivalency for the years indicated (in thousands): Years ended December 31, 1995 1994 1993 - --------------------------------------------------------------- Commercial and other loans $ 87 $ 88 $ 95 Nontaxable debt securities 480 200 156 Corporate stocks 277 203 324
Volume/Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis) 1995/1994 1994/1993 1993/1992 - -------------------------------------------------------------------------------------------------------------------------- Net Net Net (In thousands) Volume Rate Change Volume Rate Change Volume Rate Change - -------------------------------------------------------------------------------------------------------------------------- Interest on: Interest-earning assets: Residential real estate loans $ 372 744 1,116 $1,043 (1,291) (248) $ (545) (1,205) (1,750) Commercial and other loans 118 2,205 2,323 657 722 1,379 121 (521) (400) Installment loans 1,046 102 1,148 615 (202) 413 (138) (243) (381) Federal funds sold and securities purchased under agreements to resell 434 165 599 (165) 99 (66) 64 (34) 30 Taxable debt securities 28 331 359 493 (172) 321 1,441 (70) 1,371 Nontaxable debt securities 155 26 181 139 (16) 123 89 (63) 26 Corporate stocks 348 (96) 252 (666) 393 (273) 311 (80) 231 - -------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 2,501 3,477 5,978 2,116 (467) 1,649 1,343 (2,216) (873) - -------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings deposits (400) 11 (389) (29) (600) (629) 469 (1,318) (849) Time deposits 1,921 1,932 3,853 350 (545) (195) (395) (1,770) (2,165) Federal Home Loan Bank advances (99) 95 (4) 211 (25) 186 407 (6) 401 Other (56) 22 (34) 49 (1) 48 (4) (4) (8) - -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,366 2,060 3,426 581 (1,171) (590) 477 (3,098) (2,621) - -------------------------------------------------------------------------------------------------------------------------- Net interest income $1,135 1,417 2,552 $1,535 704 2,239 $ 866 882 1,748 ==========================================================================================================================
Noninterest Income Noninterest income is an important source of revenue for the Corporation. For the year ended December 31, 1995, noninterest income, excluding securities sales and loan sales, accounted for 13.9% 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 45% of total noninterest income and amounted to $3.3 million in 1995, essentially unchanged from the 1994 amount. Service charges on deposit accounts rose 21.1% to $2.0 million in 1995. 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. Fees, service charges and other income increased by approximately $163,000, or 41.4%, in 1995, including $69,000 in nonrecurring items. Higher income from safe deposit rents, letters of credit and wire transfer transactions also contributed to this increase. Net gains on securities available for sale totalled $495,817 in 1995, down from $684,590 reported in 1994. The 1994 securities gains were taken in connection with a nonrecurring contribution expense of approximately $700,000 for the establishment of a charitable trust. (See Notes 3 and 13 to the consolidated financial statements for additional information regarding this transaction.) Losses on loan sales totalled $135,851 for the year ended December 31, 1995, compared to $15,998 reported in 1994. The 1995 amount includes a loss of approximately $200,000 resulting from the sale of a pool of loans with a book value of $3.3 million, most of which were nonperforming. The 1995 net loss was partially offset by gains on sales of fixed rate residential mortgages.
% Change --------------------------- (Dollars in thousands) 1995 1994 1993 1995 vs 1994 1994 vs 1993 - ------------------------------------------------------------------------------------------- Trust income $3,255 $3,284 $2,952 (0.9)% 11.2% Service charges on deposit accounts 1,951 1,611 1,446 21.1 11.4 Merchant processing fees 730 622 522 17.4 19.2 Gains on sales of securities 496 685 346 (27.6) 98.0 Gains (losses) on loan sales (136) (16) 485 (750.0) (103.3) Fees, service charges and other 557 394 391 41.4 .8 Mortgage servicing fees 350 342 287 2.3 19.2 - ------------------------------------------------------------------------------------------- Total noninterest income $7,203 $6,922 $6,429 4.1% 7.7% ===========================================================================================
Noninterest Expense Total noninterest expense amounted to $19.4 million for the year ended December 31, 1995, down slightly from the prior year amount. Deposit taxes and assessments amounted to $769,583 in 1995, down 39.8% from $1.3 million in 1994. During the third quarter of 1995, the FDIC reduced rates paid by banks for deposit insurance premiums. This reduction, retroactive to June 1, 1995, reduced the Corporation's 1995 expense by approximately $480,000. FDIC assessments are scheduled to be further reduced to a nominal amount in 1996. Also included in this expense category is a state tax on deposits which amounted to $257,000 in 1995. Foreclosed property costs resulted in a net loss of $364,000 in 1995, compared to a net gain of $16,000 in 1994. The 1994 net gain was primarily due to gains realized upon the sale of foreclosed properties. The net loss recorded in 1995 resulted primarily from increases to the valuation allowance and expenses associated with ownership of foreclosed properties. Charitable contributions amounted to $120,000 in 1995, down from $699,896 in 1994. The 1994 amount represents a nonrecurring expense associated with the donation of equity securities for the establishment of a charitable trust. 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 Notes 3 and 13 to the consolidated financial statements for additional information relating to this transaction.) The Corporation's efficiency ratio is defined as the ratio of noninterest expense, excluding nonrecurring expenses, as a percentage of fully taxable equivalent net interest income and noninterest income excluding securities transactions, loan sales and nonrecurring items. In 1995, the efficiency ratio amounted to 58.8%, down from the comparable 1994 amount of 63.2%.
% Change -------------------------- (Dollars in thousands) 1995 1994 1993 1995 vs 1994 1994 vs 1993 - ------------------------------------------------------------------------------------------ Salaries $ 8,518 $ 8,343 $ 7,597 2.1% 9.8% Employee benefits 1,705 1,587 1,089 7.4 45.7 Depreciation - occupancy 540 539 540 .2 (0.2) Other occupancy costs 682 667 648 2.2 2.9 Depreciation - equipment 791 774 906 2.2 (14.6) Other equipment costs 501 414 424 21.0 (2.4) Deposit taxes and assessments 770 1,279 1,217 (39.8) 5.1 Foreclosed property costs, net 364 (16) 627 -- (102.6) Office supplies 462 606 517 (23.8) 17.2 Advertising and promotion 538 505 476 6.5 6.1 Credit and collection 438 513 582 (14.6) (11.9) Postage 405 363 331 11.6 9.7 Charitable contributions 120 700 7 (82.3) 1,000.0 Other 3,521 3,174 2,711 10.9 17.1 - ------------------------------------------------------------------------------------------ Total noninterest expense $19,355 $19,448 $17,672 (0.5)% 10.0% ==========================================================================================
Income Taxes Income tax expense amounted to $4.0 million and $3.0 million in 1995 and 1994, respectively. The Corporation's effective tax rate was 34.4% in 1995, up from the 1994 rate of 32.6%. 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 had a net deferred tax liability amounting to $19,302 at December 31, 1995, compared to a net deferred tax asset of $1,797,340 at December 31, 1994. This conversion from a net deferred tax asset to a net deferred tax liability is attributable to the deferred tax effect of accounting for securities available for sale at their market value as required by Statement of Financial Accounting Standards ("SFAS") No. 115. The deferred tax liability relating to securities available for sale was $2.9 million and $1.9 million at December 31, 1995 and 1994, respectively. The increase in the market value of securities available for sale resulted from a general improvement in market conditions in 1995. A significant portion of the Corporation's gross deferred tax assets is expected to be realized for tax purposes within a five year period. Financial Condition Securities Available for Sale 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. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. During the fourth quarter of 1995, the Corporation transferred a pool of debt securities with a book value of $37.1 million, consisting primarily of U.S. Treasury and government agency obligations and mortgage-backed securities, from the held-to-maturity category to the available-for-sale category. The market value of these securities at the date of reclassification was $36.4 million. The transfer was made in response to a special report issued by the Financial Accounting Standards Board ("FASB") which allowed enterprises a one-time opportunity to reassess the appropriateness of their securities classifications under SFAS No. 115. Included in the securities reclassified were structured notes with an amortized cost of $13.0 million, which were subsequently sold in 1995 at a loss of $525,403. Securities available for sale amounted to 15.6% of total assets at year-end 1995, compared to 6.5% at year-end 1994. By repositioning the available-for-sale portfolio, management seeks to improve the portfolio's overall yield and to gain greater flexibility in managing the Corporation's interest rate risk and liquidity needs. The amortized cost of debt securities available for sale rose by $42.3 million over the 1994 amount. While $10.2 million of the increase resulted from transfers from the held-to-maturity portfolio of securities purchased in prior years, $37.6 million of debt securities, primarily mortgage-backed securities, were purchased in 1995. The cost basis of corporate stocks at December 31, 1995 was $7.0 million higher than the prior year-end amount, due primarily to investments in auction rate preferred stocks. 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). The Corporation utilizes these instruments for short-term investment purposes. The balance of auction rate preferred stocks in the portfolio at December 31, 1995 was $7.0 million, compared to the prior year amount of $500,000. At December 31, 1995, the net unrealized gains on securities available for sale amounted to $7.3 million, an increase of $2.6 million over the 1994 year-end amount. U.S. Treasury obligations accounted for $1.1 million of this increase, with the balance of $1.5 million relating to corporate stocks. The higher market value of U.S. Treasury obligations reflects the decline in medium-term and long-term Treasury rates that occurred during 1995. The higher market value of equity securities reflects an improvement in general equity market conditions. (See Note 3 to the consolidated financial statements for detail of unrealized gains and losses associated with securities available for sale.) Securities Held to Maturity Securities designated as held to maturity are part of the Corporation's portfolio of long-term interest-earning assets. These securities are classified as long-term because the Corporation has the intent and ability to hold them until maturity. Securities held to maturity decreased by $23.6 million, to $28.9 million at December 31, 1995. As noted above, debt securities totalling $37.1 million were transferred to the available-for-sale category in 1995. Offsetting this reduction were purchases of state and municipal bonds amounting to $7.7 million in 1995. The market value of the held-to-maturity portfolio has been favorably affected by the decrease in interest rates that occurred in 1995. At December 31, 1995, net unrealized gains in the portfolio totalled $559,828, compared to a net unrealized loss position of $3.1 million at December 31, 1994. Loans Total loans amounted to $386.5 million at December 31, 1995, down by $7.5 million, or 1.9%, from the prior year amount of $393.9 million. Strong growth in installment loans was offset by reduced commercial and residential loan originations. Total residential real estate loans decreased 3.8% in 1995. As part of the Corporation's interest rate risk management strategy, the majority of newly originated fixed rate residential mortgages are sold to U.S. government- sponsored agencies. Fixed rate mortgages originated for sale amounted to $16.2 million in 1995, up from $10.4 million in 1994. The Corporation has retained servicing rights on all residential mortgage loans sold. The balance of serviced loans at December 31, 1995 and 1994 amounted to $95.1 million and $91.8 million, respectively. Adjustable rate mortgages ("ARMs") declined slightly in 1995, but increased to 38.6% of total residential real estate loans at the end of the year, compared to 37.5% at the prior year-end. The demand for ARMs, which was strong in 1994, was down in 1995 as the spread between the initial rate charged on ARMs and that charged on fixed rate loans narrowed. Total commercial loans decreased by $9.8 million, or 5.7%, in 1995. Contributing to this decline was the sale of a pool of loans, including commercial loans with a book value of $2.9 million, most of which were nonperforming. Additionally, $2.8 million of commercial loans were charged off in 1995. The Corporation's commercial loan demand was affected by the continuation of flat economic conditions within its market area as well as strong competition from other financial institutions. The Corporation continued to emphasize maintaining high credit quality standards for new originations. Installment loans increased by $9.1 million, or 20.0%, in 1995. The strong growth is primarily attributable to direct and indirect consumer finance loans, reflecting efforts made to establish and strengthen relationships with dealers while maintaining the competitiveness of products offered. A recent expansion of the Corporation's market area into contiguous communities as well as additions to the loan staff are expected to provide additional opportunities for growth of the Corporation's loan portfolio, although there can be no assurance that they will do so. Deposits Total deposits at December 31, 1995 were $467.9 million, up $27.1 million, or 6.2%, from the prior year. In response to rising interest rates in 1995, depositors have reacted by shifting deposits into longer-term accounts. Accordingly, time deposits rose by $35.8 million during 1995 to $230.5 million at December 31, 1995. Conversely, savings deposits (regular savings, NOW and money market accounts) declined by $14.8 million. Demand deposit growth has steadily increased in the last two years. Total demand deposits rose by 11.4% during 1995, to $59.5 million at year end. Federal Home Loan Bank Advances Washington Trust utilizes advances from the Federal Home Loan Bank of Boston as part of its overall funding strategy. Advances may be utilized for short-term liquidity and longer-term financing. Total advances amounted to $21.0 million at December 31, 1995, down from $23.5 million one year earlier. Asset Quality Nonperforming Assets The following table presents nonperforming assets and related ratios (dollars in thousands):
December 31, 1995 1994 - ------------------------------------------------------------------------- Nonaccrual loans: Residential real estate $ 2,280 $ 3,681 Commercial and other: Mortgages 2,798 1,700 Construction and development 280 689 Other 2,779 4,191 Installment 437 651 - ------------------------------------------------------------------------- Total nonaccrual loans 8,574 10,912 Other real estate owned, net 1,705 2,007 - ------------------------------------------------------------------------- Total nonperforming assets $10,279 $12,919 ========================================================================= Nonaccrual loans as a percentage of total loans 2.2% 2.8% Nonperforming assets as a percentage of total assets 1.9% 2.5% =========================================================================
Nonperforming assets include nonaccrual loans and other real estate owned. Nonperforming assets declined to 1.9% of total assets at December 31, 1995, compared to 2.5% of total assets at December 31, 1994. Nonaccrual loans as a percent of total loans fell from 2.8% at the end of 1994 to 2.2% at December 31, 1995. The improvement in these ratios resulted from sales of foreclosed properties, charge-offs of nonaccrual loans and continued efforts by the Corporation to reduce the level of nonperforming assets. In addition, approximately $2.0 million of loans which were on nonaccrual status at December 31, 1994 were sold in 1995.
December 31, 1995 1994 - ------------------------------------------------------------------------- Nonaccrual loans 90 days or more past due $ 4,616 $ 6,614 Nonaccrual loans less than 90 days past due 3,958 4,298 - ------------------------------------------------------------------------- Total nonaccrual loans $ 8,574 $10,912 ========================================================================= Accruing loans 90 days or more past due (not included in nonperforming assets) $ 257 $ 24 =========================================================================
Loans, with the exception of credit card loans and certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more past due with respect to principal and/or interest. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but uncollected, is reversed against current period income. Cash receipts on nonaccrual loans are recognized as interest income, or recorded as a reduction of principal if full collection of the loan is doubtful or if impairment of the collateral is identified. Nonaccrual loans are returned to accrual status when the obligation has performed in accordance with the contract terms for a reasonable period of time and the ultimate collectibility of the contractual principal and interest is no longer doubtful. Nonaccrual residential real estate loans decreased from $3.7 million at December 31, 1994 to $2.3 million at December 31, 1995. The reasons for this reduction include the return of loans to accrual status, foreclosures, the sale of loans and charge-offs, partially offset by approximately $1.4 million in loans transferred to nonaccrual status in 1995. Commercial mortgages was the only loan category which experienced an increase in nonaccrual loans in 1995, rising by $1.1 million, or 64.6% over the prior year. The increase is due to a small number of larger balance loans being placed on nonaccrual status. Nonaccrual commercial mortgages accounted for 4.8% and 3.0% of total commercial mortgages at December 31, 1995 and 1994, respectively. Other commercial loans consist of loans to businesses and individuals, either unsecured or secured, with varied repayment terms. A substantial portion of secured loans in this category are collateralized by real estate. These loans represented 25.1% of total loans at December 31, 1995. Nonaccrual loans in this category declined by 33.7% from 1994. Reductions due to sale, repayments and charge-offs were partially offset by transfers of loans to nonaccrual status amounting to approximately $3.6 million. Nonaccrual other commercial loans as a percent of total other commercial loans amounted to 2.9% at December 31, 1995, down from 4.1% in the prior year. In the paper version of the Annual Report to Shareholders there appears here a graph showing nonperforming assets as of the five most recent year-ends. Following is a tabular presentation of the graphic material: Nonperforming Assets at December 31: $ in millions $29.5 $26.5 $19.6 $12.9 $10.3 Year 1991 1992 1993 1994 1995 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. Included in nonaccrual loans at December 31, 1995, are loans amounting to $2.4 million whose terms have been restructured. There were no commitments to lend additional funds to borrowers whose loans had been restructured. Other Real Estate Owned Other real estate owned ("OREO") is composed of properties acquired through foreclosure and other legal means, and loans determined to be substantively repossessed. A loan is considered to be substantively repossessed when the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings. OREO is carried at the lower of cost or fair value minus estimated costs to sell. A valuation allowance is maintained for potential declines in market value, known declines in market value, and estimated selling costs. The balance of OREO amounted to $1.7 million at December 31, 1995, down from the corresponding 1994 amount of $2.0 million. Sales of foreclosed properties were greater than the rate of foreclosures in 1995. During 1995, sales of foreclosed properties amounted to $1.5 million. Washington Trust has provided financing to facilitate the sales of some of these properties. Financing is generally provided at market rates with credit terms similar to those available to other borrowers. Allowance for Loan Losses Washington Trust assesses the quality of its loans by performing ongoing reviews of its portfolio to determine potential loss exposure and to assess delinquency trends. During this review, management gives consideration to such factors as overall borrower relationship, delinquency trends, credit and collateral quality, prior loss experience, current and expected economic conditions, and other pertinent factors. As a result of this process charge-offs and other potential problem loans are identified and loan loss allowances are established. The following table reflects the activity in the allowance for loan losses (dollars in thousands):
Years ended December 31, 1995 1994 - ---------------------------------------------------------------------- Beginning balance $9,328 $9,090 Net charge-offs: Residential real estate (187) (138) Commercial: Mortgages (782) (384) Construction and development (526) 2 Other (1,234) (323) Installment (214) (176) - ---------------------------------------------------------------------- Net charge-offs (2,943) (1,019) Provision for loan losses 1,400 1,257 - ---------------------------------------------------------------------- Ending balance $7,785 $9,328 ====================================================================== Allowance for loan losses to nonaccrual loans 90.8% 85.5% Allowance for loan losses to total loans 2.0% 2.4% ======================================================================
Net charge-offs increased by $1.9 million in 1995. Included in 1995 net charge- offs is approximately $620,000 in charge-offs associated with the sale of a pool of loans, most of which were nonperforming. Commercial loan charge-offs also increased in 1995 for reasons which included the deterioration of certain credit relationships and management's continuing efforts to address the level of nonperforming loans. The provision for loan losses amounted to $1.4 million in 1995, up from $1.3 million in 1994. The provision amount is determined by management to maintain the allowance at a level which is deemed appropriate. 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 and liquidity. The objective of the ALCO is to manage assets and funding sources to produce results which are consistent with Washington Trust's liquidity, capital adequacy, growth, risk and profitability goals. The ALCO establishes and monitors guidelines for proper origination and matching of assets and funding sources, and determines asset/liability origination and pricing strategies to meet its goals. The ALCO meets regularly to review the economic environment and the volume, mix and maturity of assets and liabilities, and implements appropriate changes in strategy that will manage the Corporation's exposure to interest rate risk and liquidity risk. The ALCO manages the Corporation's interest rate risk using both income simulation and gap analysis. Simulation is used as the primary tool for measuring interest rate risk inherent in the Corporation's on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect on net interest income over a 24-month period of interest rate shifts of up to 200 basis points over a 12-month period. These simulations take into account repricing, maturity and mortgage prepayment characteristics of individual products which may vary under different interest rate scenarios. The ALCO reviews simulation results to determine whether the downside exposure of net interest income to changes in interest rates remains within established tolerance levels over a 24-month horizon, and to develop appropriate strategies to manage this exposure. As of December 31, 1995, net interest income simulation indicated a slight exposure to falling interest rates to a degree that remains within tolerance levels established by the Corporation. While the ALCO consistently reviews simulation assumptions to ensure that they reflect historical experience, it should be noted that income simulation may not always prove to be an accurate indicator of interest rate risk since the repricing, maturity and prepayment characteristics of financial instruments may change to a different degree than estimated. The Corporation also uses gap analysis to provide a more general overview of the Corporation's interest rate risk profile. At December 31, 1995, the Corporation's cumulative one-year gap was a negative $79.2 million, or 15.3% of earning assets. The table on page 30 details the amounts of interest-earning assets and interest-bearing liabilities at December 31, 1995 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. The Corporation supplements its interest rate risk management strategies with off-balance sheet transactions. Such transactions are intended to hedge specifically identified risks inherent in the Corporation's balance sheet, and not to produce speculative profits. The Corporation has written policy guidelines which designate limits on the notional value of off-balance sheet transactions and require evaluation of risks associated with these transactions, including counterparty credit risk. At December 31, 1995, the Corporation had outstanding interest rate swap agreements with a notional principal amount of $10 million maturing in May 1996. These agreements were used to convert a 23-month fixed rate deposit product originated during 1994 to a variable rate. The effect of the swap agreements on net interest income for 1995 was not material. During 1995, the Corporation entered into interest rate floor contracts with a notional principal amount of $50 million and a five-year term maturing in February 2000. These contracts are intended to function as a hedge against reductions in interest income realized from prime-based loans. To purchase these contracts, the Corporation paid an up-front premium of $916,000, which is being amortized over the life of the contracts. The Corporation receives payment for these contracts if certain interest rates fall below specified levels. The floor contract premium amortization, net of interest earned for these contracts, reduced interest earned on loans by approximately $88,000 in 1995. (See Note 8 to the consolidated financial statements for additional information regarding the swap agreements and floor contracts.)
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 $ 108,670 $ 40,956 $ 92,937 $ 49,736 $ 94,616 Debt securities 13,104 6,934 13,584 58,206 22,597 Other assets 13,627 -- -- -- 2,995 - --------------------------------------------------------------------------------------- Total interest-earning assets 135,401 47,890 106,521 107,942 120,208 - --------------------------------------------------------------------------------------- Interest-bearing liabilities: Deposits (237,586) (45,714) (77,102) (48,060) 78 Interest rate swap agreements 10,000 (10,000) -- -- -- Federal Home Loan Bank advances (4,000) (2,561) (2,000) (10,811) (1,579) - --------------------------------------------------------------------------------------- Total interest-bearing liabilities (231,586) (58,275) (79,102) (58,871) (1,501) - --------------------------------------------------------------------------------------- Interest sensitivity gap per period $ (96,185) $ (10,385) $ 27,419 $ 49,071 $118,707 ======================================================================================= Cumulative interest sensitivity gap $ (96,185) $(106,570) $(79,151) $(30,080) $ 88,627 =======================================================================================
Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. Washington Trust's primary source of liquidity is customer deposits. Customer deposits (time, savings and demand deposits) funded approximately 85.9% of total average assets in 1995. Other sources of funding include loan repayments and discretionary use of purchased liabilities (i.e. 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 short- term or long-term liquidity needs. The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained above target levels established by the ALCO during 1995. Net loans as a percentage of total assets fell to 69.1% at December 31, 1995, compared to 74.6% at December 31, 1994. Total securities as a percentage of total assets rose to 20.9% at December 31, 1995, up from 16.7% at December 31, 1994. For the year ended December 31, 1995, net cash provided by financing activities was $22.6 million. Approximately $27.1 million was generated by increases in deposits, partially offset by a net repayment of Federal Home Loan Bank advances of $2.6 million and dividends paid of $2.5 million. Net cash used in investing activities was $21.1 million in 1995, the majority of which was used to purchase securities. In 1996, the Corporation plans to expand its Trust and Investment department facility and construct a new branch office. The total cost of these projects is expected to be approximately $4 million. (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 9.7% at December 31, 1995, compared to 8.9% at December 31, 1994. Book value rose to $18.56 per share at December 31, 1995, up from the year-earlier amount of $16.22 per share. Total shareholders' equity increased by $7.2 million, or 15.6%, during 1995. Approximately $1.6 million of this increase is attributable to the unrealized gain on securities available for sale. In addition, approximately $5.1 million in capital growth resulted from earnings retention. The Corporation increased cash dividends declared per share by 26% in 1995 in recognition of continued improvements in earnings and a strong capital position. Cash dividends per share amounted to $.92 in 1995 versus $.73 in 1994. 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 maintain 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 allowance for 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 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, 1995 and 1994:
(Dollars in thousands) 1995 1994 - ------------------------------------------------------------------------------------------- Risk-based capital: (1) Tier 1 capital (shareholders' equity) $48,555 $42,981 Tier 2 capital (eligible portion of allowance for loan losses) 4,354 4,337 - ------------------------------------------------------------------------------------------- Total risk-based capital $52,909 $47,318 =========================================================================================== Assets: (1) Net risk-weighted assets $344,883 $342,472 Average quarterly assets $540,175 $508,540 =========================================================================================== Risk-based capital ratios: Tier 1 (minimum 4.0%) 14.08% 12.55% Total (Tier 1 plus Tier 2, minimum 8.0%) 15.34% 13.82% Tier 1 leverage ratio (minimum 3.0%) 8.99% 8.45% =========================================================================================== (1) Amounts exclude the SFAS No. 115 market valuation adjustment associated with securities available for sale.
Recent Accounting Developments Mortgage Servicing Rights The FASB has issued SFAS No. 122, "Accounting for Mortgage Servicing Rights", which is effective for fiscal years beginning after December 15, 1995. This pronouncement requires that the rights to service mortgage loans for others be recognized as an asset, including rights acquired through both purchases and originations. Capitalized mortgage servicing rights will be amortized over the period of estimated net servicing income and will be periodically evaluated for impairment based on their fair value. The adoption of this pronouncement is not expected to have a significant effect on the Corporation's financial position or results of operations. Stock-Based Compensation Effective January 1, 1996, the Corporation will adopt SFAS No. 123, "Accounting for Stock-Based Compensation". The Statement encourages, but does not require, a fair value based method of accounting for stock-based compensation plans. SFAS No. 123 allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. For those entities electing to use the intrinsic value based method, SFAS No. 123 requires pro forma disclosures of net income and earnings per share computed as if the fair value based method had been applied. The Corporation intends to continue to account for stock-based compensation costs under APB Opinion No. 25, and will provide the additional required disclosures relating to 1995 and 1996 stock options in its 1996 Annual Report. Comparison of 1994 with 1993 Washington Trust recorded net income of $6.3 million in 1994, a 40% increase over the $4.5 million of net income excluding an accounting change for income taxes recorded in 1993. Earnings per share amounted to $2.18 for 1994, up from $1.58 per share earned on net income excluding the accounting change in 1993. Increased net interest income and noninterest income, improved levels of nonperforming assets, and a resultant decrease in the Corporation's provision for loan losses all had a positive impact on 1994 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 $2.3 million, or 11.2%, in 1994. Despite the overall increase in interest rates in 1994, both asset yields and rates paid on deposits and other interest-bearing liabilities were lower in 1994 than 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. A 23.1% increase in average demand deposits, an interest-free source of funding, contributed to the increase in net interest margin, which amounted to 5.08% in 1994 compared to 4.90% in 1993. The interest rate spread widened by 11 basis points to 4.66% for the year ended December 31, 1994. Total loans increased $36.6 million, or 10.2%, in 1994 and amounted to $393.9 million at December 31, 1994. Residential mortgages, commercial mortgages and installment loans all exhibited strong growth in 1994. Adjustable rate mortgage originations were up, as borrowers opted to take advantage of the initial lower rates associated with this product, especially as interest rates increased during the latter part of 1994. In addition, adjustable rate mortgages increased as a percent of total residential mortgages since the majority of the fixed rate mortgages originated in 1994 were sold in the secondary market. Installment loans rose 32.5% during 1994 primarily as a result of a strong marketing campaign for home equity loans. Nonperforming assets totalled 2.5% of total assets at December 31, 1994, down from the 1993 amount of 4.0%. The Corporation's loan loss provision amounted to $1.3 million in 1994, down from $2.8 million in 1993. Net loan charge-offs amounted to $1.0 million in 1994, down from $1.6 million in 1993. Shareholders' equity rose by $7.3 million, or 19.0% in 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. The ratio of capital to assets was 8.9% and 7.9% at December 31, 1994 and 1993, respectively. Dividends paid per share amounted to $.73 in 1994, up 24% from the prior year. Consolidated Balance Sheets Washington Trust Bancorp, Inc. and Subsidiary
December 31, 1995 1994 - -------------------------------------------------------------------------------------------------- Assets: Cash and due from banks (note 2) $ 15,051,777 $ 15,172,421 Federal funds sold 13,598,869 3,232,489 Mortgage loans held for sale 456,152 203,750 Securities available for sale, at fair value; cost $78,249,075 in 1995 and $28,940,165 in 1994 (note 3) 85,552,335 33,609,315 Securities held to maturity, at cost; fair value $29,432,819 in 1995 and $49,395,262 in 1994 (note 4) 28,872,991 52,496,616 Federal Home Loan Bank stock, at cost 2,995,000 2,906,800 Loans (note 5) 386,458,892 393,926,200 Less allowance for loan losses (note 6) 7,784,516 9,327,942 - -------------------------------------------------------------------------------------------------- Net loans 378,674,376 384,598,258 Premises and equipment, net (note 7) 14,646,157 14,779,903 Accrued interest receivable 3,539,305 3,232,211 Other real estate owned, net (note 9) 1,705,147 2,007,212 Other assets 2,567,195 3,440,988 - -------------------------------------------------------------------------------------------------- Total assets $547,659,304 $515,679,963 ================================================================================================== Liabilities: Deposits: Demand $ 59,470,321 $ 53,373,386 Savings 177,891,247 192,653,937 Time (note 10) 230,492,444 194,703,819 - -------------------------------------------------------------------------------------------------- Total deposits 467,854,012 440,731,142 Dividends payable 686,189 564,686 Federal Home Loan Bank advances (note 11) 20,951,266 23,522,343 Accrued expenses and other liabilities 5,231,339 5,078,808 - -------------------------------------------------------------------------------------------------- Total liabilities 494,722,806 469,896,979 - -------------------------------------------------------------------------------------------------- Commitments and contingencies (notes 8 and 15) Shareholders' Equity: (note 16) Common stock of $.0625 par value; authorized 10,000,000 shares; issued 2,880,000 shares 180,000 180,000 Paid-in capital 3,010,795 2,869,135 Retained earnings 45,690,676 40,613,979 Unrealized gain on securities available for sale, net of tax 4,381,958 2,801,490 Treasury stock, at cost; 27,130 shares in 1995 and 56,570 shares in 1994 (326,931) (681,620) - -------------------------------------------------------------------------------------------------- Total shareholders' equity 52,936,498 45,782,984 - -------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $547,659,304 $515,679,963 ==================================================================================================
See accompanying notes to consolidated financial statements. Consolidated Statements of Income Washington Trust Bancorp, Inc. and Subsidiary
Years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans (note 5) $ 35,703,570 $ 31,116,418 $ 29,565,118 Income from securities: Interest 4,803,214 4,543,584 4,143,297 Dividends 924,190 745,925 897,869 Interest on federal funds sold and securities purchased under agreements to resell 855,206 255,761 321,579 - ------------------------------------------------------------------------------------------------------- Total interest income 42,286,180 36,661,688 34,927,863 - ------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 3,946,019 4,334,637 4,964,023 Time deposits 11,770,096 7,917,428 8,111,506 Other 1,299,149 1,336,517 1,103,250 - ------------------------------------------------------------------------------------------------------- Total interest expense 17,015,264 13,588,582 14,178,779 - ------------------------------------------------------------------------------------------------------- Net interest income 25,270,916 23,073,106 20,749,084 Provision for loan losses (note 6) 1,400,000 1,256,912 2,774,407 - ------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 23,870,916 21,816,194 17,974,677 - ------------------------------------------------------------------------------------------------------- Noninterest income: Trust income 3,255,494 3,284,435 2,952,216 Service charges on deposit accounts 1,950,899 1,610,550 1,446,269 Merchant processing fees 730,449 622,013 521,545 Gains on sales of securities (note 3) 495,817 684,590 345,674 Gains (losses) on loan sales (135,851) (15,998) 484,960 Other income 906,029 736,576 678,510 - ------------------------------------------------------------------------------------------------------- Total noninterest income 7,202,837 6,922,166 6,429,174 - ------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits (note 12) 10,223,160 9,929,943 8,686,310 Net occupancy 1,221,927 1,206,031 1,187,937 Equipment 1,291,663 1,188,352 1,330,052 Deposit taxes and assessments 769,583 1,279,417 1,216,740 Foreclosed property costs, net (note 9) 363,847 (15,937) 626,913 Office supplies 461,501 605,645 516,788 Advertising and promotion 538,413 505,351 476,305 Credit and collection 437,619 512,715 581,831 Other (note 13) 4,047,073 4,236,203 3,049,444 - ------------------------------------------------------------------------------------------------------- Total noninterest expense 19,354,786 19,447,720 17,672,320 - ------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 11,718,967 9,290,640 6,731,531 Applicable income taxes (note 14) 4,031,000 3,026,000 2,255,000 - ------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 7,687,967 6,264,640 4,476,531 Cumulative effect of change in accounting for income taxes -- -- 305,000 - ------------------------------------------------------------------------------------------------------- Net income $ 7,687,967 $ 6,264,640 $ 4,781,531 ======================================================================================================= Weighted average shares outstanding - primary 2,910,201 2,872,360 2,811,846 Weighted average shares outstanding - fully diluted 2,938,650 2,872,775 2,825,759 Earnings per share - primary: Income before cumulative effect of accounting change $2.64 $2.18 $1.59 Cumulative effect of change in accounting for income taxes -- -- .11 ----- ----- ----- Net income $2.64 $2.18 $1.70 ===== ===== ===== Earnings per share - fully diluted: Income before cumulative effect of accounting change $2.62 $2.18 $1.58 Cumulative effect of change in accounting for income taxes -- -- .11 ----- ----- ----- Net income $2.62 $2.18 $1.69 ===== ===== ===== Cash dividends declared per share $ .92 $ .73 $ .59
See accompanying notes to consolidated financial statements. Consolidated Statements of Changes in Shareholders' Equity Washington Trust Bancorp, Inc. and Subsidiary
Years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------------------- Common Stock Balance at beginning of year $ 180,000 $ 120,000 $ 120,000 3-for-2 stock split in the form of a 50% stock dividend - 60,000 - - -------------------------------------------------------------------------------------------------------- Balance at end of year 180,000 180,000 120,000 - -------------------------------------------------------------------------------------------------------- Paid-in Capital Balance at beginning of year 2,869,135 2,822,908 2,784,205 Issuance of common stock for dividend reinvestment and stock option plans 141,660 106,227 38,703 3-for-2 stock split in the form of a 50% stock dividend - (60,000) - - -------------------------------------------------------------------------------------------------------- Balance at end of year 3,010,795 2,869,135 2,822,908 - -------------------------------------------------------------------------------------------------------- Retained Earnings Balance at beginning of year 40,613,979 36,418,073 33,276,746 Net income 7,687,967 6,264,640 4,781,531 Cash dividends declared (2,611,270) (2,068,734) (1,640,204) - -------------------------------------------------------------------------------------------------------- Balance at end of year 45,690,676 40,613,979 36,418,073 - -------------------------------------------------------------------------------------------------------- Unrealized Gain on Securities Available for Sale, Net of Tax Balance at beginning of year 2,801,490 - - Adoption of SFAS No. 115 - 4,910,522 - Change in unrealized gain on securities available for sale, net of tax 1,580,468 (2,109,032) - - -------------------------------------------------------------------------------------------------------- Balance at end of year 4,381,958 2,801,490 - - -------------------------------------------------------------------------------------------------------- Treasury Stock Balance at beginning of year (681,620) (898,056) (1,231,156) Issuance of common stock for dividend reinvestment and stock option plans 354,689 216,436 333,100 - -------------------------------------------------------------------------------------------------------- Balance at end of year (326,931) (681,620) (898,056) - -------------------------------------------------------------------------------------------------------- Total Shareholders' Equity $52,936,498 $45,782,984 $38,462,925 ========================================================================================================
See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows Washington Trust Bancorp, Inc. and Subsidiary
Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 7,687,967 $ 6,264,640 $ 4,781,531 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,400,000 1,256,912 2,774,407 Provision for valuation of other real estate owned 172,041 137,389 768,021 Depreciation of premises and equipment 1,331,474 1,313,158 1,446,367 Amortization of net deferred loan fees and costs (540,535) (819,142) (599,670) Cumulative effect of change in accounting principle -- -- (305,000) Deferred income tax expense (benefit) 763,000 (360,000) (881,000) Gains on sales of securities available for sale (495,817) (684,590) (345,674) Losses (gains) on sales of other real estate owned 15,095 (465,292) (674,331) Losses (gains) on loan sales 135,851 15,998 (484,960) Proceeds from sales of loans 15,967,587 13,867,186 29,396,915 Loans originated for sale (16,219,298) (10,377,435) (23,981,881) Increase in accrued interest receivable (307,094) (361,300) (9,414) Decrease (increase) in other assets (923,547) (624,046) 49,001 Increase in accrued expenses and other liabilities 133,229 499,002 861,108 Other, net (294,672) 174,088 22,998 - ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,825,281 9,836,568 12,818,418 - ------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Securities available for sale: Purchases (38,362,395) (4,719,443) (7,624,494) Proceeds from sales 16,469,090 9,666,129 7,387,344 Maturities 10,164,849 1,000,000 -- Securities held to maturity: Purchases (22,331,055) (8,399,712) (26,043,737) Maturities and principal repayments 8,770,271 8,355,132 12,611,066 Investment in Federal Home Loan Bank stock (88,200) (934,000) (30,800) Loan originations (over) under principal collected on loans 5,152,024 (36,344,321) (24,554,443) Proceeds from sales and other reductions of other real estate owned 310,084 1,263,385 2,037,048 Purchases of premises and equipment (1,222,588) (1,754,963) (755,168) - ------------------------------------------------------------------------------------------------------- Net cash used in investing activities (21,137,920) (31,867,793) (36,973,184) - ------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 27,122,870 17,356,522 18,714,615 Proceeds from Federal Home Loan Bank advances 17,564,839 15,051,500 10,000,000 Repayment of Federal Home Loan Bank advances (20,135,916) (12,029,157) (3,500,000) Proceeds from issuance of commmon stock from treasury 496,349 322,663 371,803 Cash dividends paid (2,489,767) (1,915,521) (1,599,173) - ------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 22,558,375 18,786,007 23,987,245 - ------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 10,245,736 (3,245,218) (167,521) Cash and cash equivalents at beginning of year 18,404,910 21,650,128 21,817,649 - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $28,650,646 $18,404,910 $21,650,128 ======================================================================================================= Noncash Investing Activities: Net transfers from loans to other real estate owned $ 666,158 $ 1,290,381 $ 3,270,745 Loans charged off 3,416,067 1,336,260 1,884,191 Loans made to facilitate the sale of other real estate owned 854,750 1,709,931 3,053,750 Transfer of securities from the held-to-maturity to the available-for-sale category 37,131,457 -- -- Change in unrealized gain on securities available for sale, net of tax 1,580,468 2,801,490 -- Supplemental Disclosures: Interest payments $ 7,365,825 $ 7,384,172 $ 8,154,492 Income tax payments 3,018,250 2,942,787 2,844,278
See accompanying notes to consolidated financial statements. Notes to Consolidated Financial Statements WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARY (1) Summary of Significant Accounting Policies Washington Trust Bancorp, Inc. (the "Corporation") is a publicly-owned, registered bank holding company, organized under the laws of the State of Rhode Island. The Corporation is the only Rhode Island based independent, publicly- owned, community banking organization. The Corporation provides a complete product line of financial services through its wholly-owned subsidiary, The Washington Trust Company (the "Bank"), a Rhode Island chartered commercial bank. The Bank was originally chartered in 1800 and provides a variety of financial services including commercial lending, residential mortgages, consumer loans, retail and commercial deposit products and trust services. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), subject to regulatory limits. The activities of the Corporation and the Bank are subject to the regulatory supervision of the Federal Reserve Board and the FDIC, respectively. Both companies are subject to various Rhode Island business and banking regulations. Basis of Presentation The consolidated financial statements include the accounts of the Corporation and the Bank. All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification. The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. A material estimate which is particularly susceptible to change is the determination of the allowance for loan losses in satisfaction of loans. Securities Available for Sale The Corporation designates securities that it intends to use as part of its asset/liability strategy or that may be sold as a result of changes in market conditions, changes in prepayment risk, rate fluctuations, liquidity or capital requirements as available for sale. The determination to classify such securities as available for sale is made at the time of purchase. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Any decline in fair value below the amortized cost basis of an individual security deemed to be other than temporary is recognized as a realized loss in the accounting period in which the determination is made. The fair value of the security at the time of the write- down becomes the new cost basis of the security. Realized gains or losses from sales of equity securities are determined using the average cost method, while other realized gains and losses are determined using the specific identification method. Securities Held to Maturity The determination to classify debt securities in the held-to-maturity category is made at the time of purchase and is based on management's intent and ability to hold the securities until maturity. Debt securities in the held-to-maturity portfolio are stated at cost, adjusted for amortization of premium and accretion of discount (calculated on a method that approximates the interest method). 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. Portfolio Loans Loans held in portfolio are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs. Interest income is accrued on various methods which approximate a level yield related to principal amounts outstanding. Deferred loan origination fees and costs are amortized as an adjustment to yield over the life of the related loans. Nonaccrual Loans Loans, with the exception of credit card loans and certain well-secured residential mortgage loans, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of prinicpal and interest is doubtful. Interest previously accrued, but not collected on such loans is reversed against current period income. Subsequent cash receipts on nonaccrual loans are applied to the outstanding principal balance of the loan, or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible. Restructured Loans Restructured loans include those for which concessions such as reduction of interest rates other than normal market rate adjustments, or deferral of principal or interest payments have been granted due to a borrower's financial condition. Subsequent cash receipts on restructured loans are applied to the outstanding principal balance of the loan, or recognized as interest income depending on management's assessment of the ultimate collectibility of the loan. Allowance for Loan Losses The allowance for loan losses is available for future credit losses inherent in the loan portfolio. The level of the allowance is based on management's ongoing review of the growth and composition of the loan portfolio, net charge-off experience, current and expected economic conditions, and other pertinent factors. Loans (or portions thereof) deemed to be uncollectible are charged against the allowance and recoveries of amounts previously charged off are added to the allowance. Loss provisions charged to earnings are added to the allowance to bring it to the desired level. Effective January 1, 1995, the Corporation adopted Statements of Financial Accounting Standards ("SFAS") No. 114 and No. 118. These Statements, which apply to the Corporation's commercial loan portfolio, address how allowances for loan losses and income recognized for certain loans should be determined. A loan is impaired when it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Corporation considers all nonaccrual commercial loans to be impaired. Impairment is measured on a discounted cash flow method, or at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impairment is measured based on the fair value of the collateral if it is determined that foreclosure is probable. If the measure of impairment is less than the recorded investment in the loan, an allowance for loan losses is established with a corresponding charge to the provision for loan losses. While management believes that the allowance for loan losses is adequate, future additions to the allowance may be necessary based on changes in economic conditions, particularly in the northeastern United States. In addition, various regulatory agencies periodically review the Corporation's allowance for loan losses. Such agencies may require the recognition of additions to the allowance based on their judgments about information available to them at the time of their examination. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. Expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses. Other Real Estate Owned (OREO) Other real estate owned consists of property acquired through foreclosure and loans determined to be substantively repossessed. SFAS No. 114 narrowed the definition of real estate loans substantively repossessed to include only those loans for which the Corporation has taken possession of the collateral, but has not completed legal foreclosure proceedings. Accordingly, loans previously included in OREO have been reclassified to be reported as nonaccrual loans. All prior period amounts in the consolidated financial statements and related notes pertaining thereto, including the related loss provisions and allowances, have been reclassified from OREO to loans or the allowance for loan losses, as applicable. OREO, including real estate substantively repossessed, is stated at the lower of cost or fair value minus estimated costs to sell at the date of acquisition or classification to OREO status. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure is charged to the allowance for loan losses. A valuation allowance is maintained for known specific and potential market declines and for estimated selling expenses. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in foreclosed property costs. Interest Rate Risk Management Agreements The Corporation uses financial instruments as part of its interest rate risk management strategy. Interest rate swap and floor agreements are entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Corporation does not enter into financial instruments for trading or speculative purposes. Therefore, these instruments are not marked to market. The net amounts to be paid or received on outstanding interest rate risk management agreements are recognized on the accrual basis as an adjustment to the related interest income or expense over the life of the agreements. Premiums paid for interest rate floor agreements are amortized as an adjustment to interest income over the term of the agreements. Unamortized premiums are included in other assets. Gains or losses resulting from the termination of interest rate swap and floor agreements on qualifying hedges of existing assets or liabilities are deferred and amortized over the remaining lives of the related assets/liabilities as an adjustment to the yield. Unamortized deferred gains/losses on terminated interest rate swap and floor agreements are included in the underlying assets/liabilities hedged. Deposit Taxes and Assessments Deposit taxes and assessments consist of amounts assessed to members of the Bank Insurance Fund by the FDIC and deposit taxes imposed by the State of Rhode Island. These amounts are calculated based on levels of bank deposits using rates established by the respective regulatory authorities. Pension Costs Pension costs are funded on a current basis in compliance with the requirements of the Employee Retirement Income Security Act and are accounted for in accordance with SFAS No. 87, "Employers' Accounting for Pensions." Postemployment Benefits The expected cost of providing benefits to former or inactive employees after employment but before retirement is recognized during the period in which the employee renders service. 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 SFAS No. 109, "Accounting for Income Taxes", on January 1, 1993. The cumulative effect of adoption of SFAS No. 109 was reported in the 1993 Consolidated Statement of Income. 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. (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 $7,512,422 and $6,856,533 at December 31, 1995 and 1994, respectively. (3) Securities Available For Sale Securities available for sale are summarized as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value - -------------------------------------------------------------------------------------- December 31, 1995 U.S. Treasury obligations and obligations of U.S. government agencies $37,346,696 $ 549,035 $ (18,203) $37,877,528 Mortgage-backed securities 30,024,608 189,634 (187,345) 30,026,897 Corporate stocks 10,877,771 6,783,369 (13,230) 17,647,910 - -------------------------------------------------------------------------------------- Total $78,249,075 $7,522,038 $(218,778) $85,552,335 ====================================================================================== 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) 9,076,095 - -------------------------------------------------------------------------------------- Total $28,940,165 $5,396,827 $(727,677) $33,609,315 ======================================================================================
In November 1995, the Financial Accounting Standards Board ("FASB") issued a special report which allowed enterprises to reassess the appropriateness of their securities classifications under SFAS No. 115, accounting for any resulting reclassifications between "held-to-maturity" and "available-for-sale" categories at fair value. In accordance with this report, the Corporation reassessed its securities classifications, resulting in the transfer of debt securities with an amortized cost of $37,131,457 and an unrealized loss of $706,937 from the held-to-maturity category to available for sale. Mortgage-backed securities included in the available-for-sale portfolio are issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Government National Mortgage Association. These securities represent participating interests in pools of long-term residential mortgage loans. The contractual maturities and weighted average yields of debt securities are summarized below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments:
Weighted Amortized Fair Average December 31, 1995 Cost Value Yield ----------------------------------------------------------------------------- Due in 1 year or less $13,026,068 $13,104,354 6.98% After 1 but within 5 years 36,961,572 37,131,956 6.37% After 5 but within 10 years 9,199,652 9,106,160 6.91% After 10 years 8,184,012 8,561,955 7.69% ----------------------------------------------------------------------------- Total $67,371,304 $67,904,425 6.72% =============================================================================
The following is a summary of amounts relating to sales of securities available for sale:
Years ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------- Proceeds from sales $16,469,090 $9,666,129 $7,387,344 =========================================================================== Realized gains $1,028,726 $ 713,534 $ 345,844 Realized losses (532,909) (28,944) (170) - --------------------------------------------------------------------------- Net realized gains $ 495,817 $ 684,590 $ 345,674 ===========================================================================
Included in proceeds from sales of securities 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 and amounted to $676,058, the excess of the fair market value of the donated securities over their historical cost. See Note 13 for a discussion regarding the contribution expense related to this transaction. Included in proceeds from sales of securities are $3.5 million, $7.5 million and $7.0 million in 1995, 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 $10.0 million, $3.5 million and $5.0 million in 1995, 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). Securities available for sale with a book value of $4,519,878 and $2,999,133 were pledged to secure public deposits and for other purposes at December 31, 1995 and 1994, respectively. (4) Securities Held to Maturity Securities held to maturity are summarized as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------- December 31, 1995 Mortgage-backed securities $13,947,011 $497,755 $ -- $14,444,766 States and political subdivisions 14,925,980 77,329 (15,256) 14,988,053 - ------------------------------------------------------------------------------------- Total $28,872,991 $575,084 $ (15,256) $29,432,819 ===================================================================================== 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 =====================================================================================
Included in mortgage-backed securities are Federal Home Loan Mortgage Corporation participation certificates backed by mortgage loans originated by the bank subsidiary amounting to $13,947,011 and $15,084,526 at December 31, 1995 and 1994, respectively. Securities held to maturity with a carrying value of $999,828 were pledged to secure public deposits and for other purposes at December 31, 1994. The contractual maturities and weighted average yields of debt securities are summarized below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated future prepayments:
Weighted Amortized Fair Average December 31, 1995 Cost Value Yield ----------------------------------------------------------------------------- Due in 1 year or less $ 4,732,939 $ 4,780,819 5.06% After 1 but within 5 years 12,307,233 12,476,182 5.16% After 5 but within 10 years 5,834,507 5,963,268 6.15% After 10 years 5,998,312 6,212,550 7.54% ----------------------------------------------------------------------------- Total $28,872,991 $29,432,819 5.84% =============================================================================
There were no sales of securities from the held-to-maturity portfolio during 1995, 1994 and 1993. During 1995, securities with an amortized cost of $37,131,457 were transferred from the held-to-maturity category to available for sale. See Note 3 for additional information related to this transaction. (5) Loans The following is a summary of loans:
December 31, 1995 1994 - ---------------------------------------------------------------------------------- Residential real estate: Mortgages $167,510,929 $170,366,731 Homeowner construction 3,071,177 6,933,793 - ---------------------------------------------------------------------------------- Total residential real estate 170,582,106 177,300,524 Commercial and other: Mortgages (1) 58,837,483 56,014,628 Construction and development (2) 5,968,404 12,089,966 Other (3) 96,830,889 103,334,837 - ---------------------------------------------------------------------------------- Total commercial and other 161,636,776 171,439,431 Installment 54,240,010 45,186,245 - ---------------------------------------------------------------------------------- Total loans $386,458,892 $393,926,200 ================================================================================== (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 of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation's market area. Nonaccrual Loans The balance of loans on nonaccrual status as of December 31, 1995 and 1994 was $8,573,656 and $10,911,999, respectively. Interest income that would have been recognized had these loans been performing at originally contracted rates was approximately $598,000 in 1995 and $628,000 in 1994. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $458,000 in 1995 and $287,000 in 1994. Included in nonaccrual loans at December 31, 1995 and 1994 are loans amounting to $2.4 million and $1.8 million, respectively, whose terms have been restructured. Pursuant to the adoption of SFAS No. 114, loans reported in 1994 as OREO have been reclassified to nonaccrual loans. The resulting increase in nonaccrual loans at December 31, 1994 was approximately $3,793,000. Mortgage Servicing Activities At December 31, 1995 and 1994, mortgage loans sold to others and serviced by the Corporation on a fee basis under various agreements amounted to $95,078,817 and $91,767,691, respectively. Loans serviced for others are not included in the Consolidated Balance Sheets. Effective January 1, 1996, the Corporation will adopt SFAS No. 122, "Accounting for Mortgage Servicing Rights". This statement requires that the rights to service mortgage loans for others be recognized as an asset, including rights acquired through both purchases and originations. Capitalized mortgage servicing rights will be amortized over the period of estimated net servicing income and will be periodically evaluated for impairment based on their fair value. The adoption of this pronouncement is not expected to have a significant effect on the Corporation's financial position or results of operations. Loans to Related Parties At December 31, 1995, the Corporation has made loans in the ordinary course of business to certain directors and executive officers including their immediate families and their affiliated companies. Such loans were made under normal interest rate and collateralization terms. Activity related to these loans in 1995 was as follows: Balance at December 31, 1994 $3,050,401 Additions 835,567 Reductions (893,997) - ---------------------------------------------------------------------------- Balance at December 31, 1995 $2,991,971 ============================================================================ (6) Allowance for Loan Losses The following is an analysis of the allowance for loan losses:
Years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------- Balance at beginning of year $9,327,942 $9,089,775 $7,872,351 Provision charged to expense 1,400,000 1,256,912 2,774,407 Recoveries of loans previously charged off 472,641 317,515 327,208 Loans charged off (3,416,067) (1,336,260) (1,884,191) - ------------------------------------------------------------------------------------- Balance at end of year $7,784,516 $9,327,942 $9,089,775 =====================================================================================
As discussed in Note 1, the Corporation adopted SFAS No. 114 and No. 118 as of January 1, 1995. Amounts presented for 1994 and 1993 reflect the reclassification of the valuation allowance and related loss provision activity to the allowance for loan losses for loans which no longer meet the criteria for classification as OREO. Impaired loans consist of all nonaccrual commercial loans. At December 31, 1995, the recorded investment in impaired loans was $5,855,000, including $4,854,000 which had a related allowance amounting to $953,000. The balance of impaired loans which did not require an allowance was $1,001,000. The average recorded investment in impaired loans was $6,412,000 for the year ended December 31, 1995. Also during this period, interest income recognized on impaired loans amounted to approximately $414,000. Interest income on impaired loans is recognized on a cash basis only. (7) Premises and Equipment The following is a summary of premises and equipment:
December 31, 1995 1994 - ---------------------------------------------------------------------------- Land and improvements $ 1,561,936 $ 1,530,736 Premises and improvements 15,294,192 15,120,987 Furniture, fixtures and equipment 9,954,675 8,977,727 - ---------------------------------------------------------------------------- 26,810,803 25,629,450 Less accumulated depreciation 12,164,646 10,849,547 - ---------------------------------------------------------------------------- Total premises and equipment, net $14,646,157 $14,779,903 ============================================================================
(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 and floors. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:
December 31, 1995 1994 - ------------------------------------------------------------------------------ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Commercial and other loans $24,014,537 $18,607,837 Revolving, open-end loans secured by residential properties; home equity lines 12,538,507 11,000,699 Credit card lines 12,201,670 10,975,795 Homeowner construction loans 2,993,240 2,602,710 Construction and development loans 944,736 1,274,763 Standby letters of credit 2,603,072 521,800 Loans sold with recourse 1,188,336 1,505,466 Financial instruments whose notional amounts exceed the amount of credit risk: Interest rate swaps 10,000,000 10,000,000 Interest rate floor contracts 50,000,000 --
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. 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. 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 negligible and have not resulted in any significant losses to the Corporation. Interest Rate Risk Management Agreements The Corporation uses interest rate swaps and floors as part of its interest rate risk management strategy. Swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g. fixed-rate for variable- rate payments) computed on a notional principal amount. A floor is a purchased contract that entitles the Corporation to receive payment from a counterparty if a rate index falls below a contractual rate. The amount of the payment is the difference between the contractual floor rate and the rate index multiplied by the notional principal amount of the contract. If the rate index does not fall below the contractual floor rate, no payment is received. The credit risk associated with swap and floor transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Corporation's potential loss exposure. At December 31, 1995, the Corporation had outstanding interest rate swap agreements with a total notional amount of $10 million maturing in May 1996. The purpose of the swap agreements is to convert the fixed rate paid on certain time deposits to a quarterly-resetting rate. 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, 1995, the weighted average rate paid by the Corporation on the swap agreements was 5.89%. At December 31, 1995, the fair value, or the value to the Corporation of terminating the agreements, was $15,000. During 1995, the Corporation entered into interest rate floor contracts with a total notional amount of $50 million which mature in February 2000. The purpose of the floor contracts is to offset the risk of future reductions in interest earned on certain floating rate loans. The Corporation receives payment under contracts with a total notional value of $30.0 million when the prime rate falls below 9.0% and on the remaining $20.0 million when 3-month LIBOR at the quarterly resetting dates is below 6.1875%. The prime rate and 3-month LIBOR applicable to the outstanding floor contracts at December 31, 1995 were 8.5% and 5.875%, respectively. At December 31, 1995, the fair value, or the value to the Corporation of terminating the contracts was $2,522,000. The Corporation has not terminated any interest rate swap agreements or floor contracts and there are no unamortized deferred gains or losses. (9) Other Real Estate Owned An analysis of the composition of OREO follows:
December 31, 1995 1994 - -------------------------------------------------------------------------- Commercial real estate $ 671,340 $ 751,857 Residential real estate 706,655 457,210 Construction and development -- 401,302 Land 737,158 967,388 - -------------------------------------------------------------------------- 2,115,153 2,577,757 - -------------------------------------------------------------------------- Valuation allowance (410,006) (570,545) - -------------------------------------------------------------------------- Other real estate owned, net $ 1,705,147 $ 2,007,212 ==========================================================================
An analysis of the activity relating to other real estate owned follows:
Years ended December 31, 1995 1994 - ---------------------------------------------------------------------------- Balance at beginning of year $ 2,577,757 $ 4,568,121 Net transfers from loans 666,158 1,290,381 Sales and other reductions (1,512,508) (3,228,167) Other, net 383,746 (52,578) - ---------------------------------------------------------------------------- 2,115,153 2,577,757 Valuation allowance (410,006) (570,545) - ---------------------------------------------------------------------------- Balance at end of year $ 1,705,147 $ 2,007,212 ============================================================================
The following is an analysis of activity relating to the OREO valuation allowance:
Years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Balance at beginning of year $570,545 $1,155,700 $1,252,340 Provision charged to expense 172,041 137,389 768,021 Sales and other reductions (301,294) (716,214) (1,005,626) Selling expenses incurred (31,286) (55,763) (114,712) Other, net -- 49,433 255,677 - ------------------------------------------------------------------------------- Balance at end of year $410,006 $ 570,545 $1,155,700 ===============================================================================
Net realized losses on dispositions of properties amounted to $15,095 in 1995. Net realized gains on dispositions of properties amounted to $465,292 and $674,331 in 1994 and 1993, respectively. These amounts are included in foreclosed property costs in the Consolidated Statements of Income. Pursuant to the adoption of SFAS No. 114, loans reported in 1994 and 1993 as OREO have been reclassified to nonaccrual loans. (10) Time Certificates of Deposit The aggregate amount of time certificates of deposit in denominations of $100,000 or more was $28,948,924 and $24,562,617 at December 31, 1995 and 1994, 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, 1995:
Years ending Weighted December 31, Average Rate Amount -------------------------------------------------- 1996 5.68% $ 8,604,409 1997 6.65% 7,114,285 1998 5.62% 2,623,995 1999 6.19% 1,134,855 2000 7.47% 146,470 2001 and thereafter 6.46% 1,327,252 -------------------------------------------------- Balance at end of year $20,951,266 ==================================================
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 amounting to $10.3 million at December 31, 1995. 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, 1995. (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 Plan's funded status:
October 1, 1995 1994 - ---------------------------------------------------------------------------------------- Vested accumulated benefit obligation $(7,106,888) $(5,828,039) Nonvested accumulated benefit obligation (203,609) (97,350) Effect of future compensation increases (2,130,483) (2,042,538) - --------------------------------------------------------------------------------------- Projected benefit obligation (9,440,980) (7,967,927) Plan assets at fair value, primarily listed stocks and fixed income securities 10,158,452 8,244,396 - --------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $ 717,472 $ 276,469 ======================================================================================= The assumptions used in determining the projected benefit obligation were as follows: Discount rate 7.00% 8.00% Rate of increase in compensation levels 5.00% 6.00%
Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods. Unrecognized amounts to be amortized and the amounts included in the Consolidated Balance Sheets are as follows:
October 1, 1995 1994 - --------------------------------------------------------------------------------------- Unrecognized net gain $583,799 $376,273 Unrecognized prior service cost (395,836) (426,319) Unrecognized net transition asset being amortized over 21 years 72,570 78,552 Prepaid pension cost 456,939 247,963 - --------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $717,472 $276,469 =======================================================================================
The assumptions used and the components of net pension cost for the years ended December 31, 1995, 1994 and 1993 include the following:
Years ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------- Assumptions used: Discount rate 8.00% 6.75% 7.50% Rate of increase in compensation levels 6.00% 5.00% 6.00% Expected long term rate of return on plan assets 8.75% 7.75% 8.50% Net pension cost: Service cost; benefits earned during the period $ 344,855 $328,194 $303,208 Interest cost on projected benefit obligation 653,828 519,478 521,132 Actual return on plan assets (1,693,630) (126,374) (350,777) Net amortization and deferral 1,002,748 (450,023) (238,801) - ----------------------------------------------------------------------------------------- Net periodic pension cost $ 307,801 $271,275 $234,762 =========================================================================================
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. The projected benefit obligation for this plan amounted to $556,780 and $386,200 at December 31, 1995 and 1994, respectively. The expense of this plan amounted to $78,320 and $19,125 in 1995 and 1994, respectively. The actuarial assumptions used for this supplemental plan are the same as those used for the Corporation's regular pension plan. Accrued and unpaid benefits under this plan are an unfunded obligation of the subsidiary bank. The accrued pension liability related to this plan amounted to $97,445 and $19,125 at December 31, 1995 and 1994, respectively. Savings and Profit Sharing Plan The Corporation has a qualified savings and profit sharing plan. The plan provides a specified match of employee contributions for substantially all full- time employees. In addition, full-time employees, excluding those key employees participating in the Short-Term Incentive Plan, are eligible for an annual benefit pursuant to a formula based on return on equity. Total employer matching contributions under this plan amounted to $185,710, $173,675 and $165,322 in 1995, 1994 and 1993, respectively. The amount of the profit sharing benefit was $239,295, $241,807 and $110,846 for 1995, 1994 and 1993, respectively. Short-Term Incentive Plan The Corporation's nonqualified Short-Term Incentive Plan rewards key employees for their contributions to the Corporation's success. This plan provides for annual payments up to a maximum percentage of each participant's base salary, which percentages vary among participants. Payment amounts are based on the achievement of target levels of return on equity and/or the achievement of individual objectives. Participants in this plan are not eligible to receive benefits provided under the profit sharing component of the Savings and Profit Sharing Plan. The expense of the Short-Term Incentive Plan amounted to $501,143, $480,646 and $462,459 in 1995, 1994 and 1993, respectively. 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. 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 $100,923, $89,517 and $77,847 for 1995, 1994 and 1993, respectively. Accrued and unpaid benefits under this plan are an unfunded obligation of the subsidiary bank. The accrued liability related to this plan amounted to $532,671 and $462,209 at December 31, 1995 and 1994, respectively. (13) Other Noninterest Expense Included in other noninterest expense is charitable contribution expense of $120,000, $699,896 and $6,894 in 1995, 1994 and 1993, respectively. The 1994 expense consists of the fair value of securities donated to a charitable trust established by the Corporation, recorded in accordance with SFAS No. 116, "Accounting for Contributions Received and Contributions Made". This statement requires contributions to be measured at the fair value of the asset given. A corresponding gain was recorded in the amount of the excess of the fair value over the historical cost of the donated assets (Note 3). Prior to 1994, contribution expense was recorded in the amount of the historical cost of donated assets. (14) Income Taxes The components of income tax expense were as follows:
Years ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------- Current expense: Federal $2,760,000 $2,858,000 $2,614,000 State 508,000 528,000 522,000 - ----------------------------------------------------------------------------------------- Total current expense 3,268,000 3,386,000 3,136,000 - ----------------------------------------------------------------------------------------- Deferred expense (benefit): Federal 762,000 (271,000) (715,000) State 169,000 (89,000) (186,000) Change in valuation allowance for deferred tax assets (168,000) -- 20,000 - ----------------------------------------------------------------------------------------- Total deferred expense (benefit) 763,000 (360,000) (881,000) - ----------------------------------------------------------------------------------------- Total income tax expense $4,031,000 $3,026,000 $2,255,000 =========================================================================================
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, 1995 1994 1993 - ----------------------------------------------------------------------------------------- Tax expense at Federal statutory rate $3,984,000 $3,159,000 $2,289,000 Increase (decrease) in taxes resulting from: Tax-exempt income (187,000) (155,000) (134,000) Dividends received deduction (168,000) (134,000) (179,000) State tax, net of Federal income tax benefit 446,000 289,000 222,000 Appreciated value of donated assets -- (230,000) (30,000) Change in valuation allowance for deferred tax assets (168,000) -- 20,000 Other 124,000 97,000 67,000 - ----------------------------------------------------------------------------------------- Total income tax expense $4,031,000 $3,026,000 $2,255,000 =========================================================================================
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 1995 and 1994 are as follows:
December 31, 1995 1994 - ------------------------------------------------------------------------------ Gross deferred tax assets: Allowance for loan losses $2,951,000 $3,471,000 Other real estate owned 208,000 338,000 Deferred loan origination fees 590,000 920,000 Interest on nonperforming loans 372,000 455,000 Other 646,000 531,000 - ------------------------------------------------------------------------------ Gross deferred tax assets 4,767,000 5,715,000 Valuation allowance -- (168,000) - ------------------------------------------------------------------------------ Gross deferred tax assets, net of valuation allowance 4,767,000 5,547,000 - ------------------------------------------------------------------------------ Gross deferred tax liabilities: Securities available for sale (2,921,302) (1,867,660) Premises and equipment (1,103,000) (1,020,000) Deferred loan origination costs (529,000) (525,000) Other (233,000) (337,000) - ------------------------------------------------------------------------------ Gross deferred tax liabilities (4,786,302) (3,749,660) - ------------------------------------------------------------------------------ Net deferred tax asset (liability) $ (19,302) $1,797,340 ==============================================================================
In addition to future taxable income, a primary source of recovery of deferred tax assets is taxes paid in prior years available for carryback. Since there is no carryback provision for state purposes, management believes the existing net deductible temporary differences will reverse during periods in which the Corporation generates net taxable income. (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 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, 1995, no options have been granted with SARs. All options granted prior to 1993 are exercisable. Options granted in 1995, 1994 and 1993 become vested over a three year period. At December 31, 1995, 1994 and 1993, there were 289,114, 281,126 and 246,137 shares, respectively, that were fully vested and exercisable. The following table presents changes in options outstanding during 1993, 1994 and 1995:
$21.750 $16.583 $13.250 $9.166 to to to to Exercise price per share $25.750 $18.833 $13.916 $11.666 Total - ----------------------------------------------------------------------------------------- Outstanding at December 31, 1992 -- 202,200 -- 60,416 262,616 Granted during 1993 -- -- 48,823 -- 48,823 Cancelled during 1993 -- -- -- (341) (341) - ----------------------------------------------------------------------------------------- Outstanding at December 31, 1993 -- 202,200 48,823 60,075 311,098 Granted during 1994 37,294 13,500 -- -- 50,794 Exercised during 1994 -- (3,750) -- (1,243) (4,993) - ----------------------------------------------------------------------------------------- Outstanding at December 31, 1994 37,294 211,950 48,823 58,832 356,899 Granted during 1995 39,501 -- -- -- 39,501 Exercised during 1995 (307) (33,819) (1,729) (3,386) (39,241) Cancelled during 1995 (461) -- (1,092) -- (1,553) - ----------------------------------------------------------------------------------------- Outstanding at December 31, 1995 76,027 178,131 46,002 55,446 355,606 =========================================================================================
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, 1995, a total of 649,935 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. Under the most restrictive of these requirements, the subsidiary bank could have declared aggregate additional dividends of $24.4 million as of December 31, 1995. Effective January 1, 1996, the Corporation will adopt SFAS No. 123, "Accounting for Stock-Based Compensation". The Statement encourages, but does not require, a fair value based method of accounting for stock-based compensation plans. SFAS No. 123 allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method prescribed by Accounting Principles Board ("APB") Opinion No. 25. For those entities electing to use the intrinsic value based method, SFAS No. 123 requires pro forma disclosures of net income and earnings per share computed as if the fair value based method had been applied. The Corporation intends to continue to account for stock-based compensation costs under APB Opinion No. 25, and will provide the additional required disclosures relating to 1995 and 1996 stock options in its 1996 Annual Report to Shareholders. (17) Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Corporation disclose estimated fair values of its financial instruments. Fair value estimates are made as of a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any pricing adjustments that could result from the sale of the Corporation's entire holding of a particular financial instrument. Because no quoted market exists for a 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 held to maturity is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. No market exists for shares of the Federal Home Loan Bank of Boston. Such stock may be redeemed at par upon termination of 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, 1995 and 1994 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, 1995 and 1994. 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 values of interest rate swap agreements and floor contracts generally reflect the estimated amounts that the Corporation would receive or pay to terminate the contracts. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The following table presents the fair values of the Corporation's financial instruments:
December 31, 1995 1994 - ------------------------------------------------------------------------------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------------ Financial Assets On-balance sheet: Cash and cash equivalents $ 28,650,646 $ 28,650,646 $ 18,404,910 $ 18,404,910 Securities available for sale 85,552,335 85,552,335 33,609,315 33,609,315 Mortgage loans held for sale 456,152 456,152 203,750 203,750 Securities held to maturity 28,872,991 29,432,819 52,496,616 49,395,262 Federal Home Loan Bank stock 2,995,000 2,995,000 2,906,800 2,906,800 Loans, net of allowance for loan losses 378,674,376 384,781,786 384,598,258 382,309,431 Accrued interest receivable 3,539,305 3,539,305 3,232,211 3,232,211 Off-balance sheet financial instruments relating to assets: Interest rate floor contracts 763,333 2,522,000 -- -- Financial Liabilities On-balance sheet: Noninterest bearing demand deposits $ 59,470,321 $ 59,470,321 $ 53,373,386 $ 53,373,386 Non-term savings accounts 177,891,247 177,891,247 192,653,937 192,653,937 Certificates of deposit 230,492,444 231,511,307 194,703,819 193,611,981 Federal Home Loan Bank advances 20,951,266 21,055,045 23,522,343 22,542,346 Accrued interest payable 1,743,937 1,743,937 1,278,552 1,278,552 Off-balance sheet financial instruments relating to liabilities: Interest rate swap agreements -- (15,000) -- 256,000
Other off-balance sheet financial instruments, consisting largely of loan commitments and letters of credit, contain provisions for fees, conditions and term periods which are consistent with customary market practices. Accordingly, the fair value amounts (considered to be the discounted present value of the remaining contractual fees over the unexpired commitment period) would not be material. (18) Parent Company Financial Statements The following are parent company only financial statements of Washington Trust Bancorp, Inc. reflecting the investment in the bank subsidiary on the equity basis of accounting. The Statements of Changes in Shareholders' Equity for the parent company only are identical to the Consolidated Statements of Changes in Shareholders' Equity and are therefore not presented.
Balance Sheets December 31, 1995 1994 - -------------------------------------------------------------------------------------- Assets: Cash on deposit with bank subsidiary $ 805,171 $ 245,100 Investment in bank subsidiary at equity value 51,977,516 45,541,081 Dividend receivable from bank subsidiary 840,000 552,000 Recoverable income taxes -- 9,489 - -------------------------------------------------------------------------------------- Total assets $53,622,687 $46,347,670 ====================================================================================== Liabilities: Dividends payable $ 686,189 $ 564,686 - -------------------------------------------------------------------------------------- Shareholders' Equity: Common stock of $.0625 par value; authorized 10,000,000 shares; issued 2,880,000 shares 180,000 180,000 Paid-in capital 3,010,795 2,869,135 Retained earnings 45,690,676 40,613,979 Unrealized gain on securities available for sale, net of tax 4,381,958 2,801,490 Treasury stock, at cost; 27,130 shares in 1995 and 56,570 shares in 1994 (326,931) (681,620) - -------------------------------------------------------------------------------------- Total shareholders' equity 52,936,498 45,782,984 - -------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $53,622,687 $46,347,670 ======================================================================================
Statements of Income Years ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------- Dividends from bank subsidiary $2,832,000 $1,776,000 $1,368,000 Equity in undistributed earnings of subsidiary 4,855,967 4,488,640 3,413,531 - ----------------------------------------------------------------------------------------- Net income $7,687,967 $6,264,640 $4,781,531 =========================================================================================
Statements of Cash Flows Years ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $7,687,967 $6,264,640 $4,781,531 Adjustments to reconcile net income to net cash provided by operating activities: Equity effect of undistributed earnings of subsidiary (4,855,967) (4,488,640) (3,413,531) Increase in dividend receivable (288,000) (210,000) (42,000) Decrease (increase) in recoverable income taxes 9,489 (9,489) -- - ----------------------------------------------------------------------------------------- Net cash provided by operating activities 2,553,489 1,556,511 1,326,000 - ----------------------------------------------------------------------------------------- Cash flows from financing activities: Issuance of common stock from treasury 496,349 322,663 371,803 Cash dividends paid (2,489,767) (1,915,521) (1,599,173) - ----------------------------------------------------------------------------------------- Net cash used in financing activities (1,993,418) (1,592,858) (1,227,370) - ----------------------------------------------------------------------------------------- Net increase (decrease) in cash 560,071 (36,347) 98,630 Cash at beginning of year 245,100 281,447 182,817 - ----------------------------------------------------------------------------------------- Cash at end of year $ 805,171 $ 245,100 $ 281,447 =========================================================================================
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, 1995 and 1994 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in note 1 to the financial statements, the Corporation adopted a new method of accounting for certain investments in debt and equity securities effective January 1, 1994, and a new method of accounting for income taxes effective January 1, 1993. KPMG Peat Marwick, LLP Providence, Rhode Island January 16, 1996 Summary of Unaudited Quarterly Financial Information Washington Trust Bancorp, Inc. and Subsidiary
1995 Q1 Q2 Q3 Q4 Year - --------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $8,737,731 $8,936,551 $9,008,831 $9,020,457 $35,703,570 Income from securities 1,305,386 1,305,166 1,484,315 1,632,537 5,727,404 Interest on federal funds sold and securities purchased under agreements to resell 101,283 192,671 281,664 279,588 855,206 - --------------------------------------------------------------------------------------------------------------- Total interest income 10,144,400 10,434,388 10,774,810 10,932,582 42,286,180 - --------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 994,100 961,300 993,927 996,692 3,946,019 Time deposits 2,498,335 2,994,511 3,123,944 3,153,306 11,770,096 Other 408,691 341,584 274,886 273,988 1,299,149 - --------------------------------------------------------------------------------------------------------------- Total interest expense 3,901,126 4,297,395 4,392,757 4,423,986 17,015,264 - --------------------------------------------------------------------------------------------------------------- Net interest income 6,243,274 6,136,993 6,382,053 6,508,596 25,270,916 Provision for loan losses 150,000 300,000 275,000 675,000 1,400,000 - --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,093,274 5,836,993 6,107,053 5,833,596 23,870,916 - --------------------------------------------------------------------------------------------------------------- Noninterest income: Trust income 777,823 847,232 808,735 821,704 3,255,494 Service charges on deposit accounts 470,287 486,278 491,763 502,571 1,950,899 Merchant processing fees 76,529 115,089 367,015 171,816 730,449 Gains on sales of securities -- 169,210 111,198 215,409 495,817 Gains (losses) on loan sales 21,989 26,086 (193,143) 9,217 (135,851) Other income 254,446 209,481 214,744 227,358 906,029 - --------------------------------------------------------------------------------------------------------------- Total noninterest income 1,601,074 1,853,376 1,800,312 1,948,075 7,202,837 - --------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 2,590,921 2,569,163 2,588,549 2,474,527 10,223,160 Net occupancy 301,097 277,289 324,673 318,868 1,221,927 Equipment 309,445 311,235 315,748 355,235 1,291,663 Deposit taxes and assessments 308,117 310,849 40,036 110,581 769,583 Foreclosed property costs, net 53,328 122,420 48,648 139,451 363,847 Office supplies 129,603 145,327 85,802 100,769 461,501 Other 1,151,207 1,238,477 1,392,088 1,241,333 5,023,105 - --------------------------------------------------------------------------------------------------------------- Total noninterest expense 4,843,718 4,974,760 4,795,544 4,740,764 19,354,786 - --------------------------------------------------------------------------------------------------------------- Income before income taxes 2,850,630 2,715,609 3,111,821 3,040,907 11,718,967 Applicable income taxes 1,012,000 965,000 1,079,000 975,000 4,031,000 - --------------------------------------------------------------------------------------------------------------- Net income $1,838,630 $1,750,609 $2,032,821 $2,065,907 $ 7,687,967 =============================================================================================================== Fully diluted earnings per share $ .64 $ .60 $ .70 $ .70 $2.62 Cash dividends declared per share $ .22 $ .22 $ .24 $ .24 $ .92 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 securities 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 333,365 369,982 252,089 301,476 1,256,912 - --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 4,975,291 5,206,179 5,700,153 5,934,571 21,816,194 - --------------------------------------------------------------------------------------------------------------- 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 108,846 (83,361) 80,719 (122,141) (15,937) 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 5,409,991 4,425,857 4,907,658 4,704,214 19,447,720 - --------------------------------------------------------------------------------------------------------------- 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 per share .16 .17 .20 .20 .73
EX-21 4 EXHIBIT 21 ---------- Subsidiaries of the Registrant Name of Subsidiary State of Incorporation - ------------------ ---------------------- The Washington Trust Company of Westerly Rhode Island EX-23 5 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 16, 1996, relating to the consolidated balance sheets of Washington Trust Bancorp, Inc. and subsidiary as of December 31, 1995 and 1994 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, 1995, which report included an explanatory paragraph that described the adoption of new methods of accounting for debt securities and income taxes, such report has been incorporated by reference in the 1995 annual report of Washington Trust Bancorp, Inc. on Form 10-K. KPMG Peat Marwick Providence, Rhode Island March 27, 1996 EX-27 6
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, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1995 DEC-31-1995 15,051,777 0 13,598,869 0 85,552,335 28,872,991 29,432,819 386,458,892 7,784,516 547,659,304 467,854,012 8,604,409 5,917,528 12,346,857 0 0 180,000 52,756,498 547,659,304 35,703,570 5,727,404 855,206 42,286,180 15,716,115 17,015,264 25,270,916 1,400,000 495,817 19,354,786 11,718,967 11,718,967 0 0 7,687,967 2.64 2.62 8.65 8,573,656 256,276 0 7,100,000 9,327,942 3,416,067 472,641 7,784,516 7,784,516 0 1,768,035 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.
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